Our executive offices are located at 1511 N. Westshore Blvd, Suite 870, Tampa, Florida, 33607. We lease approximately 4,900 square feet of office space at this address with a lease term through October 2019. Rent is payable in monthly installments of approximately $10,000, which escalates by three percent on each annual anniversary date beginning August 1, 2015. The lease contains an option to renew for an additional three year term subject to certain conditions.
We also lease approximately 3,600 square feet of office space located at 9100 Bluebonnet Centre Blvd, Suite 501, Baton Rouge, Louisiana, 70809 which serves as the principal office space for our insurance subsidiary, Maison. The lease term runs through December 2017 and contains an option to renew for an additional five year term subject to certain conditions. Rent is payable in monthly installments of approximately $5,000 and will increase nominally in February 2016.
In the opinion of the Company’s management, our properties are suitable for our current business and are adequately maintained.
1347 Property Insurance Holdings, Inc. (“Company”, “PIH”, “we”, “us”) was incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc. and operated as a wholly owned subsidiary of Kingsway America, Inc. (“KAI”). KAI is a wholly owned subsidiary of Kingsway Financial Services, Inc. (“KFSI”), a publicly owned holding company based in Toronto, Ontario, Canada. On November 19, 2013, the Company changed its legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business through its subsidiary Maison Insurance Company (“Maison”).
On March 31, 2014, the Company completed its IPO of 2,170,625 shares of its common stock at a price to the public of $8.00 per share, for total gross proceeds of $17,365. Net proceeds to the Company were $15,087 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. On June 13, 2014, the Company completed secondary 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 $21,173.
The subsidiaries of the Company are Maison, a Louisiana-domiciled property and casualty insurance company incorporated on October 3, 2012, and Maison Managers, Inc. (“MMI”), incorporated in the State of Delaware on October 2, 2012.
Louisiana Citizens Property Insurance Company (“Citizens”) is a state-created insurer. 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. It has been Maison’s practice to date to participate in such take-out programs, and Maison plans to continue doing so from time to time in the future. We have participated in the last three rounds of take-outs from Citizens, occurring on December 1st of each year.
Additionally, we have approximately 13,806 voluntary policies in-force obtained from our independent agents. From all sources of distribution, the in-force policy count at December 31, 2014, and December 31, 2013 was as follows:
Maison actively conducts business in the State of Louisiana only. The Company insures personal property located in 63 of the 64 parishes in the State of Louisiana. As of December 31, 2014, these policies are concentrated within these parishes as follows: Jefferson Parish 20.4%, Saint Tammany Parish 14.2%, Orleans Parish 8.4%, and East Baton Rouge Parish 6.1%. No other parish individually has over 5.0% of the policies in force as of December 31, 2014. The remaining 59 parishes aggregate to 50.9% of the total policies in force as of December 31, 2014.
The non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any financial measures prepared in accordance with U.S. GAAP. The Company’s non-U.S. GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-U.S. GAAP financial measures.
The Company, like many insurance companies, analyzes performance based on underwriting ratios such as loss ratio, expense ratio and combined ratio. The loss ratio is derived by dividing the amount of net losses and loss adjustment expenses incurred by net premiums earned. The expense ratio is derived by dividing the sum of amortization of deferred policy acquisition costs and general and administrative expenses incurred by net premiums earned. All items included in the loss and expense ratios are presented in the Company’s U.S. GAAP financial statements. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss.
Factors affecting the provision for loss and loss adjustment expense reserves include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Company’s claims departments’ personnel and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing claims management practices including claims handling and settlement practices, the effect of inflationary trends on future loss settlement costs, court decisions, economic conditions and public attitudes.
Because the establishment of the provision for loss and loss adjustment expense reserves is an inherently uncertain process involving estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected in the consolidated statements of operations and comprehensive income (loss) for the periods in which such estimates are updated. The Company’s actuaries develop a range of reasonable estimates and a point estimate of loss and loss adjustment expense reserves. The actuarial point estimate is intended to represent the actuaries’ best estimate and will not necessarily be at the mid-point of the high and low estimates of the range.
The Company’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 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.
Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the consolidated statements of operations and comprehensive income (loss). Premium and discount on investments are amortized and accreted using the interest method and charged or credited to net investment income.
Deferred policy acquisition costs represent the deferral of expenses that the Company incurs related to successful efforts to acquire new business or renew existing business. Acquisition costs, primarily commissions, premium taxes and underwriting and agency expenses related to issuing insurance policies are deferred and charged against income ratably over the terms of the related insurance policies. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. 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.
● Net income of $3,646 or $0.71 per share basic and diluted.
● Direct written premium of $32,663, an increase of 104% over the prior year.
The following selected financial information is derived from our consolidated financial statements for the years ended December 31, 2014 and 2013, and is presented in the table below.
Direct premiums written increased $16,639, or 104%, to $32,663 for 2014, compared to $16,024 in 2013. The following table shows our direct premiums written by line of business.
(1)Homeowners’ refers to our multi-peril policies for traditional dwellings as well as mobile and manufactured homes.
(2)Special property includes both our Fire and Allied lines of business, which are primarily wind/hail only products.
Ceded premiums written increased to $7,934 in 2014, compared with $3,232 for 2013. This increase was primarily due to an increase in limits purchased in the 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 purchase 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.
Net premium earned increased $13,480, to $18,463 for 2014, compared to $4,983 for 2013. The following table shows our net premiums earned by line of business.
The increase in net premiums earned is due primarily to the increase in direct written premiums less premiums ceded as previously discussed. Premium earned on a direct and ceded basis is as shown in the following table.
Other income increased $311, to $372 for 2014, compared to $61 in 2013. The increase is primarily due to policy processing and service fees on installment premiums charged on our policies. Revenue from policy processing fees is deferred and recognized over the terms of the respective policy period while service fees on installment premiums are recognized as income upon receipt of related installment payments. Increases to both amounts relate to the increase in premiums written and earned year over year.
The loss ratio (net losses and LAE divided by net premiums earned) for the year ended December 31, 2014 was 19.6% compared to 58.8% for the prior year. Our loss ratio decreased due to the fact that there were no significant weather events (catastrophes) occurring in 2014 in contrast to the unusual hail event in Louisiana in February of 2013. Furthermore, the 2014 calendar year loss ratio shows the benefit of a release of prior accident year loss reserves (redundancy) in the amount of $182, which had the effect of decreasing the loss ratio by one percentage point. The 2013 calendar year loss ratio also had a benefit resulting from the release of prior accident year loss reserves, which decreased losses by $9 and the loss ratio by 0.2 percentage points. The following table sets forth the components of our losses and loss ratios for the periods presented.
Amortization of deferred acquisition costs in 2014 was $4,529, which was $3,201 higher than in 2013. This increase was generally consistent with the increase in earned premiums for the year shown by comparing deferred acquisition cost amortization as a percentage of earned premiums, which was 24.5% for 2014, compared to 26.7% for 2013. The slight decrease in amortization of deferred acquisition costs as a percentage of earned premiums can be attributed to the fact that a larger portion of our earned premium for 2014 resulted from renewal business from our independent agents when compared to 2013. The commissions we pay are structured so that agents receive a larger commission on new business when compared to renewal business.
Income tax expense for 2014 was $2,083 compared to a benefit of $396 in 2013. The effective rate for income taxes was 36.4% for 2014 compared to 34.7% for 2013. See Note 8, Income Taxes, to the consolidated financial statements for additional detail.
The table below outlines our consolidated financial condition as of December 31, 2014 and 2013.
All of the Company’s investments in fixed income securities are classified as available-for-sale and are reported at 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 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.
At December 31, 2014, approximately 68.4% of the Company’s fixed income securities had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. The Company holds cash and high-grade short-term assets which, along with fixed income securities, management believes are sufficient in amount for the payment of loss and loss adjustment expense reserves and other operating subsidiary obligations on a timely basis. The Company may not be able to liquidate its investments in the event that additional cash is required to meet obligations to its policyholders, however, the Company believes that the high-quality, liquid investments in the portfolios provide it with sufficient liquidity.
The length of time an individual investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent the Company from recapturing the principal investment. In the case of an individual investment with a maturity date where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, the Company would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell investments at a loss.
At December 31, 2014, the gross unrealized losses for fixed income securities amounted to $18, and there were no unrealized losses attributable to non-investment grade fixed income securities. At both December 31, 2014 and 2013, 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 that default risk did not exist at the time and, therefore, 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.
Ceded Unearned Premiums represents the unexpired portion of premiums paid to the Company’s reinsurers. Ceded Unearned Premiums are charged to income over the terms of the respective policies and the applicable terms of the Company’s reinsurance contracts with third parties. Ceded unearned premiums increased $435 to $1,561 as of December 31, 2014 from $1,126 as of December 31, 2013.
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 $1,166, or 60.6% to $3,091 at December 31, 2014 from $1,925 at December 31, 2013. DPAC as a percentage of the unearned premium reserve however, remained constant at 17.5% for both years.
Other assets increased $177, to $520 as of December 31, 2014 from $343 as of December 31, 2013. The major components and the change therein, are shown below.
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, IBNR loss events and the related estimated loss adjustment expenses net of amounts expected to be recovered from reinsurance. The table below separates our loss reserves and LAE between IBNR and case specific estimates as of December 31, 2014 and 2013.
See the “Critical Accounting Estimates and Assumptions” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information pertaining to the Company’s process of estimating the provision for loss and loss adjustment expense reserves.
The Company’s increase to unearned premium is directly related to the increase in direct written premiums for the year ended December 31, 2014.
Ceded reinsurance premiums payable increased $2,509 to $2,559 as of December 31, 2014 from $50 as of December 31, 2013 primarily as a result of the timing of payments due under our catastrophe reinsurance program. The fact that the timing of payments differed year over year did not impact earned or written premiums.
Agent commissions payable increased $69 to $323 as of December 31, 2014 from $254 as of December 31, 2013. 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.
Amounts due to related parties decreased $2,523 to $145 as of December 31, 2014 from $2,668 as of December 31, 2013 and represent amounts due to the Company’s former parent, KAI, or subsidiaries of KAI. Prior to the Company’s IPO on March 31, 2014, the Company operated as wholly owned subsidiary of KAI. As a result of this relationship, KAI 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. The $2,668 balance due as of December 31, 2013 represents the cumulative amount due to KAI from the Company’s inception in October 2012 up to and including December 31, 2013. The Company began making periodic payments to KAI in January 2014 and paid down this balance in full by April 2014 with proceeds from the Company’s IPO.
On February 24, 2015, the MSA was terminated via mutual consent from both parties under the terms of a Buyout Agreement. See Note 19 - Subsequent Events in the notes to financial statements in Item 15 of this Form 10-K for further information on the terms of the Buyout Agreement.
As of December 31, 2014, KFSI and its subsidiaries retained a 16.9% ownership interest in the Company’s outstanding common shares.
Current income taxes payable was $262 as of December 31, 2014 representing the estimate of both the Company’s state and federal income taxes due for the year ended December 31, 2014, less estimated payments made during the calendar year. The Company had $0 income taxes payable as of December 31, 2013 as the Company incurred a net loss for the year then ended.
As of December 31, 2014, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.
The table below shows the changes to shareholders’ equity for the two years ending December 31, 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, capital-raising transactions, investment maturities and income and other returns received on investments. 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 Company’s subsidiaries fund their obligations primarily through capital contributions received from their parent, premium income, policy fee income, investment income and proceeds received from the maturity of the investments in their portfolios. As a holding company, the Company funds its obligations, which primarily consist of holding company operating expenses, from cash on hand as well as the receipt of dividends from MMI. Dividends paid by our insurance subsidiary, Maison are restricted by regulatory requirements in Maison’s state of domicile, Louisiana. Generally, the maximum amount of dividends that can be paid to shareholders of insurance companies with prior notice to the domiciliary state insurance commissioner is limited to the lesser of (i) 10% of a company’s statutory capital and surplus at the end of the previous year; or (ii) 100% of the company’s net income, excluding realized gains, for the previous year, plus a carry-forward of the previous second and third year net income, excluding realized gains, less dividends paid in the second and immediately preceding year.
As Maison had unassigned surplus of $1,613 as of December 31, 2014, it can pay dividends of up to $1,421 to the Company in 2015, subject to prior notice to the LDI.
For the year ended December 31, 2014, the net cash provided by operating activities as reported on our consolidated statement of cash flows was $12,905. The source of cash was primarily from the collection of written policyholder premiums of $34,729 reduced by the payment of ceded reinsurance premiums of $5,425, reduced by 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 and the payment of U.S. Federal and State of Louisiana income taxes of $1,512. The net cash used by investing activities as reported on our consolidated statements of cash flows was $12,534, primarily from the net purchases of fixed maturities of $10,213. The 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. As a result of the foregoing, our net increase in cash and cash equivalents during 2014 was $38,632.
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2014 and 2013
We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. as of December 31, 2014 and 2013, 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 Managers, Inc. serves as the Company’s management services subsidiary, known as a managing general agency. MMI earns commissions and fees for providing policy administration, marketing, reinsurance contract negotiation, and accounting and analytical services. Both Maison and MMI are licensed by and subject to the regulatory oversight of the Louisiana Department of Insurance (“LDI”).
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain amounts in the prior year’s consolidated financial statements and notes have been reclassified to conform to the current year presentation. Such reclassifications had no impact on previously reported net loss or total shareholders’ equity.
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, deferred policy acquisition costs and stock-based compensation expense.
Investments in fixed income securities are classified as available-for-sale and reported at 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.
Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value due to their short-term nature.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment. Impairment is charged to the statement of operations if the fair value of the instrument falls below its amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
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. Generally, accounts that are over 90 days old are written off to the allowance for credit losses.
For taxable periods ending on or prior to March 31, 2014, the Company is included in the U.S. consolidated federal income tax return of Kingsway America II Inc. and its eligible U.S. subsidiaries (“KAI Tax Group”). The method of allocating federal income taxes among the companies in the KAI Tax Group is subject to written agreement, approved by each company’s Board of Directors. The allocation is made primarily on a separate return basis, with current credit for any net operating losses or other items utilized in the consolidated federal income tax return. For taxable periods beginning after March 31, 2014, the Company intends to file its own U.S. consolidated federal income tax return.
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 life which range from seven years for furniture, 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.
Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, premiums receivable, and amounts due from reinsurers on losses incurred. The Company maintains its cash with two major U.S. domestic banking institutions. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At December 31, 2014 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.
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. See Note 10 for further information on the Company’s stock options issued.
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 13 for further information on the fair value of the Company’s financial instruments.
The Company operates in a single segment - property and casualty insurance.
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, 2014 and 2013 is as follows. All unrealized losses shown in the table below have been continuously held in loss positions for less than twelve months. There were 56 investments that were in unrealized loss positions as of December 31, 2014.
• considering the extent, and length of time during which the market value has been below cost;
• identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions;
• 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 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
• 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.
There were no realized gains or losses on the Company’s investments for the years ended December 31, 2014 and 2013.
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 2011 - 2013 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
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 profitability, as well as attract and retain persons of outstanding competence, and provide such persons with an opportunity to acquire an equity interest in the Company.
The Plan is administered by a committee appointed by the Board of Directors. All members of such committee must be non-employee directors and independent directors as defined in the Plan. Subject to the limitations set forth in the Plan, the committee has the authority to grant options and to determine the purchase price, term, and number of shares of the Company’s common stock to be covered by each option, and also to establish vesting schedules and other terms and conditions of the award.
The first issuance of options under the Plan occurred on February 28, 2014. Thus the Company had no option activity in prior years. Stock option information for the year ended December 31, 2014 is as follows.
In addition to those shares authorized for issuance under the Plan, 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. On June 19, 2014, the Company amended this option agreement to extend the expiration date from June 30, 2014 to March 15, 2015. As a result of this amendment, the Company recognized an incremental total of $5 in compensation expense for the year ended December 31, 2014. On March 12, 2015, the Company again amended this option agreement to extend the expiration date from March 15, 2015 to June 15, 2015, provided that Mr. Raucy is employed by the Company on the date of exercise.
A summary of the status of the Company’s non-vested employee stock options as of December 31, 2014, and changes during the year then ended is below.
Stock warrants issued, exercised and outstanding as of December 31, 2014 are as follows. The Company did not have warrants outstanding at any point prior to March 31, 2014.
The details of the Company’s warrants issued and outstanding are discussed in Note 11 - Shareholders’ Equity, 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, which included full exercise by the underwriters of their over-allotment option, 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.
On January 23, 2014, Fund Management Group LLC, an entity of which the Company’s Chairman of the Board, Gordon G. Pratt, is a Managing Member and controlling equity holder, invested $2,000 in the Company in exchange for 80,000 Series A Convertible Preferred Shares (“Preferred Shares”) of the Company. The Preferred Shares were non-voting and ranked senior to all classes of capital stock of the Company. The Preferred Shares did not pay any dividends. At the time of the issuance, the value of the common stock into which the Preferred Shares is convertible had a fair value greater than the $2,000 proceeds received upon issuance. Accordingly, the Company recorded a beneficial conversion feature on the Preferred Shares of $500 during the first quarter of 2014, which was equal to the amount by which the estimated fair value of the common stock issuable upon the conversion of the issued Preferred Shares exceeded the proceeds from the issuance.
The Preferred Shares were converted into shares of common stock and warrants on March 31, 2014, the effective date of the IPO. The Preferred 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.
The common stock issued to Fund Management Group LLC upon conversion of the Preferred 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.
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, 2014 and 2013.
The FASB has issued guidance that defines fair value as the exchange price that would be received for and asset (or paid to transfer a liability) in the principal, or most advantageous market in an orderly transaction between market participants. This guidance also establishes a fair value hierarchy that requires and entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurements, as follows:
• 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.
Assets measured at fair value as of December 31, 2014 and 2013 in accordance with this guidance are as follows. The Company did not hold any liabilities on either reporting date which were measured under this guidance.
Amounts due to related parties represent amounts due to the Company’s former parent, KAI, or subsidiaries of KAI. Prior to the Company’s IPO on March 31, 2014, the Company operated as wholly owned subsidiary of KAI. As a result of this relationship, KAI 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. Approximately $2,668 due as of December 31, 2013 represents the cumulative amount due to KAI from the Company’s inception in October 2012 up to and including December 31, 2013. The Company began making periodic payments to KAI in January 2014 and paid down this balance in full by April 2014 with proceeds from the Company’s IPO.
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 for 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. The Company has not issued any shares to date under the PSGA.
On March 31, 2014, the Company entered into a Transition Services Agreement (“TSA”) with Kingsway Financial Services, Inc. (“KFSI”), the parent company of KAI. The TSA provides for temporary access to necessary services and resources during which the Company is reliant on KFSI, including resources and services related to accounting and reporting, accounts payable, cash management, taxes, compliance with the Sarbanes-Oxley Act of 2002, payroll processing and benefits administration, information technology systems and support, human resource function, and external audit. The charges for the transition services are intended to allow KFSI to fully recover the costs directly associated with providing the services, plus all out-of-pocket costs and expenses. The charges of each of the transition services generally will be based on either a pre-determined flat fee or an allocation of the cost incurred by KFSI (or an affiliate or subsidiary thereof) for providing the service, including certain fees and expenses of third-party service providers. The TSA stipulates transition deadlines for all the services provided under it, by which time the Company is expected to establish its own independent functions for such services. As of December 31, 2014, $97 was due to KFSI under the terms of the TSA. During the fourth quarter of 2014, the Company began the process of bringing the necessary resources in-house in order to reduce its reliance on KFSI and the services provided under the TSA. This process was substantially completed as of December 31, 2014 and as such, the Company anticipates services provided under the TSA to cease beginning in the first quarter of 2015.
The Company’s insurance subsidiary, Maison prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by the LDI. Prescribed statutory accounting practices include state laws, rules and regulations as well as accounting practices and rules as outlined in a variety of publications of the National Association of Insurance Commissioners (“NAIC”). Permitted statutory accounting practices encompass all accounting practices that are not prescribed, but instead have been specifically requested by an insurer and allowed by the state in which the insurer is domiciled (in Maison’s case, Louisiana). Permitted practices may differ from state to state, company to company within a state, and may change in the future. In converting from statutory accounting basis to U.S. GAAP, typical adjustments include the deferral of acquisition costs (which are all charged to operations as incurred on a statutory basis), the inclusion of statutorily non-admitted assets on the balance sheet, the inclusion of net unrealized holding gains or losses related to investments included on the balance sheet, as well as the inclusion of changes in deferred tax assets and liabilities in the statement of operations.
As of December 31, 2014, Maison’s authorized control level RBC was $3,536, and its reported surplus was $14,213; as a result, our surplus was considered to be in the “no action” level by the LDI.
As Maison had unassigned surplus of $1,613 as of December 31, 2014, it can pay dividends of up to $1,421 to the Company in 2015, subject to prior notice to the LDI. As of December 31, 2014, Maison had not paid any dividends to its shareholders.
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 either year ended December 31, 2014 or 2013.
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 each of the years ended December 31, 2014 and 2013, the Company’s matching contributions made under KFSI’s plan were less than ten thousand dollars.
On January 2, 2015 the Company completed its acquisition of ClaimCor, LLC (“ClaimCor”), a claims and underwriting technical solutions company. The Company purchased 100% of the membership interest in ClaimCor which will complement the Company’s strategic plan and growth objectives.
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.
Unless redeemed earlier by the Company, with the written consent of the holders of the majority of the Preferred Shares then outstanding, 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 outstanding plus all accrued and unpaid dividends on such shares. The Company has the option to redeem the Preferred Shares prior to the Mandatory Redemption Date immediately prior to the consummation of any change in control of the Company that may occur.
Both the Preferred Shares and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.