Our executive offices are located at 1511 N. Westshore Blvd, Suite 870, Tampa, Florida, 33607. In November 2015, we expanded our lease at this location from 4,900 square feet to approximately 10,600 square feet of office space to allow for current and future expansion. Our lease term runs through October 2019. Rent is payable in monthly installments of approximately twenty two thousand dollars, which escalates by three percent annually. The lease contains an option to renew for an additional three year term subject to certain conditions.
Maison Insurance Holdings, Inc. was incorporated on October 2, 2012 in the State of Delaware. On November 19, 2013, the Company changed its legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc (“PIH”). PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business.
Until March 31, 2014, we operated as a wholly owned subsidiary of Kingsway America, Inc. (“KAI”). KAI in turn is a wholly owned subsidiary of Kingsway Financial Services, Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, the Company completed an initial public offering of its common stock and then on June 13, 2014, the Company completed a follow-on offering. Through the combination of the Company’s IPO and follow-on offering, we issued approximately five million shares of our common stock. As of December 31, 2015 KAI and companies affiliated with KAI held approximately 1.1 million shares of our common stock, equivalent to 17.5% of our outstanding shares.
Maison began writing commercial business in Texas in June 2015, through an alliance with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this alliance, we have assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas.
We process claims made by our policyholders both internally, through our wholly-owned subsidiary, ClaimCor, as well as through various third-party claims adjusting companies. MMI has ultimate authority over the claims handling process, while the agents we appoint have no authority to settle our claims or otherwise exercise control over the claims process.
Our manufactured home insurance policy is written on a manufactured or mobile home and is similar to both the homeowners’ insurance policy and the dwelling fire policy. The policy can provide for coverage on the manufactured home, the insured’s personal property in the home and liability and medical payments can be included. Furthermore, our manufactured home policies can be endorsed to include coverage for flood and earthquake (coverage for these perils is not available under our other policy types; as of December 31, 2015 approximately 3,500 of our manufactured home policies include this endorsement). The policy can also be written on either owner occupied or non-owner occupied units. Property coverage can be written on an actual cash value or stated amount basis with an optional replacement cost coverage available for partial loss. There are several other optional coverages that can be included and residential and commercial-use rental units can be written along with seasonal use mobile homes or homes that are used for part of the year.
Our policy counts by type as of December 31, 2015 and 2014 are as follows:
Maison insures personal property located in 63 of the 64 parishes in Louisiana. As of December 31, 2015, these policies are concentrated within these parishes as follows: Jefferson Parish 17.7%, Saint Tammany Parish 15.9%, East Baton Rouge Parish 7.3%, Orleans Parish 6.8%, Terrebonne Parish 6.2%, Livingston Parish 5.2%, and Tangipahoa Parish 5.1%. No other parish individually has over 5.0% of the policies in force as of December 31, 2015. The remaining 56 parishes combine to equal 35.1% of the total Louisiana policies in force as of December 31, 2015. On a direct basis, Maison writes in 44 of the 254 counties that comprise the State of Texas, however no single county represents over 5.0% of our policies in force as of December 31, 2015.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves, the valuation of fixed income securities, the valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs and stock-based compensation expense.
The Company’s fixed income securities are recorded at fair value using observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. The Company does not have any fixed income investments in our portfolio which require the Company to use unobservable inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its investments and other comprehensive loss on its consolidated balance sheets and statements of comprehensive income (loss).
Pursuant to the termination of the Management Services Agreement with 1347 Advisors LLC (“Advisors,” a wholly-owned subsidiary of KFSI), the Company issued Preferred Shares, Warrants, and entered into a Performance Share Grant Agreement with Advisors on February 24, 2015. Additional information regarding the termination of the Management Services Agreement with Advisors can be found under “Related Party Transactions” in Item 7 of this Report.
Market risk is the risk that the Company will incur losses due to adverse changes in interest or currency exchange rates and equity prices. Given the Company’s operations only invest in U.S. dollar denominated instruments and maintain a relatively insignificant investment in equity instruments, its primary market risk exposures in the investments portfolio are to changes in interest rates.
At December 31, 2015 and 2014, 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”).
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. Ceded unearned premiums increased $1,244 to $2,805 as of December 31, 2015 from $1,561 as of December 31, 2014. Our reinsurance treaties generally run from June 1st to May 31st of each year, thus our current treaties in place were negotiated as of June 1, 2015 requiring an upfront deposit of unearned premium each quarter. We also enhanced our catastrophe program so that our aggregate limit of coverage increased from $92,000 in place as of December 31, 2014 to $140,000 in place as of December 31, 2015. Furthermore, the premium we pay for reinsurance is based upon the total insured value (“TIV”) of our book of business as of September 30th of each year. As our TIV has increased year over year, so has the amount of premium we cede to our reinsurers, accounting for the increase in ceded unearned premiums between periods.
Reinsurance recoverable on reserves represents amounts due to the Company, or expected to be due to the Company from our reinsurers, based upon claims and claim reserves which have exceeded the retention amount under our reinsurance treaties. As of December 31, 2015 we have recorded an expected recovery of $120 from our reinsurers, compared to $363 as of December 31, 2014. See “Loss and Loss Adjustment Expense Reserves” in Item 7 of this report for the expected recovery by policy type.
Funds deposited with reinsured companies represents collateral we have placed on deposit with Brotherhood based upon our quota-share agreement to reinsure a portion of Brotherhood’s business for wind/hail coverage only. Pursuant to the agreement, we are required to fund our pro-rata portion of reserves Brotherhood has established for unearned premium, losses and loss adjustments expenses, and any other amounts for which Brotherhood may not be able to take credit for on its annual statutory financial statements filed with the appropriate insurance regulatory authority. We may fund this obligation via cash advance, trust agreement, or letter of credit. Accordingly, we have placed $725 on deposit under a trust agreement as of December 31, 2015. As our quota-share agreement with Brotherhood commenced in June 2015, there was no associated collateral in place as of December 31, 2014.
The Company’s net deferred tax asset increased $243, to $506 as of December 31, 2015 from $263 as of December 31, 2014. The net deferred tax asset is comprised of approximately $2,310 and $1,595 of deferred tax assets, net of approximately $1,804 and $1,332 of deferred tax liabilities as of December 31, 2015 and 2014, respectively. The change in the net deferred tax asset is primarily due to the increase in the deferred tax assets associated with our unearned premium reserve.
Property and equipment was $234 and $237 as of December 31, 2015 and 2014, respectively, 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 balance as of December 31, 2015 are vehicles we have purchased for the use of our sales representatives in the state of Texas. Our policy for the capitalization and depreciation of these assets can be found in the Notes to the Consolidated Financial Statements found in Item 8 of this report.
As a result of the purchase, we recorded goodwill in the amount of $211 on our consolidated balance sheet as of January 2, 2015. The goodwill was not amortized, but rather subject to impairment testing on, at minimum, an annual basis. We also recognized the estimated fair value of the non-compete agreement as well as a customer base asset as part of the ClaimCor acquisition at a combined total of $52 as of January 2, 2015. The non-compete agreement will be amortized over its 3-year contractual life, while the customer base asset was to be amortized over an estimated useful-life of 5 years.
Other assets increased $423, to $705 as of December 31, 2015 from $282 as of December 31, 2014. The major components of other assets, as well as the change therein, are shown below.
(1) Homeowners refers to our multi-peril policies for traditional dwellings as well as mobile and manufactures 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 have assumed through our agreement with Brotherhood.
For the year ended December 31, 2014, the Company reported $182 of favorable development for loss and LAE reserves from prior accident years.
The Company’s increase to its unearned premium reserve is directly related to the increase in written premiums year over year.
Agent commissions payable increased $80 to $403 as of December 31, 2015 compared to $323 as of December 31, 2014. As agent 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 2015 to December 2014.
Premium deposits were $870 and $560 and represent cash the Company has received for policies which were not yet in-force as of December 31, 2015 and 2014 respectively. Upon the effective date of coverage, advance premiums are reclassified to the unearned premium reserve account.
Amounts due to related parties decreased $145 as all amounts due as of December 31, 2014 had been paid prior to December 31, 2015. The December 31, 2014 payable represented amounts due to the Company’s former parent, KFSI, or subsidiaries of KFSI. Prior to the Company’s IPO on March 31, 2014, the Company operated as a wholly owned subsidiary of KFSI. As a result of this relationship, KFSI had advanced the Company funds consisting of payments made directly to third parties on the Company’s behalf as well as allocated inter-company expenses for various shared-services and support. As of January 1, 2015, we were no longer reliant on KFSI for support and other shared services and as such, charges for these services ceased.
On February 11, 2014, the Company entered into a Management Services Agreement (“MSA”) with 1347 Advisors LLC (“Advisors”), a wholly owned subsidiary of KFSI, under which Advisors provided certain services 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. Under the MSA, we paid Advisors a monthly fee equal to 1% of our direct written premiums. For the year ended December 31, 2015, the Company incurred an expense of $22 under the terms of the MSA prior to its termination.
Unless redeemed earlier by the Company, as defined below, the Company will be required to redeem the Preferred Shares then outstanding on February 24, 2020 (the “Mandatory Redemption Date”), for an amount equal to twenty five dollars per share then outstanding plus all accrued and unpaid dividends. The Company has the option to redeem the Preferred Shares prior to the Mandatory Redemption Date, also at twenty five dollars per share, immediately prior to the consummation of any change in control of the Company that may occur.
Both the Preferred Shares and Warrants were issued in a private placement exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
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 thirty-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.
Under the original MSA, we were required to pay Advisors a fee of 1% of written premiums on a monthly basis. The Company replaced this ongoing annuity through the Buyout by providing Advisors with an up-front cash payment and other consideration which lead to a one-time charge of $5,421 to the Company’s operations for the year ended December 31, 2015 as follows:
During the year ended December 31, 2014 we issued approximately five million shares of our common stock through the combination of our IPO on March 31, 2014, as well as our follow on offering on June 13, 2014 which resulted in approximately $36,261 in net proceeds to the Company.
The following table shows our gross premiums written by line of business for the years ended December 31, 2015 and 2014.
The increase in direct written premiums can be attributed to the organic growth in voluntary production from our independent agents as well as the addition of assumed business in Texas through our agreement with Brotherhood. Our independent agents wrote approximately $30,174 of premium for the year ended December 31, 2015 compared to approximately $22,223 for 2014. Special Property premium written for the year ended December 31, 2015 also includes the benefit of approximately $1,174 in premium assumed through our agreement with Brotherhood. There were no assumed premiums under this arrangement in 2014 as we entered into the Brotherhood agreement in June 2015.
The increase in net premiums earned is due primarily to the increase in gross written premiums less premiums ceded as previously discussed. Premium earned on a direct and ceded basis is as shown in the following table.
(1) We define Core Loss as net losses and LAE less the sum of Catastrophe losses and prior year redundancy.
The loss ratio (net losses and LAE divided by net premiums earned) for the year ended December 31, 2015 was 38.3% compared to 19.6% for the prior year. We experienced a significant increase in weather-related losses in 2015 due to a wind and hail event which occurred during the last week of April and affected properties we insure Louisiana. The impact of this event alone has accounted for $2,302 of net losses and LAE for the year ending December 31, 2015. Accordingly we have defined this as a catastrophic event as our incurred losses resulting from this storm have exceeded $1,500 and Property Claims Services has assigned this event as CAT 76. Our classification of the event does not have bearing on any reinsurance recovery we may receive, and to date we have not received any recovery related to these storms. As our reinsurance program was structured so that our retention was set at $3,000 for any single event at the time these storms occurred, there will be no recovery on this storm. Other weather-related events accounted for $3,349 in incurred losses for the year, while non-weather events accounted for approximately $4,075 in incurred losses for the year, most of which were the result of fire losses and non-weather related water damage.
On February 23, 2016, Louisiana experienced severe storms which produced multiple tornadoes throughout the state. While the ultimate cost and impact on our financial results cannot be determined at this time, we expect to incur significant losses with respect to claims related to wind and other damage resulting from these storms. Our catastrophe reinsurance program is structured so that our retention is set at $4,000 for a single event such as these storms, thus the pre-tax losses incurred by us, net of reinsurance, are not expected to exceed $4,000. We also believe that we may have recoveries available under our per-risk reinsurance program. As of March 14, 2016 our policyholders have reported a total of 210 claims to us as a result of these storms.
General and administrative expenses were $7,253 for the year ended December 31, 2015, compared to $5,095 for 2014. General and administrative expenses expressed as a percentage of net premium earned remained relatively constant at 28.0% for 2015 compared to 27.6% for 2014. The year-to-date increase in expense is primarily due to various costs associated with being a publicly held company (for example, legal fees related to our quarterly SEC filings and first annual shareholders meeting held in May 2015 for which there were no comparable charges for the same period 2014, where, during the first quarter of 2014, we operated as a subsidiary of KAI, as well as the fact that we increased our staff from fifteen employees as of December 31, 2014 to twenty-two employees as of December 31, 2015. Furthermore, due to the inclusion of ClaimCor in our consolidated financial statements for 2015, we have incurred $228 in general and administrative expenses associated with the operation of this subsidiary. We also recorded charge of $251 associated with the impairment of goodwill and other intangible assets recorded upon the purchase of ClaimCor to general and administrative expense for the year ended December 31, 2015. Excluding these expenses relating to ClaimCor, our general and administrative expense expressed as a percentage of net premium earned has decreased year over year.
Upon the termination of the MSA with 1347 Advisors, we recorded a loss of $5,421, representing the estimated fair value of the cash, warrants, preferred shares and performance shares paid to Advisors. For the year ended December 31, 2015, we also recorded a charge in the amount of $282 associated with the amortization of the discount recorded on the preferred shares issued in the transaction. See “Related Party Transactions” in the Analysis of Financial Condition above for further information on the termination of the MSA.
Income tax benefit for the year ended December 31, 2015 was $663 compared to an expense of $2,083 for 2014. The effective rate for income taxes is 28.4% for 2015 compared to 36.4% for 2014. The primary cause of the change in effective rate was due to a non-recurring tax benefit for net operating loss adjustments in 2014 related to the Company’s departure from KFSI’s consolidated tax group.
As a result of the foregoing, the Company’s net loss for 2015 was $1,673 compared to net income of $3,646 for 2014.
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, and from the proceeds from the sales of our common and preferred stock. Cash provided from these sources is used primarily for loss and loss adjustment expense payments and other operating expenses. The timing and amount of payments for net losses and loss adjustment expenses may differ materially from the Company’s provisions for loss and loss adjustment expense reserves, which may create increased liquidity requirements.
The following table summarizes the Company’s consolidated cash flows for the years ended December 31, 2015 and 2014.
Net cash used by investing activities as reported on our consolidated statements of cash flows was $9,368, primarily due to our purchase of fixed income securities for our investment portfolio.
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2015 and 2014
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, 2015 and 2014, 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.
PIH has three wholly-owned subsidiaries; Maison Insurance Company (“Maison”), a Louisiana-domiciled property and casualty insurance company, Maison Managers, Inc. (“MMI”), a managing general agent, incorporated in the State of Delaware on October 2, 2012, and ClaimCor, LLC (“ClaimCor”), a Florida based claims adjusting company.
On January 2, 2015, the Company completed its acquisition of 100% of the membership interest of ClaimCor, a claims and underwriting technical solutions company. The Company processes claims made by our policyholders through ClaimCor, and also through various third-party claims adjusting companies. MMI has ultimate authority over the claims handling process, while the agents we appoint have no authority to settle our claims or otherwise exercise control over the claims process. See Note 9 for further disclosure.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves, valuation of fixed income securities, valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs, goodwill and stock-based compensation expense.
Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
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 three major U.S. domestic banking institutions. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At December 31, 2015 the Company held funds well 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, all of which have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.
The Company also has risk associated with the lack of geographic diversification due to the fact that Maison primarily underwrites policies in Louisiana and Texas. The Company insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of December 31, 2015, these policies are concentrated within these parishes as follows: Jefferson Parish 17.7%, Saint Tammany Parish 15.9%, East Baton Rouge Parish 7.3%, Orleans Parish 6.8%, Terrebonne Parish 6.2%, Livingston Parish 5.2%, and Tangipahoa Parish 5.1%. No other parish individually has over 5.0% of the policies in force as of December 31, 2015. The remaining 56 parishes combine to equal 35.1% of the total policies in force as of December 31, 2015. On a direct basis, Maison writes in 44 of the 254 counties that comprise the State of Texas, however no single county represents over 5.0% of our policies in force as of December 31, 2015.
In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-09: Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts. This update provides for an increase in the transparency of accounting estimates made by companies in the measurement of short-duration contracts and unpaid claim and claim adjustment expense liabilities by requiring additional disclosures, as well as improvements to existing disclosures. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods withing annual periods beginning after December 15, 2016, applied retrospectively, 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 February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on fixed income securities classified as available-for-sale at December 31, 2015 and 2014 is as follows.
Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling approximately $2,000 with the State of Texas. Maison deposited the required securities with the State of Texas on May 13, 2015. These securities consist of various fixed income securities listed in the preceding tables which have an amortized cost basis of $2,004 and estimated fair value of $2,002 as of December 31, 2015.
· identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions;
· assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies;
· the historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s unknown underlying financial problems.
Accordingly, all of the Company’s investments were deemed to be in good standing and not impaired as of December 31, 2015 and 2014. Additionally, there were no write-downs for other-than-temporary impairments on the Company’s investments for the years then ended.
Under the Company’s excess of loss treaty, for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $121,000 in excess of $4,000 per event. The Company has also procured another layer of reinsurance protection that may be used for any event above $121,000, up to a maximum recovery of $15,000. This $15,000 second layer of coverage applies in total for all events occurring during the treaty year. The aggregate loss we would retain for two catastrophes occurring during the treaty year is $5,000. The Company ceded $13,080 and $7,795 in written premiums under its excess of loss treaties for the years ended December 31, 2015 and 2014 respectively.
The impact of reinsurance treaties on the Company’s financial statements is as follows:
The Company has recorded a net deferred tax asset of $506 and $263 as of December 31, 2015 and December 31, 2014, 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, 2015, 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 a result of the purchase, we recorded goodwill in the amount of $211 on our consolidated balance sheet as of January 2, 2015. The goodwill was not amortized, but rather subject to impairment testing on, at minimum, an annual basis. We also recognized the estimated fair value of the non-compete agreement as well as a customer base asset as part of the ClaimCor acquisition at a combined total of $52 as of January 2, 2015. The non-compete agreement will be amortized over its 3-year contractual life, while the customer base asset was to be amortized over an estimated useful-life of 5 years. The Company recognized expense related to the amortization of these assets in the amount of $11 for the year ended December 31, 2015.
In the fourth quarter 2015, after analyzing ClaimCor’s performance in comparison to management’s expectations and forecasts at the time of acquisition, the Company noted that an impairment to the value of the goodwill and other intangibles which were recorded was likely. Accordingly, the Company’s analysis resulted in a charge of $246 associated with the impairment of goodwill and the customer base asset and has been charged to general and administrative expense for the year ended December 31, 2015. The Company used a date of December 1, 2015 for purposes of calculating the impairment charges.
The Plan provides for the issuance of 354,912 shares of common stock. As of December 31, 2015 there were 156,956 shares available for issuance under the Plan.
Stock option information for the two years ended December 31, 2015 is as follows.
The following assumptions were used to determine the fair value of the stock option grants:
On February 28, 2014 the Company issued an option to its President and CEO, Mr. Doug Raucy, to purchase up to 33,033 shares of the Company’s common stock (“Option Shares”). Concurrent with the exercise of the option, the Company will grant matching shares of restricted common stock of the Company to Mr. Raucy as a one-for-one match against the Option Shares purchased (“Matched Shares”). The Matched Shares will vest 100% on the fourth anniversary of the date in which the Matched Shares are issued, subject to Mr. Raucy’s continued employment with the Company. Through a series of amendments, the Company has modified this option agreement to extend the expiration date from June 30, 2014 to June 15, 2016. As a result of these amendments, the Company recognized an incremental total of $8 and $5 in compensation expense for the years ended December 31, 2015 and 2014, respectively.
On May 29, 2015, the Company’s Board of Directors granted RSUs to certain of its executive officers under the Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share and; (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire, however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. The following table summarizes RSU activity for the two years ended December 31, 2015.
Total stock based compensation expense for the years ended December 31, 2015 and 2014 was $47 and $126, respectively. As of December 31, 2015, total unrecognized stock compensation expense of $51 remained, which will be recognized ratably through March 31, 2018.
The details of the Company’s warrants issued and outstanding are discussed in Note 12 - Shareholders’ Equity and Note 13 - Related Party Transactions, below.
On June 13, 2014, the Company completed an underwritten public offering of 2,875,000 shares of its common stock at a price to the public of $8.00 per share, for total gross proceeds of $23,000. Net proceeds to the Company were $21,174 after deducting underwriting discounts and commissions and other offering expenses payable by the Company.
The common stock issued to Fund Management Group LLC upon conversion of the Series A Shares has piggyback registration rights for future registrations of the Company’s common stock under the Securities Act (other than certain excluded registrations) and, upon the two-year anniversary of the IPO, Fund Management Group LLC will also have a one-time demand registration right for such common stock, subject to certain restrictions.
On February 11, 2014, the Company entered into the Management Services Agreement (“MSA”) with 1347 Advisors, LLC (“Advisors”), a wholly owned subsidiary of KFSI, which provides for certain services, that Advisors would 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 was paid a monthly fee equal to 1% of the Company’s gross written premiums, as defined in the MSA. Prior to the termination of this agreement, as discussed below, the Company incurred an expense of $22 and $304 under the terms of the MSA for the years ended December 31, 2015 and 2014, respectively.
As a result of the termination of the MSA agreement, the Company recognized an expense in the amount of $5,421 for the year ended December 31, 2015 as follows:
Based upon these models, the total estimated fair value of both the Warrants and Performance Shares was determined to be $1,010 on the date of grant.
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, 2015 and 2014.
PIH, as the parent company of Maison, is subject to the insurance holding company laws of the State of Louisiana, which, among other things, regulate the terms of surplus notes issued by insurers to their parent company. Maison’s capital is comprised of two surplus notes issued to PIH in the amount of $1,500, both of which were approved by the LDI prior to their issuance. The first note, issued in October 2013 in the principal amount of $650 will mature in October 2017. The second note, in the principal amount of $850 was issued in December 2015 and will mature in December 2017. Both notes accrue interest at 10% per annum. Interest payments on the notes are due annually, and are also subject to prior approval by the LDI.
Prior to January 1, 2015 the Company’s employees participated in the defined contribution plan of the Company’s former parent, KFSI. Under KFSI’s plan, employees could choose to voluntarily contribute up to 60% of their annual earnings subject to certain statutory limitations. The Company matched an amount equal to 50% of each participant’s contribution, limited to contributions up to 5% of a participant’s earnings. For the year ended December 31, 2014, the Company’s matching contributions made under KFSI’s plan were less than ten thousand dollars.
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Annual Report on Form 10-K, we are not a party to any litigation or legal proceeding that, individually or in the aggregate, in the current opinion of management, could have a material adverse effect on our financial condition, results of operations or cash flows. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results.
On February 23, 2016, Louisiana experienced severe storms which produced multiple tornadoes throughout the state. While the ultimate cost and impact on the Company’s financial results cannot be determined at this time, the Company expects to incur significant losses with respect to claims related to wind and other damage resulting from these storms. The Company’s catastrophe reinsurance program is structured so that its retention is set at $4,000 for a single event such as these storms, thus the pre-tax losses incurred by the Company, net of reinsurance, are not expected to exceed $4,000. The Company also believes that it may have recoveries available to it under its per-risk reinsurance program. As of March 14, 2016 our policyholders have reported a total of 210 claims to us as a result of these storms.