PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
1347
PROPERTY INSURANCE HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(in
thousands, except share and per share data)
|
|
March
31, 2019 (unaudited)
|
|
|
December
31, 2018
|
|
ASSETS
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed
income securities, at fair value (amortized cost of $79,377 and $77,366, respectively)
|
|
$
|
79,475
|
|
|
$
|
76,310
|
|
Equity investments,
at fair value (cost of $46 and $3,130, respectively)
|
|
|
46
|
|
|
|
3,263
|
|
Short-term investments,
at cost
|
|
|
7,168
|
|
|
|
474
|
|
Other
investments
|
|
|
4,188
|
|
|
|
3,287
|
|
Total investments
|
|
|
90,877
|
|
|
|
83,334
|
|
Cash and cash equivalents
|
|
|
26,292
|
|
|
|
30,902
|
|
Deferred policy acquisition costs, net
|
|
|
8,234
|
|
|
|
9,111
|
|
Premiums receivable, net of allowance
for credit losses of $52 and $50, respectively
|
|
|
2,211
|
|
|
|
7,720
|
|
Ceded unearned premiums
|
|
|
6,317
|
|
|
|
6,525
|
|
Reinsurance recoverable on paid losses
|
|
|
1,959
|
|
|
|
530
|
|
Reinsurance recoverable on loss and
loss adjustment expense reserves
|
|
|
16,336
|
|
|
|
5,661
|
|
Funds deposited with reinsured companies
|
|
|
239
|
|
|
|
287
|
|
Current income taxes recoverable
|
|
|
1,065
|
|
|
|
1,119
|
|
Deferred tax asset, net
|
|
|
1,033
|
|
|
|
1,279
|
|
Property and equipment, net
|
|
|
286
|
|
|
|
315
|
|
Other assets
|
|
|
1,407
|
|
|
|
1,140
|
|
Total assets
|
|
$
|
156,256
|
|
|
$
|
147,923
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
27,810
|
|
|
$
|
15,151
|
|
Unearned premium reserves
|
|
|
45,867
|
|
|
|
51,907
|
|
Ceded reinsurance premiums payable
|
|
|
9,248
|
|
|
|
9,495
|
|
Agency commissions payable
|
|
|
901
|
|
|
|
802
|
|
Premiums collected in advance
|
|
|
4,036
|
|
|
|
1,840
|
|
Funds held under reinsurance treaties
|
|
|
162
|
|
|
|
162
|
|
Accrued premium taxes and assessments
|
|
|
1,463
|
|
|
|
3,059
|
|
Accounts payable
and other accrued expenses
|
|
|
3,301
|
|
|
|
2,760
|
|
Total liabilities
|
|
$
|
92,788
|
|
|
$
|
85,176
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note
18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Series A Preferred Shares, $25.00 par
value, 1,000,000 shares authorized, 700,000 shares issued and outstanding as of both periods
|
|
$
|
17,500
|
|
|
$
|
17,500
|
|
Common stock, $0.001 par value; 10,000,000
shares authorized; 6,164,123 shares issued as of both periods and 6,012,764 shares outstanding as of both periods
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
46,392
|
|
|
|
46,340
|
|
Retained earnings
|
|
|
501
|
|
|
|
639
|
|
Accumulated other
comprehensive income (loss), net of tax
|
|
|
78
|
|
|
|
(729
|
)
|
|
|
|
64,477
|
|
|
|
63,756
|
|
Less: treasury
stock at cost; 151,359 shares for both periods
|
|
|
(1,009
|
)
|
|
|
(1,009
|
)
|
Total shareholders’
equity
|
|
|
63,468
|
|
|
|
62,747
|
|
Total liabilities
and shareholders’ equity
|
|
$
|
156,256
|
|
|
$
|
147,923
|
|
See
accompanying notes to consolidated financial statements
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
(in
thousands, except share and per share data)
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Net
premiums earned
|
|
$
|
15,589
|
|
|
$
|
12,615
|
|
Net investment income
|
|
|
1,031
|
|
|
|
378
|
|
Other
income
|
|
|
774
|
|
|
|
547
|
|
Total revenue
|
|
|
17,394
|
|
|
|
13,540
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Net losses and loss
adjustment expenses
|
|
|
9,279
|
|
|
|
4,259
|
|
Amortization of
deferred policy acquisition costs
|
|
|
4,269
|
|
|
|
3,295
|
|
General and administrative
expenses
|
|
|
3,701
|
|
|
|
3,021
|
|
Accretion of discount
on Series B Preferred Shares
|
|
|
–
|
|
|
|
33
|
|
Loss
on repurchase of Series B Preferred Shares and Performance Shares
|
|
|
–
|
|
|
|
612
|
|
Total expenses
|
|
|
17,249
|
|
|
|
11,220
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
145
|
|
|
|
2,320
|
|
Income tax expense
|
|
|
47
|
|
|
|
369
|
|
Net income
|
|
$
|
98
|
|
|
$
|
1,951
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
on Series A Preferred Shares
|
|
|
350
|
|
|
|
–
|
|
Income (loss)
attributable to common shareholders
|
|
$
|
(252
|
)
|
|
$
|
1,951
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.33
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.32
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,012,764
|
|
|
|
5,984,766
|
|
Diluted
|
|
|
6,012,764
|
|
|
|
6,093,096
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements
of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
98
|
|
|
$
|
1,951
|
|
Unrealized gains
(losses) on investments available for sale, net of income taxes
|
|
|
911
|
|
|
|
(684
|
)
|
Comprehensive
income
|
|
$
|
1,009
|
|
|
$
|
1,267
|
|
See
accompanying notes to consolidated financial statements.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity
($
in thousands, except share amounts)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Comprehensive
Income (Loss)
|
|
|
Shareholders’
Equity
|
|
Balance, January 1, 2018
|
|
|
–
|
|
|
|
–
|
|
|
|
5,984,766
|
|
|
$
|
6
|
|
|
|
151,359
|
|
|
$
|
(1,009
|
)
|
|
$
|
47,064
|
|
|
$
|
910
|
|
|
$
|
(169
|
)
|
|
$
|
46,802
|
|
Stock compensation expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
44
|
|
|
|
–
|
|
|
|
–
|
|
|
|
44
|
|
Issuance of Series A
Cumulative Preferred Stock
|
|
|
700,000
|
|
|
|
17,500
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,007
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
16,493
|
|
Repurchase of Performance Shares
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(54
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(54
|
)
|
Reclassification of
certain tax effects from accumulated other comprehensive income at January 1, 2018
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
33
|
|
|
|
(33
|
)
|
|
|
–
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,951
|
|
|
|
–
|
|
|
|
1,951
|
|
Other
comprehensive loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(684
|
)
|
|
|
(684
|
)
|
Balance, March 31,
2018 (unaudited)
|
|
|
700,000
|
|
|
$
|
17,500
|
|
|
|
5,984,766
|
|
|
$
|
6
|
|
|
|
151,359
|
|
|
$
|
(1,009
|
)
|
|
$
|
46,047
|
|
|
$
|
2,894
|
|
|
$
|
(886
|
)
|
|
$
|
64,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019
|
|
|
700,000
|
|
|
$
|
17,500
|
|
|
|
6,012,764
|
|
|
$
|
6
|
|
|
|
151,359
|
|
|
$
|
(1,009
|
)
|
|
$
|
46,340
|
|
|
$
|
639
|
|
|
$
|
(729
|
)
|
|
$
|
62,747
|
|
Cumulative effect of
adoption of Topic 842
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10
|
|
|
|
–
|
|
|
|
10
|
|
Cumulative
effect of adoption of ASU 2016-01
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
104
|
|
|
|
(104
|
)
|
|
|
–
|
|
Stock compensation expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
52
|
|
|
|
–
|
|
|
|
–
|
|
|
|
52
|
|
Dividends declared on
Series A Preferred Shares ($0.50 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(350
|
)
|
|
|
–
|
|
|
|
(350
|
)
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
98
|
|
|
|
–
|
|
|
|
98
|
|
Other
comprehensive loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
911
|
|
|
|
911
|
|
Balance, March 31,
2019 (unaudited)
|
|
|
700,000
|
|
|
$
|
17,500
|
|
|
|
6,012,766
|
|
|
$
|
6
|
|
|
|
151,359
|
|
|
$
|
(1,009
|
)
|
|
$
|
46,392
|
|
|
$
|
501
|
|
|
$
|
78
|
|
|
$
|
63,468
|
|
See
accompanying notes to consolidated financial statements
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
($
in thousands)
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
98
|
|
|
$
|
1,951
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Accretion of discount
on Series B Preferred Stock
|
|
|
–
|
|
|
|
33
|
|
Repurchase of Series
B Preferred Shares
|
|
|
–
|
|
|
|
612
|
|
Net deferred income
taxes
|
|
|
3
|
|
|
|
(146
|
)
|
Realized gains on
sale of investments
|
|
|
(27
|
)
|
|
|
–
|
|
Stock compensation
expense
|
|
|
52
|
|
|
|
44
|
|
Depreciation expense
|
|
|
33
|
|
|
|
24
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy
acquisition costs, net
|
|
|
877
|
|
|
|
19
|
|
Premiums receivable,
net
|
|
|
5,509
|
|
|
|
8,751
|
|
Ceded unearned premiums
|
|
|
208
|
|
|
|
46
|
|
Reinsurance recoverable
on paid losses and loss reserves
|
|
|
(12,104
|
)
|
|
|
353
|
|
Amounts held on
deposit with reinsured companies
|
|
|
48
|
|
|
|
1,079
|
|
Current income taxes
recoverable
|
|
|
54
|
|
|
|
513
|
|
Loss and loss adjustment
expense reserves
|
|
|
12,659
|
|
|
|
(2,034
|
)
|
Premiums collected
in advance
|
|
|
2,196
|
|
|
|
1,668
|
|
Unearned premium
reserves
|
|
|
(6,040
|
)
|
|
|
(2,126
|
)
|
Ceded reinsurance
premiums payable
|
|
|
(247
|
)
|
|
|
450
|
|
Other,
net
|
|
|
(1,595
|
)
|
|
|
(378
|
)
|
Net cash provided by operating activities
|
|
|
1,724
|
|
|
|
10,859
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Net purchases of
furniture and equipment
|
|
|
(3
|
)
|
|
|
(66
|
)
|
Purchases of fixed
income securities
|
|
|
(5,459
|
)
|
|
|
(12,690
|
)
|
Proceeds from the
sale of fixed income securities
|
|
|
3,443
|
|
|
|
846
|
|
Purchase of equity
investments
|
|
|
–
|
|
|
|
(100
|
)
|
Proceeds from the
sale of equity securities
|
|
|
3,226
|
|
|
|
468
|
|
Purchases of other
investments
|
|
|
(500
|
)
|
|
|
(82
|
)
|
Net
sales (purchases) of short-term investments
|
|
|
(6,681
|
)
|
|
|
256
|
|
Net cash used by investing activities
|
|
|
(5,974
|
)
|
|
|
(11,368
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from
the issuance of Series A Preferred Stock
|
|
|
–
|
|
|
|
16,493
|
|
Repurchase of Series
B Preferred Shares and Performance Shares
|
|
|
–
|
|
|
|
(3,300
|
)
|
Payment of dividends
on Series A Preferred Stock
|
|
|
(350
|
)
|
|
|
(240
|
)
|
Payments
under financing lease obligations
|
|
|
(10
|
)
|
|
|
(32
|
)
|
Net cash provided (used) by financing
activities
|
|
|
(360
|
)
|
|
|
12,921
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(4,610
|
)
|
|
|
12,412
|
|
Cash and cash
equivalents at beginning of period
|
|
|
30,902
|
|
|
|
23,575
|
|
Cash and cash
equivalents at end of period
|
|
$
|
26,292
|
|
|
$
|
35,987
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Non-cash financing
activities:
|
|
|
|
|
|
|
|
|
Obligation for the
acquisition of vehicles under financing leases
|
|
$
|
–
|
|
|
$
|
184
|
|
See
accompanying notes to consolidated financial statements.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Amounts
are 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 March 31, 2019, KFSI and its affiliates no longer held any of our outstanding shares of common stock, but did hold 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 March 31, 2019, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately
45% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive
Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman of our Board of Directors, serves as President, Co-Founder
and Partner of FGI.
We
have four wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”,
ClaimCor, LLC, or “ClaimCor”, and PIH Re, Ltd.
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, have the opportunity
to assume insurance policies written by FL Citizens, LA Citizens and TWIA. The majority of policies that 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 take-out, 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.
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 also 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,
which ranges from $25-$75.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
ClaimCor
is a claims and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor,
and also 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.
PIH
Re, Ltd., is the Company’s Bermuda-domiciled reinsurance subsidiary which was registered on December 6, 2018.
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. 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 to be issued to the Company. 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 and FedNat anticipate closing the sale on or before June 30, 2019, subject to the timely receipt of regulatory approvals
and the satisfaction or waiver of the closing conditions, including approval of the agreement and the transactions contemplated
therein by the stockholders of the Company.
As
of March 31, 2019, the Company concluded that the planned sale of Maison, MMI and ClaimCor did not meet the criteria for assets
held for sale as set forth in ASC 205-20 –
Discontinued Operations
, as under Delaware law, the approval of the Company’s
stockholders is required prior to closing of the transaction. The Company has classified the operations of Maison, MMI and ClaimCor
as continuing operations for all periods presented in this report.
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:
The
accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All 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 income. Effective January 1, 2019, we adopted Accounting Standards Update No. 2016-01,
Financial
Instruments–Overall
, requiring us to recognize unrealized gains and losses on our available-for-sale equity securities
through income. See Note 3 – Recently Adopted and Issued Accounting Standards for additional information.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Other
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 other 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 also include a fixed rate certificate of deposit with an original maturity of 15 months.
Short-term
investments, which consist of investments with original maturities between three months and one year, are reported at cost, which
approximates estimated fair value due to their short-term nature.
Realized
gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.
Interest
income is included in net investment income and is recorded as it accrues.
The
Company accounts for its investments using trade date accounting.
The
Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment.
Impairment is charged to the statement of income if the fair value of the instrument falls below its amortized cost and the decline
is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length
of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and
the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Cash
and Cash Equivalents:
Cash
and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
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, as opposed to being deferred and amortized as the premium
is earned. 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
Income
Taxes:
The
Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities
are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and
their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits
is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes
will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable
or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense (benefit).
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 $122 and $86 for the three months ended March 31, 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 two regional banks headquartered in the Eastern U.S. Such amounts are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250 per institution. At March 31, 2019, the Company held funds in excess of these FDIC insured
amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses
related to these deposits.
The
Company 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 requires 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 due to the fact that Maison exclusively underwrites
policies in Louisiana, Texas and Florida. Maison insures personal property located in 63 of the 64 parishes in Louisiana, 210
of the 254 counties which comprise the State of Texas, and 31 of the 67 counties which comprise the State of Florida. As of March
31, 2019, these policies are concentrated within Saint Tammany Parish, LA (5.9%), Tarrant County, TX (5.8%), Collin County, TX
(5.7%), and Jefferson Parish, LA (5.6%); 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 March 31, 2019.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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.
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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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.
Operating
Segments:
The
Company operates in a single segment – property and casualty insurance.
4.
Accounting Standards Recently Adopted and Pending Adoption
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. This 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 income rather than in comprehensive income.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 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, as well as the recognition of 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 “Other assets” and “Accounts
payable and other accrued expenses”, respectively.
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. The Company is currently
evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 March 31, 2019 and December 31, 2018 is as follows.
As of March 31, 2019
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government
|
|
$
|
8,693
|
|
|
$
|
37
|
|
|
$
|
(32
|
)
|
|
$
|
8,698
|
|
State municipalities
and political subdivisions
|
|
|
6,382
|
|
|
|
18
|
|
|
|
(40
|
)
|
|
|
6,360
|
|
Asset-backed securities
and collateralized mortgage obligations
|
|
|
34,396
|
|
|
|
273
|
|
|
|
(239
|
)
|
|
|
34,430
|
|
Corporate
|
|
|
29,906
|
|
|
|
231
|
|
|
|
(150
|
)
|
|
|
29,987
|
|
Total fixed income
securities
|
|
|
79,377
|
|
|
|
559
|
|
|
|
(461
|
)
|
|
|
79,475
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
46
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46
|
|
Total equity
securities
|
|
|
46
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46
|
|
Total fixed income
and equity securities
|
|
$
|
79,423
|
|
|
$
|
559
|
|
|
$
|
(461
|
)
|
|
$
|
79,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
table below summarizes the Company’s fixed income securities at March 31, 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
|
|
$
|
3,932
|
|
|
$
|
3,917
|
|
More than one to five years
|
|
|
37,876
|
|
|
|
37,833
|
|
More than five to ten years
|
|
|
12,374
|
|
|
|
12,466
|
|
More than ten
years
|
|
|
25,195
|
|
|
|
25,259
|
|
Total
|
|
$
|
79,377
|
|
|
$
|
79,475
|
|
The
following table highlights, by loss position and security type, those fixed income and equity securities in unrealized loss positions
as of March 31, 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 217 and 336 fixed income investments that were in unrealized loss
positions as of March 31, 2019 and December 31, 2018, respectively. The Company held 0 and 21 equity securities in unrealized
loss positions at March 31, 2019 and December 31, 2018, respectively.
|
|
Less
than 12 Months
|
|
|
Greater
than 12 Months
|
|
|
Total
|
|
As of March 31, 2019
|
|
Estimated
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Loss
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,313
|
|
|
$
|
(32
|
)
|
|
$
|
2,313
|
|
|
$
|
(32
|
)
|
State municipalities
and political subdivisions
|
|
|
–
|
|
|
|
–
|
|
|
|
4,420
|
|
|
|
(40
|
)
|
|
|
4,420
|
|
|
|
(40
|
)
|
Asset-backed securities
and collateralized mortgage obligations
|
|
|
2,666
|
|
|
|
(15
|
)
|
|
|
14,065
|
|
|
|
(224
|
)
|
|
|
16,731
|
|
|
|
(239
|
)
|
Corporate
|
|
|
1,462
|
|
|
|
(12
|
)
|
|
|
14,485
|
|
|
|
(138
|
)
|
|
|
15,947
|
|
|
|
(150
|
)
|
Total fixed income
securities
|
|
$
|
4,128
|
|
|
$
|
(27
|
)
|
|
$
|
35,283
|
|
|
$
|
(434
|
)
|
|
$
|
39,411
|
|
|
$
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 $1,989 as of March 31, 2019.
The
Company’s other investments are comprised of investments in a limited partnership and a limited liability company which
seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has a total potential
commitment of $935 related to these investments, of which the two entities have drawn down approximately $776 through March 31,
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 March 31, 2019, the total amount invested in
the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,112.
Also
included in other investments is 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 FOIR.
Other-than-Temporary
Impairment:
The
establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company
performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary.
The analysis includes some or all of the following procedures as deemed appropriate by the Company:
|
●
|
considering
the extent and length of time during which the market value has been below cost;
|
|
●
|
identifying
any circumstances which management believes may impact the recoverability of the unrealized loss positions;
|
|
●
|
obtaining
a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their
knowledge and experience combined with market-based valuation techniques;
|
|
●
|
reviewing
the historical trading volatility and trading range of the investment and certain other similar investments;
|
|
●
|
assessing
if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from
third-party credit rating agencies;
|
|
●
|
assessing
the timeliness and completeness of principal and interest payment due from the investee; and
|
|
●
|
assessing
the Company’s ability and intent to hold these investments until the impairment may be recovered
|
The
risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary
include, but may not be limited to, the following:
|
●
|
the
opinions of professional investment managers could be incorrect;
|
|
●
|
the
past trading patterns of investments may not reflect their future valuation trends;
|
|
●
|
the
credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the
investee company’s financial situation; and
|
|
●
|
the
historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s
unknown underlying financial problems.
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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. The Company does not intend to sell these investments in the short term, and it is not likely that
it will be required to sell these investments before the recovery of their amortized cost. There were no write-downs for other-than-temporary
impairment on our investments for the quarters ended March 31, 2019 and 2018.
The
Company does not have any exposure to subprime mortgage-backed investments.
Net
investment income for the quarters ended March 31, 2019 and 2018 is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Interest
on fixed income securities
|
|
$
|
571
|
|
|
$
|
335
|
|
Interest on cash
and cash equivalents
|
|
|
66
|
|
|
|
29
|
|
Gain on investment
under equity method accounting
|
|
|
401
|
|
|
|
–
|
|
Realized
gains upon sale of securities
|
|
|
27
|
|
|
|
36
|
|
Gross investment income
|
|
|
1,065
|
|
|
|
400
|
|
Investment
expenses
|
|
|
(34
|
)
|
|
|
(22
|
)
|
Net investment
income
|
|
$
|
1,031
|
|
|
$
|
378
|
|
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 $1,600 in excess of a retention of $400 for
each loss occurring during the treaty year that began on June 1, 2017 and ended on May 31, 2018. Effective June 1, 2018, the Company
amended its per-risk treaty such that recoveries are received for up to $1,400 in excess of a retention of $600 for each loss
occurring between June 1, 2018 and August 31, 2018. On September 1, 2018, the Company added another layer of coverage to its per-risk
treaty such that recoveries are now received for up to $3,400 in excess of a retention of $600 for each loss occurring on September
1, 2018 or thereafter. The Company estimates that the total cost of its per-risk treaty will be approximately $375 for the 2018-2019
treaty-year, an increase of $75 from the cost of the prior treaty-year due to the additional $1,000 coverage purchased effective
September 1, 2018.
The
Company’s excess of loss treaties are based upon a treaty year beginning on June 1
st
of each year and expiring
on May 31
st
of the following year. For both the treaty years beginning June 1, 2016 and June 1, 2017, the Company’s
excess of loss treaties cover 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.
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 covers losses of up to $257,000 in excess of a retention
of $5,000 per occurrence. We have also purchased reinstatement premium protection contracts to indemnify us against the potential
cost of reinstatement premiums. Our coverage also reduces our retention in multiple event scenarios through the purchase of three
subsequent event contracts. The first subsequent event contract has an occurrence limit of $6,000, an occurrence retention of
$4,000, and is subject to an otherwise recoverable amount of $6,000. The second subsequent event contract has an occurrence limit
of $3,000, an occurrence retention of $1,000, and is subject to an otherwise recoverable amount of $6,000. Both of these subsequent
event contracts include one prepaid reinstatement. The third subsequent event contract provides $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 has elected
45% coverage on its Florida exposures.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
The
Company estimates that the total cost of its excess of loss reinsurance program, inclusive of brokerage fees, will be approximately
$34,200 for the 2018-2019 treaty-year. Comparatively, the total cost for the Company’s 2017-2018 treaty-year reinsurance
program, which expired on May 31, 2018 was approximately $24,800.
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’s financial statements is as follows:
|
|
Three
months ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Premium written:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
18,698
|
|
|
$
|
16,788
|
|
Assumed
*
|
|
|
(119
|
)
|
|
|
(168
|
)
|
Ceded
|
|
|
(8,822
|
)
|
|
|
(6,085
|
)
|
Net premium written
|
|
$
|
9,757
|
|
|
$
|
10,535
|
|
|
|
|
|
|
|
|
|
|
Premium earned:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
22,733
|
|
|
$
|
16,544
|
|
Assumed
|
|
|
1,886
|
|
|
|
2,202
|
|
Ceded
|
|
|
(9,030
|
)
|
|
|
(6,131
|
)
|
Net premium earned
|
|
$
|
15,589
|
|
|
$
|
12,615
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
21,367
|
|
|
$
|
5,514
|
|
Assumed
|
|
|
16
|
|
|
|
(301
|
)
|
Ceded
|
|
|
(12,104
|
)
|
|
|
954
|
|
Net losses and
LAE incurred
|
|
$
|
9,279
|
|
|
$
|
4,259
|
|
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 months ended March 31, 2019 and 2018, is as follows:
|
|
Three
months ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance, January 1, net
|
|
$
|
9,111
|
|
|
$
|
6,785
|
|
Additions
|
|
|
3,392
|
|
|
|
3,276
|
|
Amortization
|
|
|
(4,269
|
)
|
|
|
(3,295
|
)
|
Balance, March 31, net
|
|
$
|
8,234
|
|
|
$
|
6,766
|
|
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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 months ended March 31,
2019 and 2018 were as follows:
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance, January 1, gross of reinsurance
|
|
$
|
15,151
|
|
|
$
|
13,488
|
|
Less
reinsurance recoverable on loss and LAE expense reserves
|
|
|
(5,661
|
)
|
|
|
(8,971
|
)
|
Balance, beginning of period, net of reinsurance
|
|
|
9,490
|
|
|
|
4,517
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
9,392
|
|
|
|
4,825
|
|
Prior years
|
|
|
(113
|
)
|
|
|
(566
|
)
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(3,558
|
)
|
|
|
(2,432
|
)
|
Prior
years
|
|
|
(3,737
|
)
|
|
|
(1,026
|
)
|
Balance, March 31, net of reinsurance
|
|
|
11,474
|
|
|
|
5,318
|
|
Plus
reinsurance recoverable related to loss and LAE expense reserves
|
|
|
16,336
|
|
|
|
6,136
|
|
Balance, March 31, gross of reinsurance
|
|
$
|
27,810
|
|
|
$
|
11,454
|
|
9.
Income Taxes
Actual
income tax expense for the three months ended March 31, 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:
|
|
As
of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income tax expense at
statutory income tax rate of 21%
|
|
$
|
30
|
|
|
$
|
487
|
|
State income tax (net of federal
tax benefit)
|
|
|
(23
|
)
|
|
|
(123
|
)
|
Share-based compensation
|
|
|
36
|
|
|
|
–
|
|
Other
|
|
|
4
|
|
|
|
5
|
|
Income tax expense
|
|
$
|
47
|
|
|
$
|
369
|
|
The
Company carries a net deferred income tax asset of $1,033 and $1,279 at March 31, 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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Loss
and loss adjustment expense reserves
|
|
$
|
106
|
|
|
$
|
87
|
|
Unearned premium
reserves
|
|
|
1,831
|
|
|
|
1,983
|
|
Investments
|
|
|
–
|
|
|
|
216
|
|
Share-based compensation
|
|
|
231
|
|
|
|
257
|
|
Deferred fee income
|
|
|
330
|
|
|
|
357
|
|
State deferred taxes
|
|
|
304
|
|
|
|
247
|
|
Other
|
|
|
76
|
|
|
|
81
|
|
Deferred income
tax assets
|
|
$
|
2,878
|
|
|
$
|
3,228
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy
acquisition costs
|
|
$
|
1,729
|
|
|
$
|
1,913
|
|
Investments
|
|
|
83
|
|
|
|
–
|
|
Other
|
|
|
33
|
|
|
|
36
|
|
Deferred income
tax liabilities
|
|
$
|
1,845
|
|
|
$
|
1,949
|
|
|
|
|
|
|
|
|
|
|
Net deferred
income tax assets
|
|
$
|
1,033
|
|
|
$
|
1,279
|
|
As
of March 31, 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
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 months ended March 31, 2019 and 2018.
|
|
Three
months ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net
income (in thousands)
|
|
$
|
98
|
|
|
$
|
1,951
|
|
Less:
dividends declared on Series A Preferred Shares
|
|
|
(350
|
)
|
|
|
–
|
|
Income (loss) attributable
to common shareholders
|
|
|
(252
|
)
|
|
|
1,951
|
|
Weighted average
common shares outstanding
|
|
|
6,012,764
|
|
|
|
5,984,766
|
|
Earnings (loss)
per common share
|
|
$
|
(0.04
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Income (loss) attributable
to common shareholders
|
|
$
|
(252
|
)
|
|
$
|
1,951
|
|
Weighted average common shares outstanding
|
|
|
6,012,764
|
|
|
|
5,984,766
|
|
Dilutive
RSUs outstanding
|
|
|
–
|
|
|
|
108,330
|
|
Diluted weighted
average common shares outstanding
|
|
|
6,012,764
|
|
|
|
6,093,096
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(0.04
|
)
|
|
$
|
0.32
|
|
The
following potentially dilutive securities outstanding as of March 31, 2019 and 2018 have been excluded from the computation of
diluted weighted-average shares outstanding as their effect would be anti-dilutive.
|
|
As
of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common
stock
|
|
|
177,456
|
|
|
|
177,456
|
|
Warrants to purchase common stock
|
|
|
1,906,875
|
|
|
|
1,906,875
|
|
Restricted stock units
|
|
|
146,591
|
|
|
|
20,500
|
|
Performance shares
(1)
|
|
|
–
|
|
|
|
375,000
|
|
|
|
|
2,230,922
|
|
|
|
2,479,831
|
|
(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 Issued under the 2014 Plan
For
the quarter ended March 31, 2019, a total of 163,301 of the Company’s stock options expired unexercised. The stock options
had an exercise price of $8.00 per share. There were no grants or exercises of the Company’s stock options for the quarter
ended March 31, 2019. A summary of the Company’s employee stock options outstanding as of March 31, 2019 is as follows.
All employee stock options listed were issued pursuant to the 2014 Plan.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Stock
Options Outstanding as of March 31, 2019
|
Date
of Grant
|
|
Exercise
Price
($)
|
|
|
Expiration
Date
|
|
Remaining
Contractual
Life
(Years)
|
|
|
Number
Outstanding
|
|
|
Number
Exercisable
|
|
04/04/2014
|
|
|
8.69
|
|
|
04/04/2019
|
|
|
0.01
|
|
|
|
14,155
|
|
|
|
14,155
|
|
Restricted
Stock Units Issued under both the 2014 and 2018 Plans
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 directors 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. 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.
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, the Board issued 5,714 RSUs to each of the Company’s
six non-employee directors with a value of $40. 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 the directors, representing their pro-rata share of the RSU grant issued to each of the Company’s directors on an
annual basis. The following table summarizes RSU activity for the quarter ended March 31, 2019.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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
|
|
|
10,794
|
|
|
|
4.94
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested units, March 31, 2019
|
|
|
147,910
|
|
|
$
|
6.18
|
|
Total
stock based compensation expense for the quarters ended March 31, 2019 and 2018 was $52 and $44, respectively. As of March 31,
2019, total unrecognized stock compensation expense of $810 remains, which will be recognized through December 31, 2023.
Warrants
For
the quarter ended March 31, 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 quarter. As of March 31, 2019, the Company has 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.
Offering
of 8.00% Cumulative Preferred Stock, Series A
On
February 28, 2018, we completed the underwritten public offering of 640,000 shares of the Preferred Stock designated as 8.00%
Cumulative Preferred Stock, Series A, par value $25.00 per share. Also, on March 26, 2018, we issued an additional 60,000 shares
of Preferred Stock pursuant to the exercise of the underwriters’ over-allotment option. Dividends on the Preferred Stock
are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December
of each year, commencing on June 15, 2018 when, as and if declared by our Board of Directors or a duly authorized committee thereof.
The first dividend record date for the Preferred Stock was on June 1, 2018. For the quarters ended March 31, 2019 and 2018, the
Company declared dividends of $350 and $0, 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 second quarter 2019 dividend on the shares
of Series A Preferred Stock on May 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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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
statement of income 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.
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 statement of income for the year ended December 31, 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 and $372 has been charged to operations for the years ended December 31, 2018 and 2017,
respectively. Upon our repurchase of the Series B Preferred Shares in both January and February 2018, we compared the amortized
carrying amount of the liability to the amount paid to repurchase the shares, resulting in a charge of $366 to “Loss on
repurchase of Series B Preferred Shares and Performance Shares” on the Company’s statement of income for the year
ended December 31, 2018.
Investment
in Limited 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 March 31, 2019. The managing member of Argo, Mr. John T. Fitzgerald, was appointed
as President and Chief Executive Officer of KFSI on September 5, 2018 and has served on its board of directors since April 21,
2016.
As
of March 31, 2019, the Company has invested $2,719 as a limited partner in Metrolina Property Income Fund, LP (the “Fund”).
The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and
Co-Chairman of the Board of Directors of the Company, respectively. 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.
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 March 31, 2019 and 2018, the total assets of the Fund were $5,573 and $0, respectively. Our maximum exposure to loss associated
with our investment in the Fund was $2,719 and $0 as of March 31, 2019 and 2018, respectively. 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 balance sheet under the heading “Other 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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 months ended March 31, 2019 and 2018.
|
|
Three
months March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Unrealized gains (losses) on available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
(729
|
)
|
|
$
|
(169
|
)
|
Other comprehensive
income (loss) before reclassifications
|
|
|
1,105
|
|
|
|
(861
|
)
|
Amounts reclassified
from accumulated other comprehensive income (loss)
|
|
|
21
|
|
|
|
29
|
|
Income
taxes
|
|
|
(215
|
)
|
|
|
148
|
|
Net current-period other comprehensive
income (loss)
|
|
|
911
|
|
|
|
(684
|
)
|
Reclassifications
due to adoption of new accounting standards
|
|
|
(104
|
)
|
|
|
(33
|
)
|
Balance, March 31
|
|
$
|
78
|
|
|
$
|
(886
|
)
|
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.
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 March 31, 2019 and December 31, 2018 in accordance with this guidance are as follows.
March 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
–
|
|
|
$
|
8,698
|
|
|
$
|
–
|
|
|
$
|
8,698
|
|
State municipalities and political subdivisions
|
|
|
–
|
|
|
|
6,360
|
|
|
|
–
|
|
|
|
6,360
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
–
|
|
|
|
34,430
|
|
|
|
–
|
|
|
|
34,430
|
|
Corporate
|
|
|
–
|
|
|
|
29,987
|
|
|
|
–
|
|
|
|
29,987
|
|
Total fixed income securities
|
|
$
|
–
|
|
|
$
|
79,475
|
|
|
$
|
–
|
|
|
$
|
79,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
46
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46
|
|
Total equity securities
|
|
$
|
46
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
46
|
|
|
$
|
79,475
|
|
|
$
|
–
|
|
|
$
|
79,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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 income.
Statutory
Surplus and Capital Requirements
In
order to retain its certificate of authority in Louisiana and Florida, Maison is required to maintain a minimum capital surplus
of $5,000 and $35,000, respectively. As of March 31, 2019, Maison’s capital surplus was $46,441.
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
March 31, 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
$1,989 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 March 31, 2019, Maison’s capital
includes seven 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 March 31, 2019, are as follows.
Date
of Issuance
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Principal
Amount
|
|
December 21, 2015
|
|
December 21, 2019
|
|
|
10.0
|
%
|
|
$
|
850
|
|
September 29, 2016
|
|
September 29, 2020
|
|
|
10.0
|
%
|
|
|
3,450
|
|
September 28, 2017
|
|
September 28, 2019
|
|
|
10.0
|
%
|
|
|
2,950
|
|
December 28, 2017
|
|
December 28, 2019
|
|
|
10.0
|
%
|
|
|
2,300
|
|
November 14, 2018
|
|
November 14, 2020
|
|
|
10.0
|
%
|
|
|
5,250
|
|
December 27,
2018
|
|
December 27,
2020
|
|
|
9.25
|
%
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
$
|
18,000
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
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
a consent agreement 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.
17.
Commercial Line of Credit Facility
On
April 23, 2018, the Company and MMI (collectively, the “Borrowers”) executed a Commercial Business Loan Agreement
and related Promissory Note (collectively, the “Loan Agreement”) with Hancock Bank, a trade name for Whitney Bank
(the “Lender”). The Loan Agreement provided for a revolving line of credit of $5,000. The line of credit expired on
April 19, 2019. The Borrowers did not draw down funds under the Loan Agreement during the period it was outstanding.
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 income statement charges that could be material to the Company’s results of operations in future periods.
Operating
Lease Commitments:
We
have 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 have 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 facility lease in Tampa as the lease term on the date of adoption was
less than twelve months, expiring in October, 2019. Such lease payments have been recorded in the Company’s Statement of
Income, in the period in which the obligation for those payments was incurred. Future minimum lease payments on our Tampa facility
as of March 31, 2019 were $175, all of which will be incurred in 2019.
As
of March 31, 2019, the balance of both the right-of-use assets and lease liabilities was $279, and are reflected on the Company’s
Balance Sheet under the headings “Other assets” and “Accrued expenses and other liabilities”, respectively.
The weighted-average remaining lease term for our operating leases (excluding the short term Tampa lease) is 1.9 years, while
the weighted-average discount rate used in the determination of our lease liabilities was 5.5%.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Future
minimum lease payments as of March 31, 2019 were as follows:
Year
ending March 31,
|
|
|
|
2020
|
|
$
|
153
|
|
2021
|
|
|
136
|
|
2022
|
|
|
6
|
|
Total undiscounted
lease payments
|
|
$
|
295
|
|
|
|
|
|
|
Less: imputed
interest
|
|
|
(16
|
)
|
Total discounted
lease payments (lease liability at March 31, 2019)
|
|
$
|
279
|
|
Financing
Lease Commitments:
In
March 2018, we 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 $108 as of March 31, 2019. Future minimum
lease payments, together with the present value of the net minimum lease payments as of March 31, 2019, are presented in the following
table.
Year
ending March 31,
|
|
|
|
2020
|
|
$
|
57
|
|
2021
|
|
|
67
|
|
Total minimum lease payments
|
|
|
124
|
|
Less: amount
representing estimated executory costs included in total minimum lease payments
|
|
|
–
|
|
Net minimum lease payments
|
|
|
124
|
|
Less: amount
representing interest
|
|
|
(16
|
)
|
Present value
of minimum lease payments
|
|
$
|
108
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion in conjunction with our consolidated financial statements and related notes and information
included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report for the year ended December 31, 2018 on Form
10-K filed with the Securities and Exchange Commission (“SEC”) on March 20, 2019.
Unless
context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to
1347 Property Insurance Holdings, Inc., and its subsidiaries. Except where noted otherwise, all dollar amounts have been reported
in thousands.
Emerging
Growth Company
We
are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the
Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take
advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging
growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over
financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (ii) delayed application of
newly adopted or revised accounting standards, (iii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute
voting requirements and (iv) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year
during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (ii) the last day of the fiscal
year following the fifth anniversary of our initial public offering (December 31, 2019), (iii) the date on which we have, during
the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed to
be a “large accelerated filer,” as defined under the Securities Exchange Act of 1934, as amended, or the Exchange
Act. We expect to lose our emerging growth company status as of December 31, 2109.
Cautionary
Note about Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Sections 27A of the Securities Act of
1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements
are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the
use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “can,”
“contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,”
“evaluate,” “forecast,” “goal,” “guidance,” “indicate,” “intend,”
“likely,” “may,” “might,” “outlook,” “plan,” “possibly,”
“potential,” “predict,” “probable,” “probably,” “pro-forma,” “project,”
“seek,” “should,” “target,” “view,” “will,” “would,” “will
be,” “will continue,” “will likely result” or the negative thereof or other variations thereon or
comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, and
projections. While we believe these to be reasonable, such forward-looking statements are only predictions and involve a number
of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results,
performance, or achievements to differ materially from any future results, performance or achievements expressed or implied by
these forward-looking statements. Management cautions that the forward-looking statements in this Quarterly Report on Form 10-Q
are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-looking events
and circumstances will occur.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Factors
that might cause such a difference include, without limitation: our limited operating history as a publicly traded company and
status as an emerging growth company; our ability to obtain market share; our ability to access capital; changes in economic,
business and industry conditions; legal, regulatory and tax developments; our ability to comply with regulations imposed by the
states of Louisiana, Texas and Florida and the other states where we may do business in the future; the ability of our insurance
subsidiary, Maison Insurance Company to meet minimum capital and surplus requirements; our ability to participate in take-out
programs; our ability to expand our business to other states; the level of demand for our coverage and the incidence of catastrophic
events related to our coverage; our ability to compete with other insurance companies; inadequate loss and loss adjustment expense
reserves; effects of emerging claim and coverage issues; the failure of third party adjusters to properly evaluate claims or the
failure of our claims handling administrator to pay claims fairly; investment losses; climate change and increasing occurrences
of weather-related events; increased litigation in the insurance industry; non-availability of reinsurance; our ability to recover
amounts due from reinsurers; the accuracy of models used to predict future losses; failure of risk mitigation strategies and/or
loss limitation methods; Maison Insurance Company’s failure to maintain certain rating levels; our ability to establish
and maintain an effective system of internal controls; any potential conflicts of interest between us and our controlling stockholders
and different interests of controlling stockholders; failure of our information technology systems, data breaches and cyber-attacks;
the ability of our third-party policy administrator to properly handle our policy administration process; the requirements of
being a public company; our ability to develop and implement new technologies; our ability to accurately price the risks that
we underwrite; the amount of operating resources necessary to develop future new insurance policies; assumptions related to the
rate at which our existing policies will renew; our status as an insurance holding company; the ability of our subsidiaries to
pay dividends to us; our ability to attract and retain qualified personnel, including independent agents; the impact of tax reform;
risks or disruptions to our business as a result of the proposed sale of three of the Company’s subsidiaries, which constitutes
the sale of substantially all of the Company’s assets (the “Asset Sale”); the occurrence of any event, change
or other circumstance that could give rise to the termination of the Equity Purchase Agreement governing the terms of the Asset
Sale; an inability to complete the Asset Sale due to a failure to obtain the approval of our stockholders or a failure of any
condition to the closing of the Asset Sale to be satisfied or waived by the applicable party; the extent of, and the time necessary
to obtain, the regulatory approvals required for the Asset Sale; our ability to spend or invest the net proceeds from the Asset
Sale in a manner that yields a favorable return; potential conflicts of interest of certain of our executive officers in the Asset
Sale; the outcome of any litigation we may become subject to relating to the Asset Sale; an increase in the amount of costs, fees
and expenses and other charges related to the Equity Purchase Agreement or the Asset Sale; risks arising from the diversion of
management’s attention from our ongoing business operations; a decline in the market price for our common shares if the
Asset Sale is not completed; a lack of alternative potential transactions if the Asset Sale is not completed; volatility or decline
of the shares of FedNat Holding Company common stock to be received by us as consideration in the Asset Sale or limitations on
our ability to sell or otherwise dispose of such shares; risks of being a minority stockholder of FedNat Holding Company if the
Asset Sale is completed; disruptions in our operations from the Asset Sale that prevent us from realizing intended benefits of
the Asset Sale; risks associated with our inability to identify and realize business opportunities, and undertaking of any new
such opportunities, following the Asset Sale; our inability to execute on our reinsurance, investment and investment management
strategy; potential loss of value of investments; risk of becoming an investment company; risks of being unable to attract and
retain qualified management and personnel to implement and execute on our growth strategy following completion of the Asset Sale;
and risks of our inability to continue to satisfy the continued listing standards of the Nasdaq following completion of the Asset
Sale.
Our
expectations may not be realized. If one of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect,
actual results may vary materially from those expected, estimated or projected. You are cautioned not to place undue reliance
on forward-looking statements. The forward-looking statements are made only as of the date hereof and do not necessarily reflect
our outlook at any other point in time. We do not undertake and specifically decline any obligation to update any such statements
or to publicly announce the results of any revisions to any such statements to reflect new information, future events or developments.
Overview
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. These markets are characterized as regions where larger, national insurers have reduced their market share
in favor of other, less catastrophe exposed markets. These markets are also characterized by state-administered residual insurers
controlling large market shares. These unique markets can trace their roots to Hurricane Andrew, after which larger national carriers
limited their capital allocation and approaches to property risk aggregation. These trends accelerated again after back to back
exceptionally active hurricane seasons in 2004 and 2005. However, the decade following Hurricane Katrina in 2005, had relatively
few losses arising from tropical storm activity which led to declines in reinsurance pricing and increases in its availability.
We were incorporated on October 2, 2012 in the State of Delaware to take advantage of these favorable dynamics where premium could
be acquired relatively more quickly and under less competitive pressure than in other property insurance markets and where the
cost of reinsurance, a significant expense for primary insurers, was declining from record high levels. We execute on this opportunity
via a management team with expertise in the critical facets of our business: underwriting, claims, reinsurance, and operations.
Within our three-state market, we seek to sell our products in territories with the highest rate per exposure and the least complexity
in terms of risk. As of March 31, 2019 we covered risks under approximately 68,700 policies.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
On
November 19, 2013, we changed our legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc., and
on March 31, 2014, we completed an initial public offering of our common stock. Prior to March 31, 2014, 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 March 31, 2019, KFSI and its affiliates no longer held any of our outstanding
shares of common stock, but did hold 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 March 31, 2019, Fundamental Global Investors, LLC and its affiliates,
or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board
of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman of our Board
of Directors, serves as President, Co-Founder and Partner of FGI.
We
have four wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”,
ClaimCor, LLC, or “ClaimCor”, and PIH Re, Ltd.
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 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, have the opportunity to
assume insurance policies written by FL Citizens, LA Citizens and TWIA. The majority of policies that 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 take-out, some of 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.
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 also 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”), 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,
which ranges from $25-$.
ClaimCor
is a claims and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor,
and also 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.
PIH
Re, Ltd. is our Bermuda-domiciled reinsurance subsidiary. PIH Re, Ltd. was registered in Bermuda on December 6, 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Equity
Purchase Agreement with FedNat Holding Company
As
previously announced on February 25, 2019, the Company, together with Maison, MMI and ClaimCor, entered into an Equity Purchase
Agreement (the “Purchase Agreement”) with FedNat Holding Company, a Florida corporation (“Purchaser”),
providing for the sale of all of the issued and outstanding equity of Maison, MMI and ClaimCor to Purchaser, on the terms and
subject to the conditions set forth in the Purchase Agreement (the “Asset Sale”). As consideration for the sale of
Maison, MMI and ClaimCor, Purchaser has agreed to pay the Company $51,000, consisting of $25,500 in cash (the “Cash Consideration”)
and $25,500 in Purchaser’s common stock (the “Equity Consideration”) to be issued to the Company. In addition,
upon closing of the Asset Sale (the “Closing”), up to $18,000 of outstanding surplus note obligations payable by Maison
to the Company, plus all accrued but unpaid interest (other than default rates of interest, penalties, late fees and other related
charges), will be repaid to the Company.
The
Equity Consideration is expected to be issued pursuant to the terms and conditions of a Standstill Agreement to be entered into
among the Company and Purchaser at the Closing. The Company and Purchaser also plan to enter into a Registration Rights Agreement
at the Closing providing for the registration under the Securities Act, as amended, of the resale of the Equity Consideration.
All
of the employees of MMI are expected to become employees of Purchaser as of the Closing, either directly or by remaining employees
of MMI, other than John S. Hill, the Company’s Chief Financial Officer, and Brian D. Bottjer, the Company’s Controller,
who the Company expects to hire as employees of the Company after the Closing. Douglas N. Raucy, the Company’s current President
and Chief Executive Officer and a director, and Dean E. Stroud, the Company’s current Vice President and Chief Underwriting
Officer, have entered into employment agreements with Purchaser, with the effectiveness of such agreements subject to the occurrence
of the Closing and continuous employment with the Company through the Closing.
The
Company, and not its stockholders, will receive the Cash Consideration and the Equity Consideration from the Asset Sale. The Company
does not intend to liquidate following the Closing. The Company’s board of directors will evaluate alternatives for the
use of the Cash Consideration, which are expected to include using a portion of the Cash Consideration to conduct the business
of PIH Re, Ltd., and launching a new growth strategy focused on reinsurance, investment management and new investment opportunities.
The Company may form an additional reinsurance subsidiary in a suitable jurisdiction.
Purchaser’s
obligation to close the Asset Sale is subject to Maison, MMI and ClaimCor having a consolidated net book value of at least $42,000
at the Closing (without considering the effect of the repayment of the surplus notes), Maison having at the Closing statutory
surplus of at least $29,000 after accounting for the full repayment of all of the surplus notes in effect at the closing, total
capital and surplus assets equal to or greater than 300% of its total risk-based capital on all authorized control level risk-based
capital requirements as of December 31, 2018, and there being no change to Maison’s “A” rating with Demotech,
Inc. as of the Closing, other than changes resulting from the execution of the Purchase Agreement or the circumstances of Purchaser.
In
connection with the Purchase Agreement, the Company and Purchaser plan to enter into a Reinsurance Capacity Right of First Refusal
Agreement (the “Reinsurance ROFR Agreement”) at the Closing pursuant to which the Company will have a right of first
refusal to sell reinsurance coverage to the insurance company subsidiaries of Purchaser, providing reinsurance on up to 7.5% of
annual in force limit of any layer in Purchaser’s catastrophe reinsurance program purchased by Purchaser and its subsidiaries,
subject to the annual reinsurance limit of $15,000, on the terms and subject to the conditions set forth in the Reinsurance ROFR
Agreement. All reinsurance sold by the Company pursuant to the right of first refusal will be memorialized in an agreement in
such form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance
ROFR Agreement will be assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance
ROFR Agreement will be five years.
In
addition, at the Closing, the Company and Purchaser plan to enter into a five-year agreement, pursuant to which the Company will
provide investment advisory services to Purchaser for $100 per year.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
The
Purchase Agreement contains customary representations, warranties and covenants of the parties, including covenants concerning
the conduct of business by Maison, MMI and ClaimCor prior to Closing. The Company was permitted to solicit superior offers to
acquire its insurance businesses, pursuant to the terms of the Agreement, during a 30-day go-shop period which expired on March
27, 2019. Having not received a superior offer during the go-shop period, the Company and its representatives are prohibited from
initiating, soliciting, knowingly facilitating, encouraging or engaging in discussions or negotiations relating to any competing
acquisition proposal, subject to certain limited exceptions. In addition, the Company and Purchaser have agreed to use their commercially
reasonable best efforts to consummate the Asset Sale and other transactions contemplated by the Purchase Agreement. Subject to
certain limitations, the Company and Purchaser have also agreed to indemnify the other party against certain losses, including
losses arising out of breaches of representations, warranties and covenants set forth in the Purchase Agreement.
The
Company and Purchaser anticipate closing the Asset Sale on or before June 30, 2019, subject to the timely receipt of regulatory
approvals and the satisfaction or waiver of the closing conditions, including approval of the Purchase Agreement and the transactions
contemplated therein by the stockholders of the Company.
Our
Products
As
of March 31, 2019, we covered risks under approximately 68,700 direct and assumed policies. Of these policies, approximately 25%
were obtained via take-out from LA Citizens, FL Citizens and TWIA, with the remaining 75% obtained from our independent agency
force. In total, from both take-out and voluntary business, approximately 59% of our policies are homeowner multi-peril, approximately
10% are manufactured home multi-peril policies, approximately 28% are wind/hail only policies, approximately 2% are multi-peril
dwelling policies, and approximately 1% are dwelling fire policies.
Homeowners’
Insurance
Our
homeowners’ insurance policy is written on an owner occupied dwelling and protects from all perils, except for those specifically
excluded from coverage by the policy. It also provides replacement cost coverage on the home and other structures and will provide
optional coverage for replacement cost on personal property in the home. It may also offer the option of specifically scheduling
individual personal property items for coverage. Additionally, coverage for loss of use of the home until it can be repaired is
provided. Personal liability and medical payment coverage to others is included, as well.
Wind/Hail
Insurance
Our
wind/hail insurance policy is written on an owner or non-owner occupied dwelling and protects from the perils of wind and/or hail-only
weather events. This policy type may also provide coverage for personal property, but only for specific types of coverage. It
provides replacement cost or actual cash value coverage on the home and other structures depending on the form under which the
policy is written. Personal property in the home is written at actual cash value. Additionally, coverage for loss of use of the
home is provided.
Manufactured
Home Insurance
Our
manufactured home insurance policy is written on a manufactured or mobile home and is similar to both the homeowners’ insurance
policy and the dwelling fire policy. The policy can provide for coverage on the manufactured home, the insured’s personal
property in the home and liability and medical payments can be included. Furthermore, our manufactured home policies can be endorsed
to include coverage for flood and earthquake (coverage for these perils is not available under our other policy types). The policy
can also be written on either owner occupied or non-owner occupied units. Property coverage can be written on an actual cash value
or stated amount basis with an optional replacement cost coverage available for partial loss. There are several other optional
coverages that can be included and residential and commercial-use rental units can be written along with seasonal use mobile homes
or homes that are used for part of the year.
Dwelling
Fire Insurance
Our
dwelling fire policy can be issued on an owner occupied or non-owner (tenant) occupied dwelling property. It will also provide
coverage against all types of loss unless the peril causing the loss is specifically excluded in the policy. Losses from vandalism
and malicious mischief are also included in the coverage. All claims and losses on a dwelling are covered on a replacement cost
basis and additional coverage for personal property (contents) can also be added. Personal liability and medical payments to others
may be included on an optional basis.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Our
policy counts by type as of March 31, 2019 and December 31, 2018 are as follows:
|
|
Policies
as of
|
|
Source
of Policies
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Homeowners
|
|
|
40,214
|
|
|
|
39,904
|
|
Manufactured Homes
|
|
|
6,455
|
|
|
|
6,250
|
|
Other Dwellings
|
|
|
5,020
|
|
|
|
5,200
|
|
Total Voluntary Policies in Force
|
|
|
51,689
|
|
|
|
51,354
|
|
|
|
|
|
|
|
|
|
|
Assumed through LA Citizens Depopulation
Program
|
|
|
9,676
|
|
|
|
9,930
|
|
Assumed through FL Citizens Depopulation
Program
|
|
|
6,714
|
|
|
|
6,882
|
|
Assumed through
TWIA Quota-Share Agreement
|
|
|
601
|
|
|
|
627
|
|
Total Assumed Policies
|
|
|
16,991
|
|
|
|
17,439
|
|
|
|
|
|
|
|
|
|
|
Total all Policies
|
|
|
68,680
|
|
|
|
68,793
|
|
Non
U.S.-GAAP Financial Measures
The
Company assesses its results of operations using certain non-U.S. GAAP financial measures, in addition to U.S. GAAP financial
measures. These non-U.S. GAAP financial measures are defined below. The Company believes these non-U.S. GAAP financial measures
provide useful information to investors and others in understanding and evaluating our operating performance in the same manner
as management does.
The
non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any financial
measures prepared in accordance with U.S. GAAP. The Company’s non-U.S. GAAP financial measures may be defined differently
from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised
in understanding how we define our non-U.S. GAAP financial measures.
Underwriting
Ratios
The
Company, like many insurance companies, analyzes performance based on underwriting ratios such as loss ratio, expense ratio and
combined ratio. The loss ratio is derived by dividing the amount of net losses and loss adjustment expenses incurred by net premiums
earned. The expense ratio is derived by dividing the sum of amortization of deferred policy acquisition costs and general and
administrative expenses incurred by net premiums earned. All items included in the loss and expense ratios are presented in the
Company’s U.S. GAAP financial statements. The combined ratio is the sum of the loss ratio and the expense ratio. A combined
ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the application of policies and the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on
an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting
estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment
expense reserves (as well as the reinsurance recoverable on those reserves), the valuation of fixed income and equity securities,
the valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination
of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs and stock-based
compensation expense.
Provision
for Loss and Loss Adjustment Expense Reserves
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 reserves. The process for establishing the provision for loss and loss adjustment expense
reserves reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and
unknown loss events. As such, the process is inherently complex and imprecise and estimates are constantly refined. The process
of establishing the provision for loss and loss adjustment expense reserves relies on the judgment and opinions of a large number
of individuals, including the opinions of the Company’s independent actuaries.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Factors
affecting the provision for loss and loss adjustment expense reserves include the continually evolving and changing regulatory
and legal environment, actuarial studies, professional experience and expertise of the Company’s claims department personnel
and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing
claims management practices including claims handling and settlement practices, the effect of inflationary trends on future loss
settlement costs, court decisions, economic conditions and public attitudes.
In
the actuarial review process, an analysis of the provision for loss and loss adjustment expense reserves is completed for the
Company’s insurance subsidiary. Unpaid losses, allocated loss adjustment expenses and unallocated loss adjustment expenses
are separately analyzed by line of business or coverage by accident year. A wide range of actuarial methods are utilized in order
to appropriately measure ultimate loss and loss adjustment expense costs. These methods include paid loss development, incurred
loss development and frequency-severity method. Reasonability tests such as ultimate loss ratio trends and ultimate allocated
loss adjustment expense to ultimate loss are also performed prior to selection of the final provision. The provision is indicated
by line of business or coverage and is separated into case reserves, reserves for losses incurred but not reported (“IBNR”)
claims and a provision for loss adjustment expenses (“LAE”).
Because
the establishment of the provision for loss and loss adjustment expense reserves is an inherently uncertain process involving
estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected
in the consolidated statements of income and comprehensive income for the periods in which such estimates are updated. Management
determines the loss and loss adjustment expense reserves as recorded on the Company’s financial statements, while the Company’s
independent actuaries develop a range of reasonable estimates and a point estimate of loss and loss adjustment expense reserves.
The actuarial point estimate is intended to represent the actuaries’ best estimate and will not necessarily be at the mid-point
of the high and low estimates of the range.
Valuation
of Fixed Income and Equity Securities
The
Company’s fixed income and equity securities are recorded at fair value using observable inputs such as quoted prices in
inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant
inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company
has recorded, which could change the amount the Company has recorded for its investments as well as net income and other comprehensive
loss on its consolidated balance sheets and statements of income and comprehensive income.
Gains
and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to
the consolidated statements of income and comprehensive income. Premium and discount on investments are amortized and accreted
using the interest method and charged or credited to net investment income.
The
Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary.
Further information regarding its detailed analysis and factors considered in establishing an other-than-temporary impairment
on an investment is discussed within Note 5 - Investments, to the consolidated financial statements.
Valuation
of Net Deferred Income Taxes
The
provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company’s consolidated
financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions
and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation
of net deferred income taxes.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
The
ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during
the periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established
when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining
whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific
deferred income tax asset balances, including the Company’s past and anticipated future performance, the reversal of deferred
income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in
a period, an expense must be recorded within the income tax provision in the consolidated statements of income and comprehensive
income.
The
Company carries a net deferred income tax asset of $1,033 and $1,279 at March 31, 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.
Securities
issued to 1347 Advisors, LLC
Pursuant
to the termination of the Management Services Agreement with 1347 Advisors, LLC (“Advisors,” a wholly-owned subsidiary
of KFSI), the Company issued Series B Preferred Shares, Warrants, and entered into a Performance Share Grant Agreement with Advisors
on February 24, 2015. On January 2, 2018, the Company entered into a stock purchase agreement with Advisors and IWS Acquisition
Corporation, also an affiliate of KFSI, pursuant to which the Company agreed to repurchase all 60,000 Series B Preferred Shares
held by Advisors and all 60,000 Series B Preferred Shares held by IWS Acquisition Corporation. The Company completed the repurchase
of the shares held by Advisors on January 2, 2018 and the repurchase of the shares held by IWS Acquisition Corporation on February
28, 2018. In connection with the stock purchase agreement, the Performance Share Grant Agreement, dated February 24, 2015, between
the Company and Advisors was terminated. No common shares were issued to Advisors under the Performance Share Grant Agreement.
Advisors has subsequently transferred the warrants to its affiliate, Kingsway America Inc.
Because
the Series B Preferred Shares had a redemption provision requiring mandatory redemption on February 24, 2020, the Company was
required to classify the shares as a liability on its balance sheet. The resulting liability was recorded at a discount to the
$4,200 ultimate redemption amount which included all dividends to be paid on the Series B Preferred Shares based upon an analysis
of the timing and amounts of cash payments expected to occur under the terms of the shares discounted for the Company’s
estimated cost of equity (13.9%).
The
Company estimated the fair value of the Warrants on grant date based upon the Black-Scholes option pricing model while it utilized
a Monte Carlo model to determine the fair value of the Performance Share Grant Agreement due to the fact that the underlying shares
are only issuable based upon the achievement of certain market conditions.
Deferred
Policy Acquisition Costs
Deferred
policy acquisition costs represent the deferral of expenses that the Company incurs related to successful efforts to acquire new
business or renew existing business. Acquisition costs, primarily commissions, premium taxes and underwriting and agency expenses
related to issuing insurance policies are deferred and charged against income ratably over the terms of the related insurance
policies. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of
this asset. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition
are expensed as incurred, as opposed to being deferred and amortized as the premium is earned.
Stock-Based
Compensation Expense
The
Company uses the fair-value method of accounting for stock-based compensation awards granted. The Company determines the fair
value of the stock options on their grant date using the Black-Scholes option pricing model and determines the fair value of restricted
stock units (“RSUs”) on their grant date using the fair value of the Company’s common stock on the date the
RSUs were issued (for those RSU which vest solely based upon the passage of time), as well as using multiple Monte Carlo simulations
for those RSUs with market-based vesting conditions. The fair value of these awards is recorded as compensation expense over the
requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase
to additional paid-in capital. When the stock options are exercised, or correspondingly, when the restricted stock units vest,
the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
New
Accounting Pronouncements
See
Note 4 – “Accounting Standards Adopted and Pending Adoption” in the Notes to our consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements and their
effect, if any, on the Company.
Analysis
of Financial Condition
As
of March 31, 2019 compared to December 31, 2018
Investments
The
Company’s investments in fixed income and equity securities are classified as available-for-sale and are reported at estimated
fair value. The Company held an investments portfolio comprised primarily of fixed income securities issued by the U.S. Government,
government agencies and high quality corporate issuers. The fixed income portfolio is managed by a third-party investment management
firm in accordance with the investment policies and guidelines approved by the investment committee of the Company’s Board
of Directors. These guidelines stress the preservation of capital, market liquidity and the diversification of risk. Additionally,
the Company’s investment committee is in place to identify, evaluate and approve suitable investment opportunities for the
Company. This has resulted in a number of equity investments managed by the committee that represent approximately 3.5% of the
estimated fair value of the Company’s total investment portfolio as of March 31, 2019. Investments held by the Company’s
insurance subsidiary must also comply with applicable domiciliary state regulations that prescribe the type, quality and concentration
of investments.
The
table below summarizes, by type, the Company’s investments as of March 31, 2019 and December 31, 2018.
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Type
of Investment
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government
|
|
$
|
8,698
|
|
|
|
9.6
|
%
|
|
$
|
8,422
|
|
|
|
10.1
|
%
|
State municipalities
and political subdivisions
|
|
|
6,360
|
|
|
|
7.0
|
%
|
|
|
6,428
|
|
|
|
7.7
|
%
|
Asset-backed securities
and collateralized mortgage obligations
|
|
|
34,430
|
|
|
|
37.9
|
%
|
|
|
32,792
|
|
|
|
39.4
|
%
|
Corporate
|
|
|
29,987
|
|
|
|
33.0
|
%
|
|
|
28,668
|
|
|
|
34.4
|
%
|
Total
fixed income securities
|
|
|
79,475
|
|
|
|
87.5
|
%
|
|
|
76,310
|
|
|
|
91.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
46
|
|
|
|
–%
|
|
|
|
3,077
|
|
|
|
3.7
|
%
|
Warrants to purchase
common stock
|
|
|
–
|
|
|
|
–%
|
|
|
|
123
|
|
|
|
0.1
|
%
|
Rights
to purchase common stock
|
|
|
–
|
|
|
|
–%
|
|
|
|
63
|
|
|
|
0.1
|
%
|
Total equity securities
|
|
|
46
|
|
|
|
–%
|
|
|
|
3,263
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
7,168
|
|
|
|
7.9
|
%
|
|
|
474
|
|
|
|
0.6
|
%
|
Other
investments
|
|
|
4,188
|
|
|
|
4.6
|
%
|
|
|
3,287
|
|
|
|
3.9
|
%
|
Total
investments
|
|
$
|
90,877
|
|
|
|
100.0
|
%
|
|
$
|
83,334
|
|
|
|
100.0
|
%
|
Pursuant
to the certificate of authority we received from the TDI, we are required to deposit assets with the State of Texas. These assets
consist of cash and various fixed income securities listed in the table above having an amortized cost basis of $2,000 and an
estimated fair value of $1,989 as of March 31, 2019.
The
Company’s other investments are comprised of investments in a limited partnership and a limited liability company which
seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has a total potential
commitment of $935 related to these investments, of which the two entities have drawn down approximately $776 through March 31,
2019. The limited liability company is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company
has accounted for these two investments 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.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Additionally,
on June 18, 2018 the Company invested $2,219 in FGI Metrolina Property Income Fund, LP (the “Fund”), which intends
to invest 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 March 31, 2019, the total amount
invested in the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,112.
Also
included in other investments is 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 FOIR.
Liquidity
and Cash Flow Risk
The
table below summarizes the fair value of the Company’s fixed income securities by contractual maturity as of March 31, 2019
and December 31, 2018. 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.
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Matures
in:
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
One
year or less
|
|
$
|
3,917
|
|
|
|
4.9
|
%
|
|
$
|
3,758
|
|
|
|
4.9
|
%
|
More than one to
five years
|
|
|
37,833
|
|
|
|
47.6
|
%
|
|
|
34,169
|
|
|
|
44.8
|
%
|
More than five to
ten years
|
|
|
12,466
|
|
|
|
15.7
|
%
|
|
|
13,806
|
|
|
|
18.1
|
%
|
More
than ten years
|
|
|
25,259
|
|
|
|
31.8
|
%
|
|
|
24,577
|
|
|
|
32.2
|
%
|
Total
|
|
$
|
79,475
|
|
|
|
100.0
|
%
|
|
$
|
76,310
|
|
|
|
100.0
|
%
|
The
Company holds cash and high-grade short-term assets which, along with fixed income and equity securities, management believes
are sufficient in amount for the payment of loss and loss adjustment expense reserves and other operating subsidiary obligations
on a timely basis. The Company may not be able to liquidate its investments in the event that additional cash is required to meet
obligations to its policyholders; however, the Company believes that the high-quality, liquid investments in its portfolio provide
it with sufficient liquidity.
Market
Risk
Market
risk is the risk that the Company will incur losses due to adverse changes in interest or currency exchange rates and equity prices.
Given the Company’s operations predominantly invest in U.S. dollar denominated instruments and maintain a relatively insignificant
investment in equity instruments, its primary market risk exposures in the investments portfolio are to changes in interest rates.
Because
the investments portfolio is comprised of primarily fixed maturity instruments that are usually held to maturity, periodic changes
in interest rate levels generally impact the Company’s financial results to the extent that the investments are recorded
at market value and reinvestment yields are different than the original yields on maturing instruments. During periods of rising
interest rates, the market values of the existing fixed income securities will generally decrease. The reverse is true during
periods of declining interest rates.
Credit
Risk
Credit
risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation.
Credit risk arises from the Company’s positions in short-term investments, corporate debt instruments and government, government
agency and municipal bonds.
At
March 31, 2019 and December 31, 2018, the Company’s debt securities had the following quality ratings as assigned by Standard
and Poor’s (“S&P”) or Moody’s Investors Service (“Moody’s”).
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Rating
(S&P/Moody’s)
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
|
Carrying
Amount
|
|
|
Percent
of Total
|
|
AAA/Aaa
|
|
$
|
45,176
|
|
|
|
56.8
|
%
|
|
$
|
44,605
|
|
|
|
58.5
|
%
|
Aa/Aa
|
|
|
7,394
|
|
|
|
9.3
|
%
|
|
|
7,159
|
|
|
|
9.4
|
%
|
A/A
|
|
|
18,564
|
|
|
|
23.4
|
%
|
|
|
16,211
|
|
|
|
21.2
|
%
|
BBB
|
|
|
8,341
|
|
|
|
10.5
|
%
|
|
|
8,335
|
|
|
|
10.9
|
%
|
Total
fixed income securities
|
|
$
|
79,475
|
|
|
|
100.0
|
%
|
|
$
|
76,310
|
|
|
|
100.0
|
%
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Other-Than-Temporary
Impairment
The
length of time an individual investment may be held in an unrealized loss position may vary based on the opinion of the investment
manager and their respective analyses related to valuation and to the various credit risks that may prevent the Company from recapturing
the principal investment. In the case of an individual investment with a maturity date where the investment manager determines
that there is little or no risk of default prior to the maturity of a holding, the Company would elect to hold the investment
in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might
increase the risk associated with recapture of principal, the Company may elect to sell investments at a loss.
The
Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary.
Further information regarding the Company’s detailed analysis and factors considered in establishing an other-than-temporary
impairment on an investment is discussed within Note 5 - “Investments,” to the consolidated financial statements in
Item 1 of this report.
As
a result of the analysis performed by the Company, we recorded a write-down for an other-than-temporary impairment on a single
equity investment resulting in a charge of $215 against net investment income for the quarter ended December 31, 2018. We recorded
this write-down as a result of our analysis of the investment’s operating losses for 2018, which showed a considerable decline
when compared to its results for 2017. There were no write-downs for other-than-temporary impairment on our investments for the
quarters ended March 31, 2019 or 2018.
At
March 31, 2019, the Company did not have any gross unrealized losses for equity securities, while gross unrealized losses for
fixed income securities amounted to $461, and there were no unrealized losses attributable to non-investment grade fixed income
securities. Fixed income securities in unrealized loss positions continued to pay interest and were not subject to material changes
in their respective debt ratings. The Company concluded the declines in value on its fixed income securities were considered temporary.
As the Company has the capacity to hold these investments to maturity, no impairment provision was considered necessary.
Deferred
Policy Acquisition Costs
The
Company’s deferred policy acquisition costs (“DPAC”) include commissions, premium taxes, assessments and other
policy processing fees that are directly related to successful efforts to acquire new or existing insurance policies to the extent
they are considered recoverable and represent those costs related to acquiring the premiums the Company has yet to earn (the unearned
premium reserve). DPAC decreased $877, to $8,234 as of March 31, 2019 compared to $9,111 as of December 31, 2018, corresponding
to a decrease in our unearned premium reserves over the same period. DPAC expressed as a percentage of unearned premium reserves
was 18.0% and 17.6% as of March 31, 2019 and December 31, 2018, respectively.
Premiums
Receivable, Net of Allowance for Doubtful Accounts
Premiums
receivable, net of allowances for credit losses, decreased by $5,509 to $2,211 as of March 31, 2019 from $7,720 as of December
31, 2018, due, in large part, to our collection of premiums due to us from FL Citizens as of December 31, 2018.
Ceded
Unearned Premiums
Ceded
unearned premiums represents the unexpired portion of premiums which have been paid to the Company’s reinsurers. Ceded unearned
premiums are charged to income over the terms of the respective reinsurance treaties. Our catastrophe excess of loss (“CAT
XOL”) treaties, which run from June 1st of each year to May 31st of the following year, make up the majority of our ceded
unearned premiums at both March 31, 2019 and December 31, 2018.
Reinsurance
Recoverable
Reinsurance
recoverable on both paid losses and loss reserves represents amounts due to the Company, or expected to be due to the Company
from its reinsurers, based upon claims and claim reserves which have exceeded the retention amount under our reinsurance treaties.
As of March 31, 2019, we have recorded an expected recovery of $1,959 on paid losses as well as $16,336 on loss and loss adjustment
expense reserves, compared to $530 and $5,661, respectively, as of December 31, 2018. The large increase in our reinsurance recoverable
for the current quarter relates to recoveries expected to be received under our 2018/2019 CAT XOL reinsurance program for hailstorms
affecting our policyholders in the Dallas Metroplex area in late-March 2019. We expect our gross incurred losses from this event
to be approximately $12,500, however we anticipate a recovery for virtually all of these losses under our current reinsurance
program.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Funds
Deposited with Reinsured Companies
Funds
deposited with reinsured companies represents collateral we have placed on deposit with Brotherhood based upon our quota-share
agreement to reinsure a portion of Brotherhood’s business for wind/hail coverage only. Our deposit decreased by $48 to $239
as of March 31, 2019 from $287 as of December 31, 2018 as we have applied the collateral placed on deposit to our quota-share
portion of the losses Brotherhood has paid during the quarter ended March 31, 2019. Our remaining deposit is expected to fund
all of our remaining liabilities to Brotherhood as we have terminated the quota-share with Brotherhood effective January 1, 2018.
Current
Income Taxes Recoverable
Current
income taxes recoverable were $1,065 as of March 31, 2019 compared to $1,119 as of December 31, 2018, representing the estimate
of both the Company’s state and federal income taxes due as of both periods, respectively, less estimated payments made.
Net
Deferred Tax Asset
The
Company’s net deferred tax asset decreased $246, to $1,033 as of March 31,2019, from $1,279 as of December 31, 2018, due,
in large part, to the decrease in deferred tax assets associated with unrealized losses on our bond portfolio, as well as increases
in deferred tax liabilities associated with unrealized gains on our bond portfolio. Net deferred income taxes are comprised of
approximately $2,878 of deferred tax assets, net of approximately $1,845 of deferred tax liabilities as of March 31, 2019, compared
to $3,228 of deferred tax assets, net of $1,949 of deferred tax liabilities as of December 31, 2018.
Property
and Equipment
Property
and equipment decreased $29 to $286 as of March 31, 2019 compared to $315 as of December 31, 2018, primarily as a result of depreciation.
Our policy for the capitalization and depreciation of these assets can be found in Note 3 – Significant Accounting Policies
in Item 1 of this report.
Other
Assets
Other
assets increased $267, to $1,407 as of March 31, 2019 from $1,140 as of December 31, 2018. The major components of other assets,
and the change therein, are shown below. As discussed in Note 18 in Item 1 of this report, we have a right-of-use asset in the
amount of $279 as of March 31, 2019, associated with our adoption of FASB Topic 842 –
Leases
, effective January 1,
2019.
Other Assets
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Change
|
|
Accrued interest on investments
|
|
$
|
425
|
|
|
$
|
406
|
|
|
$
|
19
|
|
Security deposits for facility leases
|
|
|
25
|
|
|
|
25
|
|
|
|
–
|
|
Prepaid expenses
|
|
|
658
|
|
|
|
683
|
|
|
|
(25
|
)
|
Right-of-use asset for operating leases
|
|
|
279
|
|
|
|
–
|
|
|
|
279
|
|
Other
|
|
|
20
|
|
|
|
26
|
|
|
|
(6
|
)
|
Total
|
|
$
|
1,407
|
|
|
$
|
1,140
|
|
|
$
|
267
|
|
Loss
and Loss Adjustment Expense Reserves
Loss
and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not reported (“IBNR”)
loss events, as well as the related estimated loss adjustment expenses (“LAE”) gross of amounts expected to be recovered
from reinsurance. The table below separates our loss reserves and LAE between IBNR and case specific estimates as of March 31,
2019 and December 31, 2018, and also shows the expected reinsurance recoverable on those reserves.
|
|
Case
Loss Reserves
|
|
|
Case
LAE Reserves
|
|
|
Total
Case Reserves
|
|
|
IBNR
Reserves (including LAE)
|
|
|
Total
Reserves
|
|
|
Reinsurance
Recoverable on Reserves
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
(1)
|
|
$
|
10,479
|
|
|
$
|
1,095
|
|
|
$
|
11,574
|
|
|
$
|
12,398
|
|
|
$
|
23,972
|
|
|
$
|
13,623
|
|
Special
Property
(2)
|
|
|
1,735
|
|
|
|
364
|
|
|
|
2,099
|
|
|
|
1,739
|
|
|
|
3,838
|
|
|
|
2,713
|
|
Total
|
|
$
|
12,214
|
|
|
$
|
1,459
|
|
|
$
|
13,673
|
|
|
$
|
14,137
|
|
|
$
|
27,810
|
|
|
$
|
16,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
$
|
4,635
|
|
|
$
|
587
|
|
|
$
|
5,222
|
|
|
$
|
3,729
|
|
|
$
|
8,951
|
|
|
$
|
1,584
|
|
Special
Property
|
|
|
3,244
|
|
|
|
419
|
|
|
|
3,663
|
|
|
|
2,537
|
|
|
|
6,200
|
|
|
|
4,077
|
|
Total
|
|
$
|
7,879
|
|
|
$
|
1,006
|
|
|
$
|
8,885
|
|
|
$
|
6,266
|
|
|
$
|
15,151
|
|
|
$
|
5,661
|
|
(1)
Homeowners refers to our multi-peril policies for traditional dwellings as well as mobile and manufactured homes.
(2)
Special property includes both our fire and allied lines of business, which are primarily wind/hail only products, and also
includes the commercial lines wind/hail only business we had assumed through our agreement with Brotherhood and our personal
lines wind/hail only business we have assumed through our agreements with LA Citizens, FL Citizens and TWIA.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Gross
reserves as of March 31, 2019 were $27,810, comprised primarily of reserves in the amount of $2,700 for Hurricane Harvey, a major
storm which made initial landfall in the United States as a Category 4 hurricane near Rockport, Texas in August 2017, as well
as gross reserves in the amount of $12,500 for PCS Event 1920, a series of hailstorms which occurred in the Dallas Metroplex area
in late-March, 2019. Reinsurance recoveries have also been established for these same amounts as of March 31, 2019, resulting
in $0 net reserves for both Hurricane Harvey and PCS 1920. As of December 31, 2018, both gross reserves and reinsurance recoveries
for Hurricane Harvey and PCS 1920 were $3,879 and $0, respectively.
As
of March 31, 2019, we anticipate our total incurred losses from Hurricane Harvey to be $29,000 gross, and $5,000 net of reinsurance
recoveries. We anticipate our total incurred losses from PCS 1920 to be $12,500 gross, and $0 net of reinsurance recoveries.
The
Company cannot predict whether loss and loss adjustment expense reserves will develop favorably or unfavorably from the amounts
reported in the Company’s consolidated financial statements. Any such development could have a material effect on the Company’s
consolidated financial results for a given period.
Unearned
Premium Reserves
Unearned
premium reserves decreased $6,040 to $45,867 as of March 31, 2019, compared to $51,907 as of December 31, 2018. Typically, we
report a reduction in our unearned premium reserves during the first quarter of each year, due to our assumption of policies from
LA Citizens and/or FL Citizens in December of each year. The majority of these policies which we have assumed have renewal dates
occurring outside of the first quarter of each year. Furthermore, our annualized retention experienced during the first quarter
of 2019 declined by 1.2% compared to the first quarter of last year. The Company believes this decline to be due to premium changes
implemented to our Louisiana and Texas books of business, however, the Company’s rate of premium earned per exposure has
increased from December 31, 2018. The following table outlines the changes in unearned premium reserves by state and by line of
business.
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Change
|
|
Homeowners - LA
|
|
$
|
15,417
|
|
|
$
|
16,639
|
|
|
$
|
(1,222
|
)
|
Special Property
- LA
|
|
|
6,889
|
|
|
|
7,633
|
|
|
|
(744
|
)
|
Total Louisiana
|
|
|
22,306
|
|
|
|
24,272
|
|
|
|
(1,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners – TX
|
|
|
14,627
|
|
|
|
15,746
|
|
|
|
(1,119
|
)
|
Special Property
– TX
|
|
|
3,082
|
|
|
|
3,241
|
|
|
|
(159
|
)
|
Total Texas
|
|
|
17,709
|
|
|
|
18,987
|
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Property
– FL
|
|
|
5,852
|
|
|
|
8,648
|
|
|
|
(2,796
|
)
|
Total Florida
|
|
|
5,852
|
|
|
|
8,648
|
|
|
|
(2,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned Premium
Reserves
|
|
$
|
45,867
|
|
|
$
|
51,907
|
|
|
$
|
(6,040
|
)
|
Ceded
Reinsurance Premiums Payable
Ceded
reinsurance premiums payable decreased $247, to $9,248 as of March 31, 2019, compared to $9,495 as of December 31, 2018. The bulk
of the balance payable as of both dates represents quarterly installment payments due under our catastrophe reinsurance programs,
which are paid in the first month of each quarter.
Agency
Commissions Payable
Agency
commissions payable increased $99 to $901 as of March 31, 2019 versus $802 as of December 31, 2018. As agency commissions are
paid in arrears, this balance represents commissions owed to the Company’s independent agencies on policies written throughout
the months ended March 31, 2019 and, December 31, 2018 respectively. Since the commissions we pay to our independent agencies
are based upon a percentage of the premium our agencies write, the balance due will vary directly with the volume of premium written
each month.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Premiums
Collected in Advance
Advance
premium deposits increased to $4,036 as of March 31, 2019 from $1,840 as of December 31, 2018, and represent cash the Company
has received for policies which were not yet in-force as of March 31, 2019 and December 31, 2018, respectively. Upon the effective
date of coverage, advance premiums are reclassified to the unearned premium reserve account.
Funds
Held under Reinsurance Treaties
Funds
held under reinsurance treaties represents collateral we have received on deposit from our reinsurers under our catastrophe excess
of loss treaties and is intended to fund those reinsurers’ pro-rata portion of the reserves we have established for losses
and loss adjustment expenses. As of both March 31, 2019 and December 31, 2018 deposits were $162.
Accrued
Premium Taxes and Assessments
Accrued
premium taxes and assessments decreased $1,596, to $1,463 as of March 31, 2019, compared to $3,059 as of December 31, 2018, primarily
due to the payment of premium taxes due March 1
st
of each year, along with the filing of the Company’s premium
tax returns in Louisiana, Texas and Florida.
Accounts
Payable and Other Accrued Expenses
Accounts
payable and other accrued expenses increased $541, to $3,301 as of March 31, 2019 compared to $2,760 as of December 31, 2018.
The largest drivers of the change when comparing periods was the change in amounts due for professional fees, which increased
by $646 from December 31, 2018, due to costs associated with the Purchase Agreement with FedNat Holding Company, as well as an
increase of $269 in lease liabilities due to the adoption of FASB Topic 842 –
Leases
, which required us to record
a liability for the required minimum future payments due under the terms of certain of our facility leases. The components of
accounts payable and other accrued expenses, as well as the change therein, are shown below.
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Change
|
|
Accrued
employee compensation
|
|
$
|
76
|
|
|
$
|
271
|
|
|
$
|
(195
|
)
|
Accrued professional
fees
|
|
|
1,162
|
|
|
|
516
|
|
|
|
646
|
|
Unearned policy
fees
|
|
|
1,571
|
|
|
|
1,701
|
|
|
|
(130
|
)
|
Lease liabilities/capital
lease obligations
|
|
|
387
|
|
|
|
118
|
|
|
|
269
|
|
Other
accounts payable
|
|
|
105
|
|
|
|
154
|
|
|
|
(49
|
)
|
Total
|
|
$
|
3,301
|
|
|
$
|
2,760
|
|
|
$
|
541
|
|
Related
Party Transactions
Termination
of Performance Share Grant Agreement
On
July 24, 2018, the Company entered into a Termination Agreement with Kingsway America, Inc. (“KAI”, a wholly owned
subsidiary of KFSI), pursuant to which KAI agreed to terminate the Performance Share Grant Agreement (“PSGA”) dated
March 26, 2014, between the Company and KAI in exchange for a payment of $1,000 from the Company, which has been recorded as a
charge under the heading “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s
statement of income for the year ended December 31, 2018. As a result of the Termination Agreement, KAI has no further rights
to any of the performance share grants contemplated by the PSGA. Under the PSGA, KAI was entitled to receive up to an aggregate
of 375,000 shares of our common stock upon achievement of certain milestones regarding our stock price. Mr. Larry G. Swets, Jr.,
who is a director of the Company, also served as Chief Executive Officer and Director of KFSI on the date the Company entered
into the Termination Agreement. The Company did not issue any shares under the PSGA while the PSGA was outstanding. The Termination
Agreement was approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.
Termination
of Management Services Agreement and Repurchase of Series B Preferred Shares
On
February 24, 2015, we terminated our Management Services Agreement with 1347 Advisors, LLC (“1347 Advisors”), a wholly
owned subsidiary of KFSI. In connection with the termination, we entered into a Performance Shares Grant Agreement, dated February
24, 2014, with 1347 Advisors pursuant to which we agreed to issue 100,000 shares of our common stock to 1347 Advisors subject
to the achievement of certain events specified in the agreement. We also issued to 1347 Advisors 120,000 shares of our Series
B preferred stock having a liquidation amount per share equal to $25.00 (the “Series B Preferred Shares”). 1347 Advisors
subsequently transferred 60,000 of the Series B Preferred Shares to IWS Acquisition Corporation, an affiliate of KFSI.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
On
January 2, 2018, the Company entered into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant
to which the Company repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740,
representing (i) the par value of the Series B Preferred Shares, or $1,500; and (ii) declared and unpaid dividends with respect
to the dividend payment due on February 23, 2018, or $240. Also in connection with the Stock Purchase Agreement, the Performance
Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated. No shares of common stock
were issued to 1347 Advisors under the Performance Shares Grant Agreement. In connection with the termination of the Performance
Shares Grant Agreement, the Company made a cash payment of $300 to 1347 Advisors. Upon termination of the MSA Agreement, the Company
recorded an increase of approximately $54 to additional paid in capital, representing the estimated fair value of the Performance
Shares Grant Agreement on the grant date. Upon the termination of the Performance Shares Grant Agreement, we compared the amount
previously recorded in additional paid in capital to the amount paid to terminate the agreement, resulting in a reversal of the
$54 originally recorded to additional paid in capital as well as a charge of $246 recorded to “Loss on repurchase of Series
B Preferred Shares and Performance Shares” on the Company’s statement of income for the quarter ended March 31, 2018.
Pursuant
to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series B Preferred Shares from IWS
Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of a capital raise resulting in the Company
receiving net proceeds in excess of $5,000. On February 28, 2018, the Company purchased the remaining 60,000 Series B Preferred
Shares from IWS Acquisition Corporation for $1,500 with the proceeds from the Company’s 8.00% Cumulative Preferred Stock,
Series A (the “Series A Preferred Stock”) offering (discussed under the heading “Shareholders’ Equity”
below).
The
Company applied the guidance outlined in ASC 480 –
Distinguishing Liabilities from Equity
in recording the issuance
of the Series B Preferred Shares. Due to the fact that the shares had a mandatory redemption date of February 24, 2020, applicable
guidance required that we classify the shares as a liability on our consolidated balance sheet, rather than recording the value
of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected
to be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result,
total amortization in the amount of $0 and $33 was charged to operations for the quarters ended March 31, 2019 and 2018, respectively.
Upon our repurchase of the Series B Preferred Shares in both January and February 2018, we compared the amortized carrying amount
of the liability to the amount paid to repurchase the shares, resulting in a charge of $366 to “Loss on repurchase of Series
B Preferred Shares and Performance Shares” on the Company’s statement of income for the quarter ended March 31, 2018.
Investment
in Limited Partnership and Limited Liability Company
On
April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary business
is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund in which the Company has committed to invest
$500, of which the Company has invested $341 as of March 31, 2019. The managing member of Argo, Mr. John T. Fitzgerald, was appointed
as President and Chief Executive Officer of KFSI on September 5, 2018 and has served on its board of directors since April 21,
2016.
On
June 18, 2018, the Company invested $2,219 as a limited partner in Metrolina Property Income Fund, LP (the “Fund”).
The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and
Co-Chairman of the Board of Directors of the Company, respectively. As of March 31, 2019, the Company’s total investment
in the Fund was $2,719, representing an approximate 47% ownership stake in the Fund.
Public
Offering of Preferred Stock
A
fund managed by Fundamental Global Investors, LLC, one of the Company’s significant stockholders, purchased an aggregate
of 34,620 shares of the Series A Preferred Stock in the Company’s public offering of the shares, at the public offering
price of $25.00 per share, including 31,680 shares purchased for a total of approximately $792 on February 28, 2018, the closing
date of the offering, and 2,940 shares purchased for a total of approximately $74 on March 26, 2018 in connection with the underwriters’
exercise of their over-allotment option. In addition, CWA Asset Management Group, LLC, of which 50% is owned by Fundamental Global
Investors, LLC, holds 56,846 shares of the Series A Preferred Stock for customer accounts (including 44 shares of the Series A
Preferred Stock held by Mr. Cerminara in a joint account with his spouse) purchased at the public offering price in connection
with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the underwriters
on the purchase of these shares.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Contractual
Obligations
As
of March 31, 2019, the Company had the following minimum amounts due for its office facilities and automobile leases in Louisiana,
Florida and Texas.
Year
ending March 31,
|
|
Facility
Leases
|
|
|
Automobile
Leases
|
|
|
Total
|
|
2020
|
|
$
|
328
|
|
|
$
|
57
|
|
|
$
|
385
|
|
2021
|
|
|
136
|
|
|
|
67
|
|
|
|
203
|
|
2022
|
|
|
6
|
|
|
|
–
|
|
|
|
6
|
|
Total
|
|
$
|
470
|
|
|
$
|
124
|
|
|
$
|
594
|
|
Shareholders’
Equity
Offering
of 8.00% Cumulative Preferred Stock, Series A
On
February 28, 2018, we completed the underwritten public offering of 640,000 preferred shares designated as 8.00% Cumulative Preferred
Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”). Also, on March 26, 2018, we issued an
additional 60,000 shares of Series A Preferred Stock pursuant to the exercise of the underwriters’ over-allotment option.
Dividends on the Series A Preferred Stock are cumulative from the date of original issue and will be payable quarterly on the
15th day of March, June, September and December of each year, commencing on June 15, 2018, when, as and if declared by our Board
of Directors or a duly authorized committee thereof. The first dividend record date for the Series A Preferred Stock was on June
1, 2018. For the quarters ended March 31, 2019 and 2018, the Board of Directors declared, and the Company paid dividends totaling
$350 and $0, respectively, representing all quarterly amounts due for the Preferred Stock. Dividends are payable out of amounts
legally available therefor at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $2.00
per share of Series A Preferred Stock per year. The Company’s Board of Directors declared the second quarter 2019
dividend on the shares of Series A Preferred Stock on May 14, 2019.
The
Series A Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the stock will be redeemable at
our option, for cash, in whole or in part, at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends
to, but not including, the date of redemption. The Series A Preferred Stock has no stated maturity and will not be subject to
any sinking fund or mandatory redemption. The stock will generally have no voting rights except as provided in the Certificate
of Designations or as from time to time provided by law. The affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock and each other class or series of voting parity stock will be required at any time for us to
authorize, create or issue any class or series of our capital stock ranking senior to the Series A Preferred Stock with respect
to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up, to amend any provision of
our Certificate of Incorporation so as to materially and adversely affect any rights of the Series A Preferred Stock or to take
certain other actions.
The
shares have been listed on the Nasdaq Stock Market under the symbol “PIHPP”, and trading of the shares commenced on
March 22, 2018. Net proceeds received by Company were approximately $16,500. The Company used $1,500 of the net proceeds to repurchase
60,000 shares of its Series B Preferred Shares from IWS Acquisition Corporation, as previously discussed under the heading “Related
Party Transactions.
The
table below presents the primary drivers behind the changes to total shareholders’ equity for the three months ended March
31, 2019 and 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
Preferred
Shares Outstanding
|
|
|
Common
Shares
Outstanding
|
|
|
Treasury
Shares
|
|
|
Total
Shareholders’
Equity
|
|
Balance,
January 1, 2018
|
|
|
–
|
|
|
|
5,984,766
|
|
|
|
151,359
|
|
|
$
|
46,802
|
|
Issuance of Series
A Preferred Stock
|
|
|
700,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,493
|
|
Repurchase of Performance Shares
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(54
|
)
|
Stock compensation
expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
44
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,951
|
|
Unrealized
losses on investment portfolio (net of income taxes)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(684
|
)
|
Balance,
March 31, 2018
|
|
|
700,000
|
|
|
|
5,984,766
|
|
|
|
151,359
|
|
|
$
|
64,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January
1, 2019
|
|
|
700,000
|
|
|
|
6,012,764
|
|
|
|
151,359
|
|
|
$
|
62,747
|
|
Adoption of new
accounting standards
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10
|
|
Dividends declared
on Series A Preferred Stock ($0.50 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(350
|
)
|
Stock compensation
expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
52
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
98
|
|
Unrealized
losses on investment portfolio (net of income taxes)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
911
|
|
Balance,
March 31, 2019
|
|
|
700,000
|
|
|
|
6,012,764
|
|
|
|
151,359
|
|
|
$
|
63,468
|
|
Results
of Operations
Three
Months Ended March 31, 2019 Compared with Three Months Ended March 31, 2018
Dollar
amounts included in the “Results of Operations” are presented in thousands, except as otherwise specified.
Gross
Premiums Written
The
following table shows our gross premiums written by state and by line of business for the three months ended March 31, 2019 and
2018.
|
|
Three
months ended March 31,
|
|
Line
of Business
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Homeowners-LA
|
|
$
|
6,734
|
|
|
$
|
6,918
|
|
|
$
|
(184
|
)
|
Special
Property-LA
|
|
|
3,108
|
|
|
|
3,201
|
|
|
|
(93
|
)
|
Total Louisiana
|
|
|
9,842
|
|
|
|
10,119
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners-TX
|
|
|
6,433
|
|
|
|
4,191
|
|
|
|
2,242
|
|
Special
Property-TX
|
|
|
1,512
|
|
|
|
2,475
|
|
|
|
(963
|
)
|
Total Texas
|
|
|
7,945
|
|
|
|
6,666
|
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
Property-FL
|
|
|
792
|
|
|
|
(164
|
)
|
|
|
956
|
|
Total
Florida
*
|
|
|
792
|
|
|
|
(164
|
)
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Premium Written
|
|
$
|
18,579
|
|
|
$
|
16,621
|
|
|
$
|
1,958
|
|
*
Florida
premiums written for the three months ended March 31, 2018 were negative due to the net cancellation of policies we assumed from
FL Citizens on December 19, 2017 as policyholders have a limited time to opt-out of the assumption process.
The
increase in gross written premiums was primarily the result of organic growth in voluntary production from our independent agencies
in Texas and Florida. In Texas, our homeowners’ book of business in the southern portion of the state accounted for the
majority of our growth, along with a state-wide rate increase which became effective in January 2019 for renewal business. Furthermore,
we have discontinued writing new business in areas of Texas which we have determined to be less profitable. In Florida, our wind
only product has grown when comparing quarters, due, in part, to our depopulation of policies from FL Citizens along with the
aforementioned increase in voluntary production.
Ceded
Premiums Written
Ceded
premiums written increased by $2,737 to $8,822 for the three months ended March 31, 2019, compared to $6,085 for the first quarter
2018. The increase in ceded premiums written is primarily due to an increase in the total insured value of the Company’s
book of business year over year as well as the change in the geographic mix of coverage that we provide. Furthermore, we have
increased the limits purchased under our catastrophe excess of loss program (“CAT XOL Program”) from $200,000 for
the treaty year ended May 31, 2018 to $262,000 for the treaty year ending May 31, 2019. The following table is a summary of key
provisions under each of our CAT XOL Programs in effect during the quarters ended March 31, 2019 and 2018.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
2017/2018
CAT XOL Program
06/01/17
– 05/31/18
|
|
|
2018/2019
CAT XOL Program
06/01/18
– 05/31/19
|
|
Wind/Hail loss occurrence
clause
(1)
|
|
|
144
hours
|
|
|
|
144
hours
|
|
Retention
on first occurrence
(2)
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Retention on second occurrence
|
|
$
|
2,000
|
|
|
$
|
4,000
|
|
Limit of coverage including first event
retention
|
|
$
|
200,000
|
|
|
$
|
262,000
|
|
Franchise deductible
(3)
|
|
$
|
250
|
|
|
|
N/
A
|
|
(1)
Specifies the time period during which our losses from the same occurrence may be aggregated and applied to our retention and
limits. We may pick the date and time when the period of consecutive hours begin in order to maximize our recovery.
(2)
For the period beginning June 1, 2018 and ending December 30, 2018, our first occurrence retention was $10,000, however on December
31, 2018 we purchased an additional excess of loss treaty with single-limit coverage of $5,000 in excess of a retention of $5,000
through May 31, 2019.
(3)
Specifies the gross incurred losses by which each 144 hour loss occurrence must exceed before recoveries are generated under our
aggregate treaty. Once the franchise deductible is met, all losses under the loss occurrence qualify for recovery, not just those
losses which exceed the franchise deductible amount. The Company did not purchase aggregate coverage under its 2018/2019 CAT XOL
Program.
The
total cost of our CAT XOL coverage is estimated to be approximately $34,200 for the 2018/2019 Program, compared to $24,800 for
the 2017/2018 Program.
Net
Premium Earned
The
following table shows our net premiums earned by state and by line of business.
|
|
Three
months ended March 31,
|
|
Line
of Business
|
|
|
2019
|
|
|
|
2018
|
|
|
|
Change
|
|
Homeowners-LA
|
|
$
|
5,108
|
|
|
$
|
5,655
|
|
|
$
|
(547
|
)
|
Special
Property-LA
|
|
|
2,806
|
|
|
|
2,905
|
|
|
|
(99
|
)
|
Total Louisiana
|
|
|
7,914
|
|
|
|
8,560
|
|
|
|
(646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners-TX
|
|
|
5,049
|
|
|
|
1,401
|
|
|
|
3,648
|
|
Special
Property-TX
|
|
|
1,479
|
|
|
|
566
|
|
|
|
913
|
|
Total Texas
|
|
|
6,528
|
|
|
|
1,967
|
|
|
|
4,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
Property-FL
|
|
|
1,147
|
|
|
|
2,088
|
|
|
|
(941
|
)
|
Total Florida
|
|
|
1,147
|
|
|
|
2,088
|
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
premium earned
|
|
$
|
15,589
|
|
|
$
|
12,615
|
|
|
$
|
2,974
|
|
Premium
earned on a gross and ceded basis is as shown in the following table.
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Gross premium earned
|
|
$
|
24,619
|
|
|
$
|
18,746
|
|
|
$
|
5,873
|
|
Ceded premium
earned
|
|
|
9,030
|
|
|
|
6,131
|
|
|
|
2,899
|
|
Net premium earned
|
|
$
|
15,589
|
|
|
$
|
12,615
|
|
|
$
|
2,974
|
|
Other
Income
Other
income increased $227 to $774 for the quarter ended March 31, 2019, compared to $547 for the same period in 2018. Other income
is comprised of claims adjusting fee revenue earned by our subsidiary, ClaimCor, policy fee income charged to our policyholders
on each policy issued, premium financing fees for those policyholders which elect to pay their premiums on an installment basis,
and also commission revenue resulting from a brokerage sharing agreement between our insurance subsidiary, Maison, and the intermediary
Maison uses to place its CAT XOL Program.
Losses
and Loss Adjustment Expenses
Losses
and LAE represent both actual payments made and changes in estimated future payments to be made to our policyholders. The following
table sets forth the components of our losses and loss ratios for the periods presented on both a gross and net (of reinsurance)
basis.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
Gross
Losses
($)
|
|
|
Gross
Loss Ratio
(%)
|
|
|
Gross
Losses
($)
|
|
|
Gross
Loss Ratio
(%)
|
|
|
Net
Losses ($)
|
|
|
Net
Loss Ratio (%)
|
|
|
Net
Losses ($)
|
|
|
Net
Loss Ratio (%)
|
|
Catastrophe
losses
(1)
|
|
$
|
12,493
|
|
|
|
50.8
|
%
|
|
$
|
–
|
|
|
|
–%
|
|
|
$
|
–
|
|
|
|
–%
|
|
|
$
|
–
|
|
|
|
-–%
|
|
Weather-related
non-catastrophe losses
|
|
|
5,918
|
|
|
|
24.0
|
%
|
|
|
3,092
|
|
|
|
16.5
|
%
|
|
|
5,918
|
|
|
|
38.0
|
%
|
|
|
2,527
|
|
|
|
20.0
|
%
|
Non-weather
related losses
|
|
|
3,474
|
|
|
|
14.1
|
%
|
|
|
2,298
|
|
|
|
12.2
|
%
|
|
|
3,474
|
|
|
|
22.2
|
%
|
|
|
2,298
|
|
|
|
18.2
|
%
|
Total current accident
year losses
|
|
|
21,885
|
|
|
|
88.9
|
%
|
|
|
5,390
|
|
|
|
28.7
|
%
|
|
|
9,392
|
|
|
|
60.2
|
%
|
|
|
4,825
|
|
|
|
38.2
|
%
|
Prior
period development (redundancy)
(2)
|
|
|
(503
|
)
|
|
|
(2.0
|
)%
|
|
|
(177
|
)
|
|
|
(0.9
|
)%
|
|
|
(113
|
)
|
|
|
(0.7
|
)%
|
|
|
(566
|
)
|
|
|
(4.5
|
)%
|
Total
net losses and LAE incurred
|
|
$
|
21,382
|
|
|
|
86.9
|
%
|
|
$
|
5,213
|
|
|
|
27.8
|
%
|
|
|
$
9 ,279
|
|
|
|
59.5
|
%
|
|
$
|
4,259
|
|
|
|
33.7
|
%
|
(1)
|
Property
Claims Services (PCS) defines a catastrophic event as an event where the insurance industry
is estimated to incur over $25,000 of insured property damage that also impacts a significant
number of insureds. For purposes of the above table, we have defined a Catastrophe loss
as a PCS event where our estimated gross incurred loss exceeds $2,500. In prior periods,
we had defined a Catastrophe loss as an event where our estimated gross incurred loss
exceeded $1,500. Due to the general increase in the premiums we write year over year,
we have determined $2,500 gross incurred losses to be a better indicator of a catastrophic
event with respect to the exposures we currently insure. Prior year loss data has been
restated to reflect this new definition.
|
|
|
(2)
|
Prior
period redundancy represents the ultimate actual loss settlement value which is less
than the estimated and determined reserves recorded for a particular liability or loss.
|
Our
gross loss ratio for the quarter ended March 31, 2019 and 2018 was 86.9% and 27.8%, respectively. The largest driver of the increase
when comparing quarters was due to catastrophe losses. As previously discussed, we experienced PCS Event 1920 in the first quarter
of 2019, which met our internally defined criteria of a catastrophe loss as this event is expected to result in approximately
$12,500 in gross incurred losses. This resulted in a gross catastrophe loss ratio of 50.8% in the current quarter, compared to
0% in the first quarter 2018 as we did not experience any catastrophe losses in that quarter. All other weather events, for which
we received no reinsurance benefit, aggregated to 24.0% of gross loss ratio for the first quarter 2019 compared to 16.5% for the
first quarter 2018.
After
deducting the impact of reinsurance, our net loss ratio for the quarter ended March 31, 2019 was 59.5% compared to 33.7% for the
first quarter of 2018. This increase was primarily driven by an increase in non-catastrophe weather-related losses and non-weather
losses as these combined categories accounted for a 220 basis point increase in our net loss ratio when comparing the first quarter
2019 to the first quarter 2018. The primary drivers behind the increase in non-cat weather claims were both increased frequency
and severity of hail claims, particularly in our Texas book of business, while the driver behind the increase in non-weather losses
was the severity of both non-weather water and fire claims we experienced.
We
have also released reserves from prior accident years for both the quarters ended March 31, 2019 and 2018, resulting in a benefit
to our gross loss ratios of approximately 2.0% and 0.9%, respectively, and also a benefit to our net loss ratios of approximately
0.7% and 4.5%, respectively.
Amortization
of Deferred Policy Acquisition Costs
Amortization
of deferred policy acquisition costs for the quarter ended March 31, 2019 was $4,269, compared to $3,295 for the quarter ended
March 31, 2018, and includes items such as commissions earned by our agencies, premium taxes, assessments, and policy processing
fees. Expressed as a percentage of gross premiums earned, amortization was 17.3% for 2019, compared to 17.6% for 2018. This slight
decrease in percentage, is due, in part, to the general reduction in commissions paid to our independent agencies as a larger
portion of our policies have shifted to renewal policies from newly issued policies.
General
and Administrative Expenses
General
and administrative expenses increased $680 to $3,701 for the quarter ended March 31, 2019, compared to $3,021 for the quarter
ended March 31, 2018. Expressed as a percentage of gross premium earned, general and administrative expenses were 15.0% and 16.1%,
respectively. The largest driver in the increase in general and administrative expense were fees associated with the potential
Asset Sale to FedNat Holding Company, which the Company has expensed as incurred over the quarter ended March 31, 2019. Excluding
expenses associated with the Asset Sale, general and administrative expenses for the quarter ended March 31, 2019 were $3,200,
or 12.8% of gross premiums earned for the quarter.
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Series
B Preferred Shares
As
previously discussed under the heading “Related Party Transactions,” we recorded amortization charges of $0 and $33,
as well as a charge of $0 and $612, for the three months ended March 31, 2019 and 2018, respectively, which were related to our
issuance and repurchase of our Series B Preferred Shares.
Income
Tax Expense
Income
tax expense for the three months ended March 31, 2019 was $47, on pretax income of $145 compared to tax expense of $369 on pretax
income of $2,320 for the three months ended March 31, 2018, resulting in an effective tax rate of 32.4% and 15.9%, respectively.
The passage of the Tax Cuts and Jobs Act on December 22, 2017 reduced the corporate federal income tax rate to 21% beginning January
1, 2018. Our actual effective tax rate varies from the statutory federal income tax rates as shown in the following table.
|
|
As
of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory federal income
tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax (net of federal
tax benefit)
|
|
|
(15.9
|
)%
|
|
|
(5.3
|
)%
|
Share-based compensation
|
|
|
24.8
|
%
|
|
|
–
|
%
|
Other
|
|
|
2.5
|
%
|
|
|
0.2
|
%
|
Income tax benefit
|
|
|
32.4
|
%
|
|
|
15.9
|
%
|
Net
Income
As
a result of the foregoing, the Company’s net income for the first quarter of 2019 was $98, or a loss of $(0.04) per diluted
share after deducting dividends paid to our preferred shareholders, compared to $1,951, or $0.32 per diluted share for the first
quarter of 2018.
Liquidity
and Capital Resources
Dollar
amounts included in the “Liquidity and Capital Resources” are presented in thousands, except as otherwise specified.
The
purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as
they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from
operations, and from the proceeds from the sales of our common and preferred stock. Cash provided from these sources is used primarily
for loss and loss adjustment expense payments as well as other operating expenses. The timing and amount of payments for net losses
and loss adjustment expenses may differ materially from the Company’s provisions for loss and loss adjustment expense reserves,
which may create increased liquidity requirements.
On
February 28, 2018, we completed the underwritten public offering of preferred shares designated as 8.00% Cumulative Preferred
Stock, Series A, par value $25.00 per share (the “Preferred Stock”), as previously discussed under the heading “Shareholders
Equity”. In addition, on March 26, 2018, we issued an additional 60,000 shares of Preferred Stock in connection with the
underwriters’ exercise of their over-allotment option. Net proceeds received by the Company were approximately $16,400.
The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Stock from IWS Acquisition Corporation,
as previously discussed under the heading “Related Party Transactions”.
On
April 19, 2019, the Commercial Business Loan Agreement and related Promissory Note (collectively, the “Loan Agreement”)
between the Company and Hancock Bank, a trade name for Whitney Bank (the “Lender”) expired by its terms. The Loan
Agreement provided for a revolving line of credit of $5,000. The Company did not draw down funds under the Loan Agreement during
the period it was outstanding.
Cash
Flows
The
following table summarizes the Company’s consolidated cash flows for the three months ended March 31, 2019 and 2018.
|
|
Three
months ended March 31,
|
|
Summary
of Cash Flows
|
|
2019
|
|
|
2018
|
|
Net
cash provided by operating activities
|
|
$
|
1,883
|
|
|
$
|
10,859
|
|
Net cash used by
investing activities
|
|
|
(6,133
|
)
|
|
|
(11,368
|
)
|
Net
cash provided (used) by financing activities
|
|
|
(360
|
)
|
|
|
12,921
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(4,610
|
)
|
|
$
|
12,412
|
|
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Three
months ended March 31, 2019
For
the three months ended March 31, 2019, net cash provided by operating activities as reported on our consolidated statement of
cash flows was $1,883, resulting from our collection of approximately $17,215 in premiums for the quarter (net of the amounts
we have ceded to our reinsurers), less the payment of approximately $8,725 in loss and LAE expenses (net of ceded recoveries collected
from our reinsurers). We also paid approximately $2,190 in commissions to our agencies, and $1,220 in salaries and benefits to
our employees. Lastly, cash payments in the approximate amount of $3,197 were made for taxes, assessments and all other general
and administrative expenses.
The
net cash used by investing activities as reported on our consolidated statement of cash flows was $6,133, resulting primarily
from the net purchases of short-term investments and fixed income securities for our investment portfolio. Net cash used by financing
activities was $360, primarily due to dividends paid on our Series A Preferred Shares.
As
a result of the foregoing, cash and cash equivalents decreased from $30,902 as of December 31, 2018 to $26,292 as of March 31,
2019.
Three
months ended March 31, 2018
For
the three months ended March 31, 2018, net cash provided by operating activities as reported on our consolidated statement of
cash flows was $10,859, resulting from our collection of approximately $21,404 in premiums for the quarter (net of the amounts
we have ceded to our reinsurers), less the payment of approximately $5,941 in loss and LAE expenses (net of ceded recoveries collected
from our reinsurers). We also paid approximately $2,098 in commissions to our agencies, as well as to LA Citizens as ceding commissions
on the premium we have assumed from them, and $1,004 in salaries and benefits to our employees. Lastly, cash payments in the approximate
amount of $1,502 were made for taxes, assessments and all other general and administrative expenses.
The
net cash used by investing activities as reported on our consolidated statement of cash flows was $11,368, resulting primarily
from the net purchases of fixed income securities for our investment portfolio. Net cash provided by financing activities was
$12,921, primarily as a result of net proceeds from our Series A Preferred Stock offering of approximately $16,500, less amounts
paid to repurchase our Series B Preferred Shares, including dividends thereon, for approximately $3,540.
As
a result of the foregoing, cash and cash equivalents increased from $23,575 as of December 31, 2017 to $35,987 as of March 31,
2018.
Regulatory
Capital
In
the United States, a risk-based capital (“RBC”) formula is used by the National Association of Insurance Commissioners
(“NAIC”) to identify property and casualty insurance companies that may not be adequately capitalized. Most states,
including Louisiana, Texas and Florida, have adopted the NAIC RBC requirements. In general, insurers reporting surplus with respect
to policyholders below 200% of the authorized control level, as defined by the NAIC, on December 31
st
of the previous
year are subject to varying levels of regulatory action, which may include discontinuation of operations. As of December 31, 2018,
Maison’s reported surplus was considered to be in the “no action” level by the LDI and TDI, as well as the FOIR.
Furthermore, pursuant to the consent order approving Maison’s admission into the State of Texas, Maison has agreed to maintain
a RBC ratio of 300% or more, and provide the calculation of such ratio to the TDI on a periodic basis. As of December 31, 2018,
Maison’s RBC ratio was 345%.
State
Deposits
States
routinely require deposits of assets for the protection of policyholders. As of March 31, 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 $1,989 as of March 31, 2019 as a deposit with the
TDI.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
1347
PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
The
Company’s management performed an evaluation under the supervision and with the participation of the Company’s principal
executive officer and principal financial officer of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as of March 31, 2019. Based upon this evaluation, the Company’s principal
executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed
in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting identified in connection with this evaluation that occurred during
the quarter ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.