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 December 31, 2017, we covered risks on approximately 51,000 policies, an increase of almost 48% 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 December 31, 2017, KFSI and its affiliates owned approximately 8.3% 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 December 31, 2017, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 36.0% 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.
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.
On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation, or FOIR, which authorizes Maison to write personal lines insurance in the State of Florida. Pursuant to the Consent Order issued, Maison has agreed to comply with certain requirements as outlined by the 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 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.
● 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.
● 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.
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 Mutual Insurance Company effective January 1, 2018.
As of December 31, 2017, we covered risks under approximately 51,000 direct and assumed policies. Of these policies, approximately 32% were obtained via take-out from the LA Citizens, FL Citizens and TWIA, approximately 66% were voluntary policies obtained from our independent agency force, with the remaining 2% comprised of assumed wind/hail only coverages from Brotherhood. In total, from both take-out and voluntary business, 46% of our policies are homeowner multi-peril, approximately 11% are manufactured home multi-peril policies, approximately 36% are wind/hail only policies, approximately 5% are multi-peril dwelling policies, and approximately 2% are dwelling fire policies.
Our policy counts by type as of December 31, 2017 and 2016 are as follows:
(1) The decrease in policies assumed through the TWIA quota share agreement from December 31, 2016 to December 31, 2017 is attributable to the fact that policyholders had a six month period (until May 31, 2017) to opt-out of the assumption process. Upon opt-out, policies are removed from the Company’s listing of assumed policies back to the original date of takeout, December 1, 2016 (as if the Company had never assumed the policy). Furthermore, pursuant to the quota share agreement, any policies which had been assumed through TWIA and had reached their expiration are renewed by Maison directly. At this point these policies are no longer considered assumed policies and are instead reflected as Voluntary Policies in Force in the table above.
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.
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.
The Company carries a net deferred income tax asset of $70 and $420 at December 31, 2017 and 2016, respectively, all of which the Company believes is more likely than not to be fully realized based upon management’s assessment of future taxable income.
The table below summarizes the estimated fair value of the Company’s fixed income securities by contractual maturity as of December 31, 2017 and 2016. 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.
As of December 31, 2017 and 2016, 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”).
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 8 of this report.
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 increased $2,396, to $6,785 as of December 31, 2017 compared to $4,389 as of December 31, 2016, corresponding to an increase in our unearned premium reserves over the same period. DPAC expressed as a percentage of unearned premium reserves was 17.2% and 17.0% as of December 31, 2017 and 2016, respectively. As of September 30, 2017, this ratio was 19.2%. September’s ratio had resulted from an increase in the effective rate on premium taxes that we pay in Louisiana and Texas due to a change in the applicable Louisiana statute whereby the Company no longer qualifies for certain credits on its premium taxes which were related to the value of investments held in the State of Louisiana. 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 we had approximately $5,692 in unearned premium related to our depopulation of FL Citizens policies as of December 31, 2017, with no corresponding acquisition costs related to commissions paid on these premiums, this was the major contributor to our ratio of DPAC to unearned premium decreasing to 17.2% from 19.2% for the three months ended December 31, 2017. Upon renewal, the policies we have assumed from FL Citizens would no longer be considered assumed policies, and we would pay our customary commission percentage to our independent agencies; thus, in future periods, we anticipate our DPAC cost to unearned premium ratio will increase.
Ceded unearned premiums represents the unexpired portion of premiums which have been paid to the Company’s reinsurers. Ceded unearned premiums are charged to income over the terms of the respective reinsurance treaties. Our catastrophe excess of loss (“CAT XOL”) treaties, which run from June 1st of each year to May 31st of the following year, make up the majority of our ceded unearned premiums at both December 31, 2017 and 2016. As the ultimate amount of premium we will cede under our CAT XOL treaties is based upon the risks we cover as of September 30th 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.
The Company’s net deferred tax asset decreased $350, to $70 as of December 31, 2017 from $420 as of December 31, 2016, due, in large, to 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. Net deferred income taxes are comprised of approximately $2,073 of deferred tax assets, net of approximately $2,003 of deferred tax liabilities as of December 31, 2017, compared to $2,360 of deferred tax assets, net of $1,940 of deferred tax liabilities as of December 31, 2016.
Property and equipment decreased $45 to $205 as of December 31, 2017 compared to $250 as of December 31, 2016, and consists of computers, office equipment, and improvements at our leased facilities in Tampa, Florida and Baton Rouge, Louisiana, shown net of accumulated depreciation. Also included in the balances are vehicles we have purchased for the use of our sales representatives in the states of Texas, Florida and Louisiana. Our policy for the capitalization and depreciation of these assets can be found in Note 2 to the Consolidated Financial Statements found in Item 8 of this report.
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not reported (“IBNR”) loss events and the related estimated loss adjustment expenses 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 December 31, 2017 and 2016.
(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 wind/hail only business we had assumed through our agreement with Brotherhood and our personal wind/hail only business we have assumed through our agreements with FL Citizens and TWIA.
Gross reserves as of December 31, 2017 were $13,488, an increase of $6,517 from December 31, 2016. Gross reserves in the approximate amount of $7,124 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. As of December 31, 2017, we anticipate 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. The reinsurance recoverable on reserves as of December 31, 2017 was $8,971, an increase of $5,319 from December 31, 2016, due, in large part, to the anticipated recoveries in the amount of $7,125 due to the Company from Hurricane Harvey losses. As a result of the foregoing, net loss reserves were $4,517 and $3,319 as of December 31, 2017 and 2016, respectively.
Unearned premium reserves increased $13,702 to $39,523 as of December 31, 2017 compared to $25,821 as of December 31, 2016. The following table outlines the change in unearned premium reserves by state and by line of business.
Ceded reinsurance premiums payable increased $303, to $5,532 as of December 31, 2017 compared to $5,229 as of December 31, 2016. The bulk of the balance payable as of both dates represents quarterly installment payments due under our catastrophe reinsurance programs, which were paid in January of each year. While the terms of our catastrophe reinsurance programs have not changed materially year over year, the amount of premium we cede has increased to correspond with the increase in our gross premium in force each year. 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 increased $198 to $695 as of December 31, 2017 compared to $497 as of December 31, 2016. As agency commissions are paid in arrears, this balance represents commissions owed to the Company’s independent agents on policies written in December of each year, and corresponds directly with the increase in premiums written by our agents when comparing December 2017 to December 2016.
Advance premium deposits decreased $50 to $1,078 as of December 31, 2017 from $1,128 as of December 31, 2016, and represent cash the Company has received for policies which were not yet in-force as of December 31, 2017 and 2016, respectively. Upon the effective date of coverage, advance premiums are reclassified to the unearned premium reserves account.
Funds held under reinsurance treaties represents collateral we have received on deposit from some of our reinsurers under our catastrophe excess of loss treaties which is intended to fund those reinsurers’ pro-rata portion of reserves we have established for losses and loss adjustment expenses. As of December 31, 2017, we had received cash deposits of $206 from our reinsurers, compared to deposits of $73 as of December 31, 2016.
Accounts payable and other accrued expenses increased $2,208, to $4,273 as of December 31, 2017 compared to $2,065 as of December 31, 2016. The largest driver of the change when comparing periods was the increase in amounts due for premium taxes and assessments, which increased by $1,510 from the prior year and is directly related to the increase in direct premiums written year over year. The components of accounts payable and other accrued expenses, as well as the change therein, are shown below.
As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company has issued the following securities to 1347 Advisors, LLC (“1347 Advisors”), a wholly owned subsidiary of KFSI.
● 120,000 shares of Series B Preferred Stock of the Company (the “Series B Preferred Shares”); 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 Stock 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.
The foregoing transactions were approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.
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 to which the Company has committed to invest $500, of which the Company has invested $211 as of December 31, 2017. The managing member of Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s Board of Directors on April 21, 2016.
On May 23, 2017, the Company announced that Dan Case has been appointed to the position of Chief Operating Officer. In connection with Mr. Case’s new employment, Mr. Case has 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 until June 15, 2018 and at the end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of restricted stock units (“RSUs”) of the Company equal to two RSUs for each share purchased by Mr. Case. 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. As of December 31, 2017, 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.
The table below presents the primary drivers behind the changes to total shareholders’ equity for the years ended December 31, 2017 and 2016.
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 “Preferred Stock”). 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 following table shows our gross premiums written by state and by line of business for the years ended December 31, 2017 and 2016.
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 from our first depopulation of policies from FL Citizens on December 19, 2017.
The following table shows our net premiums earned by state and by line of business.
The increase in net premiums earned is due to the increase in gross premiums written less premiums ceded as previously discussed. Premium earned on a direct and ceded basis is as shown in the following table.
Other income increased $717, to $1,981 as of December 31, 2017, compared to $1,264 as of December 31, 2016. 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.
Our loss ratio from weather related non-catastrophe losses has increased year over year, from 3.7% for the year ended December 31, 2016 to 10.1% for the year ended December 31, 2017. This increase is attributable to a reinsurance benefit we received in the prior year under our aggregate treaty which is a part of our catastrophe excess of loss reinsurance program. Under both of our 2015/2016 and 2016/2017 aggregate treaties, we were able to recover on weather-related non-catastrophe losses from our reinsurers as our combined first and second occurrence retentions of $5,000 and $7,000, were met in each respective treaty year. As we have not met the combined first and second occurrence retention of $7,000 under our 2017/2018 aggregate treaty as of December 31, 2017 we have not generated any recoveries from our reinsurers for non-catastrophe weather losses occurring after June 1, 2017. Our program is structured, however, such that we are able to continue to accumulate losses to our aggregate treaty through May 31, 2018. Should the accumulation of losses exceed our $7,000 retention before May 31, 2018, we will begin to generate recoveries on our non-catastrophe weather losses in 2018.
Amortization of deferred acquisition costs for the year ended December 31, 2017 was $11,080, compared to $8,492 for the year ended December 31, 2016 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 18.8% for 2017, compared to 17.4% for 2016. The increase in amortization of deferred acquisition costs as a percentage of gross earned premiums can be attributed to an increase in the effective rate of the premium taxes that we pay due to the loss of an investment credit that we had received on our premium taxes in previous years. Effective January 1, 2017, the State of Louisiana amended this credit such that certain assets such as cash and money market funds held in the state of Louisiana would no longer qualify as a tax credit on the Company’s premium taxes. 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 we had approximately $5,692 in unearned premium related to our depopulation of FL Citizens policies as of December 31, 2017, with no corresponding deferred policy acquisition costs related to commissions paid on these premiums, we expect this to contribute to the reduction of the ratio of deferred policy acquisition cost amortization to gross premiums earned in 2018. Upon renewal of these policies, 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.
On February 28, 2018, we completed the underwritten public offering of preferred shares designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Preferred Stock”), as previously discussed under the heading “Shareholders Equity”. In addition, on March 26, 2018, we issued an additional 60,000 shares of Preferred Stock in connection with the underwriters’ exercise of their over-allotment option. Net proceeds received by Company were approximately $16,400. The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Stock from IWS Acquisition Corporation, as previously discussed under the heading “Related Party Transactions”, 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 following table summarizes the Company’s consolidated cash flows for the years ended December 31, 2017 and 2016.
For the year ended December 31, 2016, net cash provided by operating activities as reported on our consolidated statement of cash flows was $3,372. Our source of cash resulted from the collection of approximately $51,058 in premiums in the period. This amount was reduced by the payment of $18,595 in ceded reinsurance premiums, the payment of losses and loss adjustment expenses (net of recoveries from our reinsurers) of $15,500, commissions paid to our agents equaling $7,075, salaries and benefits paid to our employees equaling $2,958, payments to various local and federal regulators for premium, assessments, and income taxes in the amount of $2,068, and other net operating payments of $1,490.
Net cash used by financing activities was $1,435, comprised of our purchase of 177,508 of our common shares at an aggregate purchase price of $1,195, as well as a dividend payment of $240 to the holders of our Series B Preferred shares.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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.
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.
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).
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but not yet reported loss events and the related estimated loss adjustment expenses. The Company performs a continuing review of its loss and loss adjustment expense reserves, including its reserving techniques and its reinsurance. The loss and loss adjustment expense reserves are also reviewed at minimum, on an annual basis by qualified third party actuaries. Since the loss and loss adjustment expense reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of income in the period in which the estimates are changed. Such changes in estimates could occur in a future period and may be material to the Company’s results of operations and financial position in such period.
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 December 31, 2017 the Company held funds in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.
The Company has not experienced any losses on amounts due from reinsurers. In order to limit the credit risk associated with amounts potentially due from reinsurers, the Company uses several different reinsurers, most of which have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.
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.
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 further disclosure.
The FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers”, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13, (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company will adopt Topic 606 on January 1, 2018, but since virtually all of the Company’s revenues relate to insurance contracts and investment income, the adoption of Topic 606 is not expected to have a material impact on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within the scope of Topic 606 as such are consummated.
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. ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. ASU 2016-01 will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, cash flows, or total comprehensive income, but 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.
In June 2016, the FASB issued ASU 2016-13: Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on financial instruments was generally delayed until the loss was probable of occurring. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
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 amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has reviewed the guidance and has determined that ASU 2018-02 will apply to the deferred taxes on unrealized losses on its investment portfolio, which have been previously recognized in other comprehensive income, and will result in a reclassification of the stranded tax effect of these losses from accumulated other comprehensive income to retained earnings. The Company does not believe the adoption of ASU 2018-02 will have a material impact on its consolidated financial statements.
A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on fixed income and equity securities classified as available-for-sale at December 31, 2017 and 2016 is as follows.
● considering the extent, and length of time during which the market value has been below cost;
Net investment income for the years ended December 31, 2017 and 2016 is as follows:
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 $513 and $569 in written premiums under its per-risk treaties for the years ended December 31, 2017 and 2016 respectively.
In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we acted as a reinsurer, and had assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas. Our quota-share percentage varied from 25%-100% of wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal versus non-coastal) of the risk within the State of Texas. As of December 31, 2017, we had written $2,022 in assumed premiums through the Brotherhood agreement compared with $1,150 in the previous year, but have discontinued this business effective January 1, 2018.
On December 1, 2016, we participated TWIA’s inaugural depopulation program whereby Maison assumed 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. As of December 31, 2017, we have written $1,397 in assumed premiums through the TWIA quota share agreement compared with $186 in the previous year.
On December 19, 2017, we participated in our first depopulation of policies from FL Citizens. The policies which we assumed were all personal lines policies which cover the perils of wind and hail only on homes and condominiums throughout the state. As of December 31, 2017, we have written $5,692 in assumed premiums through the FL Citizens depopulation.
The impact of reinsurance treaties on the Company’s consolidated financial statements is as follows:
DPAC as well as the related amortization expense associated with DPAC for the years ended December 31, 2017 and 2016 is as follows:
The provision for unpaid losses and loss adjustment expenses attributable to insured events of prior years’ developed favorably by approximately $2,209 and $381 in 2017 and 2016, respectively. The favorable development is the result of the continual re-estimation of unpaid losses and loss adjustment expenses. These changes are generally a result of ongoing analysis of recent loss development, economic, legal, legislative, and other trends in the industry. Changes in original estimates are included in current period operations.
The Company has recorded a net deferred tax asset of $70 and $420 as of December 31, 2017 and 2016, respectively. 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 34% to 21% and required us to reduce the value of our net deferred tax assets to reflect this new rate, resulting in a charge of $469 to income tax expense for the year ended December 31, 2017. Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2017, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the ability to realize the deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.
The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2013 - 2016 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
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 December 31, 2017, 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.
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 during his first six months of employment with the Company, which purchase period was extended by the Board of Directors to 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 restricted stock units, or 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 December 31, 2017, 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 December 31, 2017, the Company had not yet granted Mr. Case any RSUs under this agreement.
The following table summarizes RSU activity for the two years ended December 31, 2017.
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.
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. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to Advisors representing the annual dividend payment due on the Series B Preferred Shares.
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.
The table below details the change in the balance of each component of accumulated other comprehensive loss, net of tax, for the years ended December 31, 2017 and 2016.
● 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 which 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 which are unobservable and significant to the measurement of fair value.
In order to retain its certificate of authority in Louisiana and Florida, Maison is required to maintain a minimum capital surplus of $5,000 and $35,000, respectively. As of December 31, 2017, Maison’s capital surplus was $38,688.
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 certificate 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 December 31, 2017, 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 $1,988 as a deposit with the TDI.