UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

---

 

FORM 10-Q

 

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-36366

1347 Property Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

---

 

Delaware (State or other jurisdiction of incorporation or organization)		46-1119100 (I.R.S. Employer Identification No.)

1511 N. Westshore Blvd., Suite 870, Tampa, FL 33607

(Address of principal executive offices and zip code)

813-579-6213

(Registrant’s telephone number, including area code)

 

---

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller Reporting Company ☒

Emerging Growth Company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No   ☒

 

The number of shares outstanding of the registrant’s common stock as of November 6, 2017 was 5,984,766.

 

 

 

Table of Contents

 

PART I. FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4. CONTROLS AND PROCEDURES	44
PART II. OTHER INFORMATION	44
ITEM 1. LEGAL PROCEEDINGS	44
ITEM 1A. RISK FACTORS	45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4. MINE SAFETY DISCLOSURES	45
ITEM 5. OTHER INFORMATION	45
ITEM 6. EXHIBITS	46
SIGNATURES	46

 

 

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)  

		September 30, 2017 (unaudited)				December 31, 2016
ASSETS
Investments:
Fixed income securities, at fair value (amortized cost of $45,252 and $26,793, respectively)		$	45,207			$	26,559
Equity investments, at fair value (cost of $1,682 and $1,000, respectively)			1,771				1,136
Short-term investments, at cost			1,779				196
Other investments, at cost			945				505
Total investments			49,702				28,396
Cash and cash equivalents			25,679				43,045
Deferred policy acquisition costs, net			6,192				4,389
Premiums receivable, net of allowance for credit losses of $39 and $38, respectively			2,220				2,923
Ceded unearned premiums			3,836				4,847
Reinsurance recoverable on paid losses			7,767				444
Reinsurance recoverable on loss and loss adjustment expense reserves			17,560				3,652
Funds deposited with reinsured companies			—				500
Current income taxes recoverable			632				1,195
Deferred tax asset, net			855				420
Property and equipment, net			213				250
Other assets			867				788
Total assets		$	115,523			$	90,849
LIABILITIES
Loss and loss adjustment expense reserves		$	22,091			$	6,971
Unearned premium reserves			32,170				25,821
Ceded reinsurance premiums payable			5,786				5,229
Agency commissions payable			716				497
Premiums collected in advance			1,887				1,128
Funds held under reinsurance treaties			48				73
Accounts payable and other accrued expenses			4,483				2,065
Series B Preferred Shares, $25.00 par value, 1,000,000 shares authorized, 120,000   shares issued and outstanding for both periods			2,744				2,708
Total liabilities		$	69,925			$	44,492
Commitments and contingencies (Note 16)
SHAREHOLDERS’ EQUITY
Common stock, $0.001 par value; 10,000,000 shares authorized; 6,136,125 and 6,108,125 shares issued and 5,984,766 and 5,956,766 shares outstanding as of September 30, 2017 and December 31, 2016, respectively		$	6			$	6
Additional paid-in capital			47,052				46,809
Retained (deficit) earnings			(480	)			616
Accumulated other comprehensive income (loss)			29				(65	)
			46,607				47,366
Less: treasury stock at cost; 151,359 shares for both periods			(1,009	)			(1,009	)
Total shareholders’ equity			45,598				46,357
Total liabilities and shareholders’ equity		$	115,523			$	90,849

 

See accompanying notes to consolidated financial statements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share data)
(Unaudited)

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Revenue:
Net premiums earned		$	8,632			$	7,136			$	25,032			$	22,869
Net investment income			248				151				700				393
Other income			474				345				1,262				862
Total revenue			9,354				7,632				26,994				24,124
Expenses:
Net losses and loss adjustment expenses			7,795				6,443				13,809				14,917
Amortization of deferred policy acquisition costs			2,755				2,095				7,867				6,148
General and administrative expenses			2,145				1,658				6,535				4,982
Accretion of discount on Series B Preferred Shares			93				89				276				263
Total expenses			12,788				10,285				28,487				26,310
Loss before income tax benefit			(3,434	)			(2,653	)			(1,493	)			(2,186	)
Income tax benefit			(1,171	)			(847	)			(397	)			(605	)
Net loss		$	(2,263	)		$	(1,806	)		$	(1,096	)		$	(1,581	)
Net loss per common share:
Basic and diluted		$	(0.38	)		$	(0.30	)		$	(0.18	)		$	(0.26	)
Weighted average common shares outstanding:
Basic and diluted			5,961,636				6,022,983				5,958,407				6,076,838
Consolidated Statements of Comprehensive Income (Loss)
Net loss		$	(2,263	)		$	(1,806	)		$	(1,096	)		$	(1,581	)
Unrealized gains (losses) on investments available for sale, net of income taxes			25				(11	)			94				310
Comprehensive loss		$	(2,238	)		$	(1,817	)		$	(1,002	)		$	(1,271	)

 

See accompanying notes to consolidated financial statements.

 

                     

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity
(in thousands, except per share data)

		Common Stock								Treasury Stock
		Shares				Amount				Shares				Amount				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance-January 1, 2016			6,134,274			$	6				223,851			$	(1,731	)		$	48,688			$	605			$	(62	)		$	47,506
Stock compensation expense			—				—				—				—				38				—				—				38
Purchase of treasury stock			(177,508	)			—				177,508				(1,195	)			—				—				—				(1,195	)
Retirement of treasury shares			—				—				(250,000	)			1,917				(1,917	)			—				—				—
Net income			—				—				—				—				—				11				—				11
Other comprehensive loss			—				—				—				—				—				—				(3	)			(3	)
Balance - December 31, 2016			5,956,766			$	6				151,359			$	(1,009	)		$	46,809			$	616			$	(65	)		$	46,357
Issuance of common shares			28,000				—				—				—				224				—				—				224
Stock compensation expense			—				—				—				—				19				—				—				19
Net loss			—				—				—				—				—				(1,096	)			—				(1,096	)
Other comprehensive income			—				—				—				—				—				—				94				94
Balance – September 30, 2017 (unaudited)			5,984,766			$	6				151,359			$	(1,009	)		$	47,052			$	(480	)		$	29			$	45,598

 

See accompanying notes to consolidated financial statements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

		Nine months ended September 30,
		2017				2016
Cash provided by:
Operating activities:
Net loss		$	(1,096	)		$	(1,581	)
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount on Series B Preferred Shares			276				263
Net deferred income taxes			(483	)			(209	)
Stock compensation expense			19				30
Depreciation expense			55				49
Changes in operating assets and liabilities:
Premiums receivable			703				293
Reinsurance recoverable on paid losses and loss reserves			(21,231	)			(7,866	)
Amounts held on deposit with reinsured companies			500				725
Ceded unearned premiums			1,011				(1,646	)
Deferred policy acquisition costs, net			(1,803	)			(339	)
Loss and loss adjustment expense reserves			15,120				6,504
Premiums collected in advance			759				819
Unearned premium reserves			6,349				2,902
Ceded reinsurance premiums payable			557				2,333
Current income taxes recoverable			563				(606	)
Other, net			2,533				(12	)
Net cash provided by operating activities			3,832				1,659
Investing activities:
Purchases of furniture and equipment			(18	)			(81	)
Purchases of fixed income securities			(18,459	)			(7,424	)
Purchase of equity investments			(682	)			(1,000	)
Purchase of other investments			(440	)			(139	)
Net purchases of short-term investments			(1,583	)			(784	)
Net cash used in investing activities			(21,182	)			(9,428	)
Financing activities:
Payment of dividends on preferred shares			(240	)			(240	)
Proceeds from sale of common stock			224				—
Purchases of treasury stock			—				(1,022	)
Net cash used in financing activities			(16	)			(1,262	)
Net decrease in cash and cash equivalents			(17,366	)			(9,031	)
Cash and cash equivalents at beginning of period			43,045				47,957
Cash and cash equivalents at end of period		$	25,679			$	38,926
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes		$	35			$	293

 

See accompanying notes to consolidated financial statements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

1. Nature of Business

 

Maison Insurance Holdings, Inc. was incorporated on October 2, 2012 in the State of Delaware. On November 19, 2013, its legal name was changed from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. (“PIH”). PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business. Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries.

 

Prior to March 31, 2014, PIH was a wholly owned subsidiary of Kingsway America Inc. (“KAI”). KAI, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, PIH completed an initial public offering (“IPO”) of its common stock. On June 13, 2014, PIH completed a follow-on offering of its common stock to the public. Through the combination of the IPO and follow-on offering, PIH issued approximately five million shares of its common stock, while KAI, and entities affiliated with KAI retained one million shares of PIH. On October 25, 2017, KAI entered into a purchase agreement with Fundamental Global Investors, LLC (“FGI”) pursuant to which KAI agreed to sell 900,000 shares of our common stock to FGI or to one of FGI’s affiliate companies in two separate transactions. The first transaction, for the sale of 475,428 shares of our common stock, occurred on November 1, 2017. The second transaction, for the sale of 424,572 shares of our common stock is conditioned on approval of the transaction by both the LDI and FL OIR by January 23, 2018. FGI is affiliated with D. Kyle Cerminara, where he serves as Chief Executive Officer, Co-Founder and Partner, and Lewis M. Johnson, where he serves as President, Co-Founder and Partner. Messrs. Cerminara and Johnson are also members of our Board of Directors. Should the second transaction be consummated, FGI, and entities affiliated with FGI, would own 43% of our outstanding common shares.

 

PIH has three wholly-owned subsidiaries; Maison Insurance Company (“Maison”), a Louisiana-domiciled property and casualty insurance company, Maison Managers, Inc. (“MMI”), a managing general agent, incorporated in the State of Delaware, and ClaimCor, LLC (“ClaimCor”), a Florida based claims solutions company. Maison processes claims made by its policyholders through ClaimCor, and also through various third-party claims adjusting companies. MMI has 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.

 

Maison began providing homeowners insurance, manufactured home insurance and dwelling fire insurance to individuals in Louisiana in December 2012. Maison writes both full peril property policies as well as wind/hail only exposures in Louisiana and distributes its policies through a network of independent insurance agencies. Maison began assuming wind/hail only insurance for commercial properties in Texas beginning in June 2015. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis, and in March 2016, Maison began writing homeowner policies in Texas.

 

In addition to the voluntary policies that Maison writes, Maison has participated in the last five rounds of take-outs from Louisiana Citizens Property Insurance Company (“LA Citizens”), occurring on December 1^st of each year, as well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association (“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 both 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 TWIA cover losses arising only from wind and hail. Prior to our takeout, both LA Citizens and TWIA policyholders were not able to obtain such coverage from any other marketplace.

 

On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation (“FL OIR”) which authorizes Maison to write personal lines insurance in the State of Florida. Pursuant to the consent order issued, Maison has agreed to comply with certain requirements as outlined by the FL OIR until Maison can demonstrate three consecutive years of net income following the Company’s admission into Florida as evidenced by its Annual Statement filed with the FL OIR via the National Association of Insurance Commissioners electronic filing system. Among other requirements, the FL OIR requires the following as conditions related to the issuance of Maison’s certificate of authority:

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

●

Although domiciled in the State of Louisiana, Maison has agreed to comply with the Florida Insurance Code as if Maison were a domestic insurer within the State of Florida;

●

Maison has agreed to maintain capital and surplus as to policyholders of no less than $35,000;

●

Maison has agreed to receive prior approval from the FL OIR prior to the payment of any dividends; and

●

Maison has agreed to receive written approval from the FL OIR regarding any form of policy issued or rate charged to its policyholders prior to utilizing any such form or rate for policies written in the State of Florida.

 

To comply with the consent order, on March 31, 2017, Maison received a capital contribution from PIH in the amount of $16,000. As of September 30, 2017, Maison has not written any insurance policies covering risks in the State of Florida.

 

On September 29, 2017, Maison received authorization from the FL OIR to assume personal lines policies from Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison filed with FL Citizens on August 18, 2017. Accordingly, Maison plans to enter the Florida market via the assumption of policies from FL Citizens in December, 2017. The order approving Maison’s assumption of policies limits the number of policies which Maison may assume in 2017, and also stipulates that Maison maintain catastrophe reinsurance at such levels as deemed appropriate by the FL OIR.

 

MMI serves as the Company’s 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 FL OIR.

 

2. Significant Accounting Policies

 

Basis of Presentation:

 

These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Principles of Consolidation:

 

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 that we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, and the valuation of deferred policy acquisition costs.

 

Investments:

 

Investments in fixed income and equity securities are classified as available-for-sale and reported at estimated fair value. Unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses are transferred to the consolidated statement of operations.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

Other investments include investments in limited liability companies in which the Company’s interests are deemed minor and, therefore, are accounted for under the cost method of accounting, which approximates their fair value. Also included in other investments is a fixed rate certificate of deposit with an original maturity of 15 months.

 

Short-term investments, which consist of investments with maturities between three months and one year, are reported at cost, which approximates 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 operations if the fair value of the instrument falls below its amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

 

Cash and Cash Equivalents:

 

Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.

 

Premiums Receivable:

 

Premiums receivable include premium balances due and uncollected as well as installment premiums not yet due from our independent agencies and insureds. Premiums receivable are reported net of an estimated allowance for credit losses.

 

Reinsurance:

 

Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.

 

Deferred Policy Acquisition Costs:

 

The Company defers commissions, premium taxes, assessments 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 corresponding 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 and loss adjustment expenses to be incurred as revenues are earned. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Changes in estimates, if any, are recorded in the accounting period in which they are determined.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

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 life 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 leasehold improvements. Property and equipment is estimated to have no salvage value at its useful life-end.

 

Rent expense for the Company’s office leases is recognized on a straight-line basis over the term of the lease. Rent expense was $255 and $258 for the nine months ended September 30, 2017 and 2016, 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 as well as the impact of reinsurance on our loss reserves. 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 Southeastern United States. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At September 30, 2017, the Company held funds on deposit at these institutions 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, all of which have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.

 

The Company also has risk associated with the lack of geographic diversification due to the fact that through September 30, 2017, Maison exclusively underwrote policies in Louisiana and Texas. The Company insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of September 30, 2017, these policies are concentrated within these parishes, presented as a percentage of our total policies in force in all states, as follows: Jefferson Parish 12.6%, Saint Tammany Parish 12.5%, East Baton Rouge Parish 7.2%, and Livingston Parish 5.1%. No other parish individually has over 5.0% of the policies in force as of September 30, 2017. On a direct basis, Maison writes in 150 of the 254 counties that comprise the State of Texas; however, no single county represents over 5.0% of the Company’s total policies in force as of September 30, 2017.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

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 other policy fees is deferred and recognized over the terms 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 (stock options and common stock purchase warrants). 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 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 a Monte Carlo valuation model to estimate the fair value of these awards upon grant date as the vesting of these RSUs occurs solely upon market-based conditions. The fair value of each RSU is recorded as compensation expense over the derived service period, as determined by the valuation model. 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.

 

Fair Value of Financial Instruments:

 

The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable and accounts payable, 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

Earnings Per Common Share:

 

Basic earnings per common share is computed using the weighted average number of shares outstanding during the respective period.

 

Diluted earnings per common share assumes conversion of all potentially dilutive outstanding stock options, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings per share if their effect is anti-dilutive.

 

Operating Segments:

 

The Company operates in a single segment – property and casualty insurance.

 

3. Recently Issued Accounting Standards

 

ASU 2014-09: Revenue from Contracts with Customers:

 

The FASB has issued 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 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company will adopt Topic 606 on the effective date and since virtually all of the Company’s revenues relate to insurance contracts and investment income, the adoption of Topic 606 is not expected to have a material 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 are consummated.

 

ASU 2016-01: Financial Instruments-Overall:

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income (loss). ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. ASU 2016-01 will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, cash flows, or total comprehensive income, but could impact the Company’s results of operations and earnings per share as changes in fair value will be presented in net income rather than other comprehensive income.

 

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 current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require 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. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income while the repayment of the principal portion of the lease liability will be classified as a financing activity and the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company has reviewed its existing lessee obligations and has determined that ASU 2016-02 will apply should the Company renew its existing leases, or enter into any new lease agreements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

ASU 2016-09: Stock Compensation:

 

In March 2016, the FASB issued ASU 2016-09: Compensation – Stock Compensation: Improvement to Employee Share-Based Payment Accounting. ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that all tax effects related to share-based payment be made through the statement of operations at the time of settlement as opposed to the current guidance that requires excess tax benefits to be recognized in additional paid-in-capital. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. The change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a departure from the current requirement which presents tax benefits as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated financial statements.

 

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 loss was probable of occurring. 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 2016-02 on its consolidated financial statements.

 

4. Investments

 

A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on the Company’s investments in fixed income and equity securities at September 30, 2017 and December 31, 2016 is as follows.

 

As of September 30, 2017		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Fixed income securities:
U.S. government		$	2,911			$	6			$	(18	)		$	2,899
State municipalities and political subdivisions			5,379				12				(26	)			5,365
Asset-backed securities and collateralized mortgage obligations			16,727				26				(119	)			16,635
Corporate			20,235				113				(40	)			20,308
Total fixed income securities			45,252				157				(202	)			45,207
Equity securities:
Common stock			1,571				66				(25	)			1,612
Warrants to purchase common stock			72				79				(29	)			122
Rights to purchase common stock			39				3				(5	)			37
Total equity securities			1,682				148				(59	)			1,771
Total fixed income and equity securities		$	46,934			$	305			$	(261	)		$	46,978
As of December 31, 2016
Fixed income securities:
U.S. government		$	1,623			$	1			$	(20	)		$	1,604
State municipalities and political subdivisions			2,271				2				(27	)			2,246
Asset-backed securities and collateralized mortgage obligations			12,095				9				(136	)			11,968
Corporate			10,804				28				(91	)			10,741
Total fixed income securities			26,793				40				(274	)			26,559
Equity securities:
Common stock			1,000				136				—				1,136
Total equity securities			1,000				136				—				1,136
Total fixed income and equity securities		$	27,793			$	176			$	(274	)		$	27,695

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

The table below summarizes the Company’s fixed income securities at September 30, 2017 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		$	2,416			$	2,415
More than one to five years			19,759				19,757
More than five to ten years			11,780				11,804
More than ten years			11,297				11,231
Total		$	45,252			$	45,207

 

The following table highlights, by loss position and security type, those fixed income and equity securities in unrealized loss positions as of September 30, 2017 and December 31, 2016. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions. There were 149 and 122 fixed income investments that were in unrealized loss positions as of September 30, 2017 and December 31, 2016, respectively. The Company held 12 equity investments in unrealized loss positions as of September 30, 2017.

 

		Less than 12 Months								Greater than 12 Months								Total
As of September 30, 2017		Estimated Fair Value				Unrealized Loss				Estimated Fair Value				Unrealized Loss				Estimated Fair Value				Unrealized Loss
Fixed income securities:
U.S. government		$	2,041			$	(18	)		$	175			$	—			$	2,216			$	(18	)
State municipalities and political subdivisions			2,357				(13	)			589				(13	)			2,946				(26	)
Asset-backed securities and collateralized mortgage obligations			11,682				(83	)			1,675				(36	)			13,357				(119	)
Corporate			6,568				(23	)			556				(16	)			7,124				(39	)
Total fixed income securities			22,648				(137	)			2,995				(65	)			25,643				(202	)
Equity securities:											—				—
Common stock			237				(25	)			—				—				237				(25	)
Warrants to purchase common stock			23				(29	)			—				—				23				(29	)
Rights to purchase common stock			18				(5	)			—				—				18				(5	)
Total equity securities			278				(59	)			—								278				(59	)
Total fixed income and equity securities		$	22,926			$	(196	)		$	2,995			$	(65	)		$	25,921			$	(261	)
As of December 31, 2016
Fixed income securities:
U.S. government		$	1,303			$	(20	)		$	—			$	—			$	1,303			$	(20	)
State municipalities and political subdivisions			1,537				(27	)			—				—				1,537				(27	)
Asset-backed securities and collateralized mortgage obligations			9,552				(133	)			460				(3	)			10,012				(136	)
Corporate			5,952				(91	)			—				—				5,952				(91	)
Total fixed income securities		$	18,344			$	(271	)		$	460			$	(3	)		$	18,804			$	(274	)

 

Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling at least $2,000 with the State of Texas. Maison deposited the required securities with the State of Texas on May 13, 2015. These securities consist of various fixed income securities listed in the preceding tables which have an amortized cost basis of $2,001 and estimated fair value of $1,998 as of September 30, 2017.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

The Company’s other investments are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $645 through September 30, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which, as of April 21, 2016 is wholly owned by KFSI (see Note 12 – Related Party Transactions). The Company has accounted for its investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.

 

Also included in other investments is a certificate of deposit in the amount of $300 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 FL OIR.

 

Other-than-Temporary Impairment:

 

The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:

 

●

considering the extent and length of time during which the market value has been below cost;

●

identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions;

●

obtaining a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their knowledge and experience combined with market-based valuation techniques;

●

reviewing the historical trading volatility and trading range of the investment and certain other similar investments;

●

assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies;

●

assessing the timeliness and completeness of principal and interest payment due from the investee; and

●

assessing the Company’s ability and intent to hold these investments until the impairment may be recovered.

 

The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:

 

●

the opinions of professional investment managers could be incorrect;

●

the past trading patterns of investments may not reflect their future valuation trends;

●

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.

 

The Company has reviewed currently available information regarding the investments it holds which have estimated fair values that are less than their carrying amounts and 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.

 

Accordingly, all of the Company’s investments were in good standing and there were no write-downs for other-than-temporary impairments on the Company’s investments for the nine months ended September 30, 2017 and 2016.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

The Company does not have any exposure to subprime mortgage-backed investments. Net investment income for the three and nine months ended September 30, 2017 and 2016 was as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Investment income:
Interest on fixed income securities		$	231			$	123			$	548			$	332
Interest on cash and cash equivalents			30				34				126				89
Realized gain upon sale of securities			4				—				68				—
Other			—				5				—				7
Gross investment income			265				162				742				428
Investment expenses			(17	)			(11	)			(42	)			(35	)
Net investment income		$	248			$	151			$	700			$	393

 

5. Reinsurance

 

The Company reinsures, or cedes, a portion of its written premiums on a per risk and 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 treaty, reinsurance recoveries are received for up to $1,750 in excess of a retention of $250 for each loss occurring prior to June 1, 2017. Effective June 1, 2017, the Company amended its per-risk treaty such that recoveries are received for up to $1,600 in excess of a retention of $400 for each loss occurring on June 1, 2017 or thereafter. The Company has ceded $405 and $438 in written premiums under its per-risk treaties for the nine months ended September 30, 2017 and 2016, respectively.

 

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. Thus, the financial statements for the nine month periods ended September 30, 2017 and 2016 contain premiums ceded under three separate excess of loss treaties. Under the Company’s 2015/2016 excess of loss treaty which expired on May 31, 2016, for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $121,000 in excess of a retention of $4,000 per event. The Company had also procured a “top, drop and aggregate” layer of reinsurance protection that may be used for any event above $125,000, up to a maximum recovery of $15,000. This $15,000 second layer of coverage applied in total to all events occurring during the treaty year of June 1, 2015 through May 31, 2016.

 

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 $5,000 retention per event. For any event above $175,000, the Company again 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.

 

The Company has ceded $16,021 and $14,976 in written premiums under its excess of loss treaties for the nine months ended September 30, 2017 and 2016, respectively.

 

In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we act as a reinsurer, and have assumed wind/hail only exposures on certain churches and related structures that Brotherhood insures throughout the State of Texas. Our quota-share percentage varies from 25%-100% of the wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal areas versus non-coastal areas) within the State of Texas. For the nine months ended September 30, 2017, we have written $1,427 in assumed premiums through our agreement with Brotherhood, compared to $1,367 in assumed premiums for the same period in 2016.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

On December 1, 2016, we participated TWIA’s inaugural depopulation program whereby Maison assumed personal lines policies for wind and hail only exposures along the Gulf Coast area of Texas. The depopulation program was structured such that Maison reinsures TWIA under a 100% quota share agreement. For the nine months ended September 30, 2017, we have written $1,401 in assumed premiums through the TWIA quota share agreement.

 

The impact of reinsurance treaties on the Company’s financial statements is as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Premium written:
Direct		$	16,533			$	13,457			$	45,989			$	38,117
Assumed			630				509				2,828				1,367
Ceded			(6,051	)			(5,973	)			(16,426	)			(15,414	)
Net premium written		$	11,112			$	7,993			$	32,391			$	24,070
Premium earned:
Direct		$	14,056			$	12,037			$	40,015			$	34,455
Assumed			851				509				2,454				1,367
Ceded			(6,275	)			(5,410	)			(17,437	)			(12,953	)
Net premium earned		$	8,632			$	7,136			$	25,032			$	22,869
Losses and LAE incurred:
Direct		$	20,451			$	12,529			$	31,297			$	25,985
Assumed			5,734				562				8,937				2,340
Ceded			(18,390	)			(6,648	)			(26,425	)			(13,408	)
Net losses and LAE incurred		$	7,795			$	6,443			$	13,809			$	14,917

 

6. Deferred Policy Acquisition Costs

 

Deferred policy acquisition costs (“DPAC”) consist primarily of commissions, premium taxes, assessments and other policy processing fees incurred which are related to successful efforts to acquire new or renewal insurance contracts. Acquisition costs deferred on insurance products are amortized over the period in which the related revenues are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred.

 

DPAC as well as the related amortization expense associated with DPAC for the three and nine months ended September 30, 2017 and 2016, is as follows:

 

			Three months ended September 30,								Nine months ended September 30,
			2017				2016				2017				2016
Balance, beginning of period, net			$	5,545			$	4,139			$	4,389			$	4,030
Additions				3,402				2,325				9,670				6,487
Amortization				(2,755	)			(2,095	)			(7,867	)			(6,148	)
Balance, September 30, net			$	6,192			$	4,369			$	6,192			$	4,369

 

7. 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, including the opinions of the Company’s independent actuaries.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

The Company’s evaluation of the adequacy of loss and loss adjustment expense 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 nine months ended September 30, 2017 and 2016 were as follows:

 

		Three months ended September 30,								Nine months ended  September 30,
		2017				2016				2017				2016
Balance, beginning of period, gross of reinsurance		$	9,583			$	5,884			$	6,971			$	2,123
Less reinsurance recoverable on loss and LAE expense reserves			(6,012	)			(3,431	)			(3,652	)			(120	)
Balance, beginning of period, net of reinsurance			3,571				2,453				3,319				2,003
Incurred related to:
Current year			8,717				6,487				15,953				15,090
Prior years			(922	)			(44	)			(2,144	)			(173	)
Paid related to:
Current year			(7,246	)			(5,671	)			(12,060	)			(12,719	)
Prior years			411				36				(537	)			(940	)
Balance, September 30, net of reinsurance			4,531				3,261				4,531				3,261
Plus reinsurance recoverable related to loss and LAE expense reserves			17,560				5,366				17,560				5,366
Balance, September 30, gross of reinsurance		$	22,091			$	8,627			$	22,091			$	8,627

 

8. Income Taxes

 

Actual income tax expense for the three and nine months ended September 30, 2017 and 2016 varies from the amount that would result by applying the applicable statutory federal income tax rate of 34% to income before income taxes as summarized in the following table:

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Income tax benefit at statutory income tax rate		$	(1,168	)		$	(902	)		$	(508	)		$	(743	)
State income tax (net of federal tax benefit)			(5	)			54				104				131
Other			2				1				7				7
Income tax benefit		$	(1,171	)		$	(847	)		$	(397	)		$	(605	)

 

The Company carries a net deferred income tax asset of $855 and $420 as of September 30, 2017 and December 31, 2016, respectively, all of which the Company believes is more likely than not to be fully realized based upon management’s assessment of future taxable income. Significant components of the Company’s net deferred tax assets are as follows:

 

		September 30, 2017				December 31, 2016
Deferred income tax assets:
Loss and loss adjustment expense reserves		$	49			$	35
Unearned premium reserves			2,055				1,503
Net operating loss carryforwards			736				235
Share-based compensation			335				316
Other			308				270
Deferred income tax assets		$	3,483			$	2,359
Deferred income tax liabilities:
Deferred policy acquisition costs		$	2,105			$	1,492
State deferred taxes			444				397
Other			79				50
Deferred income tax liabilities		$	2,628			$	1,939
Net deferred income tax assets		$	855			$	420

 

As of September 30, 2017, 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 (benefit).

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

9. Net Loss Per Share

 

Net loss per share is computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding during the periods presented. In calculating diluted loss 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 loss per share for the three and nine months ended September 30, 2017 and 2016.

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Basic and Diluted:
Net loss		$	(2,263	)		$	(1,806	)		$	(1,096	)		$	(1,581	)
Weighted average common shares outstanding			5,961,636				6,022,983				5,958,407				6,076,838
Loss per common share		$	(0.38	)		$	(0.30	)		$	(0.18	)		$	(0.26	)

 

The following potentially dilutive securities outstanding as of September 30, 2017 and 2016 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.

 

		As of September 30,
		2017				2016
Options to purchase common stock			177,456				210,489
Warrants to purchase common stock			1,906,875				1,906,875
Restricted stock units			20,500				20,500
Performance shares			475,000				475,000
			2,579,831				2,612,864

 

10. Options, Warrants, and Restricted Stock Units

 

The Company has established an equity incentive plan for employees and directors of the Company (the “Plan”). The purpose of the Plan is to create incentives designed to motivate recipients to contribute toward the Company’s growth and success, and also to attract and retain persons of outstanding competence, and provide such persons with an opportunity to acquire an equity interest in the Company.

 

The types of awards available for issuance under the Plan include non-qualified stock options, restricted stock, restricted stock units (“RSUs”), performance shares, performance cash awards, and other stock-based awards. The Plan provides for the issuance of 354,912 shares of common stock. As of September 30, 2017, both stock options and RSUs had been issued to the Company’s employees under the Plan resulting in 156,956 shares available for future issuance under the Plan.

 

There were no grants, exercises, or cancellations of the Company’s stock options for the nine months ended September 30, 2017. The following table summarizes the Company’s stock options outstanding as of September 30, 2017.

 

Stock Options Outstanding as of September 30, 2017
Date of Grant			Exercise Price ($)				Expiration Date		Remaining Contractual Life (Years)				Number Outstanding				Number Exercisable
03/31/2014				8.00			03/31/2019			1.50				163,301				143,704
04/04/2014				8.69			04/04/2019			1.51				14,155				12,456
										Total				177,456				156,160

 

On May 29, 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs to certain of its executive officers under the 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except share and per share data)

 

On May 23, 2017, the Compensation Committee of the Company’s Board of Directors approved the potential issuance of RSUs to the Company’s Chief Operating Officer, Mr. Case. Mr. Case will be awarded two matching RSUs for each share of the Company’s common stock that he purchases on the open market or directly from the Company during the period beginning May 23, 2017 and ending November 23, 2017, up to a maximum of 136,054 RSUs. Each RSU will entitle Mr. Case to one share of the Company’s common stock upon the vesting date of the RSU, which shall vest 20% per year over a period of five years following the date granted, subject to Mr. Case’s continued employment with the Company. Mr. Case will also be required to maintain ownership of the shares purchased through the full five-year vesting period. The RSUs will be issued to Mr. Case outside of the Plan as an inducement grant material to Mr. Case entering into employment with the Company. Through September 30, 2017, Mr. Case had purchased 50,092 shares of the Company’s common stock, of which 28,000 restricted common shares were purchased directly from the Company.

 

On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved the potential issuance of additional RSUs to the Company’s Officers and Directors under the Plan. The number of RSUs to be granted will be based upon the number of shares of the Company’s common stock that each participating Officer and Director purchases in open market transactions, independently, and without assistance from the Company, during the period beginning May 31, 2017 and ending November 30, 2017 (the “Purchase Period”). At the end of the Purchase Period, the Company will issue to each participating Officer and Director a total of two RSUs for each share of the Company’s common stock purchased during the Purchase Period, subject to a maximum of 40,000 RSUs for the Company’s Chief Executive Officer, Mr. Raucy, 40,000 RSUs for the Company’s Chief Financial Officer, Mr. Hill, 20,000 RSUs for the Company’s Chief Underwriting Officer, Mr. Stroud, and 6,666 RSUs for each of the Company’s non-employee Directors. Each RSU will entitle the grantee to one share of the Company’s common stock upon the vesting date of the RSU, which shall vest 20% per year over a period of five years following the date granted, subject to each Officer’s continued employment with the Company and each Director’s continued service on the Board, provided that if a Director makes himself available and consents 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 RSUs shall vest in full as of his last date of service as a director with the Company. Participating Officers and Directors will be required to maintain ownership of the shares purchased through the full five-year vesting period. Pursuant to the arrangement, a maximum number of 139,996 RSUs may be granted to the Company’s Officers and Directors at the end of the Purchase Period under the Plan. Through September 30, 2017, the Company’s Officers and Directors had purchased 41,565 shares of the Company’s common stock.

 

The following table summarizes RSU activity for the nine months ended September 30, 2017.

 

Restricted Stock Units

Number of Units

Weighted Average Grant Date Fair Value