You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included elsewhere in this annual report on Form 10-K. You should review the “Risk Factors” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the information contained in this discussion and analysis and set forth elsewhere in this annual report on Form 10-K includes forward-looking statements that involve risks and uncertainties.
Maison provides personal property and casualty insurance solely to individuals in Louisiana. As an insurance company, Maison is subject to examination and comprehensive regulation by the Louisiana Department of Insurance (“LDI”). Maison provides dwelling policies for wind and hail only, and dwelling, homeowner and mobile home/manufactured home policies for multi-peril property risks located in the State of Louisiana.
The Company distributes insurance policies through a network of more than 130 independent agents. These agents typically represent several insurance companies in order to provide various insurance product lines to their clients. The Company refers to these policies as voluntary policies.
($ amounts in thousands, except policy in-force, share, and per share data)
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and 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, valuation of fixed income securities, valuation of net deferred income taxes, deferred policy acquisition costs and stock-based compensation expense.
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.
The Company carries a net deferred income tax asset of $263 and $571 at December 31, 2014 and 2013, 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 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 records the fair value as compensation expense over the requisite service period, which is generally the period in which stock options vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.
See Note 3 - Recent Accounting Pronouncements in the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
The increase in direct written premiums is primarily attributable to the organic growth in our independent agency voluntary production. Our independent agents wrote approximately $22,223 of premium for the year ended December 31, 2014 compared to approximately $9,071 for 2013. These increases were primarily from the number of new full peril policies written from the independent agency channel increasing to approximately 6,700 policies in the current year as compared to approximately 3,900 policies in the prior year. Additionally, we experienced the renewal of 4,900 multi-peril policies written from the independent agency channel in 2014, compared to no renewal business for 2013. Premium written from the Citizen’s take-out business was $3,136 for 2014 compared to $3,332 for 2013.
Net losses and LAE represent both actual payments made and changes in estimated future payments to be made to our policyholders. Net losses and LAE increased $684, to $3,612 for 2014, compared to 2,928 for 2013.
(3) Redundancy is the amount of ultimate actual loss settlement value which is less than the estimated and determined reserves recorded for a particular liability or loss.
General and administrative expenses as a percentage of net premium earned was 27.6% for 2014 compared to 39.7% for 2013. The decrease in this ratio is primarily due to the increase in net premiums earned, as previously discussed. General and administrative expenses incurred increased by approximately $3,116 when compared to 2013, as shown in the following table.
Salaries and benefits expense increased by $1,018 as we increased our staff from a total of five employees at the end of 2013 to fourteen employees as of December 31, 2014. We also experienced an increase to professional fees as a result of our increased use of actuarial services and attorneys in conjunction with various business matters. Management fees also increased by $304 year over year as a result of our Management Services Agreement with 1347 Advisors, LLC. See the subheading Due to Related Party under Analysis of Financial Condition below for further information on our Management Service Agreement with 1347 Advisors LLC.
As a result of the foregoing, the Company’s net income for 2014 was $3,646 compared with a net loss of $748 for 2013.
The table below summarizes the fair value of the Company’s fixed income securities by contractual maturity as of December 31, 2014 and 2013.
At December 31, 2014 and 2013, 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.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs for other-than-temporary impairments related to investments for the years ended December 31, 2014 and 2013.
Cash and cash equivalents increased $38,632 to $53,639 as of December 31, 2014 from $15,007 as of December 31, 2013 primarily from the $36,261 raised through the initial and follow-on offerings of the Company’s common stock in March and June 2014, respectively. Additionally, cash generated by the Company’s operations equaled $12,906, which was offset by the Company’s purchase of short and long term investments in the amount of $12,311.
Premiums receivable, net of allowance for credit losses, decreased by $1,719 to $2,086 as of December 31, 2014 from $3,805 as of December 31, 2013. This decrease was primarily attributable to the timing of payments received related to the takeout of policies from Citizens. Although policies are assumed as of December 1st of each year, settlement of the unearned premium due on the policies taken out in 2013 did not occur until January 2014, resulting in a balance due from Citizens in the approximate amount of $2,300 at December 31, 2013. There was no such similar balance due as of December 31, 2014 as settlement for the unearned premium due on the policies taken out on December 1, 2014 occurred on December 30, 2014.
For the year ended December 31, 2014, the Company reported $182 of favorable development for loss and loss adjustment expense reserves from prior accident years. This favorable development was primarily related to lower than expected reported claims subsequent to December 31, 2013 for losses incurred during 2013. For the year ended December 31, 2013, the Company reported $9 of favorable development for loss and loss adjustment expense reserves from prior accident years. The favorable development reported for the prior year was due to no reported claims subsequent to December 31, 2012 for losses incurred during 2012.
Unearned premium reserves increased $6,699 to $17,703 at December 31, 2014 from $11,004 at December 31, 2013. The following table outlines the change in unearned premium reserves by line of business.
On February 11, 2014, the Company entered into a Management Services Agreement (“MSA”) with 1347 Advisors LLC (“Advisors”), a wholly owned subsidiary of KAI, which provides for certain permanent services, unless terminated, that Advisors provided to the Company, including forecasting, analysis of capital structure and reinsurance programs, consultation in potential future restructuring or capital raising transactions, and consultation in corporate development initiatives. For the services performed, Advisors was paid a monthly fee equal to 1% of the Company’s gross written premiums, as defined in the MSA. At December 31, 2014, $48 was due to Advisors under the terms of the MSA.
On March 31, 2014, the Company entered into a Transition Services Agreement (“TSA”) with Kingsway Financial Services, Inc. (“KFSI”), the parent company of KAI. The TSA provides for temporary access to necessary services and resources for which the Company is reliant on KFSI, including resources and services related to accounting and reporting, accounts payable, cash management, taxes, compliance with the Sarbanes-Oxley Act of 2002, payroll processing and benefits administration, information technology systems and support, human resource function, and external audit. The charges for the transition services are intended to allow KFSI to fully recover the costs directly associated with providing the services, plus all out-of-pocket costs and expenses. The charges of each of the transition services generally will be based on either a pre-determined flat fee or an allocation of the cost incurred by KFSI (or an affiliate or subsidiary thereof) for providing the service, including certain fees and expenses of third-party service providers. The TSA stipulates transition deadlines for all the services provided under it, by which time the Company is expected to establish its own independent functions for such services. As of December 31, 2014, $97 was due to KFSI under the terms of the TSA. During the fourth quarter of 2014, the Company initiated the process of bringing the necessary resources in-house in order to reduce its reliance on KFSI as well as the services provided under the TSA. This process was substantially completed as of December 31, 2014 and as such, the Company anticipates services provided under the TSA to cease beginning in the first quarter of 2015.
Accrued expenses and other liabilities increased $804, to $1,557 as of December 31, 2014 from $753 as of December 31, 2013. The major components of accrued expenses and other liabilities, as well as the change therein, are shown below.
On March 31, 2014, the Company completed its IPO of 2,170,625 shares of its common stock at a price to the public of $8.00 per share resulting in net proceeds of $15,087. On June 13, 2014, the Company completed an underwritten follow-on public offering of 2,875,000 shares of its common stock at a price to the public of $8.00 per share resulting in net proceeds of $21,173.
On January 23, 2014, Fund Management Group LLC, an entity of which the Company’s Chairman of the Board, Gordon G. Pratt, is a Managing Member and controlling equity holder, invested $2,000 in the Company in exchange for 80,000 Series A Convertible Preferred Shares (“Preferred Shares”) of the Company. The Preferred Shares were non-voting and ranked senior to all classes of capital stock of the Company. The Preferred Shares did not pay any dividends. At the time of the issuance, the value of the common stock into which the Preferred Shares was convertible had a fair value greater than the $2,000 proceeds for the issuance. Accordingly, the Company recorded a beneficial conversion feature on the Preferred Shares of $500 for the year ended December 31, 2014, which was equivalent to the amount by which the estimated fair value of the common stock issuable upon the conversion of the issued Preferred Shares exceeded the proceeds received upon issuance of the Preferred Shares. On March 31, 2014 the Preferred Shares were converted into 312,500 shares of the Company’s common stock.
For the year ended December 31, 2013, the net cash provided from operating activities as reported on our consolidated statements of cash flows was $6,756. The source of cash was primarily from the collection of written policyholder premiums of $14,523 reduced by the payment of ceded reinsurance premiums of $3,257, reduced by the payment of losses and loss adjustment expenses of $3,584 increased by the collection of $1,000 of ceded reinsurance recovered losses, reduced by the payment of expenses, primarily policy acquisition costs of $1,814 as well as the payment of U.S. Federal income taxes in the amount of $112. The net cash provided by investing activities as reported on our consolidated statements of cash flows was $1,526, primarily from the proceeds from sales of preferred stock in the amount of $1,875. Cash provided by financing activities was $1,200 for 2013, comprised entirely of a capital contribution from our then parent company, KAI.
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1347 Property Insurance Holdings, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
1347 Property Insurance Holdings, Inc. (the “Company” or “PIH”) was incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc. The Company holds all of the capital stock of its two subsidiaries: Maison Insurance Company (“Maison”) and Maison Managers Inc. (“MMI”). On November 19, 2013, the Company changed its legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. Prior to March 31, 2014, the Company was a wholly owned subsidiary of Kingsway America Inc. (“KAI”). KAI is a wholly owned subsidiary of Kingsway Financial Services Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, the Company completed an initial public offering (“IPO”) of its common stock. On June 13, 2014, the Company completed an add-on offering of its common stock to the public. Through the combination of the Company’s IPO and add-on offering, the Company issued approximately five million shares of its common stock. As of December 31, 2014 KAI held approximately 1.1 million shares of our common stock, equivalent to 16.9% of our outstanding shares.
Maison began providing property and casualty insurance to individuals in Louisiana in December 2012. Maison’s insurance offerings currently include homeowners’ insurance, manufactured home insurance and dwelling fire insurance. Maison writes both full peril property policies as well as wind/hail only exposures and distributes its policies through independent insurance agents.
Interest income is included in net investment income and is recorded as it accrues.
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. Reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Rent expense for the Company’s office leases is recognized on a straight line basis over the term of the lease. Rent expense was $123 and $62 for the years ended December 31, 2014 and 2013, respectively.
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 also has risk associated with the lack of geographic diversification due to the fact that Maison only underwrites policies in Louisiana. The Company insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of December 31, 2014, these policies are concentrated within these parishes as follows: Jefferson Parish 20.4%, Saint Tammany Parish 14.2%, Orleans Parish 8.4%, and East Baton Rouge Parish 6.1%. No other parish individually has over 5.0% of the policies in force as of December 31, 2014. The remaining 59 parishes aggregate 50.9% of the total policies in force as of December 31, 2014.
In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-01: Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Prior to this update, an entity was required to separately classify, present, and disclose transactions considered extraordinary if they met criteria based upon normality and frequency of occurrence. ASU 2015-01 eliminates the concept of extraordinary items, and this item will no longer require separate classification. The guidance is effective for the Company beginning January 1, 2016 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position, or liquidity.
In August 2014, the FASB issued ASU 2014-15: Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance addresses the diversity in practice in determining when there is substantial doubt about an entity’s ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The update requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Should these conditions or events be present, the entity should disclose the fact that there is substantial doubt about that entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, along with the principal conditions or events that raise the doubt, as well as management’s plans intended to mitigate those conditions or events. The guidance is effective for the Company beginning January 1, 2017 with early adoption permitted.
• assessing the timeliness and completeness of principal and interest payment due from the investee; and
Accordingly, all of the Company’s investments were in good standing and not impaired as of December 31, 2014 and 2013. Additionally, there were no write-downs for other-than-temporary impairments on the Company’s investments for the years ended December 31, 2014 and 2013.
The Company does not have any exposure to subprime mortgage-backed investments. Net investment income for the years ended December 31, 2014 and 2013 is as follows:
The Company reinsures, or cedes, a portion of its written premiums on 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 the reinsurer fails to meet its obligations under the applicable reinsurance agreement, the Company would still be required to pay the insured for the loss.
On February 23, 2013, the Company incurred a significant hail event to its insured properties in Louisiana, with a direct ultimate loss of approximately $3,340 which generated a ceded recovery of $1,000. There were no significant weather related events for the year ended December 31, 2014.
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 years ended December 31, 2014 and 2013 is as follows:
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 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. 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.
The Company’s evaluation of the adequacy of loss and loss adjustment expense reserves includes a re-estimation of the liability for loss and loss adjustment expense 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 for loss and loss adjustment expense reserves, net of amounts recoverable from reinsurers, for the years ended December 31, 2014 and 2013 were as follows:
Actual income tax expense (benefit) differs from the income tax expense computed by applying the applicable effective federal and state tax rates to income before income tax expense (benefit) as follows:
The Company has recorded a net deferred tax asset of $263 and $571 as of December 31, 2014 and December 31, 2013, respectively. 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. At December 31, 2014, 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 increase or 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.
As of December 31, 2014 the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $845 which will be available to offset future taxable income. As a result of certain changes in ownership and pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, these NOLs are subject to a yearly limitation. The amount and expiration date of the NOL carryforwards are as follows:
Based upon the results of the Company’s analysis and the application of ASC 740-10, management has determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and the Company is confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions will be recognized in the financial statements.
Net income per share is computed by dividing net income attributable to common shareholders 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 (loss) per share for the years ended December 31, 2014 and 2013.
The following potentially dilutive securities outstanding at December 31, 2014 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
The Plan provides for the issuance of non-qualified options as defined by the Internal Revenue Code of 1986, as amended. The options granted under the Plan vest over periods established in each individual stock option agreement. The Plan provides for the issuance of 354,912 shares of common stock. As of December 31, 2014 there were 177,456 shares available for issuance under the Plan.
For the year ended December 31, 2014, the Company granted options to purchase a total of 106,476 shares of common stock to its officers and options to purchase a total of 70,980 shares of common stock to its directors. The options granted to officers vested 20% on the date of grant and 20% on each of the next four anniversary dates and will expire in 2019. Options granted to directors vested in full on grant date and also expire in 2019.
Total stock based compensation expense for the years ended December 31, 2014 and 2013 was $127 and zero, respectively. As of December 31, 2014, total unrecognized stock compensation expense of $74 remained, which will be recognized ratably through March 31, 2018.
On March 19, 2014, the Company authorized a one thousand to one stock split of its common stock. The stock split had the effect of increasing the number of common shares of the Company issued and outstanding from one thousand shares pre-split to 1,000,000 shares post-split. The issued and outstanding shares reported in the consolidated balance sheets and the number of weighted-average shares outstanding included in the earnings (loss) per share computations, as reported in the consolidated statements of operations and comprehensive income (loss), have been restated for all periods presented to reflect the impact of the stock split.
On March 31, 2014, the Company completed its IPO of 2,170,625 shares of its common stock at a price to the public of $8.00 per share, which included full exercise by the underwriters of their over-allotment option, for total gross proceeds of $17,365. Net proceeds to the Company were $15,087 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In conjunction with the IPO, the Company issued warrants to its underwriters to purchase 94,375 shares of its common stock. Each warrant will entitle the holder to purchase one common share of PIH at a price of $10.00 per share at any time after March 31, 2015 and prior to expiry on March 31, 2019.
The Company classifies its investments in fixed income 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.
• 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.
On February 11, 2014, the Company entered into the Management Services Agreement (“MSA”) with 1347 Advisors, LLC (“Advisors”), a wholly owned subsidiary of KAI, which provides for certain permanent services, unless terminated, that Advisors will provide to the Company, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives. For the services performed, Advisors is paid a monthly fee equal to 1% of the Company’s gross written premiums, as defined in the MSA. After the seventh year of the term of the MSA, should the ownership of the Company’s shares held by KFSI or an affiliate or subsidiary thereof fall below fifty percent (50%) of KFSI’s (or an affiliate or subsidiary thereof) ownership of the Company’s shares as of March 31, 2014, the monthly fee shall be calculated by (a) dividing the existing shares owned by KFSI (or an affiliate or subsidiary thereof) by the number of original shares owned by KFSI (or an affiliate or subsidiary thereof) as of March 31, 2014, and (b) multiplying by 1% of the Company’s gross written premiums, as defined in the MSA. The MSA will only terminate by mutual consent of both parties, except in case of certain exceptions as stated in the agreement. With respect to termination for any reason of the MSA (other than due to gross negligence or willful misconduct of Advisors), the Company will be required to pay Advisors an amount equal to twenty times the consulting fee paid to Advisors in the most recent calendar year immediately preceding. The Company has incurred an expense of $304 for the year ended December 31, 2014 under the terms of the MSA. At December 31, 2014, the Company owed $48 to Advisors under the terms of the MSA. See Note 19 - Subsequent Events for further information regarding the MSA.
As of December 31, 2014, KFSI and its subsidiaries retained approximately 17% of the Company’s outstanding common shares.
In order to retain its certificate of authority in the State of Louisiana, Maison is required to maintain a minimum capital surplus of $5,000. As of December 31, 2014 Maison’s capital surplus was $14,213.
States routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of December 31, 2014, Maison held investment securities with a fair value of approximately $100 as a deposit with the LDI.
The LDI employs risk-based capital (“RBC”) reports to monitor Maison’s financial condition. The 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.
As a Louisiana domiciled insurer, the payment of dividends is restricted by the Louisiana Insurance Code. Dividends can only be paid if an insurer’s paid-in capital and surplus exceed the minimum required by the Louisiana Insurance Code by one hundred percent or more, or as otherwise provided. Any dividend or distribution that when aggregated with any other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) ten percent of the insurer’s surplus as regards policyholders as of the thirty-first day of December next preceding; or (b) the net income of the insurer, not including realized capital gains, for the twelve month period ending the thirty-first day of December next preceding; is considered to be extra-ordinary and shall not be paid until thirty days after the LDI has received notice of the declaration thereof and has not within that period disapproved the payment, or until the LDI has approved the payment within the thirty-day period. In determining whether a dividend or distribution is extra-ordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out in dividends.
As of December 31, 2014, there were various legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. Management does not believe that the outcome of these proceedings will have, individually or in the aggregate, a material adverse effect on the Company’s results of operations, financial condition or cash flows.
On February 24, 2015, the Company entered into an Agreement to Buyout and Release (the “Buyout”) with Advisors which terminated the MSA existing between the Company and Advisors (see Note 14 - Related Party Transactions for details of the MSA). Under the terms of Buyout, the MSA was deemed terminated and cancelled effective February 24, 2015. In consideration of Advisors agreeing to voluntarily terminate the MSA, the Company (i) made a cash payment in the amount of $2,000 to Advisors; (ii) executed and delivered the Performance Shares Grant Agreement to Advisors (as defined below); (iii) issued to Advisors 120,000 shares of Series B Preferred Stock of the Company (“Preferred Shares”, defined below); and (iv) executed and delivered to Advisors a warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise price of fifteen dollars per share. The Warrant expires seven years from date of issuance. Under the terms of the Warrant, the Company will not issue any shares of Common Stock otherwise due upon exercise of the Warrant (the “Warrant Shares”) to the extent that after giving effect to such issuance of Warrant Shares any holder of the Warrant, together with its affiliates, beneficially own or control the right to vote in excess of 19.9% of the Company’s total shares of Common Stock outstanding after giving effect to such issuance, unless and until the Company obtains stockholder approval permitting such issuance in accordance with the applicable rules of the Nasdaq Stock Market (“Stockholder Approval”).
If Stockholder Approval is not obtained at the next annual meeting of stockholders of the Company, the Company shall cause the Registration Rights Agreement, dated February 28, 2014, by and between KAI and the Company (the “Registration Rights Agreement”) to be amended to provide that (i) the holder of the Warrant is granted a demand registration right thereunder with respect to the resale by the holder of the Warrants, which demand registration may, at the option of holder, be for the Company to file a shelf registration statement that permits the resale of the Warrants from time to time thereunder, (ii) the Company is required to include the Warrants in any shelf registration statement that the Company files after the date of such amendment and (iii) if the holder of Warrants exercises its demand registration right under such amended Registration Rights Agreement with respect to the Warrants, the Holder shall pay all expenses (including the Company’s expenses) relating to the registration of such Warrants.
The Performance Shares Grant Agreement grants 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 equals or exceeds ten dollars per share for any twenty trading days within any 30-day trading period (the “Milestone Event”). Advisors will not be entitled to any dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved.