April 20, 2018
Dear Fellow Shareholders:
1347 Property Insurance Holdings wrapped up 2017 on a high note as total policies in force passed the
50,000 mark, hitting approximately 50,700 as of year-end. Our accelerating growth in policies was driven by
our business in Texas while our entry into Florida, beginning with our participation in the December
depopulation by Florida Citizens’, provided a nice step-function increase of approximately 3,500 to our policy
count. We expect to build on that momentum in Florida by initially offering wind-only policies in the voluntary
market in targeted areas.
Our longer-term goal is to introduce a wider array of products and we plan to do so in a judicious
manner that best affords us the opportunity to earn reasonable returns without taking undue risk. We are very
optimistic about our prospects in the state, especially given recent pricing trends toward a hardening market.
Reflecting on 2017, I find our message from a year ago held true again. We have consistently
maintained the message that our plan in designing the business was to limit our downside risk during periods of
heightened weather activity, and catastrophe storms in particular, while also positioning the company to achieve
high ROEs during periods of benign weather activity. During 2017 we worked aggressively to service
policyholder claims during two catastrophe events, the most notable which was Hurricane Harvey, which hit
southern Texas in August. I am proud of our response to these events as our claims servicing was markedly
better than our competitors, based on our sampling of their call center response, and, I believe, positions us well
to continue winning new business as the independent agents in our network recognize the value we offer.
Our bottom line results in 2017 saw us earn 5 cents per share with an increase of 4 cents per share in
book value, just as we did last year. As with last year, we achieved this profitable result despite experiencing
two catastrophe events which negatively impacted two of our quarters. During the two quarters in which
weather activity was light, we were able to post outstanding bottom-line results, including record pre-tax income
for the Company of $3.0 million in the fourth quarter.
In Louisiana, we are experiencing heavy, rate-focused competition. We have held off pursuing rate
increases in Louisiana as long as possible, but the economics of the individual policies we write are such that
we felt it necessary to implement a 10% rate increase in that market in 2017. Despite the rate differential versus
some peers, we are holding onto our business well thanks to the strong reputation we have built with
homeowners in the state. Our market share is now over 2%, which is the low end of the target range we
identified when we began our operations in Louisiana in 2014.
Financial Review for the Fiscal Year Ended December 31, 2017
The Company’s total gross premiums written for the year ended December 31, 2017 increased 41.6%
to $72.7 million from $51.3 million in 2016. The in-force policy count increased approximately 42% year over
year and totaled 50,671, versus 35,612 at December 31, 2016.
The Company’s combined ratio for the year ended December 31, 2017 was 104.2%, down slightly
compared to 105.6% in the prior year. The main items impacting our combined ratio were an improved net loss
ratio offset somewhat by a higher net expense ratio. Net loss ratio improved 8.6 points as catastrophe losses
were 13.2 points lower, while non-catastrophe weather-related losses were up 6.4 points. Prior period
development contributed 6.2 points to our lower net loss ratio, versus 1.2 points last year. Our net expense ratio
was up 7.2 points as we invested in both internal and external resources to support our growth in Texas and
entry into Florida, and ultimately we see a favorable expense ratio trend as our business continues to scale.
As noted earlier, our fourth quarter pre-tax income of $3.0 million was a company record, allowing us
to enter 2018 on a high note. Our bottom-line GAAP Net Income and EPS were negatively impacted as the
company incurred a one-time charge due to the revaluation of deferred tax assets. Like many other public
companies, this charge was driven by the new Federal Tax legislation. Going forward, this will allow us to
retain a greater proportion of our income for our shareholders as our corporate tax rate will be lower.
Conclusion
2017 was a very solid year for the Company and we are very excited about our prospects for 2018. One
of the benefits of diversification that we have long espoused is that it would allow the Company to continue to
grow, even if one of its target markets was experiencing subdued conditions. Our business in Louisiana is very
sound although not in growth mode. However, our business in Texas is growing robustly and with our entry
into Florida, we should have two states in growth mode with the net result that our overall business is posting
excellent growth. That diversification is something we also expect to benefit the Company as we work to renew
our reinsurance program this spring and summer.
On behalf of 1347 Property Insurance Holdings’ senior management team, our Board of Directors and
associates, I thank you for your continued support.
Sincerely,
Larry Swets Jr.
Chairman
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 001-36366
1347 Property Insurance Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
1511 N. Westshore Blvd., Suite 870, Tampa, FL
(Address of principal executive offices)
46-1119100
(I.R.S Employer Identification No.)
33607
(Zip Code)
(813)-579-6213
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001 per share
8.00% Cumulative Preferred Stock, Series A,
par value $25.00 per share
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
[ ]
Accelerated Filer [ ]
Non-Accelerated Filer
[ ] (do not check if smaller reporting company)
Smaller Reporting Company [X]
Emerging Growth Company
[X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Registrant’s common stock held by non-affiliates was $24,967,545 on June 30, 2017, computed on the
basis of the closing sale price of the Registrant’s common stock on that date.
As of March 26, 2018, the total number of common shares outstanding of the Registrant’s common stock was 5,984,766.
Certain sections of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders, which is expected to be filed with the
Securities and Exchange Commission no later than April 30, 2018, are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
1347 PROPERTY INSURANCE HOLDINGS, INC.
Table of Contents
PART I .....................................................................................................................................................................
ITEM 1. BUSINESS ...........................................................................................................................................
ITEM 1A. RISK FACTORS ..............................................................................................................................
ITEM 1B. UNRESOLVED STAFF COMMENTS ..........................................................................................
ITEM 2. PROPERTIES .....................................................................................................................................
ITEM 3. LEGAL PROCEEDINGS ..................................................................................................................
ITEM 4. MINE SAFETY DISCLOSURES ......................................................................................................
PART II ...................................................................................................................................................................
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ........................................................
ITEM 6. SELECTED FINANCIAL DATA .....................................................................................................
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..........................................................................................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ..............
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................................................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...................................................................................................................
ITEM 9A. CONTROLS AND PROCEDURES ...............................................................................................
ITEM 9B. OTHER INFORMATION ...............................................................................................................
PART III ..................................................................................................................................................................
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE ...................
ITEM 11. EXECUTIVE COMPENSATION ...................................................................................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED
STOCKHOLDER MATTERS ..........................................................................................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ..............................................................................................................................................
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ................................................................
PART IV ..................................................................................................................................................................
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .....................................................
ITEM 16. FORM 10-K SUMMARY .................................................................................................................
SIGNATURES ....................................................................................................................................................
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1347 PROPERTY INSURANCE HOLDINGS, INC.
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These statements are therefore entitled to the protection of the safe harbor provisions of
these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,”
“budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “indicate,”
“intend,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,”
“seek,” “should,” “target,” “will,” “would,” “will be,” “will continue,” “will likely result” or the negative thereof or other
variations thereon or comparable terminology. We have based these forward-looking statements on our current
expectations, assumptions, estimates, and projections. While we believe these to be reasonable, such forward-looking
statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control.
These and other important factors may cause our actual results, performance, or achievements to differ materially from any
future results, performance or achievements expressed or implied by these forward-looking statements. Management
cautions that the forward-looking statements in this Annual Report on Form 10-K are not guarantees of future performance,
and we cannot assume that such statements will be realized or the forward-looking events and circumstances will occur.
Factors that might cause such a difference include, without limitation: our limited operating history as a publicly traded
company; our ability to obtain market share; our ability to access capital; changes in economic, business and industry
conditions; legal, regulatory and tax developments; our ability to comply with regulations imposed by the states of
Louisiana, Texas and Florida and the other states where we may do business in the future; our insurance subsidiary, Maison
Insurance Company’s ability to meet minimum capital and surplus requirements; our ability to participate in take-out
programs; our ability to expand our business to other states; the level of demand for our coverage and the incidence of
catastrophic events related to our coverage; our ability to compete with other insurance companies; inadequate loss and
loss adjustment expense reserves; effects of emerging claim and coverage issues; the failure of third party adjusters to
properly evaluate claims or the failure of our claims handling administrator to pay claims fairly; investment losses; climate
change and increasing occurrences of weather-related events; increased litigation in the insurance industry; non-availability
of reinsurance; our ability to recover amounts due from reinsurers; the accuracy of models used to predict future losses;
failure of risk mitigation strategies and/or loss limitation methods; Maison’s failure to maintain certain rating levels; our
ability to establish and maintain an effective system of internal controls; the impact of our status as an “emerging growth
company”; conflicts of interest between us and KFSI and its affiliates or between us and FGI and its affiliates; different
interests of controlling stockholders; failure of our information technology systems, data breaches and cyber-attacks; the
ability of our third-party policy administrator to properly handle our policy administration process; the requirements of
being a public company; the success of our acquisition strategy; our ability to develop and implement new technologies;
our ability to accurately price the risks that we underwrite; the amount of operating resources necessary to develop future
new insurance policies; assumptions related to the rate at which our existing policies will renew; our status as an insurance
holding company; the ability of our subsidiaries to pay dividends to us; our ability to attract and retain qualified personnel,
including independent agents; the impact of tax reform; and restrictions imposed on our net operating loss carryforwards.
Our expectations may not be realized. If one of these risks or uncertainties materialize, or if our underlying
assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. You are
cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included or
incorporated by reference to the Form 10-K are made only as of the date hereof and do not necessarily reflect our outlook
at any other point time. We do not undertake and specifically decline any obligation to update any such statements or to
publicly announce the results of any revisions to any such statements to reflect new information, future events or
developments.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 1.
BUSINESS
Overview
1347 Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is an insurance holding company
specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida.
These markets are characterized as regions where larger, national insurers have reduced their market share in favor of other,
less catastrophe exposed markets. These markets are also characterized by state-administered residual insurers controlling
large market shares. These unique markets can trace their roots to Hurricane Andrew, after which larger national carriers
limited their capital allocation and approaches to property risk aggregation. These trends accelerated again after back to
back exceptionally active hurricane seasons in 2004 and 2005. However, the decade following Hurricane Katrina in 2005,
had relatively few losses arising from tropical storm activity which led to declines in reinsurance pricing and increases in
its availability. We were incorporated on October 2, 2012 in the State of Delaware to take advantage of these favorable
dynamics where premium could be acquired relatively more quickly and under less competitive pressure than in other
property insurance markets and reinsurance, a significant expense for primary insurers, was declining from record high
levels. We execute on this opportunity via a management team with expertise in the critical facets of our business:
underwriting, claims, reinsurance, and operations. Within our three-state market, we seek to sell our products in territories
with the highest rate per exposure and the least complexity in terms of risk. Further, we seek to leverage our increasingly
geographically diverse insurance portfolio to gain efficiencies with respect to reinsurance. As of December 31, 2017 we
covered risks under approximately 51,000 policies, an increase of almost 48% from one year prior.
On November 19, 2013, we changed our legal name from Maison Insurance Holdings, Inc. to 1347 Property
Insurance Holdings, Inc., and on March 31, 2014, we completed an initial public offering of our common stock. Prior to
March 31, 2014, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned
subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned holding company based in Canada. As of
December 31, 2017, KFSI and its affiliates owned approximately 8.3% of our outstanding shares of common stock and
warrants and performance shares to acquire approximately an additional 23.9% of our outstanding shares of common stock.
In addition, as of December 31, 2017, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned
approximately 36.0% of our outstanding shares of common stock. D. Kyle Cerminara, a member of our Board of Directors,
serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, a member of our Board of
Directors, serves as President, Co-Founder and Partner of FGI.
We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or
“MMI”, and ClaimCor, LLC, or “ClaimCor”.
Through Maison, we began providing property and casualty insurance to individuals in Louisiana in December
2012. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis. Our
current insurance offerings in Louisiana and Texas include homeowners insurance, manufactured home insurance and
dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new
policies through a network of independent insurance agencies. We refer to the policies we write through independent
agencies as voluntary policies. We also wrote commercial business in Texas through a quota share agreement with
Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only
exposures on certain churches and related structures Brotherhood insures throughout the State of Texas.
In addition to the voluntary policies that Maison writes, we have participated in the last six rounds of take-outs
from Louisiana Citizens Property Insurance Corporation, or “LA Citizens”, occurring on December 1st of each year, as
well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association, or “TWIA”, which
occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, have the
opportunity to assume insurance policies written by LA Citizens and TWIA. The majority of policies that we have obtained
through LA Citizens as well as all of the policies we have obtained through TWIA cover losses arising only from wind and
hail. Prior to our take-out, some of the LA Citizens and TWIA policyholders may not have been able to obtain such
coverage from any other marketplace.
On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation, or
“FOIR”, which authorized Maison to write personal lines insurance in Florida. Pursuant to the Consent Order issued,
Maison has agreed to comply with certain requirements as outlined by the FOIR until Maison can demonstrate three
consecutive years of statutory net income following our admission into Florida as evidenced by its Annual Statement filed
with the National Association of Insurance Commissioners. To comply with a requirement of the consent order that Maison
have at least $35 million in capital and surplus, and maintain an RBC ratio of 300% or more, on March 31, 2017, Maison
received a capital contribution from PIH in the amount of $16 million.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
On September 29, 2017, Maison received authorization from the FOIR to assume personal lines policies from
Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison
filed with FL Citizens on August 18, 2017. Accordingly, on December 19, 2017, Maison entered the Florida market via
the assumption of approximately $5.7 million in premium on approximately 3,500 policies from FL Citizens.
MMI serves as our management services subsidiary, known as a managing general agency, and provides
underwriting, policy administration, claims administration, marketing, accounting and other management services to
Maison. MMI contracts primarily with independent agencies for policy sales and services, and also contracts with an
independent third-party for policy administration services. As a managing general agency, MMI is licensed by, and subject
to, the regulatory oversight of the LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison
writes, as well as a per policy fee which ranges from $0-$75 for providing policy administration, marketing, reinsurance
contract negotiation, and accounting and analytical services.
On January 2, 2015, we completed our acquisition of 100% of the membership interests of ClaimCor, a claims
and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor,
and also through various third-party claims adjusting companies during times of high volume, so that we may provide
responsive claims handling service when catastrophe events occur which impact many of our policyholders. We have the
ultimate authority over the claims handling process, while the agencies that we appoint have no authority to settle our
claims or otherwise exercise control over the claims process.
Business Strategy
Our primary goal is to continue to expand our property and casualty writings. Our goal for Louisiana, the first
state where we began to offer insurance, has been to establish a market share of 2% to 3%. We plan to expand our writings
in Louisiana and other states through:
●
●
Increasing our number of voluntary policies. We believe that ease of use enhancements for our web-
based agent quoting portal as well as refining our product offerings has positioned us to continue to
experience organic new policy growth through our independent agencies. Our goal is to continue to grow
through strategic relationships with agencies in the states where we currently provide insurance and also
potentially in new coastal markets in the United States. Our years of experience in coastal markets make
us qualified to manage agent expectations and provide superior support and service for our policyholders.
Increasing our book of business through the depopulation of policies from FL Citizens, LA Citizens, and
TWIA. On December 19, 2017, we participated in the depopulation of wind/hail-only policies from FL
Citizens, which has allowed us to quickly establish a significant presence in the State of Florida. We plan
to continue to focus on wind/hail-only and other specialty products in the states of Florida, Louisiana,
and Texas where we have extensive management experience.
● Strategic acquisitions. We intend to explore growth opportunities through strategic acquisitions in
coastal states, including Louisiana, Texas and Florida. We also plan to pursue complementary books of
business provided they meet our underwriting criteria. We will evaluate each opportunity based on
expected economic contribution to our results and support of our market expansion initiatives.
● Attracting and retaining high-quality agents. We intend to focus our marketing efforts on maintaining
and improving our relationships with highly productive independent agents, as well as on attracting new
high quality agents in areas with a substantial potential for profitable growth.
● Reducing our ratio of expenses to net premiums earned and using technology to increase our operating
efficiency. We are committed to improving our profitability by reducing expenses through enhanced
technologies and by increasing the number of policies that we write through the strategic deployment of
our capital. We currently outsource our policy administration and a portion of our claims handling
functions to third parties with our dedicated oversight and direction, which we believe results in increased
service and lower expense and loss ratios.
The Company will continue to evaluate its existing book of business with an emphasis on risk-adjusted returns
and rate adequacy. Accordingly, we have terminated our quota-share agreement with Brotherhood Mutual Insurance
Company effective January 1, 2018.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Competition
We operate in a highly competitive market and face competition from national and regional insurance companies,
many of whom are larger and have greater financial and other resources and offer more diversified insurance coverage.
Our competitors include companies which market their products through independent agents, as well as companies with
captive agents. Large national companies may have certain competitive advantages over regional companies such as ours,
including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs.
We may also face competition from new entrants in our niche markets. In some cases, these companies may price
their products below ours due to their interest in quickly growing their business. Although our pricing is inevitably
influenced to some degree by that of our competitors, we believe that it is generally not in our best interest to compete
solely on price. We also compete on the basis of underwriting criteria, our distribution network and superior policy,
underwriting and claims service to our agents and insureds.
Some of the national and regional companies which compete with us include ASI Lloyds, American Integrity
Insurance Company, Lighthouse Property Insurance Corporation, United Property & Casualty, First Community Insurance
Company, Southern Fidelity Insurance, Safepoint Insurance Company, Imperial F&C Insurance Company, Americas
Insurance Company, Access Home Insurance Company, Family Security Insurance Company, Gulfstream Property and
Casualty Insurance Company, Federated National Insurance Company, and Centauri Specialty Insurance Company.
Claims Administration
Claims administration and adjusting involves the handling of routine “non-catastrophic” as well as catastrophic
claims. In the event of a hurricane or other catastrophic claim, our claims volume would increase significantly. Rather than
increase the size of our staff in anticipation of such an event, we believe that outsourcing a portion of our claims handling
improves our operational efficiency because an appropriately selected third party will have the resources to adjust the
catastrophe related claims cost effectively and with the level of service we endeavor to provide for our policyholders.
Accordingly, we have outsourced our claims adjusting program to certain third party adjusters with experience in Texas,
Louisiana and Florida. Under the terms of the service contract between Maison and MMI, MMI handles the claims
administration for both catastrophic and non-catastrophic insurable events. In handling the claims administration, the
examiner for MMI reviews all claims and loss reports, and if warranted, investigates such claims and losses.
Field adjusting is outsourced to our wholly-owned subsidiary, ClaimCor, as well as third-party service providers,
who, subject to company guidance and oversight, either settle or contest the claims. Approval for payment of a claim is
given by MMI after careful review of the field adjuster’s report. We pay adjusters based on a pre-determined fee schedule.
Although we are ultimately responsible for paying the claims made by our policyholders, we believe that outsourcing our
claims handling program while maintaining an oversight function is an efficient mechanism for handling individual matters.
Furthermore, by delivering responsive service in a challenging situation, we optimize the relationship between insured and
insurer.
Reinsurance
Maison follows the industry practice of reinsuring a portion of its risk. When an insurance company purchases
reinsurance, it transfers or “cedes” all or a portion of its exposure on insurance underwritten by it to another insurer-the
“reinsurer.” Although reinsurance is intended to reduce an insurance company’s risk, the ceding of insurance does not
legally discharge the insurance company from its primary liability for the full obligation of its policies. If the reinsurer fails
to meet its obligations under the reinsurance agreement, the ceding company is still required to pay the insured for the loss.
Maison and its reinsurance broker are selective in choosing reinsurers and they consider various factors, including, but not
limited to, the financial stability of the reinsurers, the reinsurers’ history of responding to claims, as well as the reinsurer’s
overall reputation in making such determinations.
From year-to-year, both the availability of reinsurance and the costs associated with the acquisition of reinsurance
will vary. These fluctuations are not subject to our control and may limit our insurance subsidiary’s ability to purchase
adequate coverage.
In order to limit the credit risk associated with amounts which may become due from our reinsurers, Maison
predominantly uses several different reinsurers, which have an A.M. Best Rating of A- (Excellent) or better. Absent such
rating, we have required the reinsurers to place collateral on deposit with an independent financial institution under a trust
agreement for our benefit. A list of some of the reinsurance companies which we currently use includes Allianz Risk
Transfer, AXIS Specialty Limited, Everest Re, DaVinci Re, Renaissance Re, Odyssey Re, Gen Re, as well as various
Lloyd’s of London participating syndicates.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
The Company’s excess of loss reinsurance treaties are based upon a treaty year beginning on June 1st of each year
and expiring on May 31st of the following year. Thus, the financial statements for the years ended December 31, 2017 and
2016 contain premiums ceded under three separate excess of loss treaties. Under both the Company’s 2016/2017 and
2015/2016 excess of loss treaties, for each catastrophic event occurring within a 144-hour period, the Company receives
reinsurance recoveries of up to $170 million in excess of a retention of $5 million per event. The Company had also
procured another layer of reinsurance protection that can be used for any event above $175 million, up to a maximum
recovery of $25 million. This $25 million second layer of coverage applies in total to all events occurring during the
respective treaty year.
Investments
We hold an investment portfolio comprised primarily of fixed income securities issued by the U.S. government,
government agencies and high quality corporate issuers. The fixed income portfolio is managed by a third-party investment
management firm in accordance with the investment policies and guidelines approved by the investment committee of the
Company’s Board of Directors. These guidelines stress the preservation of capital, market liquidity and the diversification
of risk and are reviewed on a regular basis in order to ensure that our investment policy evolves in response to changes in
the financial market. Additionally, the investment committee comprised of a portion of the Company’s directors is in place
to identify, evaluate and approve suitable investment opportunities for the Company. This has resulted in a number of
equity investments managed by the committee that represent approximately 4.9% of the Company’s total investment
portfolio as of December 31, 2017. Investments held by the Company’s insurance subsidiary must also comply with
applicable domiciliary state regulations that prescribe the type, quality and concentration of investments.
Technology
Our business depends upon the use, development and implementation of integrated technology systems. These
systems enable us to provide a high level of service to agents and policyholders by: processing business in a timely and
efficient manner; communicating and sharing data with agents; providing a variety of methods for the payment of
premiums; and allowing for the accumulation and analysis of information for the management of our insurance subsidiary.
We believe the availability and use of these technology systems has resulted in improved service to agents and customers
and increased efficiencies in processing the business of Maison and resulted in lower operating costs. We contract with
unaffiliated, independent third parties for many of our technology systems, including the system we use to bind new policies
and renew existing policies, handle claims, analyze data with respect to the premiums we collect and the losses we incur,
and other policy administration processes. Any failure on the part of such third party to properly handle our technology
systems could negatively affect our operations.
Regulation
We are subject to the laws and regulations in Louisiana, Florida and Texas, and will be subject to the regulations
of any other states in which we may seek to conduct business in the future. In these states, it is the duty of each respective
department of insurance to administer the provisions of the insurance code in that state. The purpose of each state’s
insurance code is to regulate the insurance industry in all of its phases, including, but not limited to the following: licensing
of insurers and producers, regulation of investments and solvency, review and approval of forms and rates, and market
conduct. Furthermore, as Maison is domiciled in the State of Louisiana, the LDI conducts periodic examinations of the
financial condition and market conduct of Maison and requires Maison to file financial and other reports on a quarterly and
annual basis.
Regulation of the Payment of Dividends and other Transactions between Affiliates
Dividends paid by Maison are restricted by the Louisiana Insurance Code. Dividends can only be paid if Maison’s
paid-in capital and surplus exceed the minimum required by the Louisiana Insurance Code. Any dividend or distribution
(that when aggregated with any other dividends or distributions made within the preceding twelve months) which 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. Furthermore, pursuant to the Consent Order issued to us as a condition to our doing business in Florida,
Maison is restricted from issuing any dividends to its shareholder without receiving prior approval from the FOIR. As of
December 31, 2017, Maison has not paid any dividends to its sole shareholder, PIH.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Our other subsidiary companies collect the majority of their revenue through their affiliation with Maison. Our
subsidiary company MMI, earns commission income from Maison for underwriting, policy administration, claims
handling, and other services provided to Maison. Our subsidiary company, ClaimCor, earns claims adjusting income for
adjusting certain of the claims of Maison’s policyholders. While dividend payments from our other subsidiaries are not
restricted under insurance law, the underlying contracts between Maison and our other subsidiary companies are regulated
by, and subject to the approval of, insurance regulators.
Maison is subject to state laws and regulations regarding approval of rates and rules with respect to its insurance
policies. Each state’s respective insurance department has the authority to approve insurance rates or rate changes for the
lines of property and casualty insurance which Maison writes. Maison’s ability to change rates and the relative timing of
the rate making process are dependent upon each state’s statutory and regulatory requirements.
Requirements for Exiting Geographic Markets and/or Canceling or Non-renewing Policies
Maison is subject to Florida, Louisiana and Texas state laws and regulations which may restrict Maison’s timing
or ability to either discontinue or substantially reduce its writings in the states in which it operates. These laws and
regulations limit the reasons for cancellation or non-renewal, typically require prior notice, and in some instances require
prior approval from the respective regulatory agency. For example, in Louisiana, no insurer may cancel or fail to renew a
homeowner’s policy of insurance or increase the policy deductible that has been in effect and renewed for more than three
years unless the change is based upon non-payment of premium, fraud of the insured, a material change in the risk being
insured, two or more claims within a period of three years, or if continuance of such policy endangers the solvency of the
insurer.
Risk of Assessment by Florida, Louisiana and Texas
Maison is a member of the Louisiana Insurance Guaranty Association as a condition of its authority to transact
insurance in Louisiana and is subject to assessment as set forth in the Louisiana Insurance Code.
Maison is also required to participate, as a condition of its authority to transact insurance in Louisiana, in the
residual insurance market programs operated by Louisiana Citizens Property Insurance Corporation and designated as the
Coastal Plan and the Fair Plan. Maison is subject to assessment as set forth in the Louisiana Insurance Code for its
participation in the Coastal Plan and its participation in the Fair Plan.
As a property insurer licensed in Texas, Maison is a member of TWIA, which provides wind and hail coverage to
coastal risks unable to procure coverage in the voluntary market. Maison may become subject to assessment from TWIA
should a major loss event deplete TWIA’s available loss reserves and reinsurance coverage. Maison is also a member
insurer of the Texas Property and Casualty Insurance Guaranty Association and the FAIR Plan and is subject to assessment
by each as set forth in the Texas Insurance Code.
As we have entered into the Florida market, Maison will be required to participate in the Florida Insurance
Guaranty Association (“FIGA”), the Florida Hurricane Catastrophe Fund (“FHCF”), and FL Citizens. FIGA services
claims of member insurance companies which have become insolvent and are ordered to be liquidated. In the event of an
insolvency, Maison may be subject to assessment from FIGA based upon the amount of premium Maison writes in Florida.
Similarly, as an admitted insurer in Florida, Maison is subject to assessment from the FHCF and FL Citizens based upon
the amount of premium Maison writes in Florida. While current regulations allow the Company to recover from
policyholders the amount of these assessments imposed upon the Company, the Company’s payment of the assessments
and recoveries may not offset each other in the same year.
Insurance Regulatory Information System
The National Association of Insurance Commissioners (“NAIC”) developed the Insurance Regulatory
Information System (“IRIS”) to help state regulators identify companies that may require special attention. Using IRIS,
financial examiners develop key financial ratios in order to assess the financial condition of insurance companies such as
Maison. Each ratio has an established “usual range” of results. A ratio which falls outside the usual range however, is not
considered a failing result, but instead may be viewed as part of the regulatory early monitoring system. In some cases, it
may not be unusual for financially sound companies to have several ratios with results outside of the usual range.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
For the year ended December 31, 2017, Maison had twelve of the thirteen IRIS ratio results within the usual range.
The only ratio with results that fell outside of the usual range was caused by Maison’s yield on investments being below
the lower end of the usual range (3%) due to the general low investment yields currently realized on the highly rated fixed
income securities we hold as part of our overall investment strategy.
Management does not anticipate regulatory action as a result of these IRIS ratio results.
Risk Based Capital Requirements
In the United States, a risk-based capital (“RBC”) formula is used by the NAIC to identify property and casualty
insurance companies that may not be adequately capitalized. Most states, including Louisiana, Texas and Florida, have
adopted the NAIC RBC requirements. In general, insurers reporting surplus with respect to policyholders below 200% of
the authorized control level, as defined by the NAIC, on December 31st of the previous year are subject to varying levels
of regulatory action, which may include discontinuation of operations. Furthermore, pursuant to the consent order
approving Maison’s admission into the State of Texas, Maison has agreed to maintain a RBC ratio of 300% or more, and
provide calculation of such ratio to the TDI on a periodic basis. As of December 31, 2017, Maison’s RBC ratio was 363%.
State Deposits
States routinely require deposits of assets for the protection of policyholders. As of December 31, 2017, Maison
held certificates of deposit with an estimated fair value of approximately $100,000 and $300,000 as a deposit with the LDI
and FOIR, respectively. Maison also held cash and investment securities with an estimated fair value of approximately
$1,988,000 as of December 31, 2017 as a deposit with the TDI.
Employees
As of December 31, 2017 we had thirty employees, twenty-one of whom work at our offices in Tampa, Florida,
five of whom work at our offices in Baton Rouge, Louisiana, three of whom work from Texas, and one of whom works
from Georgia. From time to time, we employ and supplement our staff with temporary employees and consultants. We are
not a party to any collective bargaining agreement and believe that relations with our employees are satisfactory. Each of
our employees has entered into confidentiality agreements with us.
Website
Our corporate website is www.1347pih.com.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 1A. RISK FACTORS
We may not have future opportunities to participate in take-out programs.
We were able to obtain policies from the last six annual LA Citizens take-outs occurring on December 1st of each
year from 2012 to 2017, from which we have approximately 12,000 policies in-force or approximately 24% of our total
direct and assumed policies as of December 31, 2017. Furthermore, we participated in our first depopulation from FL
Citizens on December 19, 2017, and the inaugural take-out of policies from TWIA on December 1, 2016. As of December
31, 2017 we have assumed 3,444 and 745 policies for the coverages of wind and hail only from FL Citizens and TWIA,
respectively. In the future, we may not be able to obtain the quantity or quality of policies currently obtained due to changes
in the take-out programs, our inability to meet take-out program participation requirements, or due to changes to the market
in general. Additionally, competitors could change their risk profile characteristics, and write these risks directly, which
would cause us to lose these policies. The loss of these policies could impact our ability to absorb fixed expenses with
lower volumes in the future.
A substantial portion of our in-force policies have been assumed from state-run insurers and cover losses arising only
from wind and hail, which creates a large concentration of our business in wind and hail only coverage and limits our
ability to implement our restrictive underwriting guidelines.
While both LA Citizens and FL Citizens write full peril protection policies in addition to wind and hail only
policies, the majority of policies that we have obtained through these insurers’ take-out programs cover losses arising only
from wind and hail. Furthermore, the policies which we have assumed from TWIA are wind and hail only policies, as
TWIA does not write full peril protection policies. Prior to our take-out, some of these LA Citizens, FL Citizens and TWIA
policyholders may not have been able to obtain such coverage from any other marketplace. Approximately 26% of our
total direct and assumed policies as of December 31, 2017 represent LA Citizens, FL Citizens and TWIA wind and hail
only policies. These exposures may subject us to greater risk from catastrophic events. While our voluntary independent
agency program includes various restrictive underwriting strategies, we are unable to implement these strategies to the
wind and hail only policies that are taken-out from LA and FL Citizens and TWIA. Pursuant to these depopulation
programs, we must offer a minimum number of renewals on any policy taken out under the program, thus limiting our
ability to implement some of our underwriting guidelines. Upon renewal of these policies, however, we analyze
replacement cost scenarios to ensure the appropriate amount of coverage is in effect. Our results may be negatively
impacted by these limitations.
We have a risk posed by the lack of geographic diversification and concentration of policyholders in Louisiana, Florida
and Texas.
As of December 31, 2017, we had covered risks on approximately 51,000 direct and assumed policies. Of these
policies, 34,500, or approximately 68% are in Louisiana, 12,800, or approximately 25%, are in Texas, while the remaining
3,400 policies, or 7% of policies, are in Florida. These three states have significant exposed coastline. According to the
Coastal Protection and Restoration Authority of Louisiana, over 2 million residents — approximately 47% of the state’s
population based on 2009 U.S. Census estimates — live in Louisiana’s coastal parishes.
Maison insures personal property located in 63 of the 64 parishes in Louisiana. As of December 31, 2017, these
policies are concentrated within these parishes, presented as a percentage of our total direct and assumed policies in all
states, as follows: Saint Tammany Parish, 9.8%, Jefferson Parish, 9.2%, and East Baton Rouge Parish, 5.8%. No other
parish in Louisiana or county in Texas or Florida individually has over 5.0% of our total direct and assumed policies as of
December 31, 2017. As of December 31, 2017, Maison has written or assumed policies in 156 of the 254 counties that
comprise the State of Texas, and in 28 of the 67 counties in Florida.
If we are not able to significantly expand to other states, we may risk higher reinsurance costs and greater loss
experience with storm activity occurring in Texas, Florida and Louisiana.
Our strategy to expand into other states, including Florida, may not succeed.
Our strategy for growth includes potentially entering into new states. This strategy could divert management’s
attention. We cannot predict whether we will be able to enter new states or whether applicable state regulators will grant
Maison a license to do business in such states. We cannot know if we will realize the anticipated benefits of operating in
new states or if there will be substantial unanticipated costs associated with such expansion. Any of these factors could
adversely affect our financial position and results of operations. Although we have received authorization from the FOIR
via a consent order to write personal lines business in Florida, the order stipulates that we maintain catastrophe reinsurance
at such levels as deemed appropriate by the FOIR. Should we not be able to comply with these regulations our expansion
into Florida may not succeed.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
We have exposure to unpredictable catastrophes, which may have a material adverse effect on our financial results if
they occur.
We offer full peril protection and wind/hail-only insurance policies that cover homeowners and owners of
manufactured homes, as well as dwelling fire policies for owners of property rented to others, for losses that result from,
among other things, catastrophes. We are therefore subject to claims arising out of catastrophes that may have a significant
effect on our business, results of operations, and/or financial condition. Catastrophes can be caused by various events,
including hurricanes, tropical storms, tornadoes, windstorms, earthquakes, hailstorms, explosions, flood, fire, and by man-
made events, such as terrorist attacks. The incidence and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and
the severity of the event. Our policyholders are currently concentrated in Louisiana, Florida and Texas. These states are
subject to adverse weather conditions such as hurricanes and tropical storms. For example, in late August 2017, Hurricane
Harvey made landfall in Louisiana and Texas, impacting many of our policyholders. This event primarily impacted our
Texas policyholders along with a relatively smaller number of Louisiana policyholders. We expect our total gross incurred
losses for Hurricane Harvey to be approximately $27,000,000, and expect to recover $22,000,000 from our reinsurers from
this event. Insurance companies are not permitted to reserve for catastrophes until such an event takes place. Therefore, a
severe catastrophe or series of catastrophes, could exceed our reinsurance protection and may have a material adverse
impact on our results of operations and/or financial condition.
Our results may fluctuate based on many factors, including cyclical changes in the insurance industry.
The insurance business has historically been a cyclical industry characterized by periods of intense price
competition due to excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase
in pricing and, thus, more favorable underwriting profits. An increase in premium levels is often offset over time by an
increasing supply of insurance capacity in the form of capital provided by new entrants and existing insurers, which may
cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy
terms and fewer opportunities to underwrite insurance risks and any of these factors could have a material adverse effect
on our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of
losses suffered by insureds and insurers may affect the cycles of the insurance business significantly. These factors may
cause the price of our common stock to be volatile.
We cannot predict whether market conditions will improve, remain constant or deteriorate. Negative market
conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If
we are not able to write insurance at appropriate rates, our ability to transact business would be materially and adversely
affected.
Increased competition could adversely impact our results and growth.
The property and casualty insurance industry is highly competitive. We compete not only with other stock
companies but also with mutual companies, underwriting organizations and alternative risk sharing mechanisms. Many of
our competitors have substantially greater resources and name recognition than us. While our principal competitors cannot
be easily classified, Maison considers its primary competing insurers to be: ASI Lloyds, American Integrity Insurance
Company, Lighthouse Property Insurance Corporation, United Property & Casualty, First Community Insurance Company,
Southern Fidelity Insurance, Safepoint Insurance Company, Imperial F&C Insurance Company, Americas Insurance
Company, Access Home Insurance Company, Family Security Insurance Company, Gulfstream Property and Casualty
Insurance Company, Federated National Insurance Company, and Centauri Specialty Insurance Company. As we write
both full-peril as well as wind/hail only personal lines insurance throughout the states of Texas, Florida, and Louisiana,
our principal lines of business are written by numerous other insurance companies. Competition for any one account may
come from very large national firms, smaller regional companies or companies that write insurance only in Florida,
Louisiana and/or Texas. We compete for business not only on the basis of price, but also on the basis of financial strength,
availability of coverage desired by customers, underwriting criteria and quality of service to our agents and insureds. We
may have difficulty in continuing to compete successfully on any of these bases in the future.
In addition, industry developments could further increase competition in our industry, including:
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an influx of new capital in the marketplace as existing companies attempt to expand their businesses and
new companies attempt to enter the insurance business as a result of better pricing and/or terms;
the creation or expansion of programs in which state-sponsored entities provide property insurance in
catastrophe-prone areas or other alternative market types of coverage;
changing practices caused by the Internet, which has led to greater competition in the insurance business;
changes to the regulatory climate in the states in which we operate; and
the passage of federal proposals for an optional federal charter that would allow some competing insurers
to operate under regulations different or less stringent than those applicable to our insurance subsidiary.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
These developments and others could make the property and casualty insurance marketplace more competitive.
If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely
affected.
If our actual losses from insureds exceed our loss reserves, our financial results would be adversely affected.
We record liabilities, which are referred to as reserves, for specific claims incurred and reported as well as reserves
for claims incurred but not reported. The estimates of losses for reported claims are established on a case-by-case basis.
Such estimates are based on our particular experience with the type of risk involved and our knowledge of the circumstances
surrounding each individual claim. Reserves for reported claims encapsulate our total estimate of the cost to settle the
claims, including investigation and defense of the claim, and may be adjusted for differences between costs as originally
estimated and the costs as re-estimated or incurred. Reserves for incurred but not reported claims are based on the estimated
ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past
experience adjusted for current trends and any other factors that would modify past experience. We use a variety of
statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic,
social and legal factors. Although management believes that amounts included in the consolidated financial statements for
loss and loss adjustment expense reserves are adequate, future changes in loss development, favorable or unfavorable, may
occur. Due to these uncertainties, the ultimate losses may vary materially from current loss reserves which could have a
material adverse effect on our future financial condition, results of operations and cash flows.
As of December 31, 2017, our net loss and loss adjustment expense reserves of $4.5 million were comprised of
incurred but not reported reserves of $2.4 million and known case reserves of $2.1 million.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues related to claims and coverage may emerge. These changes may have a material adverse effect on our
business by extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some
instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected
by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after
a contract is issued and/or renewed, and this may have a material adverse effect on our financial position and results of
operations.
The lack of availability of third party adjusters during periods of high claim frequency, or the failure of third party
adjusters to properly evaluate claims or the failure of our claims handling administrator to pay claims fairly could
adversely affect our business, financial results and capital requirements.
We have outsourced a portion of our claim adjusting function to third party adjusters and therefore rely on these
third party adjusters to accurately evaluate claims that are made under our policies. Many factors affect our ability to pay
claims accurately, including the training and experience of their claims representatives, the culture of their respective claims
organizations, the effectiveness of their management and their ability to develop or select and implement appropriate
procedures and systems to support their claims functions. In periods following catastrophic events, or during other periods
of high claims frequency, the availability of third party adjusters may be limited. This lack of availability may result in an
inability to pay our claims in a timely manner and damage our reputation in the marketplace.
Furthermore, MMI functions as our claims administrator and authorizes payment based on recommendations from
third party adjusters; any failure on the part of the third party adjusters to recommend payment on claims fairly could lead
to material litigation, or other extra-contractual liabilities, undermine our reputation in the marketplace, impair our image
and adversely affect our financial results.
If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our
financial results may suffer.
Our future growth may depend on our ability to expand the number of insurance policies we write, the kinds of
insurance products we offer and the geographic markets in which we do business, all balanced by the business risks we
choose to assume and cede. Our existing sources of funds include possible sales of our securities and our earnings from
operations and investments. Unexpected catastrophic events in our market areas, such as the hurricanes and other storms
experienced in Florida, Louisiana and Texas in recent years, may result in greater claims losses than anticipated, which
could require us to limit or halt our growth strategy in these and other coastal states we may enter while we deploy our
capital to pay these unanticipated claims, unless we are able to raise additional capital.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment
of our company’s capital and surplus, premiums and loss reserves in various investment vehicles.
A portion of our expected income is likely to be generated by the investment of our cash reserves in money market
funds, bonds, and other investment vehicles. The amount of income generated from these investments is a function of our
investment policy, available investment opportunities, and the amount of invested assets. If we experience larger than
expected losses, our invested assets may need to be liquidated in order to provide the cash needed to pay current claims,
which may result in lower investment income. We periodically review our investment policy in light of our then-current
circumstances, including liquidity needs, and available investment opportunities. Fluctuating interest rates and other
economic factors make it difficult to accurately estimate the amount of investment income that will actually be realized.
We may realize losses on our investments, which may have a material adverse impact on our results of operations and/or
financial condition.
We may experience financial exposure from climate change.
Our financial exposure from climate change is most notably associated with losses in connection with increasing
occurrences of weather-related events striking the states in which we insure risks. Our maximum reinsurance coverage
amount is determined by subjecting our homeowner exposures to statistical forecasting models that are designed to quantify
a catastrophic event in terms of the frequency of a storm occurring once in every 100 years. 100 years is used as a measure
of the relative size of a storm as compared to a storm expected to occur once every 250 years, which would be larger, or
conversely, a storm expected to occur once every 50 years, which would be smaller. We assess the appropriateness of the
level of reinsurance we purchase by giving consideration to our own risk appetite, the opinions of independent rating
agencies as well as the requirements of state regulators. Our amount of losses we retain (referred to as our deductible) in
connection with a catastrophic event is determined by market capacity, pricing conditions and surplus preservation.
Industry trends, such as increased litigation against the insurance industry and individual insurers, the willingness of
courts to expand covered causes of loss, rising jury awards, and the escalation of loss severity, may contribute to
increased costs and to the deterioration of the reserves of our insurance subsidiary.
The propensity of policyholders and third party claimants to litigate, the willingness of courts to expand causes of
loss and the size of awards may render the loss reserves of our insurance subsidiary inadequate for current and future losses,
which could have a material adverse effect on our financial position, results of operation and cash flows.
Our ability to compete in the property and casualty insurance industry and our ability to expand our business may be
negatively affected by the fact that we do not have a rating from A.M. Best.
We are not rated by A.M. Best, although we currently have a Financial Stability Rating (FSR) of ‘A’ Exceptional
from Demotech, Inc. We have never been reviewed by A.M. Best and do not intend to seek a rating from A.M. Best. Unlike
Demotech, A.M. Best may penalize companies that are highly leveraged, i.e. that utilize reinsurance to support premium
writings. We do not plan to give up revenues or efficiency of size as a means to qualify for an acceptable A.M. Best rating.
While our Demotech rating has proved satisfactory to date in attracting an acceptable amount of business from independent
agents, some independent agents are reluctant to do business with a company that is not rated by A.M. Best. As a result,
not having an A.M. Best rating may prevent us from expanding our business into certain independent agencies or limit our
access to credit from certain financial institutions, which may in turn limit our ability to compete with large, national
insurance companies and certain regional insurance companies.
An adverse rating from Demotech may negatively impact our ability to write new policies, renew desirable policies, or
obtain adequate reinsurance, which could harm our business.
Although our insurance subsidiary company currently has a Financial Stability Rating of ‘A’ Exceptional from
Demotech, Inc., the withdrawal of our rating could limit or prevent us from writing or renewing desirable insurance
policies, from competing with insurers who have higher ratings, or from obtaining adequate reinsurance. The withdrawal
or downgrade of our rating could have a material adverse effect on our results of operations and financial position because
our insurance policies may no longer be acceptable to the secondary marketplace or mortgage lenders. Furthermore, a
withdrawal or downgrade of our rating could prevent independent agencies from selling and servicing our insurance
policies.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
We rely on independent agents to write our insurance policies, and if we are not able to attract and retain independent
agents, our revenues would be negatively affected.
While we currently obtain some of our policies through the assumption of policies from TWIA and LA and FL
Citizens, we still require the cooperation and consent of our network of independent agents. We rely on these independent
agents to be the primary source for our property insurance policies. Many of our competitors also rely on independent
agents. As a result, we must compete with other insurers for independent agents’ business. Our competitors may offer a
greater variety of insurance products, lower premiums for insurance coverage or higher commissions to their agents. If our
products, pricing and commissions are not competitive, we may find it difficult to attract business from independent agents
to sell our products, or may receive less attractive business than our competitors. A material reduction in the amount of our
products that independent agents sell would adversely affect our revenues.
We face a risk of non-availability of reinsurance, which may have a material adverse effect on our ability to write
business and our results of operations and financial condition.
We use, and we expect to continue to use, reinsurance to help manage our exposure to catastrophic losses due to
various events, including hurricanes, windstorms, hailstorms, explosions, power outages, fire and man-made events. The
availability and cost of reinsurance are each subject to prevailing market conditions beyond our control which can affect
business volume and profitability. We may be unable to maintain our current reinsurance coverage, to obtain additional
reinsurance coverage in the event our current reinsurance coverage is exhausted by a catastrophic event, or to obtain other
reinsurance coverage in adequate amounts or at acceptable rates. Similar risks exist whether we are seeking to replace
coverage terminated during the applicable coverage period or to renew or replace coverage upon its expiration. Each of the
FOIR, LDI and TDI require that we maintain a minimum level of reinsurance coverage as a condition of writing insurance
in their jurisdictions. Should we not be able to maintain this coverage, these regulators may revoke our license to write
insurance. We can provide no assurance that we can obtain sufficient reinsurance to cover losses resulting from one or
more storms in the future, or that we can obtain such reinsurance in a timely or cost-effective manner. If we are unable to
renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase or, if
we are unwilling to accept an increase in net risk exposures, we would have to reduce the amount of risk we underwrite.
Either increasing our net exposure to risk or reducing the amount of risk we underwrite may cause a material adverse effect
on our results of operations and our financial condition.
We face a risk of non-collectability of reinsurance, which may have a material adverse effect on our business, results
of operations and/or financial condition.
Although reinsurers are liable to us to the extent of the reinsurance coverage we purchase, we remain primarily
liable as the direct insurer on all risks that we reinsure. Accordingly, our reinsurance agreements do not eliminate our
obligation to pay claims. As a result, we are subject to risk with respect to our ability to recover amounts due from
reinsurers, including the risks that: (a) our reinsurers may dispute some of our reinsurance claims based on contract terms,
and we may ultimately receive partial or no payment, or (b) the amount of losses that reinsurers incur related to worldwide
catastrophes may materially harm the financial condition of our reinsurers and cause them to default on their obligations.
While we will attempt to manage these risks through underwriting guidelines, collateral requirements, financial strength
ratings, credit reviews and other oversight mechanisms, our efforts may not be successful. Further, while we may require
collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions,
balances generally are not collateralized because it has not always been standard business practice to require security for
balances due. As a result, our exposure to credit risk may have a material adverse effect on our results of operations,
financial condition and cash flow.
We use actuarially driven catastrophe models to provide us with risk management guidelines.
As is common practice within the insurance industry, we run our exposures in an actuarially driven model that
uses past storm data to predict future loss of certain events reoccurring based upon the location and other data of our insured
properties. These models, which are provided by independent third parties, can produce wide ranging results within the
states we do business. We use these models along with the advice of our reinsurance intermediary to select the amount and
type of reinsurance to mitigate the loss of capital from catastrophic wind events. These models are used to develop future
theoretical loss scenarios, and there are risks that the amount of reinsurance purchased will be insufficient to cover the
ultimate catastrophic wind event. Furthermore, the probability of the occurrence of a catastrophic event may be larger than
that predicted by the models.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or
results of operations.
We utilize a number of strategies to mitigate our risk exposure including:
● utilizing restrictive underwriting criteria;
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carefully evaluating and monitoring the terms and conditions of our policies;
focusing on our risk aggregations by geographic zones; and
ceding insurance risk to reinsurance companies.
However, there are inherent limitations in all of these tactics. An event or series of events may result in loss levels
which could have a material adverse effect on our financial condition or results of operations.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial
condition or our results of operations.
Various provisions of our policies, such as limitations or exclusions from coverage which have been drafted to
limit our risks, may not be enforceable in the manner we intend. At the present time, we employ a variety of endorsements
to our policies that limit exposure to known risks, including but not limited to exclusions relating to flood coverage for
homes in close proximity to the coast line. In addition, the policies we issue contain conditions requiring the prompt
reporting of claims to us or to our claims handling administrator and our right to decline coverage in the event of a violation
of that condition. While our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate
known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or that
legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would increase
our loss experience, which could have a material adverse effect on our financial condition or results of operations.
Maison is subject to an independent third party rating agency and must maintain certain rating levels to continue to
write much of its current and future policies.
In the event that Maison fails to maintain an “A” rating given by a rating agency acceptable to both our insurance
agents and our insureds’ home lenders, it will be unable to continue to write much of its current and future insurance
policies. In order to maintain this rating, among several factors, Maison must maintain certain minimum capital and surplus.
The loss of such an acceptable rating may lead to a significant decline in our premium volume and adversely affect the
results of our operations. Demotech, Inc. affirmed our Financial Stability Rating of “A” on December 8, 2017. This
“Exceptional” rating continues as long as we continue to satisfy their requirements, including improving underwriting
results, reporting risk-based capital and other financial measures, submitting quarterly statutory financial statements within
45 days of the period end and submitting annual statutory financial statements within 60 days of the period end.
If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our
financial results accurately, which could have a material adverse effect on our business, financial condition and results
of operations.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can
produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated
frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation
of their internal controls and attestations of the effectiveness of internal controls by independent auditors. We currently
qualify as an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”), and a smaller
reporting company under the regulations of the Securities and Exchange Commission (the “SEC”). Both emerging growth
companies and smaller reporting companies are exempt from the requirement to include the auditor’s report of the
effectiveness of internal control over financial reporting and we will continue to be exempt until such time as we no longer
qualify as an emerging growth company or smaller reporting company. Regardless of our qualification status, we have
implemented substantial control systems and procedures in order to satisfy the reporting requirements under the Exchange
Act and applicable requirements of Nasdaq, among other items. Maintaining these internal controls is costly and may divert
management’s attention.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause
us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory
consequences, including sanctions by the SEC, or violations of Nasdaq’s listing rules. There also could be a negative
reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.
Confidence in the reliability of our financial statements also could suffer if we or our independent registered public
accounting firm were to report a material weakness in our internal controls over financial reporting. This may have a
material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the
price of our common stock.
While we currently qualify as an emerging growth company under the JOBS Act, and as a smaller reporting company
under SEC regulations, we cannot be certain if we take advantage of the reduced disclosure requirements applicable to
these companies that we will not make our common stock less attractive to investors. Once we lose emerging growth
and smaller reporting company status, the costs and demands placed upon our management are expected to increase.
The JOBS Act permits emerging growth companies and the SEC’s rules permit smaller reporting companies like
us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that
are not emerging growth or smaller reporting companies. As long as we qualify as an emerging growth or smaller reporting
company, we are permitted, and we intend to, omit the auditor’s attestation on internal control over financial reporting that
would otherwise be required by the Sarbanes-Oxley Act. We also take advantage of the exemption provided under the
JOBS Act from the requirements to submit say on pay, say on frequency, and say on golden parachute votes to our
stockholders and we will avail ourselves of reduced executive compensation disclosure that is already available to smaller
reporting companies. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take
advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of
the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the
adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
elected to take advantage of these benefits until we are no longer an emerging growth company or until we affirmatively
and irrevocably opt out of this exemption. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards.
We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year
during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (ii) December 31, 2019,
(iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt
or (iv) the date on which we are deemed to be a “large accelerated filer,” as defined under the Exchange Act. In addition,
we will continue to be a smaller reporting company until we have more than $75 million in public float (based on our
common equity) measured as of the last business day of our most recently completed second fiscal quarter or, in the event
we have no public float (based on our common equity), annual revenues of more than $50 million during the most recently
completed fiscal year for which audited financial statements are available.
Until such time that we lose emerging growth company and/or smaller reporting company status, it is unclear if
investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less active trading market for our common stock and our stock
price may be more volatile and could cause our stock price to decline. Once we lose emerging growth company status, we
expect the costs and demands placed upon our management to increase, as we would have to comply with additional
disclosure and accounting requirements.
We have directors who also serve as directors and/or executive officers for our controlling stockholders, which may lead
to conflicting interests.
As a result of our having previously spun off from KFSI, we have directors who also serve as directors and
executive officers of KFSI, 1347 Advisors, LLC (“1347 Advisors”), a wholly-owned subsidiary of KFSI, Atlas Financial
Holdings, Inc. (Nasdaq: AFH) (“Atlas”), and Limbach Holdings, Inc. (Nasdaq: LMB) (“Limbach”). As of December 31,
2017, KFSI and its affiliates beneficially owned approximately 8.3% of our outstanding shares of common stock and also
warrants and performance shares to acquire an additional 23.9% of our outstanding shares of common stock. We also have
directors who serve as executive officers and/or directors of FGI and its affiliates, which together, as of December 31,
2017, beneficially owned approximately 36.0% of our outstanding shares of common stock. In addition, FGI and its
affiliates beneficially own 4.9% of our outstanding shares of 8.00% cumulative Preferred Stock, Series A.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Our executive officers and members of our Company’s Board of Directors have fiduciary duties to our
stockholders; likewise, persons who serve in similar capacities at KFSI, 1347 Advisors, Atlas, and Limbach and FGI have
fiduciary duties to those companies’ investors. We may find, though, the potential for a conflict of interest if our Company
and one or more of these other companies pursue acquisitions, investments and other business opportunities that may be
suitable for each of us. Our directors who find themselves in these multiple roles may, as a result, have conflicts of interest
or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to
which they owe fiduciary duties. Furthermore, our directors who find themselves in these multiple roles own stock options,
shares of common stock and other securities in some of these entities. These ownership interests could create, or appear to
create, potential conflicts of interest when the applicable individuals are faced with decisions that could have different
implications for our Company and these other entities. From time to time, we may enter into transactions with or participate
jointly in investments with KFSI, 1347 Advisors, Atlas, Limbach, or FGI or its affiliates. We may create new situations in
the future in which our directors serve as directors or executive officers in future investment holdings of such entities.
Our information technology systems may fail or suffer a loss of security which may have a material adverse effect on
our business.
Our business is highly dependent upon the successful and uninterrupted functioning of our computer and data
processing systems. We rely on these systems to perform actuarial and other modeling functions necessary for our
underwriting business, as well as to handle our policy administration processes (such as the printing and mailing of our
policies, endorsements, and renewal notices, etc.). Our operations are dependent upon our ability to process our business
timely and efficiently and protect our information systems from physical loss or unauthorized access. In the event one or
more of our facilities cannot be accessed due to a natural catastrophe, terrorist attack or power outage, or systems and
telecommunications failures or outages, external attacks such as computer viruses, malware or cyber-attacks, or other
disruptions occur, our ability to perform business operations on a timely basis could be significantly impaired and may
cause our systems to be inaccessible for an extended period of time. A sustained business interruption or system failure
could adversely impact our ability to perform necessary business operations in a timely manner, hurt our relationships with
our business partners and customers and have a material adverse effect our financial condition and results of operations.
Our operations also depend on the reliable and secure processing, storage and transmission of confidential and
other information in our computer systems and networks. From time to time, we may experience threats to our data and
systems, including malware and computer virus attacks, unauthorized access, systems failures and disruptions. Computer
viruses, hackers, employee misconduct and other external hazards could expose our data systems to security breaches,
cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal, confidential and proprietary
information by electronic means. Our systems and networks may be subject to breaches or interference. Any such event
may result in operational disruptions as well as unauthorized access to or the disclosure or loss of our proprietary
information or our customers’ information, which in turn may result in legal claims, regulatory scrutiny and liability,
damage to our reputation, the incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated
advisers or other damage to our business.
The development and expansion of our business is dependent upon the successful development and implementation of
advanced computer and data processing systems. The failure of these systems to function as planned could slow our
growth and adversely affect our future business volume and results of operations.
We believe that our independent agents will play a key role in our efforts to increase the number of voluntary
policies written by our insurance subsidiary. We utilize various policy administration, rating, and issuance systems. Internet
disruptions or system failures of our current policy administration, policy rating and policy issuance system could affect
our future business volume and results of operations. In addition, a security breach of our computer systems could damage
our reputation or result in liability. We retain confidential information regarding our business dealings and our customers
in our computer systems. We may be required to spend significant capital and other resources to protect against security
breaches or to alleviate problems caused by such breaches. It is critical that these facilities and infrastructure remain secure.
Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer
viruses, programming errors, attacks by third parties or other disruptive problems. In addition, we could be subject to
liability if hackers were able to penetrate our network security or otherwise misappropriate customer’s personal data or
other confidential information.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Any failure on the part of our third-party policy administration processor could lead to material litigation, undermine
our reputation in the marketplace, impair our image and negatively affect our financial results.
We outsource our policy administration process to an unaffiliated, independent third party service provider. Any
failure on the part of such third party to properly handle our policy administration process could lead to material litigation,
extra-contractual liabilities, regulatory action, and undermine our reputation in the marketplace, impair our image and
negatively affect our financial results.
We have a limited operating history as a publicly-traded company. Our inexperience as a public company and the
requirements of being a public company may strain our resources, divert management’s attention, affect our ability to
attract and retain qualified board members and have a material adverse effect on us and our stockholders.
We have a limited operating history as a publicly-traded company. Our Board of Directors and senior management
team has overall responsibility for our management and not all of our directors and members of our senior management
team have prior experience in operating a public company. As a publicly-traded company, we are required to develop and
implement substantial control systems, policies and procedures in order to satisfy our periodic SEC reporting and Nasdaq
obligations. Management’s past experience may not be sufficient to successfully develop and implement these systems,
policies and procedures and to operate our company. Failure to do so could jeopardize our status as a public company, and
the loss of such status may have a material adverse effect on us and our stockholders.
In addition, as a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-
Oxley Act, the Dodd-Frank Act, and Nasdaq rules, including those promulgated in response to the Sarbanes-Oxley Act.
The requirements of these rules and regulations increase our legal and financial compliance costs, make some activities
more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires,
among other things, that we file annual, quarterly and current reports with respect to our business and financial condition.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal controls for financial reporting. To maintain and improve the effectiveness of our disclosure controls and
procedures, we need to continually commit significant resources, maintain staff and provide additional management
oversight. In addition, sustaining our growth will require us to commit additional management, operational and financial
resources to identify new professionals to join our organization and to maintain appropriate operational and financial
systems to adequately support expansion. These activities may divert management’s attention from other business
concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
As a public company, we incur significant annual expenses related to these steps associated with, among other
things, director fees, reporting requirements, transfer agent fees, accounting, legal and administrative personnel, auditing
and legal fees and similar expenses. We also incur higher costs for director and officer liability insurance. Any of these
factors make it more difficult for us to attract and retain qualified members of our Board of Directors. Finally, we expect
to incur additional costs once we lose emerging growth company and/or smaller reporting company status.
We may require additional capital in the future which may not be available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully
and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is
insufficient to meet future operating requirements or to cover losses, we may need to raise additional funds through
financings or curtail our projected growth. Many factors will affect our capital needs as well as their amount and timing,
including our growth and profitability, the availability of reinsurance, as well as possible acquisition opportunities, market
disruptions and other developments. If we had to raise additional capital, equity or debt financing may not be available at
all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our
stockholders could result, and in any case such securities may have rights, preferences and privileges that are senior to
those of existing stockholders. If we cannot obtain adequate capital on favorable terms or at all, our business, financial
condition or results of operations could be materially adversely affected.
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Our acquisition strategy may not succeed.
1347 PROPERTY INSURANCE HOLDINGS, INC.
Our strategy for growth includes, among other things, acquisition transactions. This strategy could divert
management’s attention, or, if implemented, create difficulties including the integration of operations and the retention of
employees, and the contingent and latent risks associated with our transaction partner. The risks associated with the
acquisition of a smaller insurance company include:
inadequacy of reserves for losses and loss expenses and other unanticipated liabilities;
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● quality of their data and underwriting processes;
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the need to supplement management with additional experienced personnel;
conditions imposed by regulatory agencies that make the realization of cost-savings through integration
of operations more difficult;
the requirement for regulatory approval for certain acquisitions;
a need for additional capital that was not anticipated at the time of the acquisition; and
the use of a substantial amount of our management’s time.
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We may be unable to identify and complete a future transaction on terms favorable to us. We may not know if we
will realize the anticipated benefits of a completed transaction and there may be substantial unanticipated costs associated
with the transaction. In addition, a future transaction may result in tax consequences at either or both the stockholder and
company level, potentially dilutive issuances of our securities, the incurrence of additional debt and the recognition of
potential impairment of goodwill and other intangible assets. Each of these factors could adversely affect our financial
position and results of operations.
The development and implementation of new technologies will require an additional investment of our capital resources
in the future.
Frequent technological changes, new products and services and evolving industry standards all influence the
insurance business. The Internet, for example, is increasingly used to transmit benefits and related information to clients
and to facilitate business-to-business information exchange and transactions. We believe that the development and
implementation of new technologies will require additional investment of our capital resources in the future. We have not
determined, however, the amount of resources and the time that this development and implementation may require, which
may result in short-term, unexpected interruptions to our business, or may result in a competitive disadvantage in price
and/or efficiency, as we endeavor to develop or implement new technologies.
Our success depends on our ability to accurately price the risks we underwrite.
The results of our operations and the financial condition of our insurance subsidiary depend on our ability to
underwrite and set premium rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient
premiums to pay losses, loss adjustment expenses and underwriting expenses and to earn a profit. In order to price our
products accurately, we must collect and properly analyze a substantial amount of data, develop, test and apply appropriate
rating formulas, closely monitor and timely recognize changes in trends and project both severity and frequency of losses
with reasonable accuracy. Our ability to undertake these efforts successfully, and thereby price our products accurately, is
subject to a number of risks and uncertainties, some of which are outside our control, including:
the availability of sufficient reliable data and our ability to properly analyze such data;
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● uncertainties that inherently characterize estimates and assumptions;
● our selection and application of appropriate rating and pricing techniques;
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changes in legal standards, claim settlement practices and restoration costs; and
legislatively imposed consumer initiatives.
Because we have assumed a substantial portion of our current policies from LA Citizens, FL Citizens and TWIA,
our rates are based, to a certain extent, on the rates charged by those insurers. In determining the rates we charge in
connection with the policies we have assumed, our rates must be equal to or less than the rates previously charged by the
state-run insurer. If LA or FL Citizens reduces its rates, we must reduce our rates to keep them equivalent to or less than
their rates; however, if LA or FL Citizens increases its rates, we may not automatically increase our rates. Additionally,
absent certain circumstances, we must continue to provide coverage to the policyholders that we assume from LA or FL
Citizens if we have underwritten the same policyholder for a period of three consecutive years. In determining the rates we
charge in connection with the policies we have assumed from TWIA, our rates must be no greater than 115% of premiums
charged by TWIA for comparable coverage. Additionally, we must continue to provide coverage to the policyholders under
those policies that we have assumed from TWIA for a minimum of three successive renewal periods. If we underprice our
risks, it may negatively affect our profit margins and if we overprice risks, it could reduce our customer retention, sales
volume and competitiveness. Either event may have a material adverse effect on the profitability of our insurance
subsidiary.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Current operating resources are necessary to develop future new insurance products.
We currently intend to expand our product offerings by underwriting additional insurance products and programs,
and marketing them through our distribution network. Expansion of our product offerings will result in increases in
expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional
insurance products will also require regulatory approval, further increasing our costs and potentially affecting the speed
with which we will be able to pursue new market opportunities. There can be no assurance that we will be successful
bringing new insurance products to our marketplace.
As an insurance holding company, we are currently subject to regulation by the States of Louisiana, Texas, and Florida
and in the future may become subject to regulation by certain other states or a federal regulator.
All states regulate insurance holding company systems. State statutes and administrative rules generally require
each insurance company in the holding company group to register with the department of insurance in its state of domicile
and to furnish information concerning the operations of the companies within the holding company system which may
materially affect the operations, management or financial condition of the insurers within the group. As part of its
registration, each insurance company must identify material agreements, relationships and transactions with affiliates,
including without limitation loans, investments, asset transfers, transactions outside of the ordinary course of business,
certain management, service, and cost sharing agreements, reinsurance transactions, dividends, and consolidated tax
allocation agreements. Insurance holding company regulations generally provide that transactions between an insurance
company and its affiliates must be fair and equitable, allocated between the parties in accordance with customary
accounting practices, and fully disclosed in the records of the respective parties. Many types of transactions between an
insurance company and its affiliates, such as transfers of assets among such affiliated companies, certain dividend payments
from insurance subsidiaries and certain material transactions between companies within the system, may be subject to prior
notice to, or prior approval by, state regulatory authorities. If we are unable to provide the required materials or obtain the
requisite prior approval for a specific transaction, we may be precluded from taking the actions, which could adversely
affect our financial condition and results of operations.
Our insurance subsidiary currently operates in Louisiana, Florida and Texas. In the future, our insurance
subsidiary may become authorized to transact business in other states and therefore will become subject to the laws and
regulatory requirements of those states. These regulations may vary from state to state, and certain states may have
regulations which conflict with the regulations of other states. Currently, the federal government’s role in regulating or
dictating the policies of insurance companies is limited. However, Congress, from time to time, considers proposals that
would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state regulation.
The impact of any future federal insurance regulation on our insurance operations is unclear and may adversely impact our
business or competitive position.
Our insurance subsidiary is subject to extensive regulation which may reduce our profitability or inhibit our growth.
Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions,
which may have a material adverse effect on our financial condition and results of operations.
The insurance industry is highly regulated and supervised. Maison, our insurance company subsidiary, is subject
to the supervision and regulation of the state in which it is domiciled and the states in which it does business. Such
supervision and regulation is primarily designed to protect policyholders rather than stockholders. These regulations are
generally administered by a department of insurance in each state and relate to, among other things:
the content and timing of required notices and other policyholder information;
the amount of premiums the insurer may write in relation to its surplus;
the amount and nature of reinsurance a company is required to purchase;
approval of insurance company acquisitions;
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● participation in guaranty funds and other statutorily-created markets or organizations;
● business operations and claims practices;
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approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers and their products;
licensing and appointment of agents and managing general agents;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of our insurance company subsidiary to pay dividends to us;
restrictions on transactions between insurance company subsidiaries and their affiliates;
restrictions on the size of risks insurable under a single policy;
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1347 PROPERTY INSURANCE HOLDINGS, INC.
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requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
prescribing the form and content of records of financial condition required to be filed; and
requiring reserves as required by statutory accounting rules.
The LDI and regulators in other jurisdictions where our insurance company subsidiary operates or may operate
conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports
relating to financial condition, information relating to and notices and approvals of transactions with affiliated parties, and
other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our
business objectives. These regulatory authorities also conduct periodic examinations into insurers’ business practices.
These reviews may reveal deficiencies in our insurance operations or differences between our interpretations of regulatory
requirements and those of the regulators. In addition, regulatory authorities have relatively broad discretion to deny or
revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on
our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices
may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and
approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could prevent or
temporarily suspend us from carrying on some or all of our business or otherwise penalize us. Any such outcome may have
a material adverse effect on our ability to operate our business.
Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves
or interpretations by regulatory authorities may have a material adverse effect on our ability to operate our business.
Maison is subject to minimum capital and surplus requirements, and our failure to meet these requirements could
subject us to regulatory action.
Maison is subject to risk-based capital standards and other minimum capital and surplus requirements imposed
under the laws of Texas, Florida and Louisiana (and other states where we may eventually conduct business). The risk-
based capital standards, based upon the Risk-Based Capital Model Act adopted by the National Association of Insurance
Commissioners, or NAIC, require Maison to report its results of risk-based capital calculations to state departments of
insurance and the NAIC. These risk-based capital standards provide for different levels of regulatory attention depending
upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its
authorized control level risk-based capital. Authorized control level risk-based capital is determined by applying the
NAIC’s risk-based capital formula, which measures the minimum amount of capital that an insurance company needs to
support its overall business operations.
In addition, Maison is required to maintain certain minimum capital and surplus and to limit its written premiums
to specified multiples of its capital and surplus. Maison could exceed these ratios if its volume increases faster than
anticipated or if its surplus declines due to catastrophic and/or non-catastrophic losses, excessive underwriting and/or
operational expenses.
Any failure by Maison to meet the applicable risk-based capital or minimum statutory capital requirements or the
writings ratio limitations imposed by the laws of the states in which Maison operates could subject it to further examination
or corrective action imposed by state regulators, including limitations on our writing of additional business, state
supervision or liquidation. Any changes in existing risk-based capital requirements, minimum statutory capital
requirements or applicable writings ratios may require us to increase our statutory capital levels, which we may be unable
to do.
Should our retention rate be less than anticipated, our future results will be negatively impacted.
We make assumptions about the rate at which our existing policies will renew for the purpose of projecting
premiums written and the amount of reinsurance which we obtain based upon the projected amount of future exposure. If
the actual exposure renewed is less than anticipated, our premiums written would be adversely impacted. Furthermore, we
may purchase more reinsurance than may be appropriate given the actual amount of coverage in force.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Holders of our outstanding shares of 8.00% Cumulative Preferred Stock, Series A, have dividend, liquidation and other
rights that are senior to the rights of the holders of our common shares.
As of March 26, 2018, we have issued and outstanding 700,000 shares of preferred stock designated as 8.00%
Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”). The aggregate
liquidation preference with respect to the outstanding shares of Series A Preferred Stock is approximately $17.5 million,
and annual dividends on the outstanding shares of Series A Preferred Stock are approximately $1.4 million. Holders of our
Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Company or a
duly authorized committee thereof, out of lawfully available funds for the payment of dividends, cumulative cash dividends
from and including the original issue date at the rate of 8.00% of the $25.00 per share liquidation preference per annum
(equivalent to $2.00 per annum per share). Upon our voluntary or involuntary liquidation, dissolution or winding up, before
any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation
preference of $25.00 per share plus an amount equal to any accumulated and unpaid dividends to, but not including, the
date of payment. This would reduce the remaining amount of our assets, if any, available to distribute to holders of our
common shares.
Our Board of Directors has the authority to designate and issue additional preferred shares with liquidation,
dividend and other rights that are senior to those of our common shares similar to the rights of the holders of our Series A
Preferred Stock. Because our decision to issue additional securities will depend on market conditions and other factors
beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. Thus, our
stockholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting
their interests.
We depend on the ability of our subsidiaries to generate and transfer funds to meet our financial obligations.
Our operations are substantially conducted through our subsidiaries, Maison, MMI and ClaimCor. As an insurance
holding company, we are dependent on dividends and other permitted payments from our subsidiary companies to serve
as operating capital. The ability of Maison, our insurance company subsidiary, to pay dividends to us is subject to certain
restrictions imposed under Louisiana insurance law, which is the state of domicile for Maison. Dividends payments to us
may also be restricted pursuant to a consent agreement entered into with the LDI and the FOIR as a condition of our
licensure in each state. Interest payments on the surplus notes issued to us by Maison are also subject to the prior approval
of the LDI. Our other subsidiary companies collect the majority of their revenue through their affiliation with Maison. Our
subsidiary company, MMI, earns commission income from Maison for underwriting, policy administration, claims
handling, and other services provided to Maison. Our subsidiary company, ClaimCor, earns claims adjusting income for
adjusting certain of the claims of Maison’s policyholders. While dividend payments from our other subsidiaries are not
restricted under insurance law, the underlying contracts between Maison and our other subsidiary companies are regulated
by, and subject to the approval of, insurance regulators.
As a result of the regulatory and contractual restrictions described above, we may not be able to receive dividends
from Maison or our other subsidiaries, which would affect our ability to pay dividends on our capital stock, including our
Series A Preferred Stock. Under Delaware corporate law, we are generally restricted to paying dividends from either
Company surplus or from net income from the current or preceding fiscal year so long as the payment of the dividends
does not reduce the value of the Company’s net assets below the stated value of the Company’s outstanding preferred
shares. Our ability to make dividend payments on our capital stock, including our Series A Preferred Stock, is therefore
dependent on dividends and other distributions or payments from our subsidiaries. The ability of those subsidiaries to pay
dividends or make distributions or other payments to us depends upon the availability of cash flow from operations and
proceeds from the sale of assets and other capital-raising activities. We cannot be certain of the future availability of such
distributions and the lack of any such distributions may adversely affect our ability to make dividend payments on our
capital stock, including our Series A Preferred Stock.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who
are knowledgeable about our business. If the quality of our underwriters and other personnel decreases, we may be unable
to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our
operations, which could adversely affect our results. Because we have relatively few employees, the loss of, or failure to
attract, key personnel could also significantly impede the financial plans, growth, marketing and other objectives of our
company. Our success depends to a substantial extent on the ability and experience of our senior management. We believe
that our future success will depend in large part on our ability to attract and retain additional skilled and qualified personnel
and to expand, train and manage our employees. We may not be successful in doing so, because the competition for
experienced personnel in the insurance industry is intense. Many of the companies with which we compete for experienced
personnel have greater resources than we have. We cannot be certain of our ability to identify, hire and retain adequately
qualified personnel. We do not have employment agreements with our employees. Failure to identify, hire and retain
necessary key personnel could have a material adverse effect on our business, financial condition and results of operations.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Changes in tax laws could adversely impact our business, financial condition and results of operations.
The U.S. Congress recently passed the Tax Cuts and Jobs Act, which was signed into law by the President on
December 22, 2017. One of the key features of the legislation is a reduction in the Federal corporate income tax rate to
21% from 35%. Due to this reduction, the Company has incurred an initial charge to earnings to write off a portion of the
net deferred tax asset position recognized in the Company’s Consolidated Balance Sheet. However, future operating results
would be taxed at the lower rate. The Company’s insurance subsidiary has also incurred a charge associated with the write
off of its deferred tax asset, which has resulted in a decrease in its capital and surplus under statutory accounting principles
for insurance companies. If corporate Federal income tax rates were reduced, federal and/or state legislation might be
enacted to help offset the decrease in tax revenue to the government. Such legislation might reduce or eliminate certain tax
advantages that are currently beneficial to the Company, including tax-exempt interest on municipal securities, the
dividends received deduction and certain tax credits. Accordingly, the fair value of the Company’s investments might be
adversely impacted. Under the new tax law, the Company’s net deferred tax asset decreased $350,000 on a consolidated
basis to $70,000 as of December 31, 2017 from $420,000 as of December 31, 2016 and decreased $284,000, on a regulatory
basis, in the Company’s insurance subsidiary.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 2.
PROPERTIES
Our executive offices are located at 1511 N. Westshore Blvd., Suite 870, Tampa, Florida, 33607 and consist of
approximately 10,600 square feet of office space which allows for current and future expansion. Our lease term runs
through October 2019. Rent is payable in monthly installments of approximately $22,500, which escalates by 3% annually.
The lease contains an option to renew for an additional three year term subject to certain conditions.
We also lease 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, and consists of approximately 4,000 square
feet of office space, with an original lease term which ran through January 15, 2018. We have renewed this lease for an
additional three year term expiring January 15, 2021. Rent is payable in monthly installments of approximately $6,300 and
escalates by approximately 2.5% annually.
On February 28, 2018, we entered into an agreement to lease space located at 8750 N. Central Expressway, Dallas,
TX, 75231, which consists of approximately 3,000 square feet of office space. The lease term runs through May 31, 2021
with an option to extend the lease for an additional three year term subject to certain conditions. Rent is payable in monthly
installments of approximately $6,000 and escalates by approximately 2% annually.
In the opinion of the Company’s management, our properties are suitable for our current business and are
adequately maintained.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business.
Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such
development will be affected by future court decisions and interpretations. Because of these uncertainties, additional
liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of
ultimate loss and loss adjustment expenses may change. These additional liabilities, or increases in estimates, or a range of
either, cannot be reasonably estimated, and could result in income statement charges that could be material to the
Company’s results of operations in future periods.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
1347 PROPERTY INSURANCE HOLDINGS, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Stock
Our common stock is traded on the Nasdaq Global Market tier of the Nasdaq Stock Market, LLC under the symbol
“PIH.” The following table sets forth the range of high and low intraday sales price for our common stock for each of the
quarterly periods indicated.
Fiscal Year 2017 Quarters Ended:
High Low
March 31, 2017........................................ $ 9.00 $ 6.50
6.95
June 30, 2017 ...........................................
6.85
September 30, 2017 .................................
6.85
December 31, 2017 ..................................
8.50
8.25
7.75
High Low
Fiscal Year 2016 Quarters Ended:
March 31, 2016........................................ $ 7.64 $ 5.32
5.60
June 30, 2016 ...........................................
5.65
September 30, 2016 .................................
6.29
December 31, 2016 ..................................
7.21
6.99
7.90
Our Series A Preferred Stock is also traded on the Nasdaq Global Market tier of the Nasdaq Stock Market under
the symbol “PIHPP.”
Number of Common Shareholders
As of March 26, 2018, we had 5,984,766 common shares outstanding, which were held by four shareholders of
record including Cede & Co., which holds shares on behalf of the beneficial owners of the Company’s common stock.
Because brokers and other institutions hold many of our shares on behalf of shareholders, we are unable to estimate the
total number of shareholders represented by these record holders.
Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash
dividends on our common stock in the foreseeable future. It is the present policy of our Board of Directors to retain earnings,
if any, for use in developing and expanding our business. In the future, our payment of dividends on our common stock
will also depend on the amount of funds available, our financial condition, capital requirements and such other factors as
our Board of Directors may consider.
Holders of our Series A Preferred Stock are entitled to receive cash dividends at a rate of 8.00% per annum of the
$25.00 per share liquidation preference (equivalent to $2.00 per annum per share), accruing from February 28, 2018.
Dividends are payable to holders of our Series A Preferred Stock quarterly on or about the 15th day of March, June,
September and December of each year, commencing on June 15, 2018. The record dates for dividend payment are March
1, June 1, September 1 and December 1 of each year, whether or not a business day, immediately preceding the applicable
dividend payment date. The first dividend record date is June 1, 2018. Dividends on the Series A Preferred Stock
accumulate whether or not the Company has earnings, whether or not there are funds legally available for the payment of
those dividends and whether or not those dividends are declared by the Board of Directors. We intend to declare regular
quarterly dividends on the shares of Series A Preferred Stock. As of December 31, 2017, we had $1.6 million available for
the payment of dividends. The declaration, payment and amount of future dividends will be subject to the discretion of our
Board of Directors. Our Board of Directors expects to take into account a variety of factors when determining whether to
declare any future dividends on the Series A Preferred Stock, including (i) our financial condition, liquidity, results of
operations, retained earnings, and capital requirements, (ii) general business conditions, (iii) legal, tax and regulatory
limitations, including those placed on our subsidiary companies, and (iv) any other factors that our Board of Directors
deems relevant. Accordingly, there can be no assurance that we will declare dividends on our preferred shares in the future.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Recent Sales of Unregistered Securities
On May 23, 2017, the Company announced that Dan Case has been appointed to the position of Chief Operating
Officer. In connection with Mr. Case’s new employment, Mr. Case has the opportunity to purchase up to 68,027 shares of
the Company’s common stock on the open market or in direct purchases from the Company until June 15, 2018 and at the
end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of restricted stock
units (“RSUs”) of the Company equal to two RSUs for each share purchased by Mr. Case. The RSUs will vest 20% per
year over five years following the date granted, subject to continued employment through such vesting date. The aggregate
maximum number of shares of the Company’s common stock that may be acquired pursuant to this arrangement, including
through open market purchases, purchases from the Company and grants from the Company, is 204,081. Any shares
purchased directly from the Company will be made at a price equal to the closing price of the Company’s common stock
on the prior trading day, but not less than the latest quarter end published book value per share. This arrangement was
entered into outside of the Company’s existing stockholder approved equity plans and was approved by the Compensation
Committee of the Company’s Board of Directors as an inducement material to Mr. Case entering into employment with
the Company in reliance on Nasdaq Listing Rule 5635(c)(4). As of December 31, 2017, Mr. Case had purchased 56,276
shares of the Company’s common stock pursuant to this arrangement, 28,000 of which shares were purchased directly from
the Company at a purchase price of $8.00 per share on September 14, 2017. The shares of the Company’s common stock
issued under this arrangement were issued pursuant to an exemption from registration under Section 4(a)(2) of the
Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
On January 2, 2018, the Company entered into a Stock Purchase Agreement with 1347 Advisors and IWS
Acquisition Corporation, pursuant to which the Company repurchased 60,000 Series B Preferred Shares from 1347
Advisors for an aggregate purchase price of $1,740,000, representing (i) the par value of the Series B Preferred Shares, or
$1,500,000 and; (ii) declared and unpaid dividends with respect to the dividend payment due on February 23, 2018, or
$240,000. Also in connection with the Stock Purchase Agreement, the Performance Shares Grant Agreement, dated
February 24, 2015, between the Company and 1347 Advisors was terminated. In connection with the termination, the
Company made a cash payment of $300,000 to 1347 Advisors.
Pursuant to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series
B Preferred Shares from IWS Acquisition Corporation for an aggregate purchase price of $1,500,000, upon the completion
of a capital raise resulting in the Company receiving net proceeds in excess of $5,000,000. On February 28, 2018, the
Company purchased the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for $1,500,000
with the proceeds from the Company’s Series A Preferred Share offering (discussed under the heading “Shareholders’
Equity” below).
The foregoing transactions were approved by a special committee of the Board of Directors of the Company
consisting solely of independent directors.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related
notes and information included elsewhere in this annual report on Form 10-K. You should review the “Risk Factors”
section of this annual report for a discussion of important factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Some of the information contained in this discussion and analysis and set forth elsewhere in this annual report on Form
10-K includes forward-looking statements that involve risks and uncertainties.
Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to 1347 Property Insurance
Holdings, Inc., and its subsidiaries. Except where noted otherwise, all dollar amounts have been reported in thousands.
Overview
We are an insurance holding company specialized in providing personal property insurance in coastal markets
including those in Louisiana, Texas and Florida. These markets are characterized as regions where larger, national insurers
have reduced their market share in favor of other, less catastrophe exposed markets. These markets are also characterized
by state-administered residual insurers controlling large market shares. These unique markets can trace their roots to
Hurricane Andrew, after which larger national carriers limited their capital allocation and approaches to property risk
aggregation. These trends accelerated again after back to back exceptionally active hurricane seasons in 2004 and 2005.
However, the decade following Hurricane Katrina in 2005, had relatively few losses arising from tropical storm activity
which led to declines in reinsurance pricing and increases in its availability. We were incorporated on October 2, 2012 in
the State of Delaware to take advantage of these favorable dynamics where premium could be acquired relatively more
quickly and under less competitive pressure than in other property insurance markets and reinsurance, a significant expense
for primary insurers, was declining from record high levels. We execute on this opportunity via a management team with
expertise in the critical facets of our business: underwriting, claims, reinsurance, and operations. Within our three-state
market, we seek to sell our products in territories with the highest rate per exposure and the least complexity in terms of
risk. Further, we seek to leverage our increasingly geographically diverse insurance portfolio to gain efficiencies with
respect to reinsurance. As of December 31, 2017, we covered risks on approximately 51,000 policies, an increase of almost
48% from one year prior.
On November 19, 2013, we changed our legal name from Maison Insurance Holdings, Inc. to 1347 Property
Insurance Holdings, Inc., and on March 31, 2014, we completed an initial public offering of our common stock. Prior to
March 31, 2014, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned
subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned holding company based in Canada. As of
December 31, 2017, KFSI and its affiliates owned approximately 8.3% of our outstanding shares of common stock and
warrants and performance shares to acquire approximately an additional 23.9% of our outstanding shares of common stock.
In addition, as of December 31, 2017, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned
approximately 36.0% of our outstanding shares of common stock. D. Kyle Cerminara, a member of our Board of Directors,
serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, a member of our Board of
Directors, serves as President, Co-Founder and Partner of FGI.
We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or
“MMI”, and ClaimCor, LLC, or “ClaimCor”.
Through Maison, we began providing property and casualty insurance to individuals in Louisiana in December
2012. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis. Our
current insurance offerings in Louisiana and Texas include homeowners insurance, manufactured home insurance and
dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new
policies through a network of independent insurance agencies. We refer to the policies we write through independent
agencies as voluntary policies. We also wrote commercial business in Texas through a quota share agreement with
Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only
exposures on certain churches and related structures Brotherhood insures throughout the State of Texas, but discontinued
this business effective January 1, 2018.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
In addition to the voluntary policies that Maison writes, we have participated in the last six rounds of take-outs
from Louisiana Citizens Property Insurance Corporation, or “LA Citizens”, occurring on December 1st of each year, as
well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association, or “TWIA”, which
occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, have the
opportunity to assume insurance policies written by LA Citizens and TWIA. The majority of policies that we have obtained
through LA Citizens as well as all of the policies we have obtained through TWIA cover losses arising only from wind and
hail. Prior to our take-out, some of the LA Citizens and TWIA policyholders may not have been able to obtain such
coverage from any other marketplace.
On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation, or
FOIR, which authorizes Maison to write personal lines insurance in the State of Florida. Pursuant to the Consent Order
issued, Maison has agreed to comply with certain requirements as outlined by the FOIR until Maison can demonstrate three
consecutive years of net income following the Company’s admission into Florida as evidenced by its Annual Statement
filed with the FOIR via the National Association of Insurance Commissioners electronic filing system. Among other
requirements, the FOIR requires the following as conditions related to the issuance of Maison’s certificate of authority:
● Although domiciled in the State of Louisiana, Maison has agreed to comply with the Florida Insurance
Code as if Maison were a domestic insurer within the State of Florida;
● Maison has agreed to maintain capital and surplus as to policyholders of no less than $35,000;
● Maison has agreed to receive prior approval from the FOIR prior to the payment of any dividends; and
● Maison has agreed to receive written approval from the FOIR regarding any form of policy issued or rate
charged to its policyholders prior to utilizing any such form or rate for policies written in the State of
Florida.
To comply with the Consent Order, on March 31, 2017, Maison received a capital contribution from us in the
amount of $16,000.
On September 29, 2017, Maison received authorization from the FOIR to assume personal lines policies from
Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison
filed with FL Citizens on August 18, 2017. Accordingly, on December 19, 2017, Maison entered the Florida market via
the assumption of approximately 3,500 policies from FL Citizens.
MMI serves as our management services subsidiary, known as a managing general agency, and provides
underwriting, policy administration, claims administration, marketing, accounting and other management services to
Maison. MMI contracts primarily with independent agencies for policy sales and services, and also contracts with an
independent third-party for policy administration services. As a managing general agency, MMI is licensed by, and subject
to, the regulatory oversight of the LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison
writes, as well as a per policy fee which ranges from $0-$75 for providing policy administration, marketing, reinsurance
contract negotiation, and accounting and analytical services.
On January 2, 2015, we completed our acquisition of 100% of the membership interests of ClaimCor, a claims
and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor,
and also through various third-party claims adjusting companies during times of high volume, so that we may provide
responsive claims handling service when catastrophe events occur which impact many of our policyholders. We have the
ultimate authority over the claims handling process, while the agencies that we appoint have no authority to settle our
claims or otherwise exercise control over the claims process.
Business Strategy
Our primary goal is to continue to expand our property and casualty writings. Our goal for Louisiana, the first
state where we began to offer insurance, has been to establish a market share of 2% to 3%. We plan to expand our writings
in Louisiana and other states through:
●
Increasing our number of voluntary policies. We believe that ease of use enhancements for our web-
based agent quoting portal as well as refining our product offerings has positioned us to continue to
experience organic new policy growth through our independent agencies. Our goal is to continue to grow
through strategic relationships with agencies in the states where we currently provide insurance and also
potentially in new coastal markets in the United States. Our years of experience in coastal markets make
us qualified to manage agent expectations and provide superior support and service for our policyholders.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
●
Increasing our book of business through the depopulation of policies from FL Citizens, LA Citizens, and
TWIA. On December 19, 2017, we participated in the depopulation of wind/hail-only policies from FL
Citizens, which has allowed us to quickly establish a significant presence in the State of Florida. We plan
to continue to focus on wind/hail-only and other specialty products in the states of Florida, Louisiana,
and Texas where we have extensive management experience.
● Strategic acquisitions. We intend to explore growth opportunities through strategic acquisitions in
coastal states, including Louisiana, Texas and Florida. We also plan to pursue complementary books of
business provided they meet our underwriting criteria. We will evaluate each opportunity based on
expected economic contribution to our results and support of our market expansion initiatives.
● Attracting and retaining high-quality agents. We intend to focus our marketing efforts on maintaining
and improving our relationships with highly productive independent agents, as well as on attracting new
high quality agents in areas with a substantial potential for profitable growth.
● Reducing our ratio of expenses to net premiums earned and using technology to increase our operating
efficiency. We are committed to improving our profitability by reducing expenses through enhanced
technologies and by increasing the number of policies that we write through the strategic deployment of
our capital. We currently outsource our policy administration and a portion of our claims handling
functions to third parties with our dedicated oversight and direction, which we believe results in increased
service and lower expense and loss ratios.
The Company will continue to evaluate its existing book of business with an emphasis on risk-adjusted returns
and rate adequacy. Accordingly, we have terminated our quota-share agreement with Brotherhood Mutual Insurance
Company effective January 1, 2018.
Our Products
As of December 31, 2017, we covered risks under approximately 51,000 direct and assumed policies. Of these
policies, approximately 32% were obtained via take-out from the LA Citizens, FL Citizens and TWIA, approximately 66%
were voluntary policies obtained from our independent agency force, with the remaining 2% comprised of assumed
wind/hail only coverages from Brotherhood. In total, from both take-out and voluntary business, 46% of our policies are
homeowner multi-peril, approximately 11% are manufactured home multi-peril policies, approximately 36% are wind/hail
only policies, approximately 5% are multi-peril dwelling policies, and approximately 2% are dwelling fire policies.
Homeowners’ Insurance
Our homeowners’ insurance policy is written on an owner occupied dwelling which protects from all perils, except
for those specifically excluded from coverage by the policy. It also provides replacement cost coverage on the home and
other structures and will provide optional coverage for replacement cost on personal property in the home. It may also offer
the option of specifically scheduling individual personal property items for coverage. Additionally, coverage for loss of
use of the home until it can be repaired is provided. Personal liability and medical payment coverage to others is included,
as well.
Wind/Hail Insurance
Our wind/hail insurance policy is written on an owner or non-owner occupied dwelling which protects from the
perils of wind and/or hail-only weather events. This policy type may also provide coverage for personal property, but only
for specific types of coverage. It provides replacement cost or actual cash value coverage on the home and other structures
depending on the form under which the policy is written. Personal property in the home is written at actual cash value.
Additionally, coverage for loss of use of the home is provided.
Manufactured Home Insurance
Our manufactured home insurance policy is written on a manufactured or mobile home and is similar to both the
homeowners’ insurance policy and the dwelling fire policy. The policy can provide for coverage on the manufactured
home, the insured’s personal property in the home and liability and medical payments can be included. Furthermore, our
manufactured home policies can be endorsed to include coverage for flood and earthquake (coverage for these perils is not
available under our other policy types). The policy can also be written on either owner occupied or non-owner occupied
units. Property coverage can be written on an actual cash value or stated amount basis with an optional replacement cost
coverage available for partial loss. There are several other optional coverages that can be included and residential and
commercial-use rental units can be written along with seasonal use mobile homes or homes that are used for part of the
year.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Dwelling Fire Insurance
Our dwelling fire policy can be issued on an owner occupied or non-owner (tenant) occupied dwelling property.
It will also provide coverage against all types of loss unless the peril causing the loss is specifically excluded in the policy.
Losses from vandalism and malicious mischief are also included in the coverage. All claims and losses on a dwelling are
covered on a replacement cost basis and additional coverage for personal property (contents) can also be added. Personal
liability and medical payments to others may be included on an optional basis.
Our policy counts by type as of December 31, 2017 and 2016 are as follows:
Source of Policies
Policies as of December 31,
2017
2016
Total LA Citizens Takeout Policies in Force ...........................
12,002
8,892
Homeowners .............................................................................
Manufactured Homes ...............................................................
Other Dwellings .......................................................................
Total Voluntary Policies in Force .............................................
23,283
4,975
5,187
33,445
17,685
4,694
2,568
24,947
Total Direct Policies in Force ...................................................
45,447
33,839
Assumed through FL Citizens Depopulation Program .............
Assumed through Brotherhood Quota-Share Agreement .........
Assumed through TWIA Quota-Share Agreement(1) ................
Total Assumed Policies ............................................................
3,444
1,035
745
5,224
—
522
1,251
1,773
Total all policies .......................................................................
50,671
35,612
(1) The decrease in policies assumed through the TWIA quota share agreement from December 31, 2016 to
December 31, 2017 is attributable to the fact that policyholders had a six month period (until May 31,
2017) to opt-out of the assumption process. Upon opt-out, policies are removed from the Company’s
listing of assumed policies back to the original date of takeout, December 1, 2016 (as if the Company
had never assumed the policy). Furthermore, pursuant to the quota share agreement, any policies which
had been assumed through TWIA and had reached their expiration are renewed by Maison directly. At
this point these policies are no longer considered assumed policies and are instead reflected as Voluntary
Policies in Force in the table above.
Non-U.S. GAAP Financial Measures
The Company assesses its results of operations using certain non-U.S. GAAP financial measures, in addition to
U.S. GAAP financial measures. These non-U.S. GAAP financial measures consist of underwriting ratios and are defined
below. The Company believes these non-U.S. GAAP financial measures provide useful information to investors and others
in understanding and evaluating our operating performance in the same manner as management does.
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.
Underwriting Ratios
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 an underwriting profit whereas a
combined ratio over 100% demonstrates an underwriting loss.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
Critical Accounting Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Estimates and
their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period
in which they are determined. The critical accounting estimates and assumptions in the accompanying consolidated
financial statements include the provision for loss and loss adjustment expense reserves (as well as the reinsurance
recoverable on those reserves), the valuation of fixed income and equity securities, the valuation of net deferred income
taxes, the valuation of various securities we have issued in conjunction with the termination of the management services
agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs and stock-based compensation
expense.
Provision for Loss and Loss Adjustment Expense Reserves
A significant degree of judgment is required to determine amounts recorded in the consolidated financial
statements for the provision for loss and loss adjustment expense reserves. The process for establishing the provision for
loss and loss adjustment expense reserves reflects the uncertainties and significant judgmental factors inherent in predicting
future results of both known and unknown loss events. As such, the process is inherently complex and imprecise and
estimates are constantly refined. The process of establishing the provision for loss and loss adjustment expense reserves
relies on the judgment and opinions of a large number of individuals, including the opinions of the Company’s independent
actuaries.
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 department 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.
In the actuarial review process, an analysis of the provision for loss and loss adjustment expense reserves is
completed for the Company’s insurance subsidiary. Unpaid losses, allocated loss adjustment expenses and unallocated loss
adjustment expenses are separately analyzed by line of business or coverage by accident year. A wide range of actuarial
methods are utilized in order to appropriately measure ultimate loss and loss adjustment expense costs. These methods
include paid loss development, incurred loss development and frequency-severity method. Reasonability tests such as
ultimate loss ratio trends and ultimate allocated loss adjustment expense to ultimate loss are also performed prior to
selection of the final provision. The provision is indicated by line of business or coverage and is separated into case
reserves, reserves for losses incurred but not reported (“IBNR”) claims and a provision for loss adjustment expenses
(“LAE”).
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 income and comprehensive income 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.
Valuation of Fixed Income and Equity Securities
The Company’s fixed income and equity 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. Any change in the estimated fair value of its investments could impact the amount of
unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its
investments and other comprehensive loss on its consolidated balance sheets and statements of comprehensive income.
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1347 PROPERTY INSURANCE HOLDINGS, INC.
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 income and comprehensive income. Premium and discount on
investments are amortized and accreted using the interest method and charged or credited to net investment income.
The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value
are other-than-temporary. Further information regarding its detailed analysis and factors considered in establishing an
other-than-temporary impairment on an investment is discussed within Note 4 - Investments, to the consolidated financial
statements.
Valuation of Net Deferred Income Taxes
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the
Company’s consolidated financial statements. In determining its provision for income taxes, the Company interprets tax
legislation in a variety of jurisdictions and makes assumptions about the expected timing of the reversal of deferred income
tax assets and liabilities and the valuation of net deferred income taxes.
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 income and comprehensive income.
The Company carries a net deferred income tax asset of $70 and $420 at December 31, 2017 and 2016,
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.
Securities issued to 1347 Advisors, LLC
Pursuant to the termination of the Management Services Agreement with 1347 Advisors LLC (“Advisors,” a
wholly-owned subsidiary of KFSI), the Company issued Series B Preferred Shares, Warrants, and entered into a
Performance Share Grant Agreement with Advisors on February 24, 2015. On January 2, 2018, the Company entered into
a stock purchase agreement with Advisors and IWS Acquisition Corporation, also an affiliate of KFSI, pursuant to which
the Company agreed to repurchase all 60,000 Series B Preferred Shares held by Advisors and all 60,000 Series B Preferred
Shares held by IWS Acquisition Corporation. The Company completed the repurchase of the shares held by Advisors on
January 2, 2018 and the repurchase of the shares held by IWS Acquisition Corporation on February 28, 2018. In connection
with the stock purchase agreement, the Performance Share Grant Agreement, dated February 24, 2015, between the
Company and Advisors was terminated. No common shares were issued to Advisors under the Performance Share Grant
Agreement.
Because the Series B Preferred Shares had a redemption provision requiring mandatory redemption on February
24, 2020, the Company was required to classify the shares as a liability on its balance sheet. The resulting liability was
recorded at a discount to the $4,200 ultimate redemption amount which included all dividends to be paid on the Series B
Preferred Shares based upon an analysis of the timing and amounts of cash payments expected to occur under the terms of
the shares discounted for the Company’s estimated cost of equity (13.9%).
The Company estimated the fair value of the Warrants on grant date based upon the Black-Scholes option pricing
model while it utilized a Monte Carlo model to determine the fair value of the Performance Share Grant Agreement due to
the fact that the underlying shares are only issuable based upon the achievement of certain market conditions.
Deferred Policy Acquisition Costs
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.
34
1347 PROPERTY INSURANCE HOLDINGS, INC.
Stock-Based Compensation Expense
The Company uses the fair-value method of accounting for stock-based compensation awards granted. The
Company determines the fair value of the stock options on their grant date using the Black-Scholes option pricing model
and determines the fair value of restricted stock units (“RSUs”) on their grant date using the fair value of the Company’s
common stock on the date the RSUs were issued (for those RSU which vest solely based upon the passage of time), as well
as using multiple Monte Carlo simulations for those RSUs with market-based vesting conditions. The fair value of these
awards is recorded as compensation expense over the requisite service period, which is generally the expected period over
which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are
exercised, or correspondingly, when the restricted stock units vest, the amount of proceeds together with the amount
recorded in additional paid-in capital is recorded in shareholders’ equity.
Recent Accounting Pronouncements
See Item 8, 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.
Analysis of Financial Condition
As of December 31, 2017 compared to December 31, 2016
Investments
The Company’s investments in fixed income and equity securities are classified as available-for-sale and are
reported at estimated fair value. The Company held an investments portfolio comprised primarily of fixed income securities
issued by the U.S. Government, government agencies and high quality corporate issuers. The fixed income portfolio is
managed by a third-party investment management firm in accordance with the investment policies and guidelines approved
by the investment committee of the Company’s Board of Directors. These guidelines stress the preservation of capital,
market liquidity and the diversification of risk. Additionally, the Company’s investment committee is in place to identify,
evaluate and approve suitable investment opportunities for the Company. This has resulted in a number of equity
investments managed by the committee that represent approximately 4.9% of the estimated fair value of Company’s total
investment portfolio as of December 31, 2017. Investments held by the Company’s insurance subsidiary must also comply
with applicable domiciliary state regulations that prescribe the type, quality and concentration of investments.
The table below summarizes, by type, the Company’s investments as of December 31, 2017 and 2016.
Type of Investment
Fixed income securities:
U.S. government ............................................. $
State municipalities and political subdivisions
Asset-backed securities and collateralized
mortgage obligations ......................................
Corporate ........................................................
Total fixed income securities ..............................
Equity securities:
Common stock ................................................
Warrants to purchase common stock ..............
Rights to purchase common stock ..................
Total equity securities .........................................
Short-term investments .......................................
Other investments ...............................................
Total investments ................................................ $
December 31, 2017
December 31, 2016
Carrying
Amount
Percent of
Total
Carrying
Amount
Percent of
Total
4.9 % $
10.7 %
36.0 %
41.0 %
92.6 %
4.4 %
0.3 %
0.2 %
4.9 %
0.8 %
1.7 %
100.0 % $
1,604
2,246
11,968
10,741
26,559
1,136
-
-
1,136
196
505
28,396
5.6 %
7.9 %
42.2 %
37.8 %
93.5 %
4.0 %
-
-
4.0 %
0.7 %
1.8 %
100.0 %
2,698
5,907
19,867
22,650
51,122
2,460
154
93
2,707
417
945
55,191
35
1347 PROPERTY INSURANCE HOLDINGS, INC.
Pursuant to the certificate of authority we received from the TDI, we are required to deposit securities with the
State of Texas. These securities consist of cash in the amount of $300 as well as various fixed income securities listed in
the table above having an amortized cost basis of $1,701 and an estimated fair value of $1,688 as of December 31, 2017.
The Company’s limited liability investments, as reported as other investments in the table above, are comprised
of investments in two limited partnerships which seek to provide equity and asset-backed debt investment in a variety of
privately-owned companies. The Company has committed to a total investment of $1,000, of which the limited partnerships
have drawn down approximately $645 through December 31, 2017. One of these limited partnerships is managed by Argo
Management Group, LLC, an entity which is wholly owned by KFSI, and in which the Company has invested $211 as of
December 31, 2017. The Company has accounted for its limited liability investments under the cost method as the
instruments do not have readily determinable fair values and the Company does not exercise significant influence over the
operations of the limited partnerships or the underlying privately-owned companies.
Also included in other investments is a certificate of deposit in the amount of $300 with an original term of 18
months deposited with the State of Florida pursuant to the terms of the certificate of authority issued to Maison from the
FOIR.
Liquidity and Cash Flow Risk
The table below summarizes the estimated fair value of the Company’s fixed income securities by contractual
maturity as of December 31, 2017 and 2016. 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.
Matures in:
One year or less .................................................. $
More than one to five years ................................
More than five to ten years .................................
More than ten years ............................................
Total fixed income securities .............................. $
December 31, 2017
December 31, 2016
Carrying
Amount
Percent of
Total
Carrying
Amount
Percent of
Total
1,525
22,995
13,138
13,464
51,122
3.0 % $
45.0 %
25.7 %
26.3 %
100.0 % $
1,828
12,678
3,918
8,135
26,559
6.9 %
47.7 %
14.8 %
30.6 %
100.0 %
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.
Market Risk
Market risk is the risk that the Company will incur losses due to adverse changes in interest or currency exchange
rates and equity prices. Given the Company’s operations only invest in U.S. dollar denominated instruments and maintain
a relatively insignificant investment in equity instruments, its primary market risk exposures in the investments portfolio
are to changes in interest rates.
Because the investments portfolio is comprised of primarily fixed maturity instruments that are usually held to
maturity, periodic changes in interest rate levels generally impact the Company’s financial results to the extent that the
investments are recorded at market value and reinvestment yields are different than the original yields on maturing
instruments. During periods of rising interest rates, the market values of the existing fixed income securities will generally
decrease. The reverse is true during periods of declining interest rates.
Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to
discharge an obligation. Credit risk arises from the Company’s positions in short-term investments and debt instruments.
As of December 31, 2017 and 2016, the Company’s debt securities had the following quality ratings as assigned
by Standard and Poor’s (“S&P”) or Moody’s Investors Service (“Moody’s”).
36
1347 PROPERTY INSURANCE HOLDINGS, INC.
Rating (S&P/Moody’s)
AAA/Aaa ............................................................ $
Aa/Aa ..................................................................
A/A .....................................................................
BBB ....................................................................
Total fixed income securities .............................. $
Other-Than-Temporary Impairment
December 31, 2017
December 31, 2016
Carrying
Amount
Percent of
Total
Carrying
Amount
Percent of
Total
24,188
6,322
13,651
6,961
51,122
47.3 % $
12.4 %
26.7 %
13.6 %
100.0 % $
14,995
2,627
5,516
3,421
26,559
56.4 %
9.9 %
20.8 %
12.9 %
100.0 %
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.
The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value
are other-than-temporary. Further information regarding the Company’s detailed analysis and factors considered in
establishing an other-than-temporary impairment on an investment is discussed within Note 4 - “Investments,” to the
consolidated financial statements in Item 8 of this report.
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, 2017 and 2016.
At December 31, 2017, the gross unrealized losses for fixed income securities amounted to $498, and there were
no unrealized losses attributable to non-investment grade fixed income securities. At both December 31, 2017 and 2016,
all unrealized losses on individual investments were considered temporary. Fixed income securities in unrealized loss
positions continued to pay interest and were not subject to material changes in their respective debt ratings. The Company
concluded the declines in value were considered temporary. As the Company has the capacity to hold these investments to
maturity, no impairment provision was considered necessary.
Deferred Policy Acquisition Costs
The Company’s deferred policy acquisition costs (“DPAC”) include commissions, premium taxes, assessments
and other policy processing fees that are directly related to successful efforts to acquire new or existing insurance policies
to the extent they are considered recoverable and represent those costs related to acquiring the premiums the Company has
yet to earn (the unearned premium reserve). DPAC increased $2,396, to $6,785 as of December 31, 2017 compared to
$4,389 as of December 31, 2016, corresponding to an increase in our unearned premium reserves over the same period.
DPAC expressed as a percentage of unearned premium reserves was 17.2% and 17.0% as of December 31, 2017 and 2016,
respectively. As of September 30, 2017, this ratio was 19.2%. September’s ratio had resulted from an increase in the
effective rate on premium taxes that we pay in Louisiana and Texas due to a change in the applicable Louisiana statute
whereby the Company no longer qualifies for certain credits on its premium taxes which were related to the value of
investments held in the State of Louisiana. On December 19, 2017, we participated in our first depopulation of policies
from FL Citizens. Under the terms of its depopulation program, FL Citizens does not charge insurers a ceding commission
for those premiums assumed, unlike LA Citizens and TWIA, which charge a ceding commission of 16% and approximately
22% of the premiums assumed from each entity, respectively. As we had approximately $5,692 in unearned premium
related to our depopulation of FL Citizens policies as of December 31, 2017, with no corresponding acquisition costs
related to commissions paid on these premiums, this was the major contributor to our ratio of DPAC to unearned premium
decreasing to 17.2% from 19.2% for the three months ended December 31, 2017. Upon renewal, the policies we have
assumed from FL Citizens would no longer be considered assumed policies, and we would pay our customary commission
percentage to our independent agencies; thus, in future periods, we anticipate our DPAC cost to unearned premium ratio
will increase.
37
1347 PROPERTY INSURANCE HOLDINGS, INC.
Premiums Receivable, Net of Allowance for Doubtful Accounts
Premiums receivable, net of allowances for credit losses, increased by $7,908 to $10,831 as of December 31, 2017
from $2,923 as of December 31, 2016, resulting primarily from the assumption of policies from FL and LA Citizens in
December 2017. Although we have participated in LA Citizens take-outs each December for the past six years, our
assumption of policies which occurred on December 1, 2017 marked our largest assumption to date, whereby we assumed
approximately $3,304 in premium in 2017, compared to approximately $883 in 2016. Furthermore, December 19, 2017
marked our first-ever assumption of policies from FL Citizens, whereby we assumed approximately $5,692 in premium.
As a result, we were owed approximately $8,467 in premiums from the Citizens entities as of December 31, 2017,
consisting of premiums assumed less ceding commissions (in the case of LA Citizens only, as FL Citizens does not
withhold a ceding commission), accounting for the majority of the increase to premiums receivable year over year.
Ceded Unearned Premiums
Ceded unearned premiums represents the unexpired portion of premiums which have been paid to the Company’s
reinsurers. Ceded unearned premiums are charged to income over the terms of the respective reinsurance treaties. Our
catastrophe excess of loss (“CAT XOL”) treaties, which run from June 1st of each year to May 31st of the following year,
make up the majority of our ceded unearned premiums at both December 31, 2017 and 2016. As the ultimate amount of
premium we will cede under our CAT XOL treaties is based upon the risks we cover as of September 30th of each treaty
year, we must develop an estimate of the amounts due to our reinsurers at the inception of each treaty. Ceded premiums
are earned by our reinsurers based upon actual amounts due for each treaty year, whereas cash payments made to our
reinsurers are based upon an estimated schedule developed at the outset of each treaty year. At the end of each treaty year,
estimated cash payments are reconciled with actual premiums due, and all premium balances are settled. This has resulted
in the decrease in the unearned portion of our ceded premiums year over year, despite the fact that we expect to cede
approximately $24,716 in premiums under CAT XOL treaty year expiring May 31, 2018, compared to $21,192 for the
treaty year which expired on May 31, 2017.
Reinsurance Recoverable
Reinsurance recoverable on both paid losses and loss reserves represents amounts due to the Company, or
expected to be due to the Company from its reinsurers, based upon claims and claim reserves which have exceeded the
retention amount under our reinsurance treaties. As of December 31, 2017, we have recorded an expected recovery of
$1,952 on paid losses as well as $8,971 on loss and loss adjustment expense reserves, compared to $444 and $3,652,
respectively, as of December 31, 2016. Our expected recoveries as of December 31, 2017 relate primarily to Hurricane
Harvey, which impacted our policyholders in Texas and Louisiana in August, 2017. We anticipate our gross incurred losses
to be $27,000 from this event. As our retention is $5,000 under our CAT XOL treaty, we expect to recover approximately
$22,000 from our reinsurers from this event. As of December 31, 2017, we had collected approximately $13,600, with the
remaining $1,300 recorded as a recoverable on paid losses and $7,100 recorded as a recoverable on loss and loss adjustment
expense reserves.
Our expected recoveries as of December 31, 2016 result from a series of severe storms which produced multiple
tornadoes and flooding in the state of Louisiana in late February 2016 which exceeded the $4,000 retention under our CAT
XOL treaty which covered storms we incurred from the period beginning June 1, 2015 and ending May 31, 2016, a wind
and hail event occurring in both Texas and Louisiana in early March 2016, which generated recoveries under our aggregate
excess of loss treaty for the treaty year ended May 31, 2017, as well as a wind and flooding event which occurred in
Louisiana in mid-August 2016, which exceeded the $5,000 retention under our CAT XOL treaty which covered storms we
incurred from the period beginning June 1, 2016 and ending May 31, 2017.
Funds Deposited with Reinsured Companies
Funds deposited with reinsured companies represents collateral we have placed on deposit with Brotherhood based
upon our quota-share agreement to reinsure a portion of Brotherhood’s business for wind/hail coverage only. Our obligation
increased to $2,250 as of December 31, 2017 from $500 as of December 31, 2016 due to our quota-share portion of losses
Brotherhood incurred with respect to Hurricane Harvey, which impacted a number of churches Brotherhood insures on or
near the Gulf Coast of Texas in August 2017. We funded these obligations via cash deposits made to Brotherhood under a
trust agreement. The losses we incur with respect to our quota share agreement with Brotherhood are subject to our CAT
XOL treaty, thus we are able to include these Hurricane Harvey losses in the ultimate $22,000 we expect to recover from
our reinsurers as previously discussed under the heading “Reinsurance Recoverable”.
38
Current Income Taxes Recoverable/Payable
1347 PROPERTY INSURANCE HOLDINGS, INC.
Current income taxes recoverable decreased $1,131 to $64 as of December 31, 2017, compared to $1,195 as of
December 31, 2016, representing the estimate for both the Company’s state and federal income taxes to be recovered for
the years ended December 31, 2017 and 2016, respectively, less estimated payments made during each year.
Net Deferred Tax Asset
The Company’s net deferred tax asset decreased $350, to $70 as of December 31, 2017 from $420 as of December
31, 2016, due, in large, to the passage of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the corporate
federal income tax rate from 35% to 21% and required us to reduce the value of our net deferred tax assets to reflect this
new rate. Net deferred income taxes are comprised of approximately $2,073 of deferred tax assets, net of approximately
$2,003 of deferred tax liabilities as of December 31, 2017, compared to $2,360 of deferred tax assets, net of $1,940 of
deferred tax liabilities as of December 31, 2016.
Property and Equipment
Property and equipment decreased $45 to $205 as of December 31, 2017 compared to $250 as of December 31,
2016, and consists of computers, office equipment, and improvements at our leased facilities in Tampa, Florida and Baton
Rouge, Louisiana, shown net of accumulated depreciation. Also included in the balances are vehicles we have purchased
for the use of our sales representatives in the states of Texas, Florida and Louisiana. Our policy for the capitalization and
depreciation of these assets can be found in Note 2 to the Consolidated Financial Statements found in Item 8 of this report.
Other Assets
Other assets increased $100, to $888 as of December 31, 2017 from $788 as of December 31, 2016. The major
components of other assets, as well as the change therein, are shown below.
December 31,
2017
2016
Change
Accrued interest on investments ...................................... $
Security deposits for facility leases .................................
Prepaid expenses .............................................................
Other receivables .............................................................
Total ................................................................................ $
285 $
38
556
9
888 $
117 $
38
616
17
788 $
168
-
(60 )
(8 )
100
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but
not reported (“IBNR”) loss events and the related estimated loss adjustment expenses gross 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, 2017 and 2016.
Case
Loss
Reserves
Case
LAE
Reserves
Total
Case
Reserves
IBNR
Reserves
(including
LAE)
Total
Reserves
Reinsurance
Recoverable
on Reserves
December 31, 2017
Homeowners(1) ..................................... $
Special Property(2) ................................
Total..................................................... $
December 31, 2016
Homeowners ........................................ $
Special Property ...................................
Total..................................................... $
2,438 $
5,307
7,745 $
260 $
103
363 $
2,698 $
5,410
8,108 $
4,669 $
1,971 $
3,409
8,819
5,380 $ 13,488 $
1,523 $
697
2,220 $
463 $
88
551 $
1,986 $
785
2,771 $
3,303 $
897
4,200 $
5,289 $
1,682
6,971 $
1,562
7,409
8,971
2,565
1,087
3,652
(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 and also includes the commercial wind/hail only business we had assumed through our
agreement with Brotherhood and our personal wind/hail only business we have assumed through our
agreements with FL Citizens and TWIA.
39
1347 PROPERTY INSURANCE HOLDINGS, INC.
Gross reserves as of December 31, 2017 were $13,488, an increase of $6,517 from December 31, 2016. Gross
reserves in the approximate amount of $7,124 have been established for PCS Catastrophe 1743, or Hurricane Harvey, a
major storm which made initial landfall in the United States as a Category 4 hurricane near Rockport, Texas in August
2017. As of December 31, 2017, we anticipate our total incurred losses from Hurricane Harvey to be $27,000 on a gross
basis, or $5,000 on a net basis after recoveries under our catastrophe excess of loss reinsurance program. The reinsurance
recoverable on reserves as of December 31, 2017 was $8,971, an increase of $5,319 from December 31, 2016, due, in large
part, to the anticipated recoveries in the amount of $7,125 due to the Company from Hurricane Harvey losses. As a result
of the foregoing, net loss reserves were $4,517 and $3,319 as of December 31, 2017 and 2016, respectively.
The Company cannot predict whether loss and loss adjustment expense reserves will develop favorably or
unfavorably from the amounts reported in the Company’s consolidated financial statements. Any such development could
have a material effect on the Company’s consolidated financial results for a given period.
Unearned Premium Reserves
Unearned premium reserves increased $13,702 to $39,523 as of December 31, 2017 compared to $25,821 as of
December 31, 2016. The following table outlines the change in unearned premium reserves by state and by line of business.
December 31,
2017
2016
Change
Homeowners – LA ........................................... $
Special Property – LA ......................................
Total Louisiana .................................................
16,920 $
9,050
25,970
16,644 $
7,113
23,757
Homeowners – TX ...........................................
Special Property – TX ......................................
Total Texas .......................................................
4,717
3,454
8,171
822
1,242
2,064
Special Property – FL .......................................
Total Florida .....................................................
5,382
5,382
-
-
276
1,937
2,213
3,895
2,212
6,107
5,382
5,382
Unearned Premium Reserves ............................ $
39,523 $
25,821 $
13,702
The Company’s increase to its unearned premium reserve is directly related to the increase in written premiums
year over year.
Ceded Reinsurance Premiums Payable
Ceded reinsurance premiums payable increased $303, to $5,532 as of December 31, 2017 compared to $5,229 as
of December 31, 2016. The bulk of the balance payable as of both dates represents quarterly installment payments due
under our catastrophe reinsurance programs, which were paid in January of each year. While the terms of our catastrophe
reinsurance programs have not changed materially year over year, the amount of premium we cede has increased to
correspond with the increase in our gross premium in force each year. See “Ceded Premiums Written” under the heading
“Results of Operations” below for further information on the premium we have ceded under our reinsurance programs.
Agency Commissions Payable
Agency commissions payable increased $198 to $695 as of December 31, 2017 compared to $497 as of December
31, 2016. As agency commissions are paid in arrears, this balance represents commissions owed to the Company’s
independent agents on policies written in December of each year, and corresponds directly with the increase in premiums
written by our agents when comparing December 2017 to December 2016.
Premiums Collected in Advance
Advance premium deposits decreased $50 to $1,078 as of December 31, 2017 from $1,128 as of December 31,
2016, and represent cash the Company has received for policies which were not yet in-force as of December 31, 2017 and
2016, respectively. Upon the effective date of coverage, advance premiums are reclassified to the unearned premium
reserves account.
40
Funds held under Reinsurance Treaties
1347 PROPERTY INSURANCE HOLDINGS, INC.
Funds held under reinsurance treaties represents collateral we have received on deposit from some of our
reinsurers under our catastrophe excess of loss treaties which is intended to fund those reinsurers’ pro-rata portion of
reserves we have established for losses and loss adjustment expenses. As of December 31, 2017, we had received cash
deposits of $206 from our reinsurers, compared to deposits of $73 as of December 31, 2016.
Accounts Payable and Other Accrued Expenses
Accounts payable and other accrued expenses increased $2,208, to $4,273 as of December 31, 2017 compared to
$2,065 as of December 31, 2016. The largest driver of the change when comparing periods was the increase in amounts
due for premium taxes and assessments, which increased by $1,510 from the prior year and is directly related to the increase
in direct premiums written year over year. The components of accounts payable and other accrued expenses, as well as the
change therein, are shown below.
December 31,
2017
2016
Change
Accrued employee compensation ................................ $
Accrued professional fees ...........................................
Unearned policy fees ...................................................
Accrued premium taxes and assessments ....................
Other accounts payable ...............................................
Total ............................................................................ $
51 $
587
454
2,703
478
4,273 $
95 $
509
204
1,193
64
2,065 $
(44 )
78
250
1,510
414
2,208
Related Party Transactions
Termination of Management Services Agreement
As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24,
2015, the Company has issued the following securities to 1347 Advisors, LLC (“1347 Advisors”), a wholly owned
subsidiary of KFSI.
● 100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant
Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event;
● 120,000 shares of Series B Preferred Stock of the Company (the “Series B Preferred Shares”); and
● A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise
price of $15.00 per share. The Warrant expires on February 24, 2022.
The Performance Shares Grant Agreement granted 1347 Advisors 100,000 shares of the Company’s common
stock issuable upon the date that the last sales price of the Company’s common stock equaled or exceeded $10.00 per share
for any 20 trading days within any 30-day trading period (the “Milestone Event”). 1347 Advisors was not entitled to any
dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved. As described below,
on January 2, 2018, the Performance Shares Grant Agreement was terminated. As the Milestone Event was never achieved,
no shares of common stock were issued to 1347 Advisors under the agreement.
The Series B Preferred Shares had a par value of $25.00 dollars and paid annual cumulative dividends at a rate of
eight percent per annum. The shares ranked senior to the Company’s common stock, and the Company was not permitted
to issue any other series of preferred stock that ranked equal or senior to the Series B Preferred Shares while the Series B
Preferred Shares were outstanding. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to
1347 Advisors representing the annual dividend payment due on the Series B Preferred Shares. As described below,
through two transactions dated January 2, 2018 and February 28, 2018 all shares of Series B Preferred Stock have been
repurchased by the Company.
Subsequent to the issuance of the Series B Preferred Shares, 1347 Advisors transferred 60,000 of its 120,000
Series B Preferred Shares to IWS Acquisition Corporation, an affiliate of KFSI. On January 2, 2018, the Company entered
into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant to which the Company
repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740, representing
(i) the par value of the Series B Preferred Shares, or $1,500 and; (ii) declared and unpaid dividends with respect to the
dividend payment due on February 23, 2018, or $240. Also in connection with the Stock Purchase Agreement, the
Performance Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated.
In connection with the termination, the Company made a cash payment of $300 to 1347 Advisors.
41
1347 PROPERTY INSURANCE HOLDINGS, INC.
Pursuant to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series
B Preferred Shares from IWS Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of
a capital raise resulting in the Company receiving net proceeds in excess of $5,000. On February 28, 2018, the Company
purchased the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for $1,500 with the proceeds
from the Company’s Series A Preferred Share offering (discussed under the heading “Shareholders’ Equity” below).
The foregoing transactions were approved by a special committee of the Board of Directors of the Company
consisting solely of independent directors.
Since the Series B Preferred Shares had a mandatory redemption provision requiring redemption on February 24,
2020, we were required to classify the shares as a liability on our balance sheet instead of recording the value of these
shares in equity. The resulting liability was recorded at a discount to the ultimate redemption amount of the Series B
Preferred Shares based upon an analysis of the cash payments expected to occur under the terms of the Series B Preferred
Shares discounted for the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of
$372 and $355 was charged to operations for the years ended December 31, 2017 and 2016, respectively.
Investment in Limited Liability Company
On April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary
business is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund to which the Company has
committed to invest $500, of which the Company has invested $211 as of December 31, 2017. The managing member of
Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s Board of Directors on April 21, 2016.
Public Offering of Preferred Stock
A fund managed by Fundamental Global Investors, LLC, one of the Company’s significant shareholders,
purchased an aggregate of 34,620 shares of Series A Preferred Stock in the Company’s public offering of the shares
(discussed under Note 18 – Subsequent Events to the consolidated financial statements in Item 8 of this report), at the
public offering price of $25.00 per share, including 31,680 shares purchased for a total of approximately $792 on February
28, 2018, the closing date of the offering, and 2,940 shares purchased for a total of approximately $74 on March 26, 2018
in connection with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the
underwriters on the purchase of these shares.
Off Balance Sheet Arrangements
None.
Contractual Obligations
As of December 31, 2017, the Company had the following amounts due under its operating leases for facilities in
Baton Rouge, Louisiana, and Tampa, Florida.
Year ending December 31,
2018 ..................................................................................................... $
2019 .....................................................................................................
2020 .....................................................................................................
Total ..................................................................................................... $
Amounts due
under operating
leases
366
327
79
772
Shareholders’ Equity
On December 1, 2014, the Company’s Board of Directors authorized a share repurchase program for up to 500,000
shares of the Company’s common stock, which expired on December 31, 2016. Through December 31, 2016, the Company
had repurchased an aggregate 401,359 shares at an aggregate purchase price of $2,927, or $7.29 per share, including all
fees and commissions. On January 29, 2016, the Company retired 250,000 of its treasury shares, resulting in a
reclassification of the purchase price of $1,917 to additional paid in capital.
42
47,506
38
(1,195 )
-
11
(3 )
46,357
31
224
294
1347 PROPERTY INSURANCE HOLDINGS, INC.
On May 23, 2017, the Company announced that Dan Case has been appointed to the position of Chief Operating
Officer. In connection with Mr. Case’s new employment, Mr. Case has the opportunity to purchase up to 68,027 shares of
the Company’s common stock on the open market or in direct purchases from the Company until June 15, 2018 and at the
end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of restricted stock
units (“RSUs”) of the Company equal to two RSUs for each share purchased by Mr. Case. The aggregate maximum number
of shares of the Company’s common stock that may be acquired pursuant to this arrangement, including through open
market purchases, purchases from the Company and grants from the Company, is 204,081. As of December 31, 2017, Mr.
Case had purchased 56,276 shares of the Company’s common stock pursuant to this arrangement, 28,000 of which shares
were purchased directly from the Company at a purchase price of $8.00 per share on September 14, 2017.
The table below presents the primary drivers behind the changes to total shareholders’ equity for the years ended
December 31, 2017 and 2016.
Common
Shares
Outstanding
Treasury
Shares
Total
Shareholders’
Equity
Balance, January 1, 2016 ................................
Stock compensation expense .............................
Purchase of treasury stock .................................
Retirement of treasury stock..............................
Net income ........................................................
Unrealized loss on investment portfolio (net of
income taxes) ....................................................
Balance, December 31, 2016 ...........................
6,134,274
-
(177,508 )
-
-
223,851 $
-
177,508
(250,000 )
-
-
5,956,766
-
151,359
Stock compensation expense .............................
Issuance of common stock ................................
Net income ........................................................
Unrealized loss on investment portfolio (net of
income taxes) ....................................................
Balance, December 31, 2017 ...........................
Offering of 8.00% Cumulative Preferred Stock, Series A
-
28,000
-
-
-
-
-
5,984,766
-
151,359 $
(104 )
46,802
On February 28, 2018, we completed the underwritten public offering of 640,000 preferred shares designated as
8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Preferred Stock”). In addition, on March 26,
2018, we issued an additional 60,000 shares of Preferred Stock pursuant to the exercise of the underwriters’ over-allotment
option. Dividends on the Preferred Stock are cumulative from the date of original issue and will be payable quarterly on
the 15th day of March, June, September and December of each year, commencing on June 15, 2018, when, as and if
declared by our Board of Directors or a duly authorized committee thereof. The first dividend record date for the Preferred
Stock will be June 1, 2018. Dividends will be payable out of amounts legally available therefor at a rate equal to 8.00%
per annum per $25.00 of stated liquidation preference per share, or $2.00 per share of Preferred Stock per year.
The Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the Preferred Stock will
be redeemable at our option, for cash, in whole or in part, at a redemption price of $25.00 per share of Preferred Stock,
plus all accumulated and unpaid dividends to, but not including, the date of redemption. The Preferred Stock has no stated
maturity and will not be subject to any sinking fund or mandatory redemption. The Preferred Stock will generally have no
voting rights except as provided in the Certificate of Designations or as from time to time provided by law. The affirmative
vote of the holders of at least two-thirds of the outstanding shares of Preferred Stock and each other class or series of voting
parity stock will be required at any time for us to authorize, create or issue any class or series of our capital stock ranking
senior to the Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution
or winding up, to amend any provision of our Certificate of Incorporation so as to materially and adversely affect any rights
of the Preferred Stock or to take certain other actions.
The shares have been listed on the Nasdaq Stock Market under the symbol “PIHPP”, and trading of the shares
commenced on March 22, 2018. Net proceeds received by Company were approximately $16,400. The Company used
$1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Stock from IWS Acquisition Corporation,
as previously discussed under the heading “Related Party Transactions”, with the remainder of the proceeds to be used to
support organic growth, including spending for business development, sales and marketing and working capital, and for
future potential acquisition opportunities.
43
1347 PROPERTY INSURANCE HOLDINGS, INC.
Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Gross Premiums Written
The following table shows our gross premiums written by state and by line of business for the years ended
December 31, 2017 and 2016.
Year Ended December 31,
Line of Business
Homeowners – LA ...................................................... $
Special Property – LA .................................................
Total Louisiana ............................................................
2017
2016
Change
33,039 $
16,286
49,325
32,380 $
14,151
46,531
Homeowners – TX ......................................................
Special Property – TX .................................................
Total Texas ..................................................................
7,927
9,735
17,662
1,235
3,561
4,796
Special Property – FL ..................................................
Total Florida ................................................................
5,692
5,692
-
-
659
2,135
2,794
6,692
6,174
12,866
5,692
5,692
Gross Premium Written ............................................... $
72,679 $
51,327 $
21,352
The increase in gross written premiums was primarily the result of organic growth in voluntary production from
our independent agencies in Texas as well as from our first depopulation of policies from FL Citizens on December 19,
2017.
Ceded Premiums Written
Ceded premiums written increased by $2,042 to $22,583 for the year ended December 31, 2017, compared to
$20,541 for the year ended December 31, 2016. The increase in ceded premiums written is primarily due to an increase in
the total insured value of the Company’s book of business year over year as well as the change in the geographic mix of
coverage that we provide. While the limits purchased under our catastrophe excess of loss reinsurance (“CAT XOL”) and
aggregate programs did not change year over year, our treaty years run from June 1st through May 31st of each year, thus
the two year period ended December 31, 2017 is covered by ceded premiums written under three separate reinsurance
treaties. Therefore, the increase in ceded premiums written for the twelve month period can also be attributed to the increase
in limits purchased when comparing our 2015/2016 treaty with the Company’s two most recent treaties (2016/2017 and
2017/2018). The following table is a summary of the key provisions under each of our treaties.
Wind/Hail loss occurrence clause(1) ................
Retention on first occurrence .......................... $
Retention on second occurrence ..................... $
Limit of coverage including first event
retention .......................................................... $
Franchise deductible(2) .................................... $
2015/2016 CAT
XOL Treaty
06/01/15 – 05/31/16
144 hours
4,000 $
1,000 $
2016/2017 CAT
XOL Treaty
06/01/16 – 05/31/17
144 hours
5,000 $
2,000 $
2017/2018 CAT
XOL Treaty
06/01/17 – 05/31/18
144 hours
5,000
2,000
140,000 $
- $
200,000 $
125 $
200,000
250
(1) Specifies the time period during which our losses from the same occurrence may be aggregated and
applied to our retention and limits. We may pick the date and time when the period of consecutive hours
begin in order to maximize our recovery.
(2) Specifies the gross incurred losses by which each 144 hour loss occurrence must exceed before recoveries
are generated under our aggregate treaty. Once the franchise deductible is met, all losses under the loss
occurrence qualify for recovery, not just those losses which exceed the franchise deductible amount.
The total cost of our CAT XOL and aggregate coverage is estimated to be approximately $24,700 for the
2017/2018 treaty year, compared to $21,200 for the 2016/2017 treaty year.
44
Net Premium Earned
1347 PROPERTY INSURANCE HOLDINGS, INC.
The following table shows our net premiums earned by state and by line of business.
Year Ended December 31,
Line of Business
Homeowners – LA ...................................................... $
Special Property – LA .................................................
Total Louisiana ............................................................
Homeowners – TX ......................................................
Special Property – TX .................................................
Total Texas ..................................................................
Special Property – FL ..................................................
Total Florida ................................................................
2017
2016
Change
21,511 $
7,303
28,814
20,443 $
7,104
27,547
3,261
2,818
6,079
309
309
487
2,414
2,901
-
-
1,068
199
1,267
2,774
404
3,178
309
309
Net Premium Earned ................................................... $
35,202 $
30,448 $
4,754
The increase in net premiums earned is due to the increase in gross premiums written less premiums ceded as
previously discussed. Premium earned on a direct and ceded basis is as shown in the following table.
Year Ended December 31,
2017
2016
Change
Gross premium earned .................................. $
Ceded premium earned .................................
Net premium earned ..................................... $
58,977 $
23,775
35,202 $
48,947 $
18,499
30,448 $
10,030
5,276
4,754
Other Income
Other income increased $717, to $1,981 as of December 31, 2017, compared to $1,264 as of December 31, 2016.
Other income is comprised of claims adjusting fee revenue earned by our subsidiary, ClaimCor, policy fee income charged
to our policyholders for inspections, premium financing fees for those policyholders which elect to pay their premiums on
an installment basis, and also commission revenue resulting from a brokerage sharing agreement between our insurance
subsidiary, Maison, and the intermediary Maison uses to place its CAT XOL reinsurance program.
Net Losses and Loss Adjustment Expenses
Net losses and LAE represent both actual payments made and changes in estimated future payments to be made
to our policyholders. Net losses and LAE are as shown in the following table.
Year ended December 31,
2017
2016
Loss Ratio
(%)
Loss Ratio
(%)
Weather-Related Non-Catastrophe Losses .. $
Non-Weather Related Losses ......................
Subtotal Core Losses(1) ............................
Catastrophe Losses(2) ...................................
Prior Period Development (Redundancy)(3)
Total ............................................................ $
Losses ($)
3,551
7,858
11,409
6,700
(2,209 )
15,900
Losses ($)
1,133
5,815
6,948
9,805
(381 )
16,372
10.1 % $
22.3 %
32.4 %
19.0 %
(6.2 )%
45.2 % $
3.7 %
19.1 %
22.8 %
32.2 %
(1.2 )%
53.8 %
(1) We define Core Loss as net losses and LAE less the sum of Catastrophe Losses and prior period
development (redundancy).
(2) Property Claims Services (PCS) defines a catastrophic event as an event where the insurance industry is
estimated to incur over $25,000 of insured property damage that also impacts a significant number of
insureds. For purposes of the above table, we have defined a Catastrophe as a PCS event where our
estimated cost exceeds $1,500.
(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.
45
1347 PROPERTY INSURANCE HOLDINGS, INC.
Our loss ratio (net losses and LAE divided by net premiums earned) for the year ended December 31, 2017 was
45.2% compared to 53.8% for the prior year. While we experienced an increase in our core loss ratio, this was offset by a
decrease in our catastrophe loss ratio when comparing periods. Although Hurricane Harvey was a significant event for us,
as we expect our total gross incurred losses to be approximately $27,000 for this storm, due to our reinsurance program,
our net incurred losses from Hurricane Harvey are limited to $5,000. Also included in our catastrophe loss figure for the
current year is PCS event 1714, which was a series of wind/hail storms which impacted our policyholders in both Louisiana
and Texas in early February, 2017, resulting in approximately $1,700 in net incurred losses for the year ended December
31, 2017. These net losses from event 1714, along with $5,000 in net incurred losses from Hurricane Harvey, represent the
extent of our catastrophe losses for the year ended December 31, 2017 as shown in the preceding table. In comparison, for
the year ended December 31, 2016, we experienced three catastrophe events as follows:
● PCS CAT 1616 – Our Louisiana policyholders experienced primarily tornado damage, but also damage
due to other high winds and hail during these storms which occurred in late February, 2016. The
Company’s gross incurred losses from this event for the year ended December 31, 2016 were $6,501.
After recoveries available to us under our excess of loss and per risk reinsurance treaties, our net incurred
losses from this event were $3,890.
● PCS CAT 1617 – This event also primarily impacted our Louisiana policyholders who experienced
damage from wind, hail, lightning and flooding between March 5-10, 2016. Our gross incurred losses
from this event for the year ended December 31, 2016 were $1,597, while net incurred losses were $1,000
after recoveries under our excess of loss treaty.
● PCS CAT 1644 – This event impacted our Louisiana policyholders as a result of heavy rains and wind
in the state between August 11-16, 2016. Our gross and net incurred losses from these storms for the year
ended December 31, 2016 were $10,000 and $4,915, respectively.
Our loss ratio from weather related non-catastrophe losses has increased year over year, from 3.7% for the year
ended December 31, 2016 to 10.1% for the year ended December 31, 2017. This increase is attributable to a reinsurance
benefit we received in the prior year under our aggregate treaty which is a part of our catastrophe excess of loss reinsurance
program. Under both of our 2015/2016 and 2016/2017 aggregate treaties, we were able to recover on weather-related non-
catastrophe losses from our reinsurers as our combined first and second occurrence retentions of $5,000 and $7,000, were
met in each respective treaty year. As we have not met the combined first and second occurrence retention of $7,000 under
our 2017/2018 aggregate treaty as of December 31, 2017 we have not generated any recoveries from our reinsurers for
non-catastrophe weather losses occurring after June 1, 2017. Our program is structured, however, such that we are able to
continue to accumulate losses to our aggregate treaty through May 31, 2018. Should the accumulation of losses exceed our
$7,000 retention before May 31, 2018, we will begin to generate recoveries on our non-catastrophe weather losses in 2018.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred acquisition costs for the year ended December 31, 2017 was $11,080, compared to
$8,492 for the year ended December 31, 2016 and includes items such as commissions earned by our agencies, premium
taxes, assessments, and policy processing fees. Expressed as a percentage of gross premiums earned, amortization was
18.8% for 2017, compared to 17.4% for 2016. The increase in amortization of deferred acquisition costs as a percentage
of gross earned premiums can be attributed to an increase in the effective rate of the premium taxes that we pay due to the
loss of an investment credit that we had received on our premium taxes in previous years. Effective January 1, 2017, the
State of Louisiana amended this credit such that certain assets such as cash and money market funds held in the state of
Louisiana would no longer qualify as a tax credit on the Company’s premium taxes. On December 19, 2017, we participated
in our first depopulation of policies from FL Citizens. Under the terms of its depopulation program, FL Citizens does not
charge insurers a ceding commission for those premiums assumed, unlike LA Citizens and TWIA, which charge a ceding
commission of 16% and approximately 22% of the premiums assumed from each entity, respectively. As we had
approximately $5,692 in unearned premium related to our depopulation of FL Citizens policies as of December 31, 2017,
with no corresponding deferred policy acquisition costs related to commissions paid on these premiums, we expect this to
contribute to the reduction of the ratio of deferred policy acquisition cost amortization to gross premiums earned in 2018.
Upon renewal of these policies, however, we will pay our customary commission percentage to our independent agencies,
which will be charged to deferred policy acquisition cost amortization throughout the coverage period of the renewal
policies.
General and Administrative Expenses
General and administrative expenses increased $2,386 to $9,304 for the year ended December 31, 2017, compared
to $6,918 for the year ended December 31, 2016. Expressed as a percentage of gross premium earned, general and
administrative expenses were 15.8% and 14.1%, respectively. The largest drivers in the increase in general and
administrative expense include employee costs and professional fees. Employee costs accounted for approximately 34%
of the increase as we have increased staffing to support our growth in Texas and Florida while professional fees accounted
for approximately 37% of the increase as we finalized a review of the rates that we charge on our risks in Louisiana and
also have initiated filings for the new products that we plan to offer in Florida.
46
1347 PROPERTY INSURANCE HOLDINGS, INC.
Income Tax Expense (Benefit)
Income tax expense for the year ended December 31, 2017 was $1,198 compared to $108 for the year ended
December 31, 2016. The effective rate for income taxes was 80% for the current year, resulting primarily from a write
down of the Company’s net deferred tax assets associated with the passage of the Tax Cuts and Jobs Act on December 22,
2017, which reduced the corporate federal income tax rate from 35% to 21% beginning in the year 2018. As our net deferred
tax assets are, by definition, only available to be used by us for tax years beginning in 2018 and later, we were required to
write down the value of these assets to the newly enacted rate of 21%, while the current portion of our federal income
taxes, related to 2017, were recorded at 35%. Were it not for the write-down of our net deferred tax assets as a result of the
passage of the Tax Cuts and Jobs Act, our effective rate for income taxes would have been approximately 38%, including
state tax, for the year ended December 31, 2017.
Net Income
As a result of the foregoing, the Company’s net income for the year ended December 31, 2017 was $294, or $0.05
per diluted share compared to $11, or $0.00 per diluted share for the year ended December 31, 2016.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments
and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily
by funds generated from operations, and from the proceeds from the sales of our common and preferred stock. Cash
provided from these sources is used primarily for loss and loss adjustment expense payments as well as 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.
On February 28, 2018, we completed the underwritten public offering of preferred shares designated as 8.00%
Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Preferred Stock”), as previously discussed under
the heading “Shareholders Equity”. In addition, on March 26, 2018, we issued an additional 60,000 shares of Preferred
Stock in connection with the underwriters’ exercise of their over-allotment option. Net proceeds received by Company
were approximately $16,400. The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series B
Preferred Stock from IWS Acquisition Corporation, as previously discussed under the heading “Related Party
Transactions”, with the remainder of the proceeds to be used to support organic growth, including spending for business
development, sales and marketing and working capital, and for future potential acquisition opportunities.
Cash Flows
The following table summarizes the Company’s consolidated cash flows for the years ended December 31, 2017
and 2016.
Summary of Cash Flows
Net cash provided by operating activities ....................................... $
Net cash used by investing activities ..............................................
Net cash used by financing activities .............................................
Net decrease in cash and cash equivalents ..................................... $
2017
2016
7,527 $
(26,981 )
(16 )
(19,470 ) $
3,372
(6,849 )
(1,435 )
(4,912 )
Year ended December 31,
Year ended December 31, 2017
For the year ended December 31, 2017, net cash provided by operating activities as reported on our consolidated
statement of cash flows was $7,527, resulting from our collection of approximately $42,441 in premiums for the year (net
of the amounts we have ceded to our reinsurers), less the payment of approximately $16,209 in loss and LAE expenses
(net of ceded recoveries collected from our reinsurers). We also paid approximately $9,702 in commissions to our agencies,
as well as to Brotherhood and Citizens as ceding commissions and $3,666 in salaries and benefits paid to our employees.
Lastly, cash payments in the approximate amount of $5,337 were made for taxes, assessments and all other general and
administrative expenses.
47
1347 PROPERTY INSURANCE HOLDINGS, INC.
The net cash used by investing activities as reported on our consolidated statement of cash flows was $26,981,
resulting primarily from the net purchases of fixed income, equity securities and short term investments for our investment
portfolio. Net cash used by financing activities was $16, which resulted from a dividend payment of $240 to 1347 Advisors
as holders of the Series B Preferred Shares issued in the MSA termination transaction, offset by the receipt of $224 from
the sale of our common stock to our Chief Operating Officer, Mr. Dan Case, at a sale price of $8.00 per share.
As a result of the foregoing, cash and cash equivalents decreased from $43,045 as of December 31, 2016 to
$23,575 as of December 31, 2017.
Year ended December 31, 2016
For the year ended December 31, 2016, net cash provided by operating activities as reported on our consolidated
statement of cash flows was $3,372. Our source of cash resulted from the collection of approximately $51,058 in premiums
in the period. This amount was reduced by the payment of $18,595 in ceded reinsurance premiums, the payment of losses
and loss adjustment expenses (net of recoveries from our reinsurers) of $15,500, commissions paid to our agents equaling
$7,075, salaries and benefits paid to our employees equaling $2,958, payments to various local and federal regulators for
premium, assessments, and income taxes in the amount of $2,068, and other net operating payments of $1,490.
Net cash used by investing activities as reported on our consolidated statements of cash flows was $6,849,
primarily due to our purchase of fixed income and equity securities for our investment portfolio.
Net cash used by financing activities was $1,435, comprised of our purchase of 177,508 of our common shares at
an aggregate purchase price of $1,195, as well as a dividend payment of $240 to the holders of our Series B Preferred
shares.
As a result of the foregoing, our net decrease in cash and cash equivalents for the year ended December 31, 2016
was $4,912.
48
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
49
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ......................................................................................... 51
Consolidated Balance Sheets as of December 31, 2017 and 2016 ................................................................................ 52
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2017 and 2016 53
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017 and 2016 ....................... 54
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016 ...................................... 55
Notes to the Consolidated Financial Statements ........................................................................................................... 56
50
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
1347 Property Insurance Holdings, Inc.
Tampa, FL
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. (the
“Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income and
comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31,
2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company and
subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2012.
Grand Rapids, Michigan
March 26, 2018
51
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)
December 31, 2017 December 31, 2016
Investments:
ASSETS
Fixed income securities, at fair value (amortized cost of $51,503 and
$26,793, respectively) ............................................................................ $
Equity investments, at fair value (cost of $2,582 and $1,000,
respectively) ...........................................................................................
Short-term investments, at cost ..............................................................
Other investments, at cost ......................................................................
Total investments .......................................................................................
Cash and cash equivalents .........................................................................
Deferred policy acquisition costs, net ........................................................
Premiums receivable, net of allowance for credit losses of $33 and $38,
respectively ................................................................................................
Ceded unearned premiums .........................................................................
Reinsurance recoverable on paid losses .....................................................
Reinsurance recoverable on loss and loss adjustment expense reserves ....
Funds deposited with reinsured companies ...............................................
Current income taxes recoverable ..............................................................
Deferred tax asset, net ................................................................................
Property and equipment, net ......................................................................
Other assets ................................................................................................
Total assets ................................................................................................ $
LIABILITIES
Loss and loss adjustment expense reserves................................................ $
Unearned premium reserves ......................................................................
Ceded reinsurance premiums payable .......................................................
Agency commissions payable ....................................................................
Premiums collected in advance ..................................................................
Funds held under reinsurance treaties ........................................................
Accounts payable and other accrued expenses ..........................................
Series B Preferred Shares, $25.00 par value, 1,000,000 shares
authorized, 120,000 shares issued and outstanding at December 31,
2017 and 2016 ...........................................................................................
Total liabilities ...........................................................................................
Commitments and contingencies (Note 17)
SHAREHOLDERS’ EQUITY
Common stock, $0.001 par value; 10,000,000 shares authorized,
6,136,125 and 6,108,125 issued at December 31, 2017 and 2016,
respectively and 5,984,766 and 5,956,766 outstanding at December 31,
2017 and 2016, respectively ......................................................................
Additional paid-in capital ..........................................................................
Retained earnings .......................................................................................
Accumulated other comprehensive loss, net of tax ....................................
Less: treasury stock at cost, 151,359 shares as of December 31, 2017
and 2016 ....................................................................................................
Total shareholders’ equity .........................................................................
Total liabilities and shareholders’ equity ................................................... $
51,122 $
2,707
417
945
55,191
23,575
6,785
10,831
3,655
1,952
8,971
2,250
64
70
205
888
114,437 $
13,488 $
39,523
5,532
695
1,078
206
4,273
2,840
67,635
6
47,064
910
(169 )
47,811
(1,009 )
46,802
114,437 $
26,559
1,136
196
505
28,396
43,045
4,389
2,923
4,847
444
3,652
500
1,195
420
250
788
90,849
6,971
25,821
5,229
497
1,128
73
2,065
2,708
44,492
6
46,809
616
(65 )
47,366
(1,009 )
46,357
90,849
See accompanying notes to consolidated financial statements.
52
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
($ in thousands, except per share amounts)
Revenue:
Net premiums earned ............................................................................................ $
Net investment income .........................................................................................
Other income ........................................................................................................
Total revenue ............................................................................................................
Expenses:
Net losses and loss adjustment expenses ..............................................................
Amortization of deferred policy acquisition costs ................................................
General and administrative expenses ....................................................................
Accretion of discount on Series B Preferred Shares .............................................
Total expenses ..........................................................................................................
Income before income tax expense ...........................................................................
Income tax expense ...................................................................................................
Net income ................................................................................................................ $
Year ended December 31,
2017
2016
35,202 $
965
1,981
38,148
15,900
11,080
9,304
372
36,656
1,492
1,198
294 $
30,448
544
1,264
32,256
16,372
8,492
6,918
355
32,137
119
108
11
Net earnings per common share:
Basic and diluted ................................................................................................... $
0.05 $
-
Weighted average common shares outstanding:
Basic .....................................................................................................................
Diluted ..................................................................................................................
5,965,051
5,970,096
6,047,979
6,047,979
Consolidated Statements of Comprehensive Income
Net income ................................................................................................................ $
Unrealized losses on investments available for sale, net of income taxes ................
Comprehensive income............................................................................................. $
294 $
(104 )
190 $
11
(3 )
8
See accompanying notes to consolidated financial statements.
53
–
–
–
–
–
–
Balance, January 1, 2016
Stock compensation
expense ...........................
Repurchases of common
stock ...............................
Retirement of treasury
shares ..............................
Net income .....................
Other comprehensive
loss .................................
Balance, December 31,
2016 ................................
Stock compensation
expense ...........................
Issuance of common
stock ...............................
Net income .....................
Other comprehensive
loss .................................
Balance, December 31,
2017 ................................
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
($ in thousands, except share amounts)
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
– 6,134,274 $
Paid-in
Capital
6 223,851 $ (1,731 ) $ 48,688 $
Retained
Earnings
605 $
–
–
–
–
–
38
– (177,508 )
– 177,508 (1,195 )
–
–
–
–
–
–
–
– (250,000 ) 1,917 (1,917 )
–
–
–
–
–
–
–
–
–
–
–
11
–
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
(62 ) $
47,506
–
–
–
–
(3 )
38
(1,195 )
–
11
(3 )
– $
– 5,956,766 $
6 151,359 $ (1,009 ) $ 46,809 $
616 $
(65 ) $
46,357
–
–
–
–
–
–
– 28,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31
–
224
–
–
294
–
–
–
31
224
294
–
–
(104 )
(104 )
– $
– 5,984,766 $
6 151,359 $ (1,009 ) $ 47,064 $
910 $
(169 ) $
46,802
See accompanying notes to consolidated financial statements
54
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
Year ended December 31,
2017
2016
Cash provided by (used in):
Operating activities:
Net income ................................................................................................................ $
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount on Series B Preferred Shares .............................................
Net deferred income taxes ....................................................................................
Stock compensation expense ................................................................................
Depreciation expense ............................................................................................
Changes in operating assets and liabilities:
Premiums receivable, net ..................................................................................
Reinsurance recoverable on paid losses and loss reserves ................................
Amounts held on deposit with reinsured companies .........................................
Ceded unearned premiums ................................................................................
Deferred policy acquisition costs, net ...............................................................
Loss and loss adjustment expense reserves .......................................................
Premiums collected in advance .........................................................................
Unearned premium reserves .............................................................................
Ceded reinsurance premiums payable ...............................................................
Current income taxes payable ...........................................................................
Other, net ..........................................................................................................
Net cash provided by operating activities .................................................................
Investing activities:
Purchases of furniture and equipment ...................................................................
Purchases of fixed income securities ....................................................................
Proceeds from the sale of fixed income securities ................................................
Purchases of equity securities ...............................................................................
Proceeds from the sale of equity securities ...........................................................
Net proceeds from the sales of short-term investments ........................................
Purchases of other investments .............................................................................
Net cash used by investing activities ........................................................................
Financing activities:
Proceeds from issuance of common stock, net .....................................................
Payment of dividends on Series B Preferred shares ..............................................
Purchases of treasury stock ...................................................................................
Net cash used by financing activities ........................................................................
294 $
372
404
31
73
(7,908 )
(6,826 )
(1,750 )
1,192
(2,396 )
6,517
(50 )
13,702
303
1,131
2,438
7,527
(28 )
(30,088 )
5,378
(2,562 )
980
(221 )
(440 )
(26,981 )
224
(240 )
-
(16 )
Net decrease in cash and cash equivalents ................................................................
Cash and cash equivalents at beginning of period ....................................................
Cash and cash equivalents at end of period .............................................................. $
(19,470 )
43,045
23,575 $
11
355
87
38
67
(528 )
(3,976 )
225
(2,042 )
(359 )
4,848
258
2,379
1,946
(230 )
293
3,372
(83 )
(10,811 )
4,350
(1,000 )
–
953
(258 )
(6,849 )
-
(240 )
(1,195 )
(1,435 )
(4,912 )
47,957
43,045
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ..................................................................................................... $
155 $
128
See accompanying notes to consolidated financial statements.
55
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
1. Nature of Business
1347 Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is an insurance holding company
specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida.
We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and
changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we
completed an initial public offering of our common stock. Prior to March 31, 2014, we were a wholly owned subsidiary of
Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a
publicly owned holding company based in Canada. As of December 31, 2017, KFSI and its affiliates owned approximately
8.3% of our outstanding shares of common stock and warrants and performance shares to acquire approximately an
additional 23.9% of our outstanding shares of common stock. In addition, as of December 31, 2017, Fundamental Global
Investors, LLC and its affiliates, or FGI, beneficially owned approximately 36.0% of our outstanding shares of common
stock. D. Kyle Cerminara, a member of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner
of FGI, and Lewis M. Johnson, a member of our Board of Directors, serves as President, Co-Founder and Partner of FGI.
We have three wholly-owned subsidiaries: Maison Insurance Company, or “Maison”, Maison Managers Inc., or
“MMI”, and ClaimCor, LLC, or “ClaimCor”.
Through Maison, we began providing property and casualty insurance to individuals in Louisiana in December
2012. In September 2015, Maison began writing manufactured home policies in the State of Texas on a direct basis. Our
current insurance offerings in Louisiana and Texas include homeowners insurance, manufactured home insurance and
dwelling fire insurance. We write both full peril property policies as well as wind/hail only exposures and we produce new
policies through a network of independent insurance agencies. We refer to the policies we write through independent
agencies as voluntary policies. We also wrote commercial business in Texas through a quota share agreement with
Brotherhood Mutual Insurance Company (“Brotherhood”). Through this agreement, we had assumed wind/hail only
exposures on certain churches and related structures Brotherhood insures throughout the State of Texas.
In addition to the voluntary policies that Maison writes, we have participated in the last six rounds of take-outs
from Louisiana Citizens Property Insurance Corporation, or “LA Citizens”, occurring on December 1st of each year, as
well as the inaugural depopulation of policies from the Texas Windstorm Insurance Association, or “TWIA”, which
occurred on December 1, 2016. Under these programs, state-approved insurance companies, such as Maison, have the
opportunity to assume insurance policies written by LA Citizens and TWIA. The majority of policies that we have obtained
through LA Citizens as well as all of the policies we have obtained through TWIA cover losses arising only from wind and
hail. Prior to our take-out, some of LA Citizens and TWIA policyholders may not have been able to obtain such coverage
from any other marketplace.
On March 1, 2017, Maison received a certificate of authority from the Florida Office of Insurance Regulation, or
“FOIR”, which authorized Maison to write personal lines insurance in Florida. Pursuant to the Consent Order issued,
Maison has agreed to comply with certain requirements as outlined by the FOIR until Maison can demonstrate three
consecutive years of statutory net income following our admission into Florida as evidenced by its Annual Statement filed
with the National Association of Insurance Commissioners. To comply with a requirement of the consent order that Maison
have at least $35 million in capital and surplus, and maintain an RBC ratio of 300% or more, on March 31, 2017, Maison
received a capital contribution from PIH in the amount of $16 million.
On September 29, 2017, Maison received authorization from the FOIR to assume personal lines policies from
Florida Citizens Property Insurance Corporation (“FL Citizens”) pursuant to a proposal of depopulation which Maison
filed with FL Citizens on August 18, 2017. Accordingly, on December 19, 2017, Maison entered the Florida market via
the assumption of approximately 3,500 policies from FL Citizens.
MMI serves as our management services subsidiary, known as a managing general agency, and provides
underwriting, policy administration, claims administration, marketing, accounting and other management services to
Maison. MMI contracts primarily with independent agencies for policy sales and services, and also contracts with an
independent third-party for policy administration services. As a managing general agency, MMI is licensed by, and subject
to, the regulatory oversight of the LDI, TDI and FOIR. MMI earns commissions on a portion of the premiums Maison
writes, as well as a per policy fee which ranges from $0-$75.
56
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
On January 2, 2015, we completed our acquisition of 100% of the membership interests of ClaimCor, a claims
and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor,
and also through various third-party claims adjusting companies during times of high volume, so that we may provide
responsive claims handling service when catastrophe events occur which impact many of our policyholders. We have the
ultimate authority over the claims handling process, while the agencies that we appoint have no authority to settle our
claims or otherwise exercise control over the claims process.
2. Significant Accounting Policies
Basis of Presentation:
These statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated upon consolidation.
The Use of Estimates in the Preparation of Consolidated Financial Statements:
The preparation of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets
and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses
during the period reported. Actual results could differ from those estimates. Changes in estimates are recorded in the
accounting period in which the change is determined. The critical accounting estimates and assumptions in the
accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves,
valuation of fixed income securities, valuation of net deferred income taxes, the valuation of various securities we have
issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation
of deferred policy acquisition costs, and stock-based compensation expense.
Investments:
Investments in fixed income and equity 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 income.
Limited liability investments include investments in limited liability companies in which the Company’s interests
are deemed minor and therefor, are accounted for under the cost method of accounting which approximates their fair value.
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.
Realized gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in
net investment income.
Interest income is included in net investment income and is recorded as it accrues.
The Company accounts for its investments using trade date accounting.
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 income 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.
Cash and Cash Equivalents:
Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
57
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Premiums Receivable:
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.
Reinsurance:
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those
used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded
to other companies have been reported as a reduction of premium revenue and incurred net losses and loss adjustment
expenses. A reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses
that are ceded to other companies.
Deferred Policy Acquisition Costs:
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, loss adjustment,
and maintenance 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.
Income Taxes:
For taxable periods ending on or prior to March 31, 2014, the Company was 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 has filed its own U.S. consolidated federal income tax return.
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income
tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing
assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to
the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion
of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current
year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense
(benefit).
Property and Equipment:
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 $340 and $343 for the years ended December 31, 2017 and 2016, respectively.
58
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Loss and Loss Adjustment Expense Reserves:
Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred but
not yet reported loss events and the related estimated loss adjustment expenses. The Company performs a continuing review
of its loss and loss adjustment expense reserves, including its reserving techniques and its reinsurance. The loss and loss
adjustment expense reserves are also reviewed at minimum, on an annual basis by qualified third party actuaries. Since the
loss and loss adjustment expense reserves are based on estimates, the ultimate liability may be more or less than such
reserves. The effects of changes in such estimated reserves are included in the results of income in the period in which the
estimates are changed. Such changes in estimates could occur in a future period and may be material to the Company’s
results of operations and financial position in such period.
Concentration of Credit Risk:
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 and two regional banks headquartered in the Southeastern U.S. Such amounts are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. At December 31, 2017 the
Company held funds 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 significant losses related to premiums receivable from its policyholders and
management believes that amounts provided as an allowance for credit losses is adequate.
The Company 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, most of which
have an A.M. Best Rating of A- (Excellent) or better. Absent such rating, the Company has required its reinsurers to place
collateral on deposit with an independent institution under a trust agreement for the Company’s benefit.
The Company also has risk associated with the lack of geographic diversification due to the fact that Maison
exclusively underwrites policies in Louisiana, Texas and Florida. Maison insures personal property located in 63 of the 64
parishes in Louisiana. As of December 31, 2017, these policies are concentrated within these parishes, presented as a
percentage of our total direct and assumed policies in all states, as follows: Saint Tammany Parish, 9.8%, Jefferson Parish,
9.2%, and East Baton Rouge Parish, 5.8%. No other parish in Louisiana or county in Texas or Florida individually has over
5.0% of our total direct and assumed policies as of December 31, 2017. As of December 31, 2017, Maison has written or
assumed policies in 156 of the 254 counties that comprise the State of Texas, and in 28 of the 67 counties in Florida.
Revenue Recognition:
Premium revenue is recognized on a pro rata basis over the term of the respective policy contract. Unearned
premium reserves represent the portion of premium written that is applicable to the unexpired term of policies in force.
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 term 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.
Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third
party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to reinsurers and are
reported as an asset on the Company’s consolidated balance sheets.
Premiums collected in advance occur when the policyholder premium is paid in advance of the effective
commencement period of the policy and are recorded as a liability on the Company’s consolidated balance sheets.
59
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Stock-Based Compensation:
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. 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.
The Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have
been accounted for as equity based awards since, upon vesting, they are required to be settled in the Company’s common
shares. The Company used the fair value of the Company’s common stock on the date the RSUs were issued to estimate
the grant date fair value of those RSUs which vest solely based upon the passage of time, as well as a Monte Carlo valuation
model to estimate the fair value of those RSUs which vest solely upon market-based conditions. The fair value of each
RSU is recorded as compensation expense over the requisite service period, which is generally the expected period over
which the awards will vest. In the case of those RSUs which vest upon market-based conditions, should the market-based
condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as
compensation expense in the period in which the RSUs actually vest. See Note 10 for further disclosure.
Fair Value of Financial Instruments:
The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable,
accounts payable, and other accrued expenses approximate fair value due to their short-term nature. The Company
measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price
that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset
(or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair
value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. See Note 14 for further information on the fair value of the Company’s financial
instruments.
Earnings (loss) Per Common Share:
Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding
during the respective period.
Diluted earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options,
warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation
of diluted earnings (loss) per share if their effect is anti-dilutive.
Operating Segments:
The Company operates in a single segment – property and casualty insurance.
3. Recently Issued Accounting Standards
ASU 2014-09: Revenue from Contracts with Customers:
The FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers”, and related amendments
ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13, (collectively, “Topic 606”).
Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance
for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the
transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts.
Topic 606 becomes effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal
years. The Company will adopt Topic 606 on January 1, 2018, but since virtually all of the Company’s revenues relate to
insurance contracts and investment income, the adoption of Topic 606 is not expected to have a material impact on the
Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within
the scope of Topic 606 as such are consummated.
60
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
ASU 2016-01: Financial Instruments-Overall:
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. ASU 2016-01 is effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. ASU 2016-
01 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 will impact the Company’s results of operations and earnings per share as
changes in fair value will be presented in net income rather than other comprehensive income.
ASU 2016-02: Leases:
In February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial
reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain
criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset
and a corresponding lease liability, discounted to present value, for all leases that extend beyond 12 months. For operating
leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in
the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized
separately from the amortization of the right-of-use asset in the statement of comprehensive income while the repayment
of the principal portion of the lease liability will be classified as a financing activity and the interest component will be
included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual reporting periods
beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early
adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period
presented using a modified retrospective approach. We are currently evaluating the impact of our pending adoption of ASU
2016-02 on our consolidated financial position, results of operations or cash flows. Upon adoption, we expect to recognize
right of use assets and liabilities on the consolidated statement of financial position for leases currently classified as
operating leases.
ASU 2016-09: Stock Compensation:
In March 2016, the FASB issued ASU 2016-09: Compensation – Stock Compensation: Improvement to Employee
Share-Based Payment Accounting. ASU 2016-09 was issued to simplify the accounting for share-based payment awards.
The guidance requires that all tax effects related to share-based payment be made through the statement of income at the
time of settlement as opposed to the current guidance that requires excess tax benefits to be recognized in additional paid-
in-capital. ASU 2016-09 also removes the requirement to delay recognition of a tax benefit until it reduces current taxes
payable. The change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to
opening accumulated deficit. Additionally, all tax related cash flows resulting from share-based payments are to be reported
as operating activities on the statement of cash flows, a departure from the current requirement which presents tax benefits
as an inflow from financing activities and an outflow from operating activities. ASU 2016-09 is effective for annual and
interim reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after
December 15, 2018. Early adoption is permitted with any adjustments reflected as of the beginning of the fiscal year of
adoption. The Company does not believe the adoption of ASU 2016-09 will have a material impact on its consolidated
financial statements.
ASU 2016-13: Financial Instruments – Credit Losses:
In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses: Measurement of Credit
Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with more useful
information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial
statement recognition for credit losses on financial instruments was generally delayed until the loss was probable of
occurring. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an
entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must
consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted
information instead of the current methodology which only considered past events and current conditions. Under ASU
2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP; however,
the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down.
The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited
under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating
the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
61
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
ASU 2018-02: Income Statement – Reporting Comprehensive Income:
In February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income. ASU
2018-02 was issued to address financial reporting issues that arose as a result of the passage of the Tax Cuts and Jobs Act,
enacted into law by the United States federal government on December 22, 2017. Prior to the issuance of ASU 2018-02,
GAAP required that deferred tax assets and liabilities be adjusted for the effect of a change in tax laws or rates with the
effect included in income from continuing operations in the reporting period that includes the enactment date. That
guidance was applicable even in situations in which the related income tax effects of items in accumulated other
comprehensive income were originally recognized in other comprehensive income. Under ASU 2018-02, a reclassification
from accumulated other comprehensive income to retained earnings is allowed for stranded tax effects resulting from the
Tax Cuts and Jobs Act. However, because ASU 2018-02 only relates to the reclassification of the income tax effects of the
Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in
income from continuing operations is not affected. The amendments in this update are effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company
has reviewed the guidance and has determined that ASU 2018-02 will apply to the deferred taxes on unrealized losses on
its investment portfolio, which have been previously recognized in other comprehensive income, and will result in a
reclassification of the stranded tax effect of these losses from accumulated other comprehensive income to retained
earnings. The Company does not believe the adoption of ASU 2018-02 will have a material impact on its consolidated
financial statements.
4. Investments
A summary of the amortized cost, estimated fair value, and gross unrealized gains and losses on fixed income and
equity securities classified as available-for-sale at December 31, 2017 and 2016 is as follows.
As of December 31, 2017
Fixed income securities:
U.S. government ...................................... $
State municipalities and political
subdivisions .............................................
Asset-backed securities and
collateralized mortgage obligations .........
Corporate .................................................
Total fixed income securities .......................
Equity securities:
Common stock .........................................
Warrants to purchase common stock .......
Rights to purchase common stock ...........
Total equity securities ..................................
Total fixed income and equity securities ..... $
As of December 31, 2016
Fixed income securities:
U.S. government ...................................... $
State municipalities and political
subdivisions .............................................
Asset-backed securities and
collateralized mortgage obligations .........
Corporate .................................................
Total fixed income securities .......................
Equity securities:
Common stock .........................................
Total equity securities ..................................
Total fixed income and equity securities ..... $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair
Value
- $
3
10
44
57
71
88
26
185
242 $
1 $
2
9
28
40
136
136
176 $
(37 ) $
(55 )
(227 )
(119 )
(438 )
(59 )
-
(1 )
(60 )
(498 ) $
(20 ) $
(27 )
(136 )
(91 )
(274 )
-
-
(274 ) $
2,698
5,907
19,867
22,650
51,122
2,460
154
93
2,707
53,829
1,604
2,246
11,968
10,741
26,559
1,136
1,136
27,695
2,735 $
5,959
20,084
22,725
51,503
2,448
66
68
2,582
54,085 $
1,623 $
2,271
12,095
10,804
26,793
1,000
1,000
27,793 $
62
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The table below summarizes the Company’s fixed income securities at December 31, 2017 by contractual maturity
periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties,
prior to the contractual maturity of these obligations.
Matures in:
One year or less ................................................. $
More than one to five years ...............................
More than five to ten years ................................
More than ten years ...........................................
Total ................................................................... $
Amortized
Cost
Estimated Fair
Value
1,528 $
23,133
13,217
13,625
51,503 $
1,525
22,995
13,138
13,464
51,122
The following table highlights the aggregate unrealized loss position and security type, those fixed income
securities in unrealized loss positions as of December 31, 2017 and December 31, 2016. The tables segregate the holdings
based on the period of time the investments have been continuously held in unrealized loss positions. There were 235 and
122 fixed income investments that were in unrealized loss positions as of December 31, 2017 and December 31, 2016,
respectively. The Company held 12 and zero equity securities in unrealized loss positions at December 31, 2017 and 2016,
respectively.
As of December 31, 2017
Fixed income securities:
Less than 12 Months
Greater than 12 Months
Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
U.S. government ......................................... $
State municipalities and political
subdivisions ................................................
Asset-backed securities and collateralized
mortgage obligations ..................................
Corporate ....................................................
Total fixed income securities ..........................
Equity securities:
Common stock ...........................................
Warrants to purchase common stock ..........
Rights to purchase common stock ..............
Total equity securities .....................................
Total fixed income and equity securities ........ $
1,547 $
(22 ) $
771 $
(15 ) $
2,318 $
4,267
(35 )
732
(20 )
4,999
13,530
14,690
34,034
453
15
15
483
34,517 $
(123 )
(92 )
(272 )
(59 )
-
(1 )
(60 )
(332 ) $
4,503
1,158
7,164
-
-
-
-
-
7,164 $
(104 )
(27 )
(166 )
-
-
-
-
(166 ) $
18,033
15,848
41,198
453
15
15
483
41,681 $
As of December 31, 2016
Fixed income securities:
U.S. government ......................................... $
State municipalities and political
subdivisions ................................................
Asset-backed securities and collateralized
mortgage obligations ..................................
Corporate ....................................................
Total fixed income securities .......................... $
1,303 $
(20 ) $
1,537
(27 )
9,552
5,952
18,344 $
(133 )
(91 )
(271 ) $
- $
-
460
-
460 $
- $
1,303 $
-
1,537
(3 )
-
(3 ) $
10,012
5,952
18,804 $
(37 )
(55 )
(227 )
(119 )
(438 )
(59 )
-
(1 )
(60 )
(498 )
(20 )
(27 )
(136 )
(91 )
(274 )
Under the terms of the certificate of authority granted to Maison by the Texas Department of Insurance, Maison
is required to pledge securities totaling at least $2,000 with the State of Texas. These securities consist of cash in the amount
of $300 as well as various fixed income securities listed in the preceding tables which have an amortized cost basis of
$1,701 and estimated fair value of $1,688 as of December 31, 2017.
The Company’s limited liability investments are comprised of investments in two limited partnerships which seek
to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company has
committed to a total investment of $1,000, of which the limited partnerships have drawn down approximately $645 through
December 31, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which is
wholly owned by KFSI. The Company has accounted for its limited liability investments under the cost method as the
instruments do not have readily determinable fair values and the Company does not exercise significant influence over the
operations of the limited partnerships or the underlying privately-owned companies.
63
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Also included in other investments is a certificate of deposit in the amount of $300 with an original term of 18
months deposited with the State of Florida pursuant to the terms of the certificate of authority issued to Maison from the
FOIR.
Other-than-Temporary Impairment:
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and
estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market
value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by
the Company:
●
●
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 if declines in market value are other-than-temporary for debt instruments based upon the
investment grade credit ratings from third-party credit rating agencies;
assessing the 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 risks and uncertainties inherent in the assessment methodology used to determine declines in market value
that are other-than-temporary include, but may not be limited to, the following:
●
●
●
●
the opinions of professional investment managers could be incorrect;
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.
The Company has reviewed currently available information regarding its investments with estimated fair values
that are less than their carrying amounts and believes that these unrealized losses are primarily due to temporary market
and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell these investments in
the short term, and it is not likely that it will be required to sell these investments before the recovery of their amortized
cost.
Accordingly, all of the Company’s investments were deemed to be in good standing and not impaired as of
December 31, 2017 and 2016. Additionally, there were no write-downs for other-than-temporary impairments on the
Company’s investments for the years then ended.
The Company does not have any exposure to subprime mortgage-backed investments.
Net investment income for the years ended December 31, 2017 and 2016 is as follows:
Year Ended December 31,
2017
2016
Investment income:
Interest on fixed income securities ................ $
Interest on cash and cash equivalents ............
Realized gains upon sale of securities ...........
Gross investment income ...................................
Investment expenses ......................................
Net investment income ...................................... $
820 $
145
67
1,032
(67 )
965 $
471
129
9
609
(65 )
544
64
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
5. Reinsurance
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 our reinsurers fail to meet their obligations under the applicable reinsurance agreements,
the Company would still be required to pay the insured for the loss.
Under the Company’s per-risk treaties, reinsurance recoveries are received for up to $1,750 in excess of a retention
of $250 for each loss occurring prior to June 1, 2017. Effective June 1, 2017, the Company amended its per-risk treaty such
that recoveries are received for up to $1,600 in excess of a retention of $400 for each loss occurring on June 1, 2017 or
thereafter. The Company ceded $513 and $569 in written premiums under its per-risk treaties for the years ended December
31, 2017 and 2016 respectively.
The Company’s excess of loss treaties are based upon a treaty year beginning on June 1st of each year and expiring
on May 31st of the following year. Thus, the financial statements for the years ended December 31, 2017 and 2016 contain
premiums ceded under three separate excess of loss treaties. Under the Company’s 2015/2016 excess of loss treaty which
expired on May 31, 2016, for each catastrophic event occurring within a 144-hour period, the Company receives
reinsurance recoveries of up to $121,000 in excess of a retention of $4,000 per event. The Company had also procured
“top, drop and aggregate” layer of reinsurance protection that may be used for any event above $125,000, up to a maximum
recovery of $15,000. This $15,000 second layer of coverage applied in total to all events occurring during the treaty year
of June 1, 2015 through May 31, 2016.
For both the treaty years beginning June 1, 2016 and June 1, 2017, the Company’s excess of loss treaties cover
losses of up to $170,000 in excess of a $5,000 retention per event. For any event above $175,000, the Company again
purchased top, drop and aggregate coverage, with an additional limit of $25,000. The $25,000 aggregate coverage applies
in total to all events occurring during each of the treaty years.
The Company ceded $22,070 and $19,972 in written premiums under its excess of loss treaties for the years ended
December 31, 2017 and 2016, respectively.
In June 2015, we began writing business through a quota-share agreement with Brotherhood Mutual Insurance
Company (“Brotherhood”). Through this agreement, we acted as a reinsurer, and had assumed wind/hail only exposures
on certain churches and related structures Brotherhood insures throughout the State of Texas. Our quota-share percentage
varied from 25%-100% of wind/hail premium written by Brotherhood, dependent upon the geographic location (coastal
versus non-coastal) of the risk within the State of Texas. As of December 31, 2017, we had written $2,022 in assumed
premiums through the Brotherhood agreement compared with $1,150 in the previous year, but have discontinued this
business effective January 1, 2018.
On December 1, 2016, we participated TWIA’s inaugural depopulation program whereby Maison assumed
policies for wind and hail only exposures along the Gulf Coast area of Texas. The depopulation program was structured
such that Maison reinsures TWIA under a 100% quota share agreement. As of December 31, 2017, we have written $1,397
in assumed premiums through the TWIA quota share agreement compared with $186 in the previous year.
On December 19, 2017, we participated in our first depopulation of policies from FL Citizens. The policies which
we assumed were all personal lines policies which cover the perils of wind and hail only on homes and condominiums
throughout the state. As of December 31, 2017, we have written $5,692 in assumed premiums through the FL Citizens
depopulation.
65
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The impact of reinsurance treaties on the Company’s consolidated financial statements is as follows:
Year Ended December 31,
2017
2016
Premium written:
Direct ............................................................. $
Assumed ........................................................
Ceded .............................................................
Net premium written .......................................... $
63,568 $
9,111
(22,583 )
50,096 $
Premium earned:
Direct ............................................................. $
Assumed ........................................................
Ceded .............................................................
Net premium earned .......................................... $
55,406 $
3,571
(23,775 )
35,202 $
Losses and LAE incurred:
Direct ............................................................. $
Assumed ........................................................
Ceded .............................................................
Net losses and LAE incurred ............................. $
36,287 $
10,302
(30,689 )
15,900 $
49,991
1,336
(20,541 )
30,786
46,851
2,096
(18,499 )
30,448
28,372
3,414
(15,414 )
16,372
6. Deferred Policy Acquisition Costs
Deferred policy acquisition costs (“DPAC”) consist primarily of commissions, premium taxes, assessments and
other policy processing fees incurred which are related to successful efforts to acquire new or renewal insurance contracts.
Acquisition costs deferred on insurance products are amortized over the period in which the related revenues are earned.
Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are
expensed as incurred.
DPAC as well as the related amortization expense associated with DPAC for the years ended December 31, 2017
and 2016 is as follows:
Year Ended December 31,
2017
2016
Balance, January 1, net ...................................... $
Additions ...........................................................
Amortization ......................................................
Balance, December 31, net ................................ $
4,389 $
13,476
(11,080 )
6,785 $
4,030
8,851
(8,492 )
4,389
7. Loss and Loss Adjustment Expense Reserves
The Company continually revises its estimates of the ultimate financial impact of claims made. A significant
degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision
for loss and loss adjustment expense (“LAE”) reserves. The process for establishing the provision for loss and loss
adjustment expense reserves reflects the uncertainties and significant judgmental factors inherent in predicting future
results of both known and unknown loss events. The process of establishing the provision for loss and loss adjustment
expense reserves relies on the judgment and opinions of a large number of individuals within the Company.
66
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The Company’s evaluation of the adequacy of loss and loss adjustment expense reserves includes a re-estimation
of the liability for loss and loss adjustment expense reserves relating to each preceding financial year compared to the
liability that was previously established. The following tables illustrate incurred and paid claims development as of
December 31, 2017, net of reinsurance, along with cumulative claim frequency and total incurred-but-not-reported
(“IBNR”) liabilities as well as paid claims development on reported claims within the net incurred claims amounts. We
have presented this information separately for both our homeowners’ multi-peril policies, which includes our traditional
dwelling policies and also mobile and manufactured home policies, as well as for our special property policies, which
include both our fire and allied lines of business. Our allied lines primarily consist of wind/hail only policies (including
those assumed through LA and FL Citizens and TWIA) as well as the commercial wind/hail only policies we had assumed
through our agreement with Brotherhood. The information about incurred and paid claims development for the years ended
December 31, 2012 through 2015 is presented as unaudited supplementary information.
Cumulative Incurred Losses and LAE, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2017
Accident
Year
2012
2013
2014
2015
2016
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
2017
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
- $
- $
2012 ............. $
2013 .............
2014 .............
2015 .............
2016 .............
2017 .............
Total – Homeowners Multi-Peril Policies ......................................
380
3,680
460
- $
- $
- $
355
3,878
8,442
355
4,357
7,734
15,862
$
- $
355
4,350
7,481
14,746
11,725
38,657 $
-
-
2
40
229
852
1,123
Cumulative
Number of
Reported
Claims
-
57
559
1,224
2,797
2,027
6,664
For the Years Ended December 31,
As of December 31, 2017
Accident
Year
2012
2013
2014
2015
2016
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
2017
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
- $
9,392 $
2012 ............. $
2013 .............
2014 .............
2015 .............
2016 .............
2017 .............
Total – Special Property Policies ...............................................................................
2,363
120
1,331
2,375
115
2,478
- $
- $
- $
- $
2,400
120
1,142
891
$
2,358
120
1,151
91
6,384
10,104 $
-
-
-
-
116
1,161
1,277
Cumulative
Number of
Reported
Claims
-
406
34
195
244
1,833
2,712
For the Years Ended December 31,
As of December 31, 2017
Accident
Year
2012
2013
2014
2015
2016
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
2017
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
- $
9,392 $
2012 ............. $
2013 .............
2014 .............
2015 .............
2016 .............
2017 .............
Total – All Lines..............................................................................
2,755
3,795
2,938
- $
- $
- $
2,718
3,998
9,773
2,755
4,477
8,876
16,753
$
- $
2,713
4,470
8,632
14,837
18,109
48,761 $
-
-
2
40
345
2,013
2,400
67
Cumulative
Number of
Reported
Claims
-
463
593
1,419
3,041
3,860
9,376
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Cumulative Paid Losses and LAE, Net of Reinsurance
For the Years Ended December 31,
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
- $
Accident Year
2012 ................. $
2013 .................
2014 .................
2015 .................
2016 .................
2017 .................
Total Paid Losses and LAE, net of reinsurance – Homeowners Multi-Peril Policies .................................................. $
Liability for Losses and LAE, net of reinsurance – Homeowners Multi-Peril Policies ............................................... $
- $
355
4,058
7,426
13,745
- $
355
3,674
6,867
- $
352
2,925
- $
309
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
- $
Accident Year
2012 ................. $
2013 .................
2014 .................
2015 .................
2016 .................
2017 .................
Total Paid Losses and LAE, net of reinsurance – Special Property Policies ................................................................ $
Liability for Losses and LAE, net of reinsurance – Special Property Policies ............................................................. $
- $
2,340
120
1,112
386
- $
2,346
120
1,124
- $
2,325
99
- $
2,275
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
- $
Accident Year
2012 ................. $
2013 .................
2014 .................
2015 .................
2016 .................
2017 .................
Total Paid Losses and LAE, net of reinsurance – All Lines ........................................................................................ $
Liability for Losses and LAE, net of reinsurance – All Lines ...................................................................................... $
- $
2,695
4,178
8,538
14,131
- $
2,701
3,794
7,991
- $
2,677
3,024
- $
2,584
2017
-
355
4,340
7,435
14,404
9,016
35,550
3,107
2017
-
2,358
120
1,151
(25 )
5,090
8,694
1,410
2017
-
2,713
4,460
8,586
14,379
14,106
44,244
4,517
A reconciliation of the net incurred and paid loss development tables to the liability for loss and loss adjustment
expenses on the balance sheet is as follows.
As of December 31,
2017
2016
Net Liability for Loss and LAE Reserves
Homeowners Multi-Peril Policies .............................................. $
Special Property Policies ............................................................
Net Liability for Loss and LAE, net of reinsurance – All Lines $
Reinsurance Recoverable on Loss and LAE Reserves
Homeowners Multi-Peril Policies .............................................. $
Special Property Policies ............................................................
Reinsurance Recoverable on Loss and LAE Reserves – All
Lines ........................................................................................... $
3,107 $
1,410
4,517 $
1,562 $
7,409
8,971 $
Total Gross Liability for Loss and LAE Reserves – All Lines ...... $
13,488 $
2,724
595
3,319
2,565
1,087
3,652
6,971
68
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The changes in the provision for unpaid losses and loss adjustment expenses for the years ended December 31,
2017 and 2016 is as follows:
Year Ended December 31,
2017
2016
Balance, Jan 1, gross of reinsurance ................................ $
6,971 $
2,123
Less reinsurance recoverable on loss and LAE
expense reserves ..........................................................
Balance, beginning of period, net of reinsurance .............
Incurred related to:
Current year .................................................................
Prior years ...................................................................
Paid related to:
Current year .................................................................
Prior years ...................................................................
Balance, December 31, net of reinsurance .......................
Plus reinsurance recoverable related to loss and LAE
expense reserves ..........................................................
Balance, December 31, gross of reinsurance ................... $
(3,652 )
3,319
18,109
(2,209 )
(14,106 )
(596 )
4,517
8,971
13,488 $
(120 )
2,003
16,753
(381 )
(14,131 )
(925 )
3,319
3,652
6,971
The provision for unpaid losses and loss adjustment expenses attributable to insured events of prior years’
developed favorably by approximately $2,209 and $381 in 2017 and 2016, respectively. The favorable development is the
result of the continual re-estimation of unpaid losses and loss adjustment expenses. These changes are generally a result of
ongoing analysis of recent loss development, economic, legal, legislative, and other trends in the industry. Changes in
original estimates are included in current period operations.
The following supplementary information provides average historical claims duration as of December 31, 2017.
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
(unaudited)
1
85.0 %
88.8 %
85.8 %
Age of loss (in years) .........................
Homeowners Multi-Peril Policies ......
Special Property Policies....................
All Lines .............................................
4
0.7 %
-%
0.6 %
3
1.0 %
0.2 %
0.9 %
5.2 %
(3.5 )%
3.4 %
2
5
- %
0.2 %
- %
8. Income Taxes
A summary of income tax expense is as follows:
Current income tax expense ..................................................... $
Deferred income tax expense ...................................................
Total income tax expense ......................................................... $
795 $
403
1,198 $
20
88
108
Year Ended December 31,
2016
2017
Actual income tax expense differs from the income tax expense computed by applying the applicable effective
federal and state tax rates to income before income tax expense as follows:
Provision for taxes at U.S. statutory
marginal income tax rate of 34% ................ $
Impact of tax reform ...................................
Nondeductible expenses .............................
State tax (net of federal benefit)..................
Income tax expense ..................................... $
Year Ended December 31,
2017
2016
$
%
$
%
34.0 % $
31.4 %
1.0 %
13.9 %
80.3 % $
40
-
15
53
108
34.0 %
- %
12.4 %
44.4 %
90.8 %
507
469
15
207
1,198
69
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes as compared to the amounts used for income tax purposes. Significant
components of the Company’s net deferred tax assets are as follows:
As of December 31,
2017
2016
Deferred income tax assets:
Loss and loss adjustment expense reserves .......................... $
Unearned premium reserves .................................................
Net operating loss carryforwards .........................................
Share-based compensation ...................................................
Other .....................................................................................
Deferred income tax assets ....................................................... $
Deferred income tax liabilities:
Deferred policy acquisition costs ......................................... $
State deferred taxes ..............................................................
Other .....................................................................................
Deferred income tax liabilities ................................................. $
28 $
1,576
-
229
240
2,073 $
1,425 $
543
35
2,003 $
Net deferred income tax assets ................................................. $
70 $
35
1,503
235
316
270
2,359
1,492
397
50
1,939
420
The Company has recorded a net deferred tax asset of $70 and $420 as of December 31, 2017 and 2016,
respectively. The Company’s net deferred tax assets were impacted by the passage of the Tax Cuts and Jobs Act on
December 22, 2017, which reduced the corporate federal income tax rate from 34% to 21% and required us to reduce the
value of our net deferred tax assets to reflect this new rate, resulting in a charge of $469 to income tax expense for the year
ended December 31, 2017. Realization of net deferred tax asset is dependent on generating sufficient taxable income in
future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such
no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of
December 31, 2017, based upon the level of historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company
considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances
lead to a change in judgment about the ability to realize the deferred tax assets in future years, the Company would record
valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a
corresponding charge to net income. The resolution of tax reserves and changes in valuation allowances could be material
to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial
position.
Based upon the results of the Company’s analysis and the application of ASC 740-10, management has determined
that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is
based on clear and unambiguous tax law, and the Company is confident that the full amount of each tax position will be
sustained upon possible examination. Accordingly, the full amount of the tax positions is anticipated to be recognized in
the financial statements.
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 2013 - 2016 are open for review by the Internal Revenue
Service (“IRS”) and the various state taxing authorities.
9. Net Earnings Per Share
Net earnings per share is computed by dividing net income by the weighted average number of common shares
and common share equivalents outstanding during the periods presented. In calculating diluted earnings per share, those
potential common shares that are found to be anti-dilutive are excluded from the calculation. The table below provides a
summary of the numerators and denominators used in determining basic and diluted earnings per share for the years ended
December 31, 2017 and 2016.
70
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Year Ended December 31,
2016
2017
Basic:
Net income ........................................................................... $
Weighted average common shares outstanding ....................
Basic earnings per common share ............................................ $
294 $
5,965,051
0.05 $
11
6,047,979
-
Diluted:
Net income ........................................................................... $
Weighted average common shares outstanding ....................
Dilutive RSUs outstanding ...............................................
Diluted weighted average common shares outstanding ........
Diluted earnings per common share ......................................... $
294 $
5,965,051
5,045
5,970,096
0.05 $
11
6,047,979
-
6,047,979
-
The following potentially dilutive securities outstanding as of December 31, 2017 and 2016 have been excluded
from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
Options to purchase common stock ..........................................
Warrants to purchase common stock ........................................
Restricted stock units ...............................................................
Performance shares ..................................................................
As of December 31,
2017
2016
177,456
1,906,875
20,500
475,000
2,579,831
177,456
1,906,875
20,500
475,000
2,579,831
10. Equity Incentive Plan
The Company has established an equity incentive plan for employees and directors of the Company (the “Plan”).
The purpose of the Plan is to create incentives designed to motivate recipients to significantly contribute toward the
Company’s growth and success, to attract and retain persons of outstanding competence, and to provide such persons with
an opportunity to acquire an equity interest in the Company.
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 awards as well as determine the general provisions of each award including
the purchase price, term, number of shares, and performance criteria, and also to establish vesting schedules and other
terms and conditions of the award.
In April 2015, the Company’s shareholders approved an amendment to the Plan to allow for the issuance of
additional award types under the Plan. In addition to non-qualified stock options issuable under the Plan, the amendment
provides for the issuance of restricted stock, restricted stock units (“RSUs”), performance shares, performance cash awards,
and other stock-based awards. The Plan provides for the issuance of 354,912 shares of common stock. As of December 31,
2017, both stock options and RSUs had been issued to the Company’s employees and directors under the Plan resulting in
48,626 shares available for future issuance under the Plan.
71
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Stock option information for the two years ended December 31, 2017 is as follows.
Weighted
Average
Remaining
Contractual
Term
(Years)
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic
Value
Shares
Common Stock Options
Outstanding, January 1, 2016 ....................
Exercisable, January 1, 2016 .....................
Granted .................................................
Exercised ..............................................
Cancelled ..............................................
Outstanding, December 31, 2016 ..............
Exercisable, December 31, 2016 ...............
Granted .................................................
Exercised ..............................................
Cancelled ..............................................
Outstanding, December 31, 2017 ..............
Exercisable, December 31, 2017 ...............
210,489 $
146,603 $
-
-
(33,033 )
177,456 $
134,865 $
-
-
-
177,456 $
156,160 $
8.05
8.04
-
-
8.00
8.06
8.06
-
-
-
8.06
8.06
2.81 $
2.62 $
0.96 $
0.90 $
2.25 $
2.25 $
1.07 $
1.07 $
1.25 $
1.25 $
1.07 $
1.07 $
-
-
-
-
-
-
A summary of the status of the Company’s non-vested employee stock options is as follows.
Weighted
Average Grant
Date Fair Value
Shares
Non-Vested Common Stock Options
Non-vested, January 1, 2016 .................................
Granted ..............................................................
Vested ...............................................................
Cancelled ...........................................................
Non-vested, December 31, 2016 ...........................
Granted ..............................................................
Vested ...............................................................
Cancelled ...........................................................
Non-vested, December 31, 2017 ...........................
63,886 $
-
(21,295 )
-
42,591 $
-
(21,295 )
-
21,296 $
1.07
-
1.07
-
1.07
-
1.07
-
1.07
On May 29, 2015, the Company’s Board of Directors granted RSUs to certain of its executive officers under the
Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the
RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or
exceeds $10.00 per share; and (ii) 50% upon the date that the closing price of the Company’s common stock equals or
exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on
the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the
Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment
is discontinued.
In connection with the Company’s appointment of Dan Case as Chief Operating Officer effective May 23, 2017,
we entered into an offer letter with Mr. Case, which provides Mr. Case with the opportunity to purchase up to 68,027 shares
of the Company’s common stock on the open market or in direct purchases from the Company during his first six months
of employment with the Company, which purchase period was extended by the Board of Directors to June 15, 2018. At
the end of the purchase period, the Company will match any such shares purchased by Mr. Case with a grant of restricted
stock units, or RSUs, of the Company equal to two RSUs for each share purchased by Mr. Case. The RSUs will vest 20%
per year over five years following the date granted, subject to continued employment through such vesting date. The
aggregate maximum number of shares of the Company’s common stock that may be acquired pursuant to this arrangement,
including through open market purchases, purchases from the Company and grants from the Company, is 204,081. Any
shares purchased directly from the Company will be made at a price equal to the closing price of the Company’s common
stock on the prior trading day, but at a price not less than the Company’s latest quarter end published book value per share.
This arrangement was entered into outside of the Plan, and was approved by the Compensation Committee of the Board of
Directors as an inducement material to Mr. Case entering into employment with the Company in reliance on Nasdaq listing
rule 5635(c)(4). As of December 31, 2017, Mr. Case had purchased 56,276 shares of the Company’s common stock
pursuant to this arrangement, 28,000 of which shares were purchased directly from the Company at a purchase price of
$8.00 per share on September 14, 2017. As of December 31, 2017, the Company had not yet granted Mr. Case any RSUs
under this agreement.
72
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved a share matching
arrangement for certain purchases of common stock made by the Company’s executive officers and directors. During the
period beginning on May 31, 2017 and ending on November 30, 2017, each of the Company’s executive officers and
directors had the opportunity to purchase the Company’s common stock through the open market, independently, and
without assistance from the Company. At the end of the purchase period, the Company agreed to match any such shares
purchased by the Company’s executive officers and directors with a grant of RSUs of the Company equal to two RSUs for
each share purchased. Accordingly, on December 15, 2017, the Committee granted a total of 108,330 RSUs as follows;
40,000, 32,000 and 3,000 RSUs to our executive officers, Messrs. Raucy, Hill and Stroud, respectively as well as 6,666
RSUs to each of directors Swets, Cerminara, Horowitz, Johnson and Wong. Each RSU will entitle the grantee to one share
of the Company’s common stock upon the vesting date of the RSU, which will vest 20% per year over a period of five
years following the date granted, subject to each officer’s continued employment with the Company, or each director’s
continued service on the Board. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared
on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the
Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment
is discontinued. The Board of Directors may, in its discretion, accelerate vesting in the event of early retirement. Similarly,
should a director makes himself available and consents to be nominated by the Company for continued service but is not
nominated by the Board for election by the shareholders, other than for good reason as determined by the Board in its
discretion, then such director’s RSU grant shall vest in full as of his last date of service as a director with the Company.
Directors will be required to maintain ownership of the shares purchased through the full five-year vesting period, except
as set forth above.
The following table summarizes RSU activity for the two years ended December 31, 2017.
Restricted Stock Units
Non-vested units, January 1, 2016 .....................
Granted ..........................................................
Vested ............................................................
Forfeited .........................................................
Non-vested units, December 31, 2016 ...............
Granted ..........................................................
Vested ............................................................
Forfeited .........................................................
Non-vest units, December 31, 2017 ...................
Weighted
Average Grant
Date Fair
Value
Number of
Units
20,500 $
-
-
-
20,500 $
108,330
-
-
128,830 $
1.34
-
-
-
1.34
7.20
-
-
6.27
Total stock based compensation expense for the years ended December 31, 2017 and 2016 was $31 and $38,
respectively. As of December 31, 2017, total unrecognized stock compensation expense of $779 remains, which will be
recognized through December 31, 2022.
Stock warrants issued, exercised and outstanding as of December 31, 2017 are as shown in the following table.
Additional information regarding the Company’s outstanding warrants is discussed under Note 12 – Related Party
Transactions, below.
Weighted
Average
Exercise Price
Shares
Common Stock Warrants
Outstanding, January 1, 2016 ............................
Exercisable, January 1, 2016 .............................
Granted ..........................................................
Exercised .......................................................
Cancelled .......................................................
Outstanding, December 31, 2016.......................
Exercisable, December 31, 2016 .......................
Granted ..........................................................
Exercised .......................................................
Cancelled .......................................................
Outstanding, December 31, 2017.......................
Exercisable, December 31, 2017 .......................
1,906,875 $
1,906,875 $
-
-
-
1,906,875 $
1,906,875 $
-
-
-
1,906,875 $
1,906,875 $
13.87
13.87
13.87
13.87
-
-
-
13.87
13.87
73
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
11. Shareholders’ Equity
Treasury Shares
On December 1, 2014, the Company’s Board of Directors authorized a share repurchase program for up to 500,000
shares of the Company’s common stock which expired on December 31, 2016. Through December 31, 2016, the Company
had repurchased an aggregate 401,359 shares at an aggregate purchase price of $2,927, or $7.29 per share, including all
fees and commissions.
On January 29, 2016, the Company retired 250,000 of its treasury shares, resulting in a reclassification of the
purchase price of $1,917 to additional paid in capital.
Sale of Common Stock to Chief Operating Officer
On September 14, 2017, the Company sold 28,000 shares of its common stock to our Chief Operating Officer,
Dan Case, at a sale price of $8.00 per share, as previously discussed in Note 10.
12. Related Party Transactions
Related party transactions are carried out in the normal course of operations and are measured in part by the
amount of consideration paid or received as established and agreed by the parties. Management believes that consideration
paid for such services in each case approximates fair value. Except where disclosed elsewhere in these consolidated
financial statements, the following is a summary of related party transactions.
Performance Share Grant Agreement
On March 26, 2014, the Company entered into a Performance Share Grant Agreement (“PSGA”) with KAI,
whereby KAI will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of
certain milestones regarding the Company’s stock price. Pursuant to the terms of the PSGA, if at any time the last sales
price of the Company’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive
125,000 shares of the Company’s common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, KAI will receive
125,000 shares of the Company’s common stock (in addition to the 125,000 shares of common stock earned pursuant to
clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations
and the like) for any 20 trading days within any 30-trading day period, KAI will receive 125,000 shares of the Company’s
common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein). The
shares of common stock granted to KAI will have a valuation equal to the last sales price of PIH common stock on the day
prior to such grant. As of December 31, 2016, the Company has not issued any shares under the PSGA.
Termination of Management Services Agreement
As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24,
2015, the Company has issued the following securities to 1347 Advisors, LLC (“1347 Advisors”), a wholly owned
subsidiary of KFSI.
● 100,000 shares of the Company’s common stock issuable pursuant to the Performance Shares Grant
Agreement dated February 24, 2015, and subject to the achievement of the Milestone Event;
● 120,000 shares of Series B Preferred Stock of the Company (the “Series B Preferred Shares”); and
● A warrant (the “Warrant”) to purchase 1,500,000 shares of the Company’s common stock at an exercise
price of $15.00 per share. The Warrant expires on February 24, 2022.
The Performance Shares Grant Agreement granted 1347 Advisors 100,000 shares of the Company’s common
stock issuable upon the date that the last sales price of the Company’s common stock equaled or exceeded $10.00 per share
for any 20 trading days within any 30-day trading period (the “Milestone Event”). 1347 Advisors was not entitled to any
dividends declared or paid on the Company’s stock prior to the Milestone Event having been achieved. As described below,
on January 2, 2018, the Performance Shares Grant Agreement was terminated. As the Milestone Event was never achieved,
no shares of common stock were issued to 1347 Advisors under the agreement.
74
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
The Series B Preferred Shares had a par value of $25.00 dollars and paid annual cumulative dividends at a rate of
eight percent per annum. The shares ranked senior to the Company’s common stock, and the Company was not permitted
to issue any other series of preferred stock that rank equal or senior to the Series B Preferred Shares while the Series B
Preferred Shares were outstanding. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to
Advisors representing the annual dividend payment due on the Series B 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 shares had a mandatory redemption date of February 24,
2020, the guidance required that we classify the shares as a liability on our consolidated balance sheet, rather than recording
the value of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus
dividends expected to be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity
(13.9%). As a result, total amortization in the amount of $372 and $355 was charged to operations for the years ended
December 31, 2017 and 2016, respectively.
As described below, through two transactions dated January 2, 2018 and February 28, 2018, all shares of Series
B Preferred Stock have been repurchased by the Company.
Subsequent to the issuance of the Series B Preferred Shares, 1347 Advisors transferred 60,000 of its 120,000
Series B Preferred Shares to IWS Acquisition Corporation, an affiliate of KFSI. On January 2, 2018, the Company entered
into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant to which the Company
repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740, representing
(i) the par value of the Series B Preferred Shares, or $1,500; and (ii) declared and unpaid dividends with respect to the
dividend payment due on February 23, 2018, or $240. Also in connection with the Stock Purchase Agreement, the
Performance Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated.
In connection with the termination, the Company made a cash payment of $300 to 1347 Advisors.
Pursuant to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series
B Preferred Shares from IWS Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of
a capital raise resulting in the Company receiving net proceeds in excess of $5,000. On February 28, 2018, the Company
purchased the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for $1,500 with the proceeds
from the offering of the Company’s 8.00% Cumulative Preferred Stock, Series A (the “Preferred Stock”) offering
(discussed under Note 18 – Subsequent Events below).
The foregoing transactions were approved by a special committee of the Board of Directors of the Company
consisting solely of independent directors.
Investment in Limited Liability Company
On April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary
business is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund to which the Company has
committed to invest $500, of which the Company has invested $211 as of December 31, 2017. The managing member of
Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s Board of Directors on April 21, 2016.
Public Offering of Preferred Stock
A fund managed by Fundamental Global Investors, LLC, one of the Company’s significant shareholders,
purchased an aggregate of 34,620 shares of the Series A Preferred Stock in the Company’s public offering of the shares
(discussed under Note 18 – Subsequent Events below), at the public offering price of $25.00 per share, including 31,680
shares purchased for a total of approximately $792 on February 28, 2018, the closing date of the offering, and 2,940 shares
purchased for a total of approximately $74 on March 26, 2018 in connection with the underwriters’ exercise of their over-
allotment option. In addition, CWA Asset Management Group, LLC, of which 50% is owned by Fundamental Global
Investors, LLC, purchased 57,060 shares of the Series A Preferred Stock for customer accounts at the public offering price
in connection with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the
underwriters on the purchase of these shares.
75
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
13. Accumulated Other Comprehensive Loss
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, 2017 and 2016.
Unrealized gains (losses) on available-for-sale
securities:
Balance, January 1 .............................................................. $
Other comprehensive income (loss) before
reclassifications ..............................................................
Amounts reclassified from accumulated other
comprehensive loss .........................................................
Income taxes ...................................................................
Net current-period other comprehensive loss .................
Balance, December 31 ........................................................ $
Year Ended December 31,
2017
2016
(65 ) $
(113 )
(45 )
54
(104 )
(169 ) $
(62 )
1
(6 )
2
(3 )
(65 )
14. Fair Value of Financial Instruments
Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask
prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that
instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted
prices of similar financial instruments or valuation models with observable market based inputs are used to estimate the
fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign
exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility
levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market
prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for
financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the
calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of
future fair values. For the Company’s financial instruments carried at cost or amortized cost, the book value is not adjusted
to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it
is the Company’s intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company classifies its investments in fixed income and equity securities as available-for-sale and reports
these investments at fair value. Fair values of fixed income securities for which no active market exists are derived from
quoted market prices of similar instruments or other third-party evidence.
The FASB has issued guidance that 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 in an orderly transaction between market
participants. This guidance also establishes a fair value hierarchy that requires an 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 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.
76
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
Financial instruments measured at fair value as of December 31, 2017 and 2016 in accordance with this guidance
are as follows.
As of December 31, 2017
Fixed income securities:
Level 1
Level 2
Level 3
Total
- $
2,698 $
- $
2,698
Total fixed income and equity securities ............ $
2,707 $
51,122 $
- $
53,829
U.S. government ............................................ $
State municipalities and political
subdivisions ....................................................
Asset-backed securities and collateralized
mortgage obligations ......................................
Corporate ........................................................
Total fixed income securities .............................
-
-
-
-
5,907
19,867
22,650
51,122
Equity securities:
Common stock ...............................................
Warrants to purchase common stock .............
Rights to purchase common stock ..................
Total equity securities ........................................
2,460
154
93
2,707
-
-
-
-
As of December 31, 2016
Fixed income securities:
U.S. government ............................................ $
State municipalities and political
subdivisions ....................................................
Asset-backed securities and collateralized
mortgage obligations ......................................
Corporate ........................................................
Total fixed income securities .............................
-
-
-
-
2,246
11,968
10,741
26,559
Equity securities:
Common stock ...............................................
Total equity securities ........................................
1,136
1,136
-
-
-
-
-
-
-
-
-
-
5,907
19,867
22,650
51,122
2,460
154
93
2,707
-
-
-
-
-
-
2,246
11,968
10,741
26,559
1,136
1,136
- $
1,604 $
- $
1,604
Total fixed income and equity securities ............ $
1,136 $
26,559 $
- $
27,695
15. Statutory Requirements
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, or 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 income.
Statutory Surplus and Capital Requirements
In order to retain its certificate of authority in Louisiana and Florida, Maison is required to maintain a minimum
capital surplus of $5,000 and $35,000, respectively. As of December 31, 2017, Maison’s capital surplus was $38,688.
77
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
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. Furthermore, in order to retain
its certificate of authority in Texas and Florida, Maison is required to maintain an RBC ratio of 300% or more. As of
December 31, 2017, Maison’s RBC ratio was 363%; as a result, our surplus was considered to be in the “no action” level.
States routinely require deposits of assets for the protection of policyholders either in those states or for all
policyholders. As of December 31, 2017, Maison held certificates of deposit with an estimated fair value of approximately
$100 and $300 as a deposit with the LDI and FOIR, respectively. Maison also held cash investment securities with an
estimated fair value of approximately $1,988 as a deposit with the TDI.
Surplus Notes
PIH, as the parent company of Maison, is subject to the insurance holding company laws of the State of Louisiana,
which, among other things, regulate the terms of surplus notes issued by insurers to their parent company. As of December
31, 2017, Maison’s capital includes six surplus notes issued to PIH in the amount of $10,650, all of which were approved
by the LDI prior to their issuance. Notes accrue interest at 10% per annum. Interest payments on the notes are due annually,
and are also subject to prior approval by the LDI. The Company’s surplus notes, as of December 31, 2017, are as follows.
Date of Issuance
Maturity Date
December 21, 2015 ........................ December 21, 2019
March 31, 2016 .............................. March 31, 2018
September 29, 2016 ....................... September 29, 2018
November 14, 2016 ........................ November 14, 2018
September 28, 2017 ....................... September 28, 2019
December 28, 2017 ........................ December 28, 2019
$
Principal Amount
850
550
3,450
550
2,950
2,300
10,650
Restrictions on Payments from our Subsidiary Companies
As an insurance holding company, we are dependent on dividends and other permitted payments from our
subsidiary companies to serve as operating capital. The ability of Maison to pay dividends to us is subject to certain
restrictions imposed under Louisiana insurance law, which is the state of domicile for Maison. Dividend payments from
Maison may be further restricted pursuant to a consent agreement entered into with the LDI and the FOIR as a condition
of our licensure in each state. Interest payments on the surplus notes issued to us by Maison are also subject to the prior
approval of the LDI. Our other subsidiary companies collect the majority of their revenue through their affiliation with
Maison. Our subsidiary company MMI, earns commission income from Maison for underwriting, policy administration,
claims handling, and other services provided to Maison. Our subsidiary company, ClaimCor, earns claims adjusting income
for adjusting certain of the claims of Maison’s policyholders. While dividend payments from our other subsidiaries are not
restricted under insurance law, the underlying contracts between Maison and our other subsidiary companies are regulated
by, and subject to the approval of, insurance regulators.
16. Retirement plans
The 1347 Property Insurance Holdings, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January
1, 2015, as a defined contribution plan. The Retirement Plan is subject to the provisions for the Employee Retirement
Income Security Act of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the
plan. Employees who have completed one month of service are eligible to participate and are permitted to make annual pre
and post-tax salary reduction contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as
amended. Contributions are invested at the direction of the employee participant in various money market and mutual
funds. The Company matches contributions up to 100% of each participant’s contribution, limited to contributions up to
4% of a participant’s earnings. The Company may also elect to make a profit sharing contribution to the Retirement Plan
based upon discretionary amounts and percentages authorized by the Company’s Board of Directors. For the years ended
December 31, 2017 and 2016, the Company made matching contributions to the Retirement Plan in the amount of $94 and
$75, respectively.
78
1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
($ in thousands, except per share amounts)
17. Commitments and Contingencies
Legal Proceedings:
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business.
Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such
development will be affected by future court decisions and interpretations. Because of these uncertainties, additional
liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of
ultimate loss and loss adjustment expenses may change. These additional liabilities, or increases in estimates, or a range of
either, cannot be reasonably estimated, and could result in income statement charges that could be material to the
Company’s results of operations in future periods.
Operating Lease Commitments:
As of December 31, 2017, the Company had the following amounts due under its operating leases for facilities
leased in Baton Rouge, Louisiana, and Tampa, Florida.
Year ended December 31,
2018 ........................................................................ $
2019 ........................................................................
2020 ........................................................................
Total ........................................................................ $
Amounts due
under operating
leases
366
327
79
772
18. Subsequent Events
Offering of 8.00% Cumulative Preferred Stock, Series A
On February 28, 2018, we completed the underwritten public offering of 640,000 shares of the Preferred Stock
designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share. In addition, on March 26, 2018,
we issued an additional 60,000 shares of Preferred Stock pursuant to the exercise of the underwriters’ over-allotment
option. Dividends on the Preferred Stock are cumulative from the date of original issue and will be payable quarterly on
the 15th day of March, June, September and December of each year, commencing on June 15, 2018 when, as and if declared
by our Board of Directors or a duly authorized committee thereof. The first dividend record date for the Preferred Stock
will be June 1, 2018. Dividends will be payable out of amounts legally available therefor at a rate equal to 8.00% per annum
per $25.00 of stated liquidation preference per share, or $2.00 per share of Preferred Stock per year.
The Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the Preferred Stock will
be redeemable at our option, for cash, in whole or in part, at a redemption price of $25.00 per share of Preferred Stock,
plus all accumulated and unpaid dividends to, but not including, the date of redemption. The Preferred Stock has no stated
maturity and will not be subject to any sinking fund or mandatory redemption. The Preferred Stock will generally have no
voting rights except as provided in the Certificate of Designations or as from time to time provided by law. The affirmative
vote of the holders of at least two-thirds of the outstanding shares of Preferred Stock and each other class or series of voting
parity stock will be required at any time for us to authorize, create or issue any class or series of our capital stock ranking
senior to the Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution
or winding up, to amend any provision of our Certificate of Incorporation so as to materially and adversely affect any rights
of the Preferred Stock or to take certain other actions.
The shares have been listed on the Nasdaq Stock Market under the symbol “PIHPP”, trading of the shares
commenced on March 22, 2018. Net proceeds received by Company were approximately $16,400. The Company used
$1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Stock from IWS Acquisition Corporation,
as previously discussed under Note 12 - Related Party Transactions, with the remainder of the proceeds to be used to
support organic growth, including spending for business development, sales and marketing and working capital, and for
future potential acquisition opportunities.
Texas Operating Lease
On February 28, 2018, we entered into an agreement to lease space located at 8750 N. Central Expressway, Dallas,
TX, 75231, which consists of approximately 3,000 square feet of office space. The lease term runs through May 31, 2021
with an option to extend the lease for an additional three year term subject to certain conditions. Rent is payable in monthly
installments of approximately $6,000 and escalates by approximately 2% annually.
79
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
80
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management performed an evaluation under the supervision and with the participation of the
Company’s principal executive officer and principal financial officer of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2017. Based upon this evaluation,
the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls
and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that
information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated
and communicated to the Company’s management, including its principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the Company’s assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles;
● provide reasonable assurance that the Company’s receipts and expenditures are made in accordance with
proper authorizations from the Company’s management and directors; and
● provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition,
use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Our management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based upon this evaluation, management concluded that
our internal control over financial reporting was effective as of December 31, 2017.
This Annual Report on Form 10-K does not include a report of our independent registered public accounting firm
regarding the effectiveness of our internal control over financial reporting. SEC’s rules permit non-accelerated filers like
us to provide only management’s report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with this evaluation
that occurred during the quarter ended December 31, 2017 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
81
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 9B. OTHER INFORMATION
None.
82
1347 PROPERTY INSURANCE HOLDINGS, INC.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the “Election of Directors,”,
“Directors,” “Executive Officers,”, “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” and
“Board Committees and Committee Member Independence” sections of the Proxy Statement for the Company’s 2018
Annual Meeting of Shareholders, which we expect to file with the Securities and Exchange Commission no later than April
30, 2018. Any amendment to, or waiver from, a provision of the Code of Ethics that applies to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, or Controller will be promptly disclosed on our website
(www.1347pih.com) as required by the laws, rules and regulations of the Securities and Exchange Commission.
83
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the “Compensation of Executive
Officers” and “Director Compensation” sections of the Proxy Statement for the Company’s 2018 Annual Meeting of
Shareholders, which we expect to file with the Securities and Exchange Commission no later than April 30, 2018.
84
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED
STOCKHOLDER MATTERS
Information regarding our equity compensation plans is included below.
Securities authorized for issuance under the Company’s Amended and Restated 2014 Equity Incentive Plan are
as follows as of December 31, 2017:
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Plan Category
Equity compensation plans approved by security
holders .........................................................................
Equity compensation plans not approved by security
holders(1) ......................................................................
Total .......................................................................
306,286 $
7.95
48,626
—
306,286 $
—
7.95
136,054
184,680
(1) Includes shares of our common stock that could be acquired by our Chief Operating Officer, Mr. Case,
pursuant to the restricted stock unit matching arrangement between the Company and Mr. Case, as
described in Item 5 of this Annual Report under the heading “Recent Sales of Unregistered Securities”
and in accordance with Nasdaq Listing Rule 5635(c)(4).
All other information required by this item is incorporated herein by reference to the “Security Ownership of
Certain Beneficial Owners & Directors & Executive Officers” section of the Proxy Statement for the Company’s 2018
Annual Meeting of Shareholders, which we expect to file with the Securities and Exchange Commission no later than April
30, 2018.
85
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the “Transactions with Related
Persons” and “Board Meetings and Independence” sections of the Proxy Statement for the Company’s 2018 Annual
Meeting of Shareholders, which we expect to file with the Securities and Exchange Commission no later than April 30,
2018.
86
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the “Principal Accountant Fees and
Services” section of the Proxy Statement for the Company’s 2018 Annual Meeting of Shareholders, which we expect to
file with the Securities and Exchange Commission no later than April 30, 2018.
87
1347 PROPERTY INSURANCE HOLDINGS, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
The following documents are filed as part of this report
1. Financial Statements – the following consolidated financial statements of the Company and the reports
of independent audit thereon are filed with this report:
Independent Auditor’s Report
i.
ii. Consolidated Balance Sheets as of December 31, 2017 and 2016
iii. Consolidated Statements of Income and Comprehensive Income for the Years Ended December
31, 2017 and 2016
iv. Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2017 and
2016
v. Consolidated Statements of Cash Flows for the Years ended December 31, 2017 and 2016
vi. Notes to the Consolidated Financial Statements for the Years ended December 31, 2017 and
2016
2. Exhibits - the exhibits listed below are filed or incorporated by reference as part of this Form 10-K.
Exhibit
Description
1.1
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
10.1†
10.2
10.3
10.4†
10.5†
10.6†
10.7†
10.8†
Underwriting Agreement, dated February 23, 2018, by and between 1347 Property Insurance Holdings, Inc. and
Boenning & Scattergood, Inc., as representative of the several underwriters listed on Schedule I thereto
(incorporated by reference to Exhibit 1.1 of Registrant’s Current Report on Form 8-K filed with the Commission
on February 26, 2018).
Third Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of
Registrant’s Registration Statement on Form S-1/A filed with the Commission on January 30, 2014).
Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 of Registrant’s Registration
Statement on Form S-1/A filed with the Commission on January 30, 2014).
Certificate of Designations of Series A Preferred Shares of 1347 Property Insurance Holdings, Inc. (incorporated
by reference to Exhibit A of Exhibit 10.9 of Registrant’s Registration Statement on Form S-1/A filed with the
Commission on January 30, 2014).
Certificate of Designations of Series B Preferred Shares of 1347 Property Insurance Holdings, Inc. (incorporated
by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the Commission on February
27, 2015).
Certificate of Elimination of Certificate of Designations of Series B Preferred Shares of 1347 Property Insurance
Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with
the Commission on February 28, 2018).
Certificate of Designations of Cumulative Preferred Stock, Series A, of 1347 Property Insurance Holdings, Inc.
(incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed with the Commission
on February 26, 2018).
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Registrant’s Registration
Statement on Form S-1/A filed with the Commission on January 30, 2014).
Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 of Registrant’s Current
Report on Form 8-K filed with the Commission on February 27, 2015).
Certificate of Series B Preferred Shares (incorporated by reference to Exhibit 4.1 of Registrant’s Current Report
on Form 8-K filed with the Commission on February 27, 2015).
Form of Global Certificate of Cumulative Preferred Stock, Series A (incorporated by reference to Exhibit 4.4 of
Registrant’s Registration Statement on Form S-1/A filed with the Commission on February 5, 2018).
1347 Property Insurance Holdings, Inc. Amended and Restated 2014 Equity Incentive Plan (incorporated by
reference to Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission
on April 30, 2015).
Indemnification Agreement (incorporated by reference to Exhibit 10.6 of Registrant’s Registration Statement on
Form S-1/A filed with the Commission on January 30, 2014).
Trademark License Agreement, dated February 28, 2014, between 1347 Advisors LLC and 1347 Property
Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.6 of Registrant’s Registration Statement on
Form S-1 filed with the Commission on May 20, 2014).
Option Agreement, dated February 28, 2014 between Douglas N. Raucy and 1347 Property Insurance Holdings,
Inc. (incorporated by reference to Exhibit 10.7 of Registrant’s Registration Statement on Form S-1 filed with the
Commission on May 20, 2014).
First Amendment to Option Agreement, dated June 19, 2014 between Douglas N. Raucy and 1347 Property
Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed with the Commission on June 19, 2014).
Second Amendment to Option Agreement, dated March 13, 2015 between Douglas N. Raucy and 1347 Property
Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed with the Commission on March 17, 2015).
Third Amendment to Option Agreement, dated March 13, 2015 between Douglas N. Raucy and 1347 Property
Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.3 of Registrant’s Current Report on Form 8-K
filed with the Commission on June 2, 2015).
Fourth Amendment to Option Agreement, dated December 15, 2015 between Douglas N. Raucy and 1347
Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on
Form 8-K filed with the Commission on December 17, 2015).
88
1347 PROPERTY INSURANCE HOLDINGS, INC.
10.9†
10.10
Fifth Amendment to Option Agreement, dated June 14, 2016 between Douglas N. Raucy and 1347 Property
Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed with the Commission on June 16, 2016).
Series A Convertible Preferred Stock Purchase Agreement, dated January 23, 2014, between Fund Management
Group LLC and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.9 of Registrant’s
Registration Statement on Form S-1/A filed with the Commission on January 30, 2014).
10.11†
Offer letter to Douglas N. Raucy, dated September 25, 2012 (incorporated by reference to Exhibit 10.10 of our
10.12
10.13
Registration Statement on Form S-1/A filed with the Commission on January 30, 2014).
Registration Rights Agreement, dated February 28, 2014, by and between Kingsway America, Inc. and 1347
Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.10 of Registrant’s Registration
Statement on Form S-1 filed with the Commission on May 20, 2014).
Performance Share Grant Agreement by and between Kingsway America, Inc. and 1347 Property Insurance
Holdings, Inc. (incorporated by reference to Exhibit 10.12 of Registrant’s Registration Statement on Form S-1/A
filed with the Commission on March 27, 2014).
10.14
Agreement to Buyout and Release dated February 24, 2015 (incorporated by reference to Exhibit 10.1 of
Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015).
10.15
Performance Shares Grant Agreement dated February 24, 2015 (incorporated by reference to Exhibit 10.2 of
Registrant’s Current Report on Form 8-K filed with the Commission on February 27, 2015).
10.16*
Termination Agreement, dated as of January 2, 2018, by and among 1347 Advisors LLC and 1347 Property
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
Insurance Holdings, Inc.
Form of Option Agreement Issued to the Executive Officers of 1347 Property Insurance Holdings, Inc.
(incorporated by reference to Exhibit 10.16 of Registrant’s Annual Report on Form 10-K filed with the
Commission on March 26, 2015).
Form of Option Agreement Issued to the Directors of 1347 Property Insurance Holdings, Inc. (incorporated by
reference to Exhibit 10.17 of Registrant’s Annual Report on Form 10-K filed with the Commission on March 26,
2015).
Form of Restricted Stock Unit Agreement Issued to the Executive Officers of 1347 Property Insurance Holdings,
Inc. (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed with the
Commission on June 2, 2015).
Employment Offer Letter, dated May 23, 2017, by and between 1347 Property Insurance Holdings, Inc. and Dan
Case (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the
Commission on May 23, 2017).
Form of Executive Restricted Stock Unit Award Agreement under the Share-Matching Program (incorporated
by reference to Exhibit 10.1 of Registrant’s Current on Report on Form 8-K filed with the Commission on
December 19, 2017).
Form of Non-Employee Director Restricted Stock Unit Award Agreement under the Share-Matching Program
(incorporated by reference to Exhibit 10.2 of Registrant’s Current on Report on Form 8-K filed with the
Commission on December 19, 2017).
10.23†*
Stock Purchase Agreement, dated January 8, 2018, by and between 1347 Property Insurance Holdings, Inc. and
Daniel E. Case.
10.24
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
Stock Purchase Agreement, dated January 2, 2018, by and among 1347 Advisors LLC, IWS Acquisition
Corporation and 1347 Property Insurance Holdings, Inc. (incorporated by reference to Exhibit 10.22 of
Registrant’s Registration Statement on Form S-1 filed with the Commission on January 8, 2018).
Subsidiaries of 1347 Property Insurance Holdings, Inc.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on signature page).
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
XBRL Instance Document.
XBRL Taxonomy Extension Schema.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
*
**
†
Filed herewith.
Furnished herewith.
Denotes management contracts or compensatory plans or arrangements.
89
1347 PROPERTY INSURANCE HOLDINGS, INC.
ITEM 16. FORM 10-K SUMMARY
None.
90
1347 PROPERTY INSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2018
1347 PROPERTY INSURANCE HOLDINGS, INC.
/s/ Douglas N. Raucy
By:
Name: Douglas N. Raucy
Title: President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Douglas N. Raucy and John S. Hill, and each of them, the true and lawful attorney-in-fact and
agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the
undersigned, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to
such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully as to all intents and purposes as each of the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Douglas N. Raucy
Douglas N. Raucy
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 26, 2018
/s/ John S. Hill
John S. Hill
Vice President, Secretary, and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
March 26, 2018
Director, Chairman of the Board
March 26, 2018
/s/ Larry Gene Swets, Jr.
Larry Gene Swets, Jr.
/s/ D. Kyle Cerminara
D. Kyle Cerminara
/s/ Joshua S. Horowitz
Joshua S. Horowitz
/s/ Lewis M. Johnson
Lewis M. Johnson
Director
Director
Director
/s/ Scott David Wollney
Scott David Wollney
Director
/s/ Dennis A. Wong
Dennis A. Wong
Director
91
March 26, 2018
March 26, 2018
March 26, 2018
March 26, 2018
March 26, 2018
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
SUBSIDIARIES
Exhibit 21.1
Maison Managers, Inc., a Delaware Corporation
Maison Insurance Company, a Louisiana Corporation
ClaimCor, LLC, a Florida Limited Liability Company
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
1347 Property Insurance Holdings, Inc.
Tampa, FL
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-19500)
of 1347 Property Insurance Holdings, Inc. of our report dated March 26, 2018, relating to the consolidated financial
statements, which appear in this Form 10-K.
/s/ BDO USA LLP
Grand Rapids, Michigan
March 26, 2018
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
Exhibit 31.1
I, Douglas N. Raucy, certify that:
CERTIFICATION
I have reviewed this annual report on Form 10-K of 1347 Property Insurance Holdings, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board
of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize, and report financial information; and
b. Any fraud, whether material or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 26, 2018
By:
/s/ Douglas N. Raucy
Douglas N. Raucy, President and Chief Executive
Officer
(Principal Executive Officer)
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
Exhibit 31.2
I, John S. Hill, certify that:
CERTIFICATION
I have reviewed this annual report on Form 10-K of 1347 Property Insurance Holdings, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board
of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize, and report financial information; and
b. Any fraud, whether material or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 26, 2018
By:
/s/ John S. Hill
John S. Hill, Vice President, Secretary,
and Chief Financial Officer
(Principal Financial Officer)
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
Exhibit 32.1
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of 1347 Property Insurance Holdings, Inc. (the “Company”),
for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Douglas N. Raucy, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
1. The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and result of operations of the Company.
Dated: March 26, 2018
By:
/s/ Douglas N. Raucy
Douglas N. Raucy, Chief Executive Officer
(Principal Executive Officer)
1347 PROPERTY INSURANCE HOLDINGS, INC AND SUBSIDIARIES
Exhibit 32.2
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of 1347 Property Insurance Holdings, Inc. (the “Company”),
for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, John S. Hill, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
1. The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and result of operations of the Company.
Dated: March 26, 2018
By:
/s/ John S. Hill
John S. Hill, Chief Financial Officer
(Principal Financial Officer)