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 amount have been rounded to the nearest thousand.
Maison writes personal property and casualty insurance in Louisiana and both personal and commercial property and casualty insurance in Texas. Maison provides dwelling policies for wind and hail only, and dwelling, homeowner and mobile home/manufactured home policies for multi-peril property risks.
Maison distributes its insurance policies through a network of more than 170 producing independent agents in Louisiana and approximately 40 producing independent agents in Texas. 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.
MMI serves as the Company’s management services subsidiary as a general agency providing underwriting, policy administration, claims administration, marketing, accounting and financial and other management services to Maison. MMI contracts with independent agents for policy sales and services, and 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 both the Louisiana and Texas Departments of Insurance (“LDI” and “TDI”, respectively).
As of December 31, 2015, we had approximately 28,400 policies in-force. Of these policies in-force, approximately 32% of our policies are comprised of policies obtained from the Citizens take-out program (most of which are wind/hail only dwelling policies) while the remaining 68% are obtained through our independent agents. In total, 51% of our policies are home-owner multi-peril, approximately 15% are manufactured home policies and approximately 2% are dwelling fire policies.
We do not consider the commercial wind/hail only book of business we have written in Texas in our policies-in-force count as of December 31, 2015 since we have assumed this business through our alliance with Brotherhood. As of December 31, 2015, we have assumed wind/hail coverage on 495 policies in Texas through this agreement.
Because the establishment of the provision for loss and loss adjustment expense reserves is an inherently uncertain process involving estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected in the consolidated statements of operations and comprehensive income (loss) for the periods in which such estimates are updated. Management determines the loss and loss adjustment expense reserves as recorded on the Company’s financial statements, while the Company’s independent actuaries develop a range of reasonable estimates and a point estimate of loss and loss adjustment expense reserves. The actuarial point estimate is intended to represent the actuaries’ best estimate and will not necessarily be at the mid-point of the high and low estimates of the range.
The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company’s past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of operations and comprehensive income (loss).
The Company carries a net deferred income tax asset of $506 and $263 at December 31, 2015 and 2014, 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.
See Note 3 - Recently Issued Accounting Standards in the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
The Company’s investments in fixed income securities are classified as available-for-sale and are reported at estimated fair value. The Company holds an investment portfolio comprised primarily of fixed income securities issued by the U.S. Government, government agencies and high quality corporate issuers. The portfolio is managed by a third-party investment management firm in accordance with the investment policies and guidelines approved by Maison’s Board of Directors. These guidelines stress the preservation of capital, market liquidity and the diversification of risk. 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. Furthermore, 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 the fixed income securities listed in the tables below and have both an amortized cost basis and estimated fair value of $2,002 as of December 31, 2015.
The table below summarizes, by type, the Company’s investments as of December 31, 2015 and 2014.
The table below summarizes the fair value of the Company’s fixed income securities by contractual maturity as of December 31, 2015 and 2014. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
As a result of the analysis performed by the Company, there were no write-downs for other-than-temporary impairments related to investments for the years ended December 31, 2015 and 2014.
At December 31, 2015, the gross unrealized losses for fixed income securities amounted to $95, and there were no unrealized losses attributable to non-investment grade fixed income securities. At both December 31, 2015 and 2014, 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.
The Company’s deferred policy acquisition costs (“DPAC”) include commissions, premium taxes, assessments and other policy processing fees and represent those costs related to acquiring the premiums the Company has yet to earn (the unearned premium reserve). DPAC increased $939, to $4,030 as of December 31, 2015 compared to $3,091 as of December 31, 2014, corresponding to an increase in our unearned premium reserves over the same period.
Premiums receivable, net of allowance for credit losses, increased by $309 to $2,395 as of December 31, 2015 from $2,086 as of December 31, 2014. This increase was primarily attributable to the timing of payments received on premium written in December of each year. Premiums written for the month of December 2015 increased by approximately $483 when compared to premiums written in December 2014, leading to a corresponding increase in the amount of premium receivable from our agents and policyholders.
Current income taxes recoverable were $965 as of December 31, 2015, compared to a current payable of $262 as of December 31, 2014, representing the estimate of both the Company’s state and federal income taxes to be recovered/due for the years ended December 31, 2015 and 2014, respectively, less estimated payments made during each year.
On January 2, 2015, we acquired a 100% interest in ClaimCor, a Florida domiciled company in the business of adjusting property and casualty insurance claims. Under the terms of the agreement to purchase ClaimCor, the purchase price equaled $323, which we paid in cash, at closing. Pursuant to the purchase agreement, the prior managing members of ClaimCor entered into a non-compete agreement with us, whereby the members cannot engage in, continue in, or carry on any business that competes with ClaimCor for a period of three years from the date in which the transaction closed.
In December 2015, after analyzing ClaimCor’s performance in comparison to management’s expectations and forecasts at the time of acquisition, we noted that an impairment to the value of the goodwill and other intangibles we recorded was likely. Accordingly, our analysis resulted in a charge of $246 in the quarter ending December 31, 2015 associated with the impairment of goodwill and the customer base asset. As of December 31, 2015, the carrying value of the Company’s intangible assets was $6 representing the unamortized balance of the non-compete agreement recorded as part of the acquisition.
Unfavorable development for loss and LAE reserves from prior accident years was $205 for the year ended December 31, 2015.
Unearned premium reserves increased $5,739 to $23,442 as of December 31, 2015 compared to $17,703 as of December 31, 2014. The following table outlines the change in unearned premium reserves by line of business.
The Company entered into an Agreement to Buyout and Release (the “Buyout”) with Advisors which terminated the MSA on February 24, 2015. In consideration for Advisors voluntary termination of 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; (iii) issued to Advisors 120,000 shares of Series B Preferred Stock of the Company (the “Preferred Shares”); and (iv) executed and delivered to Advisors a warrant (the “Warrant”) to purchase up to 1,500,000 shares of the Company’s common stock at an exercise price of fifteen dollars per share. The Warrant expires on February 24, 2022.
The Preferred Shares have a par value of twenty five dollars per share and pay annual cumulative dividends at a rate of eight percent per annum. Cumulative dividends accrue, whether or not declared by the Board and irrespective of the legal availability of funds for the payment of dividends. Accrued dividends are to be paid in cash only when, as, and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Preferred Shares. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of the Preferred Shares then outstanding will be entitled to be paid out of the assets of the Company available for distributions to its shareholders. The Preferred Shares rank senior to the Company’s common stock, and the Company is not permitted to issue any other series of preferred stock that ranks equal or senior to the Preferred Shares while the Preferred Shares are outstanding. On February 22, 2016 the Board authorized a dividend payment on the Preferred Shares for shareholders of record as of February 23, 2016. Accordingly, on February 24, 2016, the Company issued a cash payment of $240 to Advisors representing the first annual dividend payment the Company has made on the Preferred Shares.
The issuance of the Warrants and Performance Shares had no effect on the Company’s total shareholders’ equity as they both resulted in equal and offsetting charges to the Company’s retained earnings and additional paid-in capital. We estimated the fair value of the Warrant on grant date based upon the Black-Scholes option pricing model while we utilized a Monte Carlo model to determine the fair value of the Performance Shares due to the fact that these shares are only issuable based upon the achievement of certain market conditions.
Because the Preferred Shares have a mandatory redemption provision requiring redemption on February 24, 2020, we were required to classify the Preferred 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 $3,000 ultimate redemption amount of the Preferred Shares based upon an analysis of the cash payments expected to occur under the terms of the Preferred Shares discounted for the Company’s estimated cost of equity (13.9%). As a result, amortization in the amount of $1,889 will be charged to operations through February 24, 2020 using the effective interest method. For the year ended December 31, 2015, amortization of the discount on the Preferred Shares totaled $282.
Accounts payable and other accrued expenses increased $306, to $1,863 as of December 31, 2015 compared to $1,557 as of December 31, 2014. The major components of accounts payable and other accrued expenses, as well as the change therein, are shown below.
As of December 31, 2015, the Company had the following amounts due under its operating leases for facilities in Baton Rouge, Louisiana, and Tampa, Florida.
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 (“Series A Shares”) of the Company. At the time of their issuance, the value of the common stock into which the Series A 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 Series A 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 Series A Shares exceeded the proceeds received upon issuance of the Series A Shares. On March 31, 2014 the Preferred Shares were converted into 312,500 shares of the Company’s common stock.
On December 1, 2014 our Board of Directors approved a share repurchase program for up to 500,000 shares of our common stock. Through December 31, 2015, we had repurchased an aggregate 223,851 shares under this program at an average cost of $7.73 per share. In November 2015, our Board of Directors approved the continuation of the repurchase program such that we anticipate repurchases to continue to be made periodically through the period ending December 31, 2016.
Ceded premiums written increased to $13,422 in 2015, compared to $7,934 in 2014. The increase is primarily due to an increase in limits purchased in our excess of loss reinsurance program which increased from $9,500 for the treaty year ended May 31, 2014 to $69,000 for the treaty year ending May 31, 2015. We also purchased reinsurance for aggregate losses. The aggregate treaty increased in coverage from $13,000 to $20,000 for the treaty years ended May 31, 2014 and 2015, respectively.
The following table shows our net premiums earned by line of business.
Other income increased $462, to $834 as of December 31, 2015, compared to $372 as of December 31, 2014. The increase is primarily due to the acquisition of ClaimCor. ClaimCor generated $270 in claims adjusting revenue for the year ended December 31, 2015. As we acquired ClaimCor on January 2, 2015, there was no comparable revenue for 2014.
(2) Property Claims Services (PCS) defines a catastrophic event as an event where the insurance industry is estimated to incur over $25 million 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.
(3) Prior Period Development is the amount of ultimate actual loss settlement value which is more than the estimated reserves recorded for a particular liability or loss, while redundancy represents the ultimate actual loss settlement value which is less than the estimated and determined reserves recorded for a particular liability or loss.
Amortization of deferred acquisition costs in 2015 was $6,571, compared to $4,529 for the year ended December 31, 2014. This increase correlates with the increase in earned premiums year over year shown by calculating deferred acquisition cost amortization as a percentage of earned premiums, which was 25.3% for 2015, compared to 24.5% for 2014. The increase in amortization of deferred acquisition costs as a percentage of earned premiums can be attributed to the fact that we began writing business in Texas in 2015, where commission rates tend to be slightly higher than that of Louisiana.
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 (“Series A Shares”) of the Company. At the time of the issuance, the value of the common stock into which the Series A Shares was convertible had a fair value greater than the $2,000 proceeds received for the issuance. Accordingly, the Company recorded a beneficial conversion feature on the Series A 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 Series A Shares exceeded the proceeds received upon issuance of the 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, 2015, net cash provided by operating activities as reported on our consolidated statement of cash flows was $5,417. Our source of cash resulted from the collection of approximately $43,851 in premiums in the period. This amount was reduced by the payment of ceded reinsurance premiums of $12,460, the payment of losses and loss adjustment expenses (net of subrogation recoveries) of $8,784, the one-time cash payment of $2,000 to Advisors pursuant to the termination of the MSA, commissions paid to our agents equaling $6,219, wages and salaries paid to our employees equaling $2,267, payments to various local and federal regulators for premium and income taxes and assessments in the amount of $2,495, and other net operating payments of $4,209.
Net cash used by financing activities was $1,731, comprised entirely of our purchase of 223,851 of our common shares to be held as treasury stock.
As a result of the foregoing, our net decrease in cash and cash equivalents for the year ended December 31, 2015 was $5,682.
For the year ended December 31, 2014, net cash provided by operating activities as reported on our consolidated statement of cash flows was $12,905. This cash was sourced from the collection of written policyholder premiums of $34,729 reduced by the payment of ceded reinsurance premiums of $5,425, the payment of losses and loss adjustment expenses (net of subrogation recoveries) of $3,523, increased by the collection of $405 of ceded reinsurance recovered losses and loss adjustment expenses, reduced by the payment of expenses, including policy acquisition costs of $11,769 as well as the payment of U.S. Federal and State of Louisiana income taxes of $1,512.
Net cash provided by financing activities as reported on our consolidated statements of cash flows was $38,261 which consisted of the issuance of our common shares in our initial and follow-on public offerings for $36,261 as well as the issuance of our preferred shares for $2,000.
We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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. Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries.
Prior to March 31, 2014, the Company was 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.
In addition to the voluntary policies Maison writes, we have participated in the last three rounds of take-outs from Louisiana Citizens Property Insurance Company (“Citizens”), occurring on December 1st of each year. As the State of Louisiana has not historically been in the business of serving as an insurer, an insurance “take-out” program was implemented to reduce the number of properties insured by Citizens. Under this take-out program, state-approved insurance companies, such as Maison, have the opportunity to assume insurance policies written by Citizens.
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Investments in fixed income securities are classified as available-for-sale and reported at estimated fair value. Unrealized gains and losses are included in accumulated other comprehensive loss, net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses are transferred to the consolidated statement of operations.
The Company defers commissions, premium taxes and other underwriting and agency expenses that are directly related to successful efforts to acquire new or existing insurance policies to the extent they are considered recoverable. Costs deferred on insurance products are amortized over the period in which premiums are earned. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred, as opposed to being deferred and amortized as the premium is earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future loss and loss adjustment expenses to be incurred as revenues are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs.
Property and equipment is reported at historical cost less accumulated depreciation. Depreciation of property and equipment is recorded on a straight-line basis over estimated useful lives which range from seven years for furniture, five years for vehicles, three years for computer equipment, and the shorter of estimated useful life or the term of the lease for leasehold improvements. Property and equipment is estimated to have no salvage value at its useful life-end.
Rent expense for the Company’s office leases is recognized on a straight line basis over the term of the lease. Rent expense was $214 and $123 for the years ended December 31, 2015 and 2014, respectively.
Goodwill represents the amount paid in excess of the fair value for the net assets acquired in our purchase of ClaimCor, which has been accounted for under FASB ASC Topic 805 - Business Combinations. Goodwill is not amortized to expense, but rather is analyzed for impairment on an annual basis or as events and circumstances change. The carrying value of goodwill was $0 for both December 31, 2015 and December 31, 2014 as a result of an impairment charge recorded against the value of goodwill in the fourth quarter 2015. See Note 9 for further information on the goodwill resulting from our acquisition of ClaimCor.
Service charges on installment premiums are recognized as income upon receipt of related installment payments and are reflected in other income. Revenue from policy fees is deferred and recognized over the terms of the respective policy period, with revenue reflected in other income. Any customer payment received is applied first to any service charge or policy fee due, with the remaining amount applied toward any premium due.
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 - Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.
Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.
In January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income (loss). ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017 and will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, cash flows, or total comprehensive income, but could impact the Company’s results of operations and earnings (loss) per share as changes in fair value will be presented in net income (loss) rather than other comprehensive income (loss).
The table below summarizes the Company’s fixed income securities at December 31, 2015 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.
The Company’s other investments are comprised of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $248 through December 31, 2015. The Company has accounted for its investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.
· considering the extent, and length of time during which the market value has been below cost;
· 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 the timeliness and completeness of principal and interest payment due from the investee; and
· assessing the Company’s ability and intent to hold these investments until the impairment may be recovered
· the past trading patterns of investments may not reflect their future valuation trends;
· the credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the investee company’s financial situation; and
Net investment income for the years ended December 31, 2015 and 2014 is as follows:
There were no realized gains or losses on the Company’s investments for the years ended December 31, 2015 and 2014.
The Company reinsures, or cedes, a portion of its written premiums on a per-risk and an excess of loss basis to non-affiliated insurers in order to limit its loss exposure. Although reinsurance is intended to reduce the Company’s exposure risk, the ceding of insurance does not legally discharge the Company from its primary liability for the full amount of coverage under its policies. If 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.
Under the Company’s per-risk treaty, reinsurance recoveries are received for up to $1,750 in excess of a retention of $250 for each risk. The Company ceded $342 and $139 in written premiums under its per-risk treaties for the years ended December 31, 2015 and 2014 respectively.
In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we act as a reinsurer, and have assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas. Our quota-share percentage varies from 35%-100% of wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal versus non-coastal) within the State of Texas. As of December 31, 2015, we have written $1,174 in assumed premiums on 495 policies through the Brotherhood agreement.
DPAC as well as the related amortization expense associated with DPAC for the years ended December 31, 2015 and 2014 is as follows:
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, 2015 and 2014 were as follows:
The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2012 - 2014 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
As of December 31, 2015, the carrying value of the Company’s intangible assets was $6 representing the unamortized balance of the non-compete agreement recorded as part of the acquisition. Future expense related to the amortization of this asset is expected to be as follows:
Net (loss) earnings 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 (loss) earnings per share for the years ended December 31, 2015 and 2014.
The following potentially dilutive securities outstanding as of December 31, 2015 and 2014 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
The Company has established a stock option 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, as well as attract and retain persons of outstanding competence, and provide such persons to act in the long-term best interest of the Company and its shareholders.
At the 2015 Annual Shareholders Meeting, the Company’s shareholders approved an amendment to the Plan which implemented changes relating to the permitted award types issuable under the Plan. In addition to non-qualified stock options issuable under the Plan, the amendments provide for the issuance of restricted stock, restricted stock units, performance shares, performance cash awards, and other stock-based awards.
Stock warrants issued, exercised and outstanding as of December 31, 2015 are as follows. The Company did not have warrants outstanding at any point prior to March 31, 2014.
The Series A Shares were converted into shares of common stock and warrants on March 31, 2014, the effective date of the IPO. The Series A Shares were converted into (i) 312,500 common shares of the Company and (ii) warrants to purchase 312,500 shares of the Company’s common stock. Each warrant issued to Fund Management Group LLC entitles the holder to purchase one share of common stock at a price equal to $9.60, subject to certain adjustments under a warrant agreement (the “Warrant Agreement”). The warrants have an expiry date of March 31, 2019 and vested upon issuance. The warrants may be redeemable by the Company at a price of $0.01 per warrant during any period in which the closing price of the Company’s common shares is at or above $14.00 per share for 20 consecutive trading days. The warrant holder is entitled to a 30-day notice prior to the date of such redemption.
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. Through December 31, 2015, the Company has repurchased 223,851 shares of common stock at an aggregate purchase price of $1,731, or $7.73 per share, including all fees and commissions. The entirety of these shares were purchased during the twelve months ended December 31, 2015. The repurchased shares are classified as treasury stock, at cost on the Company’s consolidated balance sheet.
Amounts due to related parties represent 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 December 31, 2014, there was approximately $145 due to KFSI under this arrangement which was paid during 2015. 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.
As of December 31, 2015, KFSI and its subsidiaries retained approximately 17.5% of the Company’s outstanding common shares.
On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with Kingway America, Inc. (“KAI”, a wholly owned subsidiary of KFSI), 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, 2015, the Company has not issued any shares under the PSGA.
The Company entered into an Agreement to Buyout and Release (the “Buyout”) with Advisors which terminated the MSA on 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 a Performance Shares Grant Agreement to Advisors (as described below); (iii) issued to Advisors 120,000 shares of Series B Preferred Stock of the Company (“Preferred Shares”, described 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 on February 24, 2022.
The Preferred Shares have a par value of twenty five dollars and pay annual cumulative dividends at a rate of eight percent per annum. Cumulative dividends shall accrue, whether or not declared by the Board and irrespective of whether there are funds legally available for the payment of dividends. Accrued dividends shall be paid in cash only when, as, and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Preferred Shares. In the event of any voluntary of involuntary liquidation, dissolution, or winding up of the Company, the holders of the Preferred Shares then outstanding shall be entitled to be paid out of the assets of the Company available for distributions to its shareholders, before any payment shall be made to holders of securities junior in preference to the Preferred Shares. The Preferred Shares rank senior to the Company’s common stock, have a liquidation value of twenty five dollars per share, and the Company is not permitted to issue any other series of preferred stock that ranks equal or senior to the Preferred Shares while the Preferred Shares are outstanding. On February 22, 2016 the Company’s board of directors authorized a dividend payment on the Preferred Shares for shareholders of record as of February 23, 2016. Accordingly, on February 24, 2016, the Company issued a cash payment of $240 to Advisors representing the first annual dividend payment the Company has made on the Preferred Shares.
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 Preferred Shares have a mandatory redemption date of February 24, 2020, the guidance required that we classify the Preferred Shares as a liability on our consolidated balance sheet, as opposed to recording the value of the shares in equity. The resulting liability was recorded at a discount to the $4,200 ultimate redemption amount which includes all dividends to be paid on the Preferred Shares based upon an analysis of the timing and amount of cash payments expected to occur under the terms of the Preferred Shares discounted at the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of $1,889 will be charged to operations from February 2015 through February 2020 using the effective interest method. For the year ended December 31, 2015, a charge of $282 associated with the amortization of the Preferred Shares has been recorded on the Company’s consolidated statement of operations.
The Company applied the guidance outlined in ASC 505-50 - Equity-Based Payments to Non-Employees in recording the issuance of the Warrants and Performance Shares by recognizing an increase to equity for the estimated fair value for both instruments as of their date of grant. We estimated the fair value of the Warrants on grant date based upon the Black-Scholes option pricing model. Significant assumptions used in determining the fair value of the Warrants are as follows:
· Level 1 - inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets providing the most reliable measurement of fair value since it is directly observable.
· Level 2 - inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets. These inputs are observable, either directly or indirectly for substantially the full-term of the financial instrument.
· Level 3 - inputs to the valuation methodology which are unobservable and significant to the measurement of fair value.
Financial instruments measured at fair value as of December 31, 2015 and 2014 in accordance with this guidance are as follows.
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, 2015 Maison’s capital surplus was $16,518.
The LDI employs risk-based capital (“RBC”) reports to monitor Maison’s financial condition. Risk-based capital is determined in accordance with a formula adopted by the NAIC which takes into consideration the covariance between asset risk, credit risk, underwriting risk, and other business risks. The RBC report determines whether Maison falls into the “no action” level or one of the four action levels set forth in the Louisiana Insurance Code. In order to retain its certificate of authority in the State of Texas, Maison is required to maintain an RBC ratio of 300% or more.
As of December 31, 2015, Maison’s RBC ratio was 345%, as a result, our surplus was considered to be in the “no action” level by the LDI.
States routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of December 31, 2015, Maison held investment securities with a fair value of approximately $100 as a deposit with the LDI and investment securities with a fair value of approximately $2,002 as a deposit with the TDI.
As a Louisiana domiciled insurer, the payment of dividends from our insurance subsidiary 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.
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. As the Retirement Plan did not become effective until January 1, 2015, the Company did not make any matching or profit sharing contributions for the year ended December 31, 2014. For the year ended December 31, 2015, the Company made matching contributions to the Retirement Plan in the amount of $67.
As of December 31, 2015, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.