Item
8.01 Other Events
2019-2020
Catastrophe Excess of Loss Reinsurance Program
1347
Property Insurance Holdings, Inc. (the “Company”), through its wholly-owned subsidiary, Maison
Insurance Company (“Maison”), has agreed upon the terms of its excess of loss catastrophe reinsurance program for
the period beginning July 1, 2019 and ending on June 30, 2020. The program also covers the two wholly-owned insurance subsidiaries
of FedNat Holding Company, FedNat Insurance Company (“FNIC”) and Monarch National Insurance Company (“Monarch”).
On February 25, 2019, the Company announced that it had entered into an Equity Purchase Agreement with FedNat Holding Company
(“Purchaser”), providing for the sale of all the issued and outstanding equity of Maison and two of the Company’s
other wholly-owned subsidiaries to Purchaser (the “Asset Sale”), which currently remains subject to the receipt of
regulatory approvals and satisfaction of closing conditions. See below for additional information on the Asset Sale.
Given
the pending acquisition of Maison by Purchaser, the Company and Purchaser have agreed to combine their 2019-2020 excess of loss
catastrophe reinsurance program into a single program (the “Program”) allowing Maison, FNIC, and Monarch to capitalize
on efficiencies, spread of risk and scale. The Program provides approximately $1.28 billion of single-event coverage, and aggregate
coverage of $1.84 billion. Maison’s single-event retention will be $5 million and includes one prepaid automatic reinstatement.
Additionally, the Program is structured such that coverage is provided in layers, with a cascading feature which allows substantially
all layers to attach after $5 million in losses for Maison. If the aggregate limit of the preceding layer is exhausted, the next
layer drops down (cascades) in its place. Any unused layer of protection cascades for subsequent events until exhausted.
The reinsurers participating in the Program currently have an A.M. Best Company or Standard & Poor’s rating of “A-”
or better, or have fully collateralized their maximum potential obligations in dedicated trusts.
The
full cost of the Program for Maison, FNIC, and Monarch combined is expected to be approximately $204.7 million, of which
Maison’s total cost is anticipated to be approximately $42.7 million compared to the cost of Maison’s program
for the 2018-2019 reinsurance year, which was approximately $34.2 million. Each of the three participants in the Program will
pay its allocated portion of the total cost of the Program as explained below.
Allocation
Methodology and Projected Allocated Amounts
The
allocation methodology by which Maison, FNIC, and Monarch will determine their share of the premium and distribution of reinsurance
recoveries under the Program is based on catastrophe loss modeling of the separate books of business. Each carrier will share
the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier’s
reinsurance recoveries will be based on that carrier’s contributing share of a given event’s total loss. Both FNIC
and Monarch maintained their Florida Hurricane Catastrophe Fund (“FHCF”) participation at 75% for the
2019 hurricane season, while Maison increased its FHCF participation to 90% from 45% for the 2018-2019 reinsurance year.
FNIC’s single event pre-tax retention for a catastrophic event in Florida is $20 million, Monarch’s single event pre-tax
retention for a catastrophic event is $2 million, Maison’s single event pre-tax retention for a catastrophic event is $5
million.
The
insurance carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. The
data is subjected to exposure level analysis at various dates through December 31, 2019. This analysis of the carriers’
exposure level in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits
and reinsurance premiums in total, and by carrier, as a result of increases or decreases in the carriers’ exposure levels.
The
following table summarizes the reinsurance coverage and estimated cost of the Program, based on modeled information:
|
($ in thousands)
|
|
FNIC and Monarch
|
|
|
Maison
|
|
|
Total
|
|
|
Single-event limit
1
|
|
$
|
1,082,000
|
|
|
$
|
195,000
|
|
|
$
|
1,277,000
|
|
|
Aggregate limit
1
|
|
$
|
1,560,000
|
|
|
$
|
282,000
|
|
|
$
|
1,842,000
|
|
|
Program cost
2
|
|
$
|
162,000
|
|
|
$
|
42,700
|
|
|
$
|
204,700
|
|
|
1
|
These
illustrative allocations of the single-event and aggregate limits are based on each carrier’s single-event modeled loss
in proportion to the combined single-event modeled loss, all on a 1-in-130 year basis. Actual coverages will be allocated
based on each carrier’s contributing share of actual storm events.
|
|
2
|
Preliminary
premium allocation is based on projected exposures by reinsurance layer for each carrier. Actual allocations will be subject
to adjustment for changes in relative exposure at various dates up through December 31, 2019.
|
The
Asset Sale
Pursuant
to the Equity Purchase Agreement, dated February 25, 2019 (the “Purchase Agreement”), by and among the Company, Purchaser,
Maison Managers, Inc. Maison, and Claimcor, LLC, Purchaser has filed the required regulatory applications with the states of Florida
and Louisiana. The regulatory review is ongoing and a public hearing is scheduled, as customary and required in connection with
the review process, by the Louisiana Department of Insurance for July 1, 2019. Under the Purchase Agreement, if the transaction
does not close on or before June 30, 2019, then the transaction closing is to occur as soon after November 30, 2019 as reasonably
practicable. The Company and Purchaser are currently discussing the timing of closing, assuming all required regulatory approvals
are in place during the third quarter of 2019.
Forward-Looking
Statements
Certain
statements made in this Current Report are not based on historical facts, but are forward-looking statements. These statements
can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,”
“can,” “could,” “estimate,” “expect,” “evaluate,” “forecast,”
“guidance,” “intend,” “likely,” “may,” “might,” “outlook,”
“plan,” “potential,” “predict,” “probable,” “project,” “seek,”
“should,” “view,” or “will,” or the negative thereof or other variations thereon or comparable
terminology. These statements reflect the Company’s reasonable judgment with respect to future events and are subject to
risks and uncertainties that could cause actual results or outcomes to differ materially from those in the forward-looking statements.
Such risks and uncertainties include risks of disruption to the Company’s business as a result of the proposed Asset Sale,
reinsurance costs allocated to Maison, increased reinsurance costs incurred by the Company, the occurrence of any event, change
or other circumstance that could give rise to the termination of the Equity Purchase Agreement, an inability to complete the Asset
Sale due to a failure of any condition to the closing of the Asset Sale to be satisfied or waived by the applicable party, the
extent of, and the time necessary to obtain, the regulatory approvals required for the Asset Sale, outcome of any litigation that
the Company may become subject to relating to the Asset Sale, an increase in the amount of costs, fees and expenses and other
charges related to the Equity Purchase Agreement or the Asset Sale, risks arising from the diversion of management’s attention
from the Company’s ongoing business operations, a decline in the market price for the Company’s common stock if the
Asset Sale is not completed, a lack of alternative potential transactions if the Asset Sale is not completed, volatility or decline
of Purchaser’s common stock received by the Company as consideration in the Asset Sale, limitations on the Company’s
ability to sell or otherwise dispose of Purchaser’s stock, risks of being a minority stockholder of Purchaser if the Asset
Sale is completed, disruptions in the Company’s operations from the Asset Sale that prevent the Company from realizing intended
benefits of the Asset Sale, risks associated with the Company’s inability to identify and realize business opportunities,
and undertaking of any such new opportunities, following the Asset Sale, risks of the Company’s inability to satisfy the
continued listing standards of the Nasdaq Stock Market following completion of the Asset Sale, as well as the other risks and
uncertainties identified in filings by the Company with the SEC, including its periodic reports on Form 10-K and Form 10-Q.
Any
forward-looking statement speaks only as of the date of this Current Report and the Company undertakes no obligation to update
or revise any forward-looking statements, whether as a result of new developments or otherwise.