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 an
insurance holding company 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 September 30, 2019, KFSI and its affiliates held warrants that, if exercised, would cause KFSI and its affiliates to hold
an approximate 20% ownership interest in our common stock. In addition, as of September 30, 2019, Fundamental Global Investors,
LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara,
Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman
of our Board of Directors, serves as President, Co-Founder and Partner of FGI.
We
have four wholly owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”,
ClaimCor, LLC, or “ClaimCor”, and PIH Re, Ltd, or “PIH Re.”
Through
Maison, we began providing property and casualty insurance to individuals in Louisiana in December 2012. In September 2015, Maison
began writing manufactured home policies in the State of Texas on a direct basis, and in December 2017, Maison began writing wind/hail
only policies in Florida via the assumption of policies from Florida Citizens Property Insurance Corporation (“FL Citizens”).
Our current insurance offerings in Louisiana, Texas, and Florida include homeowners’ insurance, manufactured home insurance
and dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new
policies through a network of independent insurance agencies. We refer to the policies we write through independent agencies as
voluntary policies versus those policies we have assumed through state-run insurers such as FL Citizens, which we refer to as
take-out policies.
Maison
has participated in multiple take-outs from both FL Citizens, and Louisiana Citizens Property Insurance Corporation, or “LA
Citizens”, as well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association, or “TWIA”,
which occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, are able to assume
insurance policies written by FL Citizens, LA Citizens and TWIA. The majority of policies which we have obtained through LA Citizens
as well as all of the policies we have obtained through FL Citizens and TWIA cover losses arising only from wind and hail. Prior
to our assumption of policies, these policyholders may not have been able to obtain such coverage from any other marketplace.
On
August 1, 2018 House Bill No. 333 (“HB 333”) became effective, which amended the law with respect to the depopulation
of policies from LA Citizens. In July 2018, the Company was notified by LA Citizens of the number of policies which would be available
for assumption by all insurers electing to participate in the December 1, 2018 depopulation under the new law. Due to the significant
reduction of policies available when compared to those available for assumption in prior years, the Company did not participate
in the December 1, 2018 assumption of policies from LA Citizens. The Company does not expect to participate in the December 1,
2019 LA Citizens assumption process.
MMI
serves as our management services subsidiary, known as a managing general agency, and provides underwriting, policy administration,
claims administration, marketing, accounting and other management services to Maison. MMI contracts primarily with independent
agencies for policy sales and services, and contracts with an independent third-party for policy administration services. As a
managing general agency, MMI is licensed by, and subject to, the regulatory oversight of the Louisiana Department of Insurance
(“LDI”), the Texas Department of Insurance (“TDI”) and the Florida Office of Insurance Regulation (“FOIR”).
MMI earns commissions on a portion of the premiums Maison writes, as well as a policy fee on each direct policy Maison issues.
ClaimCor
is a claim and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor, and
through various third-party claims adjusting companies during times of high volume, so that we may provide responsive claims handling
service when catastrophe events occur which impact many of our policyholders. We have the ultimate authority over the claims handling
process, while the agencies that we appoint have no authority to settle our claims or otherwise exercise control over the claims
process.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
PIH
Re is the Company’s Bermuda-domiciled reinsurance subsidiary which was registered on December 6, 2018. PIH Re is still formulating
its business plan and has not been party to any reinsurance transaction since its formation.
As
further discussed in Note 2 below, the Company has entered into an agreement to sell its insurance operations which consist of
Maison, MMI and ClaimCor, and currently expects to consummate the sale transaction in December 2019. The Company does not intend
to liquidate following the sale. The Company’s Board is currently evaluating alternatives for the use of the cash consideration
to be received as a result of the sale, which are expected to include using a portion of the cash consideration to conduct the
business of PIH Re, and launching a new growth strategy focused on reinsurance, investment management and new investment opportunities.
The Company may also form an additional reinsurance subsidiary in a suitable jurisdiction.
2.
Equity Purchase Agreement with FedNat Holding Company
On
February 25, 2019, the Company, together with Maison, MMI and ClaimCor, entered into an Equity Purchase Agreement with FedNat
Holding Company (“FedNat”), a Florida corporation, providing for the sale of all of the issued and outstanding equity
of Maison, MMI and ClaimCor to FedNat, on the terms and subject to the conditions set forth in the agreement (the “Asset
Sale”). As consideration for the sale of Maison, MMI and ClaimCor, FedNat has agreed to pay the Company $51,000, consisting
of $25,500 in cash and $25,500 in FedNat common stock. In addition, upon closing of the transaction, up to $18,000 of outstanding
surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, will be repaid to the Company.
The
Company’s shareholders have approved the Asset Sale. The Company has also received the regulatory approval required from
the LDI and FOIR in order to consummate the Asset Sale. The regulatory approvals are contingent on compliance with consent orders
issued by the insurance regulators. The Company currently anticipates that the Asset Sale will close in December 2019.
As
of June 30, 2019, the Company concluded that the planned sale of Maison, MMI and ClaimCor has met the criteria for assets held
for sale as set forth in ASC 205-20 – Discontinued Operations. Accordingly, the Company has classified the operations
of Maison, MMI and ClaimCor (collectively referred to as the “disposal group”) as discontinued operations for all
periods presented in this report.
The
following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued
operations to total assets and liabilities of the disposal group classified as held for sale that are presented separately in
the Company’s consolidated balance sheet as of September 30, 2019 and December 31, 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
(unaudited)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Carrying amounts of assets included as part of discontinued operations
|
|
|
|
|
|
|
|
|
Fixed income securities, at fair value (amortized cost of $67,377 and $77,366, respectively
|
|
$
|
68,577
|
|
|
$
|
76,310
|
|
Equity investments, at fair value (cost of $- and $3,130, respectively)
|
|
|
–
|
|
|
|
3,263
|
|
Other investments
|
|
|
904
|
|
|
|
774
|
|
Cash and cash equivalents
|
|
|
34,763
|
|
|
|
27,236
|
|
Deferred policy acquisition costs
|
|
|
9,815
|
|
|
|
9,111
|
|
Premiums receivable, net of allowance of $64 and $50, respectively
|
|
|
2,911
|
|
|
|
7,720
|
|
Ceded unearned premiums
|
|
|
2,126
|
|
|
|
6,525
|
|
Reinsurance recoverable on paid losses
|
|
|
2,401
|
|
|
|
530
|
|
Reinsurance recoverable on loss reserves
|
|
|
6,946
|
|
|
|
5,661
|
|
Current income taxes recoverable
|
|
|
3,704
|
|
|
|
2,051
|
|
Deferred tax asset, net
|
|
|
1,909
|
|
|
|
1,014
|
|
Due from affiliate
|
|
|
3,108
|
|
|
|
2,698
|
|
Other assets
|
|
|
1,536
|
|
|
|
1,676
|
|
Total assets of the disposal group classified as held for sale in the Company’s consolidated balance sheet
|
|
$
|
138,700
|
|
|
$
|
144,569
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of liabilities included as part of discontinued operations
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
17,769
|
|
|
$
|
15,151
|
|
Unearned premium reserves
|
|
|
52,952
|
|
|
|
51,907
|
|
Ceded reinsurance premiums payable
|
|
|
3,490
|
|
|
|
9,495
|
|
Agency commissions payable
|
|
|
962
|
|
|
|
802
|
|
Premiums collected in advance
|
|
|
3,803
|
|
|
|
1,840
|
|
Surplus notes plus interest due to affiliate
|
|
|
18,961
|
|
|
|
18,244
|
|
Accrued premium taxes and assessments
|
|
|
2,260
|
|
|
|
3,059
|
|
Other liabilities
|
|
|
2,612
|
|
|
|
2,821
|
|
Total liabilities of the disposal group classified as held for sale in the Company’s consolidated balance sheet
|
|
$
|
102,809
|
|
|
$
|
103,319
|
|
The
following table presents a reconciliation of the major classes of line items constituting pretax profit (loss) of discontinued
operations to the after-tax profit (loss) of discontinued operations that are presented in the Company’s consolidated statement
of operations for the three- and nine-month periods ended September 30, 2019 and 2018.
(unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Major classes of line items constituting pretax profit (loss) of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
13,195
|
|
|
$
|
13,461
|
|
|
$
|
40,858
|
|
|
$
|
39,401
|
|
Net investment income
|
|
|
1,167
|
|
|
|
403
|
|
|
|
2,960
|
|
|
|
1,208
|
|
Other income
|
|
|
778
|
|
|
|
530
|
|
|
|
2,345
|
|
|
|
1,586
|
|
Net losses and loss adjustment expenses
|
|
|
(12,251
|
)
|
|
|
(8,656
|
)
|
|
|
(32,977
|
)
|
|
|
(19,774
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
(4,375
|
)
|
|
|
(3,929
|
)
|
|
|
(13,048
|
)
|
|
|
(10,841
|
)
|
General and administrative expenses
|
|
|
(2,344
|
)
|
|
|
(3,031
|
)
|
|
|
(7,649
|
)
|
|
|
(8,908
|
)
|
Interest expense on surplus notes due to affiliate
|
|
|
(478
|
)
|
|
|
(275
|
)
|
|
|
(1,391
|
)
|
|
|
(810
|
)
|
Pretax profit (loss) of discontinued operations
|
|
|
(4,308
|
)
|
|
|
(1,497
|
)
|
|
|
(8,902
|
)
|
|
|
1,862
|
|
Income tax expense (benefit)
|
|
|
(833
|
)
|
|
|
(321
|
)
|
|
|
(1,750
|
)
|
|
|
401
|
|
Total profit (loss) on discontinued operations as
presented in the Company’s statement of operations
|
|
$
|
(3,475
|
)
|
|
$
|
(1,176
|
)
|
|
$
|
(7,152
|
)
|
|
$
|
1,461
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
3.
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:
In
light of the Company’s receipt of the stockholder approval and regulatory approval required to consummate the sale of all
of the issued and outstanding equity of Maison, MMI and ClaimCor, 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 or are expected to occur between discontinued operations and those operations which the Company intends
to continue to utilize following the consummation of the Asset Sale. These items include surplus notes in the amount of $18,000
plus approximately $1,157 in unpaid interest outstanding on these notes, which have been issued by Maison to the Company, and
have been reflected as both an asset of continuing operations and liability of discontinued operations on the Company’s
consolidated balance sheets as of September 30, 2019 and December 31, 2018. Interest associated with these surplus notes has also
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 nine months ended September 30, 2019
and 2018. Upon closing of the Asset Sale, up to $18,000 in surplus notes plus accrued but unpaid interest (other than default
rates of interest, penalties, late fees and other related charges), will be repaid to the Company. Similarly, amounts due from
the Company to Maison upon the assignment of certain of Maison’s investments to the Company have been reflected as an asset
of continuing operations under the heading “Limited liability investments”, as well as a corresponding liability under
the heading “Due to affiliates” on the Company’s consolidated balance sheet as of September 30, 2019 and December
31, 2018. Pursuant to the terms of the Asset Sale, this assignment of investments is to be settled, in cash, prior to closing
of the transaction. All other significant intercompany balances and transactions have been eliminated upon consolidation.
The
Use of Estimates in the Preparation of Consolidated Financial Statements:
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates
of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual
results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined.
The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision
for loss and loss adjustment expense reserves (as well as the associated reinsurance recoverable on those reserves), the valuation
of fixed income and equity securities, the valuation of net deferred income taxes, the valuation of various securities we have
issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred
policy acquisition costs and stock-based compensation expense.
Investments:
Investments
in fixed income and equity securities are classified as available-for-sale and reported at estimated fair value. Unrealized gains
and losses on fixed income securities are included in accumulated other comprehensive income (loss), net of tax, until sold or
an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses are transferred to
the consolidated statement of operations. 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 available-for-sale equity securities
through income. See Note 4 – Recently Adopted and Issued Accounting Standards for additional information. Our fixed income
and equity securities are held by the Company’s insurance subsidiary, Maison, and accordingly have been listed as part of
assets of discontinued operations on the Company’s consolidated balance sheet as of September 30, 2019 and December 31,
2018. As of September 30, 2019, the Company has sold its equity securities, other than the limited liability investments discussed
below.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Limited
liability investments include investments in a limited partnership and a limited liability company in which the Company’s
interests are deemed minor and therefore, are accounted for under the cost method of accounting which approximates the fair value
of these investments. Also included in limited liability investments is an investment where the Company is a limited partner in
a limited partnership, which we have determined to be a variable interest entity (VIE), in which the Company is not the primary
beneficiary. The Company does not have a controlling financial interest in the limited partnership but exerts significant influence
over the entity’s operating and financial policies as it owns an economic interest of approximately 47%. Accordingly, the
Company has accounted for this investment under the equity method of accounting. See Note 13 – Related Party Transactions
for additional information on the Company’s investment in the VIE.
Other
investments consist of short-term investments, with original maturities between three months and one year, reported at cost, which
approximates estimated fair value due to their short-term nature. Other investments also include a fixed rate certificate of deposit
with an original maturity of 15 months. These investments are held by the Company’s insurance subsidiary, Maison and accordingly
have been listed as part of assets of discontinued operations on the Company’s consolidated balance sheet as of September
30, 2019 and December 31, 2018.
Realized
gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.
Interest
income is included in net investment income and is recorded as it accrues.
The
Company accounts for its investments using trade date accounting.
The
Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment.
Impairment is charged to the consolidated statement of operations if the fair value of the instrument falls below its amortized
cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary
include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects
of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for
any anticipated recovery.
Cash
and Cash Equivalents:
Cash
and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
Premiums
Receivable:
Premiums
receivable include premium balances due and uncollected as well as installment premiums not yet due from our independent agencies
and insureds. Premiums receivable are reported net of an estimated allowance for credit losses.
Reinsurance:
Reinsurance
premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as
a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for
that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Deferred
Policy Acquisition Costs:
The
Company defers commissions, premium taxes and other underwriting and agency expenses that are directly related to successful efforts
to acquire new or existing insurance policies to the extent they are considered recoverable. Costs deferred on insurance products
are amortized over the period in which premiums are earned. Costs associated with unsuccessful efforts or costs that cannot be
tied directly to a successful policy acquisition are expensed as incurred. The method followed in determining the deferred policy
acquisition costs limits the deferral to its realizable value by giving consideration to estimated future loss, loss adjustment,
and maintenance expenses to be incurred as revenues are earned. Changes in estimates, if any, are recorded in the accounting period
in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy
acquisition costs.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 carryforwards. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits
is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes
will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable
or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense (benefit).
Property
and Equipment:
Property
and equipment is reported at historical cost less accumulated depreciation. Depreciation of property and equipment is recorded
on a straight-line basis over estimated useful lives which range from seven years for furniture, five years for vehicles, three
years for computer equipment, and the shorter of estimated useful life or the term of the lease for leased property and leasehold
improvements. Property and equipment is estimated to have no salvage value at its useful life-end with the exception of leased
property where we have guaranteed a residual value at the end of the lease. Accordingly, leased property is estimated to have
a salvage value equal to the guaranteed residual value at the termination of the lease.
Rent
expense for the Company’s office leases is recognized on a straight-line basis over the term of the lease. Rent expense
was $380 and $324 for the nine months ended September 30, 2019 and 2018, respectively.
Loss
and Loss Adjustment Expense Reserves:
Loss
and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not yet reported
loss events and the related estimated loss adjustment expenses. The Company performs a continuing review of its loss and loss
adjustment expense reserves, including its reserving techniques and its reinsurance. The loss and loss adjustment expense reserves
are also reviewed at minimum, on an annual basis by qualified third-party actuaries. Since the loss and loss adjustment expense
reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of income in the period in which the estimates are changed. Such changes in estimates
could occur in a future period and may be material to the Company’s results of operations and financial position in such
period.
Concentration
of Credit Risk:
Financial
instruments which potentially expose the Company to concentrations of credit risk include investments, cash, premiums receivable,
and amounts due from reinsurers on losses incurred. The Company maintains its cash with two major U.S. domestic banking institutions
and one regional bank headquartered in the Eastern U.S. Such amounts are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250 per institution. At September 30, 2019 the Company held funds in excess of these FDIC insured
amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses
related to these deposits.
The
Company has not experienced significant losses related to premiums receivable from its policyholders and management believes that
amounts provided as an allowance for credit losses is adequate.
The
Company has not experienced any losses on amounts due from reinsurers. In order to limit the credit risk associated with amounts
potentially due from reinsurers, the Company uses several different reinsurers, most of which have an A.M. Best Rating of A- (Excellent)
or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution
under a trust agreement for the Company’s benefit.
The
Company also has risk associated with the lack of geographic diversification because Maison exclusively underwrites policies in
Louisiana, Texas, and Florida. Maison insures personal property located in 63 of the 64 parishes in Louisiana, 212 of the 254
counties which comprise the State of Texas, and 31 of the 67 counties which comprise the State of Florida. As of September 30,
2019, these policies are concentrated within Saint Tammany Parish, LA (5.6%), Jefferson Parish, LA (5.6%), and Tarrant County,
TX (5.0%); all of which are expressed as a percentage of our total direct and assumed policies in all states. No other parish
in Louisiana nor county in Texas or Florida individually has over 5.0% of our total direct and assumed policies as of September
30, 2019.
Revenue
Recognition:
Premium
revenue is recognized on a pro rata basis over the term of the respective policy contract. Unearned premium reserves represent
the portion of premium written that is applicable to the unexpired term of policies in force.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Service
charges on installment premiums are recognized as income upon receipt of related installment payments and are reflected in other
income.
Revenue
from policy fees is deferred and recognized over the term of the respective policy period, with revenue reflected in other income.
Any
customer payment received is applied first to any service charge or policy fee due, with the remaining amount applied toward any
premium due.
Ceded
premiums are charged to income over the applicable term of the various reinsurance contracts with third party reinsurers. Ceded
unearned premiums represent the unexpired portion of premiums ceded to reinsurers and are reported as an asset on the Company’s
consolidated balance sheets.
Premiums
collected in advance occur when the policyholder premium is paid in advance of the effective commencement period of the policy
and are recorded as a liability on the Company’s consolidated balance sheets.
Stock-Based
Compensation:
The
Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which
requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others
receive shares of stock or equity instruments. The fair value of each stock option award is estimated on the date of grant using
the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free
interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the
requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional
paid-in capital.
The
Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have been
accounted for as equity-based awards since, upon vesting, they are required to be settled in the Company’s common shares.
The Company 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. See Note 11 – Options, Warrants and Restricted Stock Units for further
disclosure.
Fair
Value of Financial Instruments:
The
carrying values of certain financial instruments, including cash, short-term investments, premiums receivable, accounts payable,
and other accrued expenses, approximate fair value due to their short-term nature. The Company measures the fair value of financial
instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid
to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between
market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 15 – 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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Operating
Segments:
The
Company operates in a single segment – property and casualty insurance.
4.
Recently Adopted and Issued Accounting Standards
Recently
Adopted Accounting Standards
ASU
2014-09: Revenue from Contracts with Customers:
The
Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05
and ASU 2017-13 (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that
will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer
goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope
of other standards, such as insurance contracts. Topic 606 became effective for annual periods beginning after December 15, 2017,
and interim periods within those fiscal years. The Company adopted Topic 606 on January 1, 2018, but since virtually all of the
Company’s revenues relate to insurance contracts and investment income, the adoption of Topic 606 did not have an impact
on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within
the scope of Topic 606 as such transactions are consummated.
ASU
2018-02: Income Statement – Reporting Comprehensive Income:
In
February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income. ASU 2018-02 was issued
to address financial reporting issues that arose as a result of the passage of the Tax Cuts and Jobs Act, enacted into law by
the United States federal government on December 22, 2017. Prior to the issuance of ASU 2018-02, GAAP required that deferred tax
assets and liabilities be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing
operations in the reporting period that includes the enactment date. That guidance was applicable even in situations in which
the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive
income. Under ASU 2018-02, a reclassification from accumulated other comprehensive income to retained earnings is allowed for
stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because ASU 2018-02 only relates to the reclassification
of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax
laws or rates be included in income from continuing operations is not affected. The Company adopted the amendments in this update
on January 1, 2018 and determined that ASU 2018-02 applied to the deferred taxes related to unrealized losses on its investment
portfolio, which had been previously recognized in other comprehensive income. This resulted in the reclassification of $33 from
accumulated other comprehensive income to retained earnings, representing the stranded tax effect on these losses.
ASU
2016-01: Financial Instruments-Overall:
In
January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for
financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity
method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value
recognized in net income. The Company adopted ASU 2016-01 effective January 1, 2019, resulting in a cumulative-effect adjustment
to retained earnings in the amount of $104, representing the after-tax unrealized holding gains in accumulated other comprehensive
income as of December 31, 2018, related to the Company’s available-for-sale equity securities. Subsequent changes in the
estimated fair value of the Company’s equity securities have now been recognized in the Company’s consolidated statement
of operations rather than in comprehensive income.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
ASU
2016-02: Leases:
In
February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing
transactions. Under the previous guidance for lessees, leases were only included on the consolidated balance sheet if certain
criteria, classifying the agreement as a capital lease, were met. This update requires the recognition of a right-of-use asset
and a corresponding lease liability, discounted to present value, for all leases that extend beyond 12 months. The Company adopted
this guidance effective January 1, 2019, using the modified retrospective method, under which we elected the package of practical
expedients and transition provisions allowing us to bring our existing operating leases onto the Company’s consolidated
balance sheet without adjusting comparative periods. We have 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 are recognized at the present value of the remaining contractual fixed
lease payments, discounted using our incremental borrowing rate. Operating lease expense is 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 have been reflected in the Company’s consolidated balance sheet in Assets of discontinued operations and Liabilities
of discontinued operations, respectively, as the Company’s leases are intended to be sold with the insurance operations
of the business pursuant to the terms of the Equity Purchase Agreement dated February 25, 2019.
Accounting
Standards Pending Adoption
ASU
2016-13: Financial Instruments – Credit Losses:
In
June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected
credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on
financial instruments was generally delayed until the occurrence of the loss was probable. The amendments of ASU 2016-13 eliminate
this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses.
The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for
those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered
past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in
a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the
investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current
period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, however smaller reporting
companies may delay adoption until January 2023. The Company is currently evaluating the impact of the adoption of ASU 2016-13
on its consolidated financial statements.
5.
Investments
A
summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on the Company’s investments
in fixed income and equity securities at September 30, 2019 and December 31, 2018 is as shown in the following table. The Company’s
fixed income securities are intended to be sold by the Company pursuant to the terms of the Equity Purchase Agreement dated February
25, 2019, and, as such, have been reflected in the Company’s consolidated balance sheet as assets of discontinued operations
as of September 30, 2019 and December 31, 2018. Additionally, pursuant to the Equity Purchase Agreement, the Company has sold
its equity securities as of September 30, 2019, other than the limited liability investments discussed below.
As of September 30, 2019
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
8,706
|
|
|
$
|
114
|
|
|
$
|
(4
|
)
|
|
$
|
8,816
|
|
State municipalities and political subdivisions
|
|
|
6,310
|
|
|
|
86
|
|
|
|
(1
|
)
|
|
|
6,395
|
|
Asset-backed securities and collateralized
mortgage obligations
|
|
|
28,776
|
|
|
|
562
|
|
|
|
(41
|
)
|
|
|
29,297
|
|
Corporate
|
|
|
23,585
|
|
|
|
489
|
|
|
|
(5
|
)
|
|
|
24,069
|
|
Total fixed income securities
|
|
$
|
67,377
|
|
|
$
|
1,251
|
|
|
$
|
(51
|
)
|
|
$
|
68,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
8,458
|
|
|
$
|
22
|
|
|
$
|
(58
|
)
|
|
$
|
8,422
|
|
State municipalities and political subdivisions
|
|
|
6,508
|
|
|
|
3
|
|
|
|
(83
|
)
|
|
|
6,428
|
|
Asset-backed securities and collateralized
mortgage obligations
|
|
|
33,153
|
|
|
|
72
|
|
|
|
(433
|
)
|
|
|
32,792
|
|
Corporate
|
|
|
29,247
|
|
|
|
25
|
|
|
|
(604
|
)
|
|
|
28,668
|
|
Total fixed income securities
|
|
|
77,366
|
|
|
|
122
|
|
|
|
(1,178
|
)
|
|
|
76,310
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,939
|
|
|
|
141
|
|
|
|
(3
|
)
|
|
|
3,077
|
|
Warrants to purchase common stock
|
|
|
129
|
|
|
|
17
|
|
|
|
(23
|
)
|
|
|
123
|
|
Rights to purchase common stock
|
|
|
62
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
|
63
|
|
Total equity securities
|
|
|
3,130
|
|
|
|
163
|
|
|
|
(30
|
)
|
|
|
3,263
|
|
Total fixed income and equity securities
|
|
$
|
80,496
|
|
|
$
|
285
|
|
|
$
|
(1,208
|
)
|
|
$
|
79,573
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
The
table below summarizes the Company’s fixed income securities at September 30, 2019 by contractual maturity periods. Actual
results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual
maturity of these obligations.
Matures in:
|
|
Amortized
Cost
|
|
|
Estimated Fair Value
|
|
One year or less
|
|
$
|
4,576
|
|
|
$
|
4,579
|
|
More than one to five years
|
|
|
34,926
|
|
|
|
35,421
|
|
More than five to ten years
|
|
|
6,545
|
|
|
|
6,792
|
|
More than ten years
|
|
|
21,330
|
|
|
|
21,785
|
|
Total
|
|
$
|
67,377
|
|
|
$
|
68,577
|
|
The
following table highlights, by loss position and security type, those fixed income and equity securities in unrealized loss positions
as of September 30, 2019 and December 31, 2018. The tables segregate the holdings based on the period of time the investments
have been continuously held in unrealized loss positions. There were 80 and 336 fixed income investments that were in unrealized
loss positions as of September 30, 2019 and December 31, 2018, respectively. The Company did not hold any equity securities as
of September 30, 2019, other than the limited liability investments discussed below, and held 21 equity securities in unrealized
loss positions at December 31, 2018.
|
|
Less than 12 Months
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
3,109
|
|
|
$
|
(12
|
)
|
|
$
|
3,449
|
|
|
$
|
(29
|
)
|
|
$
|
6,558
|
|
|
$
|
(41
|
)
|
State municipalities and political subdivisions
|
|
|
675
|
|
|
|
(2
|
)
|
|
|
1,023
|
|
|
|
(4
|
)
|
|
|
1,698
|
|
|
|
(6
|
)
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
214
|
|
|
|
–
|
|
|
|
529
|
|
|
|
(1
|
)
|
|
|
743
|
|
|
|
(1
|
)
|
Corporate
|
|
|
756
|
|
|
|
–
|
|
|
|
777
|
|
|
|
(3
|
)
|
|
|
1,533
|
|
|
|
(3
|
)
|
Total fixed income securities
|
|
$
|
4,754
|
|
|
$
|
(14
|
)
|
|
$
|
5,778
|
|
|
$
|
(37
|
)
|
|
$
|
10,532
|
|
|
$
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
4,552
|
|
|
$
|
(10
|
)
|
|
$
|
2,300
|
|
|
$
|
(48
|
)
|
|
$
|
6,852
|
|
|
$
|
(58
|
)
|
State municipalities and political subdivisions
|
|
|
1,145
|
|
|
|
(5
|
)
|
|
|
4,681
|
|
|
|
(78
|
)
|
|
|
5,826
|
|
|
|
(83
|
)
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
8,682
|
|
|
|
(48
|
)
|
|
|
14,864
|
|
|
|
(385
|
)
|
|
|
23,546
|
|
|
|
(433
|
)
|
Corporate
|
|
|
11,087
|
|
|
|
(204
|
)
|
|
|
13,917
|
|
|
|
(400
|
)
|
|
|
25,004
|
|
|
|
(604
|
)
|
Total fixed income securities
|
|
|
25,466
|
|
|
|
(267
|
)
|
|
|
35,762
|
|
|
|
(911
|
)
|
|
|
61,228
|
|
|
|
(1,178
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
149
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
|
|
(3
|
)
|
Warrants to purchase common stock
|
|
|
84
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
(23
|
)
|
Rights to purchase common stock
|
|
|
25
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
(4
|
)
|
Total equity securities
|
|
|
258
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
|
|
|
|
258
|
|
|
|
(30
|
)
|
Total fixed income and equity securities
|
|
$
|
25,724
|
|
|
$
|
(297
|
)
|
|
$
|
35,762
|
|
|
$
|
(911
|
)
|
|
$
|
61,486
|
|
|
$
|
(1,208
|
)
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Under
the terms of the certificate of authority granted to Maison by the TDI, Maison is required to pledge assets totaling approximately
$2,000 with the State of Texas. These assets consist of cash and various fixed income securities listed in the preceding tables
which have an amortized cost basis of $2,000 and estimated fair value of $2,015 as of September 30, 2019.
The
Company’s limited liability investments are comprised of investments in a limited partnership and a limited liability company
which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company had a total
potential commitment of $935 related to these investments, of which the two entities have drawn down approximately $776 through
September 30, 2019. The limited liability company is managed by Argo Management Group, LLC, an entity which, as of April 21, 2016,
is wholly owned by KFSI. The Company has accounted for these two investments under the cost method, 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.
Additionally,
on June 18, 2018 the Company invested $2,219 in FGI Metrolina Property Income Fund, LP (the “Fund”), which invests
in real estate through a real estate investment trust which is wholly owned by the Fund. The general partner of the Fund, FGI
Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and Co-Chairman of the Board of Directors
of the Company, respectively. The Company, a limited partner of the Fund, does not have a controlling financial interest in the
Fund, but exerts significant influence over the entity’s operating and financial policies as it owns an economic interest
of approximately 47%. Accordingly, the Company has accounted for this investment under the equity method of accounting. The Company
has committed to a total potential investment of up to $4,000 in the Fund. As of September 30, 2019, the total amount invested
in the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,217.
Pursuant
to the terms of the Equity Purchase Agreement, prior to the closing of the Asset Sale, Maison intends to assign 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 $4,100). Accordingly, these investments have been included on the Company’s consolidated
balance sheet as of September 30, 2019 and December 31, 2018 as part of continuing operations. Investment income resulting from
the Company’s limited liability investments has also been included in net investment income as part of continuing operations,
on the Company’s consolidated statement of operations for the three and nine months ended September 30, 2019 and 2018.
Also
included in assets of discontinued operations on the Company’s balance sheet as of September 30, 2019 and December 31, 2018
are short-term investments, with original maturities between three months and one year, which have been recorded at cost, as well
as a $300 certificate of deposit with an original term of 18 months deposited with the State of Florida pursuant to the terms
of the certificate of authority issued to Maison from the OIR.
Other-than-Temporary
Impairment:
The
establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company
performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary.
The analysis includes some or all of the following procedures as deemed appropriate by the Company:
|
●
|
considering
the extent and length of time during which the market value has been below cost;
|
|
●
|
identifying
any circumstances which management believes may impact the recoverability of the unrealized loss positions;
|
|
●
|
obtaining
a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their
knowledge and experience combined with market-based valuation techniques;
|
|
●
|
reviewing
the historical trading volatility and trading range of the investment and certain other similar investments;
|
|
●
|
assessing
if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from
third-party credit rating agencies;
|
|
●
|
assessing
the timeliness and completeness of principal and interest payment due from the investee; and
|
|
●
|
assessing
the Company’s ability and intent to hold these investments until the impairment may be recovered
|
The
risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary
include, but may not be limited to, the following:
|
●
|
the
opinions of professional investment managers could be incorrect;
|
|
●
|
the
past trading patterns of investments may not reflect their future valuation trends;
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
|
●
|
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.
|
As
a result of the analysis performed by the Company, we recorded a write-down for an other-than-temporary impairment on a single
equity investment resulting in a charge of $215 against net investment income in December, 2018. We recorded this write-down as
a result of our analysis of the investment’s operating losses for 2018, which showed a considerable decline when compared
to its results for 2017. For the Company’s remaining investments with estimated fair values less than their carrying amounts,
the Company believes that these unrealized losses are primarily due to temporary market and sector-related factors rather than
to issuer-specific factors. There were no write-downs for other-than-temporary impairment on our investments for the three and
nine months and ended September 30, 2019 and 2018.
The
Company does not have any exposure to subprime mortgage-backed investments.
Net
investment income from ongoing operations for the three and nine months ended September 30, 2019 and 2018 is as follows:
|
|
Three Months Ended September
30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on surplus notes issued by Maison
|
|
$
|
478
|
|
|
$
|
281
|
|
|
$
|
1,391
|
|
|
$
|
810
|
|
Limited liability investment profit distributions
|
|
|
45
|
|
|
|
–
|
|
|
|
90
|
|
|
|
–
|
|
Loss on assignment of limited liability investments
|
|
|
–
|
|
|
|
–
|
|
|
|
(239
|
)
|
|
|
–
|
|
Other
|
|
|
–
|
|
|
|
18
|
|
|
|
15
|
|
|
|
46
|
|
Net investment income
|
|
$
|
523
|
|
|
$
|
299
|
|
|
$
|
1,257
|
|
|
$
|
856
|
|
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 nine months ended September
30, 2019 and 2018 as this portfolio is intended to be sold by the Company in connection with the Asset Sale. See Note 2 for additional
information.
6.
Reinsurance
The
Company reinsures, or cedes, a portion of its written premiums on a per-risk and an excess of loss basis to non-affiliated insurers
in order to limit its loss exposure. Although reinsurance is intended to reduce the Company’s exposure risk, the ceding
of insurance does not legally discharge the Company from its primary liability for the full amount of coverage under its policies.
If our reinsurers fail to meet their obligations under the applicable reinsurance agreements, the Company would still be required
to pay the insured for the loss.
Under
the Company’s per-risk treaties, reinsurance recoveries are received for up to $3,400 in excess of a retention of $600.
The Company estimates that the total cost of its per-risk treaty will be approximately $425 for the 2019-2020 treaty-year, which
began June 1, 2019 and will end on May 31, 2020. This represents an increase of $50 from the cost of the prior treaty-year.
Historically,
the Company’s excess of loss treaties were based upon a treaty year beginning on June 1st of each year and expiring
on May 31st of the following year. For the treaty year beginning June 1, 2017, the Company’s excess of loss treaty
covered losses of up to $170,000 in excess of a retention of $5,000 per event. For any event above $175,000, the Company purchased
top, drop and aggregate coverage, with an additional limit of $25,000. The $25,000 aggregate coverage applies in total to all
events occurring during each of the treaty years.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
For
the period beginning on June 1, 2018 and ending on December 30, 2018, the Company’s excess of loss treaty covered losses
of up to $252,000 in excess of a retention of $10,000 per occurrence. Effective December 31, 2018, the Company procured an additional
layer of single-limit coverage of $5,000 in excess of a retention of $5,000. Thus, for the period beginning December 31, 2018
and ending on May 31, 2019, the Company’s excess of loss treaty covered losses of up to $257,000 in excess of a retention
of $5,000 per occurrence. We had also purchased reinstatement premium protection contracts to indemnify us against the potential
cost of reinstatement premiums. Our coverage also reduced our retention in multiple event scenarios through the purchase of three
subsequent event contracts. The first subsequent event contract had an occurrence limit of $6,000, an occurrence retention of
$4,000, and was subject to an otherwise recoverable amount of $6,000. The second subsequent event contract had an occurrence limit
of $3,000, an occurrence retention of $1,000, and was subject to an otherwise recoverable amount of $6,000. Both subsequent event
contracts included one prepaid reinstatement. The third subsequent event contract provided $10,000 of additional reinstatement
limit for the first layer of the catastrophe program and attaches after the first reinstatement has been completely exhausted.
Furthermore, for the Florida Hurricane Catastrophe Fund Reimbursement Contracts effective June 1, 2018, the Company had elected
45% coverage on its Florida exposures.
The
Company’s total cost of its excess of loss reinsurance program, inclusive of brokerage fees, was approximately $34,400 for
the 2018-2019 treaty-year.
Given
the pending sale of Maison, the Company and FedNat agreed to combine their 2019-2020 excess of loss catastrophe reinsurance program
into a single program (the “Program”). In order to facilitate this process, the Company purchased an excess of loss
stub treaty covering the month of June 2019. Under this treaty, Maison could recover one limit of $5,000 in excess of $5,000 and
two limits of $205,000 in excess of $10,000 for a total cost of approximately $6,000.
Under
the Program, effective July 1, 2019, Maison has entered into a combined program with the two wholly owned insurance subsidiaries
of FedNat, FedNat Insurance Company (“FNIC”) and Monarch National Insurance Company (“Monarch”). The Program
provides approximately $1,280,000 of single-event coverage, and aggregate coverage of $1,840,000. Maison’s single-event
retention will be $5,000 and includes one prepaid automatic reinstatement. Additionally, the Program is structured such that coverage
is provided in layers, with a cascading feature which allows substantially all layers to attach after $5,000 in losses for Maison.
If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Any unused layer
of protection cascades for subsequent events until exhausted. The reinsurers participating in the Program currently have an A.M.
Best Company or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential
obligations in dedicated trusts.
Maison’s
share of the total cost of the Program, including the separate coverage Maison has placed with the Florida Hurricane Catastrophe
Fund, is expected to be approximately $44,400.
Maison
has also assumed premium via the depopulation of policies from FL Citizens on both December 19, 2017 and December 18, 2018. The
policies assumed from FL Citizens are primarily along the coast of Florida and cover the perils of wind and hail only.
The
impact of reinsurance treaties on the Company is as shown in the following table and has been presented as part of discontinued
operations in the Company’s financial statements presented in this report.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Premium written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
27,456
|
|
|
$
|
26,324
|
|
|
$
|
75,352
|
|
|
$
|
70,848
|
|
Assumed
|
|
|
(19
|
)
|
|
|
(36
|
)
|
|
|
(198
|
)
|
|
|
(264
|
)
|
Ceded
|
|
|
(9,825
|
)
|
|
|
(8,023
|
)
|
|
|
(28,852
|
)
|
|
|
(23,541
|
)
|
Net premium written
|
|
$
|
17,612
|
|
|
$
|
18,265
|
|
|
$
|
46,302
|
|
|
$
|
47,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
23,954
|
|
|
$
|
20,818
|
|
|
$
|
69,988
|
|
|
$
|
55,663
|
|
Assumed
|
|
|
783
|
|
|
|
991
|
|
|
|
4,121
|
|
|
|
4,979
|
|
Ceded
|
|
|
(11,542
|
)
|
|
|
(8,348
|
)
|
|
|
(33,251
|
)
|
|
|
(21,241
|
)
|
Net premium earned
|
|
$
|
13,195
|
|
|
$
|
13,461
|
|
|
$
|
40,858
|
|
|
$
|
39,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
13,400
|
|
|
$
|
10,417
|
|
|
$
|
56,542
|
|
|
$
|
29,107
|
|
Assumed
|
|
|
637
|
|
|
|
12
|
|
|
|
398
|
|
|
|
(119
|
)
|
Ceded
|
|
|
(1,786
|
)
|
|
|
(1,773
|
)
|
|
|
(23,963
|
)
|
|
|
(9,214
|
)
|
Net losses and LAE incurred
|
|
$
|
12,251
|
|
|
$
|
8,656
|
|
|
$
|
32,977
|
|
|
$
|
19,774
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
7.
Deferred Policy Acquisition Costs
Deferred
policy acquisition costs (“DPAC”) consist primarily of commissions, premium taxes, assessments and other policy processing
fees incurred which are related to successful efforts to acquire new or renewal insurance contracts. Acquisition costs deferred
on insurance products are amortized over the period in which the related revenues are earned. Costs associated with unsuccessful
efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred.
DPAC
as well as the related amortization expense associated with DPAC for the three and nine months ended September 30, 2019 and 2018,
is as shown in the following table and has been presented as part of discontinued operations in the Company’s financial
statements presented in this report.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period, net
|
|
$
|
9,216
|
|
|
$
|
8,675
|
|
|
$
|
9,111
|
|
|
$
|
6,785
|
|
Additions
|
|
|
4,974
|
|
|
|
4,820
|
|
|
|
13,752
|
|
|
|
13,622
|
|
Amortization
|
|
|
(4,375
|
)
|
|
|
(3,929
|
)
|
|
|
(13,048
|
)
|
|
|
(10,841
|
)
|
Balance, September 30, net
|
|
$
|
9,815
|
|
|
$
|
9,566
|
|
|
$
|
9,815
|
|
|
$
|
9,566
|
|
8.
Loss and Loss Adjustment Expense Reserves
The
Company continually revises its estimates of the ultimate financial impact of claims made. A significant degree of judgment is
required to determine amounts recorded in the consolidated financial statements for the provision for loss and loss adjustment
expense (“LAE”) reserves. The process for establishing this provision reflects the uncertainties and significant judgmental
factors inherent in predicting future results of both known and unknown loss events. The process of establishing the provision
for loss and LAE reserves relies on the judgment and opinions of a large number of individuals within the Company.
The
Company’s evaluation of the adequacy of loss and LAE reserves includes a re-estimation of the liability for loss and LAE
reserves relating to each preceding financial year compared to the liability that was previously established. The results of this
comparison and the changes in the provision, net of amounts recoverable from reinsurers, for the three and nine months ended September
30, 2019 and 2018 were as shown in the following table and have been presented as part of discontinued operations in the Company’s
financial statements presented in this report.
|
|
Three months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period, gross of
reinsurance
|
|
$
|
23,838
|
|
|
$
|
13,817
|
|
|
$
|
15,151
|
|
|
$
|
13,488
|
|
Less reinsurance recoverable on loss and LAE expense
reserves
|
|
|
(11,560
|
)
|
|
|
(6,867
|
)
|
|
|
(5,661
|
)
|
|
|
(8,971
|
)
|
Balance, beginning of period, net of reinsurance
|
|
|
12,278
|
|
|
|
6,950
|
|
|
|
9,490
|
|
|
|
4,517
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
12,110
|
|
|
|
8,779
|
|
|
|
33,559
|
|
|
|
21,696
|
|
Prior years
|
|
|
141
|
|
|
|
(123
|
)
|
|
|
(582
|
)
|
|
|
(1,922
|
)
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(12,841
|
)
|
|
|
(6,997
|
)
|
|
|
(25,076
|
)
|
|
|
(14,332
|
)
|
Prior years
|
|
|
(865
|
)
|
|
|
(132
|
)
|
|
|
(6,568
|
)
|
|
|
(1,482
|
)
|
Balance, September 30, net of reinsurance
|
|
|
10,823
|
|
|
|
8,477
|
|
|
|
10,823
|
|
|
|
8,477
|
|
Plus reinsurance recoverable related to loss and
LAE expense reserves
|
|
|
6,946
|
|
|
|
5,695
|
|
|
|
6,946
|
|
|
|
5,695
|
|
Balance, September 30, gross of reinsurance
|
|
$
|
17,769
|
|
|
$
|
14,172
|
|
|
$
|
17,769
|
|
|
$
|
14,172
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
9.
Income Taxes
Income
tax expense for the three and nine months ended September 30, 2019 and 2018 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
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Income tax expense at statutory income tax rate of 21%
|
|
$
|
(920
|
)
|
|
$
|
(564
|
)
|
|
$
|
(2,075
|
)
|
|
$
|
(5
|
)
|
State income tax (net of federal tax benefit)
|
|
|
72
|
|
|
|
(10
|
)
|
|
|
115
|
|
|
|
(6
|
)
|
Share-based compensation
|
|
|
3
|
|
|
|
–
|
|
|
|
43
|
|
|
|
15
|
|
Other
|
|
|
1
|
|
|
|
3
|
|
|
|
6
|
|
|
|
–
|
|
Income tax expense (benefit)
|
|
$
|
(844
|
)
|
|
$
|
(571
|
)
|
|
$
|
(1,911
|
)
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)–from continuing operations
|
|
$
|
(12
|
)
|
|
$
|
(250
|
)
|
|
$
|
(162
|
)
|
|
$
|
(397
|
)
|
Income tax expense (benefit)–from discontinued operations
|
|
$
|
(832
|
)
|
|
$
|
(321
|
)
|
|
$
|
(1,749
|
)
|
|
$
|
401
|
|
The
Company carries a net deferred income tax asset of $2,285 and $1,279 at September 30, 2019 and December 31, 2018, respectively,
all of which the Company believes is more likely than not to be fully realized based upon management’s assessment of future
taxable income. Significant components of the Company’s net deferred tax assets are as follows:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
100
|
|
|
$
|
87
|
|
Unearned premium reserves
|
|
|
2,294
|
|
|
|
1,983
|
|
Investments
|
|
|
1,369
|
|
|
|
216
|
|
Share-based compensation
|
|
|
241
|
|
|
|
257
|
|
Deferred fee income
|
|
|
337
|
|
|
|
357
|
|
State deferred taxes
|
|
|
349
|
|
|
|
247
|
|
Net operating loss carryforward
|
|
|
–
|
|
|
|
–
|
|
Other
|
|
|
72
|
|
|
|
81
|
|
Deferred income tax assets
|
|
$
|
4,762
|
|
|
$
|
3,228
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
$
|
2,061
|
|
|
$
|
1,913
|
|
Investments
|
|
|
383
|
|
|
|
–
|
|
Other
|
|
|
33
|
|
|
|
36
|
|
Deferred income tax liabilities
|
|
$
|
2,477
|
|
|
$
|
1,949
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
2,285
|
|
|
$
|
1,279
|
|
|
|
|
|
|
|
|
|
|
Net DTA – from continuing operations
|
|
$
|
376
|
|
|
$
|
265
|
|
Net DTA – from discontinued operations
|
|
$
|
1,909
|
|
|
$
|
1,014
|
|
As
of September 30, 2019, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of
approximately $6,519, which will be available to offset future taxable income. Approximately $6,140 of the Company’s NOLs
will expire on December 31, 2039, while the remaining $379 of the Company’s NOLs do not expire under current tax law.
As
of September 30, 2019, 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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
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 nine months ended September 30, 2019 and 2018.
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (in thousands)
|
|
$
|
(3,535
|
)
|
|
$
|
(2,114
|
)
|
|
$
|
(7,969
|
)
|
|
$
|
(28
|
)
|
Less: dividends declared on Series A Preferred Shares
|
|
|
(350
|
)
|
|
|
(350
|
)
|
|
|
(1,050
|
)
|
|
|
(758
|
)
|
Loss attributable to common shareholders
|
|
$
|
(3,885
|
)
|
|
$
|
(2,464
|
)
|
|
$
|
(9,019
|
)
|
|
$
|
(786
|
)
|
Weighted average common shares outstanding
|
|
|
6,015,753
|
|
|
|
5,991,856
|
|
|
|
6,013,771
|
|
|
|
5,987,644
|
|
Loss per share attributable to common shareholders
|
|
$
|
(0.65
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(1.50
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(60
|
)
|
|
$
|
(938
|
)
|
|
$
|
(817
|
)
|
|
$
|
(1,489
|
)
|
Less: dividends declared on Series A Preferred Shares
|
|
|
(350
|
)
|
|
|
(350
|
)
|
|
|
(1,050
|
)
|
|
|
(758
|
)
|
Loss from continuing operations attributable to
common shareholders
|
|
|
(410
|
)
|
|
|
(1,288
|
)
|
|
|
(1,867
|
)
|
|
|
(2,247
|
)
|
Weighted average common shares outstanding
|
|
|
6,015,753
|
|
|
|
5,991,856
|
|
|
|
6,013,771
|
|
|
|
5,987,644
|
|
Loss per common share from continuing operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations, net of income taxes
|
|
$
|
(3,475
|
)
|
|
$
|
(1,176
|
)
|
|
$
|
(7,152
|
)
|
|
$
|
1,461
|
|
Weighted average common shares outstanding
|
|
|
6,015,753
|
|
|
|
5,991,856
|
|
|
|
6,013,771
|
|
|
|
5,987,644
|
|
Earnings (loss) per common share from discontinued operations
|
|
$
|
(0.58
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
0.24
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 September 30, 2019 and 2018 have been excluded from the computation
of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
–
|
|
|
|
177,456
|
|
Warrants to purchase common stock
|
|
|
1,500,000
|
|
|
|
1,906,875
|
|
Restricted stock units
|
|
|
202,634
|
|
|
|
300,168
|
|
Performance
shares(1)
|
|
|
–
|
|
|
|
375,000
|
|
|
|
|
1,657,329
|
|
|
|
2,759,499
|
|
(1)
On July 24, 2018, the Company entered into a Termination Agreement whereby the remaining performance shares owned by KFSI
and its affiliates were cancelled in exchange for a payment from the Company (see Note 13-Related Party Transactions for further
information).
11.
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.
Stock
Options
For
the three and nine months ended September 30, 2019, a total of 0 and 177,456 of the Company’s stock options expired unexercised,
respectively. The stock options had a weighted average exercise price of $8.06 per share. There were no grants or exercises of
the Company’s stock options for the nine months ended September 30, 2019. The Company did not have any employee stock options
outstanding as of September 30, 2019.
Restricted
Stock Units
On
May 29, 2015, the Company’s Board of Directors granted 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.
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. Similarly, should a director make himself 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, then such director’s RSU grant will vest in full as of his last date of service as a director
with the Company. Accordingly, since Mr. Joshua Horowitz’s term as a director did not continue following the Company’s
annual meeting of stockholders held on May 31, 2018, Mr. Horowitz’ 6,666 RSUs shares vested in full on May 31, 2018. Directors
are required to maintain ownership of the shares purchased through the full five-year vesting period, except as set forth above.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
On
August 22, 2018, the Compensation Committee of the Company’s Board of Directors 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 of directors 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. The following table summarizes RSU activity
for the year ended December 31, 2018 and the nine months ended September 30, 2019.
Restricted Stock Units
|
|
Number of Units
|
|
|
Weighted Average Grant
Date Fair Value
|
|
Non-vested units, January 1, 2018
|
|
|
128,830
|
|
|
$
|
6.27
|
|
Granted
|
|
|
171,338
|
|
|
|
7.48
|
|
Vested
|
|
|
(26,998
|
)
|
|
|
7.20
|
|
Forfeited
|
|
|
(136,054
|
)
|
|
|
7.60
|
|
Non-vested units, December 31, 2018
|
|
|
137,116
|
|
|
$
|
6.27
|
|
Granted
|
|
|
72,570
|
|
|
|
5.14
|
|
Vested
|
|
|
(7,052
|
)
|
|
|
7.00
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested units, September 30, 2019
|
|
|
202,634
|
|
|
$
|
5.84
|
|
Total
stock-based compensation expense for the nine months ended September 30, 2019 and 2018 was $163 and $236, respectively. As of
September 30, 2019, total unrecognized stock compensation expense of $1,018 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.
Warrants
For
the nine months ended September 30, 2019, a total of 406,875 warrants expired having a weighted average exercise price of $9.69.
Warrants were neither granted nor exercised during the nine-month period. As of September 30, 2019, the Company had 1,500,000
warrants outstanding with an exercise price of $15.00 which expire on February 24, 2022.
12.
Shareholders’ Equity
Grant
of Bonus Shares to Chief Financial Officer
On
August 22, 2018, the Company’s Board of Directors granted 1,000 shares of the Company’s common stock to the Company’s
Vice President and Chief Financial Officer, John S. Hill, as previously discussed in Note 11 – Options, Warrants and Restricted
Stock Units.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and 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 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, 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 the nine months ended September 30, 2019 and 2018, the Company declared
dividends totaling $1,050 and $758, respectively, 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 fourth quarter 2019 dividend on the shares of Series A Preferred
Stock on November 14, 2019.
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 13 – 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, one of the Company’s significant shareholders, purchased an aggregate
of 34,620 shares of the Series A Preferred Stock in the Company’s public offering of the shares, at the public offering
price of $25.00 per share, including 31,680 shares purchased for a total of approximately $792 on February 28, 2018, the closing
date of the offering, and 2,940 shares purchased for a total of approximately $74 on March 26, 2018 in connection with the underwriters’
exercise of their over-allotment option. In addition, CWA Asset Management Group, LLC, of which 50% is owned by Fundamental Global
Investors, LLC, holds 56,846 shares of the Series A Preferred Stock for customer accounts (including 44 shares of the Series A
Preferred Stock held by Mr. Cerminara in a joint account with his spouse) purchased at the public offering price in connection
with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the underwriters
on the purchase of these shares.
13.
Related Party Transactions
Related
party transactions are carried out in the normal course of operations and are measured in part by the amount of consideration
paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each
case approximates fair value. Except where disclosed elsewhere in these consolidated financial statements, the following is a
summary of related party transactions.
Termination
of Performance Share Grant Agreement
On
July 24, 2018, the Company entered into a Termination Agreement with Kingsway America, Inc. (“KAI”, a wholly owned
subsidiary of KFSI) pursuant to which KAI agreed to terminate the Performance Share Grant Agreement (“PSGA”) dated
March 26, 2014, between the Company and KAI in exchange for a payment of $1,000 from the Company, which has been recorded as a
charge under the heading “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s
consolidated statement of operations for year ended December 31, 2018. As a result of the Termination Agreement, KAI has no further
rights to any of the performance share grants contemplated by the PSGA. Under the PSGA, KAI was entitled to receive up to an aggregate
of 375,000 shares of our common stock upon achievement of certain milestones regarding our stock price. Mr. Larry G. Swets, Jr.,
who is a director of the Company, served as Chief Executive Officer and Director of KFSI on the date the Company entered into
the Termination Agreement. The Company did not issue any shares under the PSGA while the PSGA was outstanding. The Termination
Agreement was approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Termination
of Management Services Agreement and Repurchase of Series B Preferred Shares
On
February 24, 2015, we terminated our Management Services Agreement with 1347 Advisors, LLC (“1347 Advisors”), a wholly
owned subsidiary of KFSI. In connection with the termination, we entered into a Performance Shares Grant Agreement, dated February
24, 2014, with 1347 Advisors pursuant to which we agreed to issue 100,000 shares of our common stock to 1347 Advisors subject
to the achievement of certain events specified in the agreement. We also issued to 1347 Advisors 120,000 shares of our Series
B preferred stock having a liquidation amount per share equal to $25.00 (the “Series B Preferred Shares”) and a warrant
to purchase 1,500,000 shares of our common stock at an exercise price of fifteen dollars per share. The warrant expires seven
years from the date of issuance. 1347 Advisors subsequently transferred 60,000 of the Series B Preferred Shares to IWS Acquisition
Corporation, an affiliate of KFSI.
On
January 2, 2018, the Company entered into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant
to which the Company repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740,
representing (i) the par value of the Series B Preferred Shares, or $1,500; and (ii) declared and unpaid dividends with respect
to the dividend payment due on February 23, 2018, or $240. Also in connection with the Stock Purchase Agreement, the Performance
Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated. In connection with the
termination, the Company made a cash payment of $300 to 1347 Advisors. Upon termination of the MSA Agreement, the Company recorded
an increase of approximately $54 to additional paid in capital, representing the estimated fair value of the Performance Share
Grant Agreement on the grant date. Upon the termination of the Performance Share Grant Agreement, we compared the amount previously
recorded in additional paid in capital to the amount paid to terminate the agreement, resulting in a reversal of the $54 originally
recorded to additional paid in capital as well as a charge of $246 recorded to Loss on repurchase of Series B Preferred Shares
and Performance Shares on the Company’s consolidated statement of operations for the nine months ended September 30, 2018.
Pursuant
to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series B Preferred Shares from IWS
Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of a capital raise resulting in the Company
receiving net proceeds in excess of $5,000. On February 28, 2018, the Company purchased the remaining 60,000 Series B Preferred
Shares from IWS Acquisition Corporation for $1,500 with the proceeds from the offering of the Company’s 8.00% Cumulative
Preferred Stock, Series A (the “Preferred Stock”) offering (discussed under Note 12 – Shareholders’ Equity).
The
Company applied the guidance outlined in ASC 480 – Distinguishing Liabilities from Equity in recording the issuance
of the Series B Preferred Shares. Due to the fact that the shares had a mandatory redemption date of February 24, 2020, applicable
guidance required that we classify the shares as a liability on our consolidated balance sheet, rather than recording the value
of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected
to be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result,
total amortization in the amount of $33 has been charged to continuing operations for the nine months ended September 30, 2018.
Upon our repurchase of the Series B Preferred Shares in both January and February 2018, we compared the amortized carrying amount
of the liability to the amount paid to repurchase the shares, resulting in a charge of $366 to Loss on repurchase of Series B
Preferred Shares and Performance Shares on the Company’s consolidated statement of operations for the nine months ended
September 30, 2018.
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 September 30, 2019. The managing member of Argo, Mr. John T. Fitzgerald, was
appointed as President and Chief Executive Officer of KFSI on September 5, 2018 and has served on its board of directors since
April 21, 2016.
As
of September 30, 2019, the Company has invested $2,719 as a limited partner in FGI 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. 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 Company’s
investment represents an approximate 47% ownership stake in the Fund.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Upon
analysis of the Fund’s capital structure, related contractual relationships and terms, 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. The Company’s investment in the Fund is that of a limited partner with an approximate
47% 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.
As
of September 30, 2019, the total assets of the Fund were $5,573. Our maximum exposure to loss associated with our investment in
the Fund was $2,719 as of September 30, 2019. The Company’s maximum exposure to loss associated with the Fund is limited
to our investment; however, the Company has committed to invest up to $4,000 in the Fund. Our investment is reflected on our consolidated
balance sheet under the heading Limited liability investments. Although it is not the Company’s intent, should the Company’s
ownership percentage in the Fund exceed 50% of the total ownership interest in the Fund, we would be required to consolidate the
Fund’s financial statements with our results in future periods as we would be deemed to have a controlling interest in the
Fund.
14.
Accumulated Other Comprehensive Income (Loss)
The
table below details the change in the balance of each component of accumulated other comprehensive income (loss), net of tax,
for the three and nine months ended September 30, 2019 and 2018 and has been presented as part of discontinued operations in the
Company’s financial statements presented in this report.
|
|
Three months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,042
|
|
|
$
|
(1,079
|
)
|
|
$
|
(729
|
)
|
|
$
|
(169
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(501
|
)
|
|
|
(169
|
)
|
|
|
1,832
|
|
|
|
(1,308
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
384
|
|
|
|
–
|
|
|
|
397
|
|
|
|
63
|
|
Income taxes
|
|
|
25
|
|
|
|
36
|
|
|
|
(446
|
)
|
|
|
235
|
|
Net current-period other comprehensive income (loss)
|
|
|
(92
|
)
|
|
|
(133
|
)
|
|
|
1,783
|
|
|
|
(1,010
|
)
|
Reclassifications due to adoption of new accounting standards
|
|
|
–
|
|
|
|
–
|
|
|
|
(104
|
)
|
|
|
(33
|
)
|
Balance, September 30
|
|
$
|
950
|
|
|
$
|
(1,212
|
)
|
|
$
|
950
|
|
|
$
|
(1,212
|
)
|
15.
Fair Value of Financial Instruments
Fair
value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available,
such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate
adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments
or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple
observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices,
counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required
for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required
when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters
do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may
not be reflective of future fair values. For the Company’s financial instruments carried at cost or amortized cost, the
book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to
interest rate changes, as it is the Company’s intention to hold them until there is a recovery of fair value, which may
be to maturity.
The
Company classifies its investments in fixed income and equity securities as available-for-sale and reports these investments at
fair value. Fair values of fixed income securities for which no active market exists are derived from quoted market prices of
similar instruments or other third-party evidence.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
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.
|
Financial
instruments measured at fair value as of September 30, 2019 and December 31, 2018 in accordance with this guidance are as follows.
September 30, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
–
|
|
|
$
|
8,816
|
|
|
$
|
–
|
|
|
$
|
8,816
|
|
State municipalities and political subdivisions
|
|
|
–
|
|
|
|
6,395
|
|
|
|
–
|
|
|
|
6,395
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
–
|
|
|
|
29,297
|
|
|
|
–
|
|
|
|
29,297
|
|
Corporate
|
|
|
–
|
|
|
|
24,069
|
|
|
|
–
|
|
|
|
24,069
|
|
Total fixed income securities
|
|
$
|
–
|
|
|
$
|
68,577
|
|
|
$
|
–
|
|
|
$
|
68,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
-
|
|
|
$
|
8,422
|
|
|
$
|
-
|
|
|
$
|
8,422
|
|
State municipalities and political subdivisions
|
|
|
-
|
|
|
|
6,428
|
|
|
|
-
|
|
|
|
6,428
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
-
|
|
|
|
32,792
|
|
|
|
-
|
|
|
|
32,792
|
|
Corporate
|
|
|
-
|
|
|
|
28,668
|
|
|
|
-
|
|
|
|
28,668
|
|
Total fixed income securities
|
|
$
|
-
|
|
|
$
|
76,310
|
|
|
$
|
-
|
|
|
$
|
76,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,077
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,077
|
|
Warrants to purchase common stock
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
Rights to purchase common stock
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
Total equity securities
|
|
$
|
3,263
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
3,263
|
|
|
$
|
76,310
|
|
|
$
|
-
|
|
|
$
|
79,573
|
|
16.
Statutory Requirements
The
Company’s insurance subsidiary, Maison, prepares statutory basis financial statements in accordance with accounting practices
prescribed or permitted by the LDI. Prescribed statutory accounting practices include state laws, rules and regulations as well
as accounting practices and rules as outlined in a variety of publications of the National Association of Insurance Commissioners
(“NAIC”). Permitted statutory accounting practices encompass all accounting practices that are not prescribed, but
instead have been specifically requested by an insurer and allowed by the state in which the insurer is domiciled (in Maison’s
case, Louisiana). Permitted practices may differ from state to state, or company to company within a state, and may change in
the future. In converting from statutory accounting basis to U.S. GAAP, typical adjustments include the deferral of acquisition
costs (which are all charged to operations as incurred on a statutory basis), the inclusion of statutorily non-admitted assets
on the balance sheet, the inclusion of net unrealized holding gains or losses related to investments included on the balance sheet,
as well as the inclusion of changes in deferred tax assets and liabilities in the statement of operations.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Statutory
Surplus and Capital Requirements
In
order to retain its certificates of authority in Louisiana and Florida, Maison is required to maintain a minimum capital surplus
of $5,000 and $35,000, respectively. Accordingly, on September 30, 2019, the Company made a capital contribution in the amount
of $7,000 to Maison, resulting in Maison having a capital surplus of $40,436 as of September 30, 2019.
Our
state regulators employ risk-based capital (“RBC”) reports to monitor Maison’s financial condition. Risk-based
capital is determined in accordance with a formula adopted by the NAIC which takes into consideration the covariance between asset
risk, credit risk, underwriting risk, and other business risks. The RBC report determines whether Maison falls into the “no
action” level or one of the four action levels set forth in the Louisiana Insurance Code. Furthermore, in order to retain
its certificate of authority in Texas and Florida, Maison is required to maintain an RBC ratio of 300% or more. As of December
31, 2018, Maison’s RBC ratio was 345%; as a result, our surplus was considered to be in the “no action” level.
States
routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of
September 30, 2019, Maison held certificates of deposit with an estimated fair value of approximately $100 and $300 as a deposit
with the LDI and FOIR, respectively. Maison also held cash and investment securities with an estimated fair value of approximately
$2,015 as a deposit with the TDI.
Surplus
Notes
PIH,
as the parent company of Maison, is subject to the insurance holding company laws of the State of Louisiana, which, among other
things, regulate the terms of surplus notes issued by insurers to their parent company. As of September 30, 2019, Maison’s
capital includes six surplus notes issued to PIH in the aggregate amount of $18,000, all of which were approved by the LDI prior
to their issuance. Interest payments on the notes are due annually and are also subject to prior approval by the LDI. The Company’s
surplus notes, as of September 30, 2019, are as follows.
Date of Issuance
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Principal Amount as of
September 30, 2019
|
|
|
Principal Amount as of
December 31, 2018
|
|
December 21, 2015
|
|
December 21, 2019
|
|
|
10.0
|
%
|
|
$
|
850
|
|
|
$
|
850
|
|
September 29, 2016
|
|
September 29, 2020
|
|
|
10.0
|
%
|
|
|
3,450
|
|
|
|
3,450
|
|
September 28, 2017
|
|
September 28, 2021
|
|
|
10.0
|
%
|
|
|
2,950
|
|
|
|
2,950
|
|
December 28, 2017
|
|
December 28, 2019
|
|
|
10.0
|
%
|
|
|
2,300
|
|
|
|
2,300
|
|
November 14, 2018
|
|
November 14, 2020
|
|
|
10.0
|
%
|
|
|
5,250
|
|
|
|
5,250
|
|
December 27, 2018
|
|
December 27, 2020
|
|
|
9.25
|
%
|
|
|
3,200
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
$
|
18,000
|
|
|
$
|
18,000
|
|
Accrued interest
|
|
|
961
|
|
|
|
244
|
|
Surplus notes receivable from affiliate
|
|
$
|
18,961
|
|
|
$
|
18,244
|
|
Upon
closing of the Asset Sale, up to $18,000 in surplus notes plus accrued but unpaid interest (other than default rates of interest,
penalties, late fees and other related charges), will be repaid to the Company. Accordingly, the surplus notes have been shown
on a gross basis as both an asset of continuing operations and liability of discontinued operations on the Company’s consolidated
balance sheet as of September 30, 2019 and December 31, 2018. Interest associated with the surplus notes has also been recorded
as part of net investment income as well as interest expense in discontinued operations on the Company’s consolidated statement
of operations for the three and nine months ended September 30, 2019 and 2018.
Restrictions
on Payments from our Subsidiary Companies
As
an insurance holding company, we are dependent on dividends and other permitted payments from our subsidiary companies to serve
as operating capital. The ability of Maison to pay dividends to us is subject to certain restrictions imposed under Louisiana
insurance law, which is the state of domicile for Maison. Dividend payments from Maison may be further restricted pursuant to
consent agreements entered into with the LDI and the FOIR as a condition of our licensure in each state. Interest payments on
the surplus notes issued to us by Maison are also subject to the prior approval of the LDI. Our other subsidiary companies collect
the majority of their revenue through their affiliation with Maison. Our subsidiary company, MMI, earns commission income from
Maison for underwriting, policy administration, claims handling, and other services provided to Maison. Our subsidiary company,
ClaimCor, earns claims adjusting income for adjusting certain of the claims of Maison’s policyholders. While dividend payments
from our other subsidiaries are not restricted under insurance law, the underlying contracts between Maison and our other subsidiary
companies are regulated by, and subject to the approval of, insurance regulators.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
17.
Commercial Line of Credit Facility
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 (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 provides for a non-revolving line of credit of $7,000. The line of credit
will expire on the earlier of (i) January 20, 2020, or (ii) the closing of the transactions contemplated by the Asset Sale. Proceeds
of borrowings under the Loan Agreement may be used for providing short-term working capital to the Company’s subsidiaries
and other general corporate purposes. The line of credit is secured by a collateral assignment of the Company’s right to
receive cash proceeds under the Equity Purchase Agreement for the Asset Sale.
Borrowings
under the Loan Agreement will bear interest at a rate per annum equal to one-month ICE LIBOR (rounded up to the nearest one-eighth
(1/8th) of one percent or rounded up to one-eighth (1/8th) of one percent if the reported one-month ICE LIBOR is less than zero)
plus a margin of 3.00%. The initial interest rate is 5.25% per annum, to be adjusted on the first day of each calendar month.
The line of credit is to be repaid in monthly payments of interest only, payable in arrears, commencing on the first day of the
month following the initial borrowing under the Loan Agreement. All principal and remaining interest will be payable in full at
maturity. As of November 14, 2019, the Company had not drawn on the Loan Agreement.
The
Loan Agreement contains certain restrictive covenants customary for transactions of this type, including restrictions on liens,
indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases.
The
Loan Agreement also provides for customary events of default with corresponding grace periods, including: (1) failure to make
payments under the Loan Agreement when due; (2) failure to comply with other covenants and agreements contained in the Loan Agreement;
(3) breach of or default under the collateral assignment; (4) making of false or materially inaccurate representations and warranties;
(5) certain defaults under other debt obligations of the Company; (6) money judgments, material adverse changes or events regarding
the validity of the Loan Agreement or other loan documents; and (7) certain events of bankruptcy or insolvency affecting the Company.
Upon the occurrence of an event of default, the Lender may declare the entire unpaid principal balance and accrued unpaid interest
immediately due and payable and/or exercise any and all remedial and other rights under the Loan Agreement. The default interest
rate is 18%, subject to the maximum rate permitted by law.
18.
Commitments and Contingencies
Legal
Proceedings:
From
time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is
not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected
by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in
excess of the Company’s current reserves. In addition, the Company’s estimate of ultimate loss and loss adjustment
expenses may change. These additional liabilities, or increases in estimates, or a range of either, cannot be reasonably estimated,
and could result in consolidated statement of operations charges that could be material to the Company’s results of operations
in future periods.
Operating
Lease Commitments:
Our
management services subsidiary MMI has entered into leases for the use of office space in Baton Rouge, LA, Dallas, TX, and Tampa,
FL. Pursuant to our adoption of FASB Topic 842 – Leases, effective January 1, 2019, we recorded a right-of-use asset
and corresponding lease liability in the amount of $314 on the date of adoption, pertaining to our Baton Rouge and Dallas leases.
We did not recognize a right-of-use asset or related lease liability for our prior facility lease in Tampa as the lease term on
the date of adoption was less than twelve months; this lease subsequently expired in October 2019. Such lease payments have been
recorded in the Company’s consolidated statement of operations as part of discontinued operations in the period in which
the obligation for those payments was incurred as the Company’s leases are intended to be included as part of the sale of
the Company’s insurance operations in the Asset Sale. Future minimum lease payments on our prior Tampa facility as of September
30, 2019 were $25, all of which were incurred in October 2019.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
As
of September 30, 2019, the balance of right-of-use assets was $208 and lease liabilities was $210, both of which are reflected
on the Company’s consolidated balance sheet as assets and liabilities of discontinued operations, respectively. The weighted-average
remaining lease term for our operating leases (excluding the short-term Tampa lease) is 1.4 years, while the weighted-average
discount rate used in the determination of our lease liabilities was 5.5%.
Future
minimum lease payments as of September 30, 2019 were as follows:
Year ending September 30,
|
|
|
|
2020
|
|
$
|
154
|
|
2021
|
|
|
65
|
|
Total undiscounted lease payments
|
|
$
|
219
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
(9
|
)
|
Total discounted lease payments (lease liability at September 30, 2019)
|
|
$
|
210
|
|
On
May 20, 2019, MMI entered into a lease agreement for new office space in Tampa, FL to replace the Company’s lease for office
space which expired in October 2019. The new lease commenced on October 28, 2019, and consists of approximately six thousand square
feet of office space. Total minimum rent will be approximately $444 over the 63-month term of the lease.
Financing
Lease Commitments:
In
March 2018, MMI entered into an agreement to lease vehicles for the use of our sales representatives in Louisiana, Texas and Florida,
which have been recorded as financing leases having a carrying value of approximately $86 as of September 30, 2019, and are reflected
as liabilities from discontinued operations in the Company’s consolidated balance sheet as of September 30, 2019 and December
31, 2018. Future minimum lease payments, together with the present value of the net minimum lease payments as of September 30,
2019, are presented in the following table.
Year ending September 30,
|
|
|
|
2020
|
|
$
|
57
|
|
2021
|
|
|
39
|
|
Total minimum lease payments
|
|
|
96
|
|
Less: amount representing estimated executory costs included in total
minimum lease payments
|
|
|
–
|
|
Net minimum lease payments
|
|
|
96
|
|
Less: amount representing interest
|
|
|
(10
|
)
|
Present value of minimum lease payments
|
|
$
|
86
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES