| (d) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.provided that no such offer of Common Stock shall result in a requirement for us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation. For the purposes of this provision, the expression an “offer of Common Stock to the public” in relation to any Common Stock in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any Common Stock to be offered so as to enable an investor to decide to purchase or subscribe for our Common Stock, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129. France
This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.
Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
Ireland
The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority, or the ISA, nor have such securities been registered for sale in Israel. The shares of common stock may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the Offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
Italy
The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, “CONSOB” pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:
| ● | to Italian qualified investors, as defined in Article 100 of Decree no. 58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and |
| ● | in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. |
Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:
| ● | made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and |
| ● | in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws. |
Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.
Japan
The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder).
Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.
Portugal
This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
Sweden
This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority.
This document is personal to the recipient only and not for general circulation in Switzerland.
United Arab Emirates
Neither this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor has the company received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the securities within the United Arab Emirates.
This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by the company.
No offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre.
United Kingdom Neither the information in this document nor any other document relatingThis prospectus has only been communicated or caused to the offer hashave been delivered for approval to the Financial Services Authority in the United Kingdomcommunicated and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) has been publishedwill only be communicated or is intendedcaused to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA.
This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.
Anycommunicated as an invitation or inducement to engage in investment activity (within the meaning of sectionSection 21 of the Financial Services and Markets Act of 2000, or the FSMA) as received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdomour Common Stock in circumstances in which sectionSection 21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA will be complied with in respect to anything done in relation to our Common Stock in, from or otherwise involving the United Kingdom.
Canada The shares of our Common Stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts, or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering. Australia This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus. China The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.” France This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code Monétaire et Financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France. Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 ;and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and D.764-1 of the French Monetary and Financial Code and any implementing regulation. Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code. Ireland The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors. Israel The securities offered by this prospectus have not been approved or disapproved by the Israel Securities Authority (the “ISA”), nor have such securities been registered for sale in Israel. The securities may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus that has been approved by the ISA. The ISA has not issued permits, approvals or licenses in connection with this offering or publishing this prospectus, nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. This document does not constitute a prospectus under the Israeli Securities Law and has not been filed with or approved by the ISA. In the United Kingdom,State of Israel, this document is beingmay be distributed only to, and ismay be directed only at, and any offer of the securities may be directed only at, (i) to the extent applicable, a limited number of persons (i)in accordance with the Israeli Securities Law and (ii) investors listed in the first addendum to the Israeli Securities Law (the “Addendum”) consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange Ltd., underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who have professional experienceare investors listed in mattersthe Addendum). Qualified investors will be required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it. Italy The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering material relating to investments fallingthe securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 19(5) (investment professionals)1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than: | ● | to Italian qualified investors, as defined in Article 100 of Decree No. 58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 11971”) as amended (“Qualified Investors”); and |
| ● | in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. |
Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be: | ● | made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and | | | | | ● | in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws. |
Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors. Japan The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial ServicesInstruments and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”)Exchange Law of Japan (Law No. 25 of 1948), (ii) who fall withinas amended (the “FIEL”) pursuant to an exemption from the categoriesregistration requirements applicable to a private placement of persons referredsecurities to Qualified Institutional Investors (as defined in and in accordance with Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.)2, paragraph 3 of the FPOFIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or (iii)sold, directly or indirectly, in Japan or to, whom itor for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may otherwise be lawfully communicated (together “relevant persons”). The investmentsnot resell them to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engagedperson in only with, relevant persons. Any person whoJapan that is not a relevantQualified Institutional Investor, and acquisition by any such person shouldof securities is conditional upon the execution of an agreement to that effect. Portugal This document is not actbeing distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or rely onsold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person. Sweden This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person. Switzerland The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland. Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA). This document is personal to the recipient only and not for general circulation in Switzerland. United Arab Emirates Neither this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor has the Company received authorization or licensing from the Central Bank of its contents.the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the securities within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by the Company. No offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre. LEGAL MATTERS The validity of the shares of Preferred Stocksecurities offered by this prospectus and certain legal matters in connection with this offering will be passed uponon for us by Thompson Hine LLP.Loeb & Loeb LLP, New York, New York. Certain legal matters in connection with this offering will be passed uponon for the underwriters by Cozen O’Connor P.C.Blank Rome LLP, New York, New York. EXPERTS The consolidated financial statements of the Company as of December 31, 20162021 and 20152020 and for each of the two years in the period ended December 31, 2016 included2021 and 2020, incorporated in this Prospectus and inprospectus by reference to the Registration StatementCompany’s Annual Report on Form 10-K for the year ended December 31, 2021, have been so includedincorporated in reliance on the report of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhereincorporated herein and in the Registration Statement,by reference, given on the authority of said firm as experts in auditingaccounting and accounting.auditing. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. WHERE YOU CAN FIND MORE INFORMATION We are subject to the information reporting requirements of the Exchange Act and, in accordance with these requirements, we file, electronically, with the SEC, annual, quarterly and current reports, proxy statements, information statements, and other information. Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov. In addition, we provide free access to these materials through our website, www.fgfinancial.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. Information contained on, or (other than our SEC filings) that may be accessible through, our website is not a part of, and is not incorporated into, this prospectus. We have filed with the SEC a registration statement on Form S-1 relating to the securities covered by this prospectus. This prospectus is a part of the registration statement and does not contain all the information in the registration statement. Whenever a reference is made in this prospectus to a contract or other document, the reference is only a summary and you should refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may review a copy of the registration statement through the SEC’s website. INCORPORATION BY REFERENCE As permitted under the rules ofThe SEC allows us to incorporate by reference information in this document. This means that we can disclose important information to you by referring you to documents that we have previously filed with the SEC this prospectus incorporates important business information about the Company that is contained inor documents that we will file with the SEC but that are not included in or delivered with this prospectus. You may obtain copies of these documents, without charge, from the website maintained by the SEC at www.sec.gov, as well as other sources.
future. The following documents areinformation incorporated by reference into this prospectus, together with all exhibits filed therewith or incorporated therein by referenceis considered to the extent not otherwise amended or superseded by the contentsbe an important part of this prospectus, (exceptexcept for any information that is superseded by information that is included directly in this document. We are incorporating by reference in this prospectus the following documents which we have previously filed with the SEC (other than any portions of the Company’s Current Reports on Form 8-K that were furnished pursuant to Item 2.02 or Item 7.01 thereofof Form 8-K or otherwise not filed with theother applicable SEC which are deemed not to be incorporated by reference into this prospectus)rules): (1) | ●Annual Report on Form 10-K for the year ended December 31, 2021, filed on March 30, 2022 as well as Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2021, filed on April 29, 2022; | | | (2) | the description of our shares of common stock contained in (i) our Registration Statement on Form 8-A, as filed with the SEC on March 19, 2014, including any amendment or report filed for the purpose of updating such description and (ii) Exhibit 4.4—Description of Securities to our Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the SEC on March 30, 2022; | | | (3) | the description of our shares of 8.00% Cumulative Preferred Stock, Series A contained in (i) our Registration Statement on Form 8-A, as filed with the SEC on March 16, 2017; |
| ● | February 26, 2018, and (ii) Exhibit 4.4—Description of Securities to our Definitive Proxy Statement on Schedule 14A for our 2017 annual meeting of stockholders, as filed with the SEC on April 28, 2017; |
| ● | our Quarterly ReportsAnnual Report on Form 10-Q10-K for the quarterly periodsyear ended MarchDecember 31, 2017, June 30, 2017, and September 30, 2017 as filed with the SEC on May 11, 2017, August 10, 2017, and November 13, 2017, respectively; and |
| ● | our Current Reports on Form 8-K2021, filed with the SEC on March 8, 2017 (as amended by Form 8-K/A30, 2022; and | | | (4) | Proxy Statement on Schedule 14A filed with the SEC on March 8, 2017), April 7, 2017, May 23, 2017, May 26, 2017, June 5, 2017, June 14, 2017, September 1, 2017, December 19, 2017, and January 3, 2018.October 25, 2021. |
In addition, all documents subsequently filed by us with the SEC pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act (other than those furnished pursuant to Item 2.02 or Item 7.01 of Form 8-K or other information “furnished” to the SEC)Whenever after the effective date of filing the registration statement of which this prospectus formsis a part, and prior to the terminationuntil all of the securities to which this prospectus relates have been sold or the offering shallis otherwise terminated, we file reports or documents under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, those reports and documents will be deemed to be part of this prospectus from the time they are filed. Any statements made in this prospectus or in a document incorporated or deemed to be incorporated by reference intoin this prospectus.
Any statement contained in a document incorporated by reference herein shallprospectus will be deemed to be modified or superseded for all purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document whichthat is also incorporated or deemed to be incorporated by reference in this prospectus modifies or supersedes suchthe statement. Any statement so modified or superseded shall notNothing in this prospectus will be deemed except as so modified or superseded, to constitute a partincorporate information furnished by us on Form 8-K that under the rules of this prospectus.the SEC, is not deemed “filed” for purposes of the Exchange Act.
We will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the reports or documentsinformation that havehas been incorporated by reference in thisthe prospectus, but not delivered with the prospectus, upon oral or written request, free of charge. Any requests for this prospectus at no cost upon writteninformation should be made by calling or oral request. You may requestsending a copy of these reports or documents (other than an exhibitletter to a report or document unless that exhibit is specifically incorporated by reference into that report or document) at no cost by writing, telephoning or e-mailing usour principal executive offices at the following address, telephone number or e-mail address: 1347 Property Insurance Holdings,FG Financial Group, Inc.
1511 N. Westshore Blvd.,
Attention: Investor Relations 360 Central Ave, Suite 870
Tampa, Florida 33607
(855) 862-0436
jhellman@equityny.com800 St. Petersburg, FL 33701 Copies of these reports and documents are also available through the “Investor Relations” section of our website at www1347pih.com. For other ways to obtain a copy of these reports and documents, please refer to “Where You Can Find More Information” below.Telephone: (727) 304-5666
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the Exchange Act and file annual, quarterly and current reports, proxy statements and other information with the SEC. We have also filed a registration statement on Form S-1 under the Securities Act, including exhibits, with respect to the shares of Preferred Stock covered by this prospectus. This prospectus is a part of the registration statement, but does not contain all of the information included in the registration statement or the exhibits. For further information about us and the shares of Preferred Stock, we refer you to the documents we publicly file with the SEC and the registration statement of which this prospectus forms a part, including the documents filed as exhibits thereto. You can find our public filings with the SEC and the registration statement, including exhibits, on the internet at a website maintained by the SEC at http://www.sec.gov or from our website at http://www.1347pih.com. You may also read and copy our public filings with the SEC and the registration statement at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You can call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. We also make available on our website our annual, quarterly and current reports and amendments as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. Our website address is www.1347pih.com. The information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
1347 Property Insurance Holdings, Inc.
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements — Three and Nine Months Ended September 30, 2017 | | | Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 | | F-2 | Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) | | F-3 | Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017 (unaudited) | | F-4 | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited) | | F-5 | Notes to Consolidated Financial Statements (unaudited) | | F-6 | Report of Independent Registered Public Accounting Firm | | F-23 | Consolidated Financial Statements — Years Ended December 31, 2016 and 2015 | | | Consolidated Balance Sheets as of December 31, 2016 and 2015 | | F-24 | Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2016 and 2015 | | F-25 | Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016 and 2015 | | F-26 | Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 | | F-27 | Notes to the Consolidated Financial Statements | | F-2823 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1347 PROPERTY INSURANCE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | September 30, 2017 (unaudited) | | | December 31, 2016 | | ASSETS | | | | | | | | | Investments: | | | | | | | | | Fixed income securities, at fair value (amortized cost of $45,252 and $26,793, respectively) | | $ | 45,207 | | | $ | 26,559 | | Equity investments, at fair value (cost of $1,682 and $1,000, respectively) | | | 1,771 | | | | 1,136 | | Short-term investments, at cost | | | 1,779 | | | | 196 | | Other investments, at cost | | | 945 | | | | 505 | | Total investments | | | 49,702 | | | | 28,396 | | Cash and cash equivalents | | | 25,679 | | | | 43,045 | | Deferred policy acquisition costs, net | | | 6,192 | | | | 4,389 | | Premiums receivable, net of allowance for credit losses of $39 and $38, respectively | | | 2,220 | | | | 2,923 | | Ceded unearned premiums | | | 3,836 | | | | 4,847 | | Reinsurance recoverable on paid losses | | | 7,767 | | | | 444 | | Reinsurance recoverable on loss and loss adjustment expense reserves | | | 17,560 | | | | 3,652 | | Funds deposited with reinsured companies | | | — | | | | 500 | | Current income taxes recoverable | | | 632 | | | | 1,195 | | Deferred tax asset, net | | | 855 | | | | 420 | | Property and equipment, net | | | 213 | | | | 250 | | Other assets | | | 867 | | | | 788 | | Total assets | | $ | 115,523 | | | $ | 90,849 | | | | | | | | | | | LIABILITIES | | | | | | | | | Loss and loss adjustment expense reserves | | $ | 22,091 | | | $ | 6,971 | | Unearned premium reserves | | | 32,170 | | | | 25,821 | | Ceded reinsurance premiums payable | | | 5,786 | | | | 5,229 | | Agency commissions payable | | | 716 | | | | 497 | | Premiums collected in advance | | | 1,887 | | | | 1,128 | | Funds held under reinsurance treaties | | | 48 | | | | 73 | | Accounts payable and other accrued expenses | | | 4,483 | | | | 2,065 | | Series B Preferred Shares, $25.00 par value, 1,000,000 shares authorized, 120,000 shares issued and outstanding for both periods | | | 2,744 | | | | 2,708 | | Total liabilities | | $ | 69,925 | | | $ | 44,492 | | | | | | | | | | | Commitments and contingencies (Note 16) | | | | | | | | | | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | Common stock, $0.001 par value; 10,000,000 shares authorized; 6,136,125 and 6,108,125 shares issued and 5,984,766 and 5,956,766 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | | $ | 6 | | | $ | 6 | | Additional paid-in capital | | | 47,052 | | | | 46,809 | | Retained (deficit) earnings | | | (480 | ) | | | 616 | | Accumulated other comprehensive income (loss) | | | 29 | | | | (65 | ) | | | | 46,607 | | | | 47,366 | | Less: treasury stock at cost; 151,359 shares for both periods | | | (1,009 | ) | | | (1,009 | ) | Total shareholders’ equity | | | 45,598 | | | | 46,357 | | Total liabilities and shareholders’ equity | | $ | 115,523 | | | $ | 90,849 | |
See accompanying notes to consolidated financial statements
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share data)
(Unaudited)
| | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Revenue: | | | | | | | | | | | | | Net premiums earned | | $ | 8,632 | | | $ | 7,136 | | | $ | 25,032 | | | $ | 22,869 | | Net investment income | | | 248 | | | | 151 | | | | 700 | | | | 393 | | Other income | | | 474 | | | | 345 | | | | 1,262 | | | | 862 | | Total revenue | | | 9,354 | | | | 7,632 | | | | 26,994 | | | | 24,124 | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | Net losses and loss adjustment expenses | | | 7,795 | | | | 6,443 | | | | 13,809 | | | | 14,917 | | Amortization of deferred policy acquisition costs | | | 2,755 | | | | 2,095 | | | | 7,867 | | | | 6,148 | | General and administrative expenses | | | 2,145 | | | | 1,658 | | | | 6,535 | | | | 4,982 | | Accretion of discount on Series B Preferred Shares | | | 93 | | | | 89 | | | | 276 | | | | 263 | | Total expenses | | | 12,788 | | | | 10,285 | | | | 28,487 | | | | 26,310 | | | | | | | | | | | | | | | | | | | Loss before income tax benefit | | | (3,434 | ) | | | (2,653 | ) | | | (1,493 | ) | | | (2,186 | ) | Income tax benefit | | | (1,171 | ) | | | (847 | ) | | | (397 | ) | | | (605 | ) | Net loss | | $ | (2,263 | ) | | $ | (1,806 | ) | | $ | (1,096 | ) | | $ | (1,581 | ) | | | | | | | | | | | | | | | | | | Net loss per common share: | | | | | | | | | | | | | | | | | Basic and diluted | | $ | (0.38 | ) | | $ | (0.30 | ) | | $ | (0.18 | ) | | $ | (0.26 | ) | Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | Basic and diluted | | | 5,961,636 | | | | 6,022,983 | | | | 5,958,407 | | | | 6,076,838 | | | | | | | | | | | | | | | | | | | Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | Net loss | | $ | (2,263 | ) | | $ | (1,806 | ) | | $ | (1,096 | ) | | $ | (1,581 | ) | Unrealized gains (losses) on investments available for sale, net of income taxes
| | | 25 | | | | (11 | ) | | | 94 | | | | 310 | | Comprehensive loss | | $ | (2,238 | ) | | $ | (1,817 | ) | | $ | (1,002 | ) | | $ | (1,271 | ) |
See accompanying notes to consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity
(in thousands, except per share data)
| | Common Stock | | | Treasury Stock | | | | | | | | | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total Shareholders’ Equity | | Balance-January 1, 2016 | | | 6,134,274 | | | $ | 6 | | | | 223,851 | | | $ | (1,731 | ) | | $ | 48,688 | | | $ | 605 | | | $ | (62 | ) | | $ | 47,506 | | Stock compensation expense | | | — | | | | — | | | | — | | | | — | | | | 38 | | | | — | | | | — | | | | 38 | | Purchase of treasury stock | | | (177,508 | ) | | | — | | | | 177,508 | | | | (1,195 | ) | | | — | | | | — | | | | — | | | | (1,195 | ) | Retirement of treasury shares | | | — | | | | — | | | | (250,000 | ) | | | 1,917 | | | | (1,917 | ) | | | — | | | | — | | | | — | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | 11 | | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | Balance - December 31, 2016 | | | 5,956,766 | | | $ | 6 | | | | 151,359 | | | $ | (1,009 | ) | | $ | 46,809 | | | $ | 616 | | | $ | (65 | ) | | $ | 46,357 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common shares | | | 28,000 | | | | — | | | | — | | | | — | | | | 224 | | | | — | | | | — | | | | 224 | | Stock compensation expense | | | — | | | | — | | | | — | | | | — | | | | 19 | | | | — | | | | — | | | | 19 | | Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,096 | ) | | | — | | | | (1,096 | ) | Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 94 | | | | 94 | | Balance – September 30, 2017 (unaudited) | | | 5,984,766 | | | $ | 6 | | | | 151,359 | | | $ | (1,009 | ) | | $ | 47,052 | | | $ | (480 | ) | | $ | 29 | | | $ | 45,598 | |
See accompanying notes to consolidated financial statements
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | Nine months ended September 30, | | | | 2017 | | | 2016 | | Cash provided by: | | | | | | | | | Operating activities: | | | | | | | | | Net loss | | $ | (1,096 | ) | | $ | (1,581 | ) | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | Accretion of discount on Series B Preferred Shares | | | 276 | | | | 263 | | Net deferred income taxes | | | (483 | ) | | | (209 | ) | Stock compensation expense | | | 19 | | | | 30 | | Depreciation expense | | | 55 | | | | 49 | | Changes in operating assets and liabilities: | | | | | | | | | Premiums receivable | | | 703 | | | | 293 | | Reinsurance recoverable on paid losses and loss reserves | | | (21,231 | ) | | | (7,866 | ) | Amounts held on deposit with reinsured companies | | | 500 | | | | 725 | | Ceded unearned premiums | | | 1,011 | | | | (1,646 | ) | Deferred policy acquisition costs, net | | | (1,803 | ) | | | (339 | ) | Loss and loss adjustment expense reserves | | | 15,120 | | | | 6,504 | | Premiums collected in advance | | | 759 | | | | 819 | | Unearned premium reserves | | | 6,349 | | | | 2,902 | | Ceded reinsurance premiums payable | | | 557 | | | | 2,333 | | Current income taxes recoverable | | | 563 | | | | (606 | ) | Other, net | | | 2,533 | | | | (12 | ) | Net cash provided by operating activities | | | 3,832 | | | | 1,659 | | | | | | | | | | | Investing activities: | | | | | | | | | Purchases of furniture and equipment | | | (18 | ) | | | (81 | ) | Purchases of fixed income securities | | | (18,459 | ) | | | (7,424 | ) | Purchase of equity investments | | | (682 | ) | | | (1,000 | ) | Purchase of other investments | | | (440 | ) | | | (139 | ) | Net purchases of short-term investments | | | (1,583 | ) | | | (784 | ) | Net cash used in investing activities | | | (21,182 | ) | | | (9,428 | ) | | | | | | | | | | Financing activities: | | | | | | | | | Payment of dividends on preferred shares | | | (240 | ) | | | (240 | ) | Proceeds from sale of common stock | | | 224 | | | | — | | Purchases of treasury stock | | | — | | | | (1,022 | ) | Net cash used in financing activities | | | (16 | ) | | | (1,262 | ) | | | | | | | | | | Net decrease in cash and cash equivalents | | | (17,366 | ) | | | (9,031 | ) | Cash and cash equivalents at beginning of period | | | 43,045 | | | | 47,957 | | Cash and cash equivalents at end of period | | $ | 25,679 | | | $ | 38,926 | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Cash paid during the period for: | | | | | | | | | Income taxes | | $ | 35 | | | $ | 293 | |
See accompanying notes to consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
1. Nature of Business
Maison Insurance Holdings, Inc. was incorporated on October 2, 2012 in the State of Delaware. On November 19, 2013, its legal name was changed from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. (“PIH”). PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business. Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries.
Prior to March 31, 2014, PIH was a wholly owned subsidiary of Kingsway America Inc. (“KAI”). KAI, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, PIH completed an initial public offering (“IPO”) of its common stock. On June 13, 2014, PIH completed a follow-on offering of its common stock to the public. Through the combination of the IPO and follow-on offering, PIH issued approximately five million shares of its common stock, while KAI, and entities affiliated with KAI retained one million shares of PIH. On October 25, 2017, KAI entered into a purchase agreement with Fundamental Global Investors, LLC (“FGI”) pursuant to which KAI agreed to sell 900,000 shares of our common stock to FGI or to one of FGI’s affiliate companies in two separate transactions. The first transaction, for the sale of 475,428 shares of our common stock, occurred on November 1, 2017. The second transaction, for the sale of 424,572 shares of our common stock is conditioned on approval of the transaction by both the LDI and FL OIR by January 23, 2018. FGI is affiliated with D. Kyle Cerminara, where he serves as Chief Executive Officer, Co-Founder and Partner, and Lewis M. Johnson, where he serves as President, Co-Founder and Partner. Messrs. Cerminara and Johnson are also members of our Board of Directors. Should the second transaction be consummated, FGI, and entities affiliated with FGI, would own 43% of our outstanding common shares.
PIH has three wholly-owned subsidiaries; Maison Insurance Company (“Maison”), a Louisiana-domiciled property and casualty insurance company, Maison Managers, Inc. (“MMI”), a managing general agent, incorporated in the State of Delaware, and ClaimCor, LLC (“ClaimCor”), a Florida based claims and underwriting solutions company. Maison processes claims made by its policyholders through ClaimCor, and also through various third-party claims adjusting companies. MMI has ultimate authority over the claims handling process, while the agencies that we appoint have no authority to settle our claims or otherwise exercise control over the claims process.
Maison began providing homeowners insurance, manufactured home insurance and dwelling fire insurance to individuals in Louisiana in December 2012. Maison writes both full peril property policies as well as wind/hail only exposures in Louisiana and distributes its policies through a network of independent insurance agencies. Maison began assuming wind/hail only insurance for commercial properties in Texas beginning in June 2015. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis, and in March 2016, Maison began writing homeowner policies in Texas.
In addition to the voluntary policies that Maison writes, Maison has participated in the last five rounds of take-outs from Louisiana Citizens Property Insurance Company (“LA Citizens”), occurring on December 1st of each year, as well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association (“TWIA”), which occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, have the opportunity to assume insurance policies written by both LA Citizens and TWIA. The majority of policies that we have obtained through LA Citizens as well as all of the policies we have obtained through TWIA cover losses arising only from wind and hail. Prior to our takeout, both LA Citizens and TWIA policyholders were not able to obtain such coverage from any other marketplace.
On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation (“FL OIR”) which authorizes Maison to write personal lines insurance in the State of Florida. Pursuant to the consent order issued, Maison has agreed to comply with certain requirements as outlined by the FL OIR until Maison can demonstrate three consecutive years of net income following the Company’s admission into Florida as evidenced by its Annual Statement filed with the FL OIR via the National Association of Insurance Commissioners electronic filing system. Among other requirements, the FL OIR requires the following as conditions related to the issuance of Maison’s certificate of authority:
| ● | Although domiciled in the State of Louisiana, Maison has agreed to comply with the Florida Insurance Code as if Maison were a domestic insurer within the State of Florida; |
| ● | Maison has agreed to maintain capital and surplus as to policyholders of no less than $35,000; |
| ● | Maison has agreed to receive prior approval from the FL OIR prior to the payment of any dividends; and |
| ● | Maison has agreed to receive written approval from the FL OIR regarding any form of policy issued or rate charged to its policyholders prior to utilizing any such form or rate for policies written in the State of Florida. |
To comply with the consent order, on March 31, 2017, Maison received a capital contribution from PIH in the amount of $16,000. As of September 30, 2017, Maison has not written any insurance policies covering risks in the State of Florida.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
On September 29, 2017, Maison received authorization from the FL OIR to assume personal lines policies from Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison filed with FL Citizens on August 18, 2017. Accordingly, Maison plans to enter the Florida market via the assumption of policies from FL Citizens in December, 2017. The order approving Maison’s assumption of policies limits the number of policies which Maison may assume in 2017, and also stipulates that Maison maintain catastrophe reinsurance at such levels as deemed appropriate by the FL OIR.
MMI serves as the Company’s management services subsidiary, known as a managing general agency, and provides underwriting, policy administration, claims administration, marketing, accounting, and other management services to Maison. MMI contracts primarily with independent agencies for policy sales and services, and also contracts with an independent third-party for policy administration services. As a managing general agency, MMI is licensed by and subject to the regulatory oversight of the Louisiana Department of Insurance (“LDI”), Texas Department of Insurance (“TDI”) and the FL OIR.
2. Significant Accounting Policies
Basis of Presentation:
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
The Use of Estimates in the Preparation of Consolidated Financial Statements:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves (as well as the associated reinsurance recoverable on those reserves), the valuation of fixed income and equity securities, the valuation of net deferred income taxes, the valuation of various securities that we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, and the valuation of deferred policy acquisition costs.
Investments:
Investments in fixed income and equity securities are classified as available-for-sale and reported at estimated fair value. Unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses are transferred to the consolidated statement of operations.
Other investments include investments in limited liability companies in which the Company’s interests are deemed minor and, therefore, are accounted for under the cost method of accounting, which approximates their fair value. Also included in other investments is a fixed rate certificate of deposit with an original maturity of 15 months.
Short-term investments, which consist of investments with maturities between three months and one year, are reported at cost, which approximates fair value due to their short-term nature.
Realized gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.
Interest income is included in net investment income and is recorded as it accrues.
The Company accounts for its investments using trade date accounting.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment. Impairment is charged to the statement of operations if the fair value of the instrument falls below its amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Cash and Cash Equivalents:
Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
Premiums Receivable:
Premiums receivable include premium balances due and uncollected as well as installment premiums not yet due from our independent agencies and insureds. Premiums receivable are reported net of an estimated allowance for credit losses.
Reinsurance:
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Deferred Policy Acquisition Costs:
The Company defers commissions, premium taxes, assessments and other underwriting and agency expenses that are directly related to successful efforts to acquire new or existing insurance policies to the extent they are considered recoverable. Costs deferred on insurance products are amortized over the period in which premiums are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred, as opposed to being deferred and amortized as the corresponding premium is earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future loss and loss adjustment expenses to be incurred as revenues are earned. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Changes in estimates, if any, are recorded in the accounting period in which they are determined.
Income Taxes:
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
Property and Equipment:
Property and equipment is reported at historical cost less accumulated depreciation. Depreciation of property and equipment is recorded on a straight-line basis over estimated useful life which range from seven years for furniture, five years for vehicles, three years for computer equipment, and the shorter of estimated useful life or the term of the lease for leasehold improvements. Property and equipment is estimated to have no salvage value at its useful life-end.
Rent expense for the Company’s office leases is recognized on a straight-line basis over the term of the lease. Rent expense was $255 and $258 for the nine months ended September 30, 2017 and 2016, respectively.
Loss and Loss Adjustment Expense Reserves:
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not yet reported loss events and the related estimated loss adjustment expenses. The Company performs a continuing review of its loss and loss adjustment expense reserves, including its reserving techniques as well as the impact of reinsurance on our loss reserves. The loss and loss adjustment expense reserves are also reviewed, at minimum, on an annual basis by qualified third party actuaries. Since the loss and loss adjustment expense reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of income in the period in which the estimates are changed. Such changes in estimates could occur in a future period and may be material to the Company’s results of operations and financial position in such period.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Concentration of Credit Risk:
Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, premiums receivable, and amounts due from reinsurers on losses incurred. The Company maintains its cash with two major U.S. domestic banking institutions and two regional banks headquartered in the Southeastern United States. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At September 30, 2017, the Company held funds on deposit at these institutions in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.
The Company has not experienced significant losses related to premiums receivable from its policyholders and management believes that amounts provided as an allowance for credit losses is adequate.
The Company has not experienced any losses on amounts due from reinsurers. In order to limit the credit risk associated with amounts potentially due from reinsurers, the Company uses several different reinsurers, all of which have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.
The Company also has risk associated with the lack of geographic diversification due to the fact that through September 30, 2017, Maison exclusively underwrote policies in Louisiana and Texas. The Company insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of September 30, 2017, these policies are concentrated within these parishes, presented as a percentage of our total policies in force in all states, as follows: Jefferson Parish 12.6%, Saint Tammany Parish 12.5%, East Baton Rouge Parish 7.2%, and Livingston Parish 5.1%. No other parish individually has over 5.0% of the policies in force as of September 30, 2017. On a direct basis, Maison writes in 150 of the 254 counties that comprise the State of Texas; however, no single county represents over 5.0% of the Company’s total policies in force as of September 30, 2017.
Revenue Recognition:
Premium revenue is recognized on a pro rata basis over the term of the respective policy contract. Unearned premium reserves represent the portion of premium written that is applicable to the unexpired term of policies in force.
Service charges on installment premiums are recognized as income upon receipt of related installment payments and are reflected in other income.
Revenue from other policy fees is deferred and recognized over the terms of the respective policy period, with revenue reflected in other income.
Any customer payment received is applied first to any service charge or policy fee due, with the remaining amount applied toward any premium due.
Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to reinsurers and are reported as an asset on the Company’s consolidated balance sheets.
Premiums collected in advance occur when the policyholder premium is paid in advance of the effective commencement period of the policy and are recorded as a liability on the Company’s consolidated balance sheets.
Stock-Based Compensation:
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 –Stock Compensation, which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.
The Company has also issued restricted stock units (“RSUs”) to certain of its employees which have been accounted for as equity based awards since, upon vesting, they are required to be settled in the Company’s common shares. The Company used a Monte Carlo valuation model to estimate the fair value of these awards upon grant date as the vesting of these RSUs occurs solely upon market-based conditions. The fair value of each RSU is recorded as compensation expense over the derived service period, as determined by the valuation model. Should the market-based condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually vest.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Fair Value of Financial Instruments:
The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable and accounts payable, approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP, which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Earnings Per Common Share:
Basic earnings per common share is computed using the weighted average number of shares outstanding during the respective period.
Diluted earnings per common share assumes conversion of all potentially dilutive outstanding stock options, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings per share if their effect is anti-dilutive.
Operating Segments:
The Company operates in a single segment – property and casualty insurance.
3. Recently Issued Accounting Standards
ASU 2014-09: Revenue from Contracts with Customers:
The FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers”, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13, (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company will adopt Topic 606 on the effective date and since virtually all of the Company’s revenues relate to insurance contracts and investment income, the adoption of Topic 606 is not expected to have a material impact on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within the scope of Topic 606 as such are consummated.
ASU 2016-01: Financial Instruments-Overall:
In January 2016, the FASB issued ASU 2016-01:Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income (loss). ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. ASU 2016-01 will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, cash flows, or total comprehensive income, but could impact the Company’s results of operations and earnings per share as changes in fair value will be presented in net income rather than other comprehensive income.
ASU 2016-02: Leases:
In February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income while the repayment of the principal portion of the lease liability will be classified as a financing activity and the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company has reviewed its existing lessee obligations and has determined that ASU 2016-02 will apply should the Company renew its existing leases, or enter into any new lease agreements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
ASU 2016-09: Stock Compensation:
In March 2016, the FASB issued ASU 2016-09:Compensation – Stock Compensation: Improvement to Employee Share-Based Payment Accounting. ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that all tax effects related to share-based payment be made through the statement of operations at the time of settlement as opposed to the current guidance that requires excess tax benefits to be recognized in additional paid-in-capital. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. The change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a departure from the current requirement which presents tax benefits as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated financial statements.
ASU 2016-13: Financial Instruments – Credit Losses:
In June 2016, the FASB issued ASU 2016-13:Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on financial instruments was generally delayed until the loss was probable of occurring. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
4. Investments
A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on the Company’s investments in fixed income and equity securities at September 30, 2017 and December 31, 2016 is as follows.
As of September 30, 2017 (unaudited) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | 2,911 | | | $ | 6 | | | $ | (18 | ) | | $ | 2,899 | | State municipalities and political subdivisions | | | 5,379 | | | | 12 | | | | (26 | ) | | | 5,365 | | Asset-backed securities and collateralized mortgage obligations | | | 16,727 | | | | 26 | | | | (119 | ) | | | 16,635 | | Corporate | | | 20,235 | | | | 113 | | | | (40 | ) | | | 20,308 | | Total fixed income securities | | | 45,252 | | | | 157 | | | | (202 | ) | | | 45,207 | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,571 | | | | 66 | | | | (25 | ) | | | 1,612 | | Warrants to purchase common stock | | | 72 | | | | 79 | | | | (29 | ) | | | 122 | | Rights to purchase common stock | | | 39 | | | | 3 | | | | (5 | ) | | | 37 | | Total equity securities | | | 1,682 | | | | 148 | | | | (59 | ) | | | 1,771 | | Total fixed income and equity securities | | $ | 46,934 | | | $ | 305 | | | $ | (261 | ) | | $ | 46,978 | | | | | | | | | | | | | | | | | | | As of December 31, 2016 | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | 1,623 | | | $ | 1 | | | $ | (20 | ) | | $ | 1,604 | | State municipalities and political subdivisions | | | 2,271 | | | | 2 | | | | (27 | ) | | | 2,246 | | Asset-backed securities and collateralized mortgage obligations | | | 12,095 | | | | 9 | | | | (136 | ) | | | 11,968 | | Corporate | | | 10,804 | | | | 28 | | | | (91 | ) | | | 10,741 | | Total fixed income securities | | | 26,793 | | | | 40 | | | | (274 | ) | | | 26,559 | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,000 | | | | 136 | | | | — | | | | 1,136 | | Total equity securities | | | 1,000 | | | | 136 | | | | — | | | | 1,136 | | Total fixed income and equity securities | | $ | 27,793 | | | $ | 176 | | | $ | (274 | ) | | $ | 27,695 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
The table below summarizes the Company’s fixed income securities at September 30, 2017 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
Matures in: | | Amortized Cost | | | Estimated Fair Value | | One year or less | | $ | 2,416 | | | $ | 2,415 | | More than one to five years | | | 19,759 | | | | 19,757 | | More than five to ten years | | | 11,780 | | | | 11,804 | | More than ten years | | | 11,297 | | | | 11,231 | | Total | | $ | 45,252 | | | $ | 45,207 | |
The following table highlights, by loss position and security type, those fixed income and equity securities in unrealized loss positions as of September 30, 2017 and December 31, 2016. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions. There were 149 and 122 fixed income investments that were in unrealized loss positions as of September 30, 2017 and December 31, 2016, respectively. The Company held 12 equity investments in unrealized loss positions as of September 30, 2017.
| | Less than 12 Months | | | Greater than 12 Months | | | Total | | As of September 30, 2017 (unaudited) | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | 2,041 | | | $ | (18 | ) | | $ | 175 | | | $ | — | | | $ | 2,216 | | | $ | (18 | ) | State municipalities and political subdivisions | | | 2,357 | | | | (13 | ) | | | 589 | | | | (13 | ) | | | 2,946 | | | | (26 | ) | Asset-backed securities and collateralized mortgage obligations | | | 11,682 | | | | (83 | ) | | | 1,675 | | | | (36 | ) | | | 13,357 | | | | (119 | ) | Corporate | | | 6,568 | | | | (23 | ) | | | 556 | | | | (16 | ) | | | 7,124 | | | | (39 | ) | Total fixed income securities | | | 22,648 | | | | (137 | ) | | | 2,995 | | | | (65 | ) | | | 25,643 | | | | (202 | ) | Equity securities: | | | | | | | | | | | — | | | | — | | | | | | | | | | Common stock | | | 237 | | | | (25 | ) | | | — | | | | — | | | | 237 | | | | (25 | ) | Warrants to purchase common stock | | | 23 | | | | (29 | ) | | | — | | | | — | | | | 23 | | | | (29 | ) | Rights to purchase common stock | | | 18 | | | | (5 | ) | | | — | | | | — | | | | 18 | | | | (5 | ) | Total equity securities | | | 278 | | | | (59 | ) | | | — | | | | | | | | 278 | | | | (59 | ) | Total fixed income and equity securities | | $ | 22,926 | | | $ | (196 | ) | | $ | 2,995 | | | $ | (65 | ) | | $ | 25,921 | | | $ | (261 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | 1,303 | | | $ | (20 | ) | | $ | — | | | $ | — | | | $ | 1,303 | | | $ | (20 | ) | State municipalities and political subdivisions | | | 1,537 | | | | (27 | ) | | | — | | | | — | | | | 1,537 | | | | (27 | ) | Asset-backed securities and collateralized mortgage obligations | | | 9,552 | | | | (133 | ) | | | 460 | | | | (3 | ) | | | 10,012 | | | | (136 | ) | Corporate | | | 5,952 | | | | (91 | ) | | | — | | | | — | | | | 5,952 | | | | (91 | ) | Total fixed income securities | | $ | 18,344 | | | $ | (271 | ) | | $ | 460 | | | $ | (3 | ) | | $ | 18,804 | | | $ | (274 | ) |
Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling at least $2,000 with the State of Texas. Maison deposited the required securities with the State of Texas on May 13, 2015. These securities consist of various fixed income securities listed in the preceding tables which have an amortized cost basis of $2,001 and estimated fair value of $1,998 as of September 30, 2017.
The Company’s other investments are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $645 through September 30, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which, as of April 21, 2016 is wholly owned by KFSI (see Note 12 – Related Party Transactions). The Company has accounted for its investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Also included in other investments is a certificate of deposit in the amount of $300 with an original term of 18 months deposited with the State of Florida pursuant to the terms of the certificate of authority issued to Maison from the FL OIR.
Other-than-Temporary Impairment:
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
| ● | considering the extent and length of time during which the market value has been below cost; |
| ● | identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions; |
| ● | obtaining a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their knowledge and experience combined with market-based valuation techniques; |
| ● | reviewing the historical trading volatility and trading range of the investment and certain other similar investments; |
| ● | assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies; |
| ● | assessing the timeliness and completeness of principal and interest payment due from the investee; and |
| ● | assessing the Company’s ability and intent to hold these investments until the impairment may be recovered. |
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:
| ● | the opinions of professional investment managers could be incorrect; |
| ● | the past trading patterns of investments may not reflect their future valuation trends; |
| ● | the credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the investee company’s financial situation; and |
| ● | the historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s unknown underlying financial problems. |
The Company has reviewed currently available information regarding the investments it holds which have estimated fair values that are less than their carrying amounts and believes that these unrealized losses are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell these investments in the short term, and it is not likely that it will be required to sell these investments before the recovery of their amortized cost.
Accordingly, all of the Company’s investments were in good standing and there were no write-downs for other-than-temporary impairments on the Company’s investments for the nine months ended September 30, 2017 and 2016.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
The Company does not have any exposure to subprime mortgage-backed investments. Net investment income for the three and nine months ended September 30, 2017 and 2016 was as follows:
| | Three months ended September 30, | | | Nine months ended September 30, | | (unaudited) | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Investment income: | | | | | | | | | | | | | | | | | Interest on fixed income securities | | $ | 231 | | | $ | 123 | | | $ | 548 | | | $ | 332 | | Interest on cash and cash equivalents | | | 30 | | | | 34 | | | | 126 | | | | 89 | | Realized gain upon sale of securities | | | 4 | | | | — | | | | 68 | | | | — | | Other | | | — | | | | 5 | | | | — | | | | 7 | | Gross investment income | | | 265 | | | | 162 | | | | 742 | | | | 428 | | Investment expenses | | | (17 | ) | | | (11 | ) | | | (42 | ) | | | (35 | ) | Net investment income | | $ | 248 | | | $ | 151 | | | $ | 700 | | | $ | 393 | |
5. Reinsurance
The Company reinsures, or cedes, a portion of its written premiums on a per risk and excess of loss basis to non-affiliated insurers in order to limit its loss exposure. Although reinsurance is intended to reduce the Company’s exposure risk, the ceding of insurance does not legally discharge the Company from its primary liability for the full amount of coverage under its policies. If our reinsurers fail to meet their obligations under the applicable reinsurance agreements, the Company would still be required to pay the insured for the loss.
Under the Company’s per-risk treaty, reinsurance recoveries are received for up to $1,750 in excess of a retention of $250 for each loss occurring prior to June 1, 2017. Effective June 1, 2017, the Company amended its per-risk treaty such that recoveries are received for up to $1,600 in excess of a retention of $400 for each loss occurring on June 1, 2017 or thereafter. The Company has ceded $405 and $438 in written premiums under its per-risk treaties for the nine months ended September 30, 2017 and 2016, respectively.
The Company’s excess of loss treaties are based upon a treaty year beginning on June 1st of each year and expiring on May 31st of the following year. Thus, the financial statements for the nine month periods ended September 30, 2017 and 2016 contain premiums ceded under three separate excess of loss treaties. Under the Company’s 2015/2016 excess of loss treaty which expired on May 31, 2016, for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $121,000 in excess of a retention of $4,000 per event. The Company had also procured a “top, drop and aggregate” layer of reinsurance protection that may be used for any event above $125,000, up to a maximum recovery of $15,000. This $15,000 second layer of coverage applied in total to all events occurring during the treaty year of June 1, 2015 through May 31, 2016.
For both the treaty years beginning June 1, 2016 and June 1, 2017, the Company’s excess of loss treaties cover losses of up to $170,000 in excess of a $5,000 retention per event. For any event above $175,000, the Company again purchased top, drop and aggregate coverage, with an additional limit of $25,000. The $25,000 aggregate coverage applies in total to all events occurring during each of the treaty years.
The Company has ceded $16,021 and $14,976 in written premiums under its excess of loss treaties for the nine months ended September 30, 2017 and 2016, respectively.
In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we act as a reinsurer, and have assumed wind/hail only exposures on certain churches and related structures that Brotherhood insures throughout the State of Texas. Our quota-share percentage varies from 25%-100% of the wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal areas versus non-coastal areas) within the State of Texas. For the nine months ended September 30, 2017, we have written $1,427 in assumed premiums through our agreement with Brotherhood, compared to $1,367 in assumed premiums for the same period in 2016.
On December 1, 2016, we participated TWIA’s inaugural depopulation program whereby Maison assumed personal lines policies for wind and hail only exposures along the Gulf Coast area of Texas. The depopulation program was structured such that Maison reinsures TWIA under a 100% quota share agreement. For the nine months ended September 30, 2017, we have written $1,401 in assumed premiums through the TWIA quota share agreement.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
The impact of reinsurance treaties on the Company’s financial statements is as follows:
(unaudited) | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Premium written: | | | | | | | | | | | | | | | | | Direct | | $ | 16,533 | | | $ | 13,457 | | | $ | 45,989 | | | $ | 38,117 | | Assumed | | | 630 | | | | 509 | | | | 2,828 | | | | 1,367 | | Ceded | | | (6,051 | ) | | | (5,973 | ) | | | (16,426 | ) | | | (15,414 | ) | Net premium written | | $ | 11,112 | | | $ | 7,993 | | | $ | 32,391 | | | $ | 24,070 | | | | | | | | | | | | | | | | | | | Premium earned: | | | | | | | | | | | | | | | | | Direct | | $ | 14,056 | | | $ | 12,037 | | | $ | 40,015 | | | $ | 34,455 | | Assumed | | | 851 | | | | 509 | | | | 2,454 | | | | 1,367 | | Ceded | | | (6,275 | ) | | | (5,410 | ) | | | (17,437 | ) | | | (12,953 | ) | Net premium earned | | $ | 8,632 | | | $ | 7,136 | | | $ | 25,032 | | | $ | 22,869 | | | | | | | | | | | | | | | | | | | Losses and LAE incurred: | | | | | | | | | | | | | | | | | Direct | | $ | 20,451 | | | $ | 12,529 | | | $ | 31,297 | | | $ | 25,985 | | Assumed | | | 5,734 | | | | 562 | | | | 8,937 | | | | 2,340 | | Ceded | | | (18,390 | ) | | | (6,648 | ) | | | (26,425 | ) | | | (13,408 | ) | Net losses and LAE incurred | | $ | 7,795 | | | $ | 6,443 | | | $ | 13,809 | | | $ | 14,917 | |
6. Deferred Policy Acquisition Costs
Deferred policy acquisition costs (“DPAC”) consist primarily of commissions, premium taxes, assessments and other policy processing fees incurred which are related to successful efforts to acquire new or renewal insurance contracts. Acquisition costs deferred on insurance products are amortized over the period in which the related revenues are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred.
DPAC as well as the related amortization expense associated with DPAC for the three and nine months ended September 30, 2017 and 2016, is as follows:
(unaudited) | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | | | | | Balance, beginning of period, net | | $ | 5,545 | | | $ | 4,139 | | | $ | 4,389 | | | $ | 4,030 | | Additions | | | 3,402 | | | | 2,325 | | | | 9,670 | | | | 6,487 | | Amortization | | | (2,755 | ) | | | (2,095 | ) | | | (7,867 | ) | | | (6,148 | ) | Balance, September 30, net | | $ | 6,192 | | | $ | 4,369 | | | $ | 6,192 | | | $ | 4,369 | |
7. Loss and Loss Adjustment Expense Reserves
The Company continually revises its estimates of the ultimate financial impact of claims made. A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for loss and loss adjustment expense (“LAE”) reserves. The process for establishing this provision reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. The process of establishing the provision for loss and LAE reserves relies on the judgment and opinions of a large number of individuals, including the opinions of the Company’s independent actuaries.
The Company’s evaluation of the adequacy of loss and loss adjustment expense reserves includes a re-estimation of the liability for loss and LAE reserves relating to each preceding financial year compared to the liability that was previously established. The results of this comparison and the changes in the provision, net of amounts recoverable from reinsurers, for the nine months ended September 30, 2017 and 2016 were as follows:
(unaudited) | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Balance, beginning of period, gross of reinsurance | | $ | 9,583 | | | $ | 5,884 | | | $ | 6,971 | | | $ | 2,123 | | Less reinsurance recoverable on loss and LAE expense reserves | | | (6,012 | ) | | | (3,431 | ) | | | (3,652 | ) | | | (120 | ) | Balance, beginning of period, net of reinsurance | | | 3,571 | | | | 2,453 | | | | 3,319 | | | | 2,003 | | Incurred related to: | | | | | | | | | | | | | | | | | Current year | | | 8,717 | | | | 6,487 | | | | 15,953 | | | | 15,090 | | Prior years | | | (922 | ) | | | (44 | ) | | | (2,144 | ) | | | (173 | ) | Paid related to: | | | | | | | | | | | | | | | | | Current year | | | (7,246 | ) | | | (5,671 | ) | | | (12,060 | ) | | | (12,719 | ) | Prior years | | | 411 | | | | 36 | | | | (537 | ) | | | (940 | ) | Balance, September 30, net of reinsurance | | | 4,531 | | | | 3,261 | | | | 4,531 | | | | 3,261 | | Plus reinsurance recoverable related to loss and LAE expense reserves | | | 17,560 | | | | 5,366 | | | | 17,560 | | | | 5,366 | | Balance, September 30, gross of reinsurance | | $ | 22,091 | | | $ | 8,627 | | | $ | 22,091 | | | $ | 8,627 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
8. Income Taxes
Actual income tax expense for the three and nine months ended September 30, 2017 and 2016 varies from the amount that would result by applying the applicable statutory federal income tax rate of 34% to income before income taxes as summarized in the following table:
(unaudited) | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Income tax benefit at statutory income tax rate | | $ | (1,168 | ) | | $ | (902 | ) | | $ | (508 | ) | | $ | (743 | ) | State income tax (net of federal tax benefit) | | | (5 | ) | | | 54 | | | | 104 | | | | 131 | | Other | | | 2 | | | | 1 | | | | 7 | | | | 7 | | Income tax benefit | | $ | (1,171 | ) | | $ | (847 | ) | | $ | (397 | ) | | $ | (605 | ) |
The Company carries a net deferred income tax asset of $855 and $420 as of September 30, 2017 and December 31, 2016, respectively, all of which the Company believes is more likely than not to be fully realized based upon management’s assessment of future taxable income. Significant components of the Company’s net deferred tax assets are as follows:
(unaudited) | | September 30, 2017 | | | December 31, 2016 | | Deferred income tax assets: | | | | | | | | | Loss and loss adjustment expense reserves | | $ | 49 | | | $ | 35 | | Unearned premium reserves | | | 2,055 | | | | 1,503 | | Net operating loss carryforwards | | | 736 | | | | 235 | | Share-based compensation | | | 335 | | | | 316 | | Other | | | 308 | | | | 270 | | Deferred income tax assets | | $ | 3,483 | | | $ | 2,359 | | | | | | | | | | | Deferred income tax liabilities: | | | | | | | | | Deferred policy acquisition costs | | $ | 2,105 | | | $ | 1,492 | | State deferred taxes | | | 444 | | | | 397 | | Other | | | 79 | | | | 50 | | Deferred income tax liabilities | | $ | 2,628 | | | $ | 1,939 | | | | | | | | | | | Net deferred income tax assets | | $ | 855 | | | $ | 420 | |
As of September 30, 2017, the Company had no unrecognized tax benefits. The Company analyzed its tax positions in accordance with the provisions of Accounting Standards Codification Topic 740,Income Taxes, and has determined that there are currently no uncertain tax positions. The Company generally recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
9. Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding during the periods presented. In calculating diluted loss per share, those potential common shares that are found to be anti-dilutive are excluded from the calculation. The table below provides a summary of the numerators and denominators used in determining basic and diluted loss per share for the three and nine months ended September 30, 2017 and 2016.
(unaudited) | | Three months ended September 30, | | | Nine months ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Basic and Diluted: | | | | | | | | | | | | | | | | | Net loss | | $ | (2,263 | ) | | $ | (1,806 | ) | | $ | (1,096 | ) | | $ | (1,581 | ) | Weighted average common shares outstanding | | | 5,961,636 | | | | 6,022,983 | | | | 5,958,407 | | | | 6,076,838 | | Loss per common share | | $ | (0.38 | ) | | $ | (0.30 | ) | | $ | (0.18 | ) | | $ | (0.26 | ) |
The following potentially dilutive securities outstanding as of September 30, 2017 and 2016 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
(unaudited) | | As of September 30, | | | | 2017 | | | 2016 | | Options to purchase common stock | | | 177,456 | | | | 210,489 | | Warrants to purchase common stock | | | 1,906,875 | | | | 1,906,875 | | Restricted stock units | | | 20,500 | | | | 20,500 | | Performance shares | | | 475,000 | | | | 475,000 | | | | | 2,579,831 | | | | 2,612,864 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
10. Options, Warrants, and Restricted Stock Units
The Company has established an equity incentive plan for employees and directors of the Company (the “Plan”). The purpose of the Plan is to create incentives designed to motivate recipients to contribute toward the Company’s growth and success, and also to attract and retain persons of outstanding competence, and provide such persons with an opportunity to acquire an equity interest in the Company.
The types of awards available for issuance under the Plan include non-qualified stock options, restricted stock, restricted stock units (“RSUs”), performance shares, performance cash awards, and other stock-based awards. The Plan provides for the issuance of 354,912 shares of common stock. As of September 30, 2017, both stock options and RSUs had been issued to the Company’s employees under the Plan resulting in 156,956 shares available for future issuance under the Plan.
There were no grants, exercises, or cancellations of the Company’s stock options for the nine months ended September 30, 2017. The following table summarizes the Company’s stock options outstanding as of September 30, 2017.
Stock Options Outstanding as of September 30, 2017 (unaudited) | | Date of Grant | | | Exercise Price ($) | | | Expiration Date | | Remaining Contractual Life (Years) | | | Number Outstanding | | | Number Exercisable | | 03/31/2014 | | | | 8.00 | | | 03/31/2019 | | | 1.50 | | | | 163,301 | | | | 143,704 | | 04/04/2014 | | | | 8.69 | | | 04/04/2019 | | | 1.51 | | | | 14,155 | | | | 12,456 | | | | | | | | | | | | Total | | | | 177,456 | | | | 156,160 | |
On May 29, 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs to certain of its executive officers under the Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share; and (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued.
On May 23, 2017, the Compensation Committee of the Company’s Board of Directors approved the potential issuance of RSUs to the Company’s Chief Operating Officer, Mr. Case. Mr. Case will be awarded two matching RSUs for each share of the Company’s common stock that he purchases on the open market or directly from the Company during the period beginning May 23, 2017 and ending June 15, 2018, up to a maximum of 136,054 RSUs. Each RSU will entitle Mr. Case to one share of the Company’s common stock upon the vesting date of the RSU, which shall vest 20% per year over a period of five years following the date granted, subject to Mr. Case’s continued employment with the Company. Mr. Case will also be required to maintain ownership of the shares purchased through the full five-year vesting period. The RSUs will be issued to Mr. Case outside of the Plan as an inducement grant material to Mr. Case entering into employment with the Company. Through September 30, 2017, Mr. Case had purchased 50,092 shares of the Company’s common stock, of which 28,000 restricted common shares were purchased directly from the Company.
On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved the potential issuance of additional RSUs to the Company’s Officers and Directors under the Plan. The number of RSUs to be granted will be based upon the number of shares of the Company’s common stock that each participating Officer and Director purchases in open market transactions, independently, and without assistance from the Company, during the period beginning May 31, 2017 and ending November 30, 2017 (the “Purchase Period”). At the end of the Purchase Period, the Company will issue to each participating Officer and Director a total of two RSUs for each share of the Company’s common stock purchased during the Purchase Period, subject to a maximum of 40,000 RSUs for the Company’s Chief Executive Officer, Mr. Raucy, 40,000 RSUs for the Company’s Chief Financial Officer, Mr. Hill, 20,000 RSUs for the Company’s Chief Underwriting Officer, Mr. Stroud, and 6,666 RSUs for each of the Company’s non-employee Directors. Each RSU will entitle the grantee to one share of the Company’s common stock upon the vesting date of the RSU, which shall vest 20% per year over a period of five years following the date granted, subject to each Officer’s continued employment with the Company and each Director’s continued service on the Board, provided that if a Director makes himself available and consents to be nominated by the Company for continued service but is not nominated by the Board for election by the shareholders, other than for good reason as determined by the Board in its discretion, then such director’s RSUs shall vest in full as of his last date of service as a director with the Company. Participating Officers and Directors will be required to maintain ownership of the shares purchased through the full five-year vesting period. Pursuant to the arrangement, a maximum number of 139,996 RSUs may be granted to the Company’s Officers and Directors at the end of the Purchase Period under the Plan. Through September 30, 2017, the Company’s Officers and Directors had purchased 41,565 shares of the Company’s common stock.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
The following table summarizes RSU activity for the nine months ended September 30, 2017.
Restricted Stock Units | | Number of Units | | | Weighted Average Grant Date Fair Value | | Non-vested units, December 31, 2016 | | | 20,500 | | | $ | 1.34 | | Granted | | | — | | | | — | | Vested | | | — | | | | — | | Forfeited | | | — | | | | — | | Non-vested units, September 30, 2017(unaudited) | | | 20,500 | | | $ | 1.34 | |
Total stock based compensation expense for the nine months ended September 30, 2017 and 2016 was $19 and $30, respectively. As of September 30, 2017, total unrecognized stock compensation expense of $11 remained, which will be recognized through March 31, 2018.
There were no grants, exercises, or cancellations of the Company’s common stock warrants for the nine months ended September 30, 2017. The following table summarizes the Company’s warrants outstanding as of September 30, 2017.
Date of Grant | | | Exercise Price ($) | | | Expiration Date | | Remaining Contractual Life (Years) | | | Number Outstanding and Exercisable | | 03/31/2014 | | | | 9.60 | | | 03/31/2019 | | | 1.50 | | | | 312,500 | | 03/31/2014 | | | | 10.00 | | | 03/31/2019 | | | 1.50 | | | | 94,375 | | 02/24/2015 | | | | 15.00 | | | 02/24/2022 | | | 4.41 | | | | 1,500,000 | | | | | | | | | | | | Total | | | | 1,906,875 | |
11. Shareholders’ Equity
Treasury Shares
On December 1, 2014, the Company’s Board of Directors authorized a share repurchase program for up to 500,000 shares of the Company’s common stock, which expired on December 31, 2016. Through December 31, 2016, the Company has repurchased an aggregate 401,359 shares at an aggregate purchase price of $2,927, or $7.29 per share, including all fees and commissions.
On January 29, 2016, the Company retired 250,000 of its treasury shares, resulting in a reclassification of the purchase price of $1,917 to additional paid in capital.
12. Related Party Transactions
Related party transactions are carried out in the normal course of operations and are measured in part by the amount of consideration paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each case approximates fair value. Except where disclosed elsewhere in these consolidated financial statements, the following is a summary of related party transactions.
Performance Share Grant Agreement
On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with KAI, whereby KAI will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones regarding the Company’s stock price. Pursuant to the terms of the PSGA, if at any time the last sales price of the Company’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). The shares of common stock granted to KAI will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. As of September 30, 2017, the Company has not issued any shares under the PSGA.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Termination of Management Services Agreement
As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company has issued the following securities to 1347 Advisors, LLC (“Advisors”), a wholly owned subsidiary of KFSI:
| ● | 100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event; |
| ● | 120,000 shares of Series B Preferred Stock of the Company (the “Preferred Shares”); and |
| ● | A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $15.00 per share. The Warrant expires on February 24, 2022. |
The Performance Shares Grant Agreement grants Advisors 100,000 shares of the Company’s common stock issuable upon the date that the last sales price of the Company’s common stock equals or exceeds $10.00 per share for any 20 trading days within any 30-day trading period (the “Milestone Event”). Advisors will not be entitled to any dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved.
The Preferred Shares have a par value of $25.00 and pay annual cumulative dividends at a rate of eight percent per annum. Cumulative dividends shall accrue, whether or not declared by the Board and irrespective of whether there are funds legally available for the payment of dividends. Accrued dividends shall be paid in cash only when, as, and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Preferred Shares. In the event of any voluntary of involuntary liquidation, dissolution, or winding up of the Company, the holders of the Preferred Shares then outstanding shall be entitled to be paid out of the assets of the Company available for distributions to its shareholders, before any payment shall be made to holders of securities junior in preference to the Preferred Shares. The Preferred Shares rank senior to the Company’s common stock, and the Company is not permitted to issue any other series of preferred stock that ranks equal or senior to the Preferred Shares while the Preferred Shares are outstanding. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to Advisors representing annual dividend payments due on the Preferred Shares.
Unless redeemed earlier by the Company as discussed below, with the written consent of the holders of the majority of the Preferred Shares then outstanding, the Company will be required to redeem the Preferred Shares then outstanding on February 24, 2020 (the “Mandatory Redemption Date”), for a redemption amount equal to $25.00 per share plus all accrued and unpaid dividends on such shares. The Company has the option to redeem the Preferred Shares prior to the Mandatory Redemption Date immediately prior to the consummation of any change in control of the Company that may occur.
Since the Preferred Shares have a mandatory redemption provision requiring redemption on February 24, 2020, the Company was required to classify the Preferred Shares as a liability on the balance sheet instead of recording the value of these shares in equity. The resulting liability was recorded at a discount to the ultimate redemption amount of the Preferred Shares based upon an analysis of the cash payments expected to occur under the terms of the Preferred Shares discounted for the Company’s estimated cost of equity (13.9%). As a result, amortization in the amount of $1,889 will be charged to operations during the period the Preferred Shares are outstanding using the effective interest method. For the nine months ended September 30, 2017 and 2016, amortization of the discount on the Preferred Shares totaled $276 and $263, respectively.
Investment in Limited Liability Company
On April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary business is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund in which the Company has committed to invest $500, of which the Company has invested $211 as of September 30, 2017. The managing member of Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s board of directors on April 21, 2016.
13. Accumulated Other Comprehensive Income (Loss)
The table below details the change in the balance of each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2017 and 2016.
(unaudited) | | Three months ended September 30, | | | Nine month ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | | | | | | | Balance, beginning of period | | $ | 4 | | | $ | 259 | | | $ | (65 | ) | | $ | (62 | ) | Other comprehensive income (loss) before reclassifications | | | 40 | | | | (10 | ) | | | 187 | | | | 478 | | Amounts reclassified from accumulated other comprehensive income (loss) | | | (3 | ) | | | (6 | ) | | | (45 | ) | | | (8 | ) | Income taxes | | | (12 | ) | | | 5 | | | | (48 | ) | | | (160 | ) | Net current-period other comprehensive income (loss) | | | 25 | | | | (11 | ) | | | 94 | | | | 310 | | Balance, September 30 | | $ | 29 | | | $ | 248 | | | $ | 29 | | | $ | 248 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
14. Fair Value of Financial Instruments
Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company’s financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company’s intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company classifies its investments in fixed income and equity securities as available-for-sale and reports these investments at fair value. Fair values of fixed income securities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence.
The FASB has issued guidance that defines fair value as the exchange price that would be received for and asset (or paid to transfer a liability) in the principal, or most advantageous market in an orderly transaction between market participants. This guidance also establishes a fair value hierarchy that requires and entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurements, as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets providing the most reliable measurement of fair value since it is directly observable. |
| ● | Level 2 – inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets. These inputs are observable, either directly or indirectly, for substantially the full-term of the financial instrument. |
| ● | Level 3 – inputs to the valuation methodology which are unobservable and significant to the measurement of fair value. |
Financial instruments measured at fair value as of September 30, 2017 and December 31, 2016 in accordance with this guidance are as follows.
September 30, 2017 (unaudited) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | | $ | 2,899 | | | $ | — | | | $ | 2,899 | | State municipalities and political subdivisions | | | — | | | | 5,365 | | | | — | | | | 5,365 | | Asset-backed securities and collateralized mortgage Obligations | | | — | | | | 16,635 | | | | — | | | | 16,635 | | Corporate | | | — | | | | 20,308 | | | | — | | | | 20,308 | | Total fixed income securities | | | — | | | | 45,207 | | | | — | | | | 45,207 | | | | | | | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,612 | | | | — | | | | — | | | | 1,612 | | Warrants to purchase common stock | | | 122 | | | | — | | | | — | | | | 122 | | Rights to purchase common stock | | | 37 | | | | — | | | | — | | | | 37 | | Total equity securities | | | 1,771 | | | | — | | | | — | | | | 1,771 | | Total fixed income and equity securities | | $ | 1,771 | | | $ | 45,207 | | | $ | — | | | $ | 46,978 | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | | $ | 1,604 | | | $ | — | | | $ | 1,604 | | State municipalities and political subdivisions | | | — | | | | 2,246 | | | | — | | | | 2,246 | | Asset-backed securities and collateralized mortgage Obligations | | | — | | | | 11,968 | | | | — | | | | 11,968 | | Corporate | | | — | | | | 10,741 | | | | — | | | | 10,741 | | Total fixed income securities | | $ | — | | | $ | 26,559 | | | $ | — | | | $ | 26,559 | | | | | | | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,136 | | | | — | | | | — | | | | 1,136 | | Total equity securities | | | 1,136 | | | | — | | | | — | | | | 1,136 | | | | | | | | | | | | | | | | | | | Total fixed income and equity securities | | $ | 1,136 | | | $ | 26,559 | | | $ | — | | | $ | 27,695 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
15. Statutory Requirements
The Company’s insurance subsidiary, Maison, prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by the LDI. Prescribed statutory accounting practices include state laws, rules and regulations as well as accounting practices and rules as outlined in a variety of publications of the National Association of Insurance Commissioners (“NAIC”). Permitted statutory accounting practices encompass all accounting practices that are not prescribed, but instead have been specifically requested by an insurer and allowed by the state in which the insurer is domiciled (in Maison’s case, Louisiana). Permitted practices may differ from state to state, company to company within a state, and may change in the future. In converting from statutory accounting basis to U.S. GAAP, typical adjustments include the deferral of acquisition costs (which are all charged to operations as incurred on a statutory basis), the inclusion of statutorily non-admitted assets on the balance sheet, the inclusion of net unrealized holding gains or losses related to investments included on the balance sheet, as well as the inclusion of changes in deferred tax assets and liabilities in the statement of operations.
Statutory Surplus and Capital Requirements
In order to retain its certificate of authority in the States of Louisiana and Florida, Maison is required to maintain a minimum capital surplus of $5,000 and $35,000, respectively. As of September 30, 2017, Maison’s capital surplus was $35,962.
The LDI employs risk-based capital (“RBC”) reports to monitor Maison’s financial condition. Risk-based capital is determined in accordance with a formula adopted by the NAIC which takes into consideration the covariance between asset risk, credit risk, underwriting risk, and other business risks. The RBC report determines whether Maison falls into the “no action” level or one of the four action levels set forth in the Louisiana Insurance Code. Furthermore, in order to retain its certificate of authority in the State of Texas, Maison is required to maintain an RBC ratio of 300% or more. As of September 30, 2017, Maison’s RBC ratio was above 300%.
States routinely require deposits of assets for the protection of policyholders. As of September 30, 2017, Maison held certificates of deposit with an estimated fair value of approximately $100 and $300 as a deposit with the LDI and FL OIR, respectively. Maison also held investment securities with an estimated fair value of approximately $2,000 as a deposit with the TDI.
Surplus Notes
PIH, as the parent company of Maison, is subject to the insurance holding company laws of the State of Louisiana, which, among other things, regulate the terms of surplus notes issued by insurers to their parent company. Maison’s capital is comprised of six surplus notes issued to PIH for the total principal amount of $9,000, all of which have been approved by the LDI prior to their issuance. Notes accrue interest at 10% per annum. Interest payments on the notes are due annually, and are also subject to prior approval by the LDI. The Company’s surplus notes, as of September 30, 2017, are as follows.
Date of Issuance | | | Maturity Date | | Principal Amount | | October 22, 2013 | | | October 22, 2017 | | $ | 650 | | December 21, 2015 | | | December 21, 2017 | | | 850 | | March 31, 2016 | | | March 31, 2018 | | | 550 | | September 29, 2016 | | | September 29, 2018 | | | 3,450 | | November 14, 2016 | | | November 14, 2018 | | | 550 | | September 28, 2017 | | | September 28, 2019 | | | 2,950 | | | | | | | $ | 9,000 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ amounts in thousands, except share and per share data)
Dividend Restrictions
As a Louisiana domiciled insurer, the payment of dividends from our insurance subsidiary is restricted by the Louisiana Insurance Code. Dividends can only be paid if an insurer’s paid-in capital and surplus exceed the minimum required by the Louisiana Insurance Code. Any dividend or distribution that when aggregated with any other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) ten percent of the insurer’s surplus as regards policyholders as of the thirty-first day of December next preceding; or (b) the net income of the insurer, not including realized capital gains, for the twelve month period ending the thirty-first day of December next preceding; is considered to be extra-ordinary and shall not be paid until thirty days after the LDI has received notice of the declaration thereof and has not within that period disapproved the payment, or until the LDI has approved the payment within the thirty-day period. In determining whether a dividend or distribution is extra-ordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out in dividends.
Furthermore, pursuant to the consent order issued to Maison by the FL OIR, Maison is restricted from paying dividends which have not been approved in advance by the FL OIR.
As of September 30, 2017, Maison had not paid any dividends to its sole shareholder, PIH.
16. Commitments and Contingencies
Legal Proceedings:
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of ultimate loss and loss adjustment expenses may change. These additional liabilities, or increases in estimates, or a range of either, cannot be reasonably estimated, and could result in income statement charges that could be material to the Company’s results of operations in future periods.
Operating Lease Commitments:
As of September 30, 2017, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.
Year ending September 30, | | | | 2018 | | $ | 303 | | 2019 | | | 298 | | 2020 | | | 25 | | 2021 and thereafter | | | — | | | | $ | 626 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
1347 Property Insurance Holdings, Inc.
Tampa, FL
We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1347 Property Insurance Holdings, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Grand Rapids, Michigan
March 16, 2017
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
| | December 31, 2016 | | | December 31, 2015 | | ASSETS | | | | | | | | | Investments: | | | | | | | | | Fixed income securities, at fair value (amortized cost of $26,793 and $20,332, respectively) | | $ | 26,559 | | | $ | 20,238 | | Equity investments, at fair value (cost of $1,000 and $0, respectively) | | | 1,136 | | | | — | | Short-term investments, at cost | | | 196 | | | | 1,149 | | Limited liability investments, at cost | | | 505 | | | | 248 | | Total investments | | | 28,396 | | | | 21,635 | | Cash and cash equivalents | | | 43,045 | | | | 47,957 | | Deferred policy acquisition costs, net | | | 4,389 | | | | 4,030 | | Premiums receivable, net of allowance for credit losses of $38 and $3, respectively | | | 2,923 | | | | 2,395 | | Ceded unearned premiums | | | 4,847 | | | | 2,805 | | Reinsurance recoverable on paid losses | | | 444 | | | | — | | Reinsurance recoverable on loss and loss adjustment expense reserves | | | 3,652 | | | | 120 | | Funds deposited with reinsured companies | | | 500 | | | | 725 | | Current income taxes recoverable | | | 1,195 | | | | 965 | | Deferred tax asset, net | | | 420 | | | | 506 | | Property and equipment, net | | | 250 | | | | 234 | | Intangible assets, net of accumulated amortization of $0 and $3, respectively | | | — | | | | 6 | | Other assets | | | 788 | | | | 705 | | Total assets | | $ | 90,849 | | | $ | 82,083 | | | | | | | | | | | LIABILITIES | | | | | | | | | Loss and loss adjustment expense reserves | | $ | 6,971 | | | $ | 2,123 | | Unearned premium reserves | | | 25,821 | | | | 23,442 | | Ceded reinsurance premiums payable | | | 5,229 | | | | 3,283 | | Agent commissions payable | | | 497 | | | | 403 | | Premiums collected in advance | | | 1,128 | | | | 870 | | Funds held under reinsurance treaties | | | 73 | | | | — | | Accounts payable and other accrued expenses | | | 2,065 | | | | 1,863 | | Series B Preferred Shares, $25.00 par value, 1,000,000 shares authorized, 120,000 shares issued and outstanding at December 31, 2016 and 2015, respectively | | | 2,708 | | | | 2,593 | | Total liabilities | | | 44,492 | | | | 34,577 | | | | | | | | | | | Commitments and contingencies (Note 19) | | | | | | | | | | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | Common stock, $0.001 par value; 10,000,000 shares authorized; 6,108,125 and 6,358,125 issued and outstanding at December 31, 2016 and 2015, respectively | | | 6 | | | | 6 | | Additional paid-in capital | | | 46,809 | | | | 48,688 | | Retained earnings | | | 616 | | | | 605 | | Accumulated other comprehensive loss | | | (65 | ) | | | (62 | ) | | | | 47,366 | | | | 49,237 | | Less: treasury stock at cost, 151,359 and 223,851 shares as of December 31, 2016 and 2015, respectively | | | (1,009 | ) | | | (1,731 | ) | Total shareholders’ equity | | | 46,357 | | | | 47,506 | |
Total liabilities and shareholders’ equity | | $ | 90,849 | | | $ | 82,083 | |
See accompanying notes to consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
($ in thousands, except per share amounts)
| | Year ended December 31, | | | | 2016 | | | 2015 | | Revenue: | | | | | | | Net premiums earned | | $ | 30,448 | | | $ | 25,934 | | Net investment income | | | 544 | | | | 362 | | Other income | | | 1,264 | | | | 834 | | Total revenue | | | 32,256 | | | | 27,130 | | | | | | | | | | | Expenses: | | | | | | | | | Net losses and loss adjustment expenses | | | 16,372 | | | | 9,939 | | Amortization of deferred policy acquisition costs | | | 8,492 | | | | 6,571 | | General and administrative expenses | | | 6,918 | | | | 7,253 | | Loss on termination of Management Services Agreement | | | — | | | | 5,421 | | Accretion of discount on Series B Preferred Shares | | | 355 | | | | 282 | | Total expenses | | | 32,137 | | | | 29,466 | | | | | | | | | | | Income (Loss) before income tax expense (benefit) | | | 119 | | | | (2,336 | ) | Income tax expense (benefit) | | | 108 | | | | (663 | ) | Net income (loss) | | $ | 11 | | | $ | (1,673 | ) | | | | | | | | | | Net earnings (loss) per common share: | | | | | | | | | Basic | | $ | — | | | $ | (0.27 | ) | Diluted | | $ | — | | | $ | (0.27 | ) | Weighted average common shares outstanding: | | | | | | | | | Basic | | | 6,047,979 | | | | 6,286,706 | | Diluted | | | 6,047,979 | | | | 6,286,706 | | | | | | | | | | | Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | Net income (loss) | | $ | 11 | | | $ | (1,673 | ) | Unrealized losses on investments available for sale, net of income taxes | | | (3 | ) | | | (61 | ) | Comprehensive income (loss) | | $ | 8 | | | $ | (1,734 | ) |
See accompanying notes to consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
($ in thousands, except share amounts)
| | Preferred Stock | | | Common Stock | | | Treasury Stock | | | | | | | | | | | | | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Loss | | | Total Shareholders’ Equity | | Balance, January 1, 2015 | | | — | | | | — | | | | 6,358,125 | | | $ | 6 | | | | — | | | | — | | | $ | 47,631 | | | $ | 2,278 | | | $ | (1 | ) | | $ | 49,914 | | Stock compensation expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 47 | | | | — | | | | — | | | | 47 | | Issuance of performance shares and warrants pursuant to MSA termination transaction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,010 | | | | — | | | | — | | | | 1,010 | | Repurchases of common stock | | | — | | | | — | | | | (223,851 | ) | | | — | | | | 223,851 | | | | (1,731 | ) | | | — | | | | — | | | | — | | | | (1,731 | ) | Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,673 | ) | | | — | | | | (1,673 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (61 | ) | | | (61 | ) | Balance, December 31, 2015 | | | — | | | $ | — | | | | 6,134,274 | | | $ | 6 | | | | 223,851 | | | $ | (1,731 | ) | | $ | 48,688 | | | $ | 605 | | | $ | (62 | ) | | $ | 47,506 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock compensation expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 38 | | | | — | | | | — | | | | 38 | | Repurchases of common stock | | | — | | | | — | | | | (177,508 | ) | | | — | | | | 177,508 | | | | (1,195 | ) | | | — | | | | — | | | | — | | | | (1,195 | ) | Retirement of treasury shares | | | — | | | | — | | | | — | | | | — | | | | (250,000 | ) | | | 1,917 | | | | (1,917 | ) | | | — | | | | — | | | | — | | Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | 11 | | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | Balance, December 31, 2016 | | | — | | | $ | — | | | | 5,956,766 | | | $ | 6 | | | | 151,359 | | | $ | (1,009 | ) | | $ | 46,809 | | | $ | 616 | | | $ | (65 | ) | | $ | 46,357 | |
See accompanying notes to consolidated financial statements
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
| | Year ended December 31, | | | | 2016 | | | 2015 | | Cash provided by (used in): | | | | | | | | | Operating activities: | | | | | | | | | Net income (loss) | | $ | 11 | | | $ | (1,673 | ) | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | Issuance of Preferred Shares, Performance Shares, and Warrants pursuant to MSA termination transaction | | | — | | | | 3,321 | | Accretion of discount on Series B Preferred Shares | | | 355 | | | | 282 | | Charge for impairment of goodwill and other intangible assets | | | — | | | | 251 | | Net deferred income taxes | | | 87 | | | | (243 | ) | Stock compensation expense | | | 38 | | | | 47 | | Depreciation expense | | | 67 | | | | 53 | | Changes in operating assets and liabilities, net of effect of acquisition: | | | | | | | | | Premiums receivable, net | | | (528 | ) | | | (309 | ) | Reinsurance recoverable on paid losses and loss reserves | | | (3,976 | ) | | | 243 | | Amounts held on deposit with reinsured companies | | | 225 | | | | (725 | ) | Ceded unearned premiums | | | (2,042 | ) | | | (1,244 | ) | Deferred policy acquisition costs, net | | | (359 | ) | | | (939 | ) | Loss and loss adjustment expense reserves | | | 4,848 | | | | 912 | | Premiums collected in advance | | | 258 | | | | 310 | | Due to related party | | | — | | | | (145 | ) | Unearned premium reserves | | | 2,379 | | | | 5,739 | | Ceded reinsurance premiums payable | | | 1,946 | | | | 724 | | Current income taxes payable | | | (230 | ) | | | (1,227 | ) | Other, net | | | 293 | | | | 40 | | Net cash provided by operating activities | | | 3,372 | | | | 5,417 | | | | | | | | | | | Investing activities: | | | | | | | | | Purchases of furniture and equipment | | | (83 | ) | | | (48 | ) | Acquisition of entity, net of cash acquired | | | — | | | | (305 | ) | Purchases of limited liability investments | | | (258 | ) | | | (248 | ) | Net purchases of fixed income securities | | | (6,461 | ) | | | (9,817 | ) | Purchases of equity securities | | | (1,000 | ) | | | — | | Net proceeds from the sales of short-term investments | | | 953 | | | | 1,050 | | Net cash used by investing activities | | | (6,849 | ) | | | (9,368 | ) | | | | | | | | | | Financing activities: | | | | | | | | | Payment of dividends on preferred shares | | | (240 | ) | | | — | | Purchases of treasury stock | | | (1,195 | ) | | | (1,731 | ) | Net cash used by financing activities | | | (1,435 | ) | | | (1,731 | ) | | | | | | | | | | Net decrease in cash and cash equivalents | | | (4,912 | ) | | | (5,682 | ) | Cash and cash equivalents at beginning of period | | | 47,957 | | | | 53,639 | | Cash and cash equivalents at end of period | | $ | 43,045 | | | $ | 47,957 | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Cash paid during the period for: | | | | | | | | | Income taxes | | $ | 128 | | | $ | 775 | |
See accompanying notes to consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
1. Nature of Business
Maison Insurance Holdings, Inc. was incorporated on October 2, 2012 in the State of Delaware. On November 19, 2013, the Company changed its legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. (“PIH”). PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business. Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries.
Prior to March 31, 2014, the Company was a wholly owned subsidiary of Kingsway America Inc. (“KAI”). KAI in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, the Company completed an initial public offering of its common stock and then on June 13, 2014, the Company completed a follow-on offering. Through the combination of the Company’s IPO and follow-on offering, we issued approximately five million shares of our common stock. As of December 31, 2016 KAI and companies affiliated with KAI held approximately 975,000 shares of our common stock, equivalent to 16.4% of our outstanding shares.
PIH has three wholly-owned subsidiaries; Maison Insurance Company (“Maison”), a Louisiana-domiciled property and casualty insurance company, Maison Managers, Inc. (“MMI”), a managing general agent, incorporated in the State of Delaware, and ClaimCor, LLC (“ClaimCor”), a Florida based claims solutions company.
Maison began providing homeowners insurance, manufactured home insurance and dwelling fire insurance to individuals in Louisiana in December 2012. Maison writes both full peril property policies as well as wind/hail only exposures in Louisiana and distributes its policies through independent insurance agents. Maison began assuming wind/hail only insurance for commercial properties in Texas beginning in June 2015. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis.
In addition to the voluntary policies Maison writes, we have participated in the last five rounds of depopulation programs implemented by Louisiana Citizens Property Insurance Company (“Citizens”), occurring on December 1st of each year as well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association (“TWIA”) which occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, have the opportunity to assume insurance policies written by both Citizens and TWIA.
MMI serves as the Company’s management services subsidiary as a general agency providing underwriting, policy administration, claims administration, marketing, financial and other management services to Maison. MMI contracts with independent agents for policy sales and services, and contracts with an independent third-party for policy administration services. As a managing general agency, MMI is licensed by, and subject to the regulatory oversight of both the Louisiana and Texas Departments of Insurance (“LDI” and “TDI”, respectively).
On January 2, 2015, the Company completed its acquisition of 100% of the membership interest of ClaimCor, a claims and underwriting technical solutions company. Maison processes claims made by its policyholders through ClaimCor, and also through various third-party claims adjusting companies.
2. Significant Accounting Policies
Basis of Presentation:
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
The Use of Estimates in the Preparation of Consolidated Financial Statements:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves, valuation of fixed income securities, valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs, and stock-based compensation expense.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Investments:
Investments in fixed income and equity securities are classified as available-for-sale and reported at estimated fair value. Unrealized gains and losses are included in accumulated other comprehensive loss, net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses are transferred to the consolidated statement of operations.
Limited liability investments include investments in limited liability companies in which the Company’s interests are deemed minor and therefor, are accounted for under the cost method of accounting which approximates their fair value.
Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value due to their short-term nature.
Realized gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.
Interest income is included in net investment income and is recorded as it accrues.
The Company accounts for its investments using trade date accounting.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment. Impairment is charged to the statement of operations if the fair value of the instrument falls below its amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Cash and Cash Equivalents:
Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
Premiums Receivable:
Premiums receivable include premium balances due and uncollected and installment premiums not yet due from agents and insureds. Premiums receivable are reported net of an estimated allowance for credit losses.
Reinsurance:
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Deferred Policy Acquisition Costs:
The Company defers commissions, premium taxes and other underwriting and agency expenses that are directly related to successful efforts to acquire new or existing insurance policies to the extent they are considered recoverable. Costs deferred on insurance products are amortized over the period in which premiums are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred, as opposed to being deferred and amortized as the premium is earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future loss and loss adjustment expenses to be incurred as revenues are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs.
Income Taxes:
For taxable periods ending on or prior to March 31, 2014, the Company was included in the U.S. consolidated federal income tax return of Kingsway America II Inc. and its eligible U.S. subsidiaries (“KAI Tax Group”). The method of allocating federal income taxes among the companies in the KAI Tax Group is subject to written agreement, approved by each company’s Board of Directors. The allocation is made primarily on a separate return basis, with current credit for any net operating losses or other items utilized in the consolidated federal income tax return. For taxable periods beginning after March 31, 2014, the Company has filed its own U.S. consolidated federal income tax return.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
Property and Equipment:
Property and equipment is reported at historical cost less accumulated depreciation. Depreciation of property and equipment is recorded on a straight-line basis over estimated useful lives which range from seven years for furniture, five years for vehicles, three years for computer equipment, and the shorter of estimated useful life or the term of the lease for leasehold improvements. Property and equipment is estimated to have no salvage value at its useful life-end.
Rent expense for the Company’s office leases is recognized on a straight line basis over the term of the lease. Rent expense was $343 and $214 for the years ended December 31, 2016 and 2015, respectively.
Loss and Loss Adjustment Expense Reserves:
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not yet reported loss events and the related estimated loss adjustment expenses. The Company performs a continuing review of its loss and loss adjustment expense reserves, including its reserving techniques and its reinsurance. The loss and loss adjustment expense reserves are also reviewed at minimum, on an annual basis by qualified third party actuaries. Since the loss and loss adjustment expense reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of income in the period in which the estimates are changed. Such changes in estimates could occur in a future period and may be material to the Company’s results of operations and financial position in such period.
Concentration of Credit Risk:
Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, premiums receivable, and amounts due from reinsurers on losses incurred. The Company maintains its cash with two major U.S. domestic banking institutions and three regional banks headquartered in the Southeastern U.S. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At December 31, 2016 the Company held funds in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.
The Company has not experienced significant losses related to premiums receivable from its policyholders and management believes that amounts provided as an allowance for credit losses is adequate.
The Company has not experienced any losses on amounts due from reinsurers. In order to limit the credit risk associated with amounts potentially due from reinsurers, the Company uses several different reinsurers, all of which have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.
The Company also has risk associated with the lack of geographic diversification due to the fact that Maison primarily underwrites policies in Louisiana and Texas. The Company insures personal property located in 62 of the 64 parishes in the State of Louisiana. As of December 31, 2016, these policies are concentrated within these parishes as follows: Saint Tammany Parish 15.2%, Jefferson Parish 14.2%, East Baton Rouge Parish 7.7%, Orleans Parish 5.6%, Livingston Parish 5.6%, Tangipahoa Parish 5.3%, and Terrebonne Parish 5.2%. No other parish individually has over 5.0% of the total direct policies in force as of December 31, 2016. The remaining 56 parishes combine to equal 33% of our total policies in force as of December 31, 2016. On a direct basis, Maison writes in 105 of the 254 counties that comprise the State of Texas, however no single county represents over 5.0% of our total direct policies in force as of December 31, 2016.
Revenue Recognition:
Premium revenue is recognized on a pro rata basis over the term of the respective policy contract. Unearned premium reserves represent the portion of premium written that is applicable to the unexpired term of policies in force.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Service charges on installment premiums are recognized as income upon receipt of related installment payments and are reflected in other income.
Revenue from policy fees is deferred and recognized over the term of the respective policy period, with revenue reflected in other income.
Any customer payment received is applied first to any service charge or policy fee due, with the remaining amount applied toward any premium due.
Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to reinsurers and are reported as an asset on the Company’s consolidated balance sheets.
Premiums collected in advance occur when the policyholder premium is paid in advance of the effective commencement period of the policy and are recorded as a liability on the Company’s consolidated balance sheets.
Stock-Based Compensation:
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 –Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.
The Company has also issued restricted stock units (“RSUs”) to certain of its employees which have been accounted for as equity based awards since, upon vesting, they are required to be settled in the Company’s common shares. The Company used a Monte Carlo valuation model to estimate the fair value of these awards upon grant date as the vesting of these RSUs occurs solely upon market-based conditions. The fair value of each RSU is recorded as compensation expense over the derived service period, as determined by the valuation model. Should the market-based condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually vest. See Note 11 for further disclosure.
Fair Value of Financial Instruments:
The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable, accounts payable, and other accrued expenses approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 15 for further information on the fair value of the Company’s financial instruments.
Earnings (loss) Per Common Share:
Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.
Diluted earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings (loss) per share if their effect is anti-dilutive.
Operating Segments:
The Company operates in a single segment – property and casualty insurance.
3. Recently Issued Accounting Standards
ASU 2015-09: Financial Services – Insurance:
In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-09:Financial Services – Insurance (Topic 944): Disclosures about Short-Duration Contracts.This update provides for an increase in the transparency of accounting estimates made by companies in the measurement of short-duration contracts and unpaid claim and claim adjustment expense liabilities by requiring additional disclosures, as well as improvements to existing disclosures. The Company has elected to apply early application of the amendments as permitted in the ASU. The adoption of the amendments did not have an impact on the Company’s results of operations, financial position, or liquidity. The new standard did provide for additional disclosures surrounding our loss and loss adjustment expenses and expense reserves which the Company has included in Note 7 of this report.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
ASU 2016-01: Financial Instruments-Overall:
In January 2016, the FASB issued ASU 2016-01:Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income (loss). ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. ASU 2016-01 will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, cash flows, or total comprehensive income, but could impact the Company’s results of operations and earnings (loss) per share as changes in fair value will be presented in net income (loss) rather than other comprehensive income (loss). For the year ended December 31, 2016 the Company had an unrealized gain of $90, on its equity investments, net of the effect of income taxes.
ASU 2016-02: Leases:
In February 2016, the FASB issued ASU 2016-02:Leases. ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income while the repayment of the principal portion of the lease liability will be classified as a financing activity and the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company has reviewed its existing lessee obligations and has determined that ASU 2016-02 will apply should the Company renew its existing leases, or enter into any new lease agreements.
ASU 2016-09: Stock Compensation:
In March 2016, the FASB issued ASU 2016-09:Compensation – Stock Compensation: Improvement to Employee Share-Based Payment Accounting. ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that all tax effects related to share-based payment be made through the statement of operations at the time of settlement as opposed to the current guidance that requires excess tax benefits to be recognized in additional paid-in-capital. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. The change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a departure from the current requirement which presents tax benefits as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated financial statements.
ASU 2016-13: Financial Instruments – Credit Losses:
In June 2016, the FASB issued ASU 2016-13:Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on financial instruments was generally delayed until the loss was probable of occurring. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP, however, the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
4. Investments
A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on fixed income securities classified as available-for-sale at December 31, 2016 and 2015 is as follows.
As of December 31, 2016 | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | 1,623 | | | $ | 1 | | | $ | (20 | ) | | $ | 1,604 | | State municipalities and political subdivisions | | | 2,271 | | | | 2 | | | | (27 | ) | | | 2,246 | | Asset-backed securities and collateralized mortgage obligations | | | 12,095 | | | | 9 | | | | (136 | ) | | | 11,968 | | Corporate | | | 10,804 | | | | 28 | | | | (91 | ) | | | 10,741 | | Total fixed income securities | | | 26,793 | | | | 40 | | | | (274 | ) | | | 26,559 | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,000 | | | | 136 | | | | — | | | | 1,136 | | Total equity securities | | | 1,000 | | | | 136 | | | | — | | | | 1,136 | | Total fixed income and equity securities | | $ | 27,793 | | | $ | 176 | | | $ | (274 | ) | | $ | 27,695 | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | 650 | | | $ | — | | | $ | (3 | ) | | $ | 647 | | State municipalities and political subdivisions | | | 1,656 | | | | 2 | | | | (7 | ) | | | 1,651 | | Asset-backed securities and collateralized mortgage obligations | | | 9,123 | | | | 14 | | | | (55 | ) | | | 9,082 | | Corporate | | | 8,903 | | | | 16 | | | | (61 | ) | | | 8,858 | | Total fixed income securities | | $ | 20,332 | | | $ | 32 | | | $ | (126 | ) | | $ | 20,238 | |
The table below summarizes the Company’s fixed income securities at December 31, 2016 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
Matures in: | | Amortized Cost | | | Estimated Fair Value | | One year or less | | $ | 1,827 | | | $ | 1,828 | | More than one to five years | | | 12,737 | | | | 12,678 | | More than five to ten years | | | 3,987 | | | | 3,918 | | More than ten years | | | 8,242 | | | | 8,135 | | Total | | $ | 26,793 | | | $ | 26,559 | |
The following table highlights the aggregate unrealized loss position and security type, those fixed income securities in unrealized loss positions as of December 31, 2016 and December 31, 2015. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions. There were 122 and 107 fixed income investments that were in unrealized loss positions as of December 31, 2016 and December 31, 2015, respectively. The Company held no equity securities in unrealized loss positions at either date.
| | Less than 12 Months | | | Greater than 12 Months | | | Total | | As of December 31, 2016 | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | | Estimated Fair Value | | | Unrealized Loss | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | 1,303 | | | $ | (20 | ) | | $ | — | | | $ | — | | | $ | 1,303 | | | $ | (20 | ) | State municipalities and political subdivisions | | | 1,537 | | | | (27 | ) | | | — | | | | — | | | | 1,537 | | | | (27 | ) | Asset-backed securities and collateralized mortgage obligations | | | 9,552 | | | | (133 | ) | | | 460 | | | | (3 | ) | | | 10,012 | | | | (136 | ) | Corporate | | | 5,952 | | | | (91 | ) | | | — | | | | — | | | | 5,952 | | | | (91 | ) | Total investments in fixed income securities | | $ | 18,344 | | | $ | (271 | ) | | $ | 460 | | | $ | (3 | ) | | $ | 18,804 | | | $ | (274 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | 346 | | | $ | (3 | ) | | $ | — | | | $ | — | | | $ | 346 | | | $ | (3 | ) | State municipalities and political subdivisions | | | 1,014 | | | | (7 | ) | | | — | | | | — | | | | 1,014 | | | | (7 | ) | Asset-backed securities and collateralized mortgage obligations | | | 7,472 | | | | (55 | ) | | | — | | | | — | | | | 7,472 | | | | (55 | ) | Corporate | | | 5,236 | | | | (61 | ) | | | — | | | | — | | | | 5,236 | | | | (61 | ) | Total investments in fixed income securities | | $ | 14,068 | | | $ | (126 | ) | | $ | — | | | $ | — | | | $ | 14,068 | | | $ | (126 | ) |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling approximately $2,000 with the State of Texas. These securities consist of cash in the amount of $300 as well as various fixed income securities listed in the preceding tables which have an amortized cost basis of $1,701 and estimated fair value of $1,692 as of December 31, 2016.
The Company’s limited liability investments are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $505 through December 31, 2016. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which, as of April 21, 2016, is wholly owned by KFSI. The Company has accounted for its limited liability investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.
Other-than-Temporary Impairment:
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
| ● | considering the extent, and length of time during which the market value has been below cost; |
| ● | identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions; |
| ● | obtaining a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their knowledge and experience combined with market-based valuation techniques; |
| ● | reviewing the historical trading volatility and trading range of the investment and certain other similar investments; |
| ● | assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies; |
| ● | assessing the timeliness and completeness of principal and interest payment due from the investee; and |
| ● | assessing the Company’s ability and intent to hold these investments until the impairment may be recovered |
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:
| ● | the opinions of professional investment managers could be incorrect; |
| ● | the past trading patterns of investments may not reflect their future valuation trends; |
| ● | the credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the investee company’s financial situation; and |
| ● | the historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s unknown underlying financial problems. |
The Company has reviewed currently available information regarding its investments with estimated fair values that are less than their carrying amounts and believes that these unrealized losses are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell these investments in the short term, and it is not likely that it will be required to sell these investments before the recovery of their amortized cost.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Accordingly, all of the Company’s investments were deemed to be in good standing and not impaired as of December 31, 2016 and 2015. Additionally, there were no write-downs for other-than-temporary impairments on the Company’s investments for the years then ended.
The Company does not have any exposure to subprime mortgage-backed investments.
Net investment income for the years ended December 31, 2016 and 2015 is as follows:
| | Year Ended December 31, | | | | 2016 | | | 2015 | | Investment income: | | | | | | | | | Interest on fixed income securities | | $ | 471 | | | $ | 285 | | Interest on cash and cash equivalents | | | 129 | | | | 114 | | Realized gains on sale of fixed income securities | | | 9 | | | | — | | Gross investment income | | | 609 | | | | 399 | | Investment expenses | | | (65 | ) | | | (37 | ) | Net investment income | | $ | 544 | | | $ | 362 | |
5. Reinsurance
The Company reinsures, or cedes, a portion of its written premiums on a per-risk and an excess of loss basis to non-affiliated insurers in order to limit its loss exposure. Although reinsurance is intended to reduce the Company’s exposure risk, the ceding of insurance does not legally discharge the Company from its primary liability for the full amount of coverage under its policies. If our reinsurers fail to meet their obligations under the applicable reinsurance agreements, the Company would still be required to pay the insured for the loss.
Under the Company’s per-risk treaties, reinsurance recoveries are received for up to $1,750 in excess of a retention of $250 for each risk. The Company ceded $569 and $342 in written premiums under its per-risk treaties for the years ended December 31, 2016 and 2015 respectively.
The Company’s excess of loss treaties are based upon a treaty year beginning on June 1st of each year and expiring on May 31st of the following year. Thus, the financial statements for the years ending December 31, 2016 and 2015 contain premiums ceded under three separate excess of loss treaties. Under the Company’s 2015/2016 excess of loss treaty which expired on May 31, 2016, for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $121,000 in excess of a retention of $4,000 per event. The Company had also procured another layer of reinsurance protection that may be used for any event above $125,000, up to a maximum recovery of $15,000. This $15,000 second layer of coverage applied in total to all events occurring during the treaty year of June 1, 2015 through May 31, 2016. Thus, the aggregate loss which the Company retained for the two catastrophes which occurred during the 2015/2016 treaty year was $5,000.
On June 1, 2016 the Company entered into a new excess of loss treaties whereby for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $170,000 in excess of a $5,000 retention per event. For any event above $175,000, the Company purchased aggregate coverage, with an additional limit of $25,000 and subject to a franchise deductible of $125 for each 144-hour occurrence. The $25,000 aggregate coverage applies in total to all events occurring during the June 1, 2016 to May 31, 2017 treaty year. The aggregate loss the Company could retain for two catastrophes occurring during the treaty year is $7,000.
The Company ceded $19,972 and $13,080 in written premiums under its excess of loss treaties for the years ended December 31, 2016 and 2015, respectively.
In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we act as a reinsurer, and have assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas. Our quota-share percentage varies from 35%-100% of wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal versus non-coastal) within the State of Texas. As of December 31, 2016, we have written $1,150 in assumed premiums on 522 policies through the Brotherhood agreement.
On December 1, 2016 we participated TWIA’s inaugural depopulation program whereby Maison assumed policies for wind and hail only exposures along the Gulf Coast area of Texas. The depopulation program was structured such that Maison reinsures TWIA under a 100% quota share agreement. As of December 31, 2016, we have written $186 in assumed premiums on approximately 1,300 policies through the TWIA quota share agreement.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The impact of reinsurance treaties on the Company’s financial statements is as follows:
| | Year Ended December 31, | | | | 2016 | | | 2015 | | Premium written: | | | | | | | | | Direct | | $ | 49,991 | | | $ | 42,677 | | Assumed | | | 1,336 | | | | 1,174 | | Ceded | | | (20,541 | ) | | | (13,422 | ) | Net premium written | | $ | 30,786 | | | $ | 30,429 | | | | | | | | | | | Premium earned: | | | | | | | | | Direct | | $ | 46,851 | | | $ | 37,699 | | Assumed | | | 2,096 | | | | 413 | | Ceded | | | (18,499 | ) | | | (12,178 | ) | Net premium earned | | $ | 30,448 | | | $ | 25,934 | | | | | | | | | | | Losses and LAE incurred: | | | | | | | | | Direct | | $ | 28,372 | | | $ | 10,316 | | Assumed | | | 3,414 | | | | 90 | | Ceded | | | (15,414 | ) | | | (467 | ) | Net losses and LAE incurred | | $ | 16,372 | | | $ | 9,939 | |
6. Deferred Policy Acquisition Costs
Deferred policy acquisition costs (“DPAC”) consist primarily of commissions, premium taxes, assessments and other policy processing fees incurred which are related to successful efforts to acquire new or renewal insurance contracts. Acquisition costs deferred on insurance products are amortized over the period in which the related revenues are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred.
DPAC as well as the related amortization expense associated with DPAC for the years ended December 31, 2016 and 2015 is as follows:
| | Year Ended December 31, | | | | 2016 | | | 2015 | | | | | | | | | Balance, January 1, net | | $ | 4,030 | | | $ | 3,091 | | Additions | | | 8,851 | | | | 7,510 | | Amortization | | | (8,492 | ) | | | (6,571 | ) | Balance, December 31, net | | $ | 4,389 | | | $ | 4,030 | |
7. Loss and Loss Adjustment Expense Reserves
The Company continually revises its estimates of the ultimate financial impact of claims made. A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for loss and loss adjustment expense (“LAE”) reserves. The process for establishing the provision for loss and loss adjustment expense reserves reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. The process of establishing the provision for loss and loss adjustment expense reserves relies on the judgment and opinions of a large number of individuals within the Company.
The Company’s evaluation of the adequacy of loss and loss adjustment expense reserves includes a re-estimation of the liability for loss and loss adjustment expense reserves relating to each preceding financial year compared to the liability that was previously established. The following tables illustrate incurred and paid claims development as of December 31, 2016, net of reinsurance, along with cumulative claim frequency and total incurred-but-not-reported (“IBNR”) liabilities as well as paid claims development on reported claims within the net incurred claims amounts. We have presented this information separately for both our homeowners multi-peril policies, which includes our traditional dwelling policies and also mobile and manufactured home policies, as well as for our special property policies, which include both our fire and allied lines of business. Our allied lines primarily consist of wind/hail only policies (including those assumed through Citizens and TWIA) as well as the commercial wind/hail only policies we have assumed through our agreement with Brotherhood. The information about incurred and paid claims development for the years ended December 31, 2012 through 2015 is presented as unaudited supplementary information.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
| | Cumulative Incurred Losses and LAE, Net of Reinsurance | | | | | | | For the Years Ended December 31, | | | As of December 31, 2016 | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | | Total of IBNR Liabilities Plus Expected Development on Reported Losses | | | Cumulative Number of Reported Claims | | 2012 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | — | | 2013 | | | | | | | 460 | | | | 380 | | | | 355 | | | | 355 | | | | — | | | | 57 | | 2014 | | | | | | | | | | | 3,680 | | | | 3,878 | | | | 4,357 | | | | — | | | | 557 | | 2015 | | | | | | | | | | | | | | | 8,442 | | | | 7,734 | | | | 170 | | | | 1,207 | | 2016 | | | | | | | | | | | | | | | | | | | 15,862 | | | | 1,152 | | | | 2,704 | | Total – Homeowners Multi-Peril Policies | | | $ | 28,308 | | | $ | 1,322 | | | | 4,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | As of December 31, 2016 | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | | Total of IBNR Liabilities Plus Expected Development on Reported Losses | | | Cumulative Number of Reported Claims | | 2012 | | $ | 9,392 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | — | | 2013 | | | | | | | 2,478 | | | | 2,375 | | | | 2,363 | | | | 2,400 | | | | — | | | | 406 | | 2014 | | | | | | | | | | | 115 | | | | 120 | | | | 120 | | | | — | | | | 33 | | 2015 | | | | | | | | | | | | | | | 1,331 | | | | 1,142 | | | | 30 | | | | 191 | | 2016 | | | | | | | | | | | | | | | | | | | 891 | | | | 448 | | | | 232 | | Total – Special Property Policies | | | $ | 4,553 | | | $ | 478 | | | | 862 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | As of December 31, 2016 | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | | Total of IBNR Liabilities Plus Expected Development on Reported Losses | | | Cumulative Number of Reported Claims | | 2012 | | $ | 9,392 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | — | | 2013 | | | | | | | 2,938 | | | | 2,755 | | | | 2,718 | | | | 2,755 | | | | — | | | | 463 | | 2014 | | | | | | | | | | | 3,795 | | | | 3,998 | | | | 4,477 | | | | — | | | | 590 | | 2015 | | | | | | | | | | | | | | | 9,773 | | | | 8,876 | | | | 200 | | | | 1,398 | | 2016 | | | | | | | | | | | | | | | | | | | 16,753 | | | | 1,600 | | | | 2,936 | | Total – All Lines | | | $ | 32,861 | | | $ | 1,800 | | | | 5,387 | |
| | Cumulative Paid Losses and LAE, Net of Reinsurance | | | | For the Years Ended December 31, | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | 2012 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | 2013 | | | | | | | 309 | | | | 352 | | | | 355 | | | | 355 | | 2014 | | | | | | | | | | | 2,925 | | | | 3,674 | | | | 4,058 | | 2015 | | | | | | | | | | | | | | | 6,867 | | | | 7,426 | | 2016 | | | | | | | | | | | | | | | | | | | 13,745 | | Total Paid Losses and LAE, net of reinsurance – Homeowners Multi-Peril Policies | | | $ | 25,584 | | Liability for Losses and LAE, net of reinsurance – Homeowners Multi-Peril Policies | | | $ | 2,724 | |
| | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | 2012 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | 2013 | | | | | | | 2,275 | | | | 2,325 | | | | 2,346 | | | | 2,340 | | 2014 | | | | | | | | | | | 99 | | | | 120 | | | | 120 | | 2015 | | | | | | | | | | | | | | | 1,124 | | | | 1,112 | | 2016 | | | | | | | | | | | | | | | | | | | 386 | | Total Paid Losses and LAE, net of reinsurance – Special Property Policies | | | $ | 3,958 | | Liability for Losses and LAE, net of reinsurance – Special Property Policies | | | $ | 595 | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | Accident Year | | 2012 (unaudited) | | | 2013 (unaudited) | | | 2014 (unaudited) | | | 2015 (unaudited) | | | 2016 | | 2012 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | 2013 | | | | | | | 2,584 | | | | 2,677 | | | | 2,701 | | | | 2,695 | | 2014 | | | | | | | | | | | 3,024 | | | | 3,794 | | | | 4,178 | | 2015 | | | | | | | | | | | | | | | 7,991 | | | | 8,538 | | 2016 | | | | | | | | | | | | | | | | | | | 14,131 | | Total Paid Losses and LAE, net of reinsurance – All Lines | | | $ | 29,542 | | Liability for Losses and LAE, net of reinsurance – All Lines | | | $ | 3,319 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
A reconciliation of the net incurred and paid loss development tables to the liability for loss and loss adjustment expenses on the balance sheet is as follows.
| | As of December 31, | | | | 2016 | | | 2015 | | Net Liability for Loss and LAE Reserves | | | | | | | | | Homeowners Multi-Peril Policies | | $ | 2,724 | | | $ | 1,780 | | Special Property Policies | | | 595 | | | | 223 | | Liability for Loss and LAE, net of reinsurance – All Lines | | $ | 3,319 | | | $ | 2,003 | | | | | | | | | | | Reinsurance Recoverable on Loss and LAE Reserves | | | | | | | | | Homeowners Multi-Peril Policies | | $ | 2,565 | | | $ | 120 | | Special Property Policies | | | 1,087 | | | | — | | Reinsurance Recoverable on Loss and LAE Reserves – All Lines | | $ | 3,652 | | | $ | 120 | | | | | | | | | | | Total Gross Liability for Loss and LAE Reserves – All Lines | | $ | 6,971 | | | $ | 2,123 | |
The following supplementary information provides average historical claims duration as of December 31, 2016.
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (unaudited) | Age of loss (in years) | | | 1 | | | | 2 | | | | 3 | | | | 4 | | Homeowners Multi-Peril Policies | | | 84.2 | % | | | 4.8 | % | | | 1.4 | % | | | — | % | Special Property Policies | | | 85.3 | % | | | 1.3 | % | | | 0.4 | % | | | — | % | All Lines | | | 84.4 | % | | | 4.3 | % | | | 1.2 | % | | | — | % |
8. Income Taxes
A summary of income tax expense (benefit) is as follows:
| | Year Ended December 31, | | | | 2016 | | | 2015 | | Current income tax expense (benefit) | | $ | 20 | | | $ | (452 | ) | Deferred income tax expense (benefit) | | | 88 | | | | (211 | ) | Total income tax expense (benefit) | | $ | 108 | | | $ | (663 | ) |
Actual income tax expense (benefit) differs from the income tax expense computed by applying the applicable effective federal and state tax rates to income before income tax expense (benefit) as follows:
| | Year ended December 31, | | | | 2016 | | | 2015 | | | | $ | | | % | | | $ | | | % | | | | | | | | | | | | | | | | | | | Provision for taxes at U.S. statutory marginal income tax rate of 34% | | $ | 40 | | | | 34.0 | % | | $ | (794 | ) | | | 34.0 | % | Nondeductible expenses | | | 15 | | | | 12.4 | % | | | 20 | | | | (0.8 | )% | State tax (net of federal benefit) | | | 53 | | | | 44.4 | % | | | 105 | | | | (4.5 | )% | Other | | | — | | | | — | % | | | 6 | | | | (0.3 | )% | Income tax expense (benefit) | | $ | 108 | | | | 90.8 | % | | $ | (663 | ) | | | 28.4 | % |
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes as compared to the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows:
| | As of December 31, | | | | 2016 | | | 2015 | | Deferred income tax assets: | | | | | | | | | Loss and loss adjustment expense reserves | | $ | 35 | | | $ | 22 | | Unearned premium reserves | | | 1,503 | | | | 1,462 | | Net operating loss carryforwards | | | 235 | | | | 284 | | Share-based compensation | | | 316 | | | | 264 | | Other | | | 270 | | | | 278 | | Deferred income tax assets | | $ | 2,359 | | | $ | 2,310 | | | | | | | | | | | Deferred income tax liabilities: | | | | | | | | | Deferred policy acquisition costs | | $ | 1,492 | | | $ | 1,370 | | State deferred taxes | | | 397 | | | | 378 | | Other | | | 50 | | | | 56 | | Deferred income tax liabilities | | $ | 1,939 | | | $ | 1,804 | | | | | | | | | | | Net deferred income tax assets | | $ | 420 | | | $ | 506 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The Company has recorded a net deferred tax asset of $420 and $506 as of December 31, 2016 and December 31, 2015, respectively. Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2016, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the ability to realize the deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.
As of December 31, 2016 the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $691 which will be available to offset future taxable income. As a result of certain changes in ownership and pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, these NOLs are subject to a yearly limitation. The amount and expiration date of the NOL carryforwards are as follows:
Year of Occurrence | | | Year of Expiration | | | Amount | | 2013 | | | | 2032 | | | $ | 684 | | 2014 | | | | 2033 | | | | 7 | | Total | | | | | | | $ | 691 | |
Based upon the results of the Company’s analysis and the application of ASC 740-10, management has determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and the Company is confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions is anticipated to be recognized in the financial statements.
The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2012 - 2015 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
9. Purchase of ClaimCor LLC
On January 2, 2015, the Company acquired a 100% interest in ClaimCor, a Florida domiciled independent adjusting company in order to complement the Company’s strategic plan and growth objectives by entering into the insurance services outsourcing industry. Under the terms of the membership interest purchase agreement, the purchase price was $323, paid by the Company, in cash, at closing. Pursuant to the purchase agreement, the previous managing members of ClaimCor entered into a non-compete agreement with the Company, whereby the members will not engage in, continue in, or carry on any business that competes with ClaimCor for a period of three years from the date of purchase.
The ClaimCor purchase was accounted for under the acquisition method as outlined in ASC Topic 805 –Business Combinations.Under the acquisition method, the acquiring company is required to recognize the identifiable assets acquired and liabilities assumed at fair value as of the acquisition date. Excess purchase price, if any, over the fair value of the net assets acquired, is recognized as goodwill. The following table presents the estimated allocation of the purchase price to the net assets of ClaimCor as of January 2, 2015.
Cash | | $ | 18 | | Accounts receivable | | | 132 | | Intangible asset: Non-compete agreement | | | 9 | | Intangible asset: Customer base | | | 43 | | Goodwill | | | 211 | | Other assets | | | 7 | | Total assets | | $ | 420 | | | | | | | Accounts payable | | | 89 | | Other liabilities | | | 8 | | Total liabilities assumed | | $ | 97 | | | | | | | Net assets acquired | | $ | 323 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
As a result of the purchase, we initially recorded goodwill in the amount of $211 on our consolidated balance sheet as of January 2, 2015. The goodwill was not amortized, but rather subject to impairment testing on, at minimum, an annual basis. We also recognized the estimated fair value of the non-compete agreement as well as a customer base asset as part of the ClaimCor acquisition at a combined total of $52 as of January 2, 2015. The non-compete agreement was amortized over a two year period and on December 31, 2016, the remaining unamortized balance of the non-compete agreement was charged to operations due to its de-minimus nature. The customer base asset was to be amortized over an estimated useful-life of 5 years. The Company recognized expense related to the amortization of these assets in the amount of $6 and $11 for the years ended December 31, 2016 and 2015, respectively.
In the fourth quarter 2015, after analyzing ClaimCor’s performance in comparison to management’s expectations and forecasts at the time of acquisition, the Company noted that an impairment to the value of the goodwill and other intangibles which were recorded was likely. Accordingly, the Company’s analysis resulted in a charge of $246 associated with the impairment of goodwill and the customer base asset and has been charged to general and administrative expense for the year ended December 31, 2015. The Company used a date of December 1, 2015 for purposes of calculating the impairment charges.
10. Net Earnings (Loss) Per Share
Net earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and common share equivalents outstanding during the periods presented. In calculating diluted earnings per share, those potential common shares that are found to be anti-dilutive are excluded from the calculation. The table below provides a summary of the numerators and denominators used in determining basic and diluted earnings (loss) per share for the years ended December 31, 2016 and 2015.
| | Year Ended December 31, | | | | 2016 | | | 2015 | | Basic: | | | | | | | Net income (loss) | | $ | 11 | | | $ | (1,673 | ) | Weighted average common shares outstanding | | | 6,047,979 | | | | 6,286,706 | | Basic earnings (loss) per common share | | $ | — | | | $ | (0.27 | ) | | | | | | | | | | Diluted: | | | | | | | | | Net income (loss) | | $ | 11 | | | $ | (1,673 | ) | Weighted average common shares outstanding | | | 6,047,979 | | | | 6,286,706 | | Dilutive stock options outstanding | | | — | | | | — | | Diluted weighted average common shares outstanding | | | 6,047,979 | | | | 6,286,706 | | Diluted earnings (loss) per common share | | $ | — | | | $ | (0.27 | ) |
The following potentially dilutive securities outstanding as of December 31, 2016 and 2015 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
| | As of December 31, | | | | 2016 | | | 2015 | | Options to purchase common stock | | | 177,456 | | | | 210,489 | | Warrants to purchase common stock | | | 1,906,875 | | | | 1,906,875 | | Restricted stock units | | | 20,500 | | | | 20,500 | | Performance shares (Note 13) | | | 475,000 | | | | 475,000 | | | | | 2,579,831 | | | | 2,612,864 | |
11. Equity Incentive Plan
The Company has established a stock option incentive plan for employees and directors of the Company (the “Plan”). The purpose of the Plan is to create incentives designed to motivate recipients to significantly contribute toward the Company’s growth and success, and also to attract and retain persons of outstanding competence, and provide such persons with an opportunity to acquire an equity interest in the Company.
The Plan is administered by a committee appointed by the Board of Directors. All members of such committee must be non-employee directors and independent directors as defined in the Plan. Subject to the limitations set forth in the Plan, the committee has the authority to grant awards as well as determine the general provisions of each award including the purchase price, term, number of shares, and performance criteria, and also to establish vesting schedules and other terms and conditions of the award.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
In April 2015, the Company’s shareholders approved an amendment to the Plan to allow for the issuance of additional award types under the Plan. In addition to non-qualified stock options issuable under the Plan, the amendment provides for the issuance of restricted stock, restricted stock units (“RSUs”), performance shares, performance cash awards, and other stock-based awards. The Plan provides for the issuance of 354,912 shares of common stock. As of December 31, 2016, both stock options and RSUs had been issued to the Company’s employees under the Plan resulting in 156,956 shares available for future issuance under the Plan.
Stock option information for the two years ended December 31, 2016 is as follows.
| | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Weighted Average Grant Date Fair Value | | | Aggregate Intrinsic Value | | Common Stock Options | | | | | | | | | | | | | | | | | | | | | Outstanding, January 1, 2015 | | | 210,489 | | | $ | 8.05 | | | | 3.62 | | | $ | 0.96 | | | $ | — | | Exercisable, January 1, 2015 | | | 125,308 | | | $ | 8.04 | | | | 3.18 | | | $ | 0.88 | | | $ | — | | Granted | | | — | | | | — | | | | | | | | | | | | | | Exercised | | | — | | | | — | | | | | | | | | | | | | | Cancelled | | | — | | | | — | | | | | | | | | | | | | | Outstanding, December 31, 2015 | | | 210,489 | | | $ | 8.05 | | | | 2.81 | | | $ | 0.96 | | | $ | — | | Exercisable, December 31, 2015 | | | 146,603 | | | $ | 8.04 | | | | 2.62 | | | $ | 0.90 | | | $ | — | | Granted | | | — | | | | — | | | | | | | | | | | | | | Exercised | | | — | | | | — | | | | | | | | | | | | | | Cancelled | | | (33,033 | ) | | | 8.00 | | | | | | | | | | | | | | Outstanding, December 31, 2016 | | | 177,456 | | | $ | 8.06 | | | | 2.25 | | | $ | 1.07 | | | $ | — | | Exercisable, December 31, 2016 | | | 134,865 | | | $ | 8.06 | | | | 2.25 | | | $ | 1.07 | | | $ | — | |
A summary of the status of the Company’s non-vested employee stock options is as follows.
| | Shares | | | Weighted Average Grant Date Fair Value | | Non-Vested Common Stock Options | | | | | | | | | Non-vested, January 1, 2015 | | | 85,181 | | | $ | 1.07 | | Granted | | | — | | | | — | | Vested | | | (21,295 | ) | | | 1.07 | | Cancelled | | | — | | | | — | | Non-vested, December 31, 2015 | | | 63,886 | | | $ | 1.07 | | Granted | | | — | | | | — | | Vested | | | (21,295 | ) | | | 1.07 | | Cancelled | | | — | | | | — | | Non-vested, December 31, 2016 | | | 42,591 | | | $ | 1.07 | |
On May 29, 2015, the Company’s Board of Directors granted RSUs to certain of its executive officers under the Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share and; (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire, however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. The following table summarizes RSU activity for the two years ended December 31, 2016.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Restricted Stock Units | | Number of Units | | | Weighted Average Grant Date Fair Value | | Non-vested units, January 1, 2015 | | | — | | | $ | — | | Granted | | | 20,500 | | | | 1.34 | | Vested | | | — | | | | — | | Forfeited | | | — | | | | — | | Non-vested units, December 31, 2015 | | | 20,500 | | | $ | 1.34 | | Granted | | | — | | | | — | | Vested | | | — | | | | — | | Forfeited | | | — | | | | — | | Non-vest units, December 31, 2016 | | | 20,500 | | | $ | 1.34 | |
Total stock based compensation expense for the years ended December 31, 2016 and 2015 was $38 and $47, respectively. As of December 31, 2016, total unrecognized stock compensation expense of $30 remains, which will be recognized ratably through March 31, 2018.
Stock warrants issued, exercised and outstanding as of December 31, 2016 are as follows.
| | Shares | | | Weighted Average Exercise Price | | Common Stock Warrants | | | | | | | | | Outstanding, January 1, 2015 | | | 406,875 | | | $ | 9.69 | | Exercisable, January 1, 2015 | | | 312,500 | | | $ | 9.60 | | Granted | | | 1,500,000 | | | | 15.00 | | Exercised | | | — | | | | | | Cancelled | | | — | | | | | | Outstanding, December 31, 2015 | | | 1,906,875 | | | $ | 13.87 | | Exercisable, December 31, 2015 | | | 1,906,875 | | | $ | 13.87 | | Granted | | | — | | | | — | | Exercised | | | — | | | | — | | Cancelled | | | — | | | | — | | Outstanding, December 31, 2016 | | | 1,906,875 | | | $ | 13.87 | | Exercisable, December 31, 2016 | | | 1,906,875 | | | $ | 13.87 | |
On March 31, 2014, the Company issued warrants to purchase 94,375 shares of its common stock to the underwriters of the Company’s IPO. Each warrant entitles the holder to purchase one common share of PIH at a price of $10.00 per share at any time after March 31, 2015 and prior to expiry on March 31, 2019.
Also on March 31, 2014, in connection with the conversion of Series A Preferred Shares then outstanding into the Company’s common shares, the Company issued warrants to purchase 312,500 shares of the Company’s common stock to Fund Management Group LLC, an entity of which the Company’s Chairman of the Board, Gordon G. Pratt, is a Managing Member and controlling equity holder. Each warrant issued to Fund Management Group LLC entitles the holder to purchase one share of common stock at a price equal to $9.60, subject to certain adjustments under a warrant agreement (the “Warrant Agreement”). The warrants have an expiry date of March 31, 2019 and vested upon issuance. The warrants may be redeemable by the Company at a price of $0.01 per warrant during any period in which the closing price of the Company’s common shares is at or above $14.00 per share for 20 consecutive trading days. The warrant holder is entitled to a 30-day notice prior to the date of such redemption.
The details of the Company’s remaining warrants issued and outstanding are discussed in Note 13 – Related Party Transactions, below.
12. Shareholders’ Equity
Treasury Shares
On December 1, 2014, the Company’s Board of Directors authorized a share repurchase program for up to 500,000 shares of the Company’s common stock which expired on December 31, 2016. Through December 31, 2016, the Company has repurchased an aggregate 401,359 shares at an aggregate purchase price of $2,927, or $7.29 per share, including all fees and commissions.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
On January 29, 2016, the Company retired 250,000 of its treasury shares, resulting in a reclassification of the purchase price of $1,917 to additional paid in capital.
13. Related Party Transactions
Related party transactions are carried out in the normal course of operations and are measured in part by the amount of consideration paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each case approximates fair value. Except where disclosed elsewhere in these consolidated financial statements, the following is a summary of related party transactions.
Performance Share Grant Agreement
On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with KAI, whereby KAI will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones regarding the Company’s stock price. Pursuant to the terms of the PSGA, if at any time the last sales price of the Company’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). The shares of common stock granted to KAI will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. As of December 31, 2016, the Company has not issued any shares under the PSGA.
Termination of Management Services Agreement
As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company has issued the following securities to 1347 Advisors, LLC (“Advisors”), a wholly owned subsidiary of KFSI.
| ● | The Performance Shares Grant Agreement dated February 24, 2015. |
| ● | 120,000 shares of Series B Preferred Stock of the Company (the “Preferred Shares”) |
| ● | A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise price of fifteen dollars per share. The Warrant expires seven years from date of issuance. |
The Performance Shares Grant Agreement grants Advisors 100,000 shares of the Company’s common stock issuable upon the date that the last sales price of the Company’s common stock equals or exceeds ten dollars per share for any twenty trading days within any 30-day trading period (the “Milestone Event”). Advisors will not be entitled to any dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved.
The Preferred Shares have a par value of twenty five dollars and pay annual cumulative dividends at a rate of eight percent per annum. Cumulative dividends shall accrue, whether or not declared by the Board and irrespective of whether there are funds legally available for the payment of dividends. Accrued dividends shall be paid in cash only when, as, and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Preferred Shares. In the event of any voluntary of involuntary liquidation, dissolution, or winding up of the Company, the holders of the Preferred Shares then outstanding shall be entitled to be paid out of the assets of the Company available for distributions to its shareholders, before any payment shall be made to holders of securities junior in preference to the Preferred Shares. The Preferred Shares rank senior to the Company’s common stock, and the Company is not permitted to issue any other series of preferred stock that ranks equal or senior to the Preferred Shares while the Preferred Shares are outstanding. On February 22, 2016 the Company’s board of directors authorized a dividend payment on the Preferred Shares for shareholders of record as of February 23, 2016. Accordingly, on February 24, 2016, the Company issued a cash payment of $240 to Advisors representing the first annual dividend payment the Company has made on the Preferred Shares.
Unless redeemed earlier by the Company as discussed below, with the written consent of the holders of the majority of the Preferred Shares then outstanding, the Company will be required to redeem the Preferred Shares then outstanding on February 24, 2020 (the “Mandatory Redemption Date”), for a redemption amount equal to twenty five dollars per share plus all accrued and unpaid dividends on such shares. The Company has the option to redeem the Preferred Shares prior to the Mandatory Redemption Date immediately prior to the consummation of any change in control of the Company that may occur.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Accounting for the termination of the MSA
As a result of the termination of the MSA agreement, the Company recognized an expense in the amount of $5,421 for the year ended December 31, 2015 as follows:
| | Year ended December 31, 2015 | | Cash paid | | $ | 2,000 | | Issuance of Series B Preferred Shares (recorded at a discount to redemption amount) | | | 2,311 | | Issuance of Warrants and Performance Shares | | | 1,010 | | Professional fees incurred in connection with the Buyout | | | 100 | | Loss on termination of MSA | | $ | 5,421 | |
The Company applied the guidance outlined in ASC 480 –Distinguishing Liabilities from Equity in recording the issuance of the Series B Preferred Shares. Due to the fact that the Preferred Shares have a mandatory redemption date of February 24, 2020, the guidance required that we classify the Preferred Shares as a liability on our consolidated balance sheet, rather than recording the value of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected to be paid on the Preferred Shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of $355 and $282 was charged to operations for the years ended December 31, 2016 and 2015, respectively. An additional $1,252 is expected to be charged to operations through February 2020 using the effective interest method.
The Company applied the guidance outlined in ASC 505-50 –Equity-Based Payments to Non-Employeesin recording the issuance of the Warrants and Performance Shares by recognizing an increase to equity for the estimated fair value of both instruments as of their date of grant. We estimated the fair value of the Warrants on grant date based upon the Black-Scholes option pricing model. Significant assumptions used in determining the fair value of the Warrants were as follows:
| | | | Risk-free interest rate | | | 1.79 | % | Dividend yield | | | — | | Expected volatility | | | 23.7 | % | Expected term (in years) | | | 7 | |
We utilized a Monte Carlo simulation model to determine the estimated fair value of the Performance Shares due to the fact that shares are only issuable based upon the achievement of certain market conditions. This pricing model uses multiple simulations to evaluate the probability of achieving the market conditions, as well as a number of other inputs (some of which are Level 3 inputs as defined by the FASB) with respect to the expected volatility and dividend yield (among other inputs) of the Company’s common shares.
Based upon these models, the total estimated fair value of both the Warrants and Performance Shares was determined to be $1,010 on the date of grant.
14. Accumulated Other Comprehensive Loss
The table below details the change in the balance of each component of accumulated other comprehensive loss, net of tax, for the years ended December 31, 2016 and 2015.
| | Year Ended December 31, | | | | 2016 | | | 2015 | | Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | Balance, January 1 | | $ | (62 | ) | | $ | (1 | ) | Other comprehensive income (loss) before reclassifications | | | 1 | | | | (95 | ) | Amounts reclassified from accumulated other comprehensive loss | | | (6 | ) | | | — | | Income taxes | | | 2 | | | | 34 | | Net current-period other comprehensive loss | | | (3 | ) | | | (61 | ) | Balance, December 31 | | $ | (65 | ) | | $ | (62 | ) |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
15. Fair Value of Financial Instruments
Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company’s financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company’s intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company classifies its investments in fixed income and equity securities as available-for-sale and reports these investments at fair value. Fair values of fixed income securities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence.
The FASB has issued guidance that defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal, or most advantageous market in an orderly transaction between market participants. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurements, as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets providing the most reliable measurement of fair value since it is directly observable. |
| ● | Level 2 – inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets. These inputs are observable, either directly or indirectly for substantially the full-term of the financial instrument. |
| ● | Level 3 – inputs to the valuation methodology which are unobservable and significant to the measurement of fair value. |
Financial instruments measured at fair value as of December 31, 2016 and 2015 in accordance with this guidance are as follows.
As of December 31, 2016 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | | $ | 1,604 | | | $ | — | | | $ | 1,604 | | State municipalities and political subdivisions | | | — | | | | 2,246 | | | | — | | | | 2,246 | | Asset-backed securities and collateralized mortgage obligations | | | — | | | | 11,968 | | | | — | | | | 11,968 | | Corporate | | | — | | | | 10,741 | | | | — | | | | 10,741 | | Total fixed income securities | | | — | | | | 26,559 | | | | — | | | | 26,559 | | | | | | | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | | | | | | | Common stock | | | 1,136 | | | | — | | | | — | | | | 1,136 | | Total equity securities | | | 1,136 | | | | — | | | | — | | | | 1,136 | | | | | | | | | | | | | | | | | | | Total fixed income and equity securities | | $ | 1,136 | | | $ | 26,559 | | | $ | — | | | $ | 27,695 | | | | | | | | | | | | | | | | | | | As of December 31, 2015 | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | | $ | 647 | | | $ | — | | | $ | 647 | | State municipalities and political subdivisions | | | — | | | | 1,651 | | | | — | | | | 1,651 | | Asset-backed securities and collateralized mortgage obligations | | | — | | | | 9,082 | | | | — | | | | 9,082 | | Corporate | | | — | | | | 8,858 | | | | — | | | | 8,858 | | Total | | $ | — | | | $ | 20,238 | | | $ | — | | | $ | 20,238 | |
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
16. Statutory Requirements
The Company’s insurance subsidiary, Maison, prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by the LDI. Prescribed statutory accounting practices include state laws, rules and regulations as well as accounting practices and rules as outlined in a variety of publications of the National Association of Insurance Commissioners (“NAIC”). Permitted statutory accounting practices encompass all accounting practices that are not prescribed, but instead have been specifically requested by an insurer and allowed by the state in which the insurer is domiciled (in Maison’s case, Louisiana). Permitted practices may differ from state to state, or company to company within a state, and may change in the future. In converting from statutory accounting basis to U.S. GAAP, typical adjustments include the deferral of acquisition costs (which are all charged to operations as incurred on a statutory basis), the inclusion of statutorily non-admitted assets on the balance sheet, the inclusion of net unrealized holding gains or losses related to investments included on the balance sheet, as well as the inclusion of changes in deferred tax assets and liabilities in the statement of operations.
Statutory Surplus and Capital Requirements
In order to retain its certificate of authority in the State of Louisiana, Maison is required to maintain a minimum capital surplus of $5,000. As of December 31, 2016 Maison’s capital surplus was $19,835.
The LDI employs risk-based capital (“RBC”) reports to monitor Maison’s financial condition. Risk-based capital is determined in accordance with a formula adopted by the NAIC which takes into consideration the covariance between asset risk, credit risk, underwriting risk, and other business risks. The RBC report determines whether Maison falls into the “no action” level or one of the four action levels set forth in the Louisiana Insurance Code. In order to retain its certificate of authority in the State of Texas, Maison is required to maintain an RBC ratio of 300% or more.
As of December 31, 2016, Maison’s RBC ratio was 346%, as a result, our surplus was considered to be in the “no action” level.
States routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of December 31, 2016, Maison held investment securities with a fair value of approximately $100 as a deposit with the LDI and cash and investment securities with a fair value of approximately $1,992 as a deposit with the TDI.
Surplus Notes
PIH, as the parent company of Maison, is subject to the insurance holding company laws of the State of Louisiana, which, among other things, regulate the terms of surplus notes issued by insurers to their parent company. Maison’s capital includes five surplus notes issued to PIH in the amount of $6,050, all of which were approved by the LDI prior to their issuance. Notes accrue interest at 10% per annum. Interest payments on the notes are due annually, and are also subject to prior approval by the LDI. The Company’s surplus notes, as of December 31, 2016, are as follows.
Date of Issuance | | | Maturity Date | | Principal Amount | | October 22, 2013 | | | October 22, 2017 | | $ | 650 | | December 21, 2015 | | | December 21, 2017 | | | 850 | | March 31, 2016 | | | March 31, 2018 | | | 550 | | September 29, 2016 | | | September 29, 2018 | | | 3,450 | | November 14, 2016 | | | November 14, 2018 | | | 550 | | | | | | | $ | 6,050 | |
Dividend Restrictions
As a Louisiana domiciled insurer, the payment of dividends from our insurance subsidiary is restricted by the Louisiana Insurance Code. Dividends can only be paid if an insurer’s paid-in capital and surplus exceed the minimum required by the Louisiana Insurance Code by one hundred percent or more, or as otherwise provided. Any dividend or distribution that when aggregated with any other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) ten percent of the insurer’s surplus as regards policyholders as of the thirty-first day of December next preceding; or (b) the net income of the insurer, not including realized capital gains, for the twelve month period ending the thirty-first day of December next preceding; is considered to be extra-ordinary and shall not be paid until thirty days after the LDI has received notice of the declaration thereof and has not within that period disapproved the payment, or until the LDI has approved the payment within the thirty-day period. In determining whether a dividend or distribution is extra-ordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out in dividends. As of December 31, 2016, Maison had not paid any dividends to its shareholder, PIH.
See Note 20 – Subsequent Events, for additional statutory requirements regarding the certificate of authority granted to Maison from the Florida Office of Insurance Regulation.
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
17. Retirement plans
The 1347 Property Insurance Holdings, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January 1, 2015, as a defined contribution plan. The Retirement Plan is subject to the provisions for the Employee Retirement Income Security Act of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the plan. Employees who have completed one month of service are eligible to participate and are permitted to make annual pre and post-tax salary reduction contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as amended. Contributions are invested at the direction of the employee participant in various money market and mutual funds. The Company matches contributions up to 100% of each participant’s contribution, limited to contributions up to 4% of a participant’s earnings. The Company may also elect to make a profit sharing contribution to the Retirement Plan based upon discretionary amounts and percentages authorized by the Company’s board of directors. For the years ended December 31, 2016 and 2015, the Company made matching contributions to the Retirement Plan in the amount of $75 and $67, respectively.
19. Commitments and Contingencies
Legal Proceedings:
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of ultimate loss and loss adjustment expenses may change. These additional liabilities, or increases in estimates, or a range of either, cannot be reasonably estimated, and could result in income statement charges that could be material to the Company’s results of operations in future periods.
Operating Lease Commitments:
As of December 31, 2016, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.
Year ended December 31, | | | | | 2017 | | | $ | 344 | | 2018 | | | | 291 | | 2019 | | | | 249 | | Total | | | $ | 884 | |
20. Subsequent Events
Florida Certificate of Authority
On March 1, 2017 Maison received a certificate of authority from the Florida Office of Insurance Regulation (“OIR”) which authorizes Maison to write personal lines insurance in the state of Florida. Pursuant to the Consent Order issued, Maison has agreed to comply with certain requirements as outlined by the OIR until Maison can demonstrate three consecutive years of net income following the Company’s admission into Florida as evidenced by its Annual Statement filed with the National Association of Insurance Commissioners. Among other requirements, the OIR requires the following as conditions related to the issuance of Maison’s certificate of authority:
| ● | Although domiciled in the state of Louisiana, Maison agreed to comply with the Florida Insurance Code as if Maison were a domestic insurer within the state of Florida; |
| ● | Maison agreed to maintain capital and surplus as to policyholders of no less than $35 million; |
| ● | Maison agreed to receive prior approval from the OIR prior to the payment of any dividends and; |
| ● | Maison agreed to receive written approval from the OIR regarding any form of policy issued, or rate charged to its policyholders prior to utilizing any such form or rate for policies written in the state of Florida. |
To comply with the Consent Order, Maison will receive a capital contribution from its parent company, 1347 Property Insurance Holdings, Inc., in the approximate amount of $15 million. This contribution is expected to be in the form of one or more surplus notes as well as a direct contribution to paid in and contributed surplus and is expected to occur prior to March 31, 2017. As of March 16, 2017 Maison has not written any insurance policies covering risks in the state of Florida.
Shares
% Cumulative Preferred Stock
(Liquidation Preference Equivalent to $ Per Share)
PROSPECTUS
Boenning & Scattergood, Inc.
, 2018
Shares of Common Stock FG Financial Group, Inc. ThinkEquity , 2022 PART II
INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the various costs and expenses payableto be paid by us in connection with the sale and distribution of the securities being registered.registered, other than underwriting discounts and commissions. All such costs and expenses shall be borne by us. All amounts shown are estimates, except for the fees payable toregistration fee required by the SEC.Securities and Exchange Commission (“SEC”). | | | | | SEC Registration Fee | | $ | 2,864.00 | | FINRA Filing Fee | | | | | Nasdaq Listing Fee | | | | | Printing Expenses | | | | | Accounting Fees and Expenses | | | | | Legal Fees and Expenses | | | | | Transfer Agent Fees and Expenses | | | | | Miscellaneous | | | | | Total | | $ | | |
SEC registration fee | | $ | 427 | | FINRA filing fee | | | 1,190 | | Accounting fees and expenses | | | 30,000 | | Legal fees and expenses | | | 200,000 | | Transfer agent fees and expenses | | | 10,000 | | Printing fees and expenses | | | 10,000 | | Miscellaneous | | | 20,000 | | Total | | $ | 271,617 | |
Item 14. Indemnification of Directors and Officers The Registrant is incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides, in summary, that a director or DGCL, authorizes the Registrant to indemnify any person who was orofficer of a Delaware corporation is a party or is threatenedentitled, under certain circumstances, to be madeindemnified against all expenses and liabilities (including attorneys’ fees) incurred by him, as a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by orresult of suits brought against him in the right of the Registrant) by reason of the fact that the person is or was a director, officer, employee or agent of the Registrant, or is or was serving at the request of the Registranthis capacity as a director or officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the personhe acted in good faith and in a manner the personthey reasonably believed to be in or not opposed to theour best interests of the Registrant,company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’shis conduct was unlawful.
Further, the Registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Registrant to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the Registrant, or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Registrant,unlawful; provided that no indemnification shallmay be made against expenses in respect of any claim, issue or matter as to which such person shall have beena director or officer was adjudged to be liable to the Registrantcompany, unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determinedetermines, upon application, that, despite the adjudication of liability, but, in view of all the circumstances of the case, such personhe is fairly and reasonably entitled to indemnity for such expenses whichthat the Delaware Courtcourt deems proper. Any such indemnification may be made by us only as authorized in each specific case upon a determination by the stockholders, disinterested directors, or independent legal counsel that indemnification is proper because the indemnitee has met the applicable standard of Chancery or such other court shall deem proper. To the extent that a present or former director or officer of the Registrant has been successful on the merits or otherwise in defense of any action, suit or proceeding discussed above, or in defense of any claim, issue or matter therein, the Registrant is required to indemnify such person against expenses, including attorneys’ fees, actually and reasonably incurred by such person in connection therewith.conduct.
The terms of Section 145 of the DGCL are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933,Our By-laws, as amended, or the Securities Act.
As permitted by the DGCL, the Registrant’s Third Amended and Restated Certificate of Incorporation, or the Certificate of Incorporation, and Second Amended and Restated Bylaws, or the Bylaws, provideprovides that the Registrant is required to indemnify itsour directors and officers will be indemnified by us to the fullest extent authorized by Delaware General Corporation Law, as it now exists or may in the DGCL, subjectfuture be amended.
We may in the future enter into agreements with our directors to provide contractual indemnification in addition to the exceptions set forthindemnification provided in the DGCL described above; provided, however, that, except for proceedingsour By-laws. Our By-laws also permit us to enforce rights to indemnification, the Registrant is not obligated to indemnify any director or officer or advance expenses in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Registrant’s Board of Directors. In addition, as permitted by the DGCL, the Certificate of Incorporation and the Bylaws authorize the Registrant to advance expenses incurred by a director or officer in defending or otherwise participating in any proceeding upon receipt by the Registrant of an undertaking by orsecure insurance on behalf of any officer, director, employee or agent for any liability arising out of his or her actions, regardless of whether the directorbylaws or officer receivingDelaware General Corporation Law would permit indemnification. We have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the advancementcost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to repayindemnify the amount advanced if it is ultimately determined that such person is not entitled to be indemnified by the Registrant. Under the Certificate of Incorporation and the Bylaws, the Registrant may, to the extent authorized from time to time by the Registrant’s Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Registrant similar to those conferred to the Registrant’s directors and officers.
Further, underThese provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the Bylaws, unless ordered byeffect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a court, no indemnificationstockholder’s investment may be provided to a director, officer or employee unless a determination has been made that such person acted in good faith and in a manner such person reasonably believed to be in or not opposedadversely affected to the best interestsextent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the Registrantinsurance and with respectthe indemnity agreements are necessary to any criminal proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such determination shall be made by (a) a majority vote of the disinterestedattract and retain talented and experienced directors even though less than a quorum of the Registrant’s Board of Directors, (b) a committee comprised of disinterested directors, such committee having been designated by a majority vote of the disinterested directors (even though less than a quorum), (c) if there are no such disinterested directors, or if a majority of disinterested directors so directs, by independent legal counsel in a written opinion, or (d) by the stockholders of the Corporation. A “disinterested director” means a director of the Registrant who is not and was not a party to the proceeding in question.
The Certificate of Incorporation and Bylaws also provides that the rights to indemnification and to the advancement of expenses conferred in the Certificate of Incorporation and Bylaws are not exclusive of any other right which any person may have or hereafter acquire under the Certificate of Incorporation, the Bylaws, any statute, agreement, vote of stockholders or disinterested directors or otherwise. Further, any repeal or modification of the indemnification provisions in the Certificate of Incorporation or the Bylaws by the stockholders of the Registrant will not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Registrant existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.officers.
In addition, Section 102(b)(7)any underwriting agreement we enter into in connection with the sale of Common Stock being registered hereby, the underwriter will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us, within the meaning of the DGCL grants the Registrant the right to eliminate or limit the personal liability of a director to the Registrant or its stockholders for monetary damages for breach of the director’s fiduciary duty, subject to certain limitations. As permitted by the DGCL, the Registrant’s Certificate of Incorporation contains provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director, except for liability: | ● | For any breach of the director’s duty of loyalty to the Registrant or its stockholders; |
| ● | For acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| ● | Under Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions); or |
| ● | For any transaction from which the director derived an improper personal benefit. |
The Registrant’s Certificate of Incorporation further provides that if the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Registrant shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.
The Registrant has entered into indemnification agreements with each of its current directors and certain executive officers to provide these directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Certificate of Incorporation and Bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, executive officer or employee of the Registrant regarding which indemnification is sought. Reference is also made to section of the Underwriting Agreement, which provides for the indemnification of executive officers, directors and controlling persons of the RegistrantSecurities Act, against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
The Bylaws provide that the Registrant may maintain insurance, at its expense, to protect itself and any director, officer or employee against any liability of any character asserted against or incurred by the Registrant or any such director, officer or employee, or arising out of any such person’s “corporate status” with the Registrant, or status as a director, officer, employee or agent of the Registrant, whether or not the Registrant would have the power to indemnify such person against such liability under the DGCL or the provisions of the Bylaws.
The Registrant maintains directors’ and officers’ liability insurance.
Item 15. Recent Sales of Unregistered Securities On January 23, 2014, the Registrant issued 80,000 shares of its Series A convertible preferred stock, par value $25.00 per share, or the Series A Preferred Shares, to Fund Management Group LLC, of which the Registrant’s former Chairman of the Board, Gordon G. Pratt, is a managing member and controlling equity holder, for $2 million. The Series A Preferred Shares were issued in reliance on the private placement exemption provided by Section 4(a)(2) of the Securities Act on the basis that the sale did not involve a public offering. The Series A Preferred Shares were non-voting and ranked senior to all classes of capital stock of the Registrant. On March 31, 2014, the effective date of the Registrant’s initial public offering, the Series A Preferred Shares were converted into 312,500 shares of the Registrant’s common stock and a warrant to purchase up to 312,500 shares of the Registrant’s common stock at a price equal to $9.60 per share, subject to certain adjustments set forth in a warrant agreement. The warrant, which became exercisable upon issuance, expires on March 31, 2019. The Registrant may redeem the warrant at a price of $0.01 per share during any period in which the closing price of the Registrant’s common stock is at or above $14.00 per share for 20 consecutive trading days.None.
On February 24, 2015, the Registrant entered into an agreement with 1347 Advisors, LLC, or 1347 Advisors, a subsidiary of Kingsway Financial Services Inc., the Registrant’s largest stockholder, to terminate a Management Services Agreement between the Registrant and 1347 Advisors whereby 1347 Advisors provided certain services to the Registrant. As part of the consideration paid to 1347 Advisors for agreeing to voluntarily terminate the Management Services Agreement, the Registrant issued to 1347 Advisors 120,000 shares of the Registrant’s Series B preferred stock, par value $25.00 per share, or the Series B Preferred Shares, and a warrant to purchase up to 1,500,000 shares of the Registrant’s common stock at an exercise price of $15.00 per share, subject to certain adjustments set forth in a warrant agreement. 1347 Advisors subsequently transferred 60,000 of the shares to IWS Acquisition, an affiliate of KFSI. The Series B Preferred Shares are non-voting and rank senior to all classes of capital stock of the Registrant. The warrant, which became exercisable on issuance, expires on February 24, 2022. The Registrant and 1347 Advisors also entered into a Performance Shares Grant Agreement, dated February 24, 2015, whereby 1347 Advisors was entitled to receive 100,000 shares of the Registrant’s common stock from the Registrant if at any time the last sales price of the common stock equaled or exceeded $10.00 per share for any 20 trading days within any 30-trading day period. The Series B Preferred Shares and the warrant were issued in reliance on the private placement exemption provided by Section 4(a)(2) of the Securities Act on the basis that the sale did not involve a public offering. On January 2, 2018, the Registrant entered into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation pursuant to which the Registrant agreed to repurchase the 60,000 Series B Preferred Shares held by 1347 Advisors for an aggregate purchase price of $1,740,000, representing (i) $1,500,000, comprised of $25 per share of Series B preferred stock, and (ii) declared and unpaid dividends in respect of the dividend payment due on February 23, 2018 amounting to $240,000 in the aggregate. The Registrant also agreed to repurchase pursuant to the stock purchase agreement 60,000 Series B Preferred Shares from IWS Acquisition Corporation, upon completion of this offering, for an aggregate purchase price of $1,500,000, comprised of $25 per share of Series B preferred stock, without any dividend or interest payment. In connection with the Stock Purchase Agreement, the Performance Shares Grant Agreement, dated February 24, 2015, between the Registrant and 1347 Advisors was terminated. The Registrant paid 1347 Advisors $300,000 in connection with the termination. No common shares were issued to 1347 Advisors under the Performance Shares Grant Agreement.
On May 23, 2017, the Company announced that Dan Case has been appointed to the position of Chief Operating Officer. In connection with Mr. Case’s new employment, Mr. Case has the opportunity to purchase up to 68,027 shares of the Company’s common stock on the open market or in direct purchases from the Company until June 15, 2018 and at the end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of restricted stock units (“RSUs”) of the Company equal to two RSUs for each share purchased by Mr. Case. The RSUs will vest 20% per year over five years following the date granted, subject to continued employment through such vesting date. The aggregate maximum number of shares of the Company’s common stock that may be acquired pursuant to this arrangement, including through open market purchases, purchases from the Company and grants from the Company, is 204,081. Any shares purchased directly from the Company will be made at a price equal to the closing price of the Company’s common stock on the prior trading day, but not less than the latest quarter end published book value per share. This arrangement was entered into outside of the Company’s existing stockholder approved equity plans and was approved by the Compensation Committee of the Company’s Board of Directors as an inducement material to Mr. Case entering into employment with the Company in reliance on Nasdaq Listing Rule 5635(c)(4). As of January 4, 2018, Mr. Case had purchased 56,276 shares of the Company’s common stock pursuant to this arrangement, 28,000 of which shares were purchased directly from the Company at a purchase price of $8.00 per share on September 14, 2017. The shares of the Company’s common stock issued under this arrangement were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules (a) Exhibits.
Exhibit | | | | Incorporated by Reference to: | No. | | Description | | Document | | Ex. No. | 1.1 | ** | Form of Underwriting Agreement | | | | | 3.1 | | Fourth Amended and Restated Certificate of Incorporation, as corrected and amended | | [17] | | 3.1 | 3.2 | | Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation | | [19] | | 3.1 | 3.3 | | Fourth Amended and Restated By-Laws | | [1] | | 3.2 | 4.1 | | Form of Common Stock certificate | | [2] | | 4.1 | 4.2 | | Form of Global Certificate of Cumulative Preferred Stock, Series A | | [3] | | 4.4 | 4.3 | | Description of Securities | | [4] | | 4.4 | 5.1 | ** | Opinion of Loeb & Loeb LLP | | | | | 10.1 | † | Amended and Restated 2014 Equity Incentive Plan | | [5] | | App. A | 10.2 | † | 2018 Equity Incentive Plan | | [6] | | 10.1 | 10.3 | † | Form of Director and Officer Indemnification Agreement | | [2] | | 10.6 | 10.4 | † | Equity Award Letter Agreement between registrant and Larry Swets | | [7] | | 10.1 | 10.5 | † | Stock Option Agreement between registrant and Larry Swets | | [16] | | 10.5 | 10.6 | † | Form of Restricted Stock Unit Agreement for executive officers under 2014 Equity Incentive Plan | | [8] | | 10.2 | 10.7 | † | Form of Executive Restricted Stock Unit Award Agreement under the Share-Matching Program under the 2014 Equity Incentive Plan | | [9] | | 10.1 | 10.8 | † | Form of Non-Employee Director Restricted Stock Unit Award Agreement under the Share-Matching Program under the 2014 Equity Incentive Plan | | [9] | | 10.2 | 10.9 | † | Form of Stock Option Agreement under the 2018 Equity Incentive Plan | | [10] | | 10.2 | 10.10 | † | Form of Restricted Share Agreement under the 2018 Equity Incentive Plan | | [10] | | 10.3 | 10.11 | | Form of Restricted Share Unit Agreement under the 2018 Equity Incentive Plan | | [10] | | 10.4 | 10.12 | † | Form of Non-Employee Director Restricted Share Unit Agreement under the 2018 Equity Incentive Plan | | [11] | | 10.3 | 10.13 | † | Form of Executive Stock Grant Agreement under the 2018 Equity Incentive Plan | | [12] | | 10.1 | 10.14 | † | Form of Executive Restricted Share Unit Agreement for Share-Matching Grants under 2018 Equity Incentive Plan | | [12] | | 10.2 | 10.15 | | Registration Rights Agreement, dated December 2, 2019, between FedNat Holding Company and registrant | | [13] | | 10.1 | 10.16 | | Standstill Agreement, dated December 2, 2019, between FedNat Holding Company and registrant | | [13] | | 10.2 | 10.17 | | Reinsurance Capacity Right of First Refusal Agreement, dated December 2, 2019, by and between FedNat Holding Company and registrant | | [13] | | 10.3 | 10.18 | | Investment Advisory Agreement, dated December 2, 2019, between FedNat Holding Company and registrant | | [13] | | 10.4 | 10.19 | † | Employment Agreement, dated December 2, 2019, between Brian D. Bottjer and registrant | | [13] | | 10.9 | 10.20 | † | Employment Agreement, dated November 10, 2020, between Larry G. Swets, Jr. and registrant | | [14] | | 10.1 |
| Description | 1.1** | | Form of Underwriting Agreement. | 3.1 | | Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 3.2 | | Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 3.3 | | Certificate of Designations of Series A Preferred Shares of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit A of Exhibit 10.9 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 3.4 | | Certificate of Designations of Series B Preferred Shares of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015). | 3.5** | | Form of Certificate of Designations of Cumulative Preferred Stock, Series A, of 1347 Property Insurance Holdings, Inc. | 4.1 | | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 4.2 | | Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 of Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015). | 4.3 | | Certificate of Series B Preferred Shares (incorporated by reference to Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015). | 4.4** | | Form of Certificate of Cumulative Preferred Stock, Series A. | 5.1** | | Opinion of Thompson Hine LLP as to the validity of the shares of the securities being registered. | 10.1† | | 1347 Property Insurance Holdings, Inc. Amended and Restated 2014 Equity Incentive Plan (incorporated by reference to Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on April 30, 2015). | 10.2 | | Indemnification Agreement (incorporated by reference to Exhibit 10.6 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 10.3 | | Trademark License Agreement, dated February 28, 2014, between 1347 Advisors LLC and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.6 of Registrant’s Registration Statement on Form S-1 filed with the Commission on May 20, 2014). | 10.4† | | Option Agreement, dated February 28, 2014 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.7 of Registrant’s Registration Statement on Form S-1 filed with the Commission on May 20, 2014). | 10.5† | | First Amendment to Option Agreement, dated June 19, 2014 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on June 19, 2014). | 10.6† | | Second Amendment to Option Agreement, dated March 13, 2015 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2015). | 10.7† | | Third Amendment to Option Agreement, dated March 13, 2015 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.3 of Registrant’s Current Report on Form 8-K filed with the Commission on June 2, 2015). | 10.8† | | Fourth Amendment to Option Agreement, dated December 15, 2015 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on December 17, 2015). | 10.9† | | Fifth Amendment to Option Agreement, dated June 14, 2016 between Douglas N. Raucy and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2016). | 10.10 | | Series A Convertible Preferred Stock Purchase Agreement, dated January 23, 2014, between Fund Management Group LLC and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.9 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 10.11† | | Offer letter to Douglas N. Raucy, dated September 25, 2012 (incorporated by reference to Exhibit 10.10 of our Registration Statement on Form S-1/A filed with the Commission on January 30, 2014). | 10.12 | | Registration Rights Agreement, dated February 28, 2014, by and between Kingsway America, Inc. and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.10 of Registrant’s Registration Statement on Form S-1 filed with the Commission on May 20, 2014). | 10.13 | | Performance Share Grant Agreement by and between Kingsway America, Inc. and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.12 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on March 27, 2014). |
10.21 | | Shared Services Agreement, dated March 31, 2020, between Fundamental Global Management, LLC and registrant | | [15] | | 10.1 | 10.22 | | Amended and Restated Limited Liability Company Agreement of Fundamental Global Asset Management, LLC, dated August 6, 2021 | | [18] | | 10.1 | 10.23 | | Second Amended and Restated Management Services Agreement, dated August 11, 2021, between Sequoia Financial LLC and registrant | | [18] | | 10.2 | 10.24 | † | 2021 Equity Incentive Plan | | [19] | | 10.1 | 10.25 | † | Form of Non-Employee Director Restricted Share Unit Agreement under 2021 Equity Incentive Plan | | [20] | | 10.16 | 10.26 | | Underwriting Agreement, dated May 18, 2021, by and between FG Financial Group, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc. | | [21] | | 1.1 | 10.27 | | Underwriting Agreement, dated October 25, 2021, by and between FG Financial Group, Inc. and ThinkEquity LLC | | [22] | | 1.1 | 21.1 | | Registrant’s subsidiaries | | [20] | | 21.1 | 23.1 | * | Consent of BDO USA, LLP (independent registered public accounting firm) | | | | | 23.2 | ** | Consent of Loeb & Loeb LLP (included in Exhibit 5.1 to the Registration Statement) | | | | | 24.1 | * | Power of Attorney (included on signature page). | | | | | 107 | * | Calculation of Filing Fee Table | | | | |
10.14 | | Agreement to Buyout and Release dated February 24, 2015 (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015). | 10.15† | | Performance Shares Grant Agreement dated February 24, 2015 (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015). | 10.16† | | Form of Option Agreement Issued to the Executive Officers of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.16 of Registrant’s Annual Report on Form 10-K filed with the Commission on March 26, 2015). | 10.17† | | Form of Option Agreement Issued to the Directors of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.17 of Registrant’s Annual Report on Form 10-K filed with the Commission on March 26, 2015). | 10.18† | | Form of Restricted Stock Unit Agreement Issued to the Executive Officers of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed with the Commission on June 2, 2015). | 10.19† | | Employment Offer Letter, dated May 23, 2017, by and between 1347 Property Insurance Holdings, Inc. and Dan Case (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on May 23, 2017). | 10.20† | | Form of Executive Restricted Stock Unit Award Agreement under the Share-Matching Program (incorporated by reference to Exhibit 10.1 of Registrant’s Current on Report on Form 8-K filed with the Commission on December 19, 2017). | 10.21† | | Form of Non-Employee Director Restricted Stock Unit Award Agreement under the Share-Matching Program (incorporated by reference to Exhibit 10.2 of Registrant’s Current on Report on Form 8-K filed with the Commission on December 19, 2017). | 10.22* | | Stock Purchase Agreement, dated January 2, 2018, by and among 1347 Advisors LLC, IWS Acquisition Corporation and 1347 Property Insurance Holdings, Inc. | 21.1* | | Subsidiaries of 1347 Property Insurance Holdings, Inc. | 23.1* | | Consent of BDO USA LLP. | 23.2** | | Consent of Thompson Hine LLP (included as part of Exhibit 5.1). | 24.1* | | Power of Attorney. |
* | * Filed herewith. | ** | To be filed by amendment. | † | Denotes management contracts or compensatory plans or arrangements. |
(b) Financial statement schedules.** To be filed by amendment.
† Management contract or compensatory plan or arrangement. No financial statement schedules are provided because[1] Registrant’s Current Report on Form 8-K filed December 17, 2020
[2] Registrant’s Registration Statement on Form S-1/A1 (Reg. No. 333-193314), filed January 30, 2014 [3] Registrant’s Registration Statement on Form S-1/A1 (Reg. No. 333-222470), filed February 5, 2018 [4] Registrant’s Annual Report on Form 10-K for year ended December 31, 2019 [5] Registrant’s Definitive Proxy Statement on Schedule 14A filed April 30, 2015 [6] Registrant’s Current Report on Form 8-K filed June 1, 2018 [7] Registrant’s Current Report on Form 8-K filed January 19, 2021 [8] Registrant’s Current Report on Form 8-K filed June 2, 2015 [9] Registrant’s Current Report on Form 8-K filed December 19, 2017 [10] Registrant’s Current Report on Form 8-K filed June 1, 2018 [11] Registrant’s Quarterly Report on Form 10-Q for quarter ended September 30, 2018, filed November 13, 2018 [12] Registrant’s Current on Report on Form 8-K filed August 28, 2018 [13] Registrant’s Current Report on Form 8-K filed December 2, 2019 [14] Registrant’s Current Report on Form 8-K filed November 16, 2020 [15] Registrant’s Current Report on Form 8-K filed April 6, 2020 [16] Registrant’s Annual Report on Form 10-K for the information calledyear ended December 31, 2020, filed March 18, 2021 [17] Registrant’s Current Report on Form 8-K filed May 21, 2021 [18] Registrant’s Quarterly Report on Form 10-Q for is either not required or is shown either in the financial statements orquarter ended June 30, 2021, filed August 16, 2021 [19] Registrant’s Current Report on Form 8-K filed December 17, 2021 [20] Registrant’s Annual Report on Form 10-K for the notes thereto.year ended December 31, 2021, filed March 30, 2022 [21] Registrant’s Current Report on Form 8-K filed May 19, 2021 [22] Registrant’s Current Report on Form 8-K filed October 26, 2021 Item 17. Undertakings (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933 (the “Securities Act”), each filing of the Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be in the initialbona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(a) | The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | | | (b) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. | | | (c) | The undersigned Registrant hereby undertakes that: |
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrantRegistrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| | | | (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Tampa,St. Petersburg, State of Florida, on the 8th day of January, 2018.May 5, 2022. | FG Financial Group, Inc. | | | | | 1347 PROPERTY INSURANCE HOLDINGS, INC.By: | /s/ Larry G. Swets, Jr. | | | | By: | /s/ Douglas N. RaucyLarry G. Swets, Jr. | | Name: Douglas N. Raucy | | Title: President and Chief Executive Officer |
POWER OF ATTORNEY Each of the undersigned, whose signature appears below, hereby constitutes and appoints Larry G. Swets, Jr. and Brian D. Bottjer and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to do any and all acts and things and execute, in the name of the undersigned, any and all instruments which said attorney-in-fact and agent may deem necessary or advisable in order to enable the Company to comply with the Securities Act and any requirements of the SEC in respect thereof, in connection with the filing with the SEC of this Registration Statement on Form S-1 under the Securities Act, including specifically but without limitation, power and authority to sign the name of the undersigned to such Registration Statement, and any amendments to such Registration Statement, and any additional Registration Statement filed pursuant to Rule 462(b), and to file the same with all exhibits thereto and other documents in connection therewith, with the SEC, to sign any and all applications, registration statements, notices or other documents necessary or advisable to comply with applicable state securities laws, and to file the same, together with other documents in connection therewith with the appropriate state securities authorities, granting unto said attorney-in-fact and agent, full power and authority to do and to perform each and every act and thing requisite or necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statementregistration statement has been signed by the following persons in the capacities indicatedand on the 8th day of January, 2018.dates indicated. Signature | | TitleCapacity in Which Signed | | Date | | | | | | /s/ Douglas N. RaucyLarry G. Swets, Jr. | | President,Director and Chief Executive Officer and Director | | May 5, 2022 | Douglas N. RaucyLarry G. Swets, Jr. | | (Principal Executive Officer) | | | | /s/ John S. Hill | | Vice President, Chief Financial Officer and Secretary | John S. Hill | | (Principal Financial Officer, Principal Accounting Officer) | | | | /s/ Larry Gene Swets, Jr.* | | Director, Chairman of the Board | Larry Gene Swets, Jr. | | | | | | | | /s/ Brian D. Kyle Cerminara*Bottjer | | DirectorSenior Vice President and Chief Accounting Officer | | May 5, 2022 | Brian D. Kyle CerminaraBottjer | | (Principal Financial and Accounting Officer) | | | | | | | | /s/ Joshua S. Horowitz*Hassan R. Baqar | | DirectorExecutive Vice President and Chief Financial Officer | | May 5, 2022 | Joshua S. HorowitzHassan R. Baqar | | | | | | | | | | /s/ Lewis M. Johnson*D. Kyle Cerminara* | | DirectorChairman of the Board | | May 5, 2022 | Lewis M. JohnsonD. Kyle Cerminara | | | | | | | | | | /s/ Scott David Wollney*Richard E. Govignon, Jr.* | | Director | | May 5, 2022 | Scott David WollneyRichard E. Govignon, Jr. | | | | | | | | | | /s/ Dennis A. Wong*Rita Hayes* | | Director | | May 5, 2022 | Dennis A. WongRita Hayes | | |
*By: | /s/ John S. Hill | | | | John S. Hill | | | | /s/ E. Gray Payne* | | Director | | May 5, 2022 | E. Gray Payne | | | | | | Attorney-in-Fact | | | | /s/ Scott D. Wollney* | | Director | | May 5, 2022 | Scott D. Wollney | | | | |
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