Item
2.01 Completion of Acquisition or Disposition of Assets.
On
December 2, 2019, 1347 Property Insurance Holdings, Inc. (the “Company”) completed the previously announced sale of
all of the issued and outstanding equity of three of the Company’s wholly-owned subsidiaries, Maison Insurance Company (“Maison”),
Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and, together with Maison and MMI, the “Insurance
Companies”), to FedNat Holding Company, a Florida corporation (“Purchaser”), pursuant to the terms and conditions
of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company
and the Insurance Companies, on the one hand, and Purchaser, on the other hand (the “Asset Sale”).
As
consideration for the Asset Sale, Purchaser paid the Company $51.0 million, consisting of $25.5 million in cash and $25.5 million
in Purchaser’s common stock, or 1,773,102 shares of common stock. The stock consideration was determined by dividing $25.5
million by the weighted average closing price per share of Purchaser’s common stock on the Nasdaq Stock Market during the
20-trading day period immediately preceding December 2, 2019. In addition, upon the closing of the Asset Sale, $18.0 million of
outstanding surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, was repaid to the
Company.
The
shares of Purchaser common stock issued to the Company are not registered under the Securities Act of 1933, as amended (the “Securities
Act”), and were issued to the Company in reliance on the registration exemption set forth in Section 4(a)(2) of the Securities
Act.
The
foregoing description of the Purchase Agreement and the transactions contemplated thereby, including the Asset Sale, does not
purport to be complete and is qualified in its entirety by reference to the full text of the Purchase Agreement, a copy of which
was filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission
(the “Commission”) on February 25, 2019, and is incorporated herein by reference.
At
the closing of the Asset Sale, the Company and Purchaser entered into certain agreements, including (i) a Registration Rights
Agreement, (ii) a Standstill Agreement, (iii) a Reinsurance Capacity Right of First Refusal Agreement (the “Reinsurance
Agreement”), (iv) an Investment Advisory Agreement and (v) a Transition Services Agreement.
Registration
Rights Agreement
Under
the Registration Rights Agreement, Purchaser has granted the Company certain customary registration rights with respect to the
shares of Purchaser common stock received by the Company as partial consideration for the Asset Sale. The agreement requires Purchaser
to file a registration statement with the Commission as soon as reasonably practicable following the closing of the Asset Sale,
but in any event no later than 15 business days thereafter, and to use its best efforts to cause such registration statement to
be declared effective by the Commission. The Registration Rights Agreement also grants the Company certain piggyback registration
rights. The Company and Purchaser have also agreed to indemnify the other party for certain losses arising from the registration
of the securities.
Standstill
Agreement
The
Standstill Agreement imposes certain limitations and restrictions with respect to the voting securities of Purchaser (including
shares of Purchaser common stock) that are owned or held beneficially or of record by the Company. Under the Standstill Agreement,
the Company has agreed to vote all of the voting securities of Purchaser beneficially owned by the Company in accordance with
the recommendation of the board of directors of Purchaser with respect to any matter that is before the stockholders of Purchaser
for a vote by such stockholders. The Standstill Agreement imposes limitations on the sale of voting securities of Purchaser held
by the Company and restricts the Company from taking certain actions as a holder of voting securities of Purchaser. The term of
the Standstill Agreement is five years.
For
insurance regulatory purposes, the Company also plans to waive any rights that it may have to exercise control of Purchaser.
Reinsurance
Capacity Right of First Refusal Agreement
The
Reinsurance Agreement provides the Company with a right of first refusal to sell reinsurance coverage to the insurance company
subsidiaries of Purchaser, providing reinsurance on up to 7.5% of any layer in Purchaser’s catastrophe reinsurance program,
subject to the annual reinsurance limit of $15.0 million, on the terms and subject to the conditions set forth in the Reinsurance
Agreement. All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement
in such form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance
Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement
is five years.
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement, Fundamental Global Advisors LLC, a wholly-owned subsidiary of the Company (“Advisor”),
will provide investment advisory services to Purchaser, including identifying, analyzing and recommending potential investments,
advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding
macro-economic conditions. In exchange for providing the investment advisory services, Purchaser will pay Advisor an annual fee
of $100,000. FGI Funds Management, LLC will serve as the manager to the Advisor. Both Advisor and FGI Funds Management, LLC are
affiliates of Fundamental Global Investors, LLC, the Company’s largest stockholder. The term of the Investment Advisory
Agreement is five years.
Transition
Services Agreement
To
facilitate the transition following the Asset Sale, on December 2, 2019, the Company and Purchaser entered into a Transition Services
Agreement, pursuant to which the Company will provide certain transition accounting services to Purchaser and the Insurance Companies,
as requested, and Purchaser will arrange for certain prior employees of the Company who became employees of the Purchaser in connection
with the Asset Sale to provide transition accounting services to the Company, as requested, on the terms and conditions set forth
in the Transition Services Agreement.
The
foregoing descriptions of the Registration Rights Agreement, the Standstill Agreement, the Reinsurance Agreement, the Investment
Advisory Agreement, and the Transition Services Agreement do not purport to be complete and are qualified in their entirety by
reference to the full text of the Registration Rights Agreement, the Standstill Agreement, the Reinsurance Agreement, the Investment
Advisory Agreement, and the Transition Services Agreement, which are filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5, respectively,
to this Current Report and incorporated herein by reference.
Business
Going Forward
Following
the closing of the Asset Sale, the Company intends to operate as a diversified holding company of reinsurance and investment management
businesses. The Company’s Board of Directors (the “Board”) will continue to evaluate the alternatives for the
use of proceeds received from the Asset Sale, which are expected to include using a portion of the cash consideration to conduct
the business of its reinsurance subsidiary, PIH Re Ltd., and funding its new growth strategy focused on reinsurance, investment
management and new investment opportunities.