Our executive offices are located at 1511 N. Westshore Blvd., Suite 870, Tampa, Florida, 33607 and consist of approximately 10,600 square feet of office space which allows for current and future expansion. Our lease term runs through October 2019. Rent is payable in monthly installments of approximately $22,500, which escalates by 3% annually. The lease contains an option to renew for an additional three year term subject to certain conditions.
Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries. Except where noted otherwise, all dollar amounts have been reported in thousands.
Through Maison, we began providing property and casualty insurance to individuals in Louisiana in December 2012. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis. Our current insurance offerings in Louisiana and Texas include homeowners insurance, manufactured home insurance and dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new policies through a network of independent insurance agencies. We refer to the policies we write through independent agencies as voluntary policies. We also wrote commercial business in Texas through a quota share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas, but discontinued this business effective January 1, 2018.
● Maison has agreed to maintain capital and surplus as to policyholders of no less than $35,000;
● Maison has agreed to receive prior approval from the FOIR prior to the payment of any dividends; and
To comply with the Consent Order, on March 31, 2017, Maison received a capital contribution from us in the amount of $16,000.
MMI serves as our management services subsidiary, known as a managing general agency, and provides underwriting, policy administration, claims administration, marketing, accounting and other management services to Maison. MMI contracts primarily with independent agencies for policy sales and services, and also contracts with an independent third-party for policy administration services. As a managing general agency, MMI is licensed by, and subject to, the regulatory oversight of the LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison writes, as well as a per policy fee which ranges from $0-$75 for providing policy administration, marketing, reinsurance contract negotiation, and accounting and analytical services.
Our primary goal is to continue to expand our property and casualty writings. Our goal for Louisiana, the first state where we began to offer insurance, has been to establish a market share of 2% to 3%. We plan to expand our writings in Louisiana and other states through:
● Increasing our book of business through the depopulation of policies from FL Citizens, LA Citizens, and TWIA. On December 19, 2017, we participated in the depopulation of wind/hail-only policies from FL Citizens, which has allowed us to quickly establish a significant presence in the State of Florida. We plan to continue to focus on wind/hail-only and other specialty products in the states of Florida, Louisiana, and Texas where we have extensive management experience.
● Reducing our ratio of expenses to net premiums earned and using technology to increase our operating efficiency. We are committed to improving our profitability by reducing expenses through enhanced technologies and by increasing the number of policies that we write through the strategic deployment of our capital. We currently outsource our policy administration and a portion of our claims handling functions to third parties with our dedicated oversight and direction, which we believe results in increased service and lower expense and loss ratios.
The Company assesses its results of operations using certain non-U.S. GAAP financial measures, in addition to U.S. GAAP financial measures. These non-U.S. GAAP financial measures consist of underwriting ratios and are defined below. The Company believes these non-U.S. GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating performance in the same manner as management does.
Pursuant to the termination of the Management Services Agreement with 1347 Advisors LLC (“Advisors,” a wholly-owned subsidiary of KFSI), the Company issued Series B Preferred Shares, Warrants, and entered into a Performance Share Grant Agreement with Advisors on February 24, 2015. On January 2, 2018, the Company entered into a stock purchase agreement with Advisors and IWS Acquisition Corporation, also an affiliate of KFSI, pursuant to which the Company agreed to repurchase all 60,000 Series B Preferred Shares held by Advisors and all 60,000 Series B Preferred Shares held by IWS Acquisition Corporation. The Company completed the repurchase of the shares held by Advisors on January 2, 2018 and the repurchase of the shares held by IWS Acquisition Corporation on February 28, 2018. In connection with the stock purchase agreement, the Performance Share Grant Agreement, dated February 24, 2015, between the Company and Advisors was terminated. No common shares were issued to Advisors under the Performance Share Grant Agreement.
The Company’s investments in fixed income and equity securities are classified as available-for-sale and are reported at estimated fair value. The Company held an investments portfolio comprised primarily of fixed income securities issued by the U.S. Government, government agencies and high quality corporate issuers. The fixed income portfolio is managed by a third-party investment management firm in accordance with the investment policies and guidelines approved by the investment committee of the Company’s Board of Directors. These guidelines stress the preservation of capital, market liquidity and the diversification of risk. Additionally, the Company’s investment committee is in place to identify, evaluate and approve suitable investment opportunities for the Company. This has resulted in a number of equity investments managed by the committee that represent approximately 4.9% of the estimated fair value of Company’s total investment portfolio as of December 31, 2017. Investments held by the Company’s insurance subsidiary must also comply with applicable domiciliary state regulations that prescribe the type, quality and concentration of investments.
The table below summarizes, by type, the Company’s investments as of December 31, 2017 and 2016.
Pursuant to the certificate of authority we received from the TDI, we are required to deposit securities with the State of Texas. These securities consist of cash in the amount of $300 as well as various fixed income securities listed in the table above having an amortized cost basis of $1,701 and an estimated fair value of $1,688 as of December 31, 2017.
The Company’s limited liability investments, as reported as other investments in the table above, are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $645 through December 31, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI, and in which the Company has invested $211 as of December 31, 2017. The Company has accounted for its limited liability investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.
Also included in other investments is a certificate of deposit in the amount of $300 with an original term of 18 months deposited with the State of Florida pursuant to the terms of the certificate of authority issued to Maison from the FOIR.
At December 31, 2017, the gross unrealized losses for fixed income securities amounted to $498, and there were no unrealized losses attributable to non-investment grade fixed income securities. At both December 31, 2017 and 2016, all unrealized losses on individual investments were considered temporary. Fixed income securities in unrealized loss positions continued to pay interest and were not subject to material changes in their respective debt ratings. The Company concluded the declines in value were considered temporary. As the Company has the capacity to hold these investments to maturity, no impairment provision was considered necessary.
Premiums receivable, net of allowances for credit losses, increased by $7,908 to $10,831 as of December 31, 2017 from $2,923 as of December 31, 2016, resulting primarily from the assumption of policies from FL and LA Citizens in December 2017. Although we have participated in LA Citizens take-outs each December for the past six years, our assumption of policies which occurred on December 1, 2017 marked our largest assumption to date, whereby we assumed approximately $3,304 in premium in 2017, compared to approximately $883 in 2016. Furthermore, December 19, 2017 marked our first-ever assumption of policies from FL Citizens, whereby we assumed approximately $5,692 in premium. As a result, we were owed approximately $8,467 in premiums from the Citizens entities as of December 31, 2017, consisting of premiums assumed less ceding commissions (in the case of LA Citizens only, as FL Citizens does not withhold a ceding commission), accounting for the majority of the increase to premiums receivable year over year.
Reinsurance recoverable on both paid losses and loss reserves represents amounts due to the Company, or expected to be due to the Company from its reinsurers, based upon claims and claim reserves which have exceeded the retention amount under our reinsurance treaties. As of December 31, 2017, we have recorded an expected recovery of $1,952 on paid losses as well as $8,971 on loss and loss adjustment expense reserves, compared to $444 and $3,652, respectively, as of December 31, 2016. Our expected recoveries as of December 31, 2017 relate primarily to Hurricane Harvey, which impacted our policyholders in Texas and Louisiana in August, 2017. We anticipate our gross incurred losses to be $27,000 from this event. As our retention is $5,000 under our CAT XOL treaty, we expect to recover approximately $22,000 from our reinsurers from this event. As of December 31, 2017, we had collected approximately $13,600, with the remaining $1,300 recorded as a recoverable on paid losses and $7,100 recorded as a recoverable on loss and loss adjustment expense reserves.
Our expected recoveries as of December 31, 2016 result from a series of severe storms which produced multiple tornadoes and flooding in the state of Louisiana in late February 2016 which exceeded the $4,000 retention under our CAT XOL treaty which covered storms we incurred from the period beginning June 1, 2015 and ending May 31, 2016, a wind and hail event occurring in both Texas and Louisiana in early March 2016, which generated recoveries under our aggregate excess of loss treaty for the treaty year ended May 31, 2017, as well as a wind and flooding event which occurred in Louisiana in mid-August 2016, which exceeded the $5,000 retention under our CAT XOL treaty which covered storms we incurred from the period beginning June 1, 2016 and ending May 31, 2017.
Funds deposited with reinsured companies represents collateral we have placed on deposit with Brotherhood based upon our quota-share agreement to reinsure a portion of Brotherhood’s business for wind/hail coverage only. Our obligation increased to $2,250 as of December 31, 2017 from $500 as of December 31, 2016 due to our quota-share portion of losses Brotherhood incurred with respect to Hurricane Harvey, which impacted a number of churches Brotherhood insures on or near the Gulf Coast of Texas in August 2017. We funded these obligations via cash deposits made to Brotherhood under a trust agreement. The losses we incur with respect to our quota share agreement with Brotherhood are subject to our CAT XOL treaty, thus we are able to include these Hurricane Harvey losses in the ultimate $22,000 we expect to recover from our reinsurers as previously discussed under the heading “Reinsurance Recoverable”.
Current income taxes recoverable decreased $1,131 to $64 as of December 31, 2017, compared to $1,195 as of December 31, 2016, representing the estimate for both the Company’s state and federal income taxes to be recovered for the years ended December 31, 2017 and 2016, respectively, less estimated payments made during each year.
● 100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event;
Since the Series B Preferred Shares had a mandatory redemption provision requiring redemption on February 24, 2020, we were required to classify the shares as a liability on our balance sheet instead of recording the value of these shares in equity. The resulting liability was recorded at a discount to the ultimate redemption amount of the Series B Preferred Shares based upon an analysis of the cash payments expected to occur under the terms of the Series B Preferred Shares discounted for the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of $372 and $355 was charged to operations for the years ended December 31, 2017 and 2016, respectively.
On December 1, 2014, the Company’s Board of Directors authorized a share repurchase program for up to 500,000 shares of the Company’s common stock, which expired on December 31, 2016. Through December 31, 2016, the Company had repurchased an aggregate 401,359 shares at an aggregate purchase price of $2,927, or $7.29 per share, including all fees and commissions. On January 29, 2016, the Company retired 250,000 of its treasury shares, resulting in a reclassification of the purchase price of $1,917 to additional paid in capital.
Ceded premiums written increased by $2,042 to $22,583 for the year ended December 31, 2017, compared to $20,541 for the year ended December 31, 2016. The increase in ceded premiums written is primarily due to an increase in the total insured value of the Company’s book of business year over year as well as the change in the geographic mix of coverage that we provide. While the limits purchased under our catastrophe excess of loss reinsurance (“CAT XOL”) and aggregate programs did not change year over year, our treaty years run from June 1st through May 31st of each year, thus the two year period ended December 31, 2017 is covered by ceded premiums written under three separate reinsurance treaties. Therefore, the increase in ceded premiums written for the twelve month period can also be attributed to the increase in limits purchased when comparing our 2015/2016 treaty with the Company’s two most recent treaties (2016/2017 and 2017/2018). The following table is a summary of the key provisions under each of our treaties.
(2) Specifies the gross incurred losses by which each 144 hour loss occurrence must exceed before recoveries are generated under our aggregate treaty. Once the franchise deductible is met, all losses under the loss occurrence qualify for recovery, not just those losses which exceed the franchise deductible amount.
(1) We define Core Loss as net losses and LAE less the sum of Catastrophe Losses and prior period development (redundancy).
(2) Property Claims Services (PCS) defines a catastrophic event as an event where the insurance industry is estimated to incur over $25,000 of insured property damage that also impacts a significant number of insureds. For purposes of the above table, we have defined a Catastrophe as a PCS event where our estimated cost exceeds $1,500.
Our loss ratio (net losses and LAE divided by net premiums earned) for the year ended December 31, 2017 was 45.2% compared to 53.8% for the prior year. While we experienced an increase in our core loss ratio, this was offset by a decrease in our catastrophe loss ratio when comparing periods. Although Hurricane Harvey was a significant event for us, as we expect our total gross incurred losses to be approximately $27,000 for this storm, due to our reinsurance program, our net incurred losses from Hurricane Harvey are limited to $5,000. Also included in our catastrophe loss figure for the current year is PCS event 1714, which was a series of wind/hail storms which impacted our policyholders in both Louisiana and Texas in early February, 2017, resulting in approximately $1,700 in net incurred losses for the year ended December 31, 2017. These net losses from event 1714, along with $5,000 in net incurred losses from Hurricane Harvey, represent the extent of our catastrophe losses for the year ended December 31, 2017 as shown in the preceding table. In comparison, for the year ended December 31, 2016, we experienced three catastrophe events as follows:
● PCS CAT 1616 - Our Louisiana policyholders experienced primarily tornado damage, but also damage due to other high winds and hail during these storms which occurred in late February, 2016. The Company’s gross incurred losses from this event for the year ended December 31, 2016 were $6,501. After recoveries available to us under our excess of loss and per risk reinsurance treaties, our net incurred losses from this event were $3,890.
● PCS CAT 1617 - This event also primarily impacted our Louisiana policyholders who experienced damage from wind, hail, lightning and flooding between March 5-10, 2016. Our gross incurred losses from this event for the year ended December 31, 2016 were $1,597, while net incurred losses were $1,000 after recoveries under our excess of loss treaty.
● PCS CAT 1644 - This event impacted our Louisiana policyholders as a result of heavy rains and wind in the state between August 11-16, 2016. Our gross and net incurred losses from these storms for the year ended December 31, 2016 were $10,000 and $4,915, respectively.
General and administrative expenses increased $2,386 to $9,304 for the year ended December 31, 2017, compared to $6,918 for the year ended December 31, 2016. Expressed as a percentage of gross premium earned, general and administrative expenses were 15.8% and 14.1%, respectively. The largest drivers in the increase in general and administrative expense include employee costs and professional fees. Employee costs accounted for approximately 34% of the increase as we have increased staffing to support our growth in Texas and Florida while professional fees accounted for approximately 37% of the increase as we finalized a review of the rates that we charge on our risks in Louisiana and also have initiated filings for the new products that we plan to offer in Florida.
Income tax expense for the year ended December 31, 2017 was $1,198 compared to $108 for the year ended December 31, 2016. The effective rate for income taxes was 80% for the current year, resulting primarily from a write down of the Company’s net deferred tax assets associated with 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% beginning in the year 2018. As our net deferred tax assets are, by definition, only available to be used by us for tax years beginning in 2018 and later, we were required to write down the value of these assets to the newly enacted rate of 21%, while the current portion of our federal income taxes, related to 2017, were recorded at 35%. Were it not for the write-down of our net deferred tax assets as a result of the passage of the Tax Cuts and Jobs Act, our effective rate for income taxes would have been approximately 38%, including state tax, for the year ended December 31, 2017.
As a result of the foregoing, the Company’s net income for the year ended December 31, 2017 was $294, or $0.05 per diluted share compared to $11, or $0.00 per diluted share for the year ended December 31, 2016.
The net cash used by investing activities as reported on our consolidated statement of cash flows was $26,981, resulting primarily from the net purchases of fixed income, equity securities and short term investments for our investment portfolio. Net cash used by financing activities was $16, which resulted from a dividend payment of $240 to 1347 Advisors as holders of the Series B Preferred Shares issued in the MSA termination transaction, offset by the receipt of $224 from the sale of our common stock to our Chief Operating Officer, Mr. Dan Case, at a sale price of $8.00 per share.
We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is an insurance holding company specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida. We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed an initial public offering of our common stock. Prior to March 31, 2014, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned holding company based in Canada. As of 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.
We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or “MMI”, and ClaimCor, LLC, or “ClaimCor”.
Through Maison, we began providing property and casualty insurance to individuals in Louisiana in December 2012. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis. Our current insurance offerings in Louisiana and Texas include homeowners insurance, manufactured home insurance and dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new policies through a network of independent insurance agencies. We refer to the policies we write through independent agencies as voluntary policies. We also wrote commercial business in Texas through a quota share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas.
On September 29, 2017, Maison received authorization from the FOIR to assume personal lines policies from Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison filed with FL Citizens on August 18, 2017. Accordingly, on December 19, 2017, Maison entered the Florida market via the assumption of approximately 3,500 policies from FL Citizens.
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, and stock-based compensation expense.
Limited liability investments include investments in limited liability companies in which the Company’s interests are deemed minor and therefor, are accounted for under the cost method of accounting which approximates their fair value.
Premiums receivable include premium balances due and uncollected and installment premiums not yet due from agents and insureds. Premiums receivable are reported net of an estimated allowance for credit losses.
Rent expense for the Company’s office leases is recognized on a straight line basis over the term of the lease. Rent expense was $340 and $343 for the years ended December 31, 2017 and 2016, respectively.
The Company also has risk associated with the lack of geographic diversification due to the fact that Maison exclusively underwrites policies in Louisiana, Texas and Florida. Maison insures personal property located in 63 of the 64 parishes in Louisiana. As of December 31, 2017, these policies are concentrated within these parishes, presented as a percentage of our total direct and assumed policies in all states, as follows: Saint Tammany Parish, 9.8%, Jefferson Parish, 9.2%, and East Baton Rouge Parish, 5.8%. No other parish in Louisiana or county in Texas or Florida individually has over 5.0% of our total direct and assumed policies as of December 31, 2017. As of December 31, 2017, Maison has written or assumed policies in 156 of the 254 counties that comprise the State of Texas, and in 28 of the 67 counties in Florida.
Premium revenue is recognized on a pro rata basis over the term of the respective policy contract. Unearned premium reserves represent the portion of premium written that is applicable to the unexpired term of policies in force.
Any customer payment received is applied first to any service charge or policy fee due, with the remaining amount applied toward any premium due.
The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable, accounts payable, and other accrued expenses approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 14 for further information on the fair value of the Company’s financial instruments.
In March 2016, the FASB issued ASU 2016-09: Compensation - Stock Compensation: Improvement to Employee Share-Based Payment Accounting. ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that all tax effects related to share-based payment be made through the statement of income at the time of settlement as opposed to the current guidance that requires excess tax benefits to be recognized in additional paid-in-capital. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. The change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a departure from the current requirement which presents tax benefits as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated financial statements.
The table below summarizes the Company’s fixed income securities at December 31, 2017 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison is required to pledge securities totaling at least $2,000 with the State of Texas. These securities consist of cash in the amount of $300 as well as various fixed income securities listed in the preceding tables which have an amortized cost basis of $1,701 and estimated fair value of $1,688 as of December 31, 2017.
The Company’s limited liability investments are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $645 through December 31, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company has accounted for its limited liability investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.
● obtaining a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their knowledge and experience combined with market-based valuation techniques;
● reviewing the historical trading volatility and trading range of the investment and certain other similar investments;
● assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies;
● assessing the Company’s ability and intent to hold these investments until the impairment may be recovered.
Accordingly, all of the Company’s investments were deemed to be in good standing and not impaired as of December 31, 2017 and 2016. Additionally, there were no write-downs for other-than-temporary impairments on the Company’s investments for the years then ended.
The Company’s excess of loss treaties are based upon a treaty year beginning on June 1st of each year and expiring on May 31st of the following year. Thus, the financial statements for the years ended December 31, 2017 and 2016 contain premiums ceded under three separate excess of loss treaties. Under the Company’s 2015/2016 excess of loss treaty which expired on May 31, 2016, for each catastrophic event occurring within a 144-hour period, the Company receives reinsurance recoveries of up to $121,000 in excess of a retention of $4,000 per event. The Company had also procured “top, drop and aggregate” layer of reinsurance protection that may be used for any event above $125,000, up to a maximum recovery of $15,000. This $15,000 second layer of coverage applied in total to all events occurring during the treaty year of June 1, 2015 through May 31, 2016.
For both the treaty years beginning June 1, 2016 and June 1, 2017, the Company’s excess of loss treaties cover losses of up to $170,000 in excess of a $5,000 retention per event. For any event above $175,000, the Company again purchased top, drop and aggregate coverage, with an additional limit of $25,000. The $25,000 aggregate coverage applies in total to all events occurring during each of the treaty years.
The Company ceded $22,070 and $19,972 in written premiums under its excess of loss treaties for the years ended December 31, 2017 and 2016, respectively.
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 following tables illustrate incurred and paid claims development as of December 31, 2017, net of reinsurance, along with cumulative claim frequency and total incurred-but-not-reported (“IBNR”) liabilities as well as paid claims development on reported claims within the net incurred claims amounts. We have presented this information separately for both our homeowners’ multi-peril policies, which includes our traditional dwelling policies and also mobile and manufactured home policies, as well as for our special property policies, which include both our fire and allied lines of business. Our allied lines primarily consist of wind/hail only policies (including those assumed through LA and FL Citizens and TWIA) as well as the commercial wind/hail only policies we had assumed through our agreement with Brotherhood. The information about incurred and paid claims development for the years ended December 31, 2012 through 2015 is presented as unaudited supplementary information.
Actual income tax expense differs from the income tax expense computed by applying the applicable effective federal and state tax rates to income before income tax expense as follows:
The following potentially dilutive securities outstanding as of December 31, 2017 and 2016 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
The Company has established an equity incentive plan for employees and directors of the Company (the “Plan”). The purpose of the Plan is to create incentives designed to motivate recipients to significantly contribute toward the Company’s growth and success, to attract and retain persons of outstanding competence, and to provide such persons with an opportunity to acquire an equity interest in the Company.
Stock option information for the two years ended December 31, 2017 is as follows.
A summary of the status of the Company’s non-vested employee stock options is as follows.
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.
On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved a share matching arrangement for certain purchases of common stock made by the Company’s executive officers and directors. During the period beginning on May 31, 2017 and ending on November 30, 2017, each of the Company’s executive officers and directors had the opportunity to purchase the Company’s common stock through the open market, independently, and without assistance from the Company. At the end of the purchase period, the Company agreed to match any such shares purchased by the Company’s executive officers and directors with a grant of RSUs of the Company equal to two RSUs for each share purchased. Accordingly, on December 15, 2017, the Committee granted a total of 108,330 RSUs as follows; 40,000, 32,000 and 3,000 RSUs to our executive officers, Messrs. Raucy, Hill and Stroud, respectively as well as 6,666 RSUs to each of directors Swets, Cerminara, Horowitz, Johnson and Wong. Each RSU will entitle the grantee to one share of the Company’s common stock upon the vesting date of the RSU, which will vest 20% per year over a period of five years following the date granted, subject to each officer’s continued employment with the Company, or each director’s continued service on the Board. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. The Board of Directors may, in its discretion, accelerate vesting in the event of early retirement. Similarly, should a director makes himself available and consents to be nominated by the Company for continued service but is not nominated by the Board for election by the shareholders, other than for good reason as determined by the Board in its discretion, then such director’s RSU grant shall vest in full as of his last date of service as a director with the Company. Directors will be required to maintain ownership of the shares purchased through the full five-year vesting period, except as set forth above.
Total stock based compensation expense for the years ended December 31, 2017 and 2016 was $31 and $38, respectively. As of December 31, 2017, total unrecognized stock compensation expense of $779 remains, which will be recognized through December 31, 2022.
Stock warrants issued, exercised and outstanding as of December 31, 2017 are as shown in the following table. Additional information regarding the Company’s outstanding warrants is discussed under Note 12 - Related Party Transactions, below.
On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with KAI, whereby KAI will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones regarding the Company’s stock price. Pursuant to the terms of the PSGA, if at any time the last sales price of the Company’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). The shares of common stock granted to KAI will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant. As of December 31, 2016, the Company has not issued any shares under the PSGA.
The Company applied the guidance outlined in ASC 480 - Distinguishing Liabilities from Equity in recording the issuance of the Series B Preferred Shares. Due to the fact that the shares had a mandatory redemption date of February 24, 2020, the guidance required that we classify the shares as a liability on our consolidated balance sheet, rather than recording the value of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected to be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of $372 and $355 was charged to operations for the years ended December 31, 2017 and 2016, respectively.
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.
Pursuant to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of a capital raise resulting in the Company receiving net proceeds in excess of $5,000. On February 28, 2018, the Company purchased the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for $1,500 with the proceeds from the offering of the Company’s 8.00% Cumulative Preferred Stock, Series A (the “Preferred Stock”) offering (discussed under Note 18 - Subsequent Events below).
Financial instruments measured at fair value as of December 31, 2017 and 2016 in accordance with this guidance are as follows.
As an insurance holding company, we are dependent on dividends and other permitted payments from our subsidiary companies to serve as operating capital. The ability of Maison to pay dividends to us is subject to certain restrictions imposed under Louisiana insurance law, which is the state of domicile for Maison. Dividend payments from Maison may be further restricted pursuant to a consent agreement entered into with the LDI and the FOIR as a condition of our licensure in each state. Interest payments on the surplus notes issued to us by Maison are also subject to the prior approval of the LDI. Our other subsidiary companies collect the majority of their revenue through their affiliation with Maison. Our subsidiary company MMI, earns commission income from Maison for underwriting, policy administration, claims handling, and other services provided to Maison. Our subsidiary company, ClaimCor, earns claims adjusting income for adjusting certain of the claims of Maison’s policyholders. While dividend payments from our other subsidiaries are not restricted under insurance law, the underlying contracts between Maison and our other subsidiary companies are regulated by, and subject to the approval of, insurance regulators.
The 1347 Property Insurance Holdings, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January 1, 2015, as a defined contribution plan. The Retirement Plan is subject to the provisions for the Employee Retirement Income Security Act of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the plan. Employees who have completed one month of service are eligible to participate and are permitted to make annual pre and post-tax salary reduction contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as amended. Contributions are invested at the direction of the employee participant in various money market and mutual funds. The Company matches contributions up to 100% of each participant’s contribution, limited to contributions up to 4% of a participant’s earnings. The Company may also elect to make a profit sharing contribution to the Retirement Plan based upon discretionary amounts and percentages authorized by the Company’s Board of Directors. For the years ended December 31, 2017 and 2016, the Company made matching contributions to the Retirement Plan in the amount of $94 and $75, respectively.
As of December 31, 2017, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.
On February 28, 2018, we entered into an agreement to lease space located at 8750 N. Central Expressway, Dallas, TX, 75231, which consists of approximately 3,000 square feet of office space. The lease term runs through May 31, 2021 with an option to extend the lease for an additional three year term subject to certain conditions. Rent is payable in monthly installments of approximately $6,000 and escalates by approximately 2% annually.