UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2018

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 [X] No [  ]

 

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

 

Large accelerated filer [  ]

Accelerated filer [  ]

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

Smaller Reporting Company [X]

Emerging Growth Company [X]

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of May 10, 2018 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	28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48
ITEM 4. CONTROLS AND PROCEDURES	48
PART II. OTHER INFORMATION	48
ITEM 1. LEGAL PROCEEDINGS	48
ITEM 1A. RISK FACTORS	48
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4. MINE SAFETY DISCLOSURES	48
ITEM 5. OTHER INFORMATION	48
ITEM 6. EXHIBITS	49
SIGNATURES	50

 

 

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, 2018 (unaudited)				December 31, 2017
ASSETS
Investments:
Fixed income securities, at fair value (amortized cost of $63,296 and $51,503, respectively)		$	62,102			$	51,122
Equity investments, at fair value (cost of $2,214 and $2,582, respectively)			2,287				2,707
Short-term investments, at cost			161				417
Other investments, at cost			1,027				945
Total investments			65,577				55,191
Cash and cash equivalents			35,987				23,575
Deferred policy acquisition costs, net			6,766				6,785
Premiums receivable, net of allowance for credit losses of $42 and $33, respectively			2,080				10,831
Ceded unearned premiums			3,609				3,655
Reinsurance recoverable on paid losses			4,433				1,952
Reinsurance recoverable on loss and loss adjustment expense reserves			6,136				8,971
Funds deposited with reinsured companies			1,171				2,250
Current income taxes recoverable			–				64
Deferred tax asset, net			397				70
Property and equipment, net			432				205
Other assets			908				888
Total assets		$	127,496			$	114,437
LIABILITIES
Loss and loss adjustment expense reserves		$	11,454			$	13,488
Unearned premium reserves			37,397				39,523
Ceded reinsurance premiums payable			5,982				5,532
Agency commissions payable			1,014				695
Premiums collected in advance			2,746				1,078
Funds held under reinsurance treaties			206				206
Current income taxes payable			449				–
Accounts payable and other accrued expenses			3,696				4,273
Series B Preferred Shares, $25.00 par value, zero and 120,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively			–				2,840
Total liabilities		$	62,944			$	67,635
Commitments and contingencies (Note 16)
SHAREHOLDERS’ EQUITY
Series A Preferred Shares, $25.00 par value, 1,000,000 shares authorized, 700,000 and zero shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		$	17,500			$	–
Common stock, $0.001 par value; 10,000,000 shares authorized; 6,136,125 shares issued as of both periods; 5,984,766 shares outstanding as of both periods			6				6
Additional paid-in capital			46,047				47,064
Retained earnings			2,894				910
Accumulated other comprehensive loss, net of tax			(886	)			(169	)
			65,561				47,811
Less: treasury stock at cost; 151,359 shares for both periods			(1,009	)			(1,009	)
Total shareholders’ equity			64,552				46,802
Total liabilities and shareholders’ equity		$	127,496			$	114,437

 

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,
		2018				2017
Revenue:
Net premiums earned		$	12,615			$	8,172
Net investment income			378				168
Other income			547				377
Total revenue			13,540				8,717
Expenses:
Net losses and loss adjustment expenses			4,259				3,631
Amortization of deferred policy acquisition costs			3,295				2,522
General and administrative expenses			3,021				2,091
Accretion of discount on Series B Preferred Shares			33				92
Loss on repurchase of Series B Preferred Shares and Performance Shares			612				–
Total expenses			11,220				8,336
Income before income tax expense			2,320				381
Income tax expense			369				135
Net income		$	1,951			$	246
Net earnings per common share:
Basic		$	0.33			$	0.04
Diluted		$	0.32			$	0.04
Weighted average common shares outstanding:
Basic			5,984,766				5,956,766
Diluted			6,093,096				5,956,766
Consolidated Statements of Comprehensive Income
Net income		$	1,951			$	246
Unrealized gains (losses) on investments available for sale, net of income taxes			(684	)			55
Comprehensive income		$	1,267			$	301

 

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								Paid-in				Retained				Accumulated Other Comprehensive				Total Shareholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Earnings				Loss				Equity
Balance, January 1, 2017			–				–				5,956,766			$	6				151,359			$	(1,009	)		$	46,809			$	616			$	(65	)		$	46,357
Stock compensation expense			–				–				–				–				–				–				31				–				–				31
Issuance of common stock			–				–				28,000				–				–				–				224				–				–				224
Net income			–				–				–				–				–				–				–				294				–				294
Other comprehensive loss			–				–				–				–				–				–				–				–				(104	)			(104	)
Balance, December 31, 2017			–			$	–				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

 

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,
		2018				2017
Cash provided by (used in):
Operating activities:
Net income		$	1,951			$	246
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount on Series B Preferred Stock			33				92
Loss on repurchase of Series B Preferred Shares and Performance Shares			612				–
Net deferred income taxes			(146	)			124
Stock compensation expense			44				7
Depreciation expense			24				18
Changes in operating assets and liabilities:
Premiums receivable, net			8,751				759
Reinsurance recoverable on paid losses and loss reserves			353				(1,509	)
Amounts held on deposit with reinsured companies			1,079				500
Ceded unearned premiums			46				(530	)
Deferred policy acquisition costs, net			19				(37	)
Loss and loss adjustment expense reserves			(2,034	)			842
Premiums collected in advance			1,668				788
Unearned premium reserves			(2,126	)			(683	)
Ceded reinsurance premiums payable			450				(259	)
Current income taxes recoverable			513				523
Other, net			(378	)			188
Net cash provided by operating activities			10,859				1,069
Investing activities:
Purchases of furniture and equipment			(66	)			(12	)
Purchases of fixed income securities			(12,690	)			(7,101	)
Proceeds from the sale of fixed income securities			846				1,022
Purchase of equity investments			(100	)			–
Proceeds from the sale of equity securities			468				–
Purchases of other investments			(82	)			(300	)
Net sales (purchases) of short-term investments			256				(342	)
Net cash used by investing activities			(11,368	)			(6,733	)
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 B Preferred Shares			(240	)			(240	)
Payments under capital lease obligations			(32	)			–
Net cash provided (used) by financing activities			12,921				(240	)
Net increase (decrease) in cash and cash equivalents			12,412				(5,904	)
Cash and cash equivalents at beginning of period			23,575				43,045
Cash and cash equivalents at end of period		$	35,987			$	37,141
Supplemental disclosure of cash flow information:
Non-cash financing activities:
Obligation for the acquisition of vehicles under lease agreements		$	184			$	–

 

See accompanying notes to consolidated financial statements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 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 holding company based in Canada. As of March 31, 2018, KFSI and its affiliates owned approximately 1.3% of our outstanding shares of common stock and warrants and performance shares to acquire approximately an additional 23.9% of our outstanding shares of common stock. In addition, as of March 31, 2018, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 43.0% of our outstanding shares of common stock. D. Kyle Cerminara, a member of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, a member of our Board of Directors, serves as President, Co-Founder and Partner of FGI.

 

We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”, and ClaimCor, LLC, or “ClaimCor”.

 

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. Our current insurance offerings in Louisiana and Texas 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.

 

In addition to the voluntary policies that Maison writes, we have participated in the last six rounds of take-outs from Louisiana Citizens Property Insurance Corporation, or “LA Citizens”, occurring on December 1st of each year, 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 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 take-out, some of LA Citizens and TWIA policyholders may not have been 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, or “FOIR”, which authorized Maison to write personal lines insurance in Florida. Pursuant to the consent order issued, Maison has agreed to comply with certain requirements as outlined by the FOIR until Maison can demonstrate three consecutive years of statutory net income following our admission into Florida as evidenced by its Annual Statement filed with the National Association of Insurance Commissioners. To comply with a requirement of the consent order that Maison have at least $35 million in capital and surplus, and maintain an RBC ratio of 300% or more, on March 31, 2017, Maison received a capital contribution from PIH in the amount of $16 million.

 

On September 29, 2017, Maison received authorization from the FOIR 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, on December 19, 2017, Maison entered the Florida market via the assumption of approximately 3,500 policies from FL 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 LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison writes, as well as a per policy fee which ranges from $0-$75.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 catastrophic events occur that 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.

 

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 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 are included in accumulated other comprehensive 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.

 

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 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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.

 

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 leased property and leasehold improvements. Property and equipment is estimated to have no salvage value at its useful life-end except for 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 $86 and $85 for the three months ended March 31, 2018 and 2017, respectively.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 U.S. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At March 31, 2018, 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 Maison exclusively underwrites policies in Louisiana, Texas and Florida. Maison insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of March 31, 2018, these policies are concentrated within these parishes, presented as a percentage of our direct and assumed policies in all states, as follows: Saint Tammany Parish 9.3%, Jefferson Parish 8.5%, and East Baton Rouge Parish 5.7%. No other parish in Louisiana, or county in Texas or Florida, individually has over 5.0% of the policies in force as of March 31, 2018. As of March 31, 2018, Maison writes in 169 of the 254 counties that comprise the State of Texas, and in 27 of the 67 counties in Florida.

 

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 periods, 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 (e.g., 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 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. See Note 10 for additional information on the Company’s stock-based compensation.

 

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 14 for additional information on the fair value of the Company’s financial instruments.

 

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 Adopted and Issued Accounting Standards

 

Recently Adopted Accounting Standards

 

ASU 2014-09: Revenue from Contracts with Customers:

 

The Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13 (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 became effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted Topic 606 on January 1, 2018, but since virtually all of the Company’s revenues relate to insurance contracts and investment income, the adoption of Topic 606 did not have an impact on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within the scope of Topic 606 as such transactions are consummated.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

ASU 2018-02: Income Statement – Reporting Comprehensive Income:

 

In February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income. ASU 2018-02 was issued to address financial reporting issues that arose as a result of the passage of the Tax Cuts and Jobs Act, enacted into law by the United States federal government on December 22, 2017. Prior to the issuance of ASU 2018-02, GAAP required that deferred tax assets and liabilities be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance was applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income. Under ASU 2018-02, a reclassification from accumulated other comprehensive income to retained earnings is allowed for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because ASU 2018-02 only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company adopted the amendments in this update on January 1, 2018 and determined that ASU 2018-02 applied to the deferred taxes on unrealized losses on its investment portfolio, which had been previously recognized in other comprehensive income, resulting in the reclassification of $33 from accumulated other comprehensive income to retained earnings, representing the stranded tax effect on these losses.

 

Recently Issued Accounting Standards

 

ASU 2016-01: Financial Instruments-Overall:

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income. For public business entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018, however the Company has elected to delay the adoption of the guidance until its fiscal year beginning January 1, 2019, under its exemption as an emerging growth company under the JOBS Act. 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 will 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 (loss).

 

ASU 2016-02: Leases:

 

In February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under 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, 2018, and interim periods within those fiscal years, however the Company intends to delay the adoption of the guidance until its fiscal year beginning January 1, 2019, under its exemption as an emerging growth company under the JOBS Act. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial position, results of operations or cash flows. Upon adoption, we expect to recognize right of use assets and liabilities on the consolidated statement of financial position for leases currently classified as operating leases.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 2016-02 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 March 31, 2018 and December 31, 2017 is as follows.

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
As of March 31, 2018
Fixed income securities:
U.S. government		$	7,135			$	1			$	(70	)		$	7,066
State municipalities and political subdivisions			6,158				–				(104	)			6,054
Asset-backed securities and collateralized mortgage obligations			24,609				13				(507	)			24,115
Corporate			25,394				3				(530	)			24,867
Total fixed income securities			63,296				17				(1,211	)			62,102
Equity securities:
Common stock			2,084				80				(109	)			2,055
Warrants to purchase common stock			81				88				(2	)			167
Rights to purchase common stock			49				17				(1	)			65
Total equity securities			2,214				185				(112	)			2,287
Total fixed income and equity securities		$	65,510			$	202			$	(1,323	)		$	64,389
As of December 31, 2017
Fixed income securities:
U.S. government		$	2,735			$	–			$	(37	)		$	2,698
State municipalities and political subdivisions			5,959				3				(55	)			5,907
Asset-backed securities and collateralized mortgage obligations			20,084				10				(227	)			19,867
Corporate			22,725				44				(119	)			22,650
Total fixed income securities			51,503				57				(438	)			51,122
Equity securities:
Common stock			2,448				71				(59	)			2,460
Warrants to purchase common stock			66				88				–				154
Rights to purchase common stock			68				26				(1	)			93
Total equity securities			2,582				185				(60	)			2,707
Total fixed income and equity securities		$	54,085			$	242			$	(498	)		$	53,829

 

The table below summarizes the Company’s fixed income securities at March 31, 2018 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		$	3,447			$	3,434
More than one to five years			31,126				30,621
More than five to ten years			12,526				12,206
More than ten years			16,197				15,841
Total		$	63,296			$	62,102

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

The following table highlights, by loss position and security type, those fixed income and equity securities in unrealized loss positions as of March 31, 2018 and December 31, 2017. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions. There were 335 and 235 fixed income investments that were in unrealized loss positions as of March 31, 2018 and December 31, 2017, respectively. The Company held 10 and 12 equity securities in unrealized loss positions at March 31, 2018 and December 31, 2017, respectively.

 

		Less than 12 Months								Greater than 12 Months								Total
		Estimated Fair Value				Unrealized Loss				Estimated Fair Value				Unrealized Loss				Estimated Fair Value				Unrealized Loss
As of March 31, 2018
Fixed income securities:
U.S. government		$	2,875			$	(49	)		$	766			$	(21	)		$	3,641			$	(70	)
State municipalities and political subdivisions			5,328				(80	)			726				(24	)			6,054				(104	)
Asset-backed securities and collateralized mortgage obligations			18,591				(348	)			4,399				(159	)			22,990				(507	)
Corporate			23,094				(484	)			1,133				(46	)			24,227				(530	)
Total fixed income securities			49,888				(961	)			7,024				(250	)			56,912				(1,211	)
Equity securities:
Common stock			392				(109	)			-				-				392				(109	)
Warrants to purchase common stock			8				(2	)			-				-				8				(2	)
Rights to purchase common stock			11				(1	)			-				-				11				(1	)
Total equity securities			411				(112	)			-				-				411				(112	)
Total fixed income and equity securities		$	50,299			$	(1,073	)		$	7,024			$	(250	)		$	57,323			$	(1,323	)
As of December 31, 2017
Fixed income securities:
U.S. government		$	1,547			$	(22	)		$	771			$	(15	)		$	2,318			$	(37	)
State municipalities and political subdivisions			4,267				(35	)			732				(20	)			4,999				(55	)
Asset-backed securities and collateralized mortgage obligations			13,530				(123	)			4,503				(104	)			18,033				(227	)
Corporate			14,690				(92	)			1,158				(27	)			15,848				(119	)
Total fixed income securities			34,034				(272	)			7,164				(166	)			41,198				(438	)
Equity securities:
Common stock			453				(59	)			–				–				453				(59	)
Warrants to purchase common stock			15				–				–				–				15				–
Rights to purchase common stock			15				(1	)			–				–				15				(1	)
Total equity securities			483				(60	)			–				–				483				(60	)
Total fixed income and equity securities		$	34,517			$	(332	)		$	7,164			$	(166	)		$	41,681			$	(498	)

 

Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling approximately $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 $1,974 as of March 31, 2018.

 

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 $727 through March 31, 2018. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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.

 

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 three months ended March 31, 2018 and 2017.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

The Company does not have any exposure to subprime mortgage-backed investments. Net investment income for the three months ended March 31, 2018 and 2017 was as follows:

 

		Three Months Ended March 31,
		2018				2017
Investment income:
Interest on fixed income securities		$	335			$	132
Interest on cash and cash equivalents			29				47
Realized gains upon sale of securities			36				–
Gross investment income			400				179
Investment expenses			(22	)			(11	)
Net investment income		$	378			$	168

 

5. 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 $1,750 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 ceded $37 and $114 in written premiums under its per-risk treaties for the three months ended March 31, 2018 and 2017, 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. 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.

 

The Company ceded $6,048 and $5,762 in written premiums under its excess of loss treaties for the three months ended March 31, 2018 and 2017, respectively.

 

In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we acted as a reinsurer and had assumed wind/hail only exposures on certain churches and related structures that Brotherhood insures throughout the State of Texas. Our quota-share percentage varied 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 three months ended March 31, 2017, we had written $429 in assumed premiums through our agreement with Brotherhood. Effective January 1, 2018, we terminated our quota-share agreement with Brotherhood, as a result of our evaluation of the risk-adjusted returns on this portion of our business.

 

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 three months ended March 31, 2017, we had written $419 in assumed premiums through the TWIA quota share agreement compared to $(3) for the three months ended March 31, 2018, as we did not participate in the December 1, 2017 TWIA depopulation.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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

 

		Three months ended March 31,
		2018				2017
Premium written:
Direct		$	16,788			$	11,987
Assumed*			(168	)			847
Ceded			(6,085	)			(5,876	)
Net premium written		$	10,535			$	6,958
Premium earned:
Direct			16,544			$	12,671
Assumed			2,202				847
Ceded			(6,131	)			5,346
Net premium earned		$	12,615			$	8,172
Losses and LAE incurred:
Direct			5,514			$	4,831
Assumed			(301	)			754
Ceded			954				1,954
Net losses and LAE incurred		$	4,259			$	3,631

 

^*Assumed premium written consists of premiums written through our depopulation of policies through FL Citizens, TWIA, and our former quota share agreement with Brotherhood. Although we also assume premium through the depopulation of policies from LA Citizens, this premium has been included in direct premium and losses in the table above pursuant to guidance issued by the LDI, requiring that insurance companies report premium written and earned (as well as losses incurred) through the depopulation of policies from LA Citizens as direct premium and losses for statutory accounting purposes. Assumed 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 may opt-out of the assumption process, combined with the fact that we cancelled our quota-share agreement with Brotherhood effective January 1, 2018.

 

On May 3, 2018 the Louisiana State Legislature sent House Bill No. 333 (“HB 333”) to the Louisiana Governor for executive approval. HB 333 amends the law with respect to the depopulation of policies from LA Citizens. Under current law, LA Citizens in required to offer all of its in-force policies for removal to the voluntary market at least once per year. Current law further requires that LA Citizens offer for depopulation policies with all available geographic and risk characteristics that serve to reduce the exposure of LA Citizens. The proposed amendments under HB 333 allow LA Citizens, with approval of its board of directors, to choose which of its in-force policies to offer for depopulation, and not necessarily offer all, or any of its policies for removal to the voluntary market. The passage of HB 333 is expected to reduce the number and of policies the Company is able to depopulate from LA Citizens in the future.

 

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 months ended March 31, 2018 and 2017, is as follows:

 

		Three months ended March 31,
		2018				2017
Balance, January 1, net		$	6,785			$	4,389
Additions			3,276				2,559
Amortization			(3,295	)			(2,522	)
Balance, March 31, net		$	6,766			$	4,426

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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 within the Company.

 

The Company’s evaluation of the adequacy of loss and LAE reserves includes a re-estimation of the liability for loss and LAE reserves relating to each preceding financial year compared to the liability that was previously established. The results of this comparison and the changes in the provision, net of amounts recoverable from reinsurers, for the three months ended March 31, 2018 and 2017 were as follows:

 

		Three months ended March 31,
		2018				2017
Balance, January 1, gross of reinsurance		$	13,488			$	6,971
Less reinsurance recoverable on loss and LAE expense reserves			(8,971	)			(3,652	)
Balance, beginning of period, net of reinsurance			4,517				3,319
Incurred related to:
Current year			4,823				3,960
Prior years			(564	)			(329	)
Paid related to:
Current year			(2,432	)			(2,685	)
Prior years			(1,026	)			(921	)
Balance, March 31, net of reinsurance			5,318				3,344
Plus reinsurance recoverable related to loss and LAE expense reserves			6,136				4,469
Balance, March 31, gross of reinsurance		$	11,454			$	7,813

 

8. Income Taxes

 

Actual income tax expense for the three months ended March 31, 2018 and 2017 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,
		2018				2017
Income tax expense at statutory income tax rate			487			$	130
State income tax (net of federal tax benefit)			(123	)			2
Other			5				3
Income tax expense		$	369			$	135

 

The Company carries a net deferred income tax asset of $397 and $70 at March 31, 2018 and December 31, 2017, 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, 2018				December 31, 2017
Deferred income tax assets:
Loss and loss adjustment expense reserves		$	33			$	28
Unearned premium reserves			1,535				1,576
Investments			220				38
Share-based compensation			261				229
Other			235				202
Deferred income tax assets		$	2,284			$	2,073
Deferred income tax liabilities:
Deferred policy acquisition costs		$	1,421			$	1,425
State deferred taxes			420				543
Other			46				35
Deferred income tax liabilities		$	1,887			$	2,003
Net deferred income tax assets		$	397			$	70

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

The Company’s net deferred tax assets were impacted by the passage of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the corporate federal income tax rate from 35% to 21% and required us to reduce the value of our net deferred tax assets to reflect this new rate, effective for both periods presented in the table above. Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods.

 

As of March 31, 2018, 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.

 

9. 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, 2018 and 2017.

 

		Three months ended March 31,
		2018				2017
Basic:
Net income (in thousands)		$	1,951			$	246
Weighted average common shares outstanding			5,984,766				5,956,766
Earnings per common share		$	0.33			$	0.04
Diluted:
Weighted average common shares outstanding			6,093,096				5,956,766
Diluted earnings per common share		$	0.32			$	0.04

 

The following potentially dilutive securities outstanding as of March 31, 2018 and 2017 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.

 

		As of March 31,
		2018				2017
Options to purchase common stock			177,456				177,456
Warrants to purchase common stock			1,906,875				1,906,875
Restricted stock units			20,500				20,500
Performance shares			375,000				475,000
			2,479,831				2,579,831

 

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.

 

In April 2015, the Company’s shareholders approved an amendment to the Plan to allow for the issuance of additional award types under the Plan. In addition to non-qualified stock options issuable under the Plan, the amendment provides for the issuance of 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 March 31, 2018, both stock options and RSUs had been issued to the Company’s employees and directors under the Plan, resulting in 48,626 shares available for future issuance under the Plan.

 

There were no grants, exercises, or cancellations of the Company’s stock options for the three months ended March 31, 2018. A total of 19,596 stock options vested during the quarter ended March 31, 2018, which were granted on March 31, 2014 and have a weighted average exercise price of $8.00 per share. The following table summarizes the Company’s stock options outstanding as of March 31, 2018.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

Stock Options Outstanding as of March 31, 2018
Date of Grant		Exercise Price ($)				Expiration Date		Remaining Contractual Life (Years)				Number Outstanding				Number Exercisable
03/31/2014			8.00			03/31/2019			1.00				163,301				163,301
04/04/2014			8.69			04/04/2019			1.01				14,155				12,455
									Total				177,456				175,756

 

On May 29, 2015, 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.

 

In connection with the Company’s appointment of Dan Case as Chief Operating Officer effective May 23, 2017, we entered into an offer letter with Mr. Case, which provides Mr. Case with the opportunity to purchase up to 68,027 shares of the Company’s common stock on the open market or in direct purchases from the Company through June 15, 2018. At the end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of RSUs of the Company equal to two RSUs for each share purchased by Mr. Case. The RSUs will vest 20% per year over five years following the date granted, subject to continued employment through such vesting date. The aggregate maximum number of shares of the Company’s common stock that may be acquired pursuant to this arrangement, including through open market purchases, purchases from the Company and grants from the Company, is 204,081. Any shares purchased directly from the Company will be made at a price equal to the closing price of the Company’s common stock on the prior trading day, but at a price not less than the Company’s latest quarter end published book value per share. This arrangement was entered into outside of the Plan, and was approved by the Compensation Committee of the Board of Directors as an inducement material to Mr. Case entering into employment with the Company in reliance on Nasdaq listing rule 5635(c)(4). As of March 31, 2018, Mr. Case had purchased 56,276 shares of the Company’s common stock pursuant to this arrangement, 28,000 of which shares were purchased directly from the Company at a purchase price of $8.00 per share on September 14, 2017. As of March 31, 2018, the Company had not yet granted Mr. Case any RSUs under this agreement.

 

On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved a share matching arrangement for certain purchases of common stock made by the Company’s executive officers and directors. During the period beginning on May 31, 2017 and ending on November 30, 2017, each of the Company’s executive officers and directors had the opportunity to purchase the Company’s common stock through the open market, independently, and without assistance from the Company. At the end of the purchase period, the Company agreed to match any such shares purchased by the Company’s executive officers and directors with a grant of RSUs of the Company equal to two RSUs for each share purchased. Accordingly, on December 15, 2017, the Committee granted a total of 108,330 RSUs as follows; 40,000, 32,000 and 3,000 RSUs to our executive officers, Messrs. Raucy, Hill and Stroud, respectively, as well as 6,666 RSUs to each of directors Swets, Cerminara, Horowitz, Johnson and Wong. Each RSU entitles the 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. Directors will be required to maintain ownership of the shares purchased through the full five-year vesting period, except as set forth above.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

The following table summarizes RSU activity for the three months ended March 31, 2018.

 

Restricted Stock Units		Number of Units				Weighted Average Grant Date Fair Value
Non-vested units, December 31, 2017			128,830			$	6.27
Granted			–				–
Vested			–				–
Forfeited			–				–
Non-vested units, March 31, 2018			128,830			$	6.27

 

Total stock based compensation expense for the three months ended March 31, 2018 and 2017 was $44 and $7, respectively. As of March 31, 2018, total unrecognized stock compensation expense of $735 remains, which will be recognized through December 31, 2022.

 

There were no grants, exercises, or cancellations of the Company’s common stock warrants for the three months ended March 31, 2018. The following table summarizes the Company’s warrants outstanding as of March 31, 2018.

 

Date of Grant		Exercise Price ($)				Expiration Date		Remaining Contractual Life (Years)				Number Outstanding and Exercisable
03/31/2014			9.60			03/31/2019			1.00				312,500
03/31/2014			10.00			03/31/2019			1.00				94,375
02/24/2015			15.00			02/24/2022			3.91				1,500,000
									Total				1,906,875

 

11. Shareholders’ Equity

 

Sale of Common Stock to Chief Operating Officer

 

On September 14, 2017, the Company sold 28,000 shares of its common stock to our Chief Operating Officer, Dan Case, at a sale price of $8.00 per share, as previously discussed in Note 10.

 

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. In addition, 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 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 Preferred Stock will be June 1, 2018. Dividends will be 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 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 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 12 – “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

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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, purchased 57,060 shares of the Series A Preferred Stock for customer accounts 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.

 

12. 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.

 

Performance Share Grant Agreement

 

On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with KAI, whereby KAI will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones regarding the Company’s stock price. Pursuant to the terms of the PSGA, if at any time the last sales price of the Company’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). The shares of common stock granted to KAI will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. As of March 31, 2018, the Company had not issued any shares under the PSGA.

 

Termination of Management Services Agreement and Repurchase of Series B Preferred Shares

 

As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company issued the following securities to 1347 Advisors, LLC (“1347 Advisors”), a wholly owned subsidiary of KFSI.

 

	●	100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event (as defined below). The Performance Shares are no longer outstanding as they were repurchased by the Company on January 2, 2018, as discussed below;
	●	120,000 shares of Series B Preferred Stock of the Company (the “Series B Preferred Shares”). The Series B Preferred Shares are no longer outstanding as they were repurchased by the Company on January 2, 2018 and February 28, 2018, as discussed below; and
	●	A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $15.00 per share. The Warrant expires on February 24, 2022.

 

The Performance Shares Grant Agreement granted 1347 Advisors 100,000 shares of the Company’s common stock issuable upon the date that the last sales price of the Company’s common stock equaled or exceeded $10.00 per share for any 20 trading days within any 30-day trading period (the “Milestone Event”). 1347 Advisors was not entitled to any dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved. As described below, on January 2, 2018, the Performance Shares Grant Agreement was terminated. As the Milestone Event was never achieved, no shares of common stock were issued to 1347 Advisors under the agreement.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

The Series B Preferred Shares had a par value of $25.00 dollars and paid annual cumulative dividends at a rate of eight percent per annum. The shares ranked senior to the Company’s common stock, and the Company was not permitted to issue any other series of preferred stock that rank equal or senior to the Series B Preferred Shares while the Series B Preferred Shares were outstanding.

 

As described below, through two transactions dated January 2, 2018 and February 28, 2018, all shares of Series B Preferred Shares have been repurchased by the Company.

 

Subsequent to the issuance of the Series B Preferred Shares, 1347 Advisors transferred 60,000 of its 120,000 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 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 three months 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 offering of the Company’s 8.00% Cumulative Preferred Stock, Series A (the “Preferred Stock”) offering (discussed under Note 11 – “Shareholders’ Equity”).

 

The foregoing transactions were approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.

 

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 $92 was charged to operations for the three months ended March 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 three months ended March 31, 2018.

 

Investment in 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 $292 as of March 31, 2018. The managing member of Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s board of directors on April 21, 2016.

 

13. Accumulated Other Comprehensive Loss

 

The table below details the change in the balance of each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2018 and 2017.

 

		Three months March 31,
		2018				2017
Unrealized gains (losses) on available-for-sale securities:
Balance, January 1		$	(169	)		$	(65	)
Other comprehensive income (loss) before reclassifications			(861	)			83
Amounts reclassified from accumulated other comprehensive loss			29				–
Income taxes			148				28
Net current-period other comprehensive (loss) income			(684	)			55
Reclassification of certain effects from accumulated other comprehensive loss			(33	)			–
Balance, March 31		$	(886	)		$	(10	)

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

14. 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, 2018 and December 31, 2017 in accordance with this guidance are as follows.

 

		Level 1				Level 2				Level 3				Total
March 31, 2018
Fixed income securities:
U.S. government		$	–			$	7,066			$	–			$	7,066
State municipalities and political subdivisions			–				6,054				–				6,054
Asset-backed securities and collateralized mortgage obligations			–				24,115				–				24,115
Corporate			–				24,867				–				24,867
Total fixed income securities		$	–			$	62,102			$	–			$	62,102
Equity securities:
Common stock			2,055								–				2,055
Warrants to purchase common stock			167				–				–				167
Rights to purchase common stock			65				–				–				65
Total equity securities		$	2,287			$	–			$	–			$	2,287
Total fixed income and equity securities		$	2,287			$	62,102			$	–			$	64,389
December 31, 2017
Fixed income securities:
U.S. government		$	–			$	2,698			$	–			$	2,698
State municipalities and political subdivisions			–				5,907				–				5,907
Asset-backed securities and collateralized mortgage obligations			–				19,867				–				19,867
Corporate			–				22,650				–				22,650
Total fixed income securities		$	–			$	51,122			$	–			$	51,122
Equity securities:
Common stock			2,460				–				–				2,460
Warrants to purchase common stock			154				–				–				154
Rights to purchase common stock			93				–				–				93
Total equity securities		$	2,707			$	–			$	–			$	2,707
Total fixed income and equity securities		$	2,707			$	51,122			$	–			$	53,829

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

15. 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 certain 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 certificates 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, 2018, Maison’s capital surplus was $41,335.

 

The LDI employs 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 certificates of authority in Texas and Florida, Maison is required to maintain an RBC ratio of 300% or more. As of December 31, 2017, Maison’s RBC ratio was 363%; 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, 2018, 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 investment securities with an estimated fair value of approximately $1,974 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, 2018, Maison’s capital includes six surplus notes issued to PIH in the amount of $10,650, all of which were approved by the LDI prior to their issuance. Notes accrue interest at 10% per annum. 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, 2018, are as follows.

 

Date of Issuance		Maturity Date		Principal Amount
December 21, 2015		December 21, 2019			850
March 31, 2016		March 31, 2018*			550
September 29, 2016		September 29, 2018			3,450
November 14, 2016		November 14, 2018			550
September 28, 2017		September 28, 2019			2,950
December 28, 2017		December 28, 2019			2,300
				$	10,650

 

^*As the surplus note with a maturity date of March 31, 2018 became due on a Saturday, the note was repaid on Monday, April 2, 2018, pursuant to the terms of the surplus note agreement.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

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.

 

16. 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:

 

On February 28, 2018, we entered into an agreement to lease space located at 8750 N. Central Expressway, Dallas, Texas, 75231, which consists of approximately 3,000 square feet of office space. The lease term runs through April, 2021 with an option to extend the lease for an additional three year term subject to certain conditions. Rent is payable in monthly installments of approximately $6,000 and escalates by approximately 2% annually.

 

As of March 31, 2018, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, Tampa, Florida, and Dallas, Texas.

 

Year ending March 31,
2019			436
2020			328
2021			129
2022 and thereafter			6
		$	899

 

Capital 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 capital leases having a carrying value of approximately $180 as of March 31, 2018. Future minimum lease payments, together with the present value of the net minimum lease payments as of March 31, 2018, are presented in the following table.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ amounts in thousands, except per share data)

 

Year ending March 31,
2019		$	63
2020			57
2021			67
Total minimum lease payments			187
Less: amount representing estimated executory costs included in total minimum lease payments			2
Net minimum lease payments			185
Less: amount representing interest			33
Present value of minimum lease payments		$	152

 

The present value of the minimum lease payments of $152 has been recorded as a liability on the Company’s balance sheet, included in “Accounts payable and other accrued expenses” as of March 31, 2018.

 

17. Subsequent Events

 

On April 23, 2018, the Company and MMI (collectively, the “Borrowers”) executed a $5 million 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 provides for a revolving line of credit of $5,000. The line of credit will expire on April 19, 2019, or such earlier date on which the line of credit shall have been terminated in accordance with the provisions of the Loan Agreement. Proceeds of borrowings under the Loan Agreement may be used to support working capital. The line of credit is secured by all accounts, equipment and general intangibles of the Borrowers, and all proceeds thereof.

 

Borrowings under the Loan Agreement shall bear interest at a rate per annum equal to one-month LIBOR plus a margin of 3.00%. The line of credit is to be repaid in monthly payments of interest only, with all principal and interest to be payable in full at maturity. The Loan Agreement contains certain restrictive covenants customary for transactions of this type (subject to negotiated exceptions and baskets), including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases. In addition, during the term of the Loan Agreement, the Borrowers are required to maintain (a) a maximum Premium/Surplus Ratio of Maison Insurance Company of 3.00 to 1.00, and (b) a minimum Demotech rating of Maison Insurance Company of “A” at all times.

 

The Loan Agreement also provides for customary events of default with corresponding grace periods, including: (1) failure to pay principal, interest or fees under the Loan Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Loan Agreement; (3) the making of false or materially inaccurate representations and warranties; (4) certain defaults under other debt obligations of the Borrowers; (5) money judgments, material adverse changes or events regarding the validity of the Loan Agreement or other loan documents; (6) a change in control; and (7) certain events of bankruptcy or insolvency affecting the Borrowers. Upon the occurrence of an event of default, the Lender may declare the entire unpaid principal balance and accrued unpaid interest immediately due and payable and/or exercise any and all remedial and other rights under the Loan Agreement.

 

As of March 31, 2018, the Company has not borrowed any funds under the Loan Agreement.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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, 2017 on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2018.

 

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. Following this offering, 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.

 

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. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and other similar expressions to identify forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. Although we believe that the plans, objectives, expectations, and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations, and prospects will be achieved.

 

Important factors that may cause our actual results to differ materially from the results contemplated by the forward looking statements are contained in Item 1A. Risk Factors and elsewhere in the Company’s Form 10-K for the year ended December 31, 2017 and in our subsequent filings with the SEC, and include, among others, the following: (i) our limited operating history and status as an emerging growth company; (ii) lack of future opportunities to participate in take-out programs; (iii) the level of demand for our coverage and the incidence of catastrophic events related to such coverage, including the impact of climate change and our lack of geographic diversification; (iv) our ability to successfully implement our business strategy and expand our operations, including through acquisitions and development of new products; (v) changes in general economic, business, and industry conditions, including cyclical changes in the insurance industry; (vi) our ability to grow and remain profitable in the competitive insurance industry, including our lack of a rating from A.M. Best; (vii) legal, regulatory, and tax developments, including the effects of emerging claim and coverage issues and increased litigation against the insurance industry; (viii) legal actions brought against us; (ix) damage to our reputation; (x) adequacy of our insurance reserves; (xi) availability of reinsurance and ability of reinsurers to pay their obligations; (xii) the failure of our risk mitigation strategies or loss limitation methods; (xiii) our reliance on independent agents to write our insurance and other third parties; (xiv) our ability to maintain our public company status, exchange listing and effective internal control systems; (xv) data security breaches and other factors affecting our information technology systems; (xvi) our ability to attract and retain qualified employees, independent agents and brokers; (xvii) our ability to meet our obligations or obtain additional capital on favorable terms, or at all; (xviii) our ability to accurately price the risks that we underwrite; and (xix) restrictions on the use of our net operating loss carryforwards.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

We disclaim any obligation to update or revise any forward-looking statements as a result of new information, future events, or for any other reason.

 

Overview

 

We are 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 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. Further, we seek to leverage our increasingly geographically diverse insurance portfolio to gain efficiencies with respect to reinsurance. As of March 31, 2018, we covered risks on approximately 51,900 policies, an increase of almost 41% from one year prior.

 

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 holding company based in Canada. As of March 31, 2018, KFSI and its affiliates owned approximately 1.3% of our outstanding shares of common stock and warrants and performance shares to acquire approximately an additional 23.9% of our outstanding shares of common stock. In addition, as of March 31, 2018, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 43.1% of our outstanding shares of common stock. D. Kyle Cerminara, a member of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, a member of our Board of Directors, serves as President, Co-Founder and Partner of FGI.

 

We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”, and ClaimCor, LLC, or “ClaimCor”.

 

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. Our current insurance offerings in Louisiana and Texas 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. We also wrote commercial business in Texas through a quota share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only exposures on certain churches and related structures that Brotherhood insures throughout the State of Texas, but discontinued this business effective January 1, 2018.

 

In addition to the voluntary policies that Maison writes, we have participated in the last six rounds of take-outs from Louisiana Citizens Property Insurance Corporation, or “LA Citizens”, occurring on December 1st of each year, 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 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 take-out, some of the LA Citizens and TWIA policyholders may not have been able to obtain such coverage from any other marketplace.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation, or FOIR, which authorized 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 FOIR 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 FOIR via the National Association of Insurance Commissioners electronic filing system. Among other requirements, the FOIR requires the following as conditions related to the issuance of Maison’s certificate of authority:

 

	●	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 FOIR prior to the payment of any dividends; and
	●	Maison has agreed to receive written approval from the FOIR 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.

 

On September 29, 2017, Maison received authorization from the FOIR 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, on December 19, 2017, Maison entered the Florida market via the assumption of approximately 3,500 policies from FL 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 LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison writes, as well as a per policy fee which ranges from $0-$75 for providing policy administration, marketing, reinsurance contract negotiation, and accounting and analytical services.

 

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.

 

Business Strategy

 

Our primary goal is to continue to expand our property and casualty writings. Our goal for Louisiana, the first state where we began to offer insurance, has been to establish a market share of 2% to 3%. We plan to expand our writings in Louisiana and other states through:

 

	●	Increasing our number of voluntary policies. We believe that ease of use enhancements for our web-based agent quoting portal as well as refining our product offerings has positioned us to continue to experience organic new policy growth through our independent agencies. Our goal is to continue to grow through strategic relationships with agencies in the states where we currently provide insurance and also potentially in new coastal markets in the United States. Our years of experience in coastal markets make us qualified to manage agent expectations and provide superior support and service for our policyholders.
	●	Increasing our book of business through the depopulation of policies from FL Citizens, LA Citizens, and TWIA. On December 19, 2017, we participated in the depopulation of wind/hail-only policies from FL Citizens, which has allowed us to quickly establish a significant presence in the State of Florida. We plan to continue to focus on wind/hail-only and other specialty products in the states of Florida, Louisiana, and Texas where we have extensive management experience.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

	●	Strategic acquisitions. We intend to explore growth opportunities through strategic acquisitions in coastal states, including Louisiana, Texas and Florida. We also plan to pursue complementary books of business provided they meet our underwriting criteria. We will evaluate each opportunity based on expected economic contribution to our results and support of our market expansion initiatives.
	●	Attracting and retaining high-quality agents. We intend to focus our marketing efforts on maintaining and improving our relationships with highly productive independent agents, as well as on attracting new high quality agents in areas with a substantial potential for profitable growth.
	●	Reducing our ratio of expenses to net premiums earned and using technology to increase our operating efficiency. We are committed to improving our profitability by reducing expenses through enhanced technologies and by increasing the number of policies that we write through the strategic deployment of our capital. We currently outsource our policy administration and a portion of our claims handling functions to third parties with our dedicated oversight and direction, which we believe results in increased service and lower expense and loss ratios.

 

The Company will continue to evaluate its existing book of business with an emphasis on risk-adjusted returns and rate adequacy. Accordingly, we have terminated our quota-share agreement with Brotherhood effective January 1, 2018.

 

Our Products

 

As of March 31, 2018, we covered risks under approximately 51,900 direct and assumed policies. Of these policies, approximately 29% were obtained via take-out from the LA Citizens, FL Citizens and TWIA, with the remaining 71% obtained from our independent agency force. In total, from both take-out and voluntary business, approximately 50% of our policies are homeowner multi-peril, approximately 11% are manufactured home multi-peril policies, approximately 33% are wind/hail only policies, approximately 4% are multi-peril dwelling policies, and approximately 2% 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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.

 

Our direct in-force policy counts as well as assumed policies as of March 31, 2018 and December 31, 2017 were as follows:

 

		Policies in-force as of
Source of Policies		March 31, 2018				December 31, 2017
Total LA Citizens Takeout Policies in Force			10,928				12,002
Homeowners			26,166				23,283
Manufactured Homes			5,187				4,975
Other Dwellings			5,434				5,187
Total Voluntary Policies in Force			36,787				33,445
Total Direct Policies in Force			47,715				45,447
Assumed through FL Citizens Depopulation Program			3,440				3,444
Assumed through Brotherhood Quota-Share Agreement			–				1,035
Assumed through TWIA Quota-Share Agreement			715				745
Total Assumed Policies			4,155				5,224
Total all Policies			51,870				50,671

 

On May 3, 2018 the Louisiana State Legislature sent House Bill No. 333 (“HB 333”) to the Louisiana Governor for executive approval. HB 333 amends the law with respect to the depopulation of policies from LA Citizens. Under current law, LA Citizens is required to offer all of its in-force policies for removal to the voluntary market at least once per year. Current law further requires that LA Citizens offer for depopulation policies with all available geographic and risk characteristics that serve to reduce the exposure of LA Citizens. The proposed amendments under HB 333 allow LA Citizens, with approval of its board of directors, to choose which of its in-force policies to offer for depopulation, and not necessarily offer all, if any of its policies for removal to the voluntary market. The passage of HB 333 is expected to reduce the number and of policies the Company is able to depopulate from LA Citizens in the future.

 

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 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 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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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.

 

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 and other comprehensive loss on its consolidated balance sheets and statements of comprehensive income.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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 4 – “Investments,” to the consolidated financial statements.

 

Valuation of Net Deferred Income Taxes

 

The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company’s consolidated financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of net deferred income taxes.

 

The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company’s past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of income and comprehensive income.

 

The Company carries a net deferred income tax asset of $397 and $70 at March 31, 2018 and December 31, 2017, 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.

 

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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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 RSUs which vest solely based upon the passage of time), as well as using multiple Monte Carlo simulations for those RSUs with market-based vesting conditions. The fair value of these awards is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, or correspondingly, when the RSUs vest, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.

 

New Accounting Pronouncements

 

See Note 3 – “Recently Issued Accounting Standards” 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, 2018 compared to December 31, 2017

 

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 Company’s total investment portfolio as of March 31, 2018. 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, 2018 and December 31, 2017.

 

		March 31, 2018								December 31, 2017
Type of Investment		Carrying Amount				Percent of Total				Carrying Amount				Percent of Total
Fixed income securities:
U.S. government		$	7,066				10.8	%		$	2,698				4.9	%
State municipalities and political subdivisions			6,054				9.2	%			5,907				10.7	%
Asset-backed securities and collateralized mortgage obligations			24,115				36.8	%			19,867				36.0	%
Corporate			24,867				37.9	%			22,650				41.0	%
Total fixed income securities			62,102				94.7	%			51,122				92.6	%
Equity securities:
Common stock			2,055				3.1	%			2,460				4.4	%
Warrants to purchase common stock			167				0.3	%			154				0.3	%
Rights to purchase common stock			65				0.1	%			93				0.2	%
Total equity securities			2,287				3.5	%			2,707				4.9	%
Short-term investments			161				0.2	%			417				0.8	%
Other investments			1,027				1.6	%			945				1.7	%
Total investments		$	65,577				100.0	%		$	55,191				100.0	%

 

Pursuant to the certificate of authority we received from the TDI, we are required to deposit securities with the State of Texas. These securities consist of fixed income securities listed in the table above having an amortized cost basis of $2,001 and an estimated fair value of $1,974 as of March 31, 2018.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except 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 $727 through March 31, 2018. 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. 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 $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, 2018 and December 31, 2017. 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, 2018								December 31, 2017
Matures in:		Carrying Amount				Percent of Total				Carrying Amount				Percent of Total
One year or less		$	3,434				5.5	%		$	1,525				3.0	%
More than one to five years			30,621				49.3	%			22,995				45.0	%
More than five to ten years			12,206				19.7	%			13,138				25.7	%
More than ten years			15,841				25.5	%			13,464				26.3	%
Total		$	62,102				100.0	%		$	51,122				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 that virtually all of the Company’s investments are in U.S. dollar denominated instruments and the Company maintains a relatively small 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 and government agency bonds.

 

At March 31, 2018 and December 31, 2017, 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, 2018								December 31, 2017
Rating (S&P/Moody’s)		Carrying Amount				Percent of Total				Carrying Amount				Percent of Total
AAA/Aaa		$	33,571				54.1	%		$	24,188				47.3	%
Aa/Aa			6,157				9.9	%			6,322				12.4	%
A/A			15,369				24.7	%			13,651				26.7	%
BBB			7,005				11.3	%			6,961				13.6	%
Total fixed income securities		$	62,102				100.0	%		$	51,122				100.0	%

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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 where the investment manager determines that there is little or no risk of default prior to maturity, 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 the investment 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 4 - “Investments,” to the consolidated financial statements in Item 1 of this report.

 

As a result of the analysis performed by the Company, there were no write-downs for other-than-temporary impairments related to investments for the three months ended March 31, 2018 and 2017.

 

As of March 31, 2018, the gross unrealized losses for equity securities amounted to $112, fixed income securities amounted to $1,211, and there were no unrealized losses attributable to non-investment grade fixed income securities. At both March 31, 2018 and December 31, 2017, all unrealized losses on individual investments were considered temporary. 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 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 $19, to $6,766 as of March 31, 2018 compared to $6,785 as of December 31, 2017, corresponding to a decrease in our unearned premium reserves over the same period. DPAC expressed as a percentage of unearned premium reserves was 18.1% and 17.2% as of March 31, 2018 and December 31, 2017, respectively. On December 19, 2017, we participated in our first depopulation of policies from FL Citizens. Under the terms of its depopulation program, FL Citizens does not charge insurers a ceding commission for those premiums assumed, unlike LA Citizens and TWIA, which charge a ceding commission of 16% and approximately 22% of the premiums assumed from each entity, respectively. As of December 31, 2017, we had approximately $5,692 in unearned premium related to our depopulation of FL Citizens policies, with no corresponding acquisition costs related to commissions paid on these premiums. As these premiums are earned, as was the case during the three months ended March 31, 2018, we expect that our DPAC cost to unearned premium ratio will increase. As of March 31, 2018, unearned premium related to our depopulation of FL Citizens policies was $3,130.

 

Premiums Receivable, Net of Allowance for Doubtful Accounts

 

Premiums receivable, net of allowances for credit losses, decreased by $8,751 to $2,080 as of March 31, 2018 from $10,831 as of December 31, 2017, due, in large part, to our collection of premiums due to us from LA and FL Citizens as of December 31, 2017.

 

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 1^st of each year to May 31^st of the following year, make up the majority of our ceded unearned premiums at both March 31, 2018 and December 31, 2017. As the ultimate amount of premium we will cede under our CAT XOL treaties is based upon the risks we cover as of September 30^th of each treaty year, we must develop an estimate of the amounts due to our reinsurers at the inception of each treaty. Ceded premiums are earned by our reinsurers based upon actual amounts due for each treaty year, whereas cash payments made to our reinsurers are based upon an estimated schedule developed at the outset of each treaty year. At the end of each treaty year, estimated cash payments are reconciled with actual premiums due, and all premium balances are settled. This has resulted in the decrease in the unearned portion of our ceded premiums year over year, despite the fact that we expect to cede approximately $24,716 in premiums under CAT XOL treaty year expiring May 31, 2018, compared to $21,192 for the treaty year which expired on May 31, 2017.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Reinsurance Recoverables

 

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, 2018, we have recorded an expected recovery of $4,433 on paid losses as well as $6,136 on loss and loss adjustment expense reserves, compared to $1,952 and $8,971, respectively, as of December 31, 2017. Our expected recoveries at both periods relate primarily to Hurricane Harvey, which impacted our policyholders in Texas and Louisiana in August, 2017. We anticipate our gross incurred losses to be $27,000 from this event. As our retention is $5,000 under our CAT XOL treaty, we expect to recover approximately $22,000 from our reinsurers from this event. As of March 31, 2018, we had collected approximately $14,800, with the remaining $2,700 recorded as a recoverable on paid losses and $4,500 recorded as a recoverable on loss and loss adjustment expense reserves.

 

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 obligation decreased to $1,171 as of March 31, 2018 from $2,250 as of December 31, 2017 as we have applied the collateral placed on deposit to our quota-share portion of losses Brotherhood has paid during the three months ended March 31, 2018 with respect to Hurricane Harvey, which impacted a number of churches Brotherhood insures on or near the Gulf Coast of Texas in August 2017. The losses we incur with respect to our quota share agreement with Brotherhood are subject to our CAT XOL treaty, thus we are able to include these Hurricane Harvey losses in the ultimate $22,000 we expect to recover from our reinsurers as previously discussed under the heading “Reinsurance Recoverables”.

 

Current Income Taxes Recoverable/Payable

 

Current income taxes payable were $449 as of March 31, 2018 compared to current income taxes recoverable of $64 as of December 31, 2017, representing the estimate of both the Company’s state and federal income taxes due or receivable for the three and twelve month periods, respectively, less estimated payments made.

 

Net Deferred Income Taxes

 

The Company’s net deferred tax asset increased $327, to $397 as of March 31, 2018, from $70 as of December 31, 2017, due, in large part, to the increase in deferred tax assets associated with the unrealized losses on our bond portfolio. Net deferred income taxes are comprised of approximately $2,284 of deferred tax assets, net of approximately $1,887 of deferred tax liabilities as of March 31, 2018, compared to $2,073 of deferred tax assets, net of $2,003 of deferred tax liabilities as of December 31, 2017.

 

Property and Equipment

 

Property and equipment increased $227 to $432 as of March 31, 2018 compared to $205 as of December 31, 2017, due, in part, to the fact that the Company entered into vehicle lease agreements in the first quarter of 2018, which vehicles will be used by our sales representatives in Texas, Louisiana and Florida. Also included in property and equipment are computers, office equipment, and improvements at our leased facilities in Tampa, Florida and Baton Rouge, Louisiana, shown net of accumulated depreciation. Our policy for the capitalization and depreciation of these assets can be found in Note 2 – “Significant Accounting Policies” in Item 1 of this report.

 

Other Assets

 

Other assets increased $20, to $908 as of March 31, 2018 from $888 as of December 31, 2017. The major components of other assets, and the change therein, are shown below.

 

Other Assets		March 31, 2018				December 31, 2017				Change
Accrued interest on investments		$	326			$	285			$	41
Security deposits for facility leases			48				38				10
Prepaid expenses			528				556				(28	)
Other			6				9				(3	)
Total		$	908			$	888			$	20

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Loss and Loss Adjustment Expense Reserves

 

Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred and 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, 2018 and December 31, 2017, 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, 2018
Homeowners(1)		$	2,205			$	322			$	2,527			$	2,756			$	5,283			$	1,133
Special Property(2)			3,653				224				3,877				2,294				6,171				5,003
Total		$	5,858			$	546			$	6,404			$	5,050			$	11,454			$	6,136
December 31, 2017
Homeowners		$	2,438			$	260			$	2,698			$	1,971			$	4,669			$	1,562
Special Property			5,307				103				5,410				3,409				8,819				7,409
Total		$	7,745			$	363			$	8,108			$	5,380			$	13,488			$	8,971

 

(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 and FL Citizens and TWIA.

 

Gross reserves as of March 31, 2018 were $11,454, a decrease of $2,034 from December 31, 2017. As of March 31, 2018, gross reserves in the approximate amount of $4,496 have been established for PCS Catastrophe 1743, or Hurricane Harvey, a major storm which made initial landfall in the United States as a Category 4 hurricane near Rockport, Texas in August 2017, compared to gross reserves in the amount of $7,124 for Hurricane Harvey as of December 31, 2017. At both periods, we have anticipated our total incurred losses from Hurricane Harvey to be $27,000 on a gross basis, or $5,000 on a net basis after recoveries under our catastrophe excess of loss reinsurance program; thus we experienced no adverse development during the first quarter of 2018 as a result of Hurricane Harvey. Furthermore, we have released reserves from prior accident years (for losses unrelated to Hurricane Harvey), resulting in prior period redundancy of $566 for the current quarter. The reinsurance recoverable on reserves as of March 31, 2018 was $6,136, a decrease of $2,835 from December 31, 2017, due, in large part, to recoveries collected from our reinsurers under our catastrophe excess of loss program for Hurricane Harvey losses. As a result of the foregoing, net loss reserves were $5,318 and $4,517 as of March 31, 2018 and December 31, 2017, respectively.

 

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 $2,126 to $37,397 as of March 31, 2018 compared to $39,523 as of December 31, 2017. Typically, we report a reduction in our unearned premium reserves during the first quarter of each year due to the fact that we have assumed policies from LA Citizens in December of each year since our inception. Furthermore, on December 19, 2017, we participated in our first assumption of policies from FL Citizens. This resulted in a large increase in our unearned premium reserves as of December 31, 2017. The following table outlines the change in unearned premium reserves by state and by line of business.

 

		March 31, 2018				December 31, 2017				Change
Homeowners - LA		$	15,729			$	16,920			$	(1,191	)
Special Property - LA			7,794				9,050				(1,256	)
Total Louisiana			23,523				25,970				(2,447	)
Homeowners – TX			7,236				4,717				2,519
Special Property – TX			3,508				3,454				54
Total Texas			10,744				8,171				2,573
Special Property – FL			3,130				5,382				(2,252	)
Total Florida			3,130				5,382				(2,252	)
Unearned Premium Reserves		$	37,397			$	39,523			$	(2,126	)

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Ceded Reinsurance Premiums Payable

 

Ceded reinsurance premiums payable increased $450, to $5,982 as of March 31, 2018 compared to $5,532 as of December 31, 2017. 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. See “Ceded Premiums Written” under the heading “Results of Operations” below for further information on the premium we have ceded under our reinsurance programs.

 

Agency Commissions Payable

 

Agency commissions payable increased $319 to $1,014 as of March 31, 2018 versus $695 as of December 31, 2017. 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, 2018 and, December 31, 2017 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.

 

Premiums Collected in Advance

 

Advance premium deposits increased to $2,746 as of March 31, 2018 from $1,078 as of December 31, 2017, and represent cash the Company has received for policies which were not yet in-force as of March 31, 2018 and December 31, 2017, 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 December 31, 2017. As of both March 31, 2018 and December 31, 2017, we had received cash deposits of $206 from our reinsurers.

 

Accounts Payable and Other Accrued Expenses

 

Accounts payable and other accrued expenses decreased $577, to $3,696 as of March 31, 2018 compared to $4,273 as of December 31, 2017. The largest driver of the change when comparing periods was the change in amounts due for premium taxes and assessments, which decreased by $1,131 from December 31, 2017, as we filed and paid our annual premium taxes for the year ended December 31, 2017 in the first quarter 2018. The components of accounts payable and other accrued expenses, as well as the change therein, are shown below.

 

		March 31, 2018				December 31, 2017				Change
Accrued employee compensation		$	336			$	51			$	285
Accrued professional fees			886				587				299
Unearned policy fees			614				454				160
Accrued premium taxes and assessments			1,572				2,703				(1,131	)
Capital lease obligations			152				–				152
Other accounts payable			136				478				(342	)
Total		$	3,696			$	4,273			$	(577	)

 

Related Party Transactions

 

Termination of Management Services Agreement and Repurchase of Series B Preferred Shares

 

As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company issued the following securities to 1347 Advisors, LLC (“1347 Advisors”), a wholly owned subsidiary of KFSI.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

	●	100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event (as defined below). The Performance Shares are no longer outstanding as they were repurchased by the Company on January 2, 2018, as discussed below;
	●	120,000 shares of Series B Preferred Stock of the Company (the “Series B Preferred Shares”). The Series B Preferred Shares are no longer outstanding as they were repurchased by the Company on January 2, 2018 and February 28, 2018, as discussed below; and
	●	A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $15.00 per share. The Warrant expires on February 24, 2022.

 

The Performance Shares Grant Agreement granted 1347 Advisors 100,000 shares of the Company’s common stock issuable upon the date that the last sales price of the Company’s common stock equaled or exceeded $10.00 per share for any 20 trading days within any 30-day trading period (the “Milestone Event”). 1347 Advisors was not entitled to any dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved. As described below, on January 2, 2018, the Performance Shares Grant Agreement was terminated. As the Milestone Event was never achieved, no shares of common stock were issued to 1347 Advisors under the agreement.

 

The Series B Preferred Shares had a par value of $25.00 dollars and paid annual cumulative dividends at a rate of eight percent per annum. The shares ranked senior to the Company’s common stock, and the Company was not permitted to issue any other series of preferred stock that ranked equal or senior to the Series B Preferred Shares while the Series B Preferred Shares were outstanding. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to 1347 Advisors representing the annual dividend payment due on the Series B Preferred Shares. As described below, through two transactions dated January 2, 2018 and February 28, 2018, all shares of Series B Preferred Shares have been repurchased by the Company.

 

Subsequent to the issuance of the Series B Preferred Shares, 1347 Advisors transferred 60,000 of its 120,000 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 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 three months 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 foregoing transactions were approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.

 

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 $92 was charged to operations for the three months ended March 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 three months ended March 31, 2018.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Investment in 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 $292 as of March 31, 2018. The managing member of Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s board of directors on April 21, 2016.

 

Public Offering of Preferred Stock

 

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 (discussed under the heading “Shareholders’ Equity” below), 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, purchased 57,060 shares of the Series A Preferred Stock for customer accounts 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.

 

Contractual Obligations

 

As of March 31, 2018, the Company had the following amounts due under its operating and capital leases for its office facilities and equipment in Louisiana, Florida and Texas.

 

Year ending March 31,		Operating Leases				Capital Leases				Total
2019		$	436			$	63			$	499
2020			328				57				385
2021			129				67				196
2022 and thereafter			6				–				6
Total		$	899			$	187			$	1,086

 

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”). In addition, 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 will be June 1, 2018. Dividends will be 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 per year.

 

The Series A Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the stock will be redeemable at our option, for cash, in whole or in part, at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends to, but not including, the date of redemption. The Series A Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption. The stock will generally have no voting rights except as provided in the Certificate of Designations or as from time to time provided by law. The affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and each other class or series of voting parity stock will be required at any time for us to authorize, create or issue any class or series of our capital stock ranking senior to the Series A Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up, to amend any provision of our Certificate of Incorporation so as to materially and adversely affect any rights of the Series A Preferred Stock or to take certain other actions.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

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”, 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.

 

The table below presents the primary drivers behind the changes to total shareholders’ equity for the three months ended March 31, 2018.

 

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

 

Results of Operations

 

Three Months Ended March 31, 2018 Compared with Three Months Ended March 31, 2017

 

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, 2018 and 2017.

 

		Three months ended March 31,
		2018				2017				Change
Line of Business
Homeowners-LA		$	6,918			$	7,028			$	(110	)
Special Property-LA			3,201				2,706				495
Total Louisiana			10,119				9,734				385
Homeowners-TX			4,191				1,085				3,106
Special Property-TX			2,475				2,015				460
Total Texas			6,666				3,100				3,566
Special Property-FL			(164	)			–				(164	)
Total Florida*			(164	)			–				(164	)
Gross Premium Written		$	16,621			$	12,834			$	3,787

 

^*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, as well as the assumption of premium through our depopulation of policies from LA Citizens.

 

Ceded Premiums Written

 

Ceded premiums written increased by $209 to $6,085 for the three months ended March 31, 2018, compared to $5,876 for the first quarter 2017. 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 as the limits purchased under our catastrophe excess of loss reinsurance (“CAT XOL”) and aggregate programs did not change year over year. The following table is a summary of the key provisions under the reinsurance treaties which covered the three months ended March 31, 2018 and 2017.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

		2016/2017 CAT XOL Treaty 06/01/16 – 05/31/17				2017/2018 CAT XOL Treaty 06/01/17 – 05/31/18
Wind/Hail loss occurrence clause(1)			144 hours				144 hours
Retention on first occurrence		$	5,000			$	5,000
Retention on second occurrence		$	2,000			$	2,000
Limit of coverage including first event retention		$	200,000			$	200,000
Franchise deductible(2)		$	125			$	250

 

(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)	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 total cost of our CAT XOL coverage is estimated to be approximately $24,700 for the 2017/2018 treaty year, compared to $21,200 for the 2016/2017 treaty year.

 

Net Premium Earned

 

The following table shows our net premiums earned by line of business.

 

		Three months ended March 31,
Line of Business		2018				2017				Change
Homeowners-LA		$	5,655			$	4,883			$	772
Special Property-LA			2,905				1,576				1,329
Total Louisiana			8,560				6,459				2,101
Homeowners-TX			1,401				401				1,000
Special Property-TX			566				1,312				(746	)
Total Texas			1,967				1,713				254
Special Property-FL			2,088				–				2,088
Total Florida			2,088				–				2,088
Net premium earned		$	12,615			$	8,172			$	4,443

 

Premium earned on a gross and ceded basis is as shown in the following table.

 

		Three months ended March 31,
		2018				2017				Change
Gross premium earned		$	18,746			$	13,518			$	5,228
Ceded premium earned			6,131				5,346				785
Net premium earned		$	12,615			$	8,172			$	4,443

 

Other Income

 

Other income increased $170 to $547 for the quarter ended March 31, 2018, compared to $377 for the same period in 2017. Other income is comprised of claims adjusting fee revenue earned by our subsidiary, ClaimCor, policy fee income charged to our policyholders for inspections, 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 reinsurance program.

 

Net Losses and Loss Adjustment Expenses

 

Net 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.

 

		Three months ended March 31,
		2018								2017
		Losses ($)				Loss Ratio (%)				Losses ($)				Loss Ratio (%)
Catastrophe losses(1)		$	–				–%			$	1,697				20.7	%
Weather-related non-catastrophe losses			2,527				20.0	%			451				5.5	%
Non-weather related losses			2,298				18.2	%			1,812				22.2	%
Total current accident year losses			4,825				38.2	%			3,960				48.4	%
Prior period redundancy(2)			(566	)			(4.5	)%			(329	)			(4.0	)%
Total net losses and LAE incurred		$	4,259				33.7	%		$	3,631				44.4	%

 

	(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 $1,500.
	(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.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Our net loss ratio (net losses and LAE divided by net premiums earned) for the quarter ended March 31, 2018 was 33.7% compared to 44.4% for the same quarter last year. The decrease to our net loss ratio was driven primarily due to a reduction in both weather and non-weather loss ratios. During the quarter ended March 31, 2017, we experienced one catastrophe event - PCS event 1714, which affected our policyholders in Louisiana during early February with hail, tornado and other wind damage and resulted in approximately $1,697 incurred Catastrophe losses for the period, whereas no single weather event exceeded our internally defined Catastrophe threshold of $1,500 in gross incurred losses for the current quarter. This change was partially offset by an increase in our weather-related non-catastrophe loss ratio as we experienced a number of smaller events, primarily due to hail and freeze claims from unusually cold weather, which affected our policyholders in Louisiana in mid-January 2018. Since we have met the retention under our current aggregate treaty as of March 31, 2018, we anticipate that we will generate recoveries from our reinsurers for certain future weather losses occurring through May 31, 2018.

 

We have also released reserves from prior accident years for both the quarters ended March 31, 2018 and 2017, resulting in a benefit to our current loss ratio of approximately 4.5% and 4.0%, respectively.

 

Amortization of Deferred Policy Acquisition Costs

 

Amortization of deferred acquisition costs for the quarter ended March 31, 2018 was $3,295, compared to $2,522 for the quarter ended March 31, 2017, 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 17.6% for 2018, compared to 18.7% for 2017. On December 19, 2017, we participated in our first depopulation of policies from FL Citizens. Under the terms of its depopulation program, FL Citizens does not charge insurers a ceding commission for those premiums assumed, unlike LA Citizens and TWIA, which charge a ceding commission of 16% and approximately 22% of the premiums assumed from each entity, respectively. As these premiums are earned, we expect that the ratio of deferred policy acquisition cost amortization to gross premiums earned will decrease, as was the case during the three months ended March 31, 2018. Upon renewal of the policies which we have assumed from FL Citizens, however, we will pay our customary commission percentage to our independent agencies, which will be charged to deferred policy acquisition cost amortization throughout the coverage period of the renewal policies.

 

General and Administrative Expenses

 

General and administrative expenses increased $930 to $3,021 for the quarter ended March 31, 2018, compared to $2,091 for the quarter ended March 31, 2017. Expressed as a percentage of gross premium earned, general and administrative expenses were 16.1% and 15.5%, respectively. The largest driver in the increase in general and administrative expense were employee costs, as we have grown from 26 employees as of March 31, 2017 to 33 employees as of March 31, 2018, in order to support our growth in Texas and Florida.

 

Series B Preferred Shares

 

As previously discussed under the heading “Related Party Transactions,” we recorded amortization charges of $33 and $92, as well as a charge of $612 and $0, for the three months ended March 31, 2018 and 2017, 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, 2018 was $369, on pretax income of $2,320 compared to tax expense of $135 on pretax income of $381 for the three months ended March 31, 2017, resulting in an effective tax rate of 15.9% and 35.4%, 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, accounting for the decrease in our effective tax rate between periods. Our actual effective tax rate varies from the statutory federal income tax rates as shown in the following table.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

		As of March 31,
		2018				2017
Statutory federal income tax rate			21.0	%			34.0	%
State income tax (net of federal tax benefit)			(5.3	)%			0.5	%
Non-deductible expenses			0.2	%			0.9	%
Income tax benefit			15.9	%			35.4	%

 

Net Income

 

As a result of the foregoing, the Company’s net income for the first quarter of 2018 was $1,951, or $0.32 per diluted share, compared to $246, or $0.04 per diluted share for the first quarter of 2017.

 

Liquidity and Capital Resources

 

The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they become 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 “Series A Preferred Stock”), as previously discussed under the heading “Shareholders’ Equity”. In addition, on March 26, 2018, we issued an additional 60,000 shares of Series A Preferred Stock in connection with the underwriters’ exercise of their over-allotment option. 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 Stock from IWS Acquisition Corporation, as previously discussed under the heading “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.

 

On April 23, 2018, the Company and MMI (collectively, the “Borrowers”) executed a $5 million 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 provides for a revolving line of credit of $5,000. The line of credit will expire on April 19, 2019, or such earlier date on which the line of credit shall have been terminated in accordance with the provisions of the Loan Agreement. Proceeds of borrowings under the Loan Agreement may be used to support working capital. The line of credit is secured by all accounts, equipment and general intangibles of the Borrowers, and all proceeds thereof.

 

Borrowings under the Loan Agreement shall bear interest at a rate per annum equal to one-month LIBOR plus a margin of 3.00%. The line of credit is to be repaid in monthly payments of interest only, with all principal and interest to be payable in full at maturity. The Loan Agreement contains certain restrictive covenants customary for transactions of this type (subject to negotiated exceptions and baskets), including restrictions on liens, indebtedness, loans and guarantees, acquisitions and mergers, sales of assets, and stock repurchases. In addition, during the term of the Loan Agreement, the Borrowers are required to maintain (a) a maximum Premium/Surplus Ratio of Maison Insurance Company of 3.00 to 1.00, and (b) a minimum Demotech rating of Maison Insurance Company of “A” at all times.

 

The Loan Agreement also provides for customary events of default with corresponding grace periods, including: (1) failure to pay principal, interest or fees under the Loan Agreement when due and payable; (2) failure to comply with other covenants and agreements contained in the Loan Agreement; (3) the making of false or materially inaccurate representations and warranties; (4) certain defaults under other debt obligations of the Borrowers; (5) money judgments, material adverse changes or events regarding the validity of the Loan Agreement or other loan documents; (6) a change in control; and (7) certain events of bankruptcy or insolvency affecting the Borrowers. Upon the occurrence of an event of default, the Lender may declare the entire unpaid principal balance and accrued unpaid interest immediately due and payable and/or exercise any and all remedial and other rights under the Loan Agreement.

 

As of March 31, 2018, the Company has not borrowed any funds under the Loan Agreement.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

Cash Flows

 

The following table summarizes the Company’s consolidated cash flows for the three months ended March 31, 2018 and 2017.

 

		Three months ended March 31,
		2018				2017
Summary of Cash Flows
Net cash provided by operating activities		$	10,859			$	1,069
Net cash used by investing activities			(11,368	)			(6,733	)
Net cash provided (used) by financing activities			12,921				(240	)
Net increase (decrease) in cash and cash equivalents		$	12,412			$	(5,904	)

 

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 paid 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.

 

Three months ended March 31, 2017

 

For the three months ended March 31, 2017, the net cash provided by operating activities as reported on our consolidated statement of cash flows was $1,069, driven, in large part by our collection of approximately $8,247 in premiums for the quarter (net of the amounts we have ceded to our reinsurers), less the payment of approximately $4,298 in loss and LAE expenses (net of ceded recoveries collected from our reinsurers). We also paid approximately $1,473 in commissions to our agencies, as well as cash payments in the approximate amount of $1,407 for taxes, assessments and general and administrative expenses.

 

The net cash used by investing activities as reported on our consolidated statement of cash flows was $6,733, driven primarily by the net purchases of fixed income securities and short term investments for our investment portfolio. Net cash used by financing activities was $240, as a result of a dividend payment of $240 made to Advisors as holders of the Series B Preferred Shares issued in the MSA termination transaction.

 

As a result of the foregoing, cash and cash equivalents decreased from $43,045 as of December 31, 2016 to $37,141 as of March 31, 2017.

 

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, 2017, Maison’s reported surplus was considered to be in the “no action” level by the Louisiana and Texas Departments of Insurance, 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, 2017, Maison’s RBC ratio was 363%.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

$ amounts in thousands, except per share data

 

State Deposits

 

States routinely require deposits of assets for the protection of policyholders. As of March 31, 2018, 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 $1,974 as of March 31, 2018 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

 

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) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2018. 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, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves. 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.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” to our annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 26, 2018.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

 

ITEM 6. EXHIBITS

 

Exhibit		Description
1.1		Underwriting Agreement, dated February 23, 2018, by and between 1347 Property Insurance Holdings, Inc. and Boenning & Scattergood, Inc., as representative of the several underwriters listed on Schedule I thereto (incorporated by reference to Exhibit 1.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 26, 2018).
3.1		Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014).
3.2		Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 of Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014).
3.3		Certificate of Elimination of Certificate of Designations of Series B Preferred Shares of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 28, 2018).
3.4		Certificate of Designations of Cumulative Preferred Stock, Series A, of 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February 26, 2018).
10.1		Termination Agreement, dated as of January 2, 2018, by and among 1347 Advisors LLC and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.16 of Registrant’s Annual Report on Form 10-K filed with the Commission on March 26, 2018).
10.2		Stock Purchase Agreement, dated January 2, 2018, by and among 1347 Advisors LLC, IWS Acquisition Corporation and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.22 of Registrant’s Registration Statement on Form S-1 filed with the Commission on January 8, 2018).
10.3†		Stock Purchase Agreement, dated January 2, 2018, by and between 1347 Property Insurance Holdings, Inc. and Daniel E. Case (incorporated by reference to Exhibit 10.23 of Registrant’s Annual Report on Form 10-K filed with the Commission on March 26, 2018).
10.4		Commercial Business Loan Agreement for Term Loans and Lines of Credit, executed April 23, 2018, by and among Hancock Bank, as Lender, and 1347 Property Insurance Holdings, Inc. and Maison Managers, Inc., as Borrowers (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the Commission on April 26, 2018).
10.5		Promissory Note, executed April 23, 2018, by and among Hancock Bank, as Lender, and 1347 Property Insurance Holdings, Inc. and Maison Managers, Inc., as Borrowers (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed with the Commission on April 26, 2018).
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase.
101.DEF		XBRL Taxonomy Extension Definition Linkbase.
101.LAB		XBRL Taxonomy Extension Label Linkbase.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

 

*Furnished

† Denotes management contracts or compensatory plans or arrangements.

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		1347 PROPERTY INSURANCE HOLDINGS, INC.
Date:	May 14, 2018	By:	/s/ Douglas N. Raucy
			Douglas N. Raucy, President, Chief Executive Officer
			(principal executive officer)
Date:	May 14, 2018	By:	/s/ John S. Hill
			John S. Hill, Vice President, Secretary and Chief Financial Officer
			(principal financial and accounting officer)