S-1/A 1 forms-1a.htm

 

As filed with the United States Securities and Exchange Commission on February 13 , 2018

 

Registration No. 333-222470

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

Amendment No. 2 to

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933  

 

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   6331   46-1119100
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification No.)

 

1511 N. Westshore Blvd., Suite 870
Tampa, FL 33607
(813) 579-6213

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

John S. Hill
Vice President, Chief Financial Officer and Secretary
1511 N. Westshore Blvd., Suite 870
Tampa, FL 33607
(813) 579-6213

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies of communications to:

 

Jurgita Ashley
Thompson Hine LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114
Telephone: (216) 566-8928
Facsimile: (216) 566-5800
 

Christopher J. Bellini

Cozen O’Connor P.C.

33 S. 6th Street, Suite 3800

Minneapolis, Minnesota 55402

Telephone: (612) 260-9029

Facsimile: (612) 260-9091

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [  ]

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

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:

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a 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 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Proposed Maximum
Aggregate Offering Price(1)(2)
    Amount of
Registration Fee(3)
 
Cumulative Preferred Stock, Series A, par value $25.00 per share   $ 23,000,000     $ 2,864.00  

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Includes shares of the Cumulative Preferred Stock, Series A, that the underwriters have the option to purchase to cover over-allotments, if any.
(3) Previously paid with the Form S-1 filed on January 8, 2018.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED FEBRUARY 13 , 2018

 

800,000 Shares
8.00% Cumulative Preferred Stock, Series A
(Liquidation Preference Equivalent to $25.00 Per Share)


 

 (GRAPHIC)

 

1347 Property Insurance Holdings, Inc. is offering 800,000 shares of its newly designated 8.00% Cumulative Preferred Stock, Series A, $25.00 liquidation preference per share (the “Preferred Stock”). 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 (each, a “dividend payment date”), 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             , 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. See “Description of the Preferred Stock—Redemption” in this prospectus.

 

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.

 

We have applied to list the Preferred Stock on the Nasdaq Stock Market under the symbol “PIHPP.” If the application is approved, we expect trading to commence within 30 days following the initial issuance of the Preferred Stock. Listing of the Preferred Stock is not a condition to the completion of this offering.

 

Investing in the Preferred Stock involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus, as well as the risks described in the documents incorporated by reference in this prospectus, to read about important factors you should consider before making a decision to invest in the Preferred Stock. The Preferred Stock is not expected to be rated and may be subject to the risks associated with non-investment grade securities.

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

    Per Share     Total(2)  
Public offering price   $ 25.00     $ 20,000,000  
Underwriting discounts and commissions(1)   $       $    
Offering proceeds to us, before expenses   $       $    

 

 

  (1) See the “Underwriting” section of this prospectus for a description of compensation payable to the underwriters.
  (2) Assumes no exercise of the underwriters’ over-allotment option described below.

 

We have granted the underwriters the right to purchase up to an additional 120,000 shares of our Preferred Stock at the public offering price, less discounts and commissions, within 30 days from the date of the underwriting agreement to cover over-allotments, if any.

 

The underwriters expect to deliver the shares of Preferred Stock in book-entry form only, through the facilities of the Depository Trust Company on or about              , 2018.

 

Boenning & Scattergood, Inc.

 

American Capital Partners, LLC Joseph Gunnar  & Co.

 

The date of this prospectus is      , 2018.

 

 

  

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
RISK FACTORS 10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 26
USE OF PROCEEDS 28
DIVIDEND POLICY 29
CAPITALIZATION 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
BUSINESS 54
MANAGEMENT 61
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 74
DESCRIPTION OF THE PREFERRED STOCK 76
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS 82
UNDERWRITING 87
LEGAL MATTERS 93
EXPERTS 93
INCORPORATION BY REFERENCE 93
WHERE YOU CAN FIND MORE INFORMATION 94
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of Preferred Stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of shares of our Preferred Stock.

  

Unless otherwise indicated, statements in this prospectus concerning our market and where we operate, including our general expectations and competitive position, business opportunity, and category size, growth and share, are based on information from independent industry organizations and other third-party sources (including industry publications, surveys and forecasts), government publications, data from our internal research and management estimates. Management estimates are derived from the information and data referred to above, and are based on assumptions and calculations made by us based upon our interpretation of such information and data, and our knowledge of our industry and the categories in which we operate, which we believe to be reasonable. Furthermore, the information and data referred to above are imprecise. Projections, assumptions, expectations and estimates regarding our industry and the markets in which we operate and our future performance are also necessarily subject to risk.

 

i

 

 

 

PROSPECTUS SUMMARY

 

The following summary highlights selected information contained in this prospectus. This summary does not contain all the information that may be important to you. You should read the more detailed information contained in this prospectus, including but not limited to, the risk factors beginning on page 10. References herein to “we,” “us,” “our,” “PIH” or the “Company” refer to 1347 Property Insurance Holdings, Inc. Unless otherwise expressly indicated or the context otherwise requires, the information in this prospectus assumes that the underwriters’ over-allotment option is not exercised.

 

Defined Terms

 

“1347 Advisors” means 1347 Advisors LLC, a Delaware limited liability company and wholly owned subsidiary of KFSI.

 

“Brotherhood” means Brotherhood Mutual Insurance Company, mutual insurance company primarily serving churches and related institutions throughout the United States.

 

“ClaimCor” means ClaimCor, LLC, our wholly owned subsidiary, a Florida limited liability company that provides claims and underwriting technical solutions to Maison and other insurance companies.

“FL Citizens” means Florida Citizens Property Insurance Corporation, a state-created non-profit corporation which provides property insurance for Florida property owners who are unable to obtain insurance from private insurance companies.

 

“FGI” means Fundamental Global Investors, LLC, a Delaware limited liability company and an SEC registered investment advisor that manages equity and fixed income hedge funds. As of the date of this prospectus, FGI and its affiliates beneficially own approximately 36.0% of our outstanding common stock.

 

“FOIR” means Florida Office of Insurance Regulation.

 

“KFSI” means Kingsway Financial Services Inc., a corporation incorporated under the Business Corporations Act (Ontario). Prior to our initial public offering, KFSI was our ultimate parent company and, as of the date of this prospectus, KFSI and its affiliates beneficially own 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.

 

“LA Citizens” means Louisiana Citizens Property Insurance Corporation, a state-created corporation which operates the residual market insurance programs designated as the Central Plan and the Fair Plan, which, through these plans, provides property insurance for Louisiana property owners who are unable to obtain insurance from private insurance companies.

 

“LDI” means Louisiana Department of Insurance.

 

“Maison” means Maison Insurance Company, our wholly owned subsidiary, a Louisiana insurance company that provides property and casualty insurance to individuals in Louisiana, Texas and Florida.

 

“MMI” means Maison Managers Inc., our wholly owned subsidiary, a Delaware corporation that is a managing general agent responsible for our marketing programs and other management services.

“TDI” means Texas Department of Insurance.

 

“TWIA” means the Texas Windstorm Insurance Association, a state-created residual market property insurance company which provides coverage to residential and commercial properties in certain designated portions of the Texas seacoast territory.

 

Business 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 the 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 the 2005 Hurricane Katrina had relatively few losses arising from tropical storm activity which led to declines in reinsurance pricing and dramatic 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 broad 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 insure approximately 50,000 homes, an increase of almost 48% from one year prior. 

 

 

 1

 

 

 

On November 19, 2013, we changed our legal name 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 the date of this prospectus, KFSI and its affiliates beneficially own 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 the date of this prospectus, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially own 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 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 that we write through these independent agencies as voluntary policies. We also write commercial business in Texas through a quota-share agreement with Brotherhood Mutual Insurance Company, or Brotherhood. Through this agreement, we have assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout 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 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, Maison entered the Florida market via the assumption of policies from FL Citizens in December, 2017. The order approving Maison’s assumption of policies limits the number of policies which Maison may assume in 2017 to 14,663, and also stipulates that Maison maintain catastrophe reinsurance at such levels as deemed appropriate by the FOIR.

 

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.

 

 

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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.

 

We have an experienced management team with a collective experience of more than 130 years in the insurance industry. Our executive officers have extensive experience in the property and casualty insurance industry, as well as long-standing relationships with agents and insurance regulators in Louisiana, Texas and Florida.

 

We currently distribute our insurance policies through a network of independent agents. These agents typically represent several insurance companies in order to provide various insurance product lines to their clients.

 

As of September 30, 2017, we had total assets of $115.5 million and stockholders’ equity of $45.6 million. For the three and nine months ended September 30, 2017, we had net losses of $2.3 million and $1.1 million, respectively. As of December 31, 2017, we had approximately 51,000 direct and assumed policies. Of these policies, approximately 32% were obtained via take-out from 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.



Our Corporate Structure

 

The chart below displays our corporate structure:

 

(Flow Chart)

 

The Company was originally incorporated under the name Maison Insurance Holdings, Inc. to hold all of the capital stock of two of our subsidiaries, Maison and MMI. We acquired 100% of the membership interests of ClaimCor in January 2015. As a holding company for these subsidiaries, we are subject to regulation by the LDI, TDI and FOIR. As of the date of this prospectus, KFSI and its affiliates beneficially own approximately 8.3% of our outstanding shares of common stock and warrants and performance shares to acquire an additional 23.9% of our outstanding shares of common stock and FGI and its affiliates beneficially own approximately 36.0% of our outstanding shares of common stock.

 

We are subject to laws and regulations in Louisiana, Texas and Florida, 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.

 

We believe that our holding company structure gives us flexibility to expand our operations and the products and services we offer. We may diversify our business through existing or newly formed subsidiaries or acquisitions. We may issue additional shares of capital stock or obtain debt financing to fund such diversification.

 

 

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Competitive Strengths

 

Since we began operations in December of 2012, our growth has been due to our competitive strengths, which include:

 

Our knowledge of insurance products. Our executive team has worked in the property casualty insurance industry in excess of a combined 130 years and has extensive experience in developing primary insurance as well as reinsurance products. We structure our reinsurance program with the expectation that a large event, such as a hurricane, will occur in any given year, allowing us to limit our losses when a catastrophic event does occur.

 

Our local market expertise. Our executive experience has been with coastal states, and that is where we intend to continue to focus. These states have some of the highest overall insurance premium rates in the Unites States and have traditionally been underserved by insurance underwriters resulting in the formation of state-run insurers such as LA Citizens, FL Citizens, and TWIA.

 

Our ability to attract independent agencies. Our executive team has long-standing relationships with independent agencies, particularly in Louisiana and Florida. We have experienced multiple catastrophe events with some of our agents, who we believe continue to place business with us as a result of these experiences.

 

Our claims handling expertise. We have experienced some major weather events, including Hurricane Harvey in August, 2017 as well as a major flooding event in Louisiana in August, 2016 and believe that we have proven to both our policyholders and agents that we are able to settle claims in a prompt manner. Our President and CEO, Mr. Doug Raucy, is the founder and former head of Allstate’s National Catastrophe Team, and has over 37 years of total insurance industry experience. We are committed to helping our policyholders when they need us and we believe those to be the times where we can differentiate ourselves from our competitors.

 

Our strategy to assume policies from the Florida, Louisiana, and Texas residual markets. Depopulating policies from state-run insurers such as FL Citizens, LA Citizens and TWIA gives us the ability to grow to scale quickly and also choose those specific policies, which we believe best enhance our policy portfolio. In addition to favorable economics resulting from depopulation, these policies, by definition, have been overlooked by the voluntary market and, in certain instances, can generate attractive returns relative to the risks associated with them.

 

Our Strategies

 

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%. At December 31, 2016, our market share was 1.8%, based on the fact that direct written premiums in Louisiana were approximately $2.6 billion for the year ended December 31, 2016, for the lines of business that we write. We plan to expand our writings 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. 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 the coastal markets make us qualified to manage agent expectations and provide superior support and service for policyholders.

 

Increasing our wind/hail-only book of business through the depopulation of policies from FL Citizens. We participated in the depopulation of wind/hail-only policies from FL Citizens, which will allow us to quickly establish a significant presence in the State of Florida, where, as of September 30, 2017, we had not yet written any insurance policies. We plan to focus on wind/hail-only and other specialty products in this state 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 dedicated Maison oversight and direction, which we believe results in increased service and lower expense and loss ratios.

 

 

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Risks Associated With Our Business

 

In evaluating our business, the following items should be taken into consideration:

 

We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development.
   
We may not have future opportunities to participate in take-out programs or obtain the quantity or quality of policies currently obtained due to changes in the take-out programs, our failure to meet take-out program participation requirements, or due to changes to the market in general.
   
In the property and casualty insurance industry, we compete with large, well-established insurance companies, as well as other specialty insurers. Most of these competitors possess greater financial resources, larger agency networks and greater name recognition than we do.
   
We write insurance policies that cover homeowners, manufactured homes and dwelling fire 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 financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, hailstorms, explosions, power outages, fires and man-made events.
   
The insurance industry is highly regulated and supervised. Maison, our insurance company subsidiary, is subject to the supervision and regulation of the states of Louisiana, Texas and Florida. Regulations in these states relate to, among other things, approval of policy forms and premium rates; licensing of insurers and their products; restrictions on the nature, quality and concentration of investments; restrictions on the ability of our insurance company subsidiary to pay surplus note interest, as well as dividends; restrictions on transactions between our insurance company and its affiliates; and standards of solvency, including risk-based capital measurements and related requirements.
   
We lack geographic diversification in the policies we underwrite, which are concentrated in Louisiana and Texas. If we are not able to grow in Florida or significantly expand to other states, we may risk higher reinsurance costs and greater loss experience with storm activity occurring in Louisiana and Texas.
   

A substantial portion (approximately 32% as of December 31, 2017) of our direct and assumed policies were assumed from state-run insurers, LA Citizens, FL Citizens and TWIA, and most of these policies 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.

 

For a detailed discussion on risk factors associated with our business, see “Risk Factors — Risks Relating to Our Company” in this prospectus.

 

Recent Developments

 

Repurchase of Series B Preferred Stock

 

On January 2, 2018, we entered into a stock purchase agreement with 1347 Advisors and IWS Acquisition Corporation, both affiliates of KFSI, pursuant to which we repurchased 60,000 shares of Series B Preferred Stock of the Company from 1347 Advisors for an aggregate purchase price of $1,740,000, representing (i) $1,500,000, comprised of $25 per share of Series B Preferred Stock, and (ii) declared and unpaid dividends in respect of the dividend payment due on February 23, 2018 amounting to $240,000 in the aggregate. We also agreed to repurchase pursuant to the stock purchase agreement an additional 60,000 shares from IWS Acquisition Corporation, upon completion of this offering, for an aggregate purchase price of $1,500,000, comprised of $25 per share of Series B Preferred Stock, without any dividend or interest payment. We intend to use $1.5 million of the net proceeds from this offering to complete the repurchase of the Series B Preferred Shares from IWS Acquisition Corporation. The foregoing transactions were approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.

 

In connection with the stock purchase agreement, the Performance Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors, which provided for the issuance of an aggregate of 100,000 shares of common stock of the Company to 1347 Advisors upon the Company’s achievement of certain performance milestones, was terminated. In connection with the termination, the Company agreed to pay an aggregate cash payment of $300,000 to 1347 Advisors. No common shares were issued to 1347 Advisors under the agreement.

 

Impact of Hurricane Harvey

 

In late August 2017, Hurricane Harvey made landfall in Texas and Louisiana. Maison has many policyholders who have been impacted by this hurricane. This event primarily impacted our Texas policyholders along with a relatively smaller number of Louisiana policyholders. Since our Texas products do not cover the peril of flood, we expect our losses to arise primarily from South Texas where strong winds made landfall. Based on our analysis, we expect the gross losses to be $27 million which is within the $200 million per occurrence limit of our catastrophe excess of loss reinsurance program. Therefore, the pre-tax losses arising from Hurricane Harvey incurred by the Company, net of reinsurance, are not expected to exceed our retention of $5 million.

 

 

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Corporate Information

 

Our business began in February 2012 as part of KFSI when we began conducting market due diligence, establishing the infrastructure and seeking to obtain the necessary regulatory approvals to be able to assume and write homeowners’ insurance policies focusing on wind and hail only coverage for the coastal areas in the gulf states of the United States. On October 2, 2012, KFSI formed our company under the laws of the State of Delaware as a wholly owned subsidiary, and contributed this business to us. Our initial public offering was completed on March 31, 2014. Our principal executive offices are located at 1511 N. Westshore Blvd., Suite 870, Tampa, Florida 33607. Our telephone number is (813) 579-6213. Our website is located at www.1347pih.com. The information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

As of the date of this prospectus, KFSI and its affiliates beneficially own approximately 8.3% of our outstanding shares of common stock and warrants and performance shares to acquire an additional 23.9% of our outstanding shares of common stock. One of our directors, Larry G. Swets, Jr., is the Chief Executive Officer of KFSI.

 

In addition, as of the date of this prospectus, FGI and its affiliates beneficially own approximately 36.0% of our outstanding shares of common stock. D. Kyle Cerminara, Chief Executive Officer, Co-Founder and Partner of Fundamental Global, and Lewis M. Johnson, President, Co-Founder and Partner of FGI, are both directors of the Company.

 

Emerging Growth Company

 

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (ii) delayed application of newly adopted or revised accounting standards, (iii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iv) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Following this offering, 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) the last day of the fiscal year following the fifth anniversary of our initial public offering (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 Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

The Offering

 

The following summary contains basic information about the Preferred Stock and the offering and is not intended to be complete. For a more complete description of the terms of the Preferred Stock, see “Description of the Preferred Stock” in this prospectus. We reserve the right to reopen this series and issue additional shares of Preferred Stock either through public or private sale at any time.

 

Issuer   1347 Property Insurance Holdings, Inc.
     
Securities Offered   800,000 shares (or 920,000 shares if the underwriters exercise their over-allotment option in full) of 8.00% Cumulative Preferred Stock, Series A (or “Preferred Stock”), $25.00 par value per share, with a liquidation preference of $25.00 per share, of the Company. We may from time to time elect to issue additional shares of Preferred Stock, and all the additional shares would be deemed to form a single series with the Preferred Stock.
     
Over-allotment Option   The underwriters may exercise their option to acquire up to an additional 15% of the total number of shares of Preferred Stock to be offered in the offering within 30 days of the closing of the offering, solely for the purpose of covering over-allotments.
     
Dividends   Holders of the Preferred Stock will be entitled to receive cumulative 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).

 

 

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Dividends on the Preferred Stock, when, as and if declared by the Board of Directors of the Company or a duly authorized committee thereof, will be payable quarterly on or about the 15th day of March, June, September and December of each year (each, a “dividend payment date”), provided that if any dividend payment date is not a business day, then the dividend that would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day without adjustment in the amount of the dividend. Dividends will be payable to holders of record as they appear in our stock record books for the Preferred Stock at the close of business on the corresponding record date, which shall be the first day of March, June, September and December of each year, whether or not a business day, immediately preceding the applicable dividend payment date (each, a “dividend record date”). Dividends will be computed on the basis of a 360-day year consisting of twelve 30-day months. The first dividend record date will be June 1 , 2018. Dividends on the Preferred Stock will 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 of the Company.

 

When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Preferred Stock and any parity stock, all dividends declared upon the Preferred Stock and such parity stock shall be declared on a pro rata basis. See “Description of the Preferred Stock — Dividends” in this prospectus.

     
Redemption  

On and after                      , 2023, the Preferred Stock will be redeemable at our option, in whole or in part, at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date.

 

Our ability to redeem the Preferred Stock as described above may be limited by the terms of our agreements governing our existing and future indebtedness and by the provisions of other existing and future agreements. The Preferred Stock will not be subject to any sinking fund or other obligations of ours to redeem, purchase or retire the Preferred Stock. See “Description of the Preferred Stock — Redemption” in this prospectus.

     
Ranking  

The Preferred Stock:

 

●     will rank senior to our common stock and any other junior stock with respect to the payment of dividends and distributions upon our liquidation, dissolution or winding up. Junior stock includes our common stock and any other class or series of our capital stock that ranks junior to the Preferred Stock either as to the payment of dividends or as to the distribution of assets upon our liquidation, dissolution or winding up;

 

●     will rank at least equally with each other class or series of our capital stock ranking on parity with the Preferred Stock as to dividends and distributions upon our liquidation or dissolution or winding up, which we refer to as parity stock; and

 

 

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●     will rank junior to each other class or series of our capital stock that by its terms ranks senior to the Preferred Stock as to dividends and distributions upon our liquidation or dissolution or winding up.

     
    Upon completion of this offering and the repurchase of 60,000 Shares of Series B Preferred Stock of the Company pursuant to a stock purchase agreement with IWS Acquisition Corporation, we will not have any outstanding shares or series of capital stock that ranks equally with or senior to the Preferred Stock with respect to the payment of dividends and distribution of assets upon our liquidation, dissolution or winding up.
     
Liquidation Rights   Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of shares of Preferred Stock and any parity stock are entitled to receive out of our assets available for distribution to stockholders, before any distribution is made to holders of common stock or other junior stock, a liquidating distribution in the amount of the liquidation preference of $25.00 per share of Preferred Stock, plus any accumulated and unpaid dividends to, but not including, the date of payment. Distributions will be made pro rata as to the Preferred Stock and any parity stock and only to the extent of our assets, if any, that are available after satisfaction of all liabilities to creditors. See “Description of the Preferred Stock — Liquidation Rights” in this prospectus.
     
Voting Rights  

The holders of 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, nor will the holders of the Preferred Stock be given any notice of a meeting or vote by the Company’s common stockholders. 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 is 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. If any such amendment to our Certificate of Incorporation would adversely affect the rights, preferences, privileges or voting powers of the Preferred Stock disproportionately relative to other classes or series of parity stock, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Preferred Stock, voting separately as a class, will also be required. Please see the section titled “Description of the Preferred Stock—Voting Rights.”

     
Maturity   The Preferred Stock does not have any maturity date, and we are not required to redeem the Preferred Stock. Holders of the Preferred Stock will have no right to have the Preferred Stock redeemed. Accordingly, the shares of Preferred Stock will remain outstanding indefinitely, unless and until we decide to redeem them.
     
Preemptive Rights   Holders of the Preferred Stock will have no preemptive rights.
     
Listing  

We have applied to list the Preferred Stock on the Nasdaq Stock Market under the symbol “PIHPP.” If the application is approved, we expect trading to commence within 30 days following the initial issuance of the Preferred Stock. Listing of the Preferred Stock is not a condition to the completion of this offering.

     
Tax Considerations   For a discussion of the U.S. federal income tax consequences of purchasing, owning and disposing of the Preferred Stock, please see “Material U.S. Federal Income Tax Considerations.” You are urged to consult your tax advisor with respect to the U.S. federal income tax consequences of owning shares of the Preferred Stock in light of your own particular situation and with respect to any tax consequences arising under the laws of any state, local, foreign or other taxing jurisdiction.
     
Use of Proceeds  

We estimate that the net proceeds to us from the sale of the Preferred Stock issued in this offering will be approximately $18.7 million (or $21.6 million if the underwriters exercise their over-allotment option in full) after deducting the underwriting discount and our estimated offering expenses.

 

We intend to use $1.5 million of the net proceeds from this offering to complete the repurchase of the shares of our Series B Preferred Stock from IWS Acquisition Corporation, an affiliate of KFSI, upon completion of this offering. Following the repurchase of the shares, we expect to use the remainder of the net proceeds from this offering to support our organic growth, and for general corporate purposes, including spending for business development, sales and marketing and working capital, and for future potential acquisition opportunities. See “Use of Proceeds” in this prospectus for more information.

     
Transfer Agent   The registrar, transfer agent and dividend and redemption price disbursing agent in respect of the Preferred Stock is VStock Transfer, LLC.
     

 

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Book Entry and Form   The shares of Preferred Stock will be represented by one or more global certificates in definitive, fully registered form deposited with a custodian for, and registered in the name of, a nominee of The Depository Trust Company.
     
Risk Factors   Investing in our Preferred Stock involves risks. You should carefully read and consider the information beginning on page 10 of this prospectus and all other information set forth in and incorporated by reference into this prospectus before deciding to invest in our Preferred Stock.
     

 

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RISK FACTORS 

 

An investment in our Preferred Stock involves a high degree of risk. Before making an investment in our Preferred Stock, you should carefully consider the following risks, as well as the other information contained in this prospectus. Any of the risks described below could materially harm our business, financial condition, results of operations and prospects. As a result, the trading price of the Preferred Stock could decline, and you may lose part or all of your investment. Some statements in this prospectus, including such statements in the following risk factors, constitute forward-looking statements. See the section of this prospectus entitled “Special Note Regarding Forward-Looking Statements.”

 

Risks Relating To Our Company

 

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 3,461 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 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 through 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 coverage that other insurance companies have declined to insure. 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 all of these depopulation programs, we must offer a minimum number of renewals on any policy taken out under the programs, thus limiting our ability to implement some of our underwriting guidelines. Upon renewal of these policies, however, we analyze replacement cost scenarios to ensure 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 and Texas.

 

As of December 31, 2017, we had approximately 51,000 direct and assumed policies. Of these policies, 34,500, or approximately 68%, are in the State of Louisiana, 12,800, or approximately 25%, are in the State of Texas, while the remaining 3,400 policies, or 7%, 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 the State of 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. 

 

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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 the State of Florida, the order limits the number of policies which Maison may assume in 2017 and stipulates that we maintain catastrophe reinsurance at such levels as deemed appropriate by the FOIR. Should we not be able to comply with these and other regulations, our expansion into Florida may not succeed.

 

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, fires 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 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. 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, 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.

 

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In addition, industry developments could further increase competition in our industry, including:

 

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.

 

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. While management believes that amounts included in the consolidated financial statements for loss and loss adjustment expense reserves are adequate, there can be no assurance that future changes in loss development, favorable or unfavorable, will not 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 September 30, 2017, our net loss and loss adjustment expense reserves of $4.5 million were comprised of incurred but not reported reserves of $2.5 million and known case reserves of $2.0 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.

 

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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 extracontractual 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.

 

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. 

 

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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.

 

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 LA Citizens 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, fires 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 that 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.

 

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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 Louisiana and Texas. While 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 not verified, 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.

 

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;

 

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. 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, based upon their review of Maison’s statutory financial statements as of September 30, 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 and annual statutory financial statements within 60 days of the period end.

 

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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 needs 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 to include assessments of the effectiveness of internal controls by independent auditors. We currently qualify as an emerging growth company under the JOBS Act and a smaller reporting company under the regulations of the Securities and Exchange Commission, or 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 a 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.

 

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.

 

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 companies or smaller reporting companies. As long as we qualify as an emerging growth company or smaller reporting company, we are permitted, and we intend to, omit the auditor’s report on the effectiveness of our internal controls that would otherwise be required by the Sarbanes-Oxley Act, as described above. We also take advantage of the exemption provided for emerging growth companies 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 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 and/or smaller reporting 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.

 

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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, a wholly owned subsidiary of KFSI, Atlas Financial Holdings, Inc. (Nasdaq: AFH) (“Atlas”), and Limbach Holdings, Inc. (Nasdaq: LMB) (“Limbach”). As of the date of this prospectus, KFSI and its affiliates beneficially own approximately 8.3% of our outstanding shares of common stock and 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 the date of this prospectus, beneficially own approximately 36.0% of our outstanding shares of common stock.

 

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 and its affiliates 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, or 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.

 

 17

 

 

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, extracontractual liabilities, regulatory action, 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.

 

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;

 

quality of their data and underwriting processes;

 

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.

 

We may be unable to identify and complete a future transaction on terms favorable to us. We cannot know if we will realize the anticipated benefits of a completed transaction or if there will 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;

 

uncertainties that inherently characterize estimates and assumptions;

 

our selection and application of appropriate rating and pricing techniques;

 

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, TWIA and FOIR, 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 from LA Citizens, our rates must be equal to or less than the rates charged by LA Citizens. If LA Citizens reduces its rates, we must reduce our rates to keep them equivalent to or less than LA Citizens’ rates; however, if LA 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 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.

 

 19

 

 

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 and Texas. Although we have not written any policies in Florida, pursuant to the consent order issued on March 1, 2017, we are subject to the regulatory requirements of the FOIR. 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 states 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;

  

participation in guaranty funds and other statutorily-created markets or organizations;

 

business operations and claims practices;

 

approval of policy forms and premium rates;

 

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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;

 

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 premium 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.

 

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Should our retention rate be less than anticipated, future results will be negatively impacted.

 

We make assumptions about the rate at which our existing policies will renew for the purpose of projecting direct 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 direct premiums written would be adversely impacted. Furthermore, we may purchase more reinsurance than may be appropriate given the actual amount of coverage in force.

 

We depend on the ability of our subsidiaries to generate and transfer funds to meet our financial obligations

 

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 is 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.

 

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.

 

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 will incur 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 will also have to write-off or otherwise non-admit a portion of its respective deferred tax asset, which would result in a decrease in its respective capital and surplus under statutory accounting principles for insurance companies. This might result in the Company contributing additional capital to its insurance subsidiary in order to maintain desired statutory capital adequacy ratios. 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 estimates a decrease of approximately $325,000 in deferred tax assets on a consolidated basis, and a decrease of $718,000 in deferred tax assets, on a regulatory basis, in the Company’s insurance subsidiary.

 

Our tax-loss carryforwards are subject to restrictions.

 

As of December 31, 2016 we had net operating loss carryforwards, or NOLs, for federal income tax purposes of approximately $ 0.69 million which will be available to offset future taxable income. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, utilization of NOLs may be limited after an ownership change, as defined in Section 382. Due to potential changes in our ownership, a significant portion of these carry-forwards may be subject to significant restrictions with respect to our ability to use those amounts to offset future taxable income. Use of our NOLs may be further limited as a result of future equity transactions.

  

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Risks Related to this Offering and Ownership of Our Preferred Stock

 

We are a holding company and our ability to make dividend payments on the Preferred Stock may depend upon our ability to receive dividends or other distributions from our subsidiaries.

 

Our operations are substantially conducted through our subsidiaries, Maison, MMI and ClaimCor. As a holding company, we do not own any significant assets other than equity in our subsidiaries. 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 the Preferred Stock will be 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 the Preferred Stock. In addition, dividends or other distributions from our subsidiaries to us may be subject to contractual and other restrictions and are subject to other business considerations.

 

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. As a result, at times, we may not be able to receive dividends from Maison, which would affect our ability to pay dividends on our capital stock, including the Preferred Stock. Our other subsidiary companies collect the majority of their revenue through their affiliation with Maison. Our subsidiary company MMI, earns commission income from Maison for underwriting, policy administration, claims handling, and other services provided to Maison. Our subsidiary company, ClaimCor, earns claims adjusting income for adjusting certain of the claims of Maison’s policyholders. While dividend payments from our other subsidiaries are not restricted under insurance law, the underlying contracts between Maison and our other subsidiary companies are regulated by, and subject to the approval of insurance regulators.

 

The Preferred Stock is equity and is subordinate to our existing and future indebtedness and other liabilities, and your interests may be diluted in the event we issue additional shares of preferred stock.

 

Shares of the Preferred Stock represent equity interests and do not constitute indebtedness. As such, the Preferred Stock will rank junior to all of our indebtedness and other non-equity claims of our creditors with respect to assets available to satisfy our claims, including in our liquidation, dissolution or winding up. Our future debt may include restrictions on our ability to pay distributions to preferred stockholders. Unlike indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of preferred stock such as the Preferred Stock, dividends are payable only if declared by our Board of Directors (or a duly authorized committee thereof). Our ability to pay dividends on the Preferred Stock may be limited by the terms of our agreements governing future indebtedness and by the provisions of other future agreements.

 

Subject to limitations prescribed by Delaware law and our charter, our Board of Directors is authorized to issue, from our authorized but unissued shares of capital stock, preferred stock in such classes or series as our Board of Directors may determine and to establish from time to time the number of shares of preferred stock to be included in any such class or series. The issuance of additional shares of Preferred Stock or additional shares of preferred stock designated as ranking on parity with the Preferred Stock would dilute the interests of the holders of shares of the Preferred Stock, and the issuance of shares of any class or series of our capital stock expressly designated as ranking senior to the Preferred Stock or the incurrence of additional indebtedness could affect our ability to pay distributions on, redeem or pay the liquidation preference on the Preferred Stock.

 

There is no existing market for the Preferred Stock and a trading market that will provide you with adequate liquidity may not develop for the Preferred Stock. In addition, the Preferred Stock has no stated maturity date.

 

The Preferred Stock is a new issue of securities and currently no market exists for the Preferred Stock. Since the securities have no established maturity date, investors seeking liquidity will be limited to selling their shares in the secondary market. We have applied to list the Preferred Stock on the Nasdaq Stock Market under the trading symbol “PIHPP”; however, the Preferred Stock may not be approved for listing. Listing of the Preferred Stock is not a condition to the completion of this offering. Even if the Preferred Stock is approved for listing, there may be little or no secondary market for the Preferred Stock. The liquidity of any market for the Preferred Stock that may develop will depend on a number of factors, including prevailing interest rates, our financial condition and operating results, the number of holders of the Preferred Stock, the market for similar securities and the interest of securities dealers in making a market in the Preferred Stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market in the Preferred Stock, or how liquid that market might be. If an active market does not develop, you may have difficulty selling your shares of Preferred Stock. The public offering price of the Preferred Stock was determined by negotiations between us and the underwriter and may not be indicative of prices that will prevail in the open market following the completion of this offering. 

 

 23

 

 

If our common stock is delisted, your ability to transfer or sell your shares of Preferred Stock may be limited and the market value of the Preferred Stock will likely be materially adversely affected.

 

The Preferred Stock does not contain provisions that are intended to protect you if our common stock is delisted from the Nasdaq. Because the Preferred Stock has no stated maturity date, you may be forced to hold your shares of the Preferred Stock and receive stated dividends on the Preferred Stock when, as and if authorized by our Board of Directors and paid by us with no assurance as to ever receiving the liquidation value thereof. Also, if our common stock is delisted from the Nasdaq, it is likely that the Preferred Stock will be delisted from the Nasdaq as well. Accordingly, if our common stock is delisted from the Nasdaq, your ability to transfer or sell your shares of the Preferred Stock may be limited and the market value of the Preferred Stock will likely be materially and adversely affected.

 

General market conditions and unpredictable factors could adversely affect market prices for the Preferred Stock.

 

The market prices for the Preferred Stock may fluctuate from the public offering price. Several factors, many of which are beyond our control, will influence the market price of the Preferred Stock. Factors that might influence the market price of the Preferred Stock include, but are not limited to:

 

whether dividends have been declared and are likely to be declared on the Preferred Stock from time to time;

 

our creditworthiness, financial condition, performance and prospects;

 

prevailing interest rates;

 

the annual yield from dividends on the Preferred Stock compared to yields on other financial instruments;

 

the market for similar securities;

 

our issuance of additional preferred equity or debt securities; and

 

economic, financial, geopolitical, regulatory or judicial events that affect us and/or the insurance or financial markets generally.

 

If you purchase shares of Preferred Stock, the shares may subsequently trade at a discount to the price that you paid for them.

 

As a holder of Preferred Stock, you will have extremely limited voting rights.

 

Other than the limited circumstances described in this prospectus and except to the extent from time to time provided by law, holders of Preferred Stock do not have any voting rights. Our shares of common stock are the only class of our securities that carry full voting rights. Voting rights for holders of Preferred Stock exist primarily with respect to voting on amendments to our certificate of incorporation or certificate of designations relating to the Preferred Stock that materially and adversely affects the rights of the holders of Preferred Stock or authorize, increase or create additional classes or series of our capital stock that are senior to the Preferred Stock. Please see the section entitled “Description of the Preferred Stock—Voting Rights.”

 

There are no voting rights for the holders of the Preferred Stock with respect to our issuance of securities that rank equally with the Preferred Stock.

 

Upon completion of this offering and the repurchase of 60,000 Shares of Series B Preferred Stock of the Company pursuant to a stock purchase agreement with IWS Acquisition Corporation, we will not have outstanding any shares of our capital stock that rank equally with or senior to the Preferred Stock. However, we may issue additional securities that rank equally with the Preferred Stock without the vote of the holders of Preferred Stock. See “Description of the Preferred Stock — Voting Rights” in this prospectus. The issuance of securities ranking equally with the Preferred Stock may reduce the amount available for dividends and the amount recoverable by holders of the Preferred Stock in the event of our liquidation, dissolution or winding up.

 

We are able to redeem the Preferred Stock beginning     , 2023, but are under no obligation to do so. If the Preferred Stock is redeemed, you may not be able to reinvest the redemption proceeds in a comparable security at a similar return on investment.

 

On and after     , 2023, we may redeem the Preferred Stock. See “Description of the Preferred Stock — Redemption” in this prospectus. We have no obligation to redeem or repurchase the Preferred Stock under any circumstances. If shares of the Preferred Stock are redeemed at a time when prevailing interest rates or preferred stock dividends are lower than the dividend rate applicable to the Preferred Stock, you may not be able to reinvest the redemption proceeds in an investment with a comparable rate of return. 

 

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The Preferred Stock may be rated below investment grade.

 

We have not sought to obtain a rating for the Preferred Stock. However, we currently expect that the rating of the Preferred Stock, if obtained, would be below investment grade, which could adversely impact the market price of the Preferred Stock. Below investment-grade securities are subject to a higher risk of price volatility than similar, higher-rated securities. Furthermore, increases in leverage or deteriorating outlooks for an issuer, or volatile markets, could lead to significant deterioration in market prices of below-investment grade rated securities.

 

Ratings only reflect the views of the issuing rating agency and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. Further, a rating is not a recommendation to purchase, sell or hold any particular security, including the Preferred Stock. In addition, ratings do not market prices or suitability of a security for a particular investor and any rating of the Preferred Stock may not reflect all risks related to us and our business, or the structure or market value of the Preferred Stock.

 

A classification of the Preferred Stock by NAIC may impact U.S. insurance companies that purchase Preferred Stock.

 

The NAIC may from time to time, in its discretion, classify securities in insurers’ portfolios as either debt, preferred equity or common equity instruments. The NAIC’s written guidelines for classifying securities as debt, preferred equity or common equity include subjective factors that require the relevant NAIC examiner to exercise substantial judgment in making a classification. There is, therefore, a risk that the Preferred Stock may be classified by NAIC as common equity instead of preferred equity. The NAIC classification determines the amount of risk based capital, or RBC, charges incurred by insurance companies in connection with an investment in a security. Securities classified as common equity by the NAIC carry RBC charges that can be significantly higher than the RBC requirement for debt or preferred equity. Therefore, any classification of the Preferred Stock as common equity may adversely affect U.S. insurance companies that hold Preferred Stock. In addition, a determination by the NAIC to classify the Preferred Stock as common equity may adversely impact the trading of the Preferred Stock in the secondary market.

 

We will have broad discretion in using the proceeds of this offering, and we may not effectively spend the proceeds.

 

We expect to use $1.5 million of the net proceeds from this offering to complete the repurchase of the shares of our Series B Preferred Stock from IWS Acquisition Corporation, an affiliate of KFSI, upon the completion of this offering. Following the repurchase of the shares, we expect to use the remainder of the net proceeds from this offering to support our organic growth, and for general corporate purposes, including spending for business development, sales and marketing and working capital, and for future potential acquisition opportunities. See “Use of Proceeds” in this prospectus for more information. We cannot specify with certainty the particular uses of the net proceeds stated above, and these allocations may change depending on the success of our planned initiatives. We will have significant flexibility and broad discretion in applying the net proceeds of this offering, and we may not apply these proceeds effectively. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds, and you will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of 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,” “guidance,” “indicate,” “intend,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “will,” “will be,” “will continue,” “would” 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 prospectus 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 access additional 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;

 

Maison’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 expenses 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;

 

the ability of our third-party policy administrator to properly handle our policy administration process;

 

the requirements of being a public company;

 

 26

 

 

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;

 

our ability to attract and retain qualified personnel, including independent agents; and

 

restrictions imposed on our net operating loss carryforwards.

  

Our expectations may not be realized. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. Such risks and uncertainties also include those set forth under “Risk Factors” in this prospectus. Our forward-looking statements speak only as of the time that they are made and do not necessarily reflect our outlook at any other point in time. Except as required by law or regulation, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason.

 

 27

 

 

USE OF PROCEEDS

 

We will receive net proceeds from this offering of approximately $18.7 million (or approximately $21.6 million if the underwriters exercise their over-allotment option in full), based on the public offering price of $25.00 per share, after deducting the underwriting discounts and commissions and estimated expenses of this offering. See “Underwriting” in this prospectus.

 

We expect to use $1.5 million of the net proceeds from this offering to complete the repurchase of the shares of our Series B Preferred Stock from IWS Acquisition Corporation, an affiliate of KFSI, upon completion of this offering. Following the repurchase of the shares, we expect to use the remainder of the net proceeds from this offering to support our organic growth, and for general corporate purposes, including spending for business development, sales and marketing and working capital, and for future potential acquisition opportunities. However, we do not have any current plans, arrangements or understandings with respect to any such acquisition or investment, and we are currently not involved in any negotiations with respect to any such transaction. We cannot specify with certainty the particular uses of the net proceeds stated above, and our allocation of the proceeds may change depending on the success of our planned initiatives. We will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in high quality, short- and long-term investments.

 

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DIVIDEND POLICY

 

Holders of our Preferred Stock will be 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          , 2018. Dividends will be payable to holders of our 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 date for dividend payment will be 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 will be June 1 , 2018. Dividends on the Preferred Stock will 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 Preferred Stock following the offering. As of December 31, 2017, prior to the receipt of any net proceeds from this offering, 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 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.

 

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.

 

CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2017:

 

on an actual basis; and

 

on an as adjusted basis to give effect to the issuance of the Preferred Stock in this offering, after deducting underwriting discounts and commissions and other offering expenses payable by us, and assuming no exercise of the underwriters’ option to purchase additional shares from us.

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

  

As of September 30, 2017 

(unaudited)

(in thousands)  Actual  As adjusted
Cash and cash equivalents  $25,679   $40,876 
Series B Preferred Stock, $25.00 par value, 1,000,000 authorized shares, 120,000 shares issued and outstanding on an actual basis, and zero shares issued and outstanding on a pro forma as adjusted basis(1)   2,744    —   
Stockholders’ equity:          
Common stock, $0.001 par value, 10,000,000 authorized shares, 6,136,125 shares issued and 5,984,766 shares outstanding on an actual, and pro forma as adjusted basis   6    6 
Cumulative Preferred Stock, $25.00 par value, 1,000,000 authorized shares, zero shares issued and outstanding on an actual basis, and 800,000 shares issued and outstanding on a pro forma as adjusted basis(2)   —      20,000 
Additional paid in capital   47,052    45,735 
Retained deficit   (480)   (1,222)
Accumulated other comprehensive income   29    29 
Total stockholders’ equity (3)    45,598    63,539 
Total capitalization  $48,342   $63,539 

 

(1)

On January 2, 2018, we entered into a stock purchase agreement with 1347 Advisors and IWS Acquisition Corporation, both affiliates of KFSI, pursuant to which we repurchased 60,000 shares of our Series B Preferred Stock from 1347 Advisors for an aggregate purchase price of $1,740,000, representing (i) $1,500,000, comprised of $25 per share of Series B Preferred Stock, and (ii) declared and unpaid dividends in respect of the dividend payment due on February 23, 2018 amounting to $240,000 in the aggregate. We also agreed to repurchase pursuant to the stock purchase agreement 60,000 shares of Series B Preferred Stock held by IWS Acquisition Corporation, upon completion of this offering, for an aggregate purchase price of $1,500,000, comprised of $25 per share of Series B Preferred Stock, without any dividend or interest payment. Also on January 2, 2018, we terminated the Performance Shares Agreement dated February 24, 2015 with 1347 Advisors whereby 1347 Advisors was entitled to receive an aggregate of 100,000 shares of common stock of the Company, subject to the market price of the Company’s common shares achieving certain milestones. In connection with the termination, the Company made an aggregate cash payment of $300,000 to 1347 Advisors. The ‘as adjusted’ column in the table above includes the pro-forma effect of these transactions.

(2)Assumes no exercise of the underwriters’ over-allotment option.
(3)The table above excludes the following common shares issuable as of September 30, 2017:
a.177,456 common shares issuable upon the exercise of options at a weighted average price of $8.06 per share;
b.1,906,875 common shares issuable upon the exercise of warrants at a weighted average price of $13.87 per share;
c.20,500 common shares issuable upon the vesting of restricted stock units;
d.375,000 common shares issuable upon the occurrence of certain milestone events pursuant to a Performance Share Grant Agreement; and
e.156,956 common shares reserved for issuance under the Company’s equity incentive plan.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

All dollar amounts are in thousands, except share and per share data.

 

Overview

 

Maison Insurance Holdings, Inc. was incorporated on October 2, 2012 in the State of Delaware. On November 19, 2013, the Company changed its legal name from Maison Insurance Holdings, Inc. to 1347 Property Insurance Holdings, Inc. The Company is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business.

 

Prior to March 31, 2014, the Company operated as a wholly owned subsidiary of Kingsway America, Inc., or KAI. KAI, in turn, is a wholly owned subsidiary of Kingsway Financial Services, Inc., or KFSI, a publicly owned holding company based in Toronto, Ontario, Canada. On March 31, 2014, the Company completed an initial public offering of its common stock and then on June 13, 2014, the Company completed a follow-on offering. Through the combination of the initial public offering and follow-on offering, we issued approximately five million shares of our common stock. On October 25, 2017, KAI entered into a purchase agreement with Fundamental Global Investors, LLC, or FGI, pursuant to which KAI agreed to sell 900,000 shares of our common stock to FGI or to one of FGI’s affiliate companies in two separate transactions. The first transaction, for the sale of 475,428 shares of our common stock, occurred on November 1, 2017. The second transaction, for the sale of 424,572 shares of our common stock, is conditioned on approval of the transaction by both the LDI and FOIR. FGI is affiliated with D. Kyle Cerminara, where he serves as Chief Executive Officer, Co-Founder and Partner, and Lewis M. Johnson, where he serves as President, Co-Founder and Partner. Messrs. Cerminara and Johnson are both members of our Board of Directors. Should the second transaction be consummated, FGI, and entities affiliated with FGI, would own approximately 43% of our outstanding common shares.

 

We have three wholly-owned subsidiaries; Maison Insurance Company, or Maison, a Louisiana-domiciled property and casualty insurance company, Maison Managers, Inc., or MMI, a managing general agent, incorporated in the State of Delaware on October 2, 2012, and ClaimCor, LLC, or ClaimCor, a Florida based claims and underwriting technical solutions company.

 

Maison writes personal property and casualty insurance in Louisiana and Florida, and both personal and commercial property and casualty insurance in Texas. Maison provides dwelling policies for wind and hail only, and dwelling, homeowner and mobile home/manufactured home policies for multi-peril property risks.

 

Maison began writing commercial business in Texas in June 2015, through a quota-share agreement with Brotherhood Mutual Insurance Company, or Brotherhood. Through this agreement, Maison has assumed wind/hail only exposures on certain churches and related structures Brotherhood insures throughout the State of Texas.

 

Maison distributes its insurance policies through a network of independent agencies in Louisiana and Texas. These agencies typically represent several insurance companies in order to provide various insurance product lines to their clients. The Company refers to these policies as voluntary policies. Maison in currently in the process of establishing a network of independent agencies in Florida.

 

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 Company, 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 both 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 takeout, some of these LA Citizens and TWIA policyholders may not have been able to obtain such coverage from any other marketplace.

 

On January 2, 2015, the Company completed its acquisition of 100% of the membership interest 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. We have the ultimate authority over the claims handling process, while the agencies we appoint have no authority to settle our claims or otherwise exercise control over the claims process.

 

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Florida Certificate of Authority

 

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. As of September 30, 2017, Maison had not written any insurance policies covering risks in the State of Florida.

 

On September 29, 2017, Maison received authorization from the FOIR to assume personal lines policies from Florida Citizens Property Insurance Corporation, or FL Citizens, pursuant to a proposal of depopulation which Maison filed with FL Citizens on August 18, 2017. Accordingly, Maison entered the Florida market via the assumption of policies from FL Citizens in December, 2017. The order approving Maison’s assumption of policies limited the number of policies which Maison could assume in 2017 to 14,663, and also stipulates that Maison maintain catastrophe reinsurance at such levels as deemed appropriate by the FOIR.

 

Our Products

 

As of December 31, 2017, we had 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 primarily protects from the perils of wind and/or hail 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. 

 

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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.

 

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. Personal liability and medical payments to others may be included on an optional basis.

 

Our direct in-force policy counts as well as assumed policies as of December 31, 2017, 2016 and 2015 were as follows:

 

   Policies in-force as of December 31,
Source of Policies  2017  2016  2015
          
Total LA Citizens Takeout Policies in Force   12,002    8,892    8,957 
                
Homeowners   23,283    17,685    14,283 
Manufactured Homes   4,975    4,694    4,343 
Other Dwellings   5,187    2,568    806 
Total Voluntary Policies in Force   33,445    24,947    19,432 
                
Total Direct Policies in Force   45,447    33,839    28,389 
                
Assumed through FL Citizens Depopulation Program   3,461    —      —   
Assumed through Brotherhood Quota-Share Agreement   1,035    522    495 
Assumed through TWIA Quota-Share Agreement(1)   745    1,251    —   
Total Assumed Policies   5,241    1,773    495 

 

(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 have 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 are no longer considered an assumed policy and are instead reflected Voluntary Policies in Force in the table above.

 

Maison Managers, Inc.

 

MMI serves as the Company’s management services subsidiary and provides underwriting, policy administration, claims administration, marketing, accounting and other management services to Maison. MMI contracts with independent agencies for policy sales and services, and contracts with an independent third-party for policy administration services. As a managing general agency, MMI is licensed by and subject to the regulatory oversight of the Louisiana and Texas Departments of Insurance, or LDI and TDI, respectively, as well as the FOIR.

 

ClaimCor, LLC

 

ClaimCor serves as the Company’s claims and underwriting technical solutions company. Maison processes claims made by our policyholders through ClaimCor, and also through various third-party claims adjusting companies. 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.

 

The Company operates in a single segment – property and casualty insurance.

 

Non U.S.-GAAP Financial Measures

 

The Company assesses its results of operations using certain non-U.S. generally accepted accounting principles (“GAAP”) financial measures, in addition to U.S. GAAP financial measures. These non-U.S. GAAP financial measures 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.

 

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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 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 by net premiums earned. All items included in the loss and expense ratios are presented in the Company’s U.S. GAAP financial statements. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss.

 

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 that we have issued in conjunction with the termination of the management services agreement with 1347 Advisors and the valuation of deferred policy acquisition costs.

 

Adoption of Accounting Standards Due to Status as an Emerging Growth Company

 

Section 107 of the JOBS act 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.

 

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 departments’ personnel and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing claims management practices including claims handling and settlement practices, the effect of inflationary trends on future loss settlement costs, court decisions, economic conditions and public attitudes.

 

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”) and a provision for loss adjustment expenses (“LAE”).

 

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Because the establishment of the provision for loss and loss adjustment expense reserves is an inherently uncertain process involving estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected in the consolidated statements of operations and comprehensive income (loss) for the periods in which such estimates are updated. Management determines the loss and loss adjustment expense reserves as recorded on the Company’s financial statements, while the Company’s independent actuaries develop a range of reasonable estimates and a point estimate of loss and loss adjustment expense reserves. The actuarial point estimate is intended to represent the actuaries’ best estimate and will not necessarily be at the mid-point of the high and low estimates of the range.

 

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. The Company does not have any fixed income or equity investments in its portfolio which require the Company to use unobservable inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its investments and other comprehensive loss on its consolidated balance sheets and statements of comprehensive income (loss).

 

Gains and losses realized on the disposition of investments are determined on the first-in, first-out basis and credited or charged to the consolidated statements of operations and comprehensive income (loss). Premium and discount on investments are amortized and accreted using the interest method and charged or credited to net investment income. The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary.

 

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 operations and comprehensive income.

 

Securities issued to 1347 Advisors

 

Pursuant to the termination of the Management Services Agreement with 1347 Advisors, a wholly-owned subsidiary of KFSI, the Company issued Series B Preferred Shares, Warrants, and entered into a Performance Share Grant Agreement with 1347 Advisors on February 24, 2015. On January 2, 2018, the Company entered into a stock purchase agreement with 1347 Advisors and IWS Acquisition Corporation, both affiliates of KFSI, pursuant to which the Company agreed to repurchase all 60,000 Series B Preferred Shares held by 1347 Advisors and all 60,000 Series B Preferred Shares held by IWS Acquisition Corporation. The Company completed the purchase of the shares held by 1347 Advisors on January 2, 2018 and intends to complete the repurchase of the shares held by IWS Acquisition Corporation upon completion of this offering. In connection with the stock purchase agreement, the Performance Share Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated. No common shares were issued to 1347 Advisors under the Performance Share Grant Agreement.

  

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Because the Series B Preferred Shares have a provision requiring mandatory redemption on February 24, 2020, the Company was required to classify the Series B Preferred Shares as a liability on its balance sheet. The resulting liability was recorded at a discount to the $4,200 ultimate amount of payments required to be made under the Series B Preferred Shares which includes all periodic 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 Series B Preferred Shares discounted for the Company’s estimated cost of equity (13.9%).

 

The Company has 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, which consist of 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.

 

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 on their grant date using multiple Monte Carlo simulations. 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 stockholders’ equity.

 

New Accounting Pronouncements

 

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 the effective date and 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.

 

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 (loss). 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 could 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.

 

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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. The Company has reviewed its existing lessee obligations and has determined that ASU 2016-02 will apply should the Company renew its existing leases, or enter into any new lease agreements.

 

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 operations 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.

 

Analysis of Financial Condition 

As of September 30, 2017 compared to December 31, 2016 and as of December 31, 2016 compared to December 31, 2015 2015

 

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 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 Company’s Board of Directors. These guidelines stress the preservation of capital, market liquidity and the diversification of risk. Additionally, an 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 3.6% of the Company’s total investment portfolio as of September 30, 2017. Investments held by the Company’s insurance company subsidiary must also comply with applicable domiciliary state regulations that prescribe the type, quality and concentration of investments.

 

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The table below summarizes, by type, the Company’s investments as of September 30, 2017, December 31, 2016, and December 31, 2015.

 

  

September 30, 2017 

(unaudited) 

   December 31, 2016   December 31, 2015 
Type of Investment  Carrying Amount   Percent of Total   Carrying Amount   Percent of Total   Carrying Amount   Percent of Total 
Fixed income securities:                              
U.S. government  $2,899    5.8%  $1,604    5.6%  $647    3.0%
State municipalities and political subdivisions   5,365    10.8%   2,246    7.9%   1,651    7.6%
Asset-backed securities and collateralized mortgage obligations   16,635    33.5%   11,968    42.2%   9,082    42.0%
Corporate   20,308    40.9%   10,741    37.8%   8,858    40.9%
Total fixed income securities   45,207    91.0%   26,559    93.5%   20,238    93.5%
                               
Equity securities:                              
Common stock   1,612    3.2%   1,136    4.0%       %
Warrants to purchase common stock   122    0.2%       %       %
Rights to purchase common stock   37    0.1%       %       %
Total equity securities   1,771    3.5%   1,136    4.0%       %
                               
Short-term investments   1,779    3.6%   196    0.7%   1,149    5.3%
Other investments   945    1.9%   505    1.8%   248    1.2%
Total investments  $49,702    100.0%  $28,396    100.0%  $21,635    100.0%

 

Pursuant to the certificate of authority that 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 $2,001 and an estimated fair value of $1,998 as of September 30, 2017.

 

The Company’s other investments are comprised of equity 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 September 30, 2017. One of these limited partnerships is managed by Argo Management Group, LLC, an entity which, as of April 21, 2016 is wholly owned by KFSI. The Company has accounted for its investments under the cost method as the instruments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the limited partnerships or the underlying privately-owned companies.

 

Also included in other investments is a $300 certificate of deposit 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 fair value of the Company’s fixed income securities by contractual maturity as of September 30, 2017, December 31, 2016, and December 31, 2015. 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.

 

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September 30, 2017

 (unaudited) 

   December 31, 2016   December 31, 2015 
Matures in:  Carrying Amount   Percent of Total   Carrying Amount   Percent of Total   Carrying Amount   Percent of Total 
One year or less  $2,415    5.3%  $1,828    6.9%  $1,012    5.0%
More than one to five years   19,757    43.7%   12,678    47.7%   10,414    51.5%
More than five to ten years   11,804    26.1%   3,918    14.8%   2,259    11.2%
More than ten years   11,231    24.9%   8,135    30.6%   6,553    32.3%
Total  $45,207    100.0%  $26,559    100.0%  $20,238    100.0%

 

The Company holds cash and high-grade short-term assets which, along with fixed income and equity 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 its portfolio 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 maintains 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, corporate debt instruments and government and government agency bonds.

 

At September 30, 2017, December 31, 2016, and December 31, 2015, 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”).

 

  

September 30, 2017 

(unaudited) 

   December 31, 2016   December 31, 2015 
Rating (S&P/Moody’s)  Carrying Amount   Percent of Total   Carrying Amount   Percent of Total   Carrying Amount   Percent of Total 
AAA/Aaa  $22,345    49.4%  $14,995    56.4%  $10,741    53.0%
Aa/Aa   5,551    12.3%   2,627    9.9%   2,520    12.5%
A/A   11,735    26.0%   5,516    20.8%   4,745    23.4%
BBB   5,576    12.3%   3,421    12.9%   2,232    11.1%
Total fixed income securities  $45,207    100.0%  $26,559    100.0%  $20,238    100.0%

 

Other-Than-Temporary Impairment

 

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 where the investment manager determines that there is little or no risk of default prior to maturity, 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 the investment at a loss.

 

The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary. 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 nine months ended September 30, 2017 nor the years ended December 31, 2016 and 2015. 

 

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As of September 30, 2017, the gross unrealized losses for fixed income and equity securities amounted to $202 and $59, respectively, and there were no unrealized losses attributable to non-investment grade securities. At September 30, 2017 and December 31, 2016 and 2015, 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 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 $1,803, to $6,192 as of September 30, 2017 from $4,389 as of December 31, 2016. DPAC expressed as a percentage of unearned premium reserves was 19.2% as of September 30, 2017, compared to 17.0% as of December 31, 2016. This increase results from an increase in the effective rate on premium taxes that we pay in Louisiana and Texas due to a change in 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.

 

DPAC increased $359, to $4,389 as of December 31, 2016 compared to $4,030 as of December 31, 2015, corresponding to an increase in our unearned premium reserves over the same period. DPAC expressed as a percentage of unearned premium reserves was 17.0% and 17.2% as of December 31, 2016 and 2015, respectively.

 

Effective January 1, 2016, we amended the terms of our quota-share agreement with Brotherhood such that the premiums we receive, and the commissions we pay, are remitted on an earned basis. Prior to January 1, 2016, commissions and premiums were remitted on an “as written” basis. While this change does not impact the net income earned as a result of the agreement, it does impact certain assets and liabilities on our consolidated financial statements, such as our unearned premium reserves and DPAC asset. This change to our quota-share agreement with Brotherhood resulted in a $221 decrease to DPAC from December 31, 2015 to December 31, 2016.

 

Premiums Receivable, Net of Allowance for Doubtful Accounts

 

Premiums receivable, net of allowances for credit losses, decreased by $703 to $2,220 as of September 30, 2017 from $2,923 as of December 31, 2016. Due to our participation in the LA Citizens take-out program on December 1, 2016, we had a balance due from LA Citizens for approximately $800 as of December 31, 2016, most of which had been collected as of September 30, 2017.

 

Premiums receivable, net of allowances for credit losses, increased by $528 to $2,923 as of December 31, 2016 from $2,395 as of December 31, 2015. This increase was primarily attributable to premiums due from LA Citizens and TWIA on the December 1, 2016 depopulation of policies from both insurers. Premiums due from LA Citizens increased by approximately $400 due to a change in the timing of payments LA Citizens makes under its depopulation program. In prior years, LA Citizens would remit premium due to us (less a 16% holdback for endorsements and cancellations) prior to December 31st of the year of the depopulation. For the depopulation which occurred on December 1, 2016, LA Citizens changed the timing of payments such that the premium would be remitted to us in late January, 2017. Since December 1, 2016 represented the first-ever depopulation of policies from TWIA, premiums due from TWIA accounted for approximately $140 of the change 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. Ceded unearned premiums decreased $1,011 to $3,836 as of September 30, 2017 from $4,847 as of December 31, 2016 due predominantly to the amount and timing of installment payments due under our excess of loss catastrophe treaties.

 

Ceded unearned premiums increased $2,042 to $4,847 as of December 31, 2016 from $2,805 as of December 31, 2015, which again was predominantly due to the timing of installment payments due under our excess of loss catastrophe treaties. As we entered into a new treaty effective June 1, 2016, with higher limits compared to our prior treaty which expired on May 31, 2016, the amount of premium we cede and therefor due under our installment agreement had increased over the prior treaty year.

 

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Reinsurance Recoverable

 

Reinsurance recoverable on both paid losses and loss and LAE reserves represents amounts due to the Company, or expected to be due to the Company, from its reinsurers, based upon claims paid as well as claims reserves which have exceeded the retention amount under our reinsurance treaties. As of September 30, 2017, we have recorded expected recoveries from our reinsurers of $7,767 on paid losses and $17,560 on loss and LAE reserves, resulting primarily from recoveries due under our catastrophe excess of loss treaty for Hurricane Harvey, which affected the Gulf Coast of Texas in late August, 2017.

 

As of December 31, 2016 we have recorded an expected recovery of $444 on paid losses and $3,652 on loss and loss adjustment expense reserves, compared to $0 and $120 respectively as of December 31, 2015. The 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, a wind and hail event occurring in both Texas and Louisiana in early March 2016, as well as a wind and flooding event which occurred in Louisiana in mid-August 2016.

 

Funds Deposited with Reinsured Companies

 

Funds deposited with reinsured companies represents collateral that we had placed on deposit with Brotherhood based upon our quota-share agreement to reinsure a portion of Brotherhood’s business for wind/hail coverage only. Pursuant to the agreement, we were required to fund our pro-rata portion of reserves that Brotherhood had established for losses and loss adjustments expenses, and any other amounts for which Brotherhood had not been able to take credit for on its annual statutory financial statements. As of December 31, 2016, we had funded this obligation via a deposit of $500 made to Brotherhood under a trust agreement. This collateral was returned to the Company in March 2017. 

 

Current Income Taxes Recoverable

 

Current income taxes recoverable were $632 as of September 30, 2017 compared to $1,195 as of December 31, 2016, and $965 as of December 31, 2015, which represent the estimate of both the Company’s state and federal income taxes paid in excess of amounts due as of each reporting date.

 

Net Deferred Income Taxes

 

Net deferred income taxes increased $435 to $855 as of September 30, 2017 compared to $420 as of December 31, 2016. Net deferred income taxes are comprised of approximately $3,483 and $2,359 of deferred tax assets, net of approximately $2,628 and $1,939 of deferred tax liabilities as of September 30, 2017 and December 31, 2016, respectively. The change in the net deferred tax asset is primarily due to an increase in deferred tax assets associated with our increase in unearned premium reserves as well as an increase in net operating loss carryforwards due to our net loss for the nine months ended September 30, 2017.

 

The Company’s net deferred tax asset decreased $86, to $420 as of December 31, 2016 from $506 as of December 31, 2015. Net deferred income taxes are comprised of approximately $2,359 of deferred tax assets, net of approximately $1,939 of deferred tax liabilities as of December 31, 2016. The change in the net deferred tax asset is primarily due to an increase in the deferred tax liabilities related to our deferred policy acquisition costs.

 

Property and Equipment

 

Property and equipment was $213, $250, and $234 as of September 30, 2017 and December 31, 2016, and 2015 respectively, and consists of computers, office equipment, and improvements at our leased facilities in Tampa, Florida and Baton Rouge, Louisiana, shown net of accumulated depreciation. Also included in these balances are vehicles that we have purchased for the use of our sales representatives in Texas, Florida and Louisiana.

 

Other Assets

 

Other assets increased $79, to $867 as of September 30, 2017 from $788 as of December 31, 2016. The major components of other assets, are shown below.  

 

Other Assets 

September 30, 2017

(unaudited)

   December 31, 2016   December 31, 2015 
Accrued interest on investments  $233   $117   $77 
Security deposits for facility leases   38    38    38 
Prepaid expenses   481    616    590 
Other   115    17     
Total  $867   $788   $705 

 

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Loss and Loss Adjustment Expense Reserves

 

Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, incurred and but not reported (“IBNR”) loss events, as well as the related estimated loss adjustment expenses (“LAE”). The table below separates our loss reserves and LAE between IBNR and case specific estimates as of September 30, 2017, December 31, 2016 and December 31, 2015, and also shows the expected reinsurance recoverable on those reserves.

 

   Case Loss Reserves   Case LAE Reserves   Total Case Reserves   IBNR Reserves (including LAE)   Total Reserves   Reinsurance Recoverable on Reserves 
September 30, 2017 (unaudited)                              
Homeowners(1)  $3,348   $347   $3,695   $3,065   $6,760   $3,254 
Special Property(2)   10,372    600    10,972    4,359    15,331    14,306 
Total  $13,720   $947   $14,667   $7,424   $22,091   $17,560 
                               
December 31, 2016                              
Homeowners  $1,523   $463   $1,986   $3,302   $5,288   $2,565 
Special Property   697    88    785    898    1,683    1,087 
Total  $2,220   $551   $2,771   $4,200   $6,971   $3,652 
                               
December 31, 2015                              
Homeowners  $758   $72   $830   $1,070   $1,900   $120 
Special Property   49    9    58    165    223     
Total  $807   $81   $888   $1,235   $2,123   $120 

(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 lines wind/hail only business that we have assumed through our agreement with Brotherhood and our personal lines wind/hail only business that we have assumed through our quota-share agreement with TWIA.

 

Gross reserves as of September 30, 2017 were $22,091, an increase of $15,120 from December 31, 2016. Gross reserves in the approximate amount of $14,200 had been established for PCS Catastrophe 1743, or Harvey, a major storm which made initial landfall in the U.S. as a Category 4 hurricane near Rockport, Texas. As of September 30, 2017, we anticipate our total incurred losses from Harvey to be $23,000 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 September 30, 2017 was $17,560, an increase of $13,908 from December 31, 2016, due, in large part, to the anticipated recoveries due to the Company from Harvey losses. As a result of the foregoing, net loss reserves were $4,531 and $3,319 as of September 30, 2017 and December 31, 2016, respectively. 

 

When comparing loss and LAE reserves for the period of December 31, 2016 to December 31, 2015, we experienced redundancy for the 2015 accident year due to a ceded benefit we received under our aggregate treaty which is a part of our catastrophe excess of loss reinsurance program. In March 2016, we experienced the second of two weather related events which, when combined, exceeded the $5,000 retention under our aggregate treaty. This second event allowed us to re-assess all claims we incurred over the reinsurance year covered under our aggregate treaty, or from the period beginning June 1, 2015 and ending May 31, 2016. Thus, in calendar 2016 we ceded approximately $1.4 million of losses related to the 2015 accident year.

 

For the year ended December 31, 2015, the Company reported $182 of favorable development for net loss and LAE reserves from prior accident years.

 

We cannot predict whether loss and loss adjustment expense reserves will develop favorably or unfavorably from the amounts reported in our consolidated financial statements. Any such development could have a material effect on our consolidated financial results for a given period. Furthermore, while we use, and expect to continue to use, reinsurance to help manage our exposure to catastrophic losses, 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.

 

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Unearned Premium Reserves

 

Unearned premium reserves increased to $32,170 as of September 30, 2017 compared to $25,821 as of December 31, 2016 and $23,442 as of December 31, 2015. The following table outlines the change in unearned premium reserves by line of business.

 

   September 30, 2017 (unaudited)   December 31, 2016   December 31, 2015 
Homeowners - LA  $17,725   $16,644   $15,585 
Special Property - LA   7,379    7,113    6,900 
Total Louisiana   25,104    23,757    22,485 
Homeowners – TX   3,439    822    103 
Special Property – TX   3,627    1,242    854 
Total Texas   7,066    2,064    957 
Grand Total  $32,170   $25,821   $23,442 

 

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 $557 to $5,786 as of September 30, 2017 compared to $5,229 as of December 31, 2016. The bulk of the balance payable as of September 30, 2017 represents a quarterly installment payment due under our catastrophe reinsurance program, which was paid in October, 2017.

 

Ceded reinsurance premiums payable increased $1,946, to $5,229 as of December 31, 2016 compared to $3,283 as of December 31, 2015 primarily as a result of an increase in the level of coverage we have purchased from year to year, to coincide with the increase in direct and assumed premium we write. The bulk of the balance payable as of December 31, 2016 represents the quarterly payment due under our catastrophe excess of loss treaty, which was paid in January 2017.

 

Agency Commissions Payable

 

Agency commissions payable were $716 as of September 30, 2017 compared to $497 as of December 31, 2016, and $403 as of December 31, 2015. As agency commissions are paid one month in arrears, this balance represents commissions owed to the Company’s independent agencies on policies written throughout the months ended September 30, 2017, and December 31, 2016 and 2015, respectively. Since the commissions that we pay to our independent agencies are based upon a percentage of the premium written by our agencies, the balance due will vary directly with the volume of premium written in the month.

 

Premiums Collected in Advance

 

Premium deposits were $1,887, $1,128, and $870 as of September 30, 2017 and December 31, 2016 and 2015, respectively. These deposits represent cash that the Company has received for policies which were not yet in-force as of each respective date. Upon the effective date of coverage, advance premiums are reclassified to the unearned premium reserves account.

 

Funds held under Reinsurance Treaties

 

Funds held under reinsurance treaties represents collateral that we have received on deposit from our reinsurers under our catastrophe excess of loss treaties and is intended to fund those reinsurers pro-rata portion of reserves that we have established for losses and loss adjustment expenses. As of December 31, 2016, we had received cash deposits of $73 from our reinsurers. This balance was reduced to $48 as of September 30, 2017 as a portion of the balance was applied to reinsurance recoveries due to us on paid losses during the nine months ended September 30, 2017. Our reserve balances as of December 31, 2015 were such that no collateral was required from our reinsurers.

 

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Accounts Payable and Other Accrued Expenses

 

Accounts payable and other accrued expenses increased were $4,483 as of September 30, 2017 and $2,065 and $1,863 as of December 31, 2016 and 2015, respectively. The major components of accrued expenses and other liabilities are shown below.

 

   September 30, 2017 (unaudited)   December 31, 2016   December 31, 2015 
Accrued employee compensation  $128   $95   $352 
Accrued professional fees   763    509    267 
Unearned policy fees   386    204    168 
Accrued premium taxes and assessments   2,108    1,193    1,004 
Funds due to settle bond trades   1,031         
Other accounts payable   67    64    72 
Total  $4,483   $2,065   $1,863 


 

Related Party Transactions

 

As a result of the termination of the Management Services Agreement (“MSA”), which occurred on February 24, 2015, the Company 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.

 

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) $1,500, comprised of $25.00 per Series B Preferred Share, and (ii) declared and unpaid dividends in respect of the dividend payment due on February 23, 2018 amounting to $240 in the aggregate. The Company also agreed to repurchase pursuant to the stock purchase agreement 60,000 Series B Preferred Shares from IWS Acquisition Corporation, upon completion of this offering, for an aggregate purchase price of $1,500, comprised of $25.00 per Series B Preferred Share, without any dividend or interest payment. The foregoing transactions were approved by a special committee of the Board of Directors of the Company consisting solely of independent directors. 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 agreed to pay an aggregate cash payment of $300 to 1347 Advisors.

 

The remaining outstanding Series B Preferred Shares have a par value of $25.00 dollars and pay annual cumulative dividends at a rate of eight percent per annum. In the event the Company does not consummate the repurchase of the remaining outstanding Series B Preferred Shares held by IWS Acquisition Corporation, cumulative dividends shall accrue, whether or not declared by the Board and irrespective of whether there are funds legally available for the payment of dividends. Accrued dividends shall be paid in cash only when, as, and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Series B Preferred Shares. In the event of any voluntary of involuntary liquidation, dissolution, or winding up of the Company, the holders of the Series B Preferred Shares then outstanding shall be entitled to be paid out of the assets of the Company available for distributions to its stockholders, before any payment shall be made to holders of securities junior in preference to the Series B Preferred Shares. The Series B Preferred Shares rank senior to the Company’s common stock, and the Company is not permitted to issue any other series of preferred stock that ranks equal or senior to the Series B Preferred Shares while the Series B Preferred Shares are outstanding. The Company intends to consummate the purchase of the remaining outstanding Series B Preferred Shares held by IWS Acquisition Corporation upon the completion of this offering. On both February 24, 2017 and 2016, the Company issued a cash payment of $240 to Advisors representing annual dividend payments due on the Series B Preferred Shares. As part of the repurchase price paid by the Company to 1347 Advisors for the repurchase of the Series B Preferred Shares held by 1347 Advisors, the Company paid $240 to 1347 Advisors on January 2, 2018, representing declared and unpaid dividends in respect of the dividend payment due on the Series B Preferred Shares on February 23, 2018.

 

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In the event the Company does not consummate the repurchase of the remaining outstanding Series B Preferred Shares held by IWS Acquisition Corporation, unless redeemed earlier by the Company as discussed below, with the written consent of the holders of the majority of the Series B Preferred Shares then outstanding, the Company will be required to redeem the Series B Preferred Shares then outstanding on February 24, 2020 (the “Mandatory Redemption Date”), for a redemption amount equal to $25.00 dollars per share outstanding plus all accrued and unpaid dividends on such shares. The Company has the option to redeem the remaining outstanding Series B Preferred Shares prior to the Mandatory Redemption Date immediately prior to the consummation of any change in control of the Company that may occur.

 

Since the Series B Preferred Shares have a mandatory redemption provision requiring redemption on February 24, 2020, the Company was required to classify the Series B Preferred Shares as a liability on the 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, amortization in the amount of $1,889 will be charged to operations during the period the Series B Preferred Shares are outstanding using the effective interest method. For the nine months ended September 30, 2017 and 2016, amortization of the discount on the Series B Preferred Shares totaled $276 and $263, respectively.

 

Effect of Buyout on Financial Condition and Statement of Operations

 

Under the original MSA, the Company was required to pay 1347 Advisors a fee of 1% of written premiums on a monthly basis. The Company replaced this ongoing annuity by providing 1347 Advisors with an up-front cash payment and other consideration which lead to a one-time charge of $5,421 to the Company’s operations for the year ended December 31, 2015 as follows:

 

   Year ended
December 31, 2015
 
Cash paid  $2,000 
Issuance of Series B Preferred Shares   2,311 
Issuance of Warrants and Performance Shares   1,010 
Professional fees incurred in connection with the Buyout   100 
Loss on termination of MSA  $5,421 

 

The issuance of the Warrants and Performance Shares had no effect on the Company’s total stockholders’ equity as they both resulted in equal and offsetting charges to the Company’s retained earnings and additional paid-in capital. The fair value of the Warrant was estimated on grant date based upon the Black-Scholes option pricing model while a Monte Carlo model was utilized to determine the fair value of the Performance Shares due to the fact that these shares are only issuable based upon the achievement of certain market conditions.

 

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 in which the Company has committed to invest $500, of which the Company has invested $211 as of September 30, 2017. The managing member of Argo, Mr. John T. Fitzgerald, was also appointed to KFSI’s board of directors on April 21, 2016.

 

Contractual Obligations

 

As of September 30, 2017, the Company had the following amounts due under its operating leases for facilities leased in Baton Rouge, Louisiana, and Tampa, Florida.
 

Year ending September 30,    
2018  $303 
2019   298 
2020   25 
2021 and thereafter    
Total  $626 

 

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Stockholders’ Equity

 

The primary drivers behind the changes to total stockholders’ equity for the nine months ended September 30, 2017 as well as for the years ended December 31, 2016 and 2015 resulted from the securities issued in the termination of the MSA (see related party transactions for further discussion), the Company’s repurchase of its common stock, as well as the Company’s net loss and net unrealized gains and losses on its investment portfolio as shown below. Furthermore, on September 14, 2017, the Company sold 28,000 restricted common shares to its Chief Operating Officer, Mr. Case, at a price of $8.00 per share.

 

   Common Shares Outstanding   Treasury Shares  

Total Stockholders’ Equity

 
Balance, January 1, 2015   6,358,125       $49,914 
Issuance of performance shares and warrants pursuant to MSA termination transaction           1,010 
Stock compensation expense           47 
Repurchase of common stock   (223,851)   223,851    (1,731)
Net loss           (1,673)
Unrealized losses on investment portfolio (net of income taxes)           (61)
Balance, December 31, 2015   6,134,274    223,851   $47,506 
Stock compensation expense           38 
Repurchase of common stock   (177,508)   177,508    (1,195)
Retirement of treasury shares       (250,000)    
Net income           11 
Unrealized losses on investment portfolio (net of income taxes)           (3)
Balance, December 31, 2016   5,956,766    151,359   $46,357 
Issuance of common shares   28,000        224 
Stock compensation expense           19 
Net loss           (1,096)
Unrealized gains on investment portfolio (net of income taxes)           94 
Balance, September 30, 2017 (unaudited)   5,984,766    151,359   $45,598 

 

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. The Company purchased 177,508 shares at an average price of $6.74 per share for the year ending December 31, 2016 and purchased 223,851 shares at an average price of $7.73 per share for the year ending December 31, 2015. 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.

 

Results of Operations

Three and Nine Months Ended September 30, 2017 Compared with Three and Nine Months Ended September 30, 2016

 

Gross Premiums Written

 

The following table shows our gross premiums written by line of business for the three and nine months ending September 30, 2017 and 2016.

 

(unaudited)  Three months ended September 30,   Nine months ended September 30, 
Line of Business  2017   2016   Change   2017   2016   Change 
Homeowners  $11,275   $9,402   $1,873   $30,474   $25,577   $4,897 
Special Property   5,888    4,564    1,324    18,343    13,907    4,436 
Gross Premium Written  $17,163   $13,966   $3,197   $48,817   $39,484   $9,333 

 

Gross premiums written were $17,163 for the quarter ended September 30, 2017, up 22.9% from $13,966 for the quarter ended September 30, 2016. This increase was largely due to organic growth in voluntary production from the Company’s independent agents, particularly in Texas where the Company is reporting solid growth across all of its product lines with homeowner’s policies especially strong.

 

For the nine months ended September 30, 2017, gross premiums written in the State of Louisiana represented approximately 74% of total gross written premiums, with the remaining 26% written in Texas. For the same period in the preceding year, gross premiums written in Louisiana and Texas represented 91% and 9%, respectively, as we continue to expand our network in Texas.

 

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Ceded Premiums Written

 

Ceded premiums written increased to $16,426 for the nine months ended September 30, 2017, compared to $15,414 for the same period 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 nine month periods ended September 30, 2017 and 2016 are covered by ceded premiums written under three separate reinsurance treaties. Therefore, the increase in ceded premiums written for the nine 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. The following table is a summary of the key provisions under each of our treaties.

 

   2015/2016 CAT XOL Treaty 06/01/15 – 05/31/16   2016/2017 CAT XOL Treaty 06/01/16 – 05/31/17   2017/2018 CAT XOL Treaty 06/01/17 – 05/31/18 
Wind/Hail loss occurrence clause(1)   144 hours    144 hours    144 hours 
Retention on first occurrence  $4,000   $5,000   $5,000 
Retention on second occurrence  $1,000   $2,000   $2,000 
Limit of coverage including first event retention  $140,000   $200,000   $200,000 
Franchise deductible(2)  $   $125   $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.

 

Net Premium Earned

 

The following table shows our net premiums earned by line of business.

 

(unaudited)  Three months ended September 30,   Nine months ended September 30, 
Line of Business  2017   2016   Change   2017   2016   Change 
Homeowners  $6,494   $4,996   $1,498   $17,410   $15,792   $1,618 
Special Property   2,138    2,140    (2)   7,622    7,077    545 
Net premium earned  $8,632   $7,136   $1,496   $25,032   $22,869   $2,163 

 

Premium earned on a gross and ceded basis is as shown in the following table.

 

   Three months ended September 30,   Nine months ended September 30, 
(unaudited)  2017   2016   Change   2017   2016   Change 
Gross premium earned  $14,907   $12,546   $2,361   $42,469   $35,822   $6,647 
Ceded premium earned   6,275    5,410    865    17,437    12,953    4,484 
Net premium earned  $8,632   $7,136   $1,496   $25,032   $22,869   $2,163 

 

Other Income

 

Other income increased $400 to $1,262 for the nine months ended September 30, 2017, compared to $862 for the same period in 2016. Comparing the three month periods ended September 30, 2017 and 2016, other income increased $129 to $474 from $345. Other income is comprised of policy fee income charged to our policyholders for property inspections, premium financing fees for those policyholders which elect to pay their premiums on an installment basis, and 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, whereby a portion of the reinsurance brokerage is shared with us based solely upon the total brokerage collected by our intermediary on the business it places for us. The growth in our book of business is the main driver behind the increase in other income when comparing the three and nine month periods ended September 30, 2017 to 2016.

 

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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. The following table sets forth the components of our losses and loss ratios for the three and nine months ended September 30, 2017 and 2016.

  

(unaudited)  Three months ended September 30,   Nine months ended September 30, 
   2017   2016   2017   2016 
   Losses ($)   Loss
Ratio (%)
   Losses ($)   Loss
Ratio (%)
   Losses  ($)   Loss
Ratio  (%)
   Losses  ($)   Loss
Ratio  (%)
 
Non-catastrophe weather losses  $881    10.2%  $51    0.7%  $2,753    11.0%  $430    1.9%
Non-weather losses   2,836    32.9%   1,648    23.1%   6,500    26.0%   4,876    21.3%
Core loss(1)   3,717    43.1%   1,699    23.8%   9,253    37.0%   5,306    23.2%
Catastrophe loss(2)   5,000    57.9%   4,798    67.2%   6,700    26.7%   9,784    42.8%
Prior period (redundancy) development(3)   (922)   (10.7)%   (54)   (0.7)%   (2,144)   (8.5)%   (173)   (0.8)%
Net losses and LAE incurred  $7,795    90.3%  $6,443    90.3%  $13,809    55.2%  $14,917    65.2%

 

(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 the Company’s estimated gross incurred cost (before recovery from reinsurance) 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.

 

Our net loss ratio (net losses and LAE divided by net premiums earned) for the nine months ended September 30, 2017 was 55.2%, compared to a net loss ratio of 65.2% for the nine months ended September 30, 2016. 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 $23,000 for this storm, due to our reinsurance program, our net incurred losses from Harvey are limited to $5,000. Furthermore, PCS event 1714 was a series of wind/hail storms which impacted our policyholders in both Louisiana and Texas in early February, 2017, resulting in $1,700 in net incurred catastrophe losses for the nine months ended September 30, 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 nine months ended September 30, 2017 as shown in the preceding table. In comparison, for the nine months ended September 30, 2016, we experienced three catastrophe events: PCS event 1616 in February, PCS event 1617 in March, and PCS event 1644 in August. These three events resulted in $9,784 in net incurred losses for prior year. Our net loss ratio for the current year was further reduced due to redundancy in the amount of $2,144 due to the release of reserves relating to prior accident years.

 

Our net loss ratio for the three months ended September 30, 2017 was 90.3% and was marked by the impact of Harvey, which resulted in $5,000 in net incurred catastrophe losses for the quarter and accounted for over half of the quarter’s net loss ratio. Non-weather losses also accounted for approximately one-third of the quarter’s net loss ratio as we experienced approximately $1,500 in net losses from fire claims and $1,336 from all other non-weather related causes of loss.

 

Amortization of Deferred Policy Acquisition Costs

 

Amortization of deferred acquisition costs for the three months ended September 30, 2017 were $2,755 compared to $2,095 for the three months ended September 30, 2016, and include items such as commissions earned by our agencies, premium taxes, assessments, and policy processing fees. Expressed as a percentage of gross earned premiums, amortization was 18.5% in the current quarter, compared to 16.7% in the same quarter last year. For the nine month periods ended September 30, amortization as a percentage of gross earned premiums was 18.5% and 16.7% in 2017 and 2016, respectively. 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 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.

 

General and Administrative Expenses

 

General and administrative expenses were $2,145 for the quarter ended September 30, 2017, compared to $1,658 for the quarter ended September 30, 2016. For the nine month periods ended September 30, 2017 and 2016, general and administrative expenses were $6,535 and $4,982, respectively. Expressed as a percentage of gross premium earned, general and administrative expenses were 15.4% and 13.9%, for the nine month periods of 2017 and 2016, respectively. The largest drivers in the increase in general and administrative expense over both the three and nine month periods include employee costs and professional fees. Employee costs accounted for approximately 35% of the nine month increase as we have increased staffing to support our growth in Texas and Florida while professional fees accounted for approximately 50% of the nine month increase as we have completed 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.

 

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Income Tax Expense

 

Income tax benefit for the three and nine months ended September 30, 2017 was $1,171 and $397, respectively, on pre-tax losses of $3,434 and 1,493, respectively. This resulted in an effective tax rate of 34% and 27%, respectively. For the three and nine month periods ended September 30, 2016, our effective income tax rate was 32% and 28%, respectively. The variances to the effective income tax rate between periods is due, in large, to state income taxes charged to the Company’s subsidiaries.

 

Net Income

 

As a result of the foregoing, the Company’s net loss for the third quarter 2017 was $2,263, or $0.38 per diluted share, compared to a net loss of $1,806, or $0.30 per diluted share for the third quarter of 2016. For the nine months ended September 30, 2017, the Company’s net loss was $1,096, or $0.18 per diluted share, compared to a net loss of $1,581 or $0.26 per diluted share for the nine months ended September 30, 2016.

 

Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Gross Premiums Written

 

The following table shows our gross premiums written by line of business for the years ended December 31, 2016 and 2015.

 

   Year Ended December 31,     
Line of Business  2016   2015   Change 
Homeowners  $33,615   $29,987   $3,628 
Special Property   17,712    13,864    3,848 
Gross Written Premium  $51,327   $43,851   $