UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
(Mark
One) |
|
|
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
|
|
|
|
For
the Quarterly Period Ended June 30, 2020 |
|
|
|
Or |
|
|
|
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
Commission
File Number: 001-36366
1347
Property Insurance Holdings, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware |
|
46-1119100 |
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
970
Lake Carillon Drive, Suite 314, St. Petersburg, FL
33716
(Address
of principal executive offices and zip code)
813-579-6213
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
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, $0.001 par value per share |
|
PIH |
|
The
Nasdaq Stock Market LLC |
|
8.00%
Cumulative Preferred Stock, Series A, $25.00 par value per
share |
|
PIHPP |
|
The
Nasdaq Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated
filer
[ ]
|
Accelerated
filer
[ ]
|
Non-accelerated
filer [X]
|
Smaller
Reporting
Company
[X]
|
Emerging
Growth
Company
[ ]
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
The
number of shares outstanding of the registrant’s common stock as of
August 10, 2020 was 6,068,106.
Table
of Contents
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
1347
PROPERTY INSURANCE HOLDINGS, INC.
Consolidated
Balance Sheets
($
in thousands, except share and per share data)
| |
|
June 30,
2020
(unaudited) |
|
|
December 31,
2019 |
|
| ASSETS |
|
|
|
|
|
|
|
|
| Equity securities, at
fair value (cost basis of $25,500 as of both periods) |
|
$ |
19,628 |
|
|
$ |
29,487 |
|
| Limited liability
investments |
|
|
4,009 |
|
|
|
4,005 |
|
| Cash and cash
equivalents |
|
|
25,638 |
|
|
|
28,509 |
|
| Current income taxes
recoverable |
|
|
1,824 |
|
|
|
1,265 |
|
| Other
assets |
|
|
722 |
|
|
|
188 |
|
| Total
assets |
|
$ |
51,821 |
|
|
$ |
63,454 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES |
|
|
|
|
|
|
|
|
| Accounts
payable |
|
$ |
294 |
|
|
$ |
400 |
|
| Deferred tax
liability, net |
|
|
– |
|
|
|
106 |
|
| Other
liabilities |
|
|
76 |
|
|
|
33 |
|
| Total
liabilities |
|
$ |
370 |
|
|
$ |
539 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and
contingencies (Note 13) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 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; 6,219,465 and 6,217,307
shares issued as of June 30, 2020 and December 31, 2019,
respectively, and 6,068,106 and 6,065,948 shares outstanding as of
June 30, 2020 and December 31, 2019, respectively |
|
|
6 |
|
|
|
6 |
|
| Additional paid-in
capital |
|
|
46,858 |
|
|
|
46,754 |
|
| Accumulated
deficit |
|
|
(11,904 |
) |
|
|
(336 |
) |
| |
|
|
52,460 |
|
|
|
63,924 |
|
| Less: treasury stock
at cost; 151,359 shares for both periods |
|
|
(1,009 |
) |
|
|
(1,009 |
) |
| Total shareholders’
equity |
|
|
51,451 |
|
|
|
62,915 |
|
| Total liabilities and
shareholders’ equity |
|
$ |
51,821 |
|
|
$ |
63,454 |
|
See
accompanying notes to consolidated financial
statements
1347
PROPERTY INSURANCE HOLDINGS, INC.
Consolidated
Statements of Operations and Comprehensive Income
(Loss)
($
in thousands, except share and per share data)
(Unaudited)
| |
|
Three months
ended
June
30,
|
|
|
Six months
ended
June
30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss) |
|
$ |
(571 |
) |
|
$ |
277 |
|
|
$ |
(9,277 |
) |
|
$ |
734 |
|
|
Other
income |
|
|
25 |
|
|
|
– |
|
|
|
54 |
|
|
|
– |
|
| Total
revenue |
|
|
(546 |
) |
|
|
277 |
|
|
|
(9,223 |
) |
|
|
734 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses |
|
|
1,505 |
|
|
|
688 |
|
|
|
2,310 |
|
|
|
1,641 |
|
| Total
expenses |
|
|
1,505 |
|
|
|
688 |
|
|
|
2,310 |
|
|
|
1,641 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing
operations before income tax benefit |
|
|
(2,051 |
) |
|
|
(411 |
) |
|
|
(11,533 |
) |
|
|
(907 |
) |
| Income tax expense
(benefit) |
|
|
520 |
|
|
|
(83 |
) |
|
|
(665 |
) |
|
|
(150 |
) |
| Net loss from
continuing operations |
|
|
(2,571 |
) |
|
|
(328 |
) |
|
|
(10,868 |
) |
|
|
(757 |
) |
| Net loss from
discontinued operations, net of income taxes |
|
|
– |
|
|
|
(4,204 |
) |
|
|
– |
|
|
|
(3,677 |
) |
| Net loss |
|
$ |
(2,571 |
) |
|
$ |
(4,532 |
) |
|
$ |
(10,868 |
) |
|
$ |
(4,434 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends declared on
Series A Preferred Shares |
|
|
350 |
|
|
|
350 |
|
|
|
700 |
|
|
|
700 |
|
| Loss attributable to
common shareholders |
|
$ |
(2,921 |
) |
|
$ |
(4,882 |
) |
|
$ |
(11,568 |
) |
|
$ |
(5,134 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted
earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing
operations |
|
$ |
(0.48 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.24 |
) |
|
Discontinued
operations |
|
|
– |
|
|
|
(0.70 |
) |
|
|
– |
|
|
|
(0.61 |
) |
| Loss per share
attributable to common shareholders |
|
$ |
(0.48 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.85 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average
common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and
diluted |
|
|
6,068,106 |
|
|
|
6,012,764 |
|
|
|
6,067,975 |
|
|
|
6,012,764 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement
of Comprehensive Income (Loss) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,571 |
) |
|
$ |
(4,532 |
) |
|
$ |
(10,868 |
) |
|
$ |
(4,434 |
) |
| Unrealized gains on
investments available for sale, net of income taxes |
|
|
– |
|
|
|
964 |
|
|
|
– |
|
|
|
1,875 |
|
| Comprehensive
loss |
|
$ |
(2,571 |
) |
|
$ |
(3,568 |
) |
|
$ |
(10,868 |
) |
|
$ |
(2,559 |
) |
See
accompanying notes to consolidated financial
statements
1347
PROPERTY INSURANCE HOLDINGS, INC.
Consolidated
Statements of Shareholders’ Equity
(Unaudited)
($
in thousands, except share amounts)
|
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
Treasury
Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Accumulated
Other Comprehensive |
|
|
Total
Shareholders’ |
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income
(Loss) |
|
|
Equity |
|
|
Balance,
January 1, 2019 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,012,764 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,340 |
|
|
$ |
639 |
|
|
$ |
(729 |
) |
|
$ |
62,747 |
|
|
Cumulative
effect of adoption of Topic 842 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10 |
|
|
|
– |
|
|
|
10 |
|
|
Cumulative
effect of adoption of ASU 2016-01 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
104 |
|
|
|
(104 |
) |
|
|
– |
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
Dividends
declared on Series A Preferred Shares ($0.50 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(350 |
) |
|
|
– |
|
|
|
(350 |
) |
|
Net
income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
98 |
|
|
|
– |
|
|
|
98 |
|
|
Other
comprehensive income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
911 |
|
|
|
911 |
|
|
Balance,
March 31, 2019 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,012,764 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,392 |
|
|
$ |
501 |
|
|
$ |
78 |
|
|
$ |
63,468 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
51 |
|
|
|
– |
|
|
|
– |
|
|
|
51 |
|
|
Dividends
declared on Series A Preferred Shares ($0.50 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(350 |
) |
|
|
– |
|
|
|
(350 |
) |
|
Net
loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(4,532 |
) |
|
|
– |
|
|
|
(4,532 |
) |
|
Other
comprehensive income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
964 |
|
|
|
964 |
|
|
Balance,
June 30, 2019 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,012,764 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,443 |
|
|
$ |
(4,381 |
) |
|
$ |
1,042 |
|
|
$ |
59,601 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance,
January 1, 2020 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,065,948 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,754 |
|
|
$ |
(336 |
) |
|
$ |
– |
|
|
$ |
62,915 |
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
2,158 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
Dividends
declared on Series A Preferred Shares ($0.50 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(350 |
) |
|
|
– |
|
|
|
(350 |
) |
|
Net
loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(8,297 |
) |
|
|
– |
|
|
|
(8,297 |
) |
|
Balance,
March 31, 2020 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,068,106 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,806 |
|
|
$ |
(8,983 |
) |
|
$ |
– |
|
|
$ |
54,320 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
|
– |
|
|
|
– |
|
|
|
52 |
|
|
Dividends
declared on Series A Preferred Shares ($0.50 per share) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(350 |
) |
|
|
– |
|
|
|
(350 |
) |
|
Net
loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(2,571 |
) |
|
|
– |
|
|
|
(2,571 |
) |
|
Balance,
June 30, 2020 |
|
|
700,000 |
|
|
$ |
17,500 |
|
|
|
6,068,106 |
|
|
$ |
6 |
|
|
|
151,359 |
|
|
$ |
(1,009 |
) |
|
$ |
46,858 |
|
|
$ |
(11,904 |
) |
|
$ |
– |
|
|
$ |
51,451 |
|
See
accompanying notes to consolidated financial
statements
1347
PROPERTY INSURANCE HOLDINGS, INC.
Consolidated
Statement of Cash Flows
(Unaudited)
($
in thousands)
| |
|
Six months ended
June 30, |
|
| |
|
2020 |
|
|
2019 |
|
| Cash provided by (used
in): |
|
|
|
|
|
|
|
|
| Operating
activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(10,868 |
) |
|
$ |
(4,434 |
) |
| Net loss from
discontinued operations, net of income taxes |
|
|
|
|
|
|
3,677 |
|
| Adjustments to
reconcile net loss to net cash provided (used) by operating
activities: |
|
|
|
|
|
|
|
|
| Net unrealized holding
loss on equity investments |
|
|
9,764 |
|
|
|
– |
|
| Net deferred income
taxes |
|
|
(106 |
) |
|
|
(99 |
) |
| Stock compensation
expense |
|
|
104 |
|
|
|
103 |
|
| Changes in operating
assets and liabilities: |
|
|
|
|
|
|
|
|
| Accrued interest on
surplus notes due from affiliate |
|
|
– |
|
|
|
(913 |
) |
| Current income taxes
recoverable |
|
|
(559 |
) |
|
|
137 |
|
| Prepaid expenses and
other assets |
|
|
(534 |
) |
|
|
(43 |
) |
| Accounts payable and
other liabilities |
|
|
(63 |
) |
|
|
394 |
|
|
Amounts
due to affiliates |
|
|
– |
|
|
|
1,413 |
|
| Net cash provided
(used) by operating activities – continuing operations |
|
|
(2,262 |
) |
|
|
235 |
|
| Net cash provided by
operating activities – discontinued operations |
|
|
– |
|
|
|
(216 |
) |
| Net cash provided
(used) by operating activities |
|
|
(2,262 |
) |
|
|
19 |
|
| |
|
|
|
|
|
|
|
|
| Investing
activities: |
|
|
|
|
|
|
|
|
| Net purchases of
furniture and equipment |
|
|
– |
|
|
|
(3 |
) |
| Proceeds from limited
liability investment |
|
|
91 |
|
|
|
– |
|
|
Purchase
of limited liability investments from subsidiary |
|
|
– |
|
|
|
(894 |
) |
| Net cash provided
(used) by investing activities – continuing operations |
|
|
91 |
|
|
|
(897 |
) |
| Net cash provided by
investing activities – discontinued operations |
|
|
– |
|
|
|
3,560 |
|
| Net cash provided by
investing activities |
|
|
91 |
|
|
|
2,663 |
|
| |
|
|
|
|
|
|
|
|
| Financing
activities: |
|
|
|
|
|
|
|
|
|
Payment of
dividends on preferred shares |
|
|
(700 |
) |
|
|
(700 |
) |
| Net cash used by
financing activities – continuing operations |
|
|
(700 |
) |
|
|
(700 |
) |
| Net cash used by
financing activities – discontinued operations |
|
|
– |
|
|
|
(21 |
) |
| Net cash used by
financing activities |
|
|
(700 |
) |
|
|
(721 |
) |
| |
|
|
|
|
|
|
|
|
| Net increase
(decrease) in cash and cash equivalents |
|
|
(2,871 |
) |
|
|
1,961 |
|
| Cash and cash
equivalents at beginning of period |
|
|
28,509 |
|
|
|
30,902 |
|
| Cash and cash
equivalents at end of period |
|
$ |
25,638 |
|
|
$ |
32,863 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| Cash paid for income
taxes |
|
$ |
– |
|
|
$ |
61 |
|
| Cash paid for
interest |
|
|
– |
|
|
|
7 |
|
See
accompanying notes to consolidated financial
statements.
1347
PROPERTY INSURANCE HOLDINGS, 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 June 30, 2020, 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 June 30, 2020, Fundamental Global
Investors, LLC and its affiliates, or FGI, beneficially owned
approximately 50.1% 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 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 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.
On
July 14, 2020, the Company transferred 156,000 shares of FedNat
common stock at $10.63 per share to Fundamental Global Reinsurance
Ltd., a Cayman Islands limited liability company and wholly-owned
subsidiary of the Company, as a capital contribution for no
consideration. Following the transfer, the Company directly holds
1,617,102 shares of FedNat common stock.
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 $15,000, on the terms and subject to
the conditions set forth in the Reinsurance Agreement. All
reinsurance sold by the Company pursuant to the right of first
refusal, if any, will be memorialized in an agreement in such form
and subject to such terms and conditions as are customary in the
property and casualty insurance industry. The Reinsurance Agreement
is assignable by the Company subject to conditions set forth in the
agreement. The term of the Reinsurance Agreement is five
years.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement 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, which include 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, all of which is paid for the benefit of the Company. FGI
Funds Management, LLC, an affiliate of FGI, serves as the manager
to the Advisor but does not receive any fees for its services other
than those outlined in the Shared Services Agreement discussed
under Note 9 – “Related Party Transactions.” 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 agreed to provide certain transition accounting
services to FedNat, Maison, MMI and ClaimCor, as requested, and
FedNat agreed to arrange for certain prior employees of the Company
who became employees of 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. Although the Transition Services Agreement
remains in effect until December 2020, the Company does not
anticipate that any further services will be provided by either the
Company or FedNat under the agreement going forward.
Business Going Forward
The
Company is implementing business plans 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 has formed a wholly-owned reinsurance subsidiary,
Fundamental Global Reinsurance Ltd. (“FGRe”), a Cayman Islands
limited liability company, to provide specialty property and
casualty reinsurance. FGRe has been granted a Class B (iii) insurer
license in accordance with the terms of The Insurance Law, 2010 and
underlying regulations thereto and is subject to regulation by the
Cayman Islands Monetary Authority (the “Authority”). The terms of
the license require FGRe to receive a capital infusion in the
amount of $5,000, which the Company effected in July 2020 via the
transfer of 156,000 shares of FedNat common stock from the Company
along with approximately $3,300 in cash. The terms of the insurer
license also require advance approval from the Authority should
FGRe wish to enter into any reinsurance agreements which are not
fully collateralized to their aggregate exposure limit. The Company
intends to write only fully collateralized agreements in the near
term.
Asset
Management:
The
Company has formed a wholly owned subsidiary, Fundamental Global
Advisors, LLC, to serve as an investment advisor to FedNat under
the investment advisory agreement entered into at the closing of
the Asset Sale. In addition, the Company has formed Fundamental
Global Asset Management, LLC, a joint venture with Fundamental
Global Investors, LLC, which intends to sponsor investment advisors
that will manage private funds ranging the full spectrum of
alternative equities, fixed income, private equity and real estate.
FGFC will seek to benefit from the growth of the assets under
management of the investment advisors it sponsors and the
performance of the funds they manage. See Note 9 – “Related Party
Transactions” for more information about the joint
venture.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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.
Appointment
of Interim Chief Executive Officer
Effective
June 17,
2020, the Company’s Board appointed Larry G. Swets Jr., a current
director of the Board, as the Company’s Interim Chief Executive
Officer. Mr. Swets replaced D. Kyle Cerminara as the Company’s
principal executive officer. Mr. Cerminara continues to serve as
the Chairman of the Board of the Company.
On
June 18, 2020, the Company entered into a consulting agreement (the
“Consulting Agreement”) by and between the Company and Itasca
Financial LLC (“Itasca Financial”), an advisory and investment firm
founded by Mr. Swets in 2005, with it being agreed that Mr. Swets
would be providing the services described on behalf of Itasca
Financial. The Consulting Agreement provides that Mr. Swets act as
the Company’s Interim Chief Executive Officer. As Interim Chief
Executive Officer, Mr. Swets is performing services and duties as
required by the Board, to whom he reports.
In
consideration for the services, the Company is paying Itasca
Financial $46 per month during the term of the Consulting
Agreement, which will terminate on the earlier of (i) the Company’s
hiring of a new Chief Executive Officer or (ii) the six-month
anniversary of the commencement date. Mr. Swets will forgo the
compensation of board fees while serving as consultant, with the
Company to resume board and committee fees immediately after the
end of the term of the Consulting Agreement or upon earlier
termination. Mr. Swets will remain a director of the Company if he
is continued to be elected by its shareholders.
The
Consulting Agreement contains a customary confidentiality provision
and a six-month post-termination of the Agreement restriction
against both soliciting employees and independent contractors of
the Company and inducing them to terminate their relationship with
the Company.
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 has continued to utilize following the closing of the
Asset Sale. These items include surplus notes in the amount of
$18,000 plus accrued interest, all of which was settled upon the
closing of the Asset Sale. These notes, which had been issued by
Maison to the Company, were reflected as both an asset of
continuing operations and liability of discontinued operations on
any of the Company’s consolidated balance sheets presented prior to
December 2, 2019. Interest associated with these surplus notes has
been recorded as part of net investment income from continuing
operations as well as interest expense as part of discontinued
operations on the Company’s consolidated statement of operations
for the year ended December 31, 2019. Similarly, amounts due from
the Company to Maison upon the assignment of certain of Maison’s
investments to the Company were reflected as an asset of continuing
operations under the heading “Limited liability investments”, as
well as a corresponding liability under the heading “Due to
affiliates” on the Company’s consolidated balance sheets prior to
the closing of the Asset Sale. Pursuant to the terms of the
Purchase Agreement, this assignment of investments was settled, in
cash, just prior to closing of the transaction. All other
significant intercompany balances and transactions have been
eliminated upon consolidation.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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
valuation of fixed income and equity securities, the valuation of
net deferred income taxes, and stock-based compensation expense.
The business and economic uncertainty resulting from the novel
coronavirus (COVID-19) pandemic has made such estimates and
assumptions difficult to calculate.
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 was recognized, at which point the cumulative unrealized
gains or losses were transferred to the consolidated statements of
operations.
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.
Limited
liability investments include investments in a limited partnership
and a limited liability company for which there does not exist
readily determinable fair values. 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 investments 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, however,
the Company 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 – “Investments” for additional information on the Company’s
investment in the VIE.
Realized
gains and losses on sales of investments are determined on a
first-in, first-out basis, and are included in net investment
income (loss).
Interest
income is included in net investment income (loss) 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 consolidated statements of operations
if the fair value of the instrument falls below its 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.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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).
Concentration
of Credit Risk:
Financial
instruments which potentially expose the Company to concentrations
of credit risk include investments, cash, and, prior to the Asset
Sale transaction, premiums receivable. 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 June 30, 2020, 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
employees and directors of the Company 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 June 30, 2020.
See Note 7 – “Options, Warrants, and Restricted Stock Units” for
further disclosure.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
Fair
Value of Financial Instruments:
The
carrying values of certain financial instruments, including cash,
short-term investments, 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 – “Fair Value of Financial
Instruments” for further information on the fair value of the
Company’s financial instruments.
Earnings
(loss) Per Common Share:
Basic
earnings (loss) per common share is computed using the weighted
average number of shares outstanding during the respective
period.
Diluted
earnings (loss) per common share assumes conversion of all
potentially dilutive outstanding stock options, 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
2016-01: Financial Instruments-Overall:
In
January 2016, the FASB issued ASU 2016-01: Financial
Instruments-Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. ASU 2016-01 amends various
aspects of the recognition, measurement, presentation, and
disclosure for financial instruments. Most significantly, ASU
2016-01 requires equity investments (except those accounted for
under the equity method of accounting or those that result in
consolidation of an investee) to be measured at fair value with
changes in fair value recognized in net income (loss). 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 statements of operations rather than in comprehensive
income (loss).
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 $314. Right-of-use assets are recognized
at the lease commencement date at amounts equal to the respective
lease liabilities, adjusted for prepaid lease payments, initial
direct costs, and lease incentives received. Lease liabilities were
recognized at the present value of the remaining contractual fixed
lease payments, discounted using our incremental borrowing rate.
Operating lease expense was recognized on a straight-line basis
over the lease term, while variable lease payments are expensed as
incurred.
The
Company’s right-of-use assets and lease liabilities were reflected
in the Company’s consolidated balance sheet in assets of
discontinued operations and liabilities of discontinued operations,
respectively, prior to the Company’s leases being sold with the
insurance operations of the business on December 2,
2019.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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 is 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, like
the Company, 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.
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 the three and six months ended June 30, 2019 as set
forth in ASC 205-20 – Discontinued Operations. On December
2, 2019, the assets and liabilities previously included in
discontinued operations had been disposed of in the Asset Sale
transaction.
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
statements of operations for the three and six months ended June
30, 2019.
| |
|
Three
months ended
June
30, 2019
|
|
|
Six
months ended
June
30, 2019
|
|
|
Net
premiums earned |
|
$ |
12,074 |
|
|
$ |
27,663 |
|
| Net investment
income |
|
|
769 |
|
|
|
1,793 |
|
| Other
income |
|
|
793 |
|
|
|
1,567 |
|
| Net losses and loss
adjustment expenses |
|
|
(11,447 |
) |
|
|
(20,726 |
) |
| Amortization of
deferred policy acquisition costs |
|
|
(4,404 |
) |
|
|
(8,673 |
) |
| General and
administrative expenses |
|
|
(2,556 |
) |
|
|
(5,305 |
) |
|
Interest
expense on surplus notes due to affiliate |
|
|
(464 |
) |
|
|
(913 |
) |
| Pretax profit from
discontinued operations |
|
|
(5,235 |
) |
|
|
(4,594 |
) |
| Income tax
benefit |
|
|
(1,031 |
) |
|
|
(917 |
) |
| Loss from discontinued
operations, net of taxes |
|
$ |
(4,204 |
) |
|
$ |
(3,677 |
) |
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. On July 14, 2020, the Company transferred 156,000 shares of
FedNat common stock to FGRe, a wholly-owned subsidiary of the
Company, as a capital contribution for no consideration. Following
the transfer, the Company directly holds 1,617,102 shares of FedNat
common stock. As of August 11, 2020, the estimated fair value of
the 1,773,102 shares of FedNat common stock held in the aggregate
by the Company and its subsidiary was $18,121.
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
has a total potential commitment of $844 related to these
investments, of which the two entities have drawn down
approximately $685 through June 30, 2020. 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 six months ended
June 30, 2020 and 2019, the Company has received profit
distributions of $42 and $45 on these investments, respectively,
which has been included in income. Furthermore, the limited
partnership began the process of returning capital back to its
investors in 2020. As of June 30, 2020, the Company has received
approximately 20% of its initial $435 investment back from the
partnership.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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.
As of June 30, 2020, the Company, a limited partner of the Fund,
did not have a controlling financial interest in the Fund, but
exerted significant influence over the entity’s operating and
financial policies as it owned an economic interest of
approximately 49%. Accordingly, the Company accounted for this
investment under the equity method of accounting, recognizing any
unrealized holding gains or losses in income. The Company
previously committed to a total potential investment of up to
$4,000 in the Fund. As of June 30, 2020, the total amount invested
in the Fund was $2,719, while the carrying amount on the Company’s
balance sheet was $3,324, consisting of $605 in undistributed
earnings of the Fund. On August 6, 2020, the Company funded an
additional $1,281, bringing its total investment in the Fund to
$4,000, and its economic interest in the Fund to over 50%.
Accordingly, the Company will consolidate the operations of the
Fund in Company’s financial statements beginning with the quarter
ending September 30, 2020.
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, or approximately $4,200. Accordingly,
these investments have been included on the Company’s consolidated
balance sheet as of June 30, 2020 and December 31, 2019 as part of
continuing operations. Investment income resulting from the
Company’s limited liability investments has also been included in
net investment income (loss) as part of continuing operations, on
the Company’s consolidated statements of operations for the three
and six months ended June 30, 2020 and 2019.
A
summary of the Company’s investments as of June 30, 2020 and
December 31, 2019 is as follows.
|
As of June
30, 2020 |
|
Cost
Basis |
|
|
Gross
Unrealized Gains |
|
|
Gross
Unrealized Losses |
|
|
Carrying
Amount |
|
|
FedNat
common stock |
|
$ |
25,500 |
|
|
$ |
– |
|
|
$ |
(5,872 |
) |
|
$ |
19,628 |
|
|
Limited
liability investments |
|
|
3,404 |
|
|
|
605 |
|
|
|
– |
|
|
|
4,009 |
|
| Total
investments |
|
$ |
28,904 |
|
|
$ |
605 |
|
|
$ |
(5,872 |
) |
|
$ |
23,637 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
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 payments
due from the investee; and |
|
|
● |
assessing
the Company’s ability and intent to hold these investments until
the impairment may be recovered. |
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
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 a write-down for an other-than-temporary
impairment on the equity investments listed in the table
above.
Net
investment income (loss) for the three and six months ended June
30, 2020 and 2019 is as follows:
| |
|
Three months
ended
June 30,
|
|
|
Six months
ended
June 30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Investment income
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding loss on FNHC common stock |
|
$ |
(726 |
) |
|
$ |
– |
|
|
$ |
(9,858 |
) |
|
$ |
– |
|
| Dividend income from
FNHC common stock |
|
|
159 |
|
|
|
– |
|
|
|
319 |
|
|
|
– |
|
| Income from limited
liability investments |
|
|
(45 |
) |
|
|
45 |
|
|
|
137 |
|
|
|
45 |
|
| Interest on surplus
notes issued by Maison |
|
|
– |
|
|
|
464 |
|
|
|
– |
|
|
|
913 |
|
|
Loss on
assignment of limited liability investments from Maison
|
|
|
– |
|
|
|
(239 |
) |
|
|
– |
|
|
|
(239 |
) |
|
Other |
|
|
41 |
|
|
|
7 |
|
|
|
125 |
|
|
|
15 |
|
| Net investment income
(loss) |
|
$ |
(571 |
) |
|
$ |
277 |
|
|
$ |
(9,277 |
) |
|
$ |
734 |
|
The
Company has also included investment income associated with its
fixed income and equity securities portfolio in discontinued
operations, net of income taxes on the Company’s consolidated
statement of operations for the three and six months ended June 30,
2019 as this portfolio was sold by the Company in connection with
the Asset Sale on December 2, 2019. See Note 2 – “Significant
Accounting Policies” for additional information.
6.
Income Taxes
Income
tax expense for the three and six months ended June 30, 2020 and
2019 varies from the amount that would result by applying the
applicable statutory federal income tax rate to income before
income taxes as summarized in the following table:
| |
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Income tax expense
(benefit) at statutory income tax rate of 21% |
|
$ |
(431 |
) |
|
$ |
(1,185 |
) |
|
$ |
(2,422 |
) |
|
$ |
(1,155 |
) |
| Valuation allowance
for deferred tax assets deemed unrealizable |
|
|
967 |
|
|
|
– |
|
|
|
2,004 |
|
|
|
– |
|
| Rate differential due
to CARES Act |
|
|
– |
|
|
|
– |
|
|
|
(214 |
) |
|
|
– |
|
| State income tax (net
of federal tax benefit) |
|
|
– |
|
|
|
66 |
|
|
|
– |
|
|
|
43 |
|
| Other |
|
|
(16 |
) |
|
|
5 |
|
|
|
(33 |
) |
|
|
45 |
|
| Income tax expense
(benefit) |
|
$ |
520 |
|
|
$ |
(1,114 |
) |
|
$ |
(665 |
) |
|
$ |
(1,067 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense
(benefit)–from continuing operations |
|
$ |
520 |
|
|
$ |
(83 |
) |
|
$ |
(665 |
) |
|
$ |
(150 |
) |
| Income tax
benefit–from discontinued operations |
|
$ |
– |
|
|
$ |
(1,031 |
) |
|
$ |
– |
|
|
$ |
(917 |
) |
As a
result of the passage of the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”), the Company recorded a credit of
$214 against its income tax expense for the quarter ended March 31,
2020, due to a provision in the CARES Act which allows for the
five-year carryback of net operating losses. Prior to the passage
of the CARES Act, these net operating losses were only available to
offset future taxable income generated by the Company.
For
the six months ended June 30, 2020, the Company recorded an
unrealized loss of $9,858 on its investment of FedNat common stock,
resulting in a deferred tax asset of approximately $1,300. The
Company’s gross deferred tax assets are $2,004 as of June 30, 2020,
however the Company has recorded a valuation allowance against all
of its deferred tax assets, resulting in a net deferred income tax
asset of $0 as of June 30, 2020, due to the uncertain nature
surrounding our ability to realize these tax benefits in the
future. As of December 31, 2019, the financial statements show a
net deferred tax liability in the amount of $106 due to the sale of
the Maison Business. Significant components of the Company’s net
deferred tax assets are as follows:
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
| |
|
June 30,
2020 |
|
|
December
31, 2019 |
|
| Deferred income tax
assets: |
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward |
|
$ |
503 |
|
|
$ |
463 |
|
| Share-based
compensation |
|
|
233 |
|
|
|
214 |
|
| Investments |
|
|
1,261 |
|
|
|
– |
|
| Other |
|
|
7 |
|
|
|
7 |
|
| Deferred income tax
assets |
|
|
2,004 |
|
|
|
684 |
|
| Less: Valuation
allowance |
|
|
(2,004 |
) |
|
|
– |
|
| Deferred income tax
assets net of valuation allowance |
|
$ |
– |
|
|
$ |
684 |
|
| |
|
|
|
|
|
|
|
|
| Deferred income tax
liabilities: |
|
|
|
|
|
|
|
|
| Investments |
|
$ |
– |
|
|
$ |
789 |
|
| Other |
|
|
– |
|
|
|
1 |
|
| Deferred income tax
liabilities |
|
$ |
– |
|
|
$ |
790 |
|
| |
|
|
|
|
|
|
|
|
| Net deferred income
tax asset (liability) |
|
$ |
– |
|
|
$ |
(106 |
) |
As of
June 30, 2020, the Company had net operating loss carryforwards
(“NOLs”) for federal income tax purposes of approximately $2,396,
which will be available to offset future taxable income.
Approximately $525 of the Company’s NOLs will expire on December
31, 2039, while the remaining $1,871 of the Company’s NOLs do not
expire under current tax law.
As of
June 30, 2020, the Company had no unrecognized tax benefits. The
Company analyzed its tax positions in accordance with the
provisions of Accounting Standards Codification Topic 740,
Income Taxes, and has determined that there are currently no
uncertain tax positions. The Company generally recognizes interest
and penalties, if any, related to unrecognized tax benefits in
income tax expense.
7.
Options, Warrants, and Restricted Stock Units
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.
As of
June 30, 2020, the Company has awards outstanding under both the
2014 Plan and the 2018 Plan.
Stock
Options issued under the 2014 Plan
For
the three and six months ended June 30, 2019, a total of 14,155 and
177,456 of the Company’s stock options expired unexercised,
respectively. The stock options had a weighted average exercise
price of $8.69 per share and $8.06 per share for the three and six
month periods, respectively. The Company has not granted any stock
options since April 4, 2014, and as of April 4, 2019, all stock
options previously granted by the Company had expired unexercised.
As a result, the Company did not have any employee stock options
outstanding as of June 30, 2020.
Restricted
Stock Units issued under both the 2014 and 2018
Plans
On
May 29, 2015, the Company’s Board of Directors granted 20,500 RSUs
to certain of its executive officers under the 2014 Plan. Each RSU
granted entitles the grantee to one share of the Company’s common
stock upon the vesting date of the RSU. The RSUs vest as follows:
(i) 50% upon the date that the closing price of the Company’s
common stock equals or exceeds $10.00 per share; and (ii) 50% upon
the date that the closing price of the Company’s common stock
equals or exceeds $12.00 per share. Prior to the vesting of the
RSUs, the grantee will not be entitled to any dividends declared on
the Company’s common stock. The RSUs do not expire; however, should
the grantee discontinue employment with the Company for any reason
other than death or disability, all unvested RSUs will be deemed
forfeited on the date employment is discontinued. In connection
with the Asset Sale and pursuant to the employment and resignation
agreements entered into between the Company and its former
executive officers, Douglas N. Raucy and Dean E. Stroud, a total of
16,500 RSUs issued under this grant to Messrs. Raucy and Stroud
were cancelled and forfeited on December 2, 2019.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
On
May 31, 2017, the Compensation Committee of the Company’s Board of
Directors approved a share matching arrangement resulting in the
issuance of 108,330 RSUs to the Company’s officers and non-employee
directors then serving under the 2014 Plan. The RSUs were issued on
December 15, 2017, and entitle each grantee to one share of the
Company’s common stock upon the vesting date of the RSU, which will
vest 20% per year over a period of five years following the date
granted, subject to each officer’s continued employment with the
Company, or each director’s continued service on the Board. Prior
to the vesting of the RSUs, the grantee will not be entitled to any
dividends declared on the Company’s common stock. The RSUs do not
expire; however, should the grantee discontinue employment with the
Company for any reason other than death or disability, all unvested
RSUs will be deemed forfeited on the date employment is
discontinued. The Board of Directors may, in its discretion,
accelerate vesting in the event of early retirement. In connection
with the Asset Sale, the Compensation and Management Resources
Committee (the “Compensation Committee”) of the Board previously
approved the accelerated vesting of the RSUs granted to the
Company’s former executive officers, Douglas N. Raucy and Dean E.
Stroud, under the share-matching arrangement. Accordingly, pursuant
to the employment and resignation agreements entered into between
the Company and Messrs. Raucy and Stroud, a total of 34,400
unvested RSUs issued to Messrs. Raucy and Stroud vested in full on
December 2, 2019.
The
RSUs granted on December 15, 2017 will also vest in full as of the
last date of service as a director of the Company should the
director make himself or herself available and consent to be
nominated by the Company for continued service but is not nominated
by the Board for election by the shareholders, other than for good
reason as determined by the Board in its discretion.
On
August 22, 2018, the Compensation Committee granted 1,000 shares of
the Company’s common stock (the “Bonus Shares”) and 1,000 RSUs to
the Company’s Chief Financial Officer, John S. Hill, under the 2018
Plan. Each RSU represents a contingent right to receive one share
of the Company’s common stock. These RSUs vest in five equal annual
installments beginning with the first anniversary of the grant
date, subject to continued employment, with vesting subject to Mr.
Hill maintaining ownership of the Bonus Shares through the full
five-year vesting period.
Also,
on August 22, 2018, the Company modified its compensation program
for all non-employee directors of the Company, effective September
1, 2018. The modified compensation program allows for an annual
grant of RSUs with a value of $40, vesting in five equal annual
installments, beginning with the first anniversary of the grant
date. Accordingly, on August 22, 2018 and again on August 13, 2019,
the Board issued RSUs to each of the Company’s then serving
non-employee directors, representing a value of $40 per director.
The total number of RSUs granted were 34,284 on August 22, 2018 and
61,776 on August 13, 2019. Furthermore, on January 11, 2019, the
Company’s Board appointed two new directors to the Board,
Ambassador Rita Hayes and Dr. Marsha G. King, resulting in the
issuance of 5,397 RSUs to each of these two directors, representing
their pro-rata share of the RSU grant issued to each of the
Company’s non-employee directors on an annual basis. On August 12,
2020, the Board issued RSUs to each of the Company’s non-employee
directors, excluding Mr. Swets, who is also currently providing
services as a consultant to the Company, representing a value of
$40 per director. The total number of RSUs granted on August 12,
2020 were 60,998. The following table summarizes RSU activity for
the six months ended June 30, 2020 and 2019.
|
Restricted
Stock Units |
|
Number of
Units
|
|
|
Weighted
Average Grant Date Fair Value |
|
| Non-vested units,
January 1, 2019 |
|
|
137,116 |
|
|
$ |
6.27 |
|
| Granted |
|
|
10,794 |
|
|
|
4.94 |
|
| Vested |
|
|
– |
|
|
|
– |
|
|
Forfeited |
|
|
– |
|
|
|
– |
|
| Non-vested units, June
30, 2019 |
|
|
147,910 |
|
|
$ |
6.18 |
|
| |
|
|
|
|
|
|
|
|
| Non-vested units,
January 1, 2020 |
|
|
140,002 |
|
|
$ |
5.93 |
|
| Granted |
|
|
– |
|
|
|
– |
|
| Vested |
|
|
(2,158 |
) |
|
|
4.94 |
|
|
Forfeited |
|
|
– |
|
|
|
– |
|
| Non-vested units, June
30, 2020 |
|
|
137,844 |
|
|
$ |
5.94 |
|
Total
stock-based compensation expense for the six months ended June 30,
2020 and 2019 was $104 and $103, respectively. As of June 30, 2020,
total unrecognized stock compensation expense of $663 remains,
which will be recognized through September 30, 2024. Stock
compensation expense has been reflected in the Company’s financial
statements as part of general and administrative expense and has
been included in net loss from continuing operations.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
Warrants
For
the six months ended June 30, 2019, a total of 406,875 warrants
expired having a weighted average exercise price of $9.69. For the
six months ended June 30, 2020 and 2019, warrants were neither
granted nor exercised. As of June 30, 2020 the Company had
1,500,000 warrants outstanding with an exercise price of $15.00
which expire on February 24, 2022.
8.
Shareholders’ Equity
Offering
of 8.00% Cumulative Preferred Stock, Series A
On
February 28, 2018, we completed the underwritten public offering of
640,000 shares of the Preferred Stock designated as 8.00%
Cumulative Preferred Stock, Series A, par value $25.00 per share.
Also, on March 26, 2018, we issued an additional 60,000 shares of
Preferred Stock pursuant to the exercise of the underwriters’
over-allotment option. Dividends on the Preferred Stock are
cumulative from the date of original issue and are 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 Preferred Stock was on June 1,
2018. For each of the quarters ended June 30, 2020 and 2019, the
Company declared dividends of $350, representing all quarterly
amounts due on 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 Company’s Board of
Directors declared the third quarter 2020 dividend on the shares of
Series A Preferred Stock on August 12, 2020.
The
Preferred Stock is not redeemable prior to February 28, 2023. On
and after that date, the Preferred Stock will be redeemable at our
option, for cash, in whole or in part, at a redemption price of
$25.00 per share of Preferred Stock, plus all accumulated and
unpaid dividends to, but not including, the date of redemption. The
Preferred Stock has no stated maturity and will not be subject to
any sinking fund or mandatory redemption. The Preferred 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 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 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 Preferred Stock or to take certain other
actions.
Trading
of the shares commenced on March 22, 2018 on the Nasdaq Stock
Market under the symbol “PIHPP”. Net proceeds received by the
Company were approximately $16,500. 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 discussed under Note 9 –
“Related Party Transactions,” with the remainder of the proceeds to
be used to support organic growth, including spending for business
development, sales and marketing and working capital, and for
future potential acquisition opportunities.
A
fund managed by Fundamental Global Investors, LLC, the Company’s
largest shareholder, 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 $74 on March 26, 2018
in connection with the underwriters’ exercise of their
over-allotment option. In addition, CWA Asset Management Group,
LLC, of which 50% is owned by Fundamental Global Investors, LLC,
holds 33,519 shares of the Series A Preferred Stock for customer
accounts (including 44 shares of the Series A Preferred Stock held
by Mr. Cerminara in a joint account with his spouse) purchased at
the public offering price in connection with the underwriters’
exercise of their over-allotment option. No discounts or
commissions were paid to the underwriters on the purchase of these
shares.
9.
Related Party Transactions
Related
party transactions are carried out in the normal course of
operations and are measured in part by the amount of consideration
paid or received as established and agreed by the parties.
Management believes that consideration paid for such services in
each case approximates fair value. Except where disclosed elsewhere
in these consolidated financial statements, the following is a
summary of related party transactions.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
Investment
in Limited Liability Company and Limited Partnership
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 June 30, 2020. 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.
As of
June 30, 2020, the Company has invested $2,719 as a limited partner
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 Fund’s investment program is managed
by FGI Funds Management LLC, an affiliate of FGI, which, with its
affiliates, is the largest stockholder of the Company. The
principals of FGI waived their share of fees associated with the
Company’s investment in Metrolina. In 2018 and 2019, the principals
of FGI waived $118 and $37, respectively, of fees that were owed by
the Company. The Company’s investment represents an approximate 49%
ownership stake in the Fund.
Upon
analysis of the Fund’s capital structure, related contractual
relationships and terms, the nature of the Fund’s operations and
purpose, as well as our involvement with the entity, we have
determined that the Fund represents a variable interest entity
(VIE) investment of the Company. Applicable guidance requires us to
consolidate those VIEs where we are determined to be the primary
beneficiary. The primary beneficiary is the entity that has both 1)
the power to direct the activities of the VIE which most
significantly affect the VIE’s economic performance; and 2) the
obligation to absorb losses or the right to receive the benefits
that could be potentially significant to the VIE. As of June 30,
2020, the Company’s investment in the Fund is that of a limited
partner with an approximate 49% ownership interest. As limited
partners in the Fund do not have the authority to direct the
operations of the Fund, we have determined we are not the primary
beneficiary of the VIE, and, accordingly, have accounted for this
investment under the equity method of accounting. On August 6,
2020, the Company funded an additional $1,281, bringing its total
investment in the Fund to $4,000, and its economic interest in the
Fund to over 50%.
As of
December 31, 2019, the total assets of the Fund were approximately
$6,849. Our maximum exposure to loss associated with our investment
in the Fund was $2,719 as of June 30, 2020. The Company’s maximum
exposure to loss associated with the Fund is limited to our
investment; however, as previously indicated, the Company increased
its total investment in the Fund to $4,000 on August 6, 2020. Our
investment is reflected on our consolidated balance sheet under the
heading Limited liability investments. Due to our additional
investment on August 6, 2020, the Company’s ownership percentage in
the Fund is now in excess of 50% of the total ownership interest in
the Fund. Accordingly, we will begin to consolidate the Fund’s
financial statements with our results beginning in quarter ending
September 30, 2020.
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, which include 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, all of which is paid for the benefit of the Company. FGI
Funds Management, LLC, an affiliate of FGI, serves as the manager
to the Advisor but does not receive any fees for its services other
than those outlined in the Shared Services Agreement below. The
term of the Investment Advisory Agreement is five years.
Shared
Services Agreement
On
March 31, 2020, the Company entered into a Shared Services
Agreement (the “Shared Services Agreement”) with Fundamental Global
Management, LLC (“FGM”), an affiliate of FGI, pursuant to which FGM
provides the Company with certain services related to the
day-to-day management of the Company, including assisting with
regulatory compliance, evaluating the Company’s financial and
operational performance, providing a management team to supplement
the executive officers of the Company, and such other services
consistent with those customarily performed by executive officers
and employees of a public company (collectively, the “Services”).
In exchange for the Services, the Company pays FGM a fee of $456
per quarter (the “Shared Services Fee”), plus reimbursement of
expenses incurred by FGM in connection with the performance of the
Services, subject to certain limitations approved by the Company’s
Board of Directors or Compensation Committee from time to
time.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
The
Shared Services Agreement has an initial term of three years, and
thereafter renews automatically for successive one-year terms
unless terminated in accordance with its terms. The Shared Services
Agreement may be terminated by FGM or by the Company, by a vote of
the Company’s independent directors, at the end of the initial or
automatic renewal term upon 120 days’ notice, subject to payment by
the Company of certain costs incurred by FGM to wind down the
provision of Services and, in the case of a termination by the
Company without cause, payment of a termination fee equal to the
Shared Services Fee paid for the two quarters preceding
termination.
Joint
Venture Agreement
On
March 31, 2020, the Company entered into the Limited Liability
Company Agreement (the “LLC Agreement”) of Fundamental Global Asset
Management, LLC (“FGAM”), a newly-formed joint venture owned 50% by
each of the Company and FGI Funds Management, LLC, an affiliate of
FGI (“FGIFM” and together with the Company, each a “Member” and
collectively, the “Members”). The purpose of FGAM is to sponsor,
capitalize and provide strategic advice to investment managers
(“Underlying Managers”) in connection with the launch and/or growth
of their asset management business and the investment products they
sponsor (each, a “Sponsored Fund”).
FGAM
is governed by a Board of Managers consisting of four managers, two
of which have been appointed by each Member. The Company has
appointed two of its independent directors to the Board of Managers
of FGAM. Certain major actions, including any decision to sponsor a
new investment manager, will require the prior consent of both
Members.
The
LLC Agreement provides that each Member will contribute its
proportionate interest of the amount of capital determined by the
Board of Managers to be required to operate FGAM (“Operating
Capital”). Unless otherwise agreed, the Company will contribute the
capital required to be contributed to a Sponsored Fund (“Seed
Capital”), as well as any amounts required to be contributed to an
Underlying Manager for working capital purposes (“Working
Capital”). Proceeds attributable to a contribution, directly or
indirectly through an Underlying Manager, to a Sponsored Fund will
be distributed to the Members in proportion to their capital
contributions in respect of Seed Capital. All other proceeds
received by FGAM attributable to a Sponsored Fund, including
proceeds from revenue shares or ownership interests in Underlying
Managers, will be distributed as follows: (i) first, to the Members
until they have received cumulative distributions up to an amount
of the Operating Capital funded by them; (ii) second, to the
Members until they have received cumulative distributions up to an
amount of Working Capital previously funded by them, plus a return
of 5% per annum; and (iii) third, to the Members in proportion to
their percentage interests.
In
addition, neither FGIFM nor any of its affiliates may participate
in a Sponsored Fund Transaction other than through FGAM unless
FGIFM has first presented the opportunity to FGAM and either the
Board of Managers or the Company has rejected such opportunity.
Notwithstanding the foregoing, if such opportunity requires in
excess of $5,000, FGIFM may offer amounts in excess of $5,000 to a
third party, subject to certain conditions.
10.
Net Earnings Per Share
Net
earnings per share is computed by dividing net income by the
weighted average number of common shares and common share
equivalents outstanding during the periods presented. In
calculating diluted earnings per share, those potential common
shares that are found to be anti-dilutive are excluded from the
calculation. The table below provides a summary of the numerators
and denominators used in determining basic and diluted earnings per
share for the three and six months ended June 30, 2020 and
2019.
| |
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Basic and
diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) (in thousands) |
|
$ |
(2,571 |
) |
|
$ |
(4,532 |
) |
|
$ |
(10,868 |
) |
|
$ |
(4,434 |
) |
|
Less:
dividends declared on Series A Preferred Shares |
|
|
(350 |
) |
|
|
(350 |
) |
|
|
(700 |
) |
|
|
(700 |
) |
| Loss attributable to
common shareholders |
|
$ |
(2,921 |
) |
|
$ |
(4,882 |
) |
|
$ |
(11,568 |
) |
|
$ |
(5,134 |
) |
| Weighted average
common shares outstanding |
|
|
6,068,106 |
|
|
|
6,012,764 |
|
|
|
6,067,975 |
|
|
|
6,012,764 |
|
| Loss per share
attributable to common shareholders |
|
$ |
(0.48 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.85 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss from
continuing operations |
|
$ |
(2,571 |
) |
|
$ |
(328 |
) |
|
$ |
(10,868 |
) |
|
$ |
(757 |
) |
|
Less:
dividends declared on Series A Preferred Shares |
|
|
(350 |
) |
|
|
(350 |
) |
|
|
(700 |
) |
|
|
(700 |
) |
| Loss from continuing
operations attributable to common shareholders |
|
$ |
(2,921 |
) |
|
$ |
(678 |
) |
|
$ |
(11,568 |
) |
|
$ |
(1,457 |
) |
| Weighted average
common shares outstanding |
|
|
6,068,106 |
|
|
|
6,012,764 |
|
|
|
6,067,975 |
|
|
|
6,012,764 |
|
| Loss per common share
from continuing operations |
|
$ |
(0.48 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.24 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss from
discontinued operations, net of income taxes |
|
$ |
– |
|
|
$ |
(4,204 |
) |
|
$ |
– |
|
|
$ |
(3,677 |
) |
| Weighted average
common shares outstanding |
|
|
– |
|
|
|
6,012,764 |
|
|
|
– |
|
|
|
6,012,764 |
|
| Loss per common share
from discontinued operations |
|
$ |
– |
|
|
$ |
(0.70 |
) |
|
$ |
– |
|
|
$ |
(0.61 |
) |
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
The
following potentially dilutive securities outstanding as of June
30, 2020 and 2019 have been excluded from the computation of
diluted weighted-average shares outstanding as their effect would
be anti-dilutive.
| |
|
As of June
30, |
|
| |
|
2020 |
|
|
2019 |
|
| Warrants to purchase
common stock |
|
|
1,500,000 |
|
|
|
1,500,000 |
|
| Restricted stock
units |
|
|
137,844 |
|
|
|
147,910 |
|
| |
|
|
1,637,844 |
|
|
|
1,647,910 |
|
11.
Accumulated Other Comprehensive Income (Loss)
The
table below details the change in the balance of each component of
accumulated other comprehensive income (loss), net of tax, for the
three and six months ended June 30, 2020 and 2019.
| |
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Unrealized gains
(losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of
period |
|
$ |
– |
|
|
$ |
78 |
|
|
$ |
– |
|
|
$ |
(729 |
) |
| Other comprehensive
income before reclassifications |
|
|
– |
|
|
|
1,228 |
|
|
|
– |
|
|
|
2,333 |
|
| Amounts reclassified
from accumulated other comprehensive income |
|
|
– |
|
|
|
(8 |
) |
|
|
– |
|
|
|
13 |
|
|
Income
taxes |
|
|
– |
|
|
|
(256 |
) |
|
|
– |
|
|
|
(471 |
) |
| Net current-period
other comprehensive income |
|
|
– |
|
|
|
964 |
|
|
|
– |
|
|
|
1,875 |
|
| Reclassifications due
to adoption of new accounting standards |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(104 |
) |
| Balance, June
30 |
|
$ |
– |
|
|
$ |
1,042 |
|
|
$ |
– |
|
|
$ |
1,042 |
|
12.
Fair Value of Financial Instruments
Fair
value is best evidenced by quoted bid or ask price, as appropriate,
in an active market. Where bid or ask prices are not available,
such as in an illiquid or inactive market, the closing price of the
most recent transaction of that instrument subject to appropriate
adjustments as required is used. Where quoted market prices are not
available, the quoted prices of similar financial instruments or
valuation models with observable market-based inputs are used to
estimate the fair value. These valuation models may use multiple
observable market inputs, including observable interest rates,
foreign exchange rates, index levels, credit spreads, equity
prices, counterparty credit quality, corresponding market
volatility levels and option volatilities. Minimal management
judgment is required for fair values calculated using quoted market
prices or observable market inputs for models. Greater subjectivity
is required when making valuation adjustments for financial
instruments in inactive markets or when using models where
observable parameters do not exist. Also, the calculation of
estimated fair value is based on market conditions at a specific
point in time and may not be reflective of future fair values. For
the Company’s financial instruments carried at cost or amortized
cost, the book value is not adjusted to reflect increases or
decreases in fair value due to market fluctuations, including those
due to interest rate changes, as it is the Company’s intention to
hold them until there is a recovery of fair value, which may be to
maturity.
The
FASB has issued guidance that defines fair value as the exchange
price that would be received for an asset (or paid to transfer a
liability) in the principal, or most advantageous market in an
orderly transaction between market participants. This guidance also
establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The guidance
categorizes assets and liabilities at fair value into one of three
different levels depending on the observation of the inputs
employed in the measurements, as follows:
| |
● |
Level
1 – inputs to the valuation methodology are quoted prices for
identical assets or liabilities in active markets providing the
most reliable measurement of fair value since it is directly
observable. |
| |
|
|
| |
● |
Level
2 – inputs to the valuation methodology include quoted prices for
similar assets or liabilities in active markets. These inputs are
observable, either directly or indirectly, for substantially the
full-term of the financial instrument. |
| |
|
|
| |
● |
Level
3 – inputs to the valuation methodology are unobservable and
significant to the measurement of fair value. |
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and
as otherwise specified)
Financial
instruments measured at fair value as of June 30, 2020 and December
31, 2019 in accordance with this guidance are as
follows.
| |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
| As of June 30,
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common
stock |
|
$ |
19,628 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
19,628 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common
stock |
|
$ |
29,487 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
29,487 |
|
13.
Commitments and Contingencies
Legal
Proceedings:
From
time to time, we are involved in legal proceedings and litigation
arising in the ordinary course of business. Currently, it is not
possible to predict legal outcomes and their impact on the future
development of claims. Any such development will be affected by
future court decisions and interpretations. Because of these
uncertainties, additional liabilities may arise for amounts in
excess of the Company’s current reserves.
Shared
Services Agreement
On
March 31, 2020, the Company entered into the Shared Services
Agreement with FGM, an affiliate of FGI, pursuant to which FGM
provides the Company with certain services related to the
day-to-day management of the Company, including assisting with
regulatory compliance, evaluating the Company’s financial and
operational performance, providing a management team to supplement
the executive officers of the Company, and such other services
consistent with those customarily performed by executive officers
and employees of a public company. In exchange for the Services,
the Company pays FGM a fee of $456 per quarter, plus reimbursement
of expenses incurred by FGM in connection with the performance of
the Services, subject to certain limitations approved by the
Company’s Board of Directors or Compensation Committee from time to
time.
The
Shared Services Agreement has an initial term of three years, and
thereafter renews automatically for successive one-year terms
unless terminated in accordance with its terms. The Shared Services
Agreement may be terminated by FGM or by the Company, by a vote of
the Company’s independent directors, at the end of the initial or
automatic renewal term upon 120 days’ notice, subject to payment by
the Company of certain costs incurred by FGM to wind down the
provision of Services and, in the case of a termination by the
Company without cause, payment of a termination fee equal to the
Shared Services Fee paid for the two quarters preceding
termination.
Operating
Lease Commitments:
Effective
June 1, 2020, the Company entered into a lease agreement for office
space in St. Petersburg, FL. The lease has a term of six months.
Total minimum rent over the six-month term is expected to be
$16.
Rent
expense for the Company’s office leases is recognized on a
straight-line basis over the term of the lease. Rent expense was
$16 and $248 for the six months ended June 30, 2020 and 2019,
respectively. The entirety of rent expense for the six months ended
June 30, 2019 has been included as part of net income from
discontinued operations, as it was associated with the operations
of the Maison Business, sold on December 2, 2019.
Impact
of the Coronavirus (COVID-19) Pandemic:
We
continue to monitor the impact of the coronavirus (COVID-19) global
pandemic on our operations.
Given
the ongoing and dynamic nature of the circumstances, it is
difficult to predict the full impact of the COVID-19 pandemic on
our business. Adverse events such as health-related concerns about
working in our offices, the inability to travel and other matters
affecting the general work environment have negatively impacted and
could harm our business and our business strategy. In addition,
during the pandemic, we have experienced significant losses related
to the value of our investment in shares of FedNat common stock,
and we may continue to experience such losses to the extent the
pandemic negatively impacts FedNat’s business. The extent to which
our operations and investments may continue to be impacted by the
COVID-19 pandemic will depend largely on future developments, which
are highly uncertain and cannot be accurately predicted, including
new developments in the severity of the pandemic and actions by
government authorities to contain the pandemic or treat its impact.
Furthermore, the impacts of a potential worsening of global
economic conditions and the continued disruptions to and volatility
in the financial markets remain unknown. In the event of a major
disruption caused by the pandemic, we may lose the services of our
employees, experience system interruptions or face challenges
accessing the capital or credit markets, 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. Management continues to monitor the impact of the
pandemic on the Company’s financial condition, liquidity,
operations, industry and workforce. Given the daily evolution of
the pandemic and the global responses to curb the spread of
COVID-19, the Company is not able to estimate the effects of
COVID-19 on its results of operations, financial condition or
liquidity for fiscal year 2020 and beyond.
1347
PROPERTY INSURANCE HOLDINGS, INC.
ITEM 2. 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 Quarterly Report on Form 10-Q and in our
Annual Report for the year ended December 31, 2019 on Form 10-K
filed with the Securities and Exchange Commission (“SEC”) on March
30, 2020.
Unless
context denotes otherwise, the terms “Company,” “we,” “us,” and
“our,” refer to 1347 Property Insurance Holdings, Inc., and its
subsidiaries. Except where noted otherwise, all dollar amounts have
been reported in thousands.
Cautionary
Note about Forward-Looking Statements
This
Quarterly Report on Form 10-Q 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.
You should be aware that many of the risks listed below were, and
are expected to continue to be, exacerbated by the COVID-19
pandemic.
Management
cautions that the forward-looking statements in this Quarterly
Report on Form 10-Q 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 COVID-19 pandemic and the impact of governmental
measures taken in response thereto; the uncertainty and difficulty
in predicting the ultimate impact of the COVID-19 pandemic on our
business; 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
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; the
impact of the COVID-19 pandemic on the business of FedNat Holding
Company; continued volatility or further decline in the value 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 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.
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 June 30, 2020, 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 June 30, 2020, Fundamental Global
Investors, LLC and its affiliates, or FGI, beneficially owned
approximately 50.1% 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 $51,000,
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.
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 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. On July
14, 2020, the Company transferred 156,000 shares of FedNat common
stock at a price of $10.63 per share to Fundamental Global Reinsurance Ltd., a
Cayman Islands limited liability company and wholly-owned
subsidiary of the Company, as a capital contribution for no
consideration. Following the transfer, the Company directly holds
1,617,102 shares of FedNat common stock.
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 $15,000, 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.
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, which include 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, all of which is paid for the benefit of the Company. FGI
Funds Management, LLC, an affiliate of FGI, serves as the manager
to the Advisor but does not receive any fees for its services other
than those outlined in the Shared Services Agreement below. 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 agreed to provide certain transition accounting
services to FedNat, Maison, MMI and ClaimCor, as requested, and
FedNat agreed to arrange for certain prior employees of the Company
who became employees of 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. Although the Transition Services Agreement
remains in effect until December 2020, the Company does not
anticipate that any further services will be provided by the
Company or FedNat under the agreement going forward.
Business Going Forward
The
Company is implementing business plans 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 has formed a wholly-owned reinsurance subsidiary,
Fundamental Global Reinsurance Ltd. (“FGRe”), a Cayman Islands
limited liability company, to provide specialty property and
casualty reinsurance. FGRe has been granted a Class B (iii) insurer
license in accordance with the terms of The Insurance Law, 2010 and
underlying regulations thereto and is subject to regulation by the
Cayman Islands Monetary Authority (the “Authority”). The terms of
the license require FGRe to receive a capital infusion in the
amount of $5,000, which the Company effected in July 2020 via the
transfer of 156,000 shares of FedNat common stock from the Company
to FGRe along with approximately $3,300 in cash. The terms of the
license also require advance approval from the Authority should
FGRe wish to enter into any reinsurance agreements which are not
fully collateralized to their aggregate exposure limit. The Company
intends to write only fully collateralized agreements in the near
term.
1347
PROPERTY INSURANCE HOLDINGS, INC.
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 has formed
Fundamental Global Asset Management, LLC, 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.
Appointment
of Interim Chief Executive Officer
On
June 17, 2020, the Company’s Board appointed Larry G. Swets Jr., a
current director of the Board, as the Company’s Interim Chief
Executive Officer, effective June 17, 2020. Mr. Swets replaced D.
Kyle Cerminara as the Company’s principal executive officer. Mr.
Cerminara continues to serve as the Chairman of the Board of the
Company.
On
June 18, 2020, the Company entered into a consulting agreement (the
“Consulting Agreement”) by and between the Company and Itasca
Financial LLC (“Itasca Financial”), an advisory and investment firm
founded by Mr. Swets in 2005, with it being agreed that Mr. Swets
would be providing the services described on behalf of Itasca
Financial. The Consulting Agreement provides that Mr. Swets act as
the Company’s Interim Chief Executive Officer. As Interim Chief
Executive Officer, Mr. Swets is performing services and duties as
required by the Board, to whom he reports.
In consideration for the services, the Company is paying Itasca
Financial $46 per month during the term of the Consulting
Agreement, which will terminate on the earlier of (i) the Company’s
hiring of a new Chief Executive Officer or (ii) the six-month
anniversary of the commencement date. Mr. Swets will forgo the
compensation of board fees while serving as consultant, with the
Company to resume the payment of board and committee fees
immediately after the end of the term of the Consulting Agreement
or upon earlier termination. Mr. Swets will remain a director of
the Company if he is continued to be elected by its
shareholders.
The
Consulting Agreement contains a customary confidentiality provision
and a six-month post-termination of the Agreement restriction
against both soliciting employees and independent contractors of
the Company and inducing them to terminate their relationship with
the Company.
Impact
of the Coronavirus (COVID-19) Pandemic
We
continue to monitor the impact of the coronavirus (COVID-19) global
pandemic on our operations.
Given
the ongoing and dynamic nature of the circumstances, it is
difficult to predict the full impact of the COVID-19 pandemic on
our business. Adverse events such as health-related concerns about
working in our offices, the inability to travel and other matters
affecting the general work environment have negatively impacted and
could continue to harm our business and our business strategy. In
addition, during the pandemic, we have experienced significant
losses related to the value of our investment in shares of FedNat
common stock, and we may continue to experience such losses to the
extent the pandemic negatively impacts FedNat’s business. The
extent to which our operations and investments may continue to be
impacted by the COVID-19 pandemic will depend largely on future
developments, which are highly uncertain and cannot be accurately
predicted, including new developments concerning the severity of
the pandemic and actions by government authorities to contain the
pandemic or treat its impact. Furthermore, the impacts of a
potential worsening of global economic conditions and the continued
disruptions to and volatility in the financial markets remain
unknown. In the event of a major disruption caused by the pandemic,
we may lose the services of our employees, experience system
interruptions or face challenges accessing the capital or credit
markets, 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. Management continues
to actively monitor the impact of the pandemic on the Company’s
financial condition, liquidity, operations, industry and workforce.
Given the daily evolution of the pandemic and the global responses
to curb the spread of COVID-19, the Company is not able to estimate
the effects of COVID-19 on its results of operations, financial
condition or liquidity for fiscal year 2020 and beyond.
1347
PROPERTY INSURANCE HOLDINGS, INC.
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 valuation of fixed income and equity securities, the
valuation of net deferred income taxes, and stock-based
compensation expense. The business and economic uncertainty
resulting from the novel coronavirus (COVID-19) pandemic has made
such estimates and assumptions difficult to calculate.
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 has continued to utilize following the closing of the
Asset Sale. These items include surplus notes in the amount of
$18,000 plus 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
any of the Company’s consolidated balance sheets presented prior to
December 2, 2019. 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 three and six months ended June 30, 2019. 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 sheets prior to the closing of the Asset Sale. Pursuant to
the terms of the Purchase Agreement, this assignment of investments
was settled, in cash, just 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.
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 in Part I, Item 1 of this
report.
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.
1347
PROPERTY INSURANCE HOLDINGS, INC.
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
RSUs vest, the amount of proceeds together with the amount recorded
in additional paid-in capital is recorded in shareholders’
equity.
New
Accounting Pronouncements
See
Note 3 – “Recently Adopted and Issued Accounting Standards” to the
consolidated financial statements included in Part I, Item 1 of
this report for a discussion of recent accounting pronouncements
and their effect, if any, on the Company.
Analysis
of Financial Condition
As
of June 30, 2020 compared to December 31, 2019
Dollar
amounts included in the “Analysis of Financial Condition” are
presented in thousands, except as otherwise specified.
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
June 30, 2020 and December 31, 2019.
| |
|
June 30,
2020 |
|
|
December
31, 2019 |
|
| |
|
Carrying
Amount |
|
|
Percent of
Total |
|
|
Carrying
Amount |
|
|
Percent of
Total |
|
| Type of
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FedNat
common stock |
|
$ |
19,628 |
|
|
|
83.0 |
% |
|
$ |
29,487 |
|
|
|
88.0 |
% |
|
Limited
liability investments |
|
|
4,009 |
|
|
|
17.0 |
% |
|
|
4,005 |
|
|
|
12.0 |
% |
| Total
investments |
|
$ |
24,455 |
|
|
|
100.0 |
% |
|
$ |
33,492 |
|
|
|
100.0 |
% |
On
July 14, 2020, the Company transferred 156,000 shares of FedNat
common stock to FGRe, a
Cayman Islands limited liability company and wholly-owned
subsidiary of the Company, as a capital contribution for no
consideration. Following the transfer, the Company directly holds
1,617,102 shares of FedNat common stock. As of August 11, 2020, the
estimated fair value of the 1,773,102 shares of FedNat common stock
held in aggregate by the Company and its subsidiary was
$18,121.
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
has a total potential commitment of $844 related to these
investments, of which the two entities have drawn down
approximately $685 through June 30, 2020. 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 and the Company does not
exercise significant influence over the operations of the
investments or the underlying privately-owned companies. For the
six months ended June 30, 2020 and 2019, the Company received
profit distributions of $42 and $45 on these investments,
respectively. Furthermore, the limited partnership began the
process of returning capital back to its investors in 2020. As of
June 30, 2020, the Company has received approximately 20% of its
initial $435 investment back from the partnership.
1347
PROPERTY INSURANCE HOLDINGS, INC.
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.
As of June 30, 2020, the Company, a limited partner of the Fund,
did not have a controlling financial interest in the Fund, but
exerted significant influence over the entity’s operating and
financial policies as it owned an economic interest of
approximately 49%. Accordingly, the Company accounted for this
investment under the equity method of accounting, with any
unrealized gains or losses on the investment recorded in income.
The Company previously committed to a total potential investment of
up to $4,000 in the Fund. As of June 30, 2020, the total amount
invested in the Fund was $2,719, while the carrying amount on the
Company’s balance sheet was $3,324. On August 6, 2020, the Company
funded an additional $1,281, bringing its total investment in the
Fund to $4,000, and its economic interest in the Fund to over 50%.
Accordingly, the Company will consolidate the operations of the
Fund in Company’s financial statements beginning with the quarter
ending September 30, 2020.
Previously,
the principals of FGI waived
their share of fees associated with the Company’s investment in
Metrolina. In 2018 and 2019, the principals of FGI waived $118 and
$37, respectively, of fees that were owed by the
Company.
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 sheets as of June 30, 2020 and December 31, 2019 as part of
continuing operations. Investment income resulting from the
Company’s limited liability investments has also been included in
net investment income (loss) as part of continuing operations, on
the Company’s consolidated statements of operations for the three
and six months ended June 30, 2020 and 2019.
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 5 –
“Investments,” to the consolidated financial statements in Part I,
Item 1 of this report.
We
have not recorded a write-down for an other-than-temporary
impairment on the equity investments listed in the table
above.
Current
Income Taxes Recoverable
Current
income taxes recoverable were $1,824 as of June 30, 2020, compared
to $1,265 as of December 31, 2019, 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 taxes were a net liability of $106 as of
December 31, 2019. As of June 30, 2020, the Company had gross net
deferred tax assets of $2,004, however the Company recorded a
valuation allowance against all of its net deferred tax assets due
to the uncertain nature surrounding our ability to realize these
tax benefits in the future. The significant components of the
Company’s net deferred taxes at each date are as
follows:
| |
|
June 30,
2020
|
|
|
December 31,
2019
|
|
| Deferred income tax
assets: |
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward |
|
$ |
503 |
|
|
$ |
463 |
|
| Share-based
compensation |
|
|
233 |
|
|
|
214 |
|
| Investments |
|
|
1,261 |
|
|
|
– |
|
| Other |
|
|
7 |
|
|
|
7 |
|
| Deferred income tax
assets |
|
|
2,004 |
|
|
|
684 |
|
| Less: Valuation
allowance |
|
|
(2,004 |
) |
|
|
– |
|
| Deferred income tax
assets net of valuation allowance |
|
$ |
– |
|
|
$ |
684 |
|
| |
|
|
|
|
|
|
|
|
| Deferred income tax
liabilities: |
|
|
|
|
|
|
|
|
| Investments |
|
$ |
– |
|
|
$ |
789 |
|
| Other |
|
|
– |
|
|
|
1 |
|
| Deferred income tax
liabilities |
|
$ |
– |
|
|
$ |
790 |
|
| |
|
|
|
|
|
|
|
|
| Net deferred income
tax asset (liability) |
|
$ |
– |
|
|
$ |
(106 |
) |
1347
PROPERTY INSURANCE HOLDINGS, INC.
Other
Assets
Other
assets increased $534, to $722 as of June 30, 2020, compared to
$188 as of December 31, 2019. The largest driver of the increase
was due to an increase in the Company’s prepaid expenses, due to
the binding of the Company’s insurance policies, most of which run
from April to April of each year. The major components of other
assets, and the change therein, are as follows:
| |
|
June 30,
2020
|
|
|
December
31, 2019 |
|
|
Change |
|
| Other
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| Amount due under
Investment Advisory Agreement with FedNat |
|
$ |
25 |
|
|
$ |
35 |
|
|
$ |
(10 |
) |
| Amount due under
Transition Services Agreement with FedNat |
|
|
– |
|
|
|
8 |
|
|
|
(8 |
) |
| Prepaid
expenses |
|
|
693 |
|
|
|
142 |
|
|
|
551 |
|
| Other |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
| Total |
|
$ |
722 |
|
|
$ |
188 |
|
|
$ |
534 |
|
Related
Party Transactions
Dollar
amounts included in the Related Party Transactions section below
are presented in thousands, except as otherwise
specified.
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 June 30, 2020. 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.
As of
June 30, 2020, 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 June 30,
2020, the Company’s investment represents a 49% ownership stake in
the Fund. The principals of FGI waived their share of fees
associated with the Company’s investment in Metrolina. In 2018 and
2019, the principals of FGI waived $118 and $37, respectively, of
fees that were owed by the Company.
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, which include 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, all of which is paid for the benefit of the Company. FGI
Funds Management, LLC, an affiliate of FGI, serves as the manager
to the Advisor but does not receive any fees for its services other
than those outlined in the Shared Services Agreement below. The
term of the Investment Advisory Agreement is five years.
Shared
Services Agreement
On
March 31, 2020, the Company entered into a Shared Services
Agreement (the “Shared Services Agreement”) with Fundamental Global
Management, LLC (“FGM”), an affiliate of FGI, pursuant to which FGM
provides the Company with certain services related to the
day-to-day management of the Company, including assisting with
regulatory compliance, evaluating the Company’s financial and
operational performance, providing a management team to supplement
the executive officers of the Company, and such other services
consistent with those customarily performed by executive officers
and employees of a public company (collectively, the “Services”).
In exchange for the Services, the Company pays FGM a fee of $456
per quarter (the “Shared Services Fee”), plus reimbursement of
expenses incurred by FGM in connection with the performance of the
Services, subject to certain limitations approved by the Company’s
Board of Directors or the Compensation Committee from time to
time.
The
Shared Services Agreement has an initial term of three years, and
thereafter renews automatically for successive one-year terms
unless terminated in accordance with its terms. The Shared Services
Agreement may be terminated by FGM or by the Company, by a vote of
the Company’s independent directors, at the end of the initial or
automatic renewal term upon 120 days’ notice, subject to payment by
the Company of certain costs incurred by FGM to wind down the
provision of Services and, in the case of a termination by the
Company without cause, payment of a termination fee equal to the
Shared Services Fee paid for the two quarters preceding
termination.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Joint
Venture Agreement
On
March 31, 2020, the Company entered into the Limited Liability
Company Agreement (the “LLC Agreement”) of Fundamental Global Asset
Management, LLC (“FGAM”), a newly-formed joint venture owned 50% by
each of the Company and FGI Funds Management, LLC, an affiliate of
FGI (“FGIFM” and together with the Company, each a “Member” and
collectively, the “Members”). The purpose of FGAM is to sponsor,
capitalize and provide strategic advice to investment managers
(“Underlying Managers”) in connection with the launch and/or growth
of their asset management business and the investment products they
sponsor (each, a “Sponsored Fund”).
FGAM
is governed by a Board of Managers consisting of four managers, two
of which have been appointed by each Member. The Company has
appointed two of its independent directors to the Board of Managers
of FGAM. Certain major actions, including any decision to sponsor a
new investment manager, will require the prior consent of both
Members.
The
LLC Agreement provides that each Member will contribute its
proportionate interest of the amount of capital determined by the
Board of Managers to be required to operate FGAM (“Operating
Capital”). Unless otherwise agreed, the Company will contribute the
capital required to be contributed to a Sponsored Fund (“Seed
Capital”), as well as any amounts required to be contributed to an
Underlying Manager for working capital purposes (“Working
Capital”). Proceeds attributable to a contribution, directly or
indirectly through an Underlying Manager, to a Sponsored Fund will
be distributed to the Members in proportion to their capital
contributions in respect of Seed Capital. All other proceeds
received by FGAM attributable to a Sponsored Fund, including
proceeds from revenue shares or ownership interests in Underlying
Managers, will be distributed as follows: (i) first, to the Members
until they have received cumulative distributions up to an amount
of the Operating Capital funded by them; (ii) second, to the
Members until they have received cumulative distributions up to an
amount of Working Capital previously funded by them, plus a return
of 5% per annum; and (iii) third, to the Members in proportion to
their percentage interests.
In
addition, neither FGIFM nor any of its affiliates may participate
in a Sponsored Fund Transaction other than through FGAM unless
FGIFM has first presented the opportunity to FGAM and either the
Board of Managers or the Company has rejected such opportunity.
Notwithstanding the foregoing, if such opportunity requires in
excess of $5,000, FGIFM may offer amounts in excess of $5,000 to a
third party, subject to certain conditions.
Shareholders’
Equity
Dollar
amounts included in Shareholders’ Equity are presented in
thousands, except as otherwise specified.
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 are 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 each of the quarters ended
June 30, 2020 and 2019, the Board of Directors declared dividends
totaling $350, 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
Series A Preferred Stock per year. The Company’s Board of Directors
declared the third quarter 2020 dividend on the shares of Series A
Preferred Stock on August 12, 2020.
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 have been 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.
Change
in Shareholders’ Equity
The
table below presents the primary drivers behind the changes to
total shareholders’ equity for the six months ended June 30, 2020
and 2019.
| |
|
Preferred
Shares Outstanding |
|
|
Common
Shares Outstanding |
|
|
Treasury
Shares |
|
|
Total
Shareholders’
Equity
|
|
| Balance, January 1,
2019 |
|
|
700,000 |
|
|
|
6,012,764 |
|
|
|
151,359 |
|
|
$ |
62,747 |
|
| Adoption of new
accounting standards |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10 |
|
| Stock compensation
expense |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
103 |
|
| Dividends declared on
Series A Preferred Shares |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(700 |
) |
| Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(4,434 |
) |
| Unrealized gains on
investment portfolio (net of income taxes) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,875 |
|
| Balance, June 30,
2019 |
|
|
700,000 |
|
|
|
6,012,764 |
|
|
|
151,359 |
|
|
$ |
59,601 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, January 1,
2020 |
|
|
700,000 |
|
|
|
6,065,948 |
|
|
|
151,359 |
|
|
$ |
62,915 |
|
| Stock compensation
expense |
|
|
– |
|
|
|
2,158 |
|
|
|
– |
|
|
|
104 |
|
| Dividends declared on
Series A Preferred Stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(700 |
) |
| Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(10,868 |
) |
| Balance, June 30,
2020 |
|
|
700,000 |
|
|
|
6,068,106 |
|
|
|
151,359 |
|
|
$ |
51,451 |
|
Results
of Operations
Three
and Six Months Ended June 30, 2020 Compared with Three and Six
Months Ended June 30, 2019
Dollar
amounts included in the Results of Operations are presented in
thousands, except as otherwise specified.
Net
Investment Income (Loss)
Net
investment income (loss) decreased to $(571) from $277 for the
three months ended June 30, 2020 and 2019, respectively, and to
$(9,277) from $734 for the six months ended June 30, 2020 and 2019,
respectively. The decrease for both periods was primarily the
result of unrealized holding losses on the 1,773,102 shares of
FedNat common stock which the Company received upon the closing of
the Asset Sale. Net investment income (loss) for the three and six
months ended June 30, 2020 and 2019 is as follows:
| |
|
Three
months ended June 30, |
|
|
Six months
ended June 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Investment
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding loss on FNHC common stock |
|
$ |
(726 |
) |
|
$ |
– |
|
|
$ |
(9,858 |
) |
|
|
– |
|
| Dividend income from
FNHC common stock |
|
|
159 |
|
|
|
– |
|
|
|
319 |
|
|
|
– |
|
| Income from limited
liability investments |
|
|
– |
|
|
|
45 |
|
|
|
137 |
|
|
|
45 |
|
| Loss on assignment of
limited liability investments |
|
|
– |
|
|
|
(239 |
) |
|
|
– |
|
|
|
(239 |
) |
| Interest on surplus
notes issued by Maison |
|
|
– |
|
|
|
464 |
|
|
|
– |
|
|
|
913 |
|
| Other |
|
|
(4 |
) |
|
|
7 |
|
|
|
125 |
|
|
|
15 |
|
| Net investment income
(loss) |
|
$ |
(571 |
) |
|
$ |
277 |
|
|
$ |
(9,277 |
) |
|
$ |
734 |
|
The
Company has also included investment income associated with its
fixed income and equity securities portfolio in discontinued
operations, net of income taxes on the Company’s consolidated
statement of operations for the three and six months ended June 30,
2019 as this portfolio was sold by the Company in connection with
the Asset Sale on December 2, 2019. See Note 2 – “Significant
Accounting Policies” to the consolidated financial statements in
Part I, Item 1 of this report for additional
information.
Other
Income
Other
income was $54 compared to $0 for the six months ended June 30,
2020 and 2019, respectively, and is comprised of fees earned under
the Investment Advisory and Transition Services Agreements between
the Company and FedNat.
1347
PROPERTY INSURANCE HOLDINGS, INC.
General
and Administrative Expenses
General
and administrative expenses increased by $669 to $2,310 for the six
months ended June 30, 2020, compared to $1,641 for the six months
ended June 30, 2019. For the three months ended June 30, 2020 and
2019, general and administrative expenses were $1,505 and $688,
respectively. The increase was primarily due to employee and
facility costs, including the $456 quarterly fee paid to FGM under
the Shares Services Agreement discussed under the heading “Related
Party Transaction’ above. These costs have been included in general
and administrative expense for the three and six months ended June
30, 2020, while employee and facility costs have been presented as
part of discontinued operations for three and six months ended June
30, 2019. Professional fees incurred in the current quarter
associated with the formulation and regulatory approval of FGRe,
our Cayman Islands-based reinsurance subsidiary, also account for a
portion of the three- and- six month increase.
Income
Tax Expense
Our
effective tax rate varies from the statutory federal income tax
rates as shown in the following table.
| |
|
Three
months ended June 30, |
|
|
Six months
ended June 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Income tax expense
(benefit) at statutory income tax rate of 21% |
|
$ |
(431 |
) |
|
$ |
(1,185 |
) |
|
$ |
(2,422 |
) |
|
$ |
(1,155 |
) |
| Valuation allowance
for deferred tax assets deemed unrealizable |
|
|
967 |
|
|
|
– |
|
|
|
2,004 |
|
|
|
– |
|
| Rate differential due
to CARES Act |
|
|
– |
|
|
|
– |
|
|
|
(214 |
) |
|
|
– |
|
| State income tax (net
of federal tax benefit) |
|
|
– |
|
|
|
66 |
|
|
|
– |
|
|
|
43 |
|
| Other |
|
|
(16 |
) |
|
|
5 |
|
|
|
(33 |
) |
|
|
45 |
|
| Income tax expense
(benefit) |
|
$ |
520 |
|
|
$ |
(1,114 |
) |
|
$ |
(665 |
) |
|
$ |
(1,067 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense
(benefit)–from continuing operations |
|
$ |
520 |
|
|
$ |
(83 |
) |
|
$ |
(665 |
) |
|
$ |
(150 |
) |
| Income tax
benefit–from discontinued operations |
|
$ |
– |
|
|
$ |
(1,031 |
) |
|
$ |
– |
|
|
$ |
(917 |
) |
As a
result of the passage of the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”), the Company recorded a credit of
$214 against its income tax expense for the quarter ended March 31,
2020, due to a provision in the CARES Act which allows for the
five-year carryback of net operating losses. Prior to the passage
of the CARES Act, these net operating losses were only available to
offset future taxable income generated by the Company.
For
the six months ended June 30, 2020, the Company recorded an
unrealized loss of $9,858 on its investment of FedNat common stock,
resulting in a deferred tax asset of approximately $1,300. As of
June 30, 2020, the Company has a gross net deferred tax asset of
$2,004, however the Company has recorded a valuation allowance
against all of its deferred tax assets due to the uncertain nature
surrounding our ability to realize these tax benefits in the
future, resulting in a net deferred income tax asset of $0 as of
June 30, 2020.
Net
Income (Loss)
Net
income (loss) for the three and six months ended June 30, 2020 and
2019 is as shown in the following table.
| |
|
Three
months ended June 30, |
|
|
Six months
ended June 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| Net loss from
continuing operations |
|
$ |
(2,571 |
) |
|
$ |
(328 |
) |
|
$ |
(10,868 |
) |
|
$ |
(757 |
) |
| Loss from discontinued
operations, net of income taxes |
|
|
– |
|
|
|
(4,204 |
) |
|
|
– |
|
|
|
(3,677 |
) |
| Net loss |
|
$ |
(2,571 |
) |
|
$ |
(4,532 |
) |
|
$ |
(10,868 |
) |
|
$ |
(4,434 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted loss per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing
operations |
|
$ |
(0.48 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.24 |
) |
|
Discontinued
operations |
|
|
– |
|
|
|
(0.70 |
) |
|
|
– |
|
|
|
(0.61 |
) |
| Attributable to common
shareholders |
|
$ |
(0.48 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.91 |
) |
|
$ |
(0.85 |
) |
Liquidity
and Capital Resources
Dollar
amounts included in the Liquidity and Capital Resources section 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 six months ended June 30, 2020 and 2019.
| |
|
Six months
ended June 30, |
|
| |
|
2020 |
|
|
2019 |
|
| Summary of Cash
Flows |
|
|
|
|
|
|
| Cash and cash
equivalents – January 1 |
|
$ |
28,509 |
|
|
$ |
30,902 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided
(used) by operating activities |
|
|
(2,262 |
) |
|
|
19 |
|
| Net cash provided by
investing activities |
|
|
91 |
|
|
|
2,663 |
|
| Net cash used by
financing activities |
|
|
(700 |
) |
|
|
(721 |
) |
| Net decrease in cash
and cash equivalents |
|
$ |
(2,871 |
) |
|
$ |
1,961 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash
equivalents – June 30 |
|
$ |
25,638 |
|
|
$ |
32,863 |
|
1347
PROPERTY INSURANCE HOLDINGS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company’s management performed an evaluation under the supervision
and with the participation of the Company’s principal executive
officer and principal financial officer of the effectiveness of the
design and operation of the Company’s disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) or 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of June 30, 2020. Based upon this
evaluation, the Company’s principal executive officer and principal
financial officer concluded that the Company’s disclosure controls
and procedures were effective as of the end of the period covered
by this Quarterly Report on Form 10-Q to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms; and (ii) accumulated and communicated to the
Company’s management, including its principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting
identified in connection with this evaluation that occurred during
the quarter ended June 30, 2020 that materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER
INFORMATION
ITEM 1. 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 1A. RISK FACTORS
Many
of the risks identified in Part I, Item A. Risk Factors to our
annual report on Form 10-K for the year ended December 31, 2019,
filed with the SEC on March 30, 2020 (the “2019 Form 10-K”), are,
and will be further, exacerbated by the impact of the COVID-19
pandemic and the actions being taken by governmental entities,
businesses, individuals and others in response to the pandemic.
Other than as set forth below, there have been no material changes
to the risk factors previously disclosed in Part I, Item 1A. Risk
Factors to the 2019 Form 10-K.
Unfavorable global economic conditions, including as a result of
the COVID-19 pandemic, have adversely effected and could continue
to adversely affect our business, financial condition or results of
operations.
Our
business, financial condition and results of operations, as well as
the implementation of our new business strategy, have been
adversely affected by general conditions in the global economy that
are outside of our control, including adverse conditions related to
the current COVID-19 coronavirus pandemic (“COVID-19”). The
COVID-19 pandemic and associated responsive measures taken by
international, federal, state and local governments have resulted
in, and continue to result in, significant disruption of the global
economy, leading to extreme volatility in global financial markets
and disruptions to capital and credit markets. Economists are
forecasting that the economic downturn resulting from the pandemic
may be of an extended duration and that a global recession has
occurred or may occur in the future. There is also continued
uncertainty surrounding when and how the global economy may be
fully reopened due to the rapidly changing nature of the pandemic.
A severe or prolonged economic downturn or recession could result
in a variety of risks to our business and delay the implementation
of our new business strategy.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Given
the ongoing and dynamic nature of the circumstances, it is
difficult to predict the full impact of the COVID-19 pandemic on
our business. Adverse events such as health-related concerns about
working in our offices, the inability to travel and other matters
affecting the general work environment have harmed and could
continue to harm our business and our business strategy. In
addition, during the pandemic, we have experienced significant
losses related to the value of our investment in shares of FedNat
common stock, and we may continue to experience such losses to the
extent the pandemic negatively impacts FedNat’s business. The
extent to which our operations and investments may continue to be
impacted by the COVID-19 pandemic will depend largely on future
developments, which are highly uncertain and cannot be accurately
predicted, including developments related to the severity of the
pandemic and actions by government authorities to contain the
pandemic or treat its impact. Furthermore, the impacts of a
potential worsening of global economic conditions and the continued
disruptions to and volatility in the financial markets remain
unknown. In the event of a major disruption caused by the pandemic,
we may lose the services of our employees, experience system
interruptions or face challenges accessing the capital or credit
markets, 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.
Management
continues to actively monitor the impact of the pandemic on the
Company’s financial condition, liquidity, operations, industry and
workforce. Given the daily evolution of the pandemic and the global
responses to curb the spread of COVID-19, the Company is not able
to estimate the effects of COVID-19 on its results of operations,
financial condition or liquidity for fiscal year 2020 and
beyond.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
1347
PROPERTY INSURANCE HOLDINGS, INC.
ITEM 6. EXHIBITS
|
Exhibit |
|
Description |
|
3.1 |
|
Third
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 of Registrant’s Registration Statement on
Form S-1/A filed with the Commission on January 30,
2014). |
|
3.2 |
|
Certificate
of Amendment of Third Amended and Restated Certificate of
Incorporation, effective December 17, 2019 (incorporated by
reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K
filed with the Commission on December 17, 2019). |
|
3.3 |
|
Third
Amended and Restated Bylaws of 1347 Property Insurance Holdings,
Inc. (incorporated by reference to Exhibit 3.3 of Registrant’s
Annual Report on Form 10-K filed with the Commission on March 30,
2020). |
|
3.4 |
|
Certificate
of Designations of Cumulative Preferred Stock, Series A, of 1347
Property Insurance Holdings, Inc. (incorporated by reference to
Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with
the Commission on February 26, 2018). |
|
10.1*† |
|
Consulting
Agreement, dated June 18, 2020, by and between 1347 Property
Insurance Holdings, Inc. and Itasca Financial LLC. |
|
31.1* |
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Exchange Act. |
|
31.2* |
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Exchange Act. |
|
32.1** |
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
32.2** |
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
| 101.INS* |
|
XBRL
Instance Document. |
| 101.SCH* |
|
XBRL
Taxonomy Extension Schema. |
| 101.CAL* |
|
XBRL
Taxonomy Extension Calculation Linkbase. |
| 101.DEF* |
|
XBRL
Taxonomy Extension Definition Linkbase. |
| 101.LAB* |
|
XBRL
Taxonomy Extension Label Linkbase. |
| 101.PRE* |
|
XBRL
Taxonomy Extension Presentation Linkbase. |
*
Filed herewith.
**
Furnished herewith.
†
Denotes management contract or compensatory plan or
arrangement
1347
PROPERTY INSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
| |
|
1347
PROPERTY INSURANCE HOLDINGS, INC. |
|
|
|
|
|
|
Date: |
August
14, 2020 |
By: |
/s/
Larry G. Swets, Jr. |
| |
|
|
Larry
G. Swets, Jr., Interim Chief Executive Officer |
| |
|
|
(principal
executive officer) |
| |
|
|
|
|
Date: |
August
14, 2020 |
By: |
/s/
John S. Hill |
| |
|
|
John
S. Hill, Executive Vice President, Secretary and Chief Financial
Officer |
| |
|
|
(principal
financial officer and principal accounting officer) |
