UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2019
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____________________ to
_______________________
Commission
file number 001-36366
|
1347
Property Insurance Holdings, Inc. |
|
(Exact
name of registrant as specified in its charter) |
|
Delaware |
|
46-1119100 |
|
(State
of incorporation) |
|
(I.R.S
Employer Identification No.) |
|
970
Lake Carillon Dr., Suite 314, Saint Petersburg, FL |
|
33716 |
|
(Address
of principal executive offices) |
|
(Zip
Code) |
(813)-579-6213
(Registrant’s telephone
number)
| Securities registered
pursuant to Section 12(b) of the Act: |
| |
|
Title of Each Class |
|
Trading Symbol(s) |
|
Name
of Each Exchange on Which Registered |
| Common Stock, par value
$0.001 per share |
|
PIH |
|
The
Nasdaq Stock Market LLC |
| 8.00% Cumulative Preferred Stock,
Series A, par value $25.00 per share |
|
PIHPP |
|
The
Nasdaq Stock Market LLC |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.:
|
Large
Accelerated Filer |
[ ] |
Accelerated
Filer |
[ ] |
| Non-Accelerated
Filer |
[X] |
Smaller
Reporting Company |
[X] |
| Emerging
Growth Company |
[ ] |
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the Registrant’s common stock held by
non-affiliates was $16,285,205 on June 28, 2019, computed on the
basis of the closing sale price of the Registrant’s common stock on
that date.
As of
March 25, 2020, the total number of common shares outstanding of
the Registrant’s common stock was 6,068,106.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for the 2020 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
Form 10-K.
1347
PROPERTY INSURANCE HOLDINGS, INC.
1347
PROPERTY INSURANCE HOLDINGS, INC.
PART I
This
Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These
statements are therefore entitled to the protection of the safe
harbor provisions of these laws. These statements may be identified
by the use of forward-looking terminology such as “anticipate,”
“believe,” “budget,” “can,” “contemplate,” “continue,” “could,”
“envision,” “estimate,” “expect,” “evaluate,” “forecast,” “goal,”
“guidance,” “indicate,” “intend,” “likely,” “may,” “might,”
“outlook,” “plan,” “possibly,” “potential,” “predict,” “probable,”
“probably,” “pro-forma,” “project,” “seek,” “should,” “target,”
“view,” “will,” “would,” “will be,” “will continue,” “will likely
result” or the negative thereof or other variations thereon or
comparable terminology. In particular, discussions and statements
regarding the Company’s future business plans and initiatives are
forward-looking in nature. We have based these forward-looking
statements on our current expectations, assumptions, estimates, and
projections. While we believe these to be reasonable, such
forward-looking statements are only predictions and involve a
number of risks and uncertainties, many of which are beyond our
control. These and other important factors may cause our actual
results, performance, or achievements to differ materially from any
future results, performance or achievements expressed or implied by
these forward-looking statements, and may impact our ability to
implement and execute on our future business plans and initiatives.
Management cautions that the forward-looking statements in this
Annual Report on Form 10-K are not guarantees of future
performance, and we cannot assume that such statements will be
realized or the forward-looking events and circumstances will
occur. Factors that might cause such a difference include, without
limitation: risks associated with our limited business operations
since the closing of the Asset Sale; risks associated with our
inability to identify and realize business opportunities, and the
undertaking of any new such opportunities, following the Asset
Sale; our ability to spend or invest the net proceeds from the
Asset Sale in a manner that yields a favorable return; general
conditions in the global economy, including the impact of health
and safety concerns from the current outbreak of the COVID-19
coronavirus; our lack of operating history or established
reputation in the reinsurance industry; our inability to obtain or
maintain the necessary approvals to operate reinsurance
subsidiaries; risks associated with operating in the reinsurance
industry, including inadequately priced insured risks, credit risk
associated with brokers we may do business with, and inadequate
retrocessional coverage; our inability to execute on our investment
and investment management strategy, including our strategy to
invest in real estate assets; potential loss of value of
investments; risk of becoming an investment company; fluctuations
in our short-term results as we implement our new business
strategy; risks of not having a Chief Executive Officer and being
unable to attract and retain qualified management and personnel to
implement and execute on our business and growth strategy; failure
of our information technology systems, data breaches and
cyber-attacks; our ability to establish and maintain an effective
system of internal controls; our limited operating history as a
publicly traded company; the requirements of being a public company
and losing our status as a smaller reporting company or becoming an
accelerated filer; any potential conflicts of interest between us
and our controlling stockholders and different interests of
controlling stockholders; potential conflicts of interest between
us and our directors and executive officers; volatility or decline
of the shares of FedNat Holding Company common stock received by us
as consideration in the Asset Sale or limitations and restrictions
with respect to our ownership of such shares; risks of being a
minority stockholder of FedNat Holding Company; and risks of our
inability to continue to satisfy the continued listing standards of
the Nasdaq following completion of the Asset Sale.
Our
expectations and future plans and initiatives may not be realized.
If one of these risks or uncertainties materialize, or if our
underlying assumptions prove incorrect, actual results may vary
materially from those expected, estimated or projected. You are
cautioned not to place undue reliance on forward-looking
statements. The forward-looking statements included or incorporated
by reference to the Form 10-K are made only as of the date hereof
and do not necessarily reflect our outlook at any other point in
time. We do not undertake and specifically decline any obligation
to update any such statements or to publicly announce the results
of any revisions to any such statements to reflect new information,
future events or developments.
1347
PROPERTY INSURANCE HOLDINGS, INC.
ITEM 1. BUSINESS
Overview
1347
Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or
“us”) is a holding company which previously specialized in
providing personal property insurance in coastal markets including
those in Louisiana, Texas and Florida. We were incorporated on
October 2, 2012 in the State of Delaware under the name Maison
Insurance Holdings, Inc., and changed our legal name to 1347
Property Insurance Holdings, Inc. on November 19, 2013. On March
31, 2014, we completed an initial public offering of our common
stock. Prior to the offering, we were a wholly owned subsidiary of
Kingsway America Inc., which, in turn, is a wholly owned subsidiary
of Kingsway Financial Services Inc., or KFSI, a publicly owned
Delaware holding company. As of December 31, 2019, KFSI and its
affiliates held warrants that, if exercised, would cause KFSI and
its affiliates to hold an approximate 20% ownership interest in our
common stock. In addition, as of December 31, 2019, Fundamental
Global Investors, LLC and its affiliates, or FGI, beneficially
owned approximately 45% of our outstanding shares of common stock.
D. Kyle Cerminara, Chairman of our Board of Directors, serves as
Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis
M. Johnson, Co-Chairman of our Board of Directors, serves as
President, Co-Founder and Partner of FGI.
Sale
of the Maison Business
On
December 2, 2019, we completed the 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 “Maison Business” or the “Insurance
Companies”), to FedNat Holding Company, a Florida corporation
(“FedNat”), 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 each of Maison, MMI and
ClaimCor, on the one hand, and FedNat, on the other hand (the
“Asset Sale”).
The
Company has classified the Maison Business as discontinued
operations for all periods presented in this report.
As
consideration for the Asset Sale, FedNat paid the Company $51.0
million, consisting of $25.5 million in cash and $25.5 million in
FedNat’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 FedNat’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.
All
of the employees of the Company became employees of FedNat as of
the closing of the Asset Sale, other than John S. Hill, then
serving as Vice President, Chief Financial Officer and Secretary of
the Company and now serving as Executive Vice President, Chief
Financial Officer and Secretary, and Brian D. Bottjer, then serving
as Controller of the Company and now serving as Senior Vice
President and Controller. Douglas N. Raucy, the Company’s former
President and Chief Executive Officer and a director, and Dean E.
Stroud, the Company’s former Vice President and Chief Underwriting
Officer, resigned from all positions with the Company, and have
entered into employment agreements with FedNat, effective December
2, 2019.
On
December 31, 2019, the shares of FedNat common stock issued to the
Company in connection with the Asset Sale were registered under the
Securities Act of 1933, as amended (the “Securities Act”), pursuant
to the terms of the Registration Rights Agreement entered into by
the Company and FedNat at the closing of the Asset Sale.
In
addition to the Registration Rights Agreement, the Company and
FedNat entered into a Standstill Agreement, a Reinsurance Capacity
Right of First Refusal Agreement (the “Reinsurance Agreement”), an
Investment Advisory Agreement and a Transition Services Agreement
at the closing of the Asset Sale.
Standstill
Agreement
The
Standstill Agreement imposes certain limitations and restrictions
with respect to the voting securities of FedNat (including shares
of FedNat 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 FedNat
beneficially owned by the Company in accordance with the
recommendation of the board of directors of FedNat with respect to
any matter that is before the stockholders of FedNat for a vote by
such stockholders. The Standstill Agreement imposes limitations on
the sale of voting securities of FedNat held by the Company and
restricts the Company from taking certain actions as a holder of
voting securities of FedNat. The term of the Standstill Agreement
is five years.
1347
PROPERTY INSURANCE HOLDINGS, INC.
For
insurance regulatory purposes, the Company has waived any rights
that it may have to exercise control of FedNat.
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 FedNat, providing reinsurance on up to 7.5% of any
layer in FedNat’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”),
was formed to provide investment advisory services to FedNat,
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, FedNat has agreed to
pay Advisor an annual fee of $100,000. FGI Funds Management, LLC
will serve as the manager to the Advisor. FGI Funds Management, LLC
is affiliated with 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, the Company and
FedNat entered into a Transition Services Agreement, pursuant to
which the Company has agreed to provide certain transition
accounting services to FedNat and the Insurance Companies, as
requested, and FedNat has agreed to arrange for certain prior
employees of the Company who became employees of the FedNat 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.
Business Going Forward
Going
forward, the Company intends to operate as a diversified holding
company of reinsurance and investment management businesses.
Subject to the approval of the Company’s stockholders at the
Company’s 2020 Annual Meeting, the Company intends to change its
name to “Fundamental Global Financial Corporation” to align with
its future business plans. Fundamental Global Financial Corporation
(“FGFC”) plans to carry out its business through three primary
avenues, insurance, asset management, and real estate. The Company
also intends to change the ticker symbols for its common stock and
8.00% cumulative preferred stock, Series A, and has reserved with
Nasdaq the ticker symbols “FGI” and “FGIPP,”
respectively.
Insurance:
The
Company is in the process of forming a wholly owned reinsurance
subsidiary, Fundamental Global Reinsurance Ltd., to provide
specialty property and casualty reinsurance. Fundamental Global
Reinsurance Ltd. is expected to have a Class B (iii) insurer
license in accordance with the terms of The Insurance Law, 2010 and
underlying regulations thereto and will be subject to regulation by
the Cayman Islands Monetary Authority.
Asset
Management:
The
Company has formed a wholly owned subsidiary, Fundamental Global
Advisors, LLC to serve as an investment advisor to FedNat Holding
Company under the investment advisory agreement entered into at the
closing of the Asset Sale. In addition, the Company intends to form
a joint venture with Fundamental Global Investors, LLC to sponsor
investment advisors that will manage private funds ranging the full
spectrum of alternative equities, fixed income, private equity and
real estate. FGFC will seek to benefit from the growth of the
assets under management of the investment advisors it sponsors and
the performance of the funds they manage.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Real
Estate:
FGFC
plans to purchase controlling interests in income producing real
estate assets. FGFC will seek to benefit from underlying rental
income on long-term leases with high quality tenants as well as the
capital appreciation from the underlying real estate
assets.
Employees
As of
December 31, 2019 we had two employees. We are not a party to any
collective bargaining agreement and believe that relations with our
employees are satisfactory. Each of our employees has entered into
confidentiality agreements with us.
Website
Our
corporate website is www.1347pih.com. Our website is
provided as an inactive textual reference only.
ITEM 1A. RISK FACTORS
We have had limited business operations since the closing of the
Asset Sale.
Since
the closing of the Asset Sale, we are no longer engaged in the
retail insurance and claims adjustment businesses and have had
limited business operations as we evaluate the alternatives for the
use of proceeds from the Asset Sale and evaluate our business
strategy going forward. Our revenue has also been reduced, as we
have limited assets with which to generate revenue. Our failure to
secure additional sources of revenue may have a material impact on
our results of operations and financial condition. In addition, the
uncertainty surrounding our future operations and business
prospects may negatively impact the value and liquidity of our
common stock.
As a result of the Asset Sale, we are a very small public company
with a large cash balance relative to our market
capitalization.
As of
December 31, 2019, we had approximately $28.5 million in cash and
cash equivalents and $33.5 million in investments. We expect to
invest significant funds into the implementation of our new
business strategy, which will increase our operating expenses.
Until we secure additional revenue streams, we may lose a
significant amount of cash, which may have a material adverse
effect on our results of operations and financial condition. In
addition, the value of our investments may be materially adversely
affected by financial market performance, general economic
conditions, and other factors that may result in the recognition of
other-than-temporary impairments. Each of these events may cause us
to reduce the carrying value of our investment portfolio and may
adversely affect our results of operations.
We
also remain subject to the listing standards of Nasdaq and SEC
rules and regulations, including the Dodd-Frank Wall Street Reform
and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, and
have an obligation to continue to comply with the applicable
reporting requirements of the Exchange Act even though compliance
with these reporting requirements is economically burdensome.
Unless we decide to deregister our shares and suspend our periodic
reporting obligations under the Exchange Act, we will continue to
incur ongoing operating expenses related to our status as a
reporting issuer. While all public companies face the costs and
burdens associated with being publicly traded, given our limited
business operations, the costs and burdens of being a public
company may be material.
The uncertainty regarding the use of proceeds from the Asset Sale
and our future operations may negatively impact the value and
liquidity of our common stock.
Our
Board continues to evaluate various alternatives for the use of
proceeds from the Asset Sale as it considers and finalizes our
business strategy going forward. Our Board has broad discretion in
finalizing the use of proceeds, which our investors may not agree
with. This uncertainty may negatively impact the value and
liquidity of our common stock.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Unfavorable global economic conditions, including as a result of
health and safety concerns, could adversely affect our business,
financial condition or results of operations.
Our
results of operations and the implementation of our new business
strategy could be adversely affected by general conditions in the
global economy, including conditions that are outside of our
control, such as the impact of health and safety concerns from the
current outbreak of the COVID-19 coronavirus. The most recent
global financial crisis caused by the coronavirus resulted in
extreme volatility and disruptions in the capital and credit
markets. A severe or prolonged economic downturn could result in a
variety of risks to our business and could delay the implementation
of our new business strategy.
Additionally,
adverse events such as health-related concerns about working in our
offices, the inability to travel and other matters affecting the
general work environment could harm our business and our business
strategy. While we do not anticipate any material impact to our
business operations as a result of the coronavirus, in the event of
a major disruption caused by the outbreak of pandemic diseases such
as coronavirus, we may lose the services of our employees or
experience system interruptions, which could lead to diminishment
of our business operations. Any of the foregoing could harm our
business and delay the implementation of our business strategy and
we cannot anticipate all the ways in which the current global
health crisis and financial market conditions could adversely
impact our business.
Management is actively monitoring the global situation on its
financial condition, liquidity, operations, industry and workforce.
Given the daily evolution of the coronavirus and the global
responses to curb its spread, the Company is not able to estimate
the effects of the coronavirus on its results of operations,
financial condition or liquidity for fiscal year 2020.
We are subject to non-competition and non-solicitation covenants
under the Purchase Agreement, which may limit our operations in
certain respects.
We
are subject to the non-competition and non-solicitation covenants
in the Purchase Agreement until December 2, 2024. During this
period of time, subject to certain exceptions, we will generally be
prohibited from (i) marketing, selling and issuing residential
property and casualty insurance policies to residential consumers
anywhere in the States of Alabama, Florida, Georgia, Louisiana,
South Carolina and Texas (a “Restricted Business”), and owning the
equity securities of, managing, operating or controlling any person
that engages in a Restricted Business, (ii) hiring or soliciting
certain employees of FedNat or the companies sold under the terms
of the Purchase Agreement, and (iii) soliciting or accepting
business from certain third parties on any customer, agent or
vendor list of Maison, MMI, or ClaimCor in connection with a
Restricted Business. The non-competition covenant does not apply to
our reinsurance business, and we will be permitted to enter into
reinsurance contracts in the States of Alabama, Florida, Georgia,
Louisiana, South Carolina and Texas.
The
limitations set forth in the non-competition and non-solicitation
covenants may negatively impact the scope of our future operations,
limit our recruitment of key employees, restrict our ability to
enter into strategic relationships, and impair our ability to
pursue certain business alternatives, which may adversely affect
our business, results of operations, financial condition, and stock
price.
We do not have an operating history or established reputation in
the reinsurance industry, and our lack of an established operating
history and reputation may make it difficult for us to attract or
retain business.
As
part of our business going forward, we plan to provide specialty
property and casualty reinsurance through PIH Re, Ltd., our
reinsurance subsidiary domiciled under the laws of Bermuda, and
Fundamental Global Reinsurance Ltd., a reinsurance subsidiary we
are in the process of forming under the laws of the Cayman Islands.
We will not have an operating history on which we can base an
estimate of our future earnings prospects. We also do not have an
established reputation in the reinsurance industry. Reputation is a
very important factor in the reinsurance industry, and competition
for business is, in part, based on reputation. Although we expect
that our reinsurance policies will be fully collateralized, we will
be a relatively newly formed reinsurance company and do not yet
have a well-established reputation in the reinsurance industry. Our
lack of an established reputation may make it difficult for us to
attract or retain business. We will compete with major reinsurers,
all of which have substantially greater financial marketing and
management resources than we do, which may make it difficult for us
to effectively market our products or offer our products at a
profit. In addition, we do not have or currently intend to obtain
financial strength ratings, which may discourage certain
counterparties from entering into reinsurance contracts with
us.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Our failure to obtain or maintain approval of insurance regulators
and other regulatory authorities as required for the operations of
our reinsurance subsidiary may have a material adverse effect on
our future business, financial condition, results of operations and
prospects.
Our
reinsurance subsidiary, PIH Re, Ltd., as a Bermuda domiciled
entity, is required to maintain licenses. PIH Re, Ltd. is
registered as a reinsurer only in Bermuda. Bermuda insurance
statutes and regulations and policies of the Bermuda Monetary
Authority, or “BMA,” require that PIH Re, Ltd., among other things,
maintain a minimum level of capital and surplus, satisfy solvency
standards, restrict dividends and distributions, obtain prior
approval or provide notification to the BMA of certain
transactions, maintain a head office, and have certain officers and
a director resident in Bermuda, appoint and maintain a principal
representative in Bermuda and provide for the performance of
certain periodic examinations of itself and its financial
conditions. A failure to meet these conditions may result in the
suspension or revocation of its license to do business as a
reinsurance company in Bermuda, which would mean that PIH Re, Ltd.
would not be able to enter into any new reinsurance contracts until
the suspension ended or it became licensed in another jurisdiction.
For any or a number of reasons, the BMA could revoke or suspend PIH
Re, Ltd.’s license. Any such suspension or revocation of its
license would negatively impact its and our reputation in the
reinsurance marketplace and could have a material adverse effect on
our results of operations.
We
are also in the process of forming a new reinsurance subsidiary,
Fundamental Global Reinsurance Ltd., to provide specialty property
and casualty reinsurance. We expect that Fundamental Global
Reinsurance Ltd. will have a Class B (iii) insurer license in
accordance with the terms of The Insurance Law, 2010 and underlying
regulations thereto, and will be subject to regulation by the
Cayman Islands Monetary Authority. Failure to comply with the laws,
regulations and requirements applicable to a Cayman
Islands-domiciled reinsurance subsidiary could result in
consequences which may have a material adverse effect on our
business and results of operations.
In
addition, other reinsurance subsidiaries we may form in other
foreign jurisdictions will be subject to the requirements of those
jurisdictions, and we may fail to comply with the applicable
regulatory requirements.
As a reinsurer, we will depend on our clients’ evaluations of the
risks associated with their insurance underwriting, which may
subject us to reinsurance losses.
In
the proportional reinsurance business, in which we will assume an
agreed percentage of each underlying insurance contract being
reinsured, or quota share contracts, we do not plan to separately
evaluate each of the original individual risks assumed under these
reinsurance contracts. We will therefore be largely dependent on
the original underwriting decisions made by ceding companies, which
will subject us to the risk that the clients may not have
adequately evaluated the insured risks and that the premiums ceded
may not adequately compensate us for the risks we assume. We also
do not plan to separately evaluate each of the individual claims
made on the underlying insurance contracts under quota share
arrangements, in which case we will be dependent on the original
claims decisions made by our clients.
The involvement of reinsurance brokers may subject us to their
credit risk.
As a
standard practice of the reinsurance industry, reinsurers
frequently pay amounts owed on claims under their policies to
reinsurance brokers, and these brokers, in turn, remit these
amounts to the ceding companies that have reinsured a portion of
their liabilities with the reinsurer. In some jurisdictions, if a
broker fails to make such a payment, the reinsurer might remain
liable to the client for the deficiency notwithstanding the
broker’s obligation to make such payment. Conversely, in certain
jurisdictions, when the client pays premiums for policies to
reinsurance brokers for payment to the reinsurer, these premiums
are considered to have been paid and the client will no longer be
liable to the reinsurer for these premiums, whether or not the
reinsurer has actually received them from the broker. Consequently,
as a reinsurer, we expect to assume a degree of credit risk
associated with the brokers that we intend to do business
with.
1347
PROPERTY INSURANCE HOLDINGS, INC.
We may be unable to purchase retrocessional reinsurance for the
liabilities we reinsure, and if we successfully purchase such
retrocessional reinsurance, we may be unable to collect, which
could adversely affect our business, financial condition and
results of operations.
Retrocessional
coverage (reinsurance for the liabilities we reinsure) may not
always be available to us or may not always be available at
acceptable terms. From time to time, as a reinsurer we expect that
we will purchase retrocessional coverage for our own account in
order to mitigate the effect of a potential concentration of losses
upon our financial condition. The insolvency or inability or
refusal of a retrocessional reinsurer to make payments under the
terms of its agreement with us could have an adverse effect on us
because we will remain primarily liable to our client. From time to
time, market conditions have limited, and in some cases have
prevented, reinsurers from obtaining the types and amounts of
retrocession that they consider adequate for their business needs.
Accordingly, we may not be able to obtain our desired amounts of
retrocessional coverage or negotiate terms that we deem appropriate
or acceptable or obtain retrocession from entities with
satisfactory creditworthiness. Our failure to establish adequate
retrocessional arrangements or the failure of our retrocessional
arrangements to protect us from overly concentrated risk exposure
could significantly and negatively affect our business, financial
condition and results of operations.
We may not be successful in carrying out our investment and
investment management strategy, and fair value of our investments
will be subject to a loss in value.
We
have formed an investment advisory firm subsidiary, Fundamental
Global Advisors LLC (the “Advisor”) which uses an affiliated
investment advisor registered with the SEC, to carry out our
investment advisory services. We also intend to form a joint
venture with Fundamental Global Investors, LLC to sponsor
investment advisors that we anticipate will manage private funds
ranging the full spectrum of alternative equities, fixed income,
private equity and real estate. In exchange for seeding the new
funds, we expect to receive a special interest in each new fund (or
its general partner). Since we plan to conduct our investment
activities through private funds, our contributions made to those
funds may be subject to lock-up agreements and our ability to
access this capital may be limited for a defined period, which may
increase a risk of loss of all or a significant portion of value.
Our investments may also become concentrated. A significant decline
in the major values of these investments may produce a large
decrease in our consolidated shareholders’ equity and can have a
material adverse effect on our consolidated book value per share
and earnings.
As
discussed above under Item 1. “Business,” in connection with the
Asset Sale, the Advisor and FedNat have entered into an investment
advisory agreement in which the Advisor has agreed to provide
investment advisory services to FedNat, 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. Any fees received for such services may
not be commensurate with the services provided. We also may not be
able to enter into such advisory management agreements with other
entities on favorable terms, or at all. Any of these events could
have a material adverse effect on our business.
As
part of our business going forward, we also plan to purchase
controlling interests in income producing real estate assets, and
will seek to benefit from underlying rental income on long-term
leases with high quality tenants as well as the capital
appreciation from the underlying real estate assets. Investments in
real estate assets are subject to varying degrees of risk. For
example, an investment in real estate cannot generally be quickly
converted to cash, limiting our ability to promptly vary our
portfolio in response to changing economic, financial and
investment conditions. Investments in real estate assets are also
subject to adverse changes in general economic conditions which may
reduce the demand for rental space. Moreover, we may not be able to
acquire quality, income producing real estate assets or attract
high-quality tenants on favorable terms, if at all. We also expect
to compete with numerous other persons or entities seeking to buy
real estate assets, including real estate investment trusts or
other real estate operating companies with greater experience and
financial strength. Any of these factors could impact our real
estate investment strategy and have a material adverse impact on
our business.
We will be subject to the risk of possibly becoming an investment
company under the Investment Company Act.
We
will be subject to the risk of inadvertently becoming an investment
company, which would require us to register under the Investment
Company Act of 1940, as amended (the “Investment Company Act”).
Registered investment companies are subject to extensive,
restrictive and potentially adverse regulations relating to, among
other things, operating methods, management, capital structure,
dividends and transactions with affiliates. Registered investment
companies are not permitted to operate their business in the manner
in which we currently operate and plan to operate our business in
the future.
1347
PROPERTY INSURANCE HOLDINGS, INC.
We
plan to monitor the value of our investments and structure our
operations and transactions to qualify for exemptions under the
Investment Company Act. Accordingly, we may structure transactions
in a less advantageous manner than if we did not have Investment
Company Act concerns, or we may avoid otherwise economically
desirable transactions due to those concerns. In addition, adverse
developments with respect to our ownership of our operating
subsidiaries, including significant appreciation or depreciation in
the market value of certain of our publicly traded holdings, could
result in our inadvertently becoming an investment company. If it
were established that we were an investment company, there would be
a risk, among other material adverse consequences, that we could
become subject to monetary penalties or injunctive relief, or both,
in an action brought by the SEC, that we would be unable to enforce
contracts with third parties or that third parties could seek to
obtain rescission of transactions with us undertaken during the
period it was established that we were an unregistered investment
company.
Our results of operations will fluctuate from period to period and
may not be indicative of our long-term
prospects.
We
anticipate that the performance of our reinsurance operations and
our future investment and real estate portfolios will fluctuate
from period to period. In addition, because we plan to underwrite
products and make investments to achieve favorable return on equity
over the long-term, our short-term results of operations may not be
indicative of our long-term prospects. Our results of operations
may also be adversely impacted by general economic conditions and
the conditions and outlook of the reinsurance markets and capital
markets.
We may be unable to attract and retain key personnel and
management, which could adversely impact our ability to
successfully implement and execute our business and growth
strategy.
The
successful implementation of our business and growth strategy
depends in large part upon the ability and experience of members of
our management and other personnel. We experienced a number of
personnel changes in connection with the closing of our Asset Sale,
including the resignations of Douglas N. Raucy, who served as our
President and Chief Executive Officer, and Dean E. Stroud, who
served as our Vice President and Chief Underwriting Officer. We
currently do not have a Chief Executive Officer, which may be
looked upon unfavorably by our investors and could have an adverse
impact on our business.
We
currently have two employees, John S. Hill, who serves as out
Executive Vice President and Chief Financial Officer, and Brian D.
Bottjer, who serves as our Senior Vice President and Controller.
Our performance will be dependent on our ability to identify, hire,
train, motivate and retain qualified management and personnel with
experience in the reinsurance industry, investment advisory
services, and in real estate investments. We may not be able to
attract and retain such personnel on acceptable terms, or at all.
If we lose the service of qualified management or other personnel
or are unable to attract and retain the necessary members of
management or personnel, we may not be able to successfully execute
on our business strategy, which could have an adverse effect on our
business.
Our information technology systems may fail or suffer a loss of
security which may have a material adverse effect on our
business.
Our
business is highly dependent upon the successful and uninterrupted
functioning of our computer and data processing systems. Our
operations are dependent upon our ability to process our business
timely and efficiently and protect our information systems from
physical loss or unauthorized access. In the event that our systems
cannot be accessed due to a natural catastrophe, terrorist attack
or power outage, or systems and telecommunications failures or
outages, external attacks such as computer viruses, malware or
cyber-attacks, or other disruptions occur, our ability to perform
business operations on a timely basis could be significantly
impaired and may cause our systems to be inaccessible for an
extended period of time. A sustained business interruption or
system failure could adversely impact our ability to perform
necessary business operations in a timely manner, hurt our
relationships with our business partners and customers and have a
material adverse effect our financial condition and results of
operations.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Our
operations also depend on the reliable and secure processing,
storage and transmission of confidential and other information in
our computer systems and networks. From time to time, we may
experience threats to our data and systems, including malware and
computer virus attacks, unauthorized access, systems failures and
disruptions. Computer viruses, hackers, phishing attacks, social
engineering schemes, ransomware, employee misconduct and other
external hazards could expose our data systems to security
breaches, cyber-attacks or other disruptions. In addition, we
routinely transmit and receive personal, confidential and
proprietary information by electronic means. Our systems and
networks may be subject to breaches or interference. Any such event
may result in operational disruptions as well as unauthorized
access to or the disclosure or loss of our proprietary information
or our customers’ information or theft of funds and other monetary
loss, which in turn may result in legal claims, regulatory scrutiny
and liability, damage to our reputation, the incurrence of costs to
eliminate or mitigate further exposure, the loss of customers or
affiliated advisers or other damage to our business.
If we fail to establish and maintain an effective system of
integrated internal controls, we may not be able to report our
financial results accurately, which could have a material adverse
effect on our business, financial condition and results of
operations.
Ensuring
that we have adequate internal financial and accounting controls
and procedures in place so that we can produce accurate financial
statements on a timely basis is a costly and time-consuming effort
that will need to be evaluated frequently. Section 404 of the
Sarbanes-Oxley Act requires public companies to conduct an annual
review and evaluation of their internal controls and attestations
of the effectiveness of internal controls by independent auditors.
We currently qualify as a smaller reporting company under the
regulations of the Securities and Exchange Commission (the “SEC”).
Under new rules recently adopted by the SEC, as a smaller reporting
company we are exempt from the requirement to include the auditor’s
report of the effectiveness of internal control over financial
reporting until such time as we no longer qualify as a smaller
reporting company based on our public float and report more than
$100 million in annual revenues in a fiscal year. Regardless of our
qualification status, we have implemented substantial control
systems and procedures in order to satisfy the reporting
requirements under the Exchange Act and applicable requirements of
Nasdaq, among other items. Maintaining these internal controls is
costly and may divert management’s attention.
Our
evaluation of our internal controls over financial reporting may
identify material weaknesses that may cause us to be unable to
report our financial information on a timely basis and thereby
subject us to adverse regulatory consequences, including sanctions
by the SEC, or violations of Nasdaq’s listing rules. There also
could be a negative reaction in the financial markets due to a loss
of investor confidence in us and the reliability of our financial
statements. Confidence in the reliability of our financial
statements also could suffer if we or our independent registered
public accounting firm were to report a material weakness in our
internal controls over financial reporting. This may have a
material adverse effect on our business, financial condition and
results of operations and could also lead to a decline in the price
of our common stock.
While we currently qualify as a smaller reporting company under SEC
regulations, we cannot be certain if we take advantage of the
reduced disclosure requirements applicable to these companies that
we will not make our common stock less attractive to investors.
Once we lose smaller reporting company status, the costs and
demands placed upon our management are expected to
increase.
The
SEC’s rules permit smaller reporting companies like us to take
advantage of certain exemptions from various reporting requirements
applicable to other public companies that are not smaller reporting
companies. As long as we qualify as a smaller reporting company,
based on our public float, and report less than $100 million in
annual revenues in a fiscal year we are permitted, and we intend
to, omit the auditor’s attestation on internal control over
financial reporting that would otherwise be required by the
Sarbanes-Oxley Act.
We
lost our status as an emerging growth company as of December 31,
2019. While we expect to remain a smaller reporting company and
non-accelerated filer, we now face increased disclosure
requirements as a non-emerging growth company, such as stockholder
advisory votes on executive compensation (“say-on-pay”). Until such
time that we lose smaller reporting company status, it is unclear
if investors will find our common stock less attractive because we
may rely on certain disclosure exemptions. If some investors find
our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may
be more volatile and could cause our stock price to decline. As a
result of the loss of our emerging growth company status, we expect
the costs and demands placed upon our management to increase, as we
now have to comply with additional disclosure and accounting
requirements. In addition, even if we remain a smaller reporting
company, if our public float exceeds $75 million and we report $100
million or more in annual revenues in a fiscal year, we will become
subject to the provisions of Section 404(b) of the Sarbanes-Oxley
Act requiring an independent registered public accounting firm to
provide an attestation report on the effectiveness of our internal
control over financial reporting, making the public reporting
process more costly.
1347
PROPERTY INSURANCE HOLDINGS, INC.
We have directors who also serve as directors and/or executive
officers for other public companies or for our controlling
stockholders or their affiliates, which may lead to conflicting
interests.
We have directors who serve as executive officers and/or directors
of FGI and its affiliates, which together, as of December 31, 2019,
beneficially owned approximately 45% of our outstanding shares of
common stock. In addition, FGI and its affiliates beneficially own
4.9% of our outstanding shares of 8.00% cumulative Preferred Stock,
Series A. In addition, one of our directors serves as an executive
officer and director of Atlas Financial Holdings, Inc. (Nasdaq:
AFH) (“Atlas”), a specialty commercial automobile insurance
company. Another of our directors also currently serves as director
of Limbach Holdings, Inc. (Nasdaq: LMB) (“Limbach”), an affiliate
of KFSI (which, together with its affiliates, holds a warrant
exercisable for common shares representing 20% of our outstanding
shares of common stock).
Our
executive officers and members of our Company’s Board of Directors
have fiduciary duties to our stockholders; likewise, persons who
serve in similar capacities at Atlas, Limbach and FGI have
fiduciary duties to those companies’ investors. We may find,
though, the potential for a conflict of interest if our Company and
one or more of these other companies pursue acquisitions,
investments and other business opportunities that may be suitable
for each of us. Our directors who find themselves in these multiple
roles may, as a result, have conflicts of interest or the
appearance of conflicts of interest with respect to matters
involving or affecting more than one of the companies to which they
owe fiduciary duties. Furthermore, our directors who find
themselves in these multiple roles own stock options, shares of
common stock and other securities in some of these entities. These
ownership interests could create, or appear to create, potential
conflicts of interest when the applicable individuals are faced
with decisions that could have different implications for our
Company and these other entities. From time to time, we may enter
into transactions with or participate jointly in investments with
Atlas, Limbach or FGI or its affiliates. We may create new
situations in the future in which our directors serve as directors
or executive officers in future investment holdings of such
entities.
We have a limited operating history as a publicly-traded company.
Our inexperience as a public company and the requirements of being
a public company may strain our resources, divert management’s
attention, affect our ability to attract and retain qualified board
members and have a material adverse effect on us and our
stockholders.
We
have a limited operating history as a publicly-traded company. As a
publicly-traded company, we are required to develop and implement
substantial control systems, policies and procedures in order to
satisfy our periodic SEC reporting and Nasdaq obligations.
Management’s past experience may not be sufficient to successfully
develop and implement these systems, policies and procedures and to
operate our company. Failure to do so could jeopardize our status
as a public company, and the loss of such status may have a
material adverse effect on us and our stockholders.
In
addition, as a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act, the
Dodd-Frank Act, and Nasdaq rules, including those promulgated in
response to the Sarbanes-Oxley Act. The requirements of these rules
and regulations increase our legal and financial compliance costs,
make some activities more difficult, time-consuming or costly and
increase demand on our systems and resources. The Exchange Act
requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and
internal controls for financial reporting. To maintain and improve
the effectiveness of our disclosure controls and procedures, we
need to continually commit significant resources, maintain staff
and provide additional management oversight. In addition,
implementing our new business strategy and sustaining our growth
will require us to commit additional management, operational and
financial resources to identify new professionals to join our
organization and to maintain appropriate operational and financial
systems to adequately support expansion. These activities may
divert management’s attention from other business concerns, which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
1347
PROPERTY INSURANCE HOLDINGS, INC.
As a
public company, we incur significant annual expenses related to
these steps associated with, among other things, director fees,
reporting requirements, transfer agent fees, accounting, legal and
administrative personnel, auditing and legal fees and similar
expenses. We also incur higher costs for director and officer
liability insurance. Any of these factors make it more difficult
for us to attract and retain qualified members of our Board of
Directors. Finally, we expect to incur additional costs once we
lose smaller reporting company status or are required to provide an
auditor attestation report on the effectiveness of our internal
control over financial reporting.
Holders of our outstanding shares of 8.00% Cumulative Preferred
Stock, Series A, have dividend, liquidation and other rights that
are senior to the rights of the holders of our common
shares.
As of
March 27, 2020, we have issued and outstanding 700,000 shares of
preferred stock designated as 8.00% Cumulative Preferred Stock,
Series A, par value $25.00 per share (the “Series A Preferred
Stock”). The aggregate liquidation preference with respect to the
outstanding shares of Series A Preferred Stock is approximately
$17.5 million, and annual dividends on the outstanding shares of
Series A Preferred Stock are $1.4 million. Holders of our Series A
Preferred Stock are entitled to receive, when, as and if declared
by the Board of Directors of the Company or a duly authorized
committee thereof, out of lawfully available funds for the payment
of dividends, cumulative cash dividends from and including the
original issue date at the rate of 8.00% of the $25.00 per share
liquidation preference per annum (equivalent to $2.00 per annum per
share). Upon our voluntary or involuntary liquidation, dissolution
or winding up, before any payment is made to holders of our common
shares, holders of these preferred shares are entitled to receive a
liquidation preference of $25.00 per share plus an amount equal to
any accumulated and unpaid dividends to, but not including, the
date of payment. This would reduce the remaining amount of our
assets, if any, available to distribute to holders of our common
shares.
Our
Board of Directors has the authority to designate and issue
additional preferred shares with liquidation, dividend and other
rights that are senior to those of our common shares similar to the
rights of the holders of our Series A Preferred Stock. Because our
decision to issue additional securities will depend on market
conditions and other factors beyond our control, we cannot predict
or estimate the amount, timing or nature of any future offerings.
Thus, our stockholders bear the risk of our future securities
issuances reducing the market price of our common shares and
diluting their interests.
The shares of FedNat common stock we have received as part of the
consideration for the Asset Sale are subject to certain limitations
and restrictions.
The
shares of FedNat common stock we have received in the Asset Sale
were issued pursuant to the terms of a Standstill Agreement entered
into between the Company and FedNat upon the closing of the Asset
Sale. The Standstill Agreement imposes certain limitations and
restrictions with respect to our ownership of FedNat common stock,
including, among other things, requiring us to vote all of the
voting securities of FedNat we own in accordance with the
recommendation of FedNat’s board of directors and prohibiting us
from publicly advising or influencing any person with respect to
the voting of any shares of FedNat common stock and taking any
action to nominate any person for election to FedNat’s board of
directors. Our status as a minority stockholder of FedNat as well
as the limitations and restrictions expected to be set forth in the
Standstill Agreement may limit our ability to exert significant
influence on FedNat’s management and operations and matters
requiring approval of FedNat’s stockholders. FedNat’s management
and holders of a larger percentage of FedNat’s common stock may
also take or encourage actions that decrease the value of our
shares of FedNat common stock or are not in our best interests as a
minority stockholder.
We may fail to satisfy the continued listing standards of Nasdaq
and may have to delist our common shares.
Even
though we currently satisfy the continued listing standards for
Nasdaq and expect to continue to do so, we can provide no assurance
that we will continue to satisfy the continued listing standards in
the future. In the event that we are unable to satisfy the
continued listing standards of Nasdaq, our common shares may be
delisted from that market. Any delisting of our common shares from
Nasdaq could:
1347
PROPERTY INSURANCE HOLDINGS, INC.
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adversely
affect our ability to attract new investors; |
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decrease
the liquidity of our outstanding common shares; |
| |
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● |
reduce
our flexibility to raise additional capital; |
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reduce
the price at which our common shares trade; and |
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increase
the transaction costs inherent in trading such common shares with
overall negative effects for our stockholders. |
In
addition, delisting of our common shares could deter broker-dealers
from making a market in or otherwise seeking or generating interest
in our common shares, and might deter certain institutions and
persons from investing in our securities at all. For these reasons
and others, delisting could adversely affect the price of our
common shares and our business, financial condition and results of
operations.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Our
executive offices are located at 970 Lake Carillon Drive, Suite
314, St. Petersburg, FL 33716. Our lease term expires in May 2020.
The Company is assessing its need for future office space following
the sale of the Maison Business. Total minimum rent over the
six-month term is expected to be $14,000.
In
the opinion of the Company’s management, our executive offices are
suitable for our current business and are adequately
maintained.
ITEM 3. 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.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
for Registrant’s Common Stock
Our
common stock is traded on the Nasdaq Global Market tier of the
Nasdaq Stock Market, LLC under the symbol “PIH.” Our Series A
Preferred Stock is also traded on the Nasdaq Global Market tier of
the Nasdaq Stock Market under the symbol “PIHPP.”
Number
of Common Stockholders
As of
December 31, 2019, we had 6,065,948 common shares outstanding,
which were held by 15 stockholders of record including Cede &
Co., which holds shares on behalf of the beneficial owners of the
Company’s common stock. Because brokers and other institutions hold
many of our shares on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these
record holders.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Dividends
We
have never declared or paid any cash dividends on our common stock
and do not anticipate paying any cash dividends on our common stock
in the foreseeable future. It is the present policy of our Board of
Directors to retain earnings, if any, for use in developing and
expanding our business. In the future, our payment of dividends on
our common stock will also depend on the amount of funds available,
our financial condition, capital requirements and such other
factors as our Board of Directors may consider.
Holders
of our Series A Preferred Stock are entitled to receive cash
dividends at a rate of 8.00% per annum of the $25.00 per share
liquidation preference (equivalent to $2.00 per annum per share),
accruing from February 28, 2018. Dividends are payable to holders
of our Series A Preferred Stock quarterly on or about the 15th day
of March, June, September and December of each year, commencing on
June 15, 2018. The record dates for dividend payment are March 1,
June 1, September 1 and December 1 of each year, whether or not a
business day, immediately preceding the applicable dividend payment
date. The first dividend record date was June 1, 2018. Dividends on
the Series A Preferred Stock accumulate whether or not the Company
has earnings, whether or not there are funds legally available for
the payment of those dividends and whether or not those dividends
are declared by the Board of Directors. We intend to declare
regular quarterly dividends on the shares of Series A Preferred
Stock. As of December 31, 2019, we had approximately $28.5 million
available for the payment of future dividends, if declared by the
Board of Directors. The declaration, payment and amount of future
dividends will be subject to the discretion of our Board of
Directors. Our Board of Directors expects to take into account a
variety of factors when determining whether to declare any future
dividends on the Series A Preferred Stock, including (i) our
financial condition, liquidity, results of operations, retained
earnings, and capital requirements, (ii) general business
conditions, (iii) legal, tax and regulatory limitations, including
those placed on our subsidiary companies, and (iv) any other
factors that our Board of Directors deems relevant. Accordingly,
there can be no assurance that we will declare dividends on our
preferred shares in the future.
ITEM 6. SELECTED FINANCIAL
DATA
Not
applicable.
1347
PROPERTY INSURANCE HOLDINGS, INC.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You
should read the following discussion in conjunction with our
consolidated financial statements and related notes and information
included elsewhere in this annual report on Form 10-K. You should
review the “Risk Factors” section of this annual report for a
discussion of important factors that could cause actual results to
differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion
and analysis. Some of the information contained in this discussion
and analysis and set forth elsewhere in this annual report on Form
10-K includes forward-looking statements that involve risks and
uncertainties.
Unless
context denotes otherwise, the terms “Company,” “we,” “us,” and
“our,” refer to 1347 Property Insurance Holdings, Inc., and its
subsidiaries.
Overview
We
are a holding company which previously specialized in providing
personal property insurance in coastal markets including those in
Louisiana, Texas and Florida. We were incorporated on October 2,
2012 in the State of Delaware under the name Maison Insurance
Holdings, Inc., and changed our legal name to 1347 Property
Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014,
we completed an initial public offering of our common stock. Prior
to the offering, we were a wholly owned subsidiary of Kingsway
America Inc., which, in turn, is a wholly owned subsidiary of
Kingsway Financial Services Inc., or KFSI, a publicly owned
Delaware holding company. As of December 31, 2019, KFSI and its
affiliates held warrants that, if exercised, would cause KFSI and
its affiliates to hold an approximate 20% ownership interest in our
common stock. In addition, as of December 31, 2019, Fundamental
Global Investors, LLC and its affiliates, or FGI, beneficially
owned approximately 45% of our outstanding shares of common stock.
D. Kyle Cerminara, Chairman of our Board of Directors, serves as
Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis
M. Johnson, Co-Chairman of our Board of Directors, serves as
President, Co-Founder and Partner of FGI.
Sale
of Maison Business to FedNat Holding Company
On
December 2, 2019, we completed the 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 “Maison Business”), to FedNat Holding Company,
a Florida corporation (“FedNat”), 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
each of Maison, MMI and ClaimCor, on the one hand, and FedNat, on
the other hand (the “Asset Sale”).
As
consideration for the Asset Sale, FedNat paid the Company $51.0
million, consisting of $25.5 million in cash and $25.5 million in
FedNat’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 FedNat’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.
Going
forward, the Company intends to operate as a diversified holding
company of reinsurance and investment management businesses.
Subject to the approval of the Company’s stockholders at the
Company’s 2020 Annual Meeting, the Company intends to change its
name to “Fundamental Global Financial Corporation” to align with
its future business plans. Fundamental Global Financial Corporation
(“FGFC”) plans to carry out its business through three primary
avenues, insurance, asset management, and real estate. The Company
also intends to change the ticker symbols for its common stock and
8.00% cumulative preferred stock, Series A, and has reserved with
Nasdaq the ticker symbols “FGI” and “FGIPP,”
respectively.
For
more information on the Purchase Agreement, Asset Sale, and the
Company’s future plans, see “Item 1. Business.”
1347
PROPERTY INSURANCE HOLDINGS, INC.
Coronavirus
Impact
We
continue to monitor the recent outbreak of the novel coronavirus
(COVID-19) on our operations. Due to the recent outbreak of the
coronavirus reported in many countries worldwide, local and federal
governments have issued travel advisories, canceled large scale
public events and closed schools. In addition, companies have begun
to cancel conferences and travel plans and require employees to
work from home. Global financial markets have also experienced
extreme volatility and disruptions to capital and credit
markets.
Adverse
events such as health-related concerns about working in our
offices, the inability to travel and other matters affecting the
general work environment could harm our business and our business
strategy. While we do not anticipate any material impact to our
business operations as a result of the coronavirus, in the event of
a major disruption caused by the outbreak of pandemic diseases such
as coronavirus, we may lose the services of our employees or
experience system interruptions, which could lead to diminishment
of our business operations. Any of the foregoing could harm our
business and delay the implementation of our business strategy and
we cannot anticipate all the ways in which the current global
health crisis and financial market conditions could adversely
impact our business.
Management is actively monitoring the global situation on its
financial condition, liquidity, operations, industry and workforce.
Given the daily evolution of the coronavirus and the global
responses to curb its spread, the Company is not able to estimate
the effects of the coronavirus on its results of operations,
financial condition or liquidity for fiscal year 2020.
Critical
Accounting Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from these estimates. Estimates
and their underlying assumptions are reviewed on an ongoing basis.
Changes in estimates are recorded in the accounting period in which
they are 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 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 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.
Discontinued
Operations
On
December 2, 2019, we sold all of the issued and outstanding equity
of Maison, MMI and ClaimCor. As a result, these operations have
been classified as discontinued operations in the Company’s
financial statements presented herein. Certain transactions between
the Company and its subsidiaries, which have historically been
eliminated upon consolidation, are shown on a gross basis in the
accompanying financial statements as such transactions have
occurred between discontinued operations and those operations which
the Company intends to continue to utilize. These items include
surplus notes in the amount of $18,000 plus approximately $728 in
accrued interest, all of which was settled upon the closing of the
Asset Sale. These notes, which had been issued by Maison to the
Company, have been reflected as both an asset of continuing
operations and liability of discontinued operations on the
Company’s consolidated balance sheet as of December 31, 2018.
Interest associated with these surplus notes has been recorded as
part of net investment income from continuing operations as well as
interest expense as part of discontinued operations on the
Company’s consolidated statement of operations for the years ended
December 31, 2019 and 2018. Similarly, amounts due from the Company
to Maison upon the assignment of certain of Maison’s investments to
the Company have been reflected as an asset of continuing
operations under the heading “Limited liability investments”, as
well as a corresponding liability under the heading “Due to
affiliates” on the Company’s consolidated balance sheet as of
December 31, 2018. Pursuant to the terms of the Purchase Agreement,
this assignment of investments was settled, in cash, prior to
closing of the transaction. All other significant intercompany
balances and transactions have been eliminated upon
consolidation.
Valuation
of Fixed Income and Equity Securities
The
Company’s fixed income and equity securities are recorded at fair
value using observable inputs such as quoted prices in inactive
markets, quoted prices in active markets for similar instruments,
benchmark interest rates, broker quotes and other relevant inputs.
Any change in the estimated fair value of its investments could
impact the amount of unrealized gain or loss the Company has
recorded, which could change the amount the Company has recorded
for its investments and on its consolidated balance sheets and
statements of income.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Gains
and losses realized on the disposition of investments are
determined on the first-in first-out basis and credited or charged
to the consolidated statements of income and comprehensive income.
Premium and discount on investments are amortized and accreted
using the interest method and charged or credited to net investment
income.
The
Company performs a quarterly analysis of its investment portfolio
to determine if declines in market value are other-than-temporary.
Further information regarding its detailed analysis and factors
considered in establishing an other-than-temporary impairment on an
investment is discussed within Note 5 - Investments, to the
consolidated financial statements.
Valuation
of Net Deferred Income Taxes
The
provision for income taxes is calculated based on the expected tax
treatment of transactions recorded in the Company’s consolidated
financial statements. In determining its provision for income
taxes, the Company interprets tax legislation in a variety of
jurisdictions and makes assumptions about the expected timing of
the reversal of deferred income tax assets and liabilities and the
valuation of net deferred income taxes.
The
ultimate realization of the deferred income tax asset balance is
dependent upon the generation of future taxable income during the
periods in which the Company’s temporary differences reverse and
become deductible. A valuation allowance is established when it is
more likely than not that all or a portion of the deferred income
tax asset balance will not be realized. In determining whether a
valuation allowance is needed, management considers all available
positive and negative evidence affecting specific deferred income
tax asset balances, including the Company’s past and anticipated
future performance, the reversal of deferred income tax
liabilities, and the availability of tax planning strategies. To
the extent a valuation allowance is established in a period, an
expense must be recorded within the income tax provision in the
consolidated statements of income and comprehensive
income.
Due
to the sale of the Maison Business on December 2, 2019, the
December 31, 2019 financial statements show a net deferred tax
liability in the amount of $106. Given the Company’s deferred tax
assets can be fully offset with deferred tax liabilities within the
expiration window of the deferred tax assets, the Company has
determined that it is more likely than not that its deferred tax
assets will be utilized. As such, the Company has not set up a
valuation allowance for its deferred tax assets as of December 31,
2019.
Securities
issued to 1347 Advisors, LLC
Pursuant
to the termination of the Management Services Agreement with 1347
Advisors, LLC (“Advisors,” a wholly-owned subsidiary of KFSI), the
Company issued Series B Preferred Shares, Warrants, and entered
into a Performance Share Grant Agreement with Advisors on February
24, 2015. On January 2, 2018, the Company entered into a stock
purchase agreement with Advisors and IWS Acquisition Corporation,
also an affiliate of KFSI, pursuant to which the Company agreed to
repurchase all 60,000 Series B Preferred Shares held by Advisors
and all 60,000 Series B Preferred Shares held by IWS Acquisition
Corporation. The Company completed the repurchase of the shares
held by Advisors on January 2, 2018 and the repurchase of the
shares held by IWS Acquisition Corporation on February 28, 2018. In
connection with the stock purchase agreement, the Performance Share
Grant Agreement, dated February 24, 2015, between the Company and
Advisors was terminated. No common shares were issued to Advisors
under the Performance Share Grant Agreement. Advisors has
subsequently transferred the warrants to its affiliate, Kingsway
America Inc.
Because
the Series B Preferred Shares had a redemption provision requiring
mandatory redemption on February 24, 2020, the Company was required
to classify the shares as a liability on its balance sheet. The
resulting liability was recorded at a discount to the $4,200
ultimate redemption amount which included all dividends to be paid
on the Series B Preferred Shares based upon an analysis of the
timing and amounts of cash payments expected to occur under the
terms of the shares discounted for the Company’s estimated cost of
equity (13.9%).
1347
PROPERTY INSURANCE HOLDINGS, INC.
The
Company estimated the fair value of the Warrants on grant date
based upon the Black-Scholes option pricing model while it utilized
a Monte Carlo model to determine the fair value of the Performance
Share Grant Agreement due to the fact that the underlying shares
are only issuable based upon the achievement of certain market
conditions.
Stock-Based
Compensation Expense
The
Company uses the fair-value method of accounting for stock-based
compensation awards granted. The Company determines the fair value
of the stock options on their grant date using the Black-Scholes
option pricing model and determines the fair value of restricted
stock units (“RSUs”) on their grant date using the fair value of
the Company’s common stock on the date the RSUs were issued (for
those RSU which vest solely based upon the passage of time), as
well as using multiple Monte Carlo simulations for those RSUs with
market-based vesting conditions. The fair value of these awards is
recorded as compensation expense over the requisite service period,
which is generally the expected period over which the awards will
vest, with a corresponding increase to additional paid-in capital.
When the stock options are exercised, or correspondingly, when the
restricted stock units vest, the amount of proceeds together with
the amount recorded in additional paid-in capital is recorded in
shareholders’ equity.
Recent
Accounting Pronouncements
See
Item 8, Note 3 – Recently Issued Accounting Standards in the Notes
to the Consolidated Financial Statements for a discussion of recent
accounting pronouncements and their effect, if any, on the
Company.
Analysis
of Financial Condition
As
of December 31, 2019 compared to December 31, 2018
Dollar
amounts included in the “Analysis of Financial Condition” are
presented in thousands, except as otherwise specified.
Discontinued
Operations
As
previously discussed, on December 2, 2019, we completed the sale of
all of the issued and outstanding equity of our three former
wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly,
the Company has classified the Maison Business as discontinued
operations for all periods presented in this report as set forth in
ASC 205-20 – Discontinued Operations.
The
following table presents a reconciliation of the carrying amounts
of major classes of assets and liabilities included in discontinued
operations which are presented separately in the Company’s
consolidated balance sheet as of December 31, 2018. On December 2,
2019 the assets and liabilities previously included in discontinued
operations had been disposed of in the Asset Sale
transaction.
| |
|
December
31, 2018 |
|
|
Carrying
amounts of assets included as part of discontinued
operations |
|
|
|
|
|
Fixed
income securities, at fair value (amortized cost of
$77,366) |
|
$ |
76,310 |
|
|
Equity
investments, at fair value (cost of $3,130) |
|
|
3,263 |
|
|
Other
investments |
|
|
774 |
|
|
Cash
and cash equivalents |
|
|
27,236 |
|
|
Deferred
policy acquisition costs |
|
|
9,111 |
|
|
Premiums
receivable, net of allowance of $50 |
|
|
7,720 |
|
|
Ceded
unearned premiums |
|
|
6,525 |
|
|
Reinsurance
recoverable on paid losses |
|
|
530 |
|
|
Reinsurance
recoverable on loss reserves |
|
|
5,661 |
|
|
Current
income taxes recoverable |
|
|
2,051 |
|
|
Deferred
tax asset, net |
|
|
1,014 |
|
|
Due
from affiliate |
|
|
2,698 |
|
|
Other
assets |
|
|
1,676 |
|
|
Total
assets of discontinued operations included in the Company’s
consolidated balance sheet |
|
$ |
144,569 |
|
| |
|
|
|
|
|
Carrying
amounts of liabilities included as part of discontinued
operations |
|
|
|
|
|
Loss
and loss adjustment expense reserves |
|
$ |
15,151 |
|
|
Unearned
premium reserves |
|
|
51,907 |
|
|
Ceded
reinsurance premiums payable |
|
|
9,495 |
|
|
Agency
commissions payable |
|
|
802 |
|
|
Premiums
collected in advance |
|
|
1,840 |
|
|
Surplus
notes plus interest due to affiliate |
|
|
18,244 |
|
|
Accrued
premium taxes and assessments |
|
|
3,059 |
|
|
Other
liabilities |
|
|
2,821 |
|
|
Total
liabilities of discontinued operations included in the Company’s
consolidated balance sheet |
|
$ |
103,319 |
|
1347
PROPERTY INSURANCE HOLDINGS, INC.
Investments
On
December 2, 2019, the Company received 1,773,102 shares of FedNat
Holding Company common stock (Nasdaq: FNHC), along with $25,500
cash as consideration for the Asset Sale. The stock consideration
was determined by dividing $25,500 by the weighted average closing
price per share of FedNat’s common stock on the Nasdaq Stock Market
during the 20-trading day period immediately preceding December 2,
2019.
The
table below summarizes, by type, the Company’s investments as of
December 31, 2019 and 2018.
| |
|
December
31, 2019 |
|
|
December
31, 2018 |
|
|
Type
of Investment |
|
|
Carrying
Amount |
|
|
|
Percent
of Total |
|
|
|
Carrying
Amount |
|
|
|
Percent
of Total |
|
|
Equity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNHC
common stock |
|
$ |
29,487 |
|
|
|
88.0 |
% |
|
$ |
– |
|
|
|
– |
% |
|
Limited
liability investments |
|
|
4,005 |
|
|
|
12.0 |
% |
|
|
2,987 |
|
|
|
3.6 |
% |
|
Equity
securities included in discontinued operations |
|
|
– |
|
|
|
– |
% |
|
|
3,263 |
|
|
|
4.0 |
% |
|
Total
equity securities |
|
|
33,492 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
7.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities included in discontinued operations |
|
|
– |
|
|
|
– |
% |
|
|
76,310 |
|
|
|
92.4 |
% |
|
Total
investments |
|
$ |
33,492 |
|
|
|
100.0 |
% |
|
$ |
82,560 |
|
|
|
100.0 |
% |
As of March 26, 2020, the estimated fair value of the Company’s
1,773,102 shares of FedNat common stock was $20,320.
The Company’s limited liability investments are comprised of
investments in a limited partnership and a limited liability
company which seek to provide equity and asset-backed debt
investment in a variety of privately-owned companies. The Company
had a total potential commitment of $935 related to these
investments, of which the two entities have drawn down
approximately $776 through December 31, 2019. The limited liability
company is managed by Argo Management Group, LLC, an entity which
is wholly owned by KFSI. The Company has accounted for these two
investments at cost, as the investments do not have readily
determinable fair values and the Company does not exercise
significant influence over the operations of the investments or the
underlying privately-owned companies. For the year ended December
31, 2019, the Company received profit distributions of $91 on these
investments.
Additionally, on June 18, 2018, Maison invested $2,219 in FGI
Metrolina Property Income Fund, LP (the “Fund”), which invests in
real estate through a real estate investment trust which is wholly
owned by the Fund. The general partner of the Fund, FGI Metrolina
GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the
Chairman and Co-Chairman of the Board of Directors of the Company,
respectively. The Company, a limited partner of the Fund, does not
have a controlling financial interest in the Fund, but exerts
significant influence over the entity’s operating and financial
policies as it owns an economic interest of approximately 49%.
Accordingly, the Company has accounted for this investment under
the equity method of accounting, with any unrealized gains or
losses on the investment recorded in income. The Company has
committed to a total potential investment of up to $4,000 in the
Fund. As of December 31, 2019, the total amount invested in the
Fund was $2,719, while the carrying amount on the Company’s balance
sheet was $3,229.
Pursuant
to the terms of the Purchase Agreement, Maison assigned all of its
right, title and interest in each of the limited liability
investments to the Company in exchange for the statutory carrying
value of each investment (approximately $4,200). Accordingly, these
investments have been included on the Company’s consolidated
balance sheet as of December 31, 2019 and 2018 as part of
continuing operations. Investment income resulting from the
Company’s limited liability investments has also been included in
net investment income as part of continuing operations, on the
Company’s consolidated statement of operations for the years ended
December 31, 2019 and 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Other-Than-Temporary
Impairment
The
Company performs a quarterly analysis of its investments to
determine if declines in market value are other-than-temporary.
Further information regarding the Company’s detailed analysis and
factors considered in establishing an other-than-temporary
impairment on an investment is discussed within Note 4 -
“Investments,” to the consolidated financial statements in Item 8
of this report.
As a
result of the analysis performed by the Company, we recorded a
write-down for an other-than-temporary impairment on a single
equity investment resulting in a charge of $215 against net
investment income for the year ended December 31, 2018. As this
investment was held by our prior insurance subsidiary, Maison, this
charge has been included as part of income from discontinued
operations for the year ended December 31, 2018. We recorded this
write-down as a result of our analysis of the investment’s
operating losses for 2018, which showed a considerable decline when
compared to its results for 2017. There were no write-downs for
other-than-temporary impairment on our investments for the year
ended December 31, 2019.
As of
December 31, 2019, the Company did not hold any investments with
estimated fair values less than their carrying amounts.
Current
Income Taxes Recoverable/Payable
Current
income taxes recoverable were $1,265 as of December 31, 2019,
compared to a payable of $932 as of December 31, 2018, representing
the estimate of both the Company’s state and federal income taxes
due as of each date, less estimated payments made.
Net
Deferred Taxes
The
Company’s net deferred tax asset decreased from $265 as of December
31, 2018 to a net deferred liability of $106 as of December 31,
2019, due, in large, to the sale of the Maison Business on December
2, 2019. Net deferred income taxes are comprised of approximately
$684 of deferred tax assets, net of approximately $790 of deferred
tax liabilities as of December 31, 2019, compared to $3,228 of
deferred tax assets, net of $1,949 of deferred tax liabilities as
of December 31, 2018. The balance of our deferred tax liabilities
as of December 31, 2019 primarily related to the unrealized holding
gains on the common shares of FedNat, which we received at the
closing of the Asset Sale.
Other
Assets
Other
assets increased $121, to $188 as of December 31, 2019 from $67 as
of December 31, 2018. The major components of other assets, and the
change therein, are shown below.
| |
|
December
31, |
|
|
|
|
|
|
|
|
2019 |
|
|
|
2018 |
|
|
|
Change |
|
|
Amount
due under Investment Advisory Agreement with FedNat |
|
$ |
35 |
|
|
$ |
– |
|
|
$ |
35 |
|
|
Amount
due under Transition Services Agreement with FedNat |
|
|
8 |
|
|
|
– |
|
|
|
8 |
|
|
Prepaid
expenses |
|
|
142 |
|
|
|
65 |
|
|
|
77 |
|
|
Other
receivables |
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
Total |
|
$ |
188 |
|
|
$ |
67 |
|
|
$ |
121 |
|
Accounts
Payable
Accounts
payable increased $334, to $400 as of December 31, 2019, compared
to $66 as of December 31, 2018 largely as a result of unpaid
professional fees associated with the closing of Asset
Sale.
Related
Party Transactions
Termination
of Performance Share Grant Agreement
On
July 24, 2018, the Company entered into a Termination Agreement
with Kingsway America, Inc. (“KAI”, a wholly owned subsidiary of
KFSI), pursuant to which KAI agreed to terminate the Performance
Share Grant Agreement (“PSGA”) dated March 26, 2014, between the
Company and KAI in exchange for a payment of $1,000 from the
Company, which has been recorded as a charge under the heading
“Loss on repurchase of Series B Preferred Shares and Performance
Shares” on the Company’s statement of income for the year ended
December 31, 2018. As a result of the Termination Agreement, KAI
has no further rights to any of the performance share grants
contemplated by the PSGA. Under the PSGA, KAI was entitled to
receive up to an aggregate of 375,000 shares of our common stock
upon achievement of certain milestones regarding our stock price.
Mr. Larry G. Swets, Jr., who is a director of the Company, also
served as Chief Executive Officer and Director of KFSI on the date
the Company entered into the Termination Agreement. The Company did
not issue any shares under the PSGA while the PSGA was outstanding.
The Termination Agreement was approved by a special committee of
the Board of Directors of the Company consisting solely of
independent directors.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Termination
of Management Services Agreement and Repurchase of Series B
Preferred Shares
On
February 24, 2015, we terminated our Management Services Agreement
with 1347 Advisors, LLC (“1347 Advisors”), a wholly owned
subsidiary of KFSI. In connection with the termination, we entered
into a Performance Shares Grant Agreement, dated February 24, 2014,
with 1347 Advisors pursuant to which we agreed to issue 100,000
shares of our common stock to 1347 Advisors subject to the
achievement of certain events specified in the agreement. We also
issued to 1347 Advisors 120,000 shares of our Series B preferred
stock having a liquidation amount per share equal to $25.00 (the
“Series B Preferred Shares”). 1347 Advisors subsequently
transferred 60,000 of the Series B Preferred Shares to IWS
Acquisition Corporation, an affiliate of KFSI.
On
January 2, 2018, the Company entered into a Stock Purchase
Agreement with 1347 Advisors and IWS Acquisition Corporation,
pursuant to which the Company repurchased 60,000 Series B Preferred
Shares from 1347 Advisors for an aggregate purchase price of
$1,740, representing (i) the par value of the Series B Preferred
Shares, or $1,500; and (ii) declared and unpaid dividends with
respect to the dividend payment due on February 23, 2018, or $240.
Also, in connection with the Stock Purchase Agreement, the
Performance Shares Grant Agreement, dated February 24, 2015,
between the Company and 1347 Advisors was terminated. No shares of
common stock were issued to 1347 Advisors under the Performance
Shares Grant Agreement. In connection with the termination of the
Performance Shares Grant Agreement, the Company made a cash payment
of $300 to 1347 Advisors. Upon termination of the MSA Agreement,
the Company recorded an increase of approximately $54 to additional
paid in capital, representing the estimated fair value of the
Performance Shares Grant Agreement on the grant date. Upon the
termination of the Performance Shares Grant Agreement, we compared
the amount previously recorded in additional paid in capital to the
amount paid to terminate the agreement, resulting in a reversal of
the $54 originally recorded to additional paid in capital as well
as a charge of $246 recorded to “Loss on repurchase of Series B
Preferred Shares and Performance Shares” on the Company’s statement
of income for the year ended December 31, 2018.
Pursuant
to the Stock Purchase Agreement, the Company also agreed to
repurchase the remaining 60,000 Series B Preferred Shares from IWS
Acquisition Corporation for an aggregate purchase price of $1,500,
upon the completion of a capital raise resulting in the Company
receiving net proceeds in excess of $5,000. On February 28, 2018,
the Company purchased the remaining 60,000 Series B Preferred
Shares from IWS Acquisition Corporation for $1,500 with the
proceeds from the Company’s 8.00% Cumulative Preferred Stock,
Series A (the “Series A Preferred Stock”) offering (discussed under
the heading “Shareholders’ Equity” below).
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
shares had a mandatory redemption date of February 24, 2020,
applicable guidance required that we classify the 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 shares while outstanding,
discounted for the Company’s estimated cost of equity (13.9%). As a
result, total amortization in the amount of $33 has been charged to
continuing operations for the year ended December 31, 2018. Upon
our repurchase of the Series B Preferred Shares in both January and
February 2018, we compared the amortized carrying amount of the
liability to the amount paid to repurchase the shares, resulting in
a charge of $366 to “Loss on repurchase of Series B Preferred
Shares and Performance Shares” on the Company’s statement of income
for the year ended December 31, 2018.
Investment
in Limited Partnership and 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 $341 as of December 31, 2019. The managing
member of Argo, Mr. John T. Fitzgerald, was appointed as President
and Chief Executive Officer of KFSI on September 5, 2018 and has
served on its board of directors since April 21, 2016.
1347
PROPERTY INSURANCE HOLDINGS, INC.
As of
December 31, 2019, the Company has invested $2,719 as a limited
partner in Metrolina Property Income Fund, LP (the “Fund”). The
general partner of the Fund, FGI Metrolina GP, LLC, is managed, in
part, by Messrs. Cerminara and Johnson, the Chairman and
Co-Chairman of the Board of Directors of the Company, respectively.
As of December 31, 2019, the Company’s investment represents a 49%
ownership stake in the Fund.
Public
Offering of Preferred Stock
A
fund managed by Fundamental Global Investors, LLC, one of the
Company’s significant stockholders, purchased an aggregate of
34,620 shares of the Series A Preferred Stock in the Company’s
public offering of the shares, at the public offering price of
$25.00 per share, including 31,680 shares purchased for a total of
approximately $792 on February 28, 2018, the closing date of the
offering, and 2,940 shares purchased for a total of approximately
$74 on March 26, 2018 in connection with the underwriters’ exercise
of their over-allotment option. In addition, CWA Asset Management
Group, LLC, of which 50% is owned by Fundamental Global Investors,
LLC, holds 56,846 shares of the Series A Preferred Stock for
customer accounts (including 44 shares of the Series A Preferred
Stock held by Mr. Cerminara in a joint account with his spouse)
purchased at the public offering price in connection with the
underwriters’ exercise of their over-allotment option. No discounts
or commissions were paid to the underwriters on the purchase of
these shares.
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement entered into upon closing of
the Asset Sale, Fundamental Global Advisors LLC, a wholly-owned
subsidiary of the Company (“Advisor”), was formed to provide
investment advisory services to FedNat, 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, FedNat has agreed to pay Advisor an annual fee
of $100. FGI Funds Management, LLC will serve as the manager to the
Advisor. FGI Funds Management, LLC is an affiliate of Fundamental
Global Investors, LLC, the Company’s largest stockholder. The term
of the Investment Advisory Agreement is five years.
Off
Balance Sheet Arrangements
None.
Shareholders’
Equity
Offering
of 8.00% Cumulative Preferred Stock, Series A
On
February 28, 2018, we completed the underwritten public offering of
640,000 preferred shares designated as 8.00% Cumulative Preferred
Stock, Series A, par value $25.00 per share (the “Series A
Preferred Stock”). Also, on March 26, 2018, we issued an additional
60,000 shares of Series A Preferred Stock pursuant to the exercise
of the underwriters’ over-allotment option. Dividends on the Series
A Preferred Stock are cumulative from the date of original issue
and will be payable quarterly on the 15th day of March, June,
September and December of each year, commencing on June 15, 2018,
when, as and if declared by our Board of Directors or a duly
authorized committee thereof. The first dividend record date for
the Series A Preferred Stock was on June 1, 2018. For the years
ended December 31, 2019 and 2018, the Board of Directors declared
dividends totaling $1,400 and $1,108, respectively, representing
all quarterly amounts due for the Preferred Stock. Dividends are
payable out of amounts legally available therefor at a rate equal
to 8.00% per annum per $25.00 of stated liquidation preference per
share, or $2.00 per share of Preferred Stock per year.
The
Series A Preferred Stock is not redeemable prior to February 28,
2023. On and after that date, the stock will be redeemable at our
option, for cash, in whole or in part, at a redemption price of
$25.00 per share, plus all accumulated and unpaid dividends to, but
not including, the date of redemption. The Series A Preferred Stock
has no stated maturity and will not be subject to any sinking fund
or mandatory redemption. The stock will generally have no voting
rights except as provided in the Certificate of Designations or as
from time to time provided by law. The affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series
A Preferred Stock and each other class or series of voting parity
stock will be required at any time for us to authorize, create or
issue any class or series of our capital stock ranking senior to
the Series A Preferred Stock with respect to the payment of
dividends or the distribution of assets on liquidation, dissolution
or winding up, to amend any provision of our Certificate of
Incorporation so as to materially and adversely affect any rights
of the Series A Preferred Stock or to take certain other
actions.
1347
PROPERTY INSURANCE HOLDINGS, INC.
The
shares of Series A Preferred Stock are listed on the Nasdaq Stock
Market under the symbol “PIHPP”, and trading of the shares
commenced on March 22, 2018. Net proceeds received by Company were
approximately $16,500. The Company used $1,500 of the net proceeds
to repurchase 60,000 shares of its Series B Preferred Shares from
IWS Acquisition Corporation, as previously discussed under the
heading “Related Party Transactions”.
The
table below presents the primary drivers behind the changes to
total shareholders’ equity for the years ended December 31, 2019
and 2018.
|
|
|
Preferred
Shares Outstanding |
|
|
Common
Shares Outstanding |
|
|
Treasury
Shares |
|
|
Total
Shareholders’ Equity |
|
|
Balance,
January 1, 2018 |
|
|
120,000 |
|
|
|
5,984,766 |
|
|
|
151,359 |
|
|
$ |
46,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
of Series B Preferred Shares |
|
|
(120,000 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Issuance
of Series A Preferred Stock |
|
|
700,000 |
|
|
|
– |
|
|
|
– |
|
|
|
16,493 |
|
| Repurchase
of Performance Shares |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(54 |
) |
|
Dividends
declared on Series A Preferred Stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,108 |
) |
|
Stock
compensation expense |
|
|
|
|
|
|
27,998 |
|
|
|
– |
|
|
|
337 |
|
|
Net
income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
804 |
|
|
Unrealized
loss on investment portfolio (net of income taxes) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(527 |
) |
|
Balance,
December 31, 2018 |
|
|
700,000 |
|
|
|
6,012,764 |
|
|
|
151,359 |
|
|
|
62,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of new accounting standards |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10 |
|
|
Dividends
declared on Series A Preferred Stock ($2.00 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,400 |
) |
|
Stock
compensation expense |
|
|
– |
|
|
|
53,184 |
|
|
|
– |
|
|
|
414 |
|
|
Net
income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
311 |
|
|
Gains
on investment portfolio (net of income taxes) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
833 |
|
|
Balance,
December 31, 2019 |
|
|
700,000 |
|
|
|
6,065,948 |
|
|
|
151,359 |
|
|
|
62,915 |
|
1347
PROPERTY INSURANCE HOLDINGS, INC.
Results
of Operations
Year
Ended December 31, 2019 Compared to Year Ended December 31,
2018
Dollar
amounts included in the “Results of Operations” are presented in
thousands, except as otherwise specified. Net Investment
Income
Net
investment income increased from $1,208 to $5,587 for the years
ended December 31, 2018 and 2019, respectively, primarily as a
result of the unrealized holding gains on the 1,773,102 shares of
FNHC common stock which the Company received upon the closing of
the Asset Sale. Net investment income for the years ended December
31, 2019 and 2018 is as follows:
| |
|
Year Ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Investment
income: |
|
|
|
|
|
|
|
|
|
Unrealized
holding gains on FNHC common stock |
|
$ |
3,987 |
|
|
$ |
– |
|
| Interest on surplus
notes issued by Maison |
|
|
1,708 |
|
|
|
1,142 |
|
| Income from limited
liability investments |
|
|
101 |
|
|
|
– |
|
| Loss on assignment of
limited liability investments |
|
|
(239 |
) |
|
|
– |
|
| Other |
|
|
55 |
|
|
|
82 |
|
| Gross investment
income |
|
|
5,612 |
|
|
|
1,224 |
|
|
Investment
expenses |
|
|
(25 |
) |
|
|
(16 |
) |
| Net investment
income |
|
$ |
5,587 |
|
|
$ |
1,208 |
|
As of March 26, 2020, the estimated fair value of the Company’s
1,773,102 shares of FNHC common stock was $20,320, resulting in an
unrealized, pre-tax holding loss of $5,180 as of that date.
Other
Income
Other
income was $10 compared to $0 for the years ended December 31, 2019
and 2018, respectively and is comprised solely of fees earned under
the Investment Advisory Agreement between our wholly-owned
subsidiary, Fundamental Global Advisors, LLC and FedNat Holding
Company.
General
and Administrative Expenses
General
and administrative expenses increased $1,331 to $2,476 for the year
ended December 31, 2019, compared to $1,145 for the year ended
December 31, 2018. The increase was primarily due to professional
fees associated with developing our new business plan following the
closing of the Asset Sale along with the fees associated with
forming our new investment advisory and reinsurance
subsidiaries.
Series
B Preferred Shares and Performance Shares
As
previously discussed under the heading “Related Party
Transactions,” we recorded amortization charges of $33 as well as a
charge of $1,612 for the year ended December 31, 2018, which were
related to our issuance and repurchase of our Series B Preferred
Shares and our Performance Shares.
Income
Tax Expense (Benefit)
Our
actual effective tax rate varies from the statutory federal income
tax rates as shown in the following table.
| |
|
Year Ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for taxes at
U.S. statutory marginal income tax rate of 21% |
|
$ |
121 |
|
|
|
21.0 |
% |
|
$ |
60 |
|
|
|
21.0 |
% |
| Net operating loss
carryback |
|
|
(213 |
) |
|
|
(36.9 |
)% |
|
|
– |
|
|
|
– |
% |
| State income tax (net
of federal benefit) |
|
|
265 |
|
|
|
45.9 |
% |
|
|
(632 |
) |
|
|
(221.0 |
)% |
| Share-based
compensation |
|
|
77 |
|
|
|
13.3 |
% |
|
|
35 |
|
|
|
12.2 |
% |
| Other |
|
|
17 |
|
|
|
3.0 |
% |
|
|
19 |
|
|
|
6.7 |
% |
| Income tax expense
(benefit) |
|
$ |
267 |
|
|
|
46.2 |
% |
|
$ |
(518 |
) |
|
|
(181.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense
(benefit) – from continuing operations |
|
$ |
738 |
|
|
|
|
|
|
$ |
(308 |
) |
|
|
|
|
| Income tax benefit –
from discontinued operations |
|
|
(471 |
) |
|
|
|
|
|
|
(210 |
) |
|
|
|
|
| Total income tax
expense (benefit) |
|
$ |
267 |
|
|
|
46.2 |
% |
|
$ |
(518 |
) |
|
|
(181.1 |
)% |
1347
PROPERTY INSURANCE HOLDINGS, INC.
Discontinued
Operations
As
previously discussed, on December 2, 2019, we completed the sale of
all of the issued and outstanding equity of our three former
wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly,
the Company has classified the Maison Business as discontinued
operations for all periods presented in this report as set forth in
ASC 205-20 – Discontinued Operations.
The
following table presents a reconciliation of the major classes of
line items constituting pretax profit (loss) of discontinued
operations to the after-tax profit (loss) of discontinued
operations that are presented in the Company’s consolidated
statement of operations for the years ended December 31, 2019 and
2018.
| |
|
Year ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Gain from sale of the
Maison Business |
|
|
|
|
|
|
|
|
|
Cash
consideration received from sale |
|
$ |
25,500 |
|
|
$ |
– |
|
|
Stock
consideration received from sale |
|
|
25,500 |
|
|
|
– |
|
| Total consideration
received from sale |
|
|
51,000 |
|
|
|
– |
|
| Less: |
|
|
|
|
|
|
|
|
| Carrying value of the
Maison Business on December 1, 2019 |
|
|
39,099 |
|
|
|
– |
|
|
Transaction and other
sale related costs |
|
|
2,818 |
|
|
|
50 |
|
| Total pre-tax
reductions |
|
|
41,917 |
|
|
|
50 |
|
| Pre-tax gain (loss) on
sale |
|
|
9,083 |
|
|
|
(50 |
) |
|
Income tax
expense |
|
|
2,017 |
|
|
|
– |
|
| Net gain (loss) from
sale of the Maison Business |
|
$ |
7,066 |
|
|
$ |
(50 |
) |
| |
|
|
|
|
|
|
|
|
| Net premiums
earned |
|
$ |
49,691 |
|
|
$ |
54,357 |
|
| Net investment
income |
|
|
4,354 |
|
|
|
1,552 |
|
| Other
income |
|
|
2,854 |
|
|
|
2,246 |
|
| Net losses and loss
adjustment expenses |
|
|
(41,634 |
) |
|
|
(27,413 |
) |
| Amortization of
deferred policy acquisition costs |
|
|
(15,983 |
) |
|
|
(15,313 |
) |
| General and
administrative expenses |
|
|
(9,200 |
) |
|
|
(12,369 |
) |
|
Interest
expense on surplus notes due to affiliate |
|
|
(1,708 |
) |
|
|
(1,142 |
) |
| Pretax profit (loss)
from the Maison Business |
|
|
(11,626 |
) |
|
|
1,918 |
|
| Income tax
benefit |
|
|
(2,488 |
) |
|
|
(210 |
) |
| Income (loss) from the
Maison Business, net of taxes |
|
$ |
(9,138 |
) |
|
$ |
2,128 |
|
| |
|
|
|
|
|
|
|
|
| Net profit (loss) from
discontinued operations, net of taxes |
|
$ |
(2,072 |
) |
|
$ |
2,078 |
|
Net
Income
Net
income for the years ended December 31, 2019 and 2018 is as shown
in the following table.
| |
|
Year
ended
December
31,
|
|
| |
|
2019 |
|
|
2018 |
|
| Net income (loss) from
continuing operations |
|
$ |
2,383 |
|
|
$ |
(1,274 |
) |
| Income (loss) from
discontinued operations, net of income taxes |
|
|
(2,072 |
) |
|
|
2,078 |
|
| Net income |
|
$ |
311 |
|
|
$ |
804 |
|
| |
|
|
|
|
|
|
|
|
| Diluted earnings
(loss) per common share |
|
|
|
|
|
|
|
|
| Continuing
operations |
|
$ |
0.16 |
|
|
$ |
(0.40 |
) |
|
Discontinued
operations |
|
|
(0.34 |
) |
|
|
0.35 |
|
| Loss attributable to
common shareholders |
|
$ |
(0.18 |
) |
|
$ |
(0.05 |
) |
Liquidity
and Capital Resources
Dollar
amounts included in the “Liquidity and Capital Resources” are
presented in thousands, except as otherwise specified.
The
purpose of liquidity management is to ensure that there is
sufficient cash to meet all financial commitments and obligations
as they fall due. The liquidity requirements of the Company and its
subsidiaries have been met primarily from the cash proceeds of the
Asset Sale, by funds generated from operations, and from the
proceeds from the sales of our common and preferred stock. Cash
provided from these sources has historically been used for loss and
loss adjustment expense payments as well as other operating
expenses.
1347
PROPERTY INSURANCE HOLDINGS, INC.
On
February 28, 2018, we completed the underwritten public offering of
preferred shares designated as 8.00% Cumulative Preferred Stock,
Series A, par value $25.00 per share (the “Preferred Stock”), as
previously discussed under the heading “Shareholders Equity”. In
addition, on March 26, 2018, we issued an additional 60,000 shares
of Preferred Stock in connection with the underwriters’ exercise of
their over-allotment option. Net proceeds received by the Company
were approximately $16,400. The Company used $1,500 of the net
proceeds to repurchase 60,000 shares of its Series B Preferred
Stock from IWS Acquisition Corporation, as previously discussed
under the heading “Related Party Transactions.
On
April 23, 2018, the Company and MMI executed a Commercial Business
Loan Agreement and related Promissory Note with Hancock Bank, a
trade name for Whitney Bank (n/k/a Hancock Whitney Bank) (the
“Lender”). The agreements provided for a revolving line of credit
of $5,000. The line of credit expired pursuant to its terms on
April 19, 2019. The Company and MMI did not draw down funds under
the Loan Agreement during the period it was outstanding.
On
August 20, 2019, the Company entered into a $7,000 Loan Agreement
and a related Commercial Note (collectively, the “Loan Agreement”)
with the Lender. The Loan Agreement provided for a non-revolving
line of credit of $7,000.
On
November 29, 2019, the Company entered into an Amended and Restated
Loan Agreement and a related Amended and Restated Commercial Note
(collectively, the “Amended and Restated Loan Agreement”) with
Lender, which increased the existing non-revolving line of credit
by an additional $10,000 (the “Line of Credit Increase”), resulting
in an amended and restated non-revolving line of credit loan in the
aggregate principal amount of up to $17,000. Immediately prior to
the closing of the Asset Sale, the Company drew $7,000 under the
line of credit, which was repaid to the Lender as of the closing of
the Asset Sale. Upon repayment, the line of credit was terminated.
Borrowings under the Loan Agreement bore interest at a rate per
annum equal to 5.25%.
Upon
the closing of the Asset Sale, the Company received cash
consideration from FedNat in the amount of $25,500 as well as
$18,728 representing the repayment of surplus notes and accrued
interest due from Maison to the Company. Pursuant to the terms of
the Purchase Agreement, at the closing, the Maison Business was
required to have a consolidated net GAAP book value of at least
$42,000 and was also required to settle any balances between the
Company and the Maison Business. Additionally, prior to the closing
of the Asset Sale, Maison was a limited partner in two limited
partnerships and also had a limited interest in a limited liability
company (collectively, the “Funds”). Pursuant to the terms
of the Purchase Agreement, Maison assigned its interests in the
Funds to the Company in exchange for the statutory carrying value
of the Funds, paid in cash, at the closing of the Asset Sale. This
resulted in net cash proceeds to the Company of $24,778, as shown
in the table below.
| Cash consideration
from FedNat |
|
$ |
25,500 |
|
| Cash from FedNat to
repay outstanding surplus note obligations |
|
|
18,728 |
|
| Capital contribution
from the Company to the Maison Business to meet GAAP book value
requirement |
|
|
(9,057 |
) |
| Transaction bonuses
paid to current and former executive officers of the
Company |
|
|
(605 |
) |
| Company acquisition of
the Funds from Maison |
|
|
(3,218 |
) |
| Payment of
intercompany federal tax obligations |
|
|
(3,702 |
) |
| Payment of transaction
expenses directly associated with the Asset Sale |
|
|
(2,868 |
) |
| Net cash
proceeds |
|
$ |
24,778 |
|
Cash
Flows
The
following table summarizes the Company’s consolidated cash flows
for the years ended December 31, 2019 and 2018.
| |
|
Year ended
December 31, |
|
|
Summary of
Cash Flows |
|
2019 |
|
|
2018 |
|
| Cash and cash
equivalents – beginning of period |
|
$ |
30,902 |
|
|
$ |
23,575 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided
(used) by operating activities |
|
|
(20,638 |
) |
|
|
24,794 |
|
| Net cash provided
(used) by investing activities |
|
|
19,684 |
|
|
|
(29,247 |
) |
| Net cash provided
(used) by financing activities |
|
|
(1,439 |
) |
|
|
11,780 |
|
| Net increase
(decrease) in cash and cash equivalents |
|
|
(2,393 |
) |
|
|
7,327 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash
equivalents – end of period |
|
$ |
28,509 |
|
|
$ |
30,902 |
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Not
applicable.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Shareholders
and Board of Directors
1347
Property Insurance Holdings, Inc.
St.
Petersburg, FL
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of 1347
Property Insurance Holdings, Inc. (the “Company”) and subsidiaries
as of December 31, 2019 and 2018, the related consolidated
statements of income and comprehensive income, shareholders’
equity, and cash flows for each of the two years in the period
ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company and
subsidiaries at December 31, 2019 and 2018, and the results of
their operations and their cash flows for each of the two years in
the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of
America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB
and in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over
financial reporting 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Emphasis
of Matter – Sale of Substantially All Business
Operations
As discussed
in Notes 1 and 4 to the consolidated financial statements, the
Company completed the sale of all of the issued and outstanding
equity of its three former wholly-owned subsidiaries, which
represented substantially all of the Company’s 2019 and 2018
business operations. Accordingly, these three former wholly-owned
subsidiaries have been presented as discontinued operations for all
periods presented.
/s/
BDO USA, LLP
We
have served as the Company’s auditor since 2012.
Grand
Rapids, Michigan
March
30, 2020
1347 PROPERTY INSURANCE HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated
Balance Sheets
($
in thousands, except share and per share data)
| |
|
December
31,
2019
|
|
|
December
31,
2018
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Equity securities, at
fair value (cost basis of $25,500 and $0) |
|
$ |
29,487 |
|
|
$ |
– |
|
| Limited liability
investments |
|
|
4,005 |
|
|
|
2,987 |
|
| Cash and cash
equivalents |
|
|
28,509 |
|
|
|
3,666 |
|
| Current income taxes
recoverable |
|
|
1,265 |
|
|
|
– |
|
| Deferred tax asset,
net |
|
|
– |
|
|
|
265 |
|
| Surplus notes
receivable from affiliate |
|
|
– |
|
|
|
18,244 |
|
| Other
assets |
|
|
188 |
|
|
|
67 |
|
| Assets of discontinued
operations (Note 4) |
|
|
– |
|
|
|
144,569 |
|
| Total
assets |
|
$ |
63,454 |
|
|
$ |
169,798 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES |
|
|
|
|
|
|
|
|
| Accounts
payable |
|
$ |
400 |
|
|
$ |
66 |
|
| Current income taxes
payable |
|
|
– |
|
|
|
932 |
|
| Deferred tax
liability, net |
|
|
106 |
|
|
|
– |
|
| Due to
affiliates |
|
|
– |
|
|
|
2,698 |
|
| Other
liabilities |
|
|
33 |
|
|
|
36 |
|
| Liabilities of
discontinued operations (Note 4) |
|
|
– |
|
|
|
103,319 |
|
| Total
liabilities |
|
$ |
539 |
|
|
$ |
107,051 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and
contingencies (Note 15) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
| Series A Preferred
Shares, $25.00 par value, 1,000,000 shares authorized; 700,000
shares issued and outstanding as of both periods |
|
$ |
17,500 |
|
|
$ |
17,500 |
|
| Common
stock, $0.001 par value; 10,000,000 shares authorized; 6,217,307
and 6,164,123 shares issued as of December 31, 2019 and 2018,
respectively and, 6,065,948 and 6,012,764 shares outstanding as of
December 31, 2019 and 2018, respectively |
|
|
6 |
|
|
|
6 |
|
| Additional paid-in
capital |
|
|
46,754 |
|
|
|
46,340 |
|
| Retained earnings
(accumulated deficit) |
|
|
(336 |
) |
|
|
639 |
|
| Accumulated other
comprehensive loss, net of tax |
|
|
– |
|
|
|
(729 |
) |
| |
|
|
63,924 |
|
|
|
63,756 |
|
| Less: treasury stock
at cost, 151,359 shares as of December 31, 2019 and
2018 |
|
|
(1,009 |
) |
|
|
(1,009 |
) |
| Total shareholders’
equity |
|
|
62,915 |
|
|
|
62,747 |
|
| Total liabilities and
shareholders’ equity |
|
$ |
63,454 |
|
|
$ |
169,798 |
|
See
accompanying notes to consolidated financial
statements.
1347 PROPERTY INSURANCE HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
($
in thousands, except share and per share data)
| |
|
Year ended December
31, |
|
| |
|
2019 |
|
|
2018 |
|
| Revenue: |
|
|
|
|
|
|
|
Net
investment income |
|
$ |
5,587 |
|
|
$ |
1,208 |
|
|
Other
income |
|
|
10 |
|
|
|
– |
|
| Total
revenue |
|
|
5,597 |
|
|
|
1,208 |
|
| |
|
|
|
|
|
|
|
|
| Expenses: |
|
|
|
|
|
|
|
|
| General and
administrative expenses |
|
|
2,476 |
|
|
|
1,145 |
|
| Accretion of discount
on Series B Preferred Shares |
|
|
– |
|
|
|
33 |
|
|
Loss on
repurchase of Series B Preferred Shares and Performance
Shares |
|
|
– |
|
|
|
1,612 |
|
| Total
expenses |
|
|
2,476 |
|
|
|
2,790 |
|
| |
|
|
|
|
|
|
|
|
| Income (Loss) from
continuing operations before income tax expense |
|
|
3,121 |
|
|
|
(1,582 |
) |
| Income tax expense
(benefit) |
|
|
738 |
|
|
|
(308 |
) |
| Net income (loss) from
continuing operations |
|
|
2,383 |
|
|
|
(1,274 |
) |
| Discontinued
operations (Note 4): |
|
|
|
|
|
|
|
|
| Gain (Loss) from sale
of the Maison Business, net of taxes |
|
|
7,066 |
|
|
|
(50 |
) |
|
Income
(Loss) from the Maison Business, net of taxes |
|
|
(9,138 |
) |
|
|
2,128 |
|
|
Net profit
(loss) from discontinued operations, net of taxes |
|
|
(2,072 |
) |
|
|
2,078 |
|
| Net income |
|
$ |
311 |
|
|
$ |
804 |
|
| |
|
|
|
|
|
|
|
|
| Dividends declared on
Series A Preferred Shares |
|
|
1,400 |
|
|
|
1,108 |
|
| Income (loss)
attributable to common shareholders |
|
$ |
(1,089 |
) |
|
$ |
(304 |
) |
| |
|
|
|
|
|
|
|
|
| Basic and diluted net
earnings (loss) per common share: |
|
|
|
|
|
|
|
|
| Continuing
operations |
|
$ |
0.16 |
|
|
$ |
(0.40 |
) |
|
Discontinued
operations |
|
$ |
(0.34 |
) |
|
$ |
0.35 |
|
| Loss per share
attributable to common shareholders |
|
$ |
(0.18 |
) |
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
| Weighted average
common shares outstanding: |
|
|
|
|
|
|
|
|
| Basic and
diluted |
|
|
6,018,542 |
|
|
|
5,989,742 |
|
| |
|
|
|
|
|
|
|
|
| Consolidated
Statements of Comprehensive Income |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
311 |
|
|
$ |
804 |
|
| Unrealized gains
(losses) on investments available for sale, net of income
taxes |
|
|
1,342 |
|
|
|
(527 |
) |
| Comprehensive
income |
|
$ |
1,653 |
|
|
$ |
277 |
|
See
accompanying notes to consolidated financial
statements.
1347 PROPERTY INSURANCE HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity
($
in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
Treasury
Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders’ |
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Equity |
|
|
January
1, 2018 |
|
|
– |
|
|
$ |
– |
|
|
|
5,984,766 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
47,064 |
|
|
$ |
910 |
|
|
$ |
(169 |
) |
|
$ |
46,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
27,998 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
337 |
|
|
|
– |
|
|
|
– |
|
|
|
337 |
|
|
Issuance
of Series A Cumulative Preferred Stock |
|
|
700,000 |
|
|
|
17,500 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,007 |
) |
|
|
– |
|
|
|
– |
|
|
|
16,493 |
|
| Repurchase
of Performance Shares |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(54 |
) |
|
|
– |
|
|
|
– |
|
|
|
(54 |
) |
|
Reclassification
of certain tax effects from accumulated other comprehensive income
at January 1, 2018 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
33 |
|
|
|
(33 |
) |
|
|
– |
|
|
Dividends
declared on Series A Preferred Shares ($1.58 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,108 |
) |
|
|
– |
|
|
|
(1,108 |
) |
|
Net
income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
804 |
|
|
|
– |
|
|
|
804 |
|
|
Other
comprehensive loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(527 |
) |
|
|
(527 |
) |
|
Balance,
December 31, 2018 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,012,764 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,340 |
|
|
$ |
639 |
|
|
$ |
(729 |
) |
|
$ |
62,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption of ASU 2016-01 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
104 |
|
|
|
(104 |
) |
|
|
– |
|
|
Cumulative
effect of adoption of Topic 842 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10 |
|
|
|
– |
|
|
|
10 |
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
53,184 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
414 |
|
|
|
– |
|
|
|
– |
|
|
|
414 |
|
|
Dividends
declared on Series A Preferred Shares ($2.00 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,400 |
) |
|
|
– |
|
|
|
(1,400 |
) |
|
Net
income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
311 |
|
|
|
– |
|
|
|
311 |
|
|
Other
comprehensive income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,342 |
|
|
|
1,342 |
|
|
Unrealized
gains realized upon sale of Maison Business |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(509 |
) |
|
|
(509 |
) |
|
Balance,
December 31, 2019 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,065,948 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,754 |
|
|
$ |
(336 |
) |
|
$ |
– |
|
|
$ |
62,915 |
|
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, |
|
| |
|
2019 |
|
|
2018 |
|
| Cash provided by (used
in): |
|
|
|
|
|
|
|
|
| Operating
activities: |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
311 |
|
|
$ |
804 |
|
| Net (income) loss from
discontinued operations, net of income taxes |
|
|
2,072 |
|
|
|
(2,078 |
) |
| Adjustments to
reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
| Unrealized holding
gains on equity investments |
|
|
(3,998 |
) |
|
|
– |
|
| Accretion of discount
on Series B Preferred Shares |
|
|
– |
|
|
|
33 |
|
| Loss on repurchase of
Series B Preferred Shares and Performance Shares |
|
|
– |
|
|
|
612 |
|
| Net deferred income
taxes |
|
|
371 |
|
|
|
(26 |
) |
| Stock compensation
expense |
|
|
414 |
|
|
|
337 |
|
| Changes in operating
assets and liabilities: |
|
|
|
|
|
|
|
|
| Accrued interest on
surplus notes due from affiliate |
|
|
244 |
|
|
|
(22 |
) |
| Other
assets |
|
|
(121 |
) |
|
|
1 |
|
| Accounts payable and
other accrued expenses |
|
|
331 |
|
|
|
(44 |
) |
| Current income taxes
payable |
|
|
(2,197 |
) |
|
|
(107 |
) |
|
Amounts
due to affiliates |
|
|
(2,698 |
) |
|
|
2,647 |
|
| Net cash provided
(used) by operating activities – continuing operations |
|
|
(5,271 |
) |
|
|
2,157 |
|
| Net cash provided
(used) by operating activities – discontinued
operations |
|
|
(15,367 |
) |
|
|
22,637 |
|
| Net cash provided
(used) by operating activities |
|
|
(20,638 |
) |
|
|
24,794 |
|
| |
|
|
|
|
|
|
|
|
| Investing
activities: |
|
|
|
|
|
|
|
|
| Proceeds from
repayment of surplus notes due from affiliates |
|
|
18,000 |
|
|
|
1,100 |
|
| Issuance of surplus
notes to affiliates |
|
|
– |
|
|
|
(8,450 |
) |
| Net purchases of
furniture and equipment |
|
|
(3 |
) |
|
|
– |
|
|
Purchase
of limited liability investments from affiliates |
|
|
(1,007 |
) |
|
|
(2,987 |
) |
| Net cash provided
(used) by investing activities – continuing operations |
|
|
16,990 |
|
|
|
(10,337 |
) |
| Net cash provided
(used) by investing activities – discontinued
operations |
|
|
2,694 |
|
|
|
(18,910 |
) |
| Net cash provided
(used) by investing activities |
|
|
19,684 |
|
|
|
(29,247 |
) |
| |
|
|
|
|
|
|
|
|
| Financing
activities: |
|
|
|
|
|
|
|
|
| Net proceeds from the
issuance of Series A Preferred Stock |
|
|
– |
|
|
|
16,493 |
|
| Repurchase of Series B
Preferred Shares and Performance Shares |
|
|
– |
|
|
|
(3,300 |
) |
|
Payment of
dividends on preferred shares |
|
|
(1,400 |
) |
|
|
(1,348 |
) |
| Net cash provided
(used) by financing activities – continuing operations |
|
|
(1,400 |
) |
|
|
11,845 |
|
| Net cash used by
financing activities – discontinued operations |
|
|
(39 |
) |
|
|
(65 |
) |
| Net cash provided
(used) by financing activities |
|
|
(1,439 |
) |
|
|
11,780 |
|
| |
|
|
|
|
|
|
|
|
| Net increase
(decrease) in cash and cash equivalents |
|
|
(2,393 |
) |
|
|
7,327 |
|
| Cash and cash
equivalents at beginning of period |
|
|
30,902 |
|
|
|
23,575 |
|
| Cash and cash
equivalents at end of period |
|
$ |
28,509 |
|
|
$ |
30,902 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| Net cash paid (refunds
received) during the period for income taxes |
|
$ |
(628 |
) |
|
$ |
1,606 |
|
| Non-cash financing
activities: |
|
|
|
|
|
|
|
|
| Obligation for the
acquisition of vehicles under lease agreements |
|
$ |
– |
|
|
$ |
118 |
|
See
accompanying notes to consolidated financial
statements.
1347 PROPERTY INSURANCE HOLDING,
INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
1.
Nature of Business
1347
Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or
“us”) is a holding company which previously specialized in
providing personal property insurance in coastal markets including
those in Louisiana, Texas and Florida. We were incorporated on
October 2, 2012 in the State of Delaware under the name Maison
Insurance Holdings, Inc., and changed our legal name to 1347
Property Insurance Holdings, Inc. on November 19, 2013. On March
31, 2014, we completed an initial public offering of our common
stock. Prior to the offering, we were a wholly owned subsidiary of
Kingsway America Inc., which, in turn, is a wholly owned subsidiary
of Kingsway Financial Services Inc., or KFSI, a publicly owned
Delaware holding company. As of December 31, 2019, KFSI and its
affiliates held warrants that, if exercised, would cause KFSI and
its affiliates to hold an approximate 20% ownership interest in our
common stock. In addition, as of December 31, 2019, Fundamental
Global Investors, LLC and its affiliates, or FGI, beneficially
owned approximately 45% of our outstanding shares of common stock.
D. Kyle Cerminara, Chairman of our Board of Directors, serves as
Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis
M. Johnson, Co-Chairman of our Board of Directors, serves as
President, Co-Founder and Partner of FGI.
On
December 2, 2019, we completed the 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 “Maison Business”), to FedNat Holding Company,
a Florida corporation (“FedNat”), 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 Maison Business, on the one hand, and FedNat, on the other hand
(the “Asset Sale”).
As
consideration for the Asset Sale, FedNat paid the Company $51,000,
consisting of $25,500 in cash and $25,500 in FedNat’s common stock,
or 1,773,102 shares of common stock. The stock consideration was
determined by dividing $25,500 by the weighted average closing
price per share of FedNat’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, $18,000 of
outstanding surplus note obligations payable by Maison to the
Company, plus all accrued but unpaid interest, was repaid to the
Company.
On
December 31, 2019, the shares of FedNat common stock issued to the
Company were registered under the Securities Act of 1933, as
amended (the “Securities Act”), pursuant to the terms of the
Registration Rights Agreement entered into by the Company and
FedNat at the closing of the Asset Sale.
In
addition to the Registration Rights Agreement, the Company and
FedNat entered into a Standstill Agreement, a Reinsurance Capacity
Right of First Refusal Agreement (the “Reinsurance Agreement”), an
Investment Advisory Agreement and a Transition Services Agreement
at the closing of the Asset Sale.
Standstill
Agreement
The
Standstill Agreement imposes certain limitations and restrictions
with respect to the voting securities of FedNat (including shares
of FedNat 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 FedNat
beneficially owned by the Company in accordance with the
recommendation of the board of directors of FedNat with respect to
any matter that is before the stockholders of FedNat for a vote by
such stockholders. The Standstill Agreement imposes limitations on
the sale of voting securities of FedNat held by the Company and
restricts the Company from taking certain actions as a holder of
voting securities of FedNat. The term of the Standstill Agreement
is five years.
For
insurance regulatory purposes, the Company has waived any rights
that it may have to exercise control of FedNat.
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 FedNat, providing reinsurance on up to 7.5% of any
layer in FedNat’s catastrophe reinsurance program, subject to the
annual reinsurance limit of $15,000, 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.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement, Fundamental Global Advisors
LLC, a wholly-owned subsidiary of the Company (“Advisor”), was
formed to provide investment advisory services to FedNat, 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, FedNat has agreed to pay Advisor an
annual fee of $100. FGI Funds Management, LLC will serve as the
manager to the Advisor. FGI Funds Management, LLC is an affiliate
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, the Company and
FedNat entered into a Transition Services Agreement, pursuant to
which the Company has agreed to provide certain transition
accounting services to FedNat and the Insurance Companies, as
requested, and FedNat will arrange for certain prior employees of
the Company who became employees of the FedNat 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.
Business Going Forward
Going
forward, the Company intends to operate as a diversified holding
company of reinsurance and investment management businesses.
Subject to the approval of the Company’s stockholders at the
Company’s 2020 Annual Meeting, the Company intends to change its
name to “Fundamental Global Financial Corporation” to align with
its future business plans. Fundamental Global Financial Corporation
(“FGFC”) plans to carry out its business through three primary
avenues, insurance, asset management, and real estate. The Company
also intends to change the ticker symbols for its common stock and
8.00% cumulative preferred stock, Series A, and has reserved with
Nasdaq the ticker symbols “FGI” and “FGIPP,”
respectively.
Insurance:
The
Company is in the process of forming a wholly owned reinsurance
subsidiary, Fundamental Global Reinsurance Ltd., to provide
specialty property and casualty reinsurance. Fundamental Global
Reinsurance Ltd. is expected to have a Class B (iii) insurer
license in accordance with the terms of The Insurance Law, 2010 and
underlying regulations thereto and will be subject to regulation by
the Cayman Islands Monetary Authority.
Asset
Management:
The
Company has formed a wholly owned subsidiary, Fundamental Global
Advisors, LLC to serve as an investment advisor to FedNat Holding
Company under the investment advisory agreement entered into at the
closing of the Asset Sale. In addition, the Company intends to form
a joint venture with Fundamental Global Investors, LLC to sponsor
investment advisors that will manage private funds ranging the full
spectrum of alternative equities, fixed income, private equity and
real estate. FGFC will seek to benefit from the growth of the
assets under management of the investment advisors it sponsors and
the performance of the funds they manage.
Real
Estate:
FGFC
plans to purchase controlling interests in income producing real
estate assets. FGFC will seek to benefit from underlying rental
income on long-term leases with high quality tenants as well as the
capital appreciation from the underlying real estate
assets.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
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 and Discontinued Operations:
Due
to the sale of all of the issued and outstanding equity of Maison,
MMI and ClaimCor on December 2, 2019, these operations have been
classified as discontinued operations in the Company’s financial
statements presented herein. Certain transactions between the
Company and its subsidiaries, which have historically been
eliminated upon consolidation, are shown on a gross basis in the
accompanying financial statements as such transactions have
occurred between discontinued operations and those operations which
the Company intends to continue to utilize. These items include
surplus notes in the amount of $18,000 plus approximately $728 in
accrued interest, all of which was settled upon the closing of the
Asset Sale. These notes, which had been issued by Maison to the
Company, have been reflected as both an asset of continuing
operations and liability of discontinued operations on the
Company’s consolidated balance sheet as of December 31, 2018.
Interest associated with these surplus notes has been recorded as
part of net investment income from continuing operations as well as
interest expense as part of discontinued operations on the
Company’s consolidated statement of operations for the years ended
December 31, 2019 and 2018. Similarly, amounts due from the Company
to Maison upon the assignment of certain of Maison’s investments to
the Company have been reflected as an asset of continuing
operations under the heading “Limited liability investments”, as
well as a corresponding liability under the heading “Due to
affiliates” on the Company’s consolidated balance sheet as of
December 31, 2018. Pursuant to the terms of the Purchase Agreement,
this assignment of investments was settled, in cash, prior to
closing of the transaction. All other 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, the
valuation of fixed income securities and limited liability
investments, 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.
Investments:
Investments in fixed income securities were classified as
available-for-sale and reported at estimated fair value prior to
the sale of our fixed income portfolio to FedNat. Unrealized gains
and losses on fixed income securities were 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 were transferred to the
consolidated statement of income. Effective January 1, 2019, we
adopted Accounting Standards Update No. 2016-01, Financial
Instruments–Overall, requiring us to recognize unrealized gains
and losses on our equity securities through income. See Note 3 –
Recently Adopted and Issued Accounting Standards for additional
information. As of December 31, 2018, our fixed income and equity
securities were held by the Company’s insurance subsidiary, Maison,
and accordingly have been listed as part of assets of discontinued
operations on the Company’s consolidated balance sheet.
Limited liability investments include investments in a limited
partnership and a limited liability company for which there does
not exist a readily determinable fair value. The Company accounts
for these investments at their cost, minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly
transactions for identical or similar investment of the same
issuer. Any profit distributions the Company receives on these
investments is included in income.
Limited liability investments also include an investment where the
Company is a limited partner in a limited partnership, which we
have determined to be a variable interest entity (VIE), in which
the Company is not the primary beneficiary. The Company does not
have a controlling financial interest in the limited partnership,
but exerts significant influence over the entity’s operating and
financial policies as it owns an economic interest of approximately
49%. Accordingly, the Company has accounted for this investment
under the equity method of accounting, recognizing any unrealized
gains or losses on the investment through income. See Note 5 for
additional information on the Company’s investment in the VIE.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
Other
investments consisted of short-term investments, with original
maturities between three months and one year, reported at cost,
which approximates estimated fair value due to their short-term
nature. Other investments also included a fixed rate certificate of
deposit with an original maturity of 15 months. These investments
were held by the Company’s insurance subsidiary, Maison and
accordingly have been listed as part of assets of discontinued
operations on the Company’s consolidated balance sheet as of
December 31, 2018.
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 income 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.
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.
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).
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
Concentration
of Credit Risk:
Financial
instruments which potentially expose the Company to concentrations
of credit risk include investments, cash, and premiums receivable
prior to the Asset Sale transaction. The Company maintains its cash
with a major U.S. domestic banking institution which is insured by
the Federal Deposit Insurance Corporation (“FDIC”) for up to $250.
As of December 31, 2019 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 had not experienced significant losses related to premiums
receivable from its policyholders nor from amounts due from
reinsurers prior to the Asset Sale transaction on December 2,
2019.
Revenue
Recognition:
Premium
revenue, up to the date of the Asset Sale transaction was
recognized on a pro rata basis over the term of the respective
policy contract.
Service
charges on installment premiums were recognized as income upon
receipt of related installment payments and were reflected in other
income up to the date of the Asset Sale transaction.
Revenue
from policy fees was deferred and recognized over the term of the
respective policy period, with revenue reflected in other income up
to the date of the Asset Sale transaction.
Ceded
premiums were charged to income over the applicable term of the
various reinsurance contracts with third party
reinsurers.
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. 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 and directors which have been accounted for as
equity-based awards since, upon vesting, they are required to be
settled in the Company’s common shares. We have used the fair value
of the Company’s common stock on the date the RSUs were issued to
estimate the grant date fair value of those RSUs which vest solely
based upon the passage of time, as well as a Monte Carlo valuation
model to estimate the fair value of those RSUs which vest solely
upon market-based conditions. The fair value of each RSU is
recorded as compensation expense over the requisite service period,
which is generally the expected period over which the awards will
vest. In the case of those RSUs which vest upon market-based
conditions, 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.
Based
upon the Company’s historical forfeiture rates relating to stock
options and RSUs, the Company has not made any adjustment to stock
compensation expense for expected forfeitures as of December 31,
2019. See Note 7 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 12 for further
information on the fair value of the Company’s financial
instruments.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
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, restricted stock
units, 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.
3.
Recently Adopted and Issued Accounting Standards
Recently
Adopted Accounting Standards
ASU
2014-09: Revenue from Contracts with Customers:
The
Financial Accounting Standards Board (the “FASB”) has issued
Accounting Standards Update (“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 became effective for annual
periods beginning after December 15, 2017, and interim periods
within those fiscal years. The Company adopted Topic 606 on January
1, 2018, but since virtually all of the Company’s historic revenues
related to insurance contracts and investment income, the adoption
of Topic 606 did not have an 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
transactions are consummated.
ASU
2018-02: Income Statement – Reporting Comprehensive
Income:
In
February 2018, the FASB issued ASU 2018-02: Income Statement –
Reporting Comprehensive Income. ASU 2018-02 was issued to
address financial reporting issues that arose as a result of the
passage of the Tax Cuts and Jobs Act, enacted into law by the
United States federal government on December 22, 2017. Prior to the
issuance of ASU 2018-02, GAAP required that deferred tax assets and
liabilities be adjusted for the effect of a change in tax laws or
rates with the effect included in income from continuing operations
in the reporting period that includes the enactment date. That
guidance was applicable even in situations in which the related
income tax effects of items in accumulated other comprehensive
income were originally recognized in other comprehensive income.
Under ASU 2018-02, a reclassification from accumulated other
comprehensive income to retained earnings is allowed for stranded
tax effects resulting from the Tax Cuts and Jobs Act. However,
because ASU 2018-02 only relates to the reclassification of the
income tax effects of the Tax Cuts and Jobs Act, the underlying
guidance that requires that the effect of a change in tax laws or
rates be included in income from continuing operations is not
affected. The Company adopted the amendments in this update on
January 1, 2018 and determined that ASU 2018-02 applied to the
deferred taxes related to unrealized losses on its investment
portfolio, which had been previously recognized in other
comprehensive income. This resulted in the reclassification of $33
from accumulated other comprehensive income to retained earnings,
representing the stranded tax effect on these losses.
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. The Company adopted
ASU 2016-01 effective January 1, 2019, resulting in a
cumulative-effect adjustment to retained earnings in the amount of
$104, representing the after-tax unrealized holding gains in
accumulated other comprehensive income as of December 31, 2018,
related to the Company’s available-for-sale equity securities.
Subsequent changes in the estimated fair value of the Company’s
equity securities have now been recognized in the Company’s
consolidated statement of operations rather than in comprehensive
income.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
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 the previous guidance for lessees, leases were
only included on the consolidated balance sheet if certain
criteria, classifying the agreement as a capital lease, were met.
This update requires 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. The Company adopted this
guidance effective January 1, 2019, using the modified
retrospective method, under which we elected the package of
practical expedients and transition provisions allowing us to bring
our existing operating leases onto the Company’s consolidated
balance sheet without adjusting comparative periods. We previously
had operating leases for our facilities, which resulted in a
cumulative-effect adjustment to retained earnings in the amount of
$10. We also recognized both a right-of-use asset and lease
liability in the amount of $314. Right-of-use assets are recognized
at the lease commencement date at amounts equal to the respective
lease liabilities, adjusted for prepaid lease payments, initial
direct costs, and lease incentives received. Lease liabilities were
recognized at the present value of the remaining contractual fixed
lease payments, discounted using our incremental borrowing rate.
Operating lease expense was recognized on a straight-line basis
over the lease term, while variable lease payments are expensed as
incurred.
The
Company’s right-of-use assets and lease liabilities were reflected
in the Company’s consolidated balance sheet in assets of
discontinued operations and liabilities of discontinued operations,
respectively, prior to the Company’s leases being sold with the
insurance operations of the business on December 2,
2019.
Accounting
Standards Pending Adoption
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 occurrence of
the loss was probable. 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, however smaller reporting companies may
delay adoption until January 2023. The Company is currently
evaluating the impact of the adoption of ASU 2016-13 on its
consolidated financial statements.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
4.
Discontinued Operations
As
previously discussed, on December 2, 2019, we completed the sale of
all of the issued and outstanding equity of our three former
wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly,
the Company has classified the Maison Business as discontinued
operations for all periods presented in this report as set forth in
ASC 205-20 – Discontinued Operations.
The
following table presents a reconciliation of the carrying amounts
of major classes of assets and liabilities included in discontinued
operations which are presented separately in the Company’s
consolidated balance sheet as of December 31, 2018. On December 2,
2019 the assets and liabilities previously included in discontinued
operations had been disposed of in the Asset Sale
transaction.
| |
|
December
31,
2018
|
|
| Carrying amounts of
assets included as part of discontinued operations |
|
|
|
|
|
Fixed
income securities, at fair value (amortized cost of
$77,366) |
|
$ |
76,310 |
|
| Equity investments, at
fair value (cost of $3,130) |
|
|
3,263 |
|
| Other
investments |
|
|
774 |
|
| Cash and cash
equivalents |
|
|
27,236 |
|
| Deferred policy
acquisition costs |
|
|
9,111 |
|
| Premiums receivable,
net of allowance of $50 |
|
|
7,720 |
|
| Ceded unearned
premiums |
|
|
6,525 |
|
| Reinsurance
recoverable on paid losses |
|
|
530 |
|
| Reinsurance
recoverable on loss reserves |
|
|
5,661 |
|
| Current income taxes
recoverable |
|
|
2,051 |
|
| Deferred tax asset,
net |
|
|
1,014 |
|
| Due from
affiliate |
|
|
2,698 |
|
|
Other
assets |
|
|
1,676 |
|
| Total assets of
discontinued operations included in the Company’s consolidated
balance sheet |
|
$ |
144,569 |
|
| |
|
|
|
|
| Carrying amounts of
liabilities included as part of discontinued operations |
|
|
|
|
| Loss and loss
adjustment expense reserves |
|
$ |
15,151 |
|
| Unearned premium
reserves |
|
|
51,907 |
|
| Ceded reinsurance
premiums payable |
|
|
9,495 |
|
| Agency commissions
payable |
|
|
802 |
|
| Premiums collected in
advance |
|
|
1,840 |
|
| Surplus notes plus
interest due to affiliate |
|
|
18,244 |
|
| Accrued premium taxes
and assessments |
|
|
3,059 |
|
|
Other
liabilities |
|
|
2,821 |
|
| Total liabilities of
discontinued operations included in the Company’s consolidated
balance sheet |
|
$ |
103,319 |
|
The
following table presents a reconciliation of the major classes of
line items constituting pretax profit (loss) of discontinued
operations to the after-tax profit (loss) of discontinued
operations that are presented in the Company’s consolidated
statement of operations for the years ended December 31, 2019 and
2018.
| |
|
Year ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Gain from sale of the
Maison Business |
|
|
|
|
|
|
|
|
|
Cash
consideration received from sale |
|
$ |
25,500 |
|
|
$ |
– |
|
|
Stock
consideration received from sale |
|
|
25,500 |
|
|
|
– |
|
| Total consideration
received from sale |
|
|
51,000 |
|
|
|
– |
|
| Less: |
|
|
|
|
|
|
|
|
| Carrying value of the
Maison Business on December 1, 2019 |
|
|
39,099 |
|
|
|
– |
|
|
Transaction and other
sale related costs |
|
|
2,818 |
|
|
|
50 |
|
| Total pre-tax
reductions |
|
|
41,917 |
|
|
|
50 |
|
| Pre-tax gain (loss) on
sale |
|
|
9,083 |
|
|
|
(50 |
) |
|
Income tax
expense |
|
|
2,017 |
|
|
|
– |
|
| Net gain (loss) from
sale of the Maison Business |
|
$ |
7,066 |
|
|
$ |
(50 |
) |
| |
|
|
|
|
|
|
|
|
| Net premiums
earned |
|
$ |
49,691 |
|
|
$ |
54,357 |
|
| Net investment
income |
|
|
4,354 |
|
|
|
1,552 |
|
| Other
income |
|
|
2,854 |
|
|
|
2,246 |
|
| Net losses and loss
adjustment expenses |
|
|
(41,634 |
) |
|
|
(27,413 |
) |
| Amortization of
deferred policy acquisition costs |
|
|
(15,983 |
) |
|
|
(15,313 |
) |
| General and
administrative expenses |
|
|
(9,200 |
) |
|
|
(12,369 |
) |
|
Interest
expense on surplus notes due to affiliate |
|
|
(1,708 |
) |
|
|
(1,142 |
) |
| Pretax profit (loss)
from the Maison Business |
|
|
(11,626 |
) |
|
|
1,918 |
|
| Income tax
benefit |
|
|
(2,488 |
) |
|
|
(210 |
) |
| Income (loss) from the
Maison Business, net of taxes |
|
$ |
(9,138 |
) |
|
$ |
2,128 |
|
| |
|
|
|
|
|
|
|
|
| Net profit (loss) from
discontinued operations, net of taxes |
|
$ |
(2,072 |
) |
|
$ |
2,078 |
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
5.
Investments
On
December 2, 2019, the Company received 1,773,102 shares of FedNat
Holding Company common stock (NASDAQ: FNHC), along with $25,500
cash as consideration for the Asset Sale. The stock consideration
was determined by dividing $25,500 by the weighted average closing
price per share of FedNat’s common stock on the Nasdaq Stock Market
during the 20-trading day period immediately preceding December 2,
2019. As of March 26, 2020, the estimated fair value of the
Company’s 1,773,102 shares of FNHC common stock was
$20,320.
The Company’s limited liability investments are comprised of
investments in a limited partnership and a limited liability
company which seek to provide equity and asset-backed debt
investment in a variety of privately-owned companies. The Company
had a total potential commitment of $935 related to these
investments, of which the two entities have drawn down
approximately $776 through December 31, 2019. The limited liability
company is managed by Argo Management Group, LLC, an entity which
is wholly owned by KFSI. The Company has accounted for these two
investments at cost minus impairment, if any, as the investments do
not have readily determinable fair values. For the year ended
December 31, 2019, the Company has received profit distributions of
$91 on these investments which has been included in income.
Additionally, on June 18, 2018, Maison invested $2,219 in FGI
Metrolina Property Income Fund, LP (the “Fund”), which invests in
real estate through a real estate investment trust which is wholly
owned by the Fund. The general partner of the Fund, FGI Metrolina
GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the
Chairman and Co-Chairman of the Board of Directors of the Company,
respectively. The Company, a limited partner of the Fund, does not
have a controlling financial interest in the Fund, but exerts
significant influence over the entity’s operating and financial
policies as it owns an economic interest of approximately 49%.
Accordingly, the Company has accounted for this investment under
the equity method of accounting, recognizing any unrealized holding
gains or losses in income. The Company has committed to a total
potential investment of up to $4,000 in the Fund. As of December
31, 2019, the total amount invested in the Fund was $2,719, while
the carrying amount on the Company’s balance sheet was $3,229. The
Company recognized an unrealized holding gain of $518 on this
investment for the year ended December 31, 2019, and an unrealized
holding loss of $8 on this investment for the year ended December
31, 2018.
Pursuant
to the terms of the Purchase Agreement, Maison assigned all of its
right, title and interest in each of the limited liability
investments to the Company in exchange for the statutory carrying
value of each investment (approximately $4,200). Accordingly, these
investments have been included on the Company’s consolidated
balance sheet as of December 31, 2019 and 2018 as part of
continuing operations. Investment income resulting from the
Company’s limited liability investments has also been included in
net investment income as part of continuing operations, on the
Company’s consolidated statement of operations for the years ended
December 31, 2019 and 2018.
A
summary of the Company’s investments as of December 31, 2019 and
2018 is as follows.
| |
|
Cost
Basis |
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Carrying
Amount
|
|
| As of December 31,
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNHC
common stock |
|
$ |
25,500 |
|
|
$ |
3,987 |
|
|
$ |
– |
|
|
$ |
29,487 |
|
|
Limited
liability investments |
|
|
3,495 |
|
|
|
510 |
|
|
|
– |
|
|
|
4,005 |
|
| Total
investments |
|
$ |
28,995 |
|
|
$ |
4,497 |
|
|
$ |
– |
|
|
$ |
33,492 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31,
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Limited liability
investments |
|
$ |
2,995 |
|
|
$ |
– |
|
|
$ |
(8 |
) |
|
$ |
2,987 |
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
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. |
We
have not recorded any write-downs for an other-than-temporary
impairment on the equity investments listed in the table above. The
Company did however record a write-down for an other-than-temporary
impairment on a single equity investment resulting in a charge of
$215 for the year ended December 31, 2018. As this investment was
held by our former insurance subsidiary, Maison, this charge has
been included as part of income from discontinued operations for
the year ended December 31, 2018. We recorded this write-down as a
result of our analysis of the investment’s operating losses for
2018, which showed a considerable decline when compared to its
results for 2017.
Net
investment income for the years ended December 31, 2019 and
2018 is as follows:
| |
|
Year Ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Investment
income: |
|
|
|
|
|
|
|
|
|
Unrealized
holding gains on FNHC common stock |
|
$ |
3,987 |
|
|
$ |
– |
|
| Interest on surplus
notes issued by Maison |
|
|
1,708 |
|
|
|
1,142 |
|
| Income from limited
liability investments |
|
|
101 |
|
|
|
– |
|
| Loss on assignment of
limited liability investments |
|
|
(239 |
) |
|
|
– |
|
| Other |
|
|
55 |
|
|
|
82 |
|
| Gross investment
income |
|
|
5,612 |
|
|
|
1,224 |
|
|
Investment
expenses |
|
|
(25 |
) |
|
|
(16 |
) |
| Net investment
income |
|
$ |
5,587 |
|
|
$ |
1,208 |
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
6.
Income Taxes
A
summary of income tax expense (benefit) is as follows:
| |
|
Year Ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Current income tax
expense (benefit) – from continuing operations |
|
$ |
– |
|
|
$ |
(282 |
) |
| Current income tax
expense (benefit) – from discontinued operations |
|
|
(894 |
) |
|
|
832 |
|
| Total current income
tax expense (benefit) |
|
|
(894 |
) |
|
|
550 |
|
| |
|
|
|
|
|
|
|
|
| Deferred income tax
expense (benefit) – from continuing operations |
|
|
738 |
|
|
|
(26 |
) |
| Deferred income tax
expense (benefit) – from discontinued operations |
|
|
423 |
|
|
|
(1,042 |
) |
| Total deferred income
tax expense (benefit) |
|
|
1,161 |
|
|
|
(1,068 |
) |
| |
|
|
|
|
|
|
|
|
| Total income tax
expense (benefit) – from continuing operations |
|
|
738 |
|
|
|
(308 |
) |
| Total income tax
expense (benefit) – from discontinued operations |
|
|
(471 |
) |
|
|
(210 |
) |
| Total income tax
expense (benefit) |
|
$ |
267 |
|
|
$ |
(518 |
) |
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 as follows:
| |
|
Year Ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for taxes at
U.S. statutory marginal income tax rate of 21% |
|
$ |
121 |
|
|
|
21.0 |
% |
|
$ |
60 |
|
|
|
21.0 |
% |
| Net operating loss
carryback |
|
|
(213 |
) |
|
|
(36.9 |
)% |
|
|
– |
|
|
|
– |
% |
| State income tax (net
of federal benefit) |
|
|
265 |
|
|
|
45.9 |
% |
|
|
(632 |
) |
|
|
(221.0 |
)% |
| Share-based
compensation |
|
|
77 |
|
|
|
13.3 |
% |
|
|
35 |
|
|
|
12.2 |
% |
| Other |
|
|
17 |
|
|
|
3.0 |
% |
|
|
19 |
|
|
|
6.7 |
% |
| Income tax expense
(benefit) |
|
$ |
267 |
|
|
|
46.2 |
% |
|
$ |
(518 |
) |
|
|
(181.1 |
)% |
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, |
|
| |
|
2019 |
|
|
2018 |
|
| Deferred income tax
assets: |
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward |
|
$ |
463 |
|
|
$ |
– |
|
| Loss and loss
adjustment expense reserves |
|
|
– |
|
|
|
87 |
|
| Unearned premium
reserves |
|
|
– |
|
|
|
1,983 |
|
| Share-based
compensation |
|
|
214 |
|
|
|
257 |
|
| Deferred fee
income |
|
|
– |
|
|
|
357 |
|
| State deferred
taxes |
|
|
– |
|
|
|
247 |
|
| Investments |
|
|
– |
|
|
|
216 |
|
| Other |
|
|
7 |
|
|
|
81 |
|
| Deferred income tax
assets |
|
$ |
684 |
|
|
$ |
3,228 |
|
| |
|
|
|
|
|
|
|
|
| Deferred income tax
liabilities: |
|
|
|
|
|
|
|
|
| Investments |
|
$ |
789 |
|
|
$ |
– |
|
| Deferred policy
acquisition costs |
|
|
– |
|
|
|
1,913 |
|
| State deferred
taxes |
|
|
– |
|
|
|
– |
|
| Other |
|
|
1 |
|
|
|
36 |
|
| Deferred income tax
liabilities |
|
$ |
790 |
|
|
$ |
1,949 |
|
| |
|
|
|
|
|
|
|
|
| Net deferred income
tax asset (liability) |
|
$ |
(106 |
) |
|
$ |
1,279 |
|
As of
December 31, 2019, the Company had net operating loss carryforwards
(“NOLs”) for federal income tax purposes of approximately $2,204,
which will be available to offset future taxable income.
Approximately $2,069 of the Company’s NOLs will expire on December
31, 2039, while the remaining $135 of the Company’s NOLs do not
expire under current tax law.
Due
to the sale of the Maison Business on December 2, 2019, the
December 31, 2019 financial statements show a net deferred tax
liability in the amount of $106. Given that the Company’s deferred
tax assets can be fully offset with deferred tax liabilities within
the expiration window of the deferred tax assets, the Company has
determined that it is more likely than not that its deferred tax
assets will be utilized. As such, the Company has not set up a
valuation allowance for its deferred tax assets as of December 31,
2019.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as
otherwise specified)
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 2015 - 2018 are open for review by
the Internal Revenue Service (“IRS”) and the various state taxing
authorities.
7.
Equity Incentive Plans
In
April 2014, the Company established an equity incentive plan for
employees and directors of the Company (the “2014 Plan”). The
purpose of the Plan was to create incentives designed to motivate
recipients to significantly contribute toward the Company’s growth
and success, to attract and retain persons of outstanding
competence, and to provide such persons with an opportunity to
acquire an equity interest in the Company.
The
Plan allowed for the issuance of non-qualified stock options,
restricted stock, restricted stock units (“RSUs”), performance
shares, performance cash awards, and other stock-based awards and
provided for the issuance of 354,912 shares of common stock. On May
31, 2018, the 2014 Plan was terminated with the adoption of the
2018 Plan, as discussed below.
On
May 31, 2018, our shareholders approved the 1347 Property Insurance
Holdings, Inc., 2018 Equity Incentive Plan (the “2018 Plan”). The
purpose of the 2018 Plan is to attract and retain directors,
consultants, and other key employees of the Company and its
subsidiaries and to provide to such persons incentives and rewards
for superior performance. The 2018 Plan is administered by the
Compensation and Management Resources Committee of the Board, and
has a term of ten years. The 2018 Plan allows for the issuance of
both incentive stock options and non-qualified stock options, stock
appreciation rights, RSUs, and other stock-based, as well as
cash-based awards, and provides for a maximum of 300,000 shares
available for issuance.
Stock
Options Issued under the 2014 Plan
The
following table summarizes stock option activity for the two years
ended December 31, 2019. The following options were issued pursuant
to the 2014 Plan.
|
Common
Stock Options |
|
Shares |
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Ave
Remaining
Contractual
Term
(Years)
|
|
|
Weighted
Ave Grant
Date Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
| Outstanding, January
1, 2018 |
|
|
177,456 |
|
|
$ |
8.06 |
|
|
|
1.25 |
|
|
$ |
1.07 |
|
|
$ |
– |
|
| Exercisable, January
1, 2018 |
|
|
156,160 |
|
|
$ |
8.06 |
|
|
|
1.25 |
|
|
$ |
1.07 |
|
|
$ |
– |
|
| Granted |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercised |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested |
|
|
21,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cancelled |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding, December
31, 2018 |
|
|
177,456 |
|
|
$ |
8.06 |
|
|
|
0.25 |
|
|
$ |
1.07 |
|
|
$ |
– |
|
| Exercisable, December
31, 2018 |
|
|
177,456 |
|
|
$ |
8.06 |
|
|
|
0.25 |
|
|
$ |
1.07 |
|
|
$ |
– |
|
| Granted |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercised |
|
|
– |
|
|
|
|
|
|