Porch Group, Inc 8-K/A, filed Jun 21, 2021
Porch Group, Inc. (PRCH)
About this 8-K/A
Porch Group, Inc filed this 8-K/A on June 21, 2021, reporting on events of April 5, 2021.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
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Item 2.01 Completion of Acquisition or Disposition of Assets.
On April 6, 2021, Porch Group, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Initial Report”) regarding the completion of its acquisition on April 5, 2021 of Homeowners of America Holding Corporation (“HOA”), pursuant to the terms of that Agreement and Plan of Merger, dated as of January 13, 2021 (the “Merger Agreement”), by and among the Company, HOA, HPAC, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), and HOA Securityholder Representative, LLC, solely in its capacity as the representative for the securityholders of HOA, pursuant to which, among other matters, Merger Sub merged with and into HOA, with HOA surviving as a wholly-owned subsidiary of the Company (the “HOA Acquisition”).
This Amendment No. 1 to Current Report on Form 8-K/A (this “Form 8-K/A”) amends the Initial Report to file the historical financial statements and pro forma financial information required by Item 9.01 of Form 8-K that were previously omitted from the Initial Report as permitted by Item 9.01(a)(4).
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
HOA’s consolidated financial statements as of and for the years ended December 31, 2020 and 2019, the related notes, and the related report of JLK Rosenberger, LLP, independent registered public accounting firm, as set forth in their report thereon, are incorporated herein by reference as Exhibit 99.1 hereto.
HOA’s unaudited consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and March 31, 2020 and the related notes are incorporated herein by reference as Exhibit 99.2 hereto.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial information of the Company, giving effect to the HOA Acquisition, which includes the unaudited pro forma condensed combined balance sheet as of March 31, 2021 and the unaudited pro forma condensed combined statements of income for the year ended December 31, 2020 and for the three months ended March 31, 2021 and the related notes, are incorporated herein by reference as Exhibit 99.3 hereto.
The pro forma financial information included in this Form 8-K/A has been presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the Acquisitions occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Company will experience after the Acquisitions.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| PORCH GROUP, INC. | |||
| By: | /s/ Martin L. Heimbigner | ||
| Name: | Martin L. Heimbigner | ||
| Title: | Chief Financial Officer | ||
Date: June 21, 2021
Exhibit 23.1
Porch.com, Inc.
2201 1st Avenue South, Suite 300
Seattle, WA 98134
Consent of Registered Independent Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333- 253778) pertaining to the Porch Group, Inc. 2020 Stock Incentive Plan and Porch.com, Inc. 2012 Equity Incentive Plan of our report dated June 11, 2021, with respect to the consolidated financial statements of Homeowners of America Holding Corporation included in this Current Report (Form 8-K).
/s/ JLK Rosenberger LLP
Addison, Texas
June 21, 2021
Exhibit 99.1
To the Board of Directors and Stockholders of Homeowners of America Holding Corporation Irving, Texas
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Homeowners of America Holding Corporation and Subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatements.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
F-1
Opinion
In our opinion, the December 31, 2020 and 2019 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Homeowners of America Holding Corporation and Subsidiaries as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Report on Supplementary Information
Accounting principles generally accepted in the United States of America require that the loss and allocated loss adjustment expenses development data included as part of Note 5 be presented to supplement the basic consolidated financial statements. Such information, although not a part of the basic consolidated financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audits of the basic consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Addison, Texas
June 11, 2021
F-2
HOMEOWNERS OF AMERICA HOLDING CORPORATION
As of December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Investments (Notes 1 and 3): | ||||||||
| Fixed maturities available-for-sale, at fair value (amortized cost $38,949,513 as of December 31, 2020 and $19,950,113 as of December 31, 2019) | $ | 40,039,273 | $ | 20,343,140 | ||||
| Restricted fixed maturities available-for-sale, at fair value (amortized cost $1,080,415 as of December 31, 2020 and $1,078,576 as of December 31, 2019) | 1,098,295 | 1,078,232 | ||||||
| Short-term investments, at fair value | 7,201,744 | 7,943,222 | ||||||
| Long-term investments | 13,052,643 | 13,347,826 | ||||||
| Restricted certificates of deposit | 2,335,703 | 2,335,703 | ||||||
| Total fixed maturity, short-term and long-term investments | 63,727,658 | 45,048,123 | ||||||
| Cash and cash equivalents | 23,855,019 | 15,794,011 | ||||||
| Restricted cash equivalents | 313,817 | 312,568 | ||||||
| Accrued investment income | 262,633 | 237,279 | ||||||
| Due and deferred premiums | 8,225,387 | 7,777,145 | ||||||
| Reinsurance balance due | 154,351,811 | 123,548,385 | ||||||
| Property, equipment and software, net | 2,400,937 | 2,484,912 | ||||||
| Deferred policy acquisition costs | 2,991,959 | 2,126,293 | ||||||
| Prepaid expenses and other | 2,502,689 | 1,558,067 | ||||||
| Deferred tax assets, net | 1,741,549 | 1,493,093 | ||||||
| Total assets | $ | 260,373,459 | $ | 200,379,876 | ||||
See accompanying notes to consolidated financial statements.
F-3
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Consolidated Balance Sheets (Continued)
As of December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Losses and loss adjustment expense reserves | $ | 34,114,346 | $ | 27,166,371 | ||||
| Advance premiums | 3,015,832 | 2,268,388 | ||||||
| Ceded reinsurance premiums payable | 14,456,104 | 11,785,145 | ||||||
| Unearned premiums | 129,980,412 | 102,985,165 | ||||||
| Unearned ceding commissions | 10,843,495 | 8,812,940 | ||||||
| Commissions payable, reinsurers and agents | 7,290,073 | 4,942,149 | ||||||
| General and other accrued expenses payable | 4,449,469 | 8,273,128 | ||||||
| Line of credit | 3,940,776 | 2,750,000 | ||||||
| Funds held under reinsurance treaty | 14,504,546 | 99,640 | ||||||
| Federal income tax payable | 124,879 | 162,234 | ||||||
| Taxes, licenses and other fees payable | 2,439,202 | 1,706,754 | ||||||
| Total liabilities | 225,159,134 | 170,951,914 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.0001 par value per share; 40,000,000 shares authorized, 18,483,684 shares issued and 10,717,518 outstanding as of December 31, 2020 and 18,483,684 shares issued and 10,702,518 outstanding as of December 31, 2019 | 1,071 | 1,070 | ||||||
| Treasury stock, $.0001par value per share; 7,766,166 common shares as of December 31,2020 and 7,781,166 common shares as of December 31, 2019 | (777 | ) | (778 | ) | ||||
| Additional paid-in capital | 1,954,786 | 1,881,864 | ||||||
| Accumulated other comprehensive income | 888,534 | 405,238 | ||||||
| Retained earnings | 32,370,711 | 27,140,568 | ||||||
| Total stockholders’ equity | 35,214,325 | 29,427,962 | ||||||
| Total liabilities and stockholders’ equity | $ | 260,373,459 | $ | 200,379,876 | ||||
See accompanying notes to consolidated financial statements.
F-4
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Consolidated Statements of Income
For the Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| Premiums earned | $ | 212,557,602 | $ | 172,732,104 | ||||
| Premiums ceded | (200,794,930 | ) | (162,706,299 | ) | ||||
| Net premiums earned | 11,762,672 | 10,025,805 | ||||||
| Policy fees | 16,244,916 | 12,911,173 | ||||||
| Ceding commissions and reinsurance profit share | 6,664,500 | 6,511,378 | ||||||
| Loss adjustment and other fee income | 7,364,003 | 5,470,393 | ||||||
| Investment income, net of investment expenses | 1,086,798 | 1,203,502 | ||||||
| Net realized (loss) gain on investments | (28,935 | ) | 37,990 | |||||
| Total revenues | 43,093,954 | 36,160,241 | ||||||
| Expenses: | ||||||||
| Losses and loss adjustment expenses | 12,563,955 | 8,744,089 | ||||||
| Policy acquisition and other underwriting expenses | 6,186,532 | 4,498,444 | ||||||
| General and administrative expenses | 17,556,307 | 12,653,328 | ||||||
| Total expenses | 36,306,794 | 25,895,861 | ||||||
| Net income before income tax expense | 6,787,160 | 10,264,380 | ||||||
| Income tax expense (benefit) (Note 7): | ||||||||
| Current | 2,041,665 | 2,034,762 | ||||||
| Deferred | (484,649 | ) | 238,573 | |||||
| Total income tax expense | 1,557,016 | 2,273,335 | ||||||
| Net income | $ | 5,230,144 | $ | 7,991,045 | ||||
| Basic earnings per common share | $ | 0.49 | $ | 0.75 | ||||
| Diluted earnings per common share | $ | 0.42 | $ | 0.65 | ||||
| Cash dividend declared per common share | $ | - | $ | - |
See accompanying notes to consolidated financial statements.
F-5
| HOMEOWNERS OF AMERICA HOLDING CORPORATION | |||
| Consolidated Statements of Comprehensive Income | |||
| For the Years Ended December 31, 2020 and 2019 | |||
| 2020 | 2019 | |||||||
| Net income | $ | 5,230,144 | $ | 7,991,045 | ||||
| Other comprehensive income: | ||||||||
| Current period change in net unrealized gain (loss), net of tax (expense) benefit of ($137,660) and ($125,456) | 517,862 | 471,954 | ||||||
| Amount reclassified from accumulated comprehensive income, net of tax (benefit) expense of ($9,188) and $4,398 | (34,566 | ) | 16,543 | |||||
| Total other comprehensive income, net of income tax | 483,296 | 488,497 | ||||||
| Comprehensive income | $ | 5,713,440 | $ | 8,479,542 | ||||
See accompanying notes to consolidated financial statements.
F-6
| HOMEOWNERS OF AMERICA HOLDING CORPORATION | |||||||||||||||
| Consolidated Statements of Stockholders’ Equity | |||||||||||||||
| For the Years Ended December 31, 2020 and 2019 | |||||||||||||||
| Common | Treasury | Additional | Accumulated other | Total | ||||||||||||||||||||||||||||
| Common | Stock | Treasury | Stock | Paid-in | Comprehensive | Retained | Shareholders’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income, net of tax | Earnings | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2018 | 10,525,988 | $ | 1,052 | 7,791,166 | $ | (779 | ) | $ | 1,610,223 | $ | (83,259 | ) | $ | 19,149,523 | $ | 20,676,760 | ||||||||||||||||
| Net income | - | - | - | - | - | - | 7,991,045 | 7,991,045 | ||||||||||||||||||||||||
| Total other comprehensive income, net of income tax | - | - | - | - | - | 488,497 | - | 488,497 | ||||||||||||||||||||||||
| Stock options exercised | 90,000 | 9 | - | 1 | 69,990 | - | - | 70,000 | ||||||||||||||||||||||||
| Common stock issued | 88,530 | 9 | (12,000 | ) | - | 176,859 | - | - | 176,868 | |||||||||||||||||||||||
| Repurchase of common stock | (2,000 | ) | - | 2,000 | - | (4,260 | ) | - | - | (4,260 | ) | |||||||||||||||||||||
| Stock based compensation | - | - | - | - | 29,052 | - | - | 29,052 | ||||||||||||||||||||||||
| Balance at December 31, 2019 | 10,702,518 | $ | 1,070 | 7,781,166 | $ | (778 | ) | $ | 1,881,864 | $ | 405,238 | $ | 27,140,568 | $ | 29,427,962 | |||||||||||||||||
| Net income | - | - | - | - | - | - | 5,230,143 | 5,230,143 | ||||||||||||||||||||||||
| Total other comprehensive loss, net of income tax | - | - | - | - | - | 483,296 | - | 483,296 | ||||||||||||||||||||||||
| Stock options exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Common stock issued | 16,000 | 1 | (16,000 | ) | 1 | 46,959 | - | - | 46,961 | |||||||||||||||||||||||
| Repurchase of common stock | (1,000 | ) | - | 1,000 | - | (2,868 | ) | - | - | (2,868 | ) | |||||||||||||||||||||
| Stock based compensation | - | - | - | - | 28,831 | - | - | 28,831 | ||||||||||||||||||||||||
| Balance at December 31, 2020 | 10,717,518 | $ | 1,071 | 7,766,166 | $ | (777 | ) | $ | 1,954,786 | $ | 888,534 | $ | 32,370,711 | $ | 35,214,325 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
| HOMEOWNERS OF AMERICA HOLDING CORPORATION | |||
| Consolidated Statements of Cash Flows | |||
| For the Years Ended December 31, 2020 and 2019 | |||
| 2020 | 2019 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 5,230,144 | $ | 7,991,045 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 642,696 | 244,824 | ||||||
| Accounting charge related to stock-based compensation expense | 28,831 | 29,052 | ||||||
| Common stock compensation for management services | - | 150,000 | ||||||
| Employee compensation stock issuance expense | 46,960 | 26,868 | ||||||
| Amortization of premium/accretion of discount, net | 126,972 | (24,206 | ) | |||||
| Net realized (gains) losses on investments | 28,961 | (37,990 | ) | |||||
| Deferred tax assets | (484,649 | ) | 238,573 | |||||
| (Increase) decrease in: | ||||||||
| Accrued investment income | (25,354 | ) | (59,454 | ) | ||||
| Due and deferred premium | (448,242 | ) | (1,109,603 | ) | ||||
| Reinsurance balance due | (30,803,426 | ) | (22,284,380 | ) | ||||
| Deferred policy acquisition costs | (865,666 | ) | (282,034 | ) | ||||
| Prepaid expenses and other | (944,622 | ) | 7,263 | |||||
| Increase (decrease) in: | ||||||||
| Losses and loss adjustment expense reserves | 6,947,975 | 6,207,010 | ||||||
| Advance premiums | 747,444 | (391,143 | ) | |||||
| Ceded reinsurance premiums payable | 2,670,959 | 2,957,873 | ||||||
| Unearned premiums | 26,995,247 | 18,242,934 | ||||||
| Unearned ceding commissions | 2,030,555 | 964,977 | ||||||
| Commissions payable, reinsurance and agents | 2,347,924 | (983,278 | ) | |||||
| General and other accrued expenses payable | (3,823,659 | ) | 726,783 | |||||
| Funds held under reinsurance treaty | 14,404,906 | (65,731 | ) | |||||
| Federal income tax payable | (37,355 | ) | 107,697 | |||||
| Taxes, licenses and other fees payable | 732,448 | 574,141 | ||||||
| Cash provided by operating activities | 25,549,049 | 13,231,221 | ||||||
See accompanying notes to consolidated financial statements.
F-8
| HOMEOWNERS OF AMERICA HOLDING CORPORATION | |||
| Consolidated Statements of Cash Flows | |||
| For the Years Ended December 31, 2020 and 2019 (Continued) | |||
| 2020 | 2019 | |||||||
| Cash used by investing activities: | ||||||||
| Purchase of long term certificates of deposit | (9,236,479 | ) | (12,666,707 | ) | ||||
| Purchase of short-term investments | (2,306,873 | ) | (5,230,750 | ) | ||||
| Maturities, sales of long-term investments | 4,362,466 | 1,230,245 | ||||||
| Maturities, sales of short-term investments | 7,944,000 | 14,211,000 | ||||||
| Purchases of fixed-maturity securities, available for sale | (25,760,409 | ) | (11,869,111 | ) | ||||
| Calls, sales, maturity of fixed maturity securities, available for sale | 6,881,316 | 2,309,283 | ||||||
| Additions to furniture, equipment and software | (558,721 | ) | (1,957,979 | ) | ||||
| Cash used by investing activities | (18,674,700 | ) | (13,974,019 | ) | ||||
| Cash provided (used) by financing activities: | ||||||||
| Proceeds from stock options exercised | - | 70,000 | ||||||
| Payments for treasury stock repurchased | (2,868 | ) | (4,260 | ) | ||||
| Net borrowings under line-of-credit agreement | 1,190,776 | 2,750,000 | ||||||
| Cash provided by financing activities | 1,187,908 | 2,815,740 | ||||||
| Net increase (decrease) in cash | 8,062,257 | 2,072,942 | ||||||
| Cash, cash equivalents, and restricted cash equivalents at beginning of year | 16,106,579 | 14,033,637 | ||||||
| Cash, cash equivalents, and restricted cash equivalents at end of year | $ | 24,168,836 | $ | 16,106,579 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for income tax | $ | 1,930,000 | $ | 1,750,000 | ||||
| Cash paid during the year for interest | $ | 62,814 | $ | 9,479 | ||||
See accompanying notes to consolidated financial statements.
F-9
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies |
Homeowners of America Holding Corporation (“HAHC”) is an insurance holding company established to hold insurance entities for the purpose of marketing personal lines insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company (“HAIC”). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. Coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. (“HAMGA”), a Texas Corporation, formed to provide marketing and claims administration services. HAHC, along with its subsidiaries HAIC and HAMGA, are collectively referred to as (“the Company”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Homeowners of America Holding Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid short-term investments, with original maturities of three months or less. The amount is carried at cost, which approximates fair value. At December 31, 2020 and 2019, cash and cash equivalents consist of cash on deposit with financial institutions, as well as money market mutual funds.
General and other accrued expenses payable as of December 31, 2020 and December 31, 2019, include $0.6 million and $6.3 million, respectively, of both claim and general operating expense checks issued in excess of cash book balances, not yet presented for payment.
Investments
The Company’s investments are comprised of short-term, restricted, long-term investments and fixed-maturity securities classified as available-for-sale as of December 31, 2020 and 2019. Restricted investments and long-term investments are described below. Short-term investments include certificates of deposit and U.S. Treasury notes. Short-term certificates of deposit have original maturities greater than three months and maturities of one year or less. Due to the short-term nature of the certificate of deposits, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, short-term certificates of deposit are carried at fair value. Short-term U.S. Treasury notes have remaining maturities of less than one year from acquisition date and are carried at fair value. Fixed-maturity securities are classified as available-for-sale when it is not management’s intent to make profits by buying and selling the securities within a short period of time or when it is not management’s intent to hold the securities to maturity.
F-10
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Fixed-maturity securities classified as available-for-sale are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders’ equity as a part of Accumulated Other Comprehensive Income (loss) (“AOCI”) and, as such, are not included in the determination of net income (loss).
The Company has restricted cash and investments pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. Restricted assets are shown separately in the accompanying consolidated balance sheets as “Restricted cash equivalents” which include money market accounts and “Restricted certificates of deposits.” “Restricted fixed-maturity securities, classified as available-for-sale” are shown separately in the accompanying consolidated balance sheets, include U.S. Treasury Notes, and are recorded at fair value. With the approval of the Departments of Insurance, the Company may exchange the investments with other funds or investments.
The following table provides the Company’s restricted cash, cash equivalents and certificates of deposit as of December 31:
| Restricted cash equivalents and investments: | 2020 | 2019 | ||||||
| Certificates of deposit | $ | 2,335,703 | $ | 2,335,703 | ||||
| Money market | 313,817 | 312,568 | ||||||
| U.S. treasury notes | 1,098,295 | 1,078,232 | ||||||
| $ | 3,747,815 | $ | 3,726,503 | |||||
As of December 31, 2020, and December 31, 2019, the Company’s investments also include certificates of deposit that mature more than one year after the balance sheet date and are reflected on the consolidated balance sheets as long-term investments. These investments are carried at fair value. Cost approximates fair value based on the rates currently offered for deposits of similar remaining maturities.
The Company’s fixed-maturity securities classified as available-for-sale are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses are recorded to AOCI, except where such securities are deemed to be other-than-temporarily impaired. Where applicable, the Company assesses investments of an issuer currently carrying a net unrealized loss.
If in management’s judgment, the decline in value is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in determining whether an impairment exists include financial condition, business prospects and creditworthiness of the issuer, the length of time and magnitude that the asset value has been less than cost, and the ability and intent to hold such investments until the fair value recovers.
F-11
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Mortgage-Backed Securities
Mortgage-backed securities are stated at fair market value. Significant changes in estimated cash flow are accounted for using the prospective method. Principal prepayments affect the cash flow pattern and yield of mortgage-backed securities. The amortization of discounts and premiums takes into consideration actual and future estimated principal prepayments. The Company utilizes estimated prepayment speed information obtained from published sources. The effects on the yield of a security from changes in principal prepayments are recognized prospectively. The degree to which a security is susceptible to yield adjustments is influenced by the difference between its carrying value and par, the relative sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment, and the repayment priority for structured securities such as collateralized mortgage obligations.
Comprehensive Income
FASB ASC Topic 220 - Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes its fixed income portfolio as available-for-sale securities when it is not management’s intent to make profits by buying and selling the securities within a short period of time or when it is not management’s intent to hold the securities to maturity, with appropriate adjustments to other comprehensive income. For the years ended December 31, 2020 and 2019, the Company recorded $517,862 and $471,954 of unrealized gains on available-for-sale securities in other comprehensive income, respectively.
Recognition of Premium Revenues
Premiums are recognized as revenue on a daily pro rata basis over the policy term. The portion of premiums related to the unexpired term of policies in force as of the end of the measurement period and to be earned over the remaining term of those polices, is deferred and reported as unearned premiums.
Ceding Commissions and Reinsurance Profit Share
Ceding commissions represent acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the associated policy. Reinsurance profit share is additional ceding commissions payable to the Company based upon attaining specified loss ratios within individual treaty years. Reinsurance profit share income is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses.
Policy Fees
Policy fee income is collected by HAMGA, and includes application fees, which are intended to offset the costs incurred in establishing the insurance. Policy fees on policies where premium is traditionally paid in full upon inception of the policy are recognized when written.
F-12
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Loss Adjustment and Other Fee Income
Loss adjustment and other fee income is recognized as income when collected. Loss adjustment fee income for the year ended December 31, 2020 and 2019, was in excess of 5% of total revenue on the consolidated statement of operations.
Property, Equipment and Software
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from three to seven years. The cost and related accumulated depreciation of assets sold or disposed are removed from the accounts and the resulting gain or loss is included in the consolidated statements of operations (See Note 10). Maintenance and repairs are expensed as incurred.
Software installation and development is stated at cost, net of accumulated amortization. Amortization is calculated on a straight-line basis method over three to five years.
Impairment of Long-Lived Assets
Long-lived assets, such as property, equipment and software, are reviewed for impairment whenever business events or circumstances could lead to or indicate that the value of the asset may not be recoverable. The assessment of possible impairment is based on whether the carrying amount of the assets exceeds its fair value. The Company uses estimates of undiscounted future cash flows in determining the recoverability of long-lived assets. As of December 31, 2020 and 2019, no impairment has been recorded.
Deferred Policy and Acquisition Costs
Deferred policy acquisitions costs (“DAC”) as of December 31, 2020 and 2019, consist of commissions, premium taxes and policy underwriting and production expenses which are incurred through and vary directly with, the level of production of new and renewal insurance business and are amortized over the terms of the policies to which they relate. The method used in calculating DAC limits the amount of the deferred cost to their estimated realizable value, which gives effect to allocating their expense along with other period costs associated with the insurance business, in relation to the amount of gross premium earned on policies to which they relate and investment income. DAC is reviewed to determine if it is recoverable from future income, including investment income. The amount of DAC considered recoverable could be reduced in the near term if management’s estimates of future premium and investment income is reduced which could impair the Company’s ability to recover these costs. Due to the short-term nature of the policies in force, recoverability has not been an issue.
F-13
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Reclassifications
In the December 31, 2020 financial statements, certain unearned ceding commissions previously presented as liabilities have been reflected as a reduction of the asset for deferred acquisition costs, to the extent they represent recoveries of deferred acquisition costs. These amounts have been reclassified in the 2019 financial statements to conform to the current presentation. There could be other 2019 amounts previously recorded that have been reclassified to conform with the 2020 presentation. These reclassifications have no impact on previously reported shareholders equity or net income.
Reserve for Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (“LAE”) is an estimate of the amounts required to cover known incurred losses and LAE, developed through the review and assessment of loss reports, along with the development of known claims.
In addition, loss and loss adjustment expense reserves include management’s estimate of an amount for losses incurred but not reported (“IBNR”), determined from reviewing overall loss reporting patterns as well as the loss development cycles of individual claim cases. Such liabilities are necessarily based on estimates and while management believes that the amount is adequate, the ultimate liability may be more or less than the amounts provided. The approach and methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in current earnings.
Due and Deferred Premiums
Due and deferred premiums consist of uncollateralized premiums and agents’ balances in the course of collection as well as premiums booked but not yet due.
Reinsurance
In the normal course of business, the Company seeks to reduce the overall exposure to losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses only quality, financially rated reinsurers and continually monitors the financial ratings of these companies through its brokers. The amount and type of reinsurance purchased each year is based on management’s analysis of liquidity and its estimate of its probable maximum loss and the conditions within the reinsurance market. The Company continually monitors its risk exposure through the use of the AIR modeling system and other modeling tools provided by its reinsurance brokers. Reinsurance premiums, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums paid for reinsurance are reported as reductions of earned premium income.
F-14
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Guaranty Fund, Texas FAIR Plan, TWIA Assessments
All property and casualty insurers doing business in the State of Texas are required, when assessed, to make payments to the Texas Guaranty Fund. The assessment is allowed as a credit for premium tax offset over five to ten years using straight-line amortization. The following Guaranty Funds may also levy similar assessments: 1) Arizona Property and Casualty Insurance Guaranty Fund, 2) Georgia Insurers Insolvency Pool, 3) South Carolina Property and Casualty Insurance Guaranty Association, and 4) Virginia Property and Casualty Insurance Guaranty Association. There were no assessments paid for the years ended December 31, 2020 and 2019.
On March 27, 2018, HAIC was notified by the Texas Fair Plan Association (“TFPA”) of assessment for the years 2016 and 2017. This assessment was required in order to eliminate the large deficits in TFPA due primarily from Hurricane related claims. The total assessment to HAIC was $710,590 which will be recouped over three years from policy surcharge fees based on Bulletin No. B-0002-18A issued by the Texas Department of Insurance. The remaining asset not recouped as of December 31, 2020 and 2019, was $-0- and $287,512, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss carryforwards, and liabilities are measured using enacted tax rates over the period they are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Uncertain Tax Positions
The Company recognizes uncertain tax positions in the consolidated financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. At December 31, 2020, the Company’s tax years from 2017 through 2020 remain subject to examination.
F-15
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company’s primary areas of estimate are for liabilities for unpaid losses and loss adjustment expenses, deferred policy acquisition costs, deferred tax asset valuation, and reinsurance. Actual results could differ significantly from those estimates.
Fair Value of Cash, Cash Equivalents, Short-term Investments and Long-term Investments
The Company’s long-term investments are carried at their fair value as of December 31, 2020 and 2019. The carrying value for the Company’s cash and cash equivalents and short-term investments approximate fair values as of December 31, 2020 and 2019, due to their short-term nature. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurement.
Fair Value of Fixed-Maturity Securities held as Available-for-Sale
The Company’s fixed-maturity securities held as available-for-sale are carried at fair value as of December 31, 2020 and 2019. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurement.
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition provisions of FASB ASC Topic 718 – Compensation – Stock Compensation, which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with FASB ASC Topic 718, the Company recognizes stock-based compensation, if any, in the consolidated statements of operations on a straight-line basis over the vesting period of the stock award. For those stock awards vesting 100% at the issue date, the Company recognizes stock-based compensation immediately.
F-16
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
Earnings Per Share
Basic earnings per share of common stock is computed by dividing net income or loss, less cumulative preferred stock dividends for the period whether or not earned or paid, by the weighted-average number of common shares during the period.
Diluted earnings per share of common stock is computed by dividing net income or loss attributable to common stockholders, adjusted for the effect of potentially dilutive securities, by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include convertible notes payable, outstanding convertible preferred stock and common stock options.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The Board issued this update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness. ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The ASU has not yet been adopted; however, it is not expected to have a material impact on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASC Update No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This guidance clarifies, for each reporting period that an entity should reevaluate whether a callable debt security with multiple call dates is required to amortize any premium to the next call date. The updated guidance is effective for annual and interim periods beginning after December 15, 2020 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASC Update No. 2020-08 to have a material impact on its financial position or results of operations.
In August 2018, the FASB issued Accounting Standards Update 2018-15 (“ASU 2018-15”), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 amends ASC 350 to include requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license. The effective date of ASU 2018-15 is for interim and annual reporting periods beginning after December 15, 2019. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
F-17
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 clarifies the fair value measurement disclosure requirements of ASC 820 by adding, eliminating, and modifying disclosures. The effective date of ASU 2018-13 is for interim and annual reporting periods beginning after December 15, 2019. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
In July 2018, the FASB issued Accounting Standards Update 2018-10 (“ASU 2018-10”), Codification Improvements to Topic 842, Leases and Accounting Standards Update 2018-11 (“ASU 2018-11”), Leases (Topic 842) Targeted Improvements. ASU 2018-10 makes narrow-scope amendments to certain aspects of the new leasing standard while ASU 2018-11 provides relief from costs of implementing certain aspects of the new leasing standard. The new guidance will also require new qualitative and quantitative disclosures. These standards append Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which was issued in February 2016, and introduced new guidance that requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact that adoption will have on the consolidated balance sheets, statements of operations, and statements of cash flows and expects that the adoption of the ASU will increase assets and liabilities related to the Company’s operating leases on the consolidated balance sheets.
In July 2018, the FASB issued Accounting Standards Update No. 2018-09 (“ASU 2018-09”), Codification Improvements. This update facilitates technical corrections, clarifications and other minor improvements and should eliminate the need for periodic agenda requests for narrow and incremental items. The FASB does not expect these changes to have a significant administrative cost to most entities. Some of the amendments in this ASU do not require transition guidance and were effective upon issuance. However, many of the amendments do have transition guidance effective for the Company for annual periods beginning after December 15, 2018. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
On February 14, 2018, the FASB issued Accounting Standards Update No. 2018-02 (“ASU 2018-02”), Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides guidance on adjusting the impact of “stranded tax effects” in AOCI due to the U.S. federal government enacting H.R. 1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) on December 22, 2017 (see Notes 1 and 7). Prior to ASU 2018-02, the tax effect of unrealized gains and losses were valued at 34% and included in AOCI. When the Act was signed into law December 22, 2017, it required companies to re-value the tax effect of all unrealized gains and losses using the new federal statutory rate of 21% with the resulting change recorded in the current income tax provision thus creating a “stranded tax effect”. ASU 2018-02 is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, early adoption is permitted. The standard allows companies to make a one-time reclassification from AOCI to retained earnings for the stranded tax effects previously noted and requires certain other disclosures. The adoption of ASU 2018-02 did not have a material impact on the consolidated balance sheets.
F-18
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
On March 30, 2017, the FASB issued Accounting Standards Update No. 2017-08 (“ASU 2017-08”), Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance shortens the amortization period for the premium on callable debt securities to the earliest call date. The amortization period for the discount on callable debt securities is not changed by the new guidance and continues to be amortized to maturity. The new guidance more closely aligns interest income recorded on debt securities held at a premium or a discount with the economics of the underlying instrument. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
On November 17, 2016, the FASB issued Accounting Standards Update No. 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. ASU 2016-18 is effective for reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019 for nonpublic business entities. The amendments should be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-18 did not have a significant impact on the consolidated financial statements.
On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides accounting guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or lacking in specific guidance. ASU 2016-15 is effective for reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019 for nonpublic business entities. The adoption of ASU 2016-15 did not have a material impact on the consolidated financial statements.
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13 (“ASU 2016-13”), Financial Instruments – Credit Losses (Topic 326): 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.
F-19
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 1. | Organization and Summary of Significant Accounting Policies (Continued) |
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 FASB has issued several updates on this ASU. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for nonpublic business entities. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
On January 5, 2016, the FASB issued Accounting Standards Update No. 2016-01 (“ASU 2016-01”), Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2018 and for interim periods within fiscal years beginning after December 15, 2019 for nonpublic business entities. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
| 2. | Related Party Transactions |
In August 2013, HAHC entered into an agreement or the “Advisory Agreement”, with Inter-Atlantic Advisors III, Ltd., or “Inter-Atlantic”, under which Inter-Atlantic agrees to perform certain management services for the Company. A number of the Company directors are among the beneficial owners of Inter-Atlantic. The Advisory Agreement has an initial term of six years, to be automatically renewed from year-to-year thereafter, unless terminated by either party upon 60 days’ notice prior to the termination of the initial or any renewal term. For its services, the Company paid Inter-Atlantic an annual fee of $300,000, as well as, an annual grant of shares of our common stock with an aggregate fair market value of $150,000 at the time of grant, plus reimbursed Inter-Atlantic’s expenses incurred in connection with the performance of its service. The Advisory Agreement terminated on June 30, 2019, and the directors of HAHC that were affiliated with Inter-Atlantic Advisors began receiving a director’s fee in the amount of $85,000 per director, per year, beginning in the third quarter of 2019.
For the year ended December 31, 2020, the Company incurred director’s fee expense of $340,000.
For the year ended December 31, 2019, the Company incurred an expense of $495,000 (of which $150,000 is represented by the issuance of 76,530 shares of common stock) for services performed under the Advisory Agreement.
HAIC and HAMGA are related parties through common ownership. HAMGA functions as the primary producer and claims administrator for HAIC and substantial transactions occur between the entities that are eliminated through the consolidation process.
F-20
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 3. | Investments |
Investment income, net of investment expenses for the years ended December 31, 2020 and 2019, consisted of the following:
| 2020 | 2019 | |||||||
| Bonds | $ | 1,121,234 | $ | 916,023 | ||||
| Cash and cash equivalents | 55,107 | 352,480 | ||||||
| Gross investment income | 1,176,341 | 1,268,503 | ||||||
| Less-allocable expenses | (89,543 | ) | (65,001 | ) | ||||
| Net investment income | $ | 1,086,798 | $ | 1,203,502 | ||||
For the years ended December 31, 2020 and 2019, there were $1,107,640 and $393,027, respectively, in unrealized gains on fixed-maturity securities held as available-for-sale. For the years ended December 31, 2020 and 2019, proceeds from sales of fixed-maturity securities held as available-for-sale amounted to $2,401,315 and $1,124,833, respectively. Gross realized gains and (losses) on sales of fixed-maturity securities held as available-for-sale securities amounted to $78,110 and ($77,082) for the year ended December 31, 2020, and $43,747 and ($5,784) for the year ended December 31, 2019.
For the year ended December 31, 2020, there were $83,912 of realized gains recognized and $112,847of realized losses recognized for the period. For the year ended December 31, 2019, there were $43,774 of realized gains recognized and $5,784 of realized losses recognized for the period. The intent is to hold to maturity certificates of deposit, which are carried at fair value.
The following table provides the Company’s restricted investment holdings by type of financial instruments that were used to estimate the fair value disclosures for financial instruments:
| December 31, 2020 | December 31, 2019 | |||||||||||||||
| Financial Assets: | Cost/ Amortized Cost | Fair Value / Carrying Value | Cost/ Amortized Cost | Fair Value / Carrying Value | ||||||||||||
| Restricted certificates of deposit | $ | 2,335,075 | $ | 2,335,703 | $ | 2,335,216 | $ | 2,335,703 | ||||||||
| Restricted money markets | 313,817 | 313,817 | 312,568 | 312,568 | ||||||||||||
| Restricted fixed-maturity securities | 1,080,415 | 1,098,295 | 1,078,576 | 1,078,232 | ||||||||||||
| $ | 3,729,307 | $ | 3,747,815 | $ | 3,726,360 | $ | 3,726,503 | |||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Range of Maturities | Interest Rates | Range of Maturities | Interest Rates | |||||
| Restricted certificates of deposit | Less than 1 year | 1.50% - 1.60% | Less than 1 year | - | ||||
| Restricted certificates of deposit | More than 1 year | 2.00% - 2.90% | More than 1 year | 1.00% - 2.90% | ||||
F-21
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 3. | Investments (Continued) |
The following table provides the amortized cost, market value and unrealized gains and (losses) of Company’s debt securities:
| December 31, 2020 | ||||||||||||||||
| Gross Unrealized | ||||||||||||||||
| Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
| U.S. treasury - held as restricted | $ | 1,080,415 | $ | 32,203 | $ | (14,323 | ) | $ | 1,098,295 | |||||||
| Industrial and miscellaneous | 29,346,268 | 461,535 | (6,213 | ) | 29,801,590 | |||||||||||
| Obligations of states and municipalities | 648,971 | 18,561 | - | 667,532 | ||||||||||||
| U.S. government obligations | 8,373,244 | 16,523 | (64 | ) | 8,389,703 | |||||||||||
| Special revenue and assessment | 3,972,744 | 159,936 | (2,333 | ) | 4,130,347 | |||||||||||
| Political subdivision | 2,813,207 | 114,736 | (10 | ) | 2,927,933 | |||||||||||
| Residential mortgage-backed securities | 6,320,354 | 94,141 | (8,322 | ) | 6,406,173 | |||||||||||
| Commercial mortgage-backed securities | 5,950,349 | 220,422 | (824 | ) | 6,169,947 | |||||||||||
| Other loan-backed and structured securities | 4,097,379 | 40,358 | (1,599 | ) | 4,136,138 | |||||||||||
| Total debt securities | $ | 62,602,931 | $ | 1,158,415 | $ | (33,688 | ) | $ | 63,727,658 | |||||||
| December 31, 2019 | ||||||||||||||||
| Gross Unrealized | ||||||||||||||||
| Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
| U.S. treasury - held as restricted | $ | 1,078,576 | $ | 12,379 | $ | (12,724 | ) | $ | 1,078,232 | |||||||
| Industrial and miscellaneous | 25,383,102 | 165,534 | (1,887 | ) | 25,546,749 | |||||||||||
| Obligations of states and municipalities | 147,560 | 2,771 | - | 150,331 | ||||||||||||
| U.S. government obligations | 3,512,912 | 22,012 | - | 3,534,924 | ||||||||||||
| Special revenue and assessment | 2,501,259 | 72,365 | (2,738 | ) | 2,570,886 | |||||||||||
| Political subdivision | 1,414,289 | 30,407 | (6,445 | ) | 1,438,251 | |||||||||||
| Residential mortgage-backed securities | 5,047,656 | 39,631 | (19,037 | ) | 5,068,250 | |||||||||||
| Commercial mortgage-backed securities | 3,543,718 | 94,604 | (3,695 | ) | 3,634,627 | |||||||||||
| Other loan-backed and structured securities | 2,002,731 | 23,217 | (75 | ) | 2,025,873 | |||||||||||
| Total debt securities | $ | 44,631,804 | $ | 462,920 | $ | (46,601 | ) | $ | 45,048,123 | |||||||
F-22
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 3. | Investments (Continued) |
The amortized cost and fair value of securities at December 31, 2020 and 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| 2020 | ||||||||
| Remaining Time to Maturity | Amortized Cost Basis | Fair Value | ||||||
| Due in one year or less | $ | 9,595,684 | $ | 9,607,015 | ||||
| Due after one year through five years | 23,573,871 | 23,928,232 | ||||||
| Due after five years through ten years | 10,921,312 | 11,276,072 | ||||||
| Due after ten years | 2,143,982 | 2,204,081 | ||||||
| Residential mortgage-backed securities | 6,320,354 | 6,406,173 | ||||||
| Commercial mortgage-backed securities | 5,950,349 | 6,169,947 | ||||||
| Other loan-backed and structured securities | 4,097,379 | 4,136,138 | ||||||
| Total | $ | 62,602,931 | $ | 63,727,658 | ||||
| 2019 | ||||||||
| Remaining Time to Maturity | Amortized Cost Basis | Fair Value | ||||||
| Due in one year or less | $ | 8,478,284 | $ | 8,503,393 | ||||
| Due after one year through five years | 19,594,464 | 19,692,298 | ||||||
| Due after five years through ten years | 4,994,531 | 5,112,851 | ||||||
| Due after ten years | 970,420 | 1,010,832 | ||||||
| Residential mortgage-backed securities | 5,047,656 | 5,068,250 | ||||||
| Commercial mortgage-backed securities | 3,543,718 | 3,634,627 | ||||||
| Other loan-backed and structured securities | 2,002,731 | 2,025,873 | ||||||
| Total | $ | 44,631,804 | $ | 45,048,123 | ||||
Other-than-temporary Impairment (“OTTI”)
The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
| § | the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; |
| § | the length of time and the extent to which the market value of the security has been below its cost or amortized cost; |
F-23
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 3. | Investments (Continued) |
| § | general market conditions and industry or sector specific factors; |
| § | nonpayment by the issuer of its contractually obligated interest and principal payments; and |
| § | the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs. |
Securities with gross unrealized loss positions at December 31, 2020, and December 31, 2019, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
| Gross | Estimated | Gross | Estimated | Gross | Estimated | |||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| As of December 31, 2020 | Loss | Value | Loss | Value | Loss | Value | ||||||||||||||||||
| U.S. treasury - held as restricted | $ | - | $ | - | $ | (14,323 | ) | $ | 673,458 | $ | (14,323 | ) | $ | 673,458 | ||||||||||
| Industrial and miscellaneous | (6,213 | ) | 809,599 | - | - | (6,213 | ) | 809,599 | ||||||||||||||||
| U.S. government obligations | (64 | ) | 975,955 | (64 | ) | 975,955 | ||||||||||||||||||
| Special revenue and assessment | (2,333 | ) | 837,315 | - | - | (2,333 | ) | 837,315 | ||||||||||||||||
| Political subdivision | - | - | (10 | ) | 18,526 | (10 | ) | 18,526 | ||||||||||||||||
| Residential mortgage-backed securities | (6,113 | ) | 1,031,074 | (2,210 | ) | 350,978 | (8,323 | ) | 1,382,052 | |||||||||||||||
| Commercial mortgage-backed securities | (666 | ) | 892,322 | (157 | ) | 97,265 | (823 | ) | 989,587 | |||||||||||||||
| Other loan-backed and structured securities | (1,599 | ) | 1,568,061 | - | - | (1,599 | ) | 1,568,061 | ||||||||||||||||
| Total securities | $ | (16,988 | ) | $ | 6,114,326 | $ | (16,700 | ) | $ | 1,140,227 | $ | (33,688 | ) | $ | 7,254,553 | |||||||||
| Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
| Gross | Estimated | Gross | Estimated | Gross | Estimated | |||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
| As of December 31, 2019 | Loss | Value | Loss | Value | Loss | Value | ||||||||||||||||||
| U.S. treasury - held as restricted | $ | (580 | ) | $ | 156,929 | $ | (12,143 | ) | $ | 516,529 | $ | (12,724 | ) | $ | 673,458 | |||||||||
| Industrial and miscellaneous | (1,887 | ) | 597,816 | - | - | (1,887 | ) | 597,816 | ||||||||||||||||
| Special revenue and assessment | (2,655 | ) | 382,286 | (83 | ) | 64,522 | (2,738 | ) | 446,807 | |||||||||||||||
| Political subdivision | (4,812 | ) | 487,124 | (1,633 | ) | 28,962 | (6,445 | ) | 516,086 | |||||||||||||||
| Residential mortgage-backed securities | (19,024 | ) | 2,846,815 | (14 | ) | 56,756 | (19,037 | ) | 2,903,571 | |||||||||||||||
| Commercial mortgage-backed securities | (3,211 | ) | 1,214,104 | (485 | ) | 101,510 | (3,695 | ) | 1,315,614 | |||||||||||||||
| Other loan-backed and structured securities | - | - | (75 | ) | 138,348 | (75 | ) | 138,348 | ||||||||||||||||
| Total securities | $ | (32,168 | ) | $ | 5,685,073 | $ | (14,433 | ) | $ | 906,626 | $ | (46,601 | ) | $ | 6,591,699 | |||||||||
At December 31, 2020, there were 36 securities in an unrealized loss position. Of these securities, 8 securities had been in an unrealized loss position for 12 months or greater.
At December 31, 2019, there were 59 securities in an unrealized loss position. Of these securities, 6 securities had been in an unrealized loss position for 12 months or greater.
F-24
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 3. | Investments (Continued) |
The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes. It is expected that the securities would not be settled at a price less than par value of the investments. Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at December 31, 2020 and 2019.
| 4. | Fair Value of Financial Instruments |
The Company’s financial assets carried at fair value have been classified, for disclosure purposes, based on the hierarchy established within FASB ASC Topic 820-10 – Fair Value Measurement. When market prices are not available, fair value is generally estimated utilizing valuation techniques that vary by asset class and incorporate available trade, bid and other market information, when available. The acceptable valuation techniques include (a) market approach, which uses prices or relevant information derived from market transactions for identical or comparable assets or liabilities, (b) the income approach, which converts future amounts such as cash flows or earnings to a single present value amount based on current market expectations about those future amounts, and (c) the cost approach, which is based on the amount that currently would be required to replace the service capacity of an asset. In certain circumstances, these valuation techniques may involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk premium inherent in a particular methodology, model or input used.
The fair value hierarchy is used to prioritize valuation inputs into three levels:
Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities. These inputs are considered to be the most reliable evidence of fair value.
Level 2 - quoted prices for similar assets in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the investment. Such inputs include market interest rates and volatilities, spreads and yield curves.
Level 3 - termed unobservable inputs which are utilized in situations where there is little or no market activity for the asset or liability at the measurement date. The approach typically involves a significant subjective management judgment toward the pricing of the security.
The Company’s short-term investments are comprised of certificates of deposit held at financial institutions which are measured at fair value on a recurring basis. A portion of the Company’s cash and cash equivalents include money market mutual fund accounts held at financial institutions which are measured at fair value on a recurring basis. Fixed-maturity securities held as available-for-sale are carried at fair value in the consolidated financial statements.
F-25
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 4. | Fair Value of Financial Instruments (Continued) |
The following tables provide information as of December 31, 2020 and 2019, about the Company’s financial assets measured at fair value on a recurring basis:
| Fair Value Hierarchy | ||||||||||||||||
| As of December 31, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Money market mutual funds | $ | 13,124,626 | $ | - | $ | - | $ | 13,124,626 | ||||||||
| Restricted money market mutual funds | 313,817 | - | - | 313,817 | ||||||||||||
| Debt securities: | ||||||||||||||||
| US Treasury - held as restricted | 1,098,295 | - | - | 1,098,295 | ||||||||||||
| Industrial and miscellaneous | - | 29,801,590 | - | 29,801,590 | ||||||||||||
| Obligations of states and municipalities | - | 667,532 | - | 667,532 | ||||||||||||
| U.S. government obligations | 8,389,703 | - | - | 8,389,703 | ||||||||||||
| Special revenue and assessment | - | 4,130,347 | - | 4,130,347 | ||||||||||||
| Political subdivisions | - | 2,927,933 | - | 2,927,933 | ||||||||||||
| Residential mortgage-backed securities | - | 6,406,173 | - | 6,406,173 | ||||||||||||
| Commercial mortgage-backed securities | - | 6,169,947 | - | 6,169,947 | ||||||||||||
| Other loan-backed and structured securities | - | 4,136,138 | - | 4,136,138 | ||||||||||||
| Total | $ | 22,926,441 | $ | 54,239,660 | $ | - | $ | 77,166,101 | ||||||||
| Fair Value Hierarchy | ||||||||||||||||
| As of December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Money market mutual funds | $ | 12,873,368 | $ | - | $ | - | $ | 12,873,368 | ||||||||
| Restricted money market mutual funds | 312,568 | - | - | 312,568 | ||||||||||||
| Debt securities: | ||||||||||||||||
| US Treasury - held as restricted | 1,078,232 | - | - | 1,078,232 | ||||||||||||
| Industrial and miscellaneous | - | 25,546,749 | - | 25,546,749 | ||||||||||||
| Obligations of states and municipalities | - | 150,331 | - | 150,331 | ||||||||||||
| U.S. government obligations | 3,534,924 | - | - | 3,534,924 | ||||||||||||
| Special revenue and assessment | - | 2,570,886 | - | 2,570,886 | ||||||||||||
| Political subdivisions | - | 1,438,251 | - | 1,438,251 | ||||||||||||
| Residential mortgage-backed securities | - | 5,068,250 | - | 5,068,250 | ||||||||||||
| Commercial mortgage-backed securities | - | 3,634,627 | - | 3,634,627 | ||||||||||||
| Other loan-backed and structured securities | - | 2,025,873 | - | 2,025,873 | ||||||||||||
| Total | $ | 17,799,092 | $ | 40,434,967 | $ | - | $ | 58,234,059 | ||||||||
F-26
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 4. | Fair Value of Financial Instruments (Continued) |
The following methods and assumptions were used to estimate the fair value disclosures for financial instruments:
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2020 or 2019.
| 5. | Unpaid Losses and Loss Adjustment Expenses |
Losses and loss adjustment expenses (LAE), less related reinsurance and deductibles, are charged to operations as incurred. Unpaid losses and LAE are based on claims adjusters’ estimates of the cost of settlement plus an estimate for IBNR losses based upon historical experience, industry loss experience, and management’s estimates. Loss reserves reflect Company management’s best estimate of the total cost of (i) claims that have been incurred but not yet paid, and (ii) claims that have been incurred, but not yet reported (IBNR). Loss reserves that are established by Company management are not an exact calculation of the liability, but rather loss reserves represent management’s best estimate for the Company’s liability based on the application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known as of the balance sheet date. The process of setting reserves is complex and necessarily imprecise. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. To arrive at its best estimate for losses, the Company uses damage estimating software developed and owned by acknowledged industry leader, Insurance Service Office. Reserve factors for IBNR are reviewed monthly by a Company employee who is an ACAS (Associate Casualty Actuarial Society) and MAAA (Member of American Academy of Actuaries). In addition, the appointed independent actuary, a Fellow in the Casualty Actuarial Society, attests to the adequacy of our unpaid claim reserve, including IBNR, at calendar year end. The Company had no significant changes in reserving assumptions or methodologies.
F-27
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
5. Unpaid Losses and Loss Adjustment Expenses (Continued)
Losses and Loss Adjustment Expenses
The following table provides the reconciliation of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for December 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Reserve for losses and LAE, beginning of year | $ | 27,166,371 | $ | 20,959,361 | ||||
| Reinsurance recoverables on losses and LAE | (24,768,466 | ) | (18,323,866 | ) | ||||
| Reserve for losses and LAE, net of reinsurance recoverables at beginning of year | 2,397,905 | 2,635,495 | ||||||
| Add provision for claims and LAE occurring in: | ||||||||
| Current year | 12,663,981 | 9,666,454 | ||||||
| Prior years | (100,026 | ) | (922,365 | ) | ||||
| Net incurred losses and LAE during the current year | 12,563,955 | 8,744,089 | ||||||
| Deduct payments for claims and LAE occurring in: | ||||||||
| Current year | 9,750,380 | 7,407,754 | ||||||
| Prior years | 1,860,265 | 1,573,925 | ||||||
| Net claim and LAE payments during the current year | 11,610,645 | 8,981,679 | ||||||
| Reserve for losses and LAE, net of reinsurance recoverables, at end of year | 3,351,215 | 2,397,905 | ||||||
| Reinsurance recoverables on losses and LAE | 30,763,131 | 24,768,466 | ||||||
| Losses and loss adjustment expenses at December 31 | $ | 34,114,346 | $ | 27,166,371 | ||||
As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of claims and claim adjustment expenses were made resulting in a decrease of $100,026 for the year ended December 31, 2020, and a decrease of $922,365 for the year ended December 31, 2019.
F-28
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 5. | Unpaid Losses and Loss Adjustment Expenses (Continued) |
The Company adopted the provisions of ASU 2015-09 Disclosures about Short-Duration Contracts effective December 31, 2017. The liability for unpaid losses and loss adjustment expenses has been disaggregated along the Homeowner and tenant condo and Dwelling fire and all other lines. The incurred and paid losses by accident year information presented below for calendar years prior to 2017 for both homeowner and tenant condominium lines and dwelling fire and all other lines is required supplementary information and is unaudited.
The following unaudited supplementary information about incurred and paid losses by accident year tables are for homeowner and tenant condominium lines:
Homeowners and tenant condo insurance
($ in thousands)
| Incurred losses and allocated loss adjustment expenses, | ||||||||||||||||||||||||||||||||||||||||
| net of reinsurance, for the years ended December 31, | IBNR | Cumulative | ||||||||||||||||||||||||||||||||||||||
| Accident Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | reserves carried | number of reported claims | ||||||||||||||||||||||||||||||
| 2013 | 2,068 | 2,099 | 2,157 | 2,102 | 2,084 | 2,083 | 2,081 | 2,081 | - | 3,388 | ||||||||||||||||||||||||||||||
| 2014 | 2,588 | 2,800 | 2,775 | 2,763 | 2,743 | 2,735 | 2,736 | - | 3,684 | |||||||||||||||||||||||||||||||
| 2015 | 4,369 | 3,742 | 3,724 | 3,710 | 3,708 | 3,709 | - | 6,021 | ||||||||||||||||||||||||||||||||
| 2016 | 7,093 | 6,665 | 6,662 | 7,117 | 7,145 | - | 10,536 | |||||||||||||||||||||||||||||||||
| 2017 | 7,289 | 6,298 | 5,876 | 5,739 | 4 | 13,053 | ||||||||||||||||||||||||||||||||||
| 2018 | 6,205 | 5,841 | 5,872 | 27 | 6,754 | |||||||||||||||||||||||||||||||||||
| 2019 | 8,484 | 8,418 | 96 | 9,032 | ||||||||||||||||||||||||||||||||||||
| 2020 | 11,432 | 1,310 | 10,035 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 47,132 | $ | 1,437 | ||||||||||||||||||||||||||||||||||||
| Cumulative
paid losses and allocated adjustment expenses, net of reinsurance, for the years ended December 31, | ||||||||||||||||||||||||||||||||
| Accident Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||
| 2013 | 1,633 | 1,965 | 2,060 | 2,081 | 2,079 | 2,080 | 2,081 | 2,081 | ||||||||||||||||||||||||
| 2014 | 1,979 | 2,480 | 2,685 | 2,703 | 2,729 | 2,734 | 2,735 | |||||||||||||||||||||||||
| 2015 | 2,976 | 3,543 | 3,637 | 3,649 | 3,708 | 3,709 | ||||||||||||||||||||||||||
| 2016 | 5,745 | 6,260 | 6,425 | 7,076 | 7,079 | |||||||||||||||||||||||||||
| 2017 | 5,478 | 6,218 | 6,185 | 5,958 | ||||||||||||||||||||||||||||
| 2018 | 4,368 | 5,555 | 5,688 | |||||||||||||||||||||||||||||
| 2019 | 6,470 | 8,112 | ||||||||||||||||||||||||||||||
| 2020 | 8,762 | |||||||||||||||||||||||||||||||
| Total | $ | 44,124 | ||||||||||||||||||||||||||||||
| All outstanding losses liabilities before 2013, net of reinsurance | - | |||||||||||||||||||||||||||||||
| Liability for losses and loss adjustment expenses, net of reinsurance | $ | 3,008 | ||||||||||||||||||||||||||||||
F-29
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 5. | Unpaid Losses and Loss Adjustment Expenses (Continued) |
The following unaudited supplementary information about incurred and paid losses by accident year tables are for dwelling fire and all other lines:
Dwelling fire and all other
($ in thousands)
| Incurred losses and allocated loss adjustment expenses, | ||||||||||||||||||||||||||||||||||||||||
| net of reinsurance, for the years ended December 31, | IBNR | Cumulative | ||||||||||||||||||||||||||||||||||||||
| Accident Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | reserves carried | number
of reported claims | ||||||||||||||||||||||||||||||
| 2013 | 458 | 508 | 494 | 485 | 483 | 483 | 483 | 483 | - | 553 | ||||||||||||||||||||||||||||||
| 2014 | 289 | 277 | 258 | 251 | 247 | 247 | 247 | - | 678 | |||||||||||||||||||||||||||||||
| 2015 | 611 | 525 | 510 | 508 | 505 | 505 | - | 1,197 | ||||||||||||||||||||||||||||||||
| 2016 | 662 | 740 | 665 | 140 | 129 | - | 2,471 | |||||||||||||||||||||||||||||||||
| 2017 | 1,233 | 1,046 | 1,099 | 1,098 | - | 2,479 | ||||||||||||||||||||||||||||||||||
| 2018 | 1,307 | 1,200 | 1,174 | 4 | 1,571 | |||||||||||||||||||||||||||||||||||
| 2019 | 1,182 | 1,260 | 16 | 1,580 | ||||||||||||||||||||||||||||||||||||
| 2020 | 1,232 | 98 | 1,344 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 6,128 | $ | 118 | ||||||||||||||||||||||||||||||||||||
| Cumulative
paid losses and allocated adjustment expenses, net of reinsurance, for the years ended December 31, | ||||||||||||||||||||||||||||||||
| Accident Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||
| 2013 | 343 | 443 | 478 | 482 | 483 | 483 | 483 | 483 | ||||||||||||||||||||||||
| 2014 | 130 | 221 | 242 | 247 | 247 | 247 | 247 | |||||||||||||||||||||||||
| 2015 | 329 | 497 | 503 | 505 | 505 | 505 | ||||||||||||||||||||||||||
| 2016 | 399 | 528 | 656 | 129 | 129 | |||||||||||||||||||||||||||
| 2017 | 948 | 1,035 | 1,057 | 1,071 | ||||||||||||||||||||||||||||
| 2018 | 927 | 1,135 | 1,150 | |||||||||||||||||||||||||||||
| 2019 | 935 | 1,212 | ||||||||||||||||||||||||||||||
| 2020 | 988 | |||||||||||||||||||||||||||||||
| Total | $ | 5,785 | ||||||||||||||||||||||||||||||
| All outstanding losses liabilities before 2013, net of reinsurance | - | |||||||||||||||||||||||||||||||
| Liability for losses and loss adjustment expenses, net of reinsurance | $ | 343 | ||||||||||||||||||||||||||||||
F-30
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 5. | Unpaid Losses and Loss Adjustment Expenses (Continued) |
The following table sets forth a reconciliation of the incurred and paid claims development tables to the liability for losses and loss adjustment expenses:
($ in thousands)
| 2020 | ||||
| Net outstanding liabilities | ||||
| Homeowners and tenant condominium insurance | $ | 3,008 | ||
| Dwelling fire and other | 343 | |||
| Total net liability for unpaid losses and loss adjustment expenses | $ | 3,351 | ||
The following is unaudited supplementary information about average historical claims duration as of December 31, 2020:
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||||||||||||||||||||
| Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||||||||||||||||||||||||
| Homeowners and tenant condo insurance | 79.3 | % | 15.6 | % | 3.1 | % | 1.4 | % | 0.6 | % | 0.1 | % | 0.0 | % | 0.0 | % | ||||||||||||||||
| Dwelling fire and all other | 102.2 | % | 34.1 | % | 19.9 | % | -80.8 | % | 0.1 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||
The classification, dwelling fire and all other, includes active smaller lines of business written by the Company, as well as run off lines of business previously written by the Company. Certain reclassifications of prior year amounts have been made between homeowners, tenant condo, and dwelling fire.
| 6. | Stockholders’ Equity |
Preferred Stock
As of December 31, 2020 and 2019, the Company has authorized 20,500,000 shares of preferred stock, convertible, 12.50 % cumulative, $0.0001 par value per share, none have been issued and none are outstanding.
Common Stock
As of December 31, 2020, the Company had 40,000,000 shares authorized and 18,483,684 shares issued and 10,717,518 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders. However, for shareholders owning or controlling more than 9.9% of the total combined voting power of the Company’s common stock entitled to vote, the voting rights attached to such stock, will be reduced so that such person may not exercise and is not attributed more than 9.9% of the total combined voting power.
As of December 31, 2019, the Company had 40,000,000 shares authorized and 18,483,684 shares issued and 10,702,518 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
F-31
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 6. | Stockholders’ Equity (Continued) |
However, for shareholders owning or controlling more than 9.9% of the total combined voting power of the Company’s common stock entitled to vote, the voting rights attached to such stock, will be reduced so that such person may not exercise and is not attributed more than 9.9% of the total combined voting power.
There were no common stock warrants issued or outstanding during the years ended December 31, 2020 and 2019.
Buyback of Shares
The following table summarizes the Company’s stock repurchase activity in fiscal 2020 and 2019:
| Fiscal Year | Shares repurchased | Average repurchase price | Repurchase amount | |||||||||
| 2020 | 1,000 | $ | 2.87 | $ | 2,870 | |||||||
| 2019 | 2,000 | $ | 2.13 | $ | 4,260 | |||||||
| 7. | Income Taxes |
The Company files a consolidated federal income tax return. Allocation of tax expense or refunds among the consolidated group is based on separate return calculations.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| 2020 | 2019 | |||||||
| Gross Deferred Tax Assets: | ||||||||
| Loss reserve discount | $ | 33,544 | $ | 23,900 | ||||
| Unearned premium reserve discount | 782,006 | 567,644 | ||||||
| Organization costs (net of amortization) | 18,243 | 21,831 | ||||||
| Unearned ceding commissions | 6,884,208 | 5,540,690 | ||||||
| Stock-based compensation | 7,284 | 6,861 | ||||||
| Capital loss carryover | - | - | ||||||
| Total deferred tax assets | 7,725,285 | 6,160,926 | ||||||
| Valuation allowance | - | - | ||||||
| Total adjusted deferred tax assets | $ | 7,725,285 | $ | 6,160,926 | ||||
| Deferred Tax Liabilities: | ||||||||
| Deferred policy acquisition costs | $ | 5,235,386 | $ | 4,136,494 | ||||
| Property, equipment and software | 504,197 | 521,787 | ||||||
| Other | 244,153 | 9,552 | ||||||
| Total deferred tax liabilities | 5,983,736 | 4,667,833 | ||||||
| Net deferred tax assets | $ | 1,741,549 | $ | 1,493,093 | ||||
F-32
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 7. | Income Taxes (Continued) |
As of December 31, 2020 and 2019, it was determined that no valuation allowance against deferred tax assets was considered necessary.
In assessing the realizability of deferred tax assets, management utilizes the criteria established under Accounting Standards Codification (ASC) 740 to annually evaluate the need for a deferred tax valuation allowance in order to determine whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management considers the reversal of deferred tax liabilities and projected future taxable income in making this assessment. The results of operations during the years ended December 31, 2020, and 2019, continued growth in the Company’s insurance policy and premium base with a wider demographic and geographic spread, as well as changes in the Company’s reinsurance and catastrophe coverage were also considered important factors in assessing the realizability of deferred tax assets.
The total income tax provision incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference for 2020 and 2019 are as follows:
| Effective | ||||||||
| 2020 | Tax Effect | Tax Rate | ||||||
| Income before taxes at statutory rate | $ | 1,406,241 | 21.0 | % | ||||
| Tax exempt interest | (8,463 | ) | -0.13 | % | ||||
| Meals and entertainment | 5,497 | 0.08 | % | |||||
| Other | 62,967 | 0.94 | % | |||||
| Total federal tax | $ | 1,466,242 | 21.90 | % | ||||
| Total state income tax | 90,774 | |||||||
| Total income tax | $ | 1,557,016 | ||||||
| Effective | ||||||||
| 2019 | Tax Effect | Tax Rate | ||||||
| Income before taxes at statutory rate | $ | 2,141,603 | 21.0 | % | ||||
| Tax exempt interest | (9,944 | ) | -0.10 | % | ||||
| Meals and entertainment | 11,304 | 0.11 | % | |||||
| Other | 64,107 | 0.63 | % | |||||
| Total federal tax | $ | 2,207,070 | 21.64 | % | ||||
| Total state income tax | 66,265 | |||||||
| Total income tax | $ | 2,273,335 | ||||||
F-33
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 8. | Reinsurance |
Certain premiums and benefits are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide HAIC with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Ceded reinsurance contracts do not relieve HAIC from its obligations to policyholders. HAIC remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements.
To minimize its exposure to significant losses from reinsurer insolvencies, HAIC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers.
2020 Program:
The Company’s third-party quota share reinsurance program is split into two separate placements to maximize coverage and cost efficiency. The 2020 Coastal program, which covers the Company’s business in certain Texas coastal regions and the Houston metropolitan area as well as all business in South Carolina, is placed at 86.25% of subject property and casualty losses. The 2020 Core program covers the remainder of the Company’s business and is placed at 90% of subject property losses and 65% of subject casualty losses. Both programs are effective for the period January 1, 2020 through December 31, 2020, and are subject to certain limits, which vary by participating reinsurer, for single loss occurrences and/or aggregate losses.
Property catastrophe excess of loss treaties which were in effect through March 31, 2020, developed over three layers and limited the Company’s net retention to $1.0 million per loss occurrence. Effective April 1, 2020, the Company purchased property catastrophe excess of loss reinsurance from third party reinsurers which develops over 3 layers to provide coverage up to a net loss of $155 million, in excess of a maximum retained loss of $1.5 million per occurrence. Effective from July 1, 2020 through December 31, 2020, the Company purchased additional property catastrophe reinsurance, extending the limit of coverage to $185 million.
The Company purchases property per risk reinsurance covering non-weather losses in excess of $500,000 per occurrence for all property coverage lines, to limit the Company’s net retained loss to $50,000 per covered event. The Company also entered into a per risk casualty excess of loss reinsurance program providing coverage for the Company’s Core program in excess of $35,000 per subject event, and for the Coastal program in excess of $13,750 per subject event. These contracts are subject to certain limits for single loss occurrences and/or aggregate losses and provide a certain number of free reinstatements during the treaty period, all of which varies by contract.
F-34
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 8. | Reinsurance (Continued) |
2019 Program:
The Company’s third-party quota share reinsurance program was split into two separate placements to maximize coverage and cost efficiency. The 2019 Coastal program, which covered the Company’s business in certain Texas coastal regions and the Houston metropolitan area, was placed at 90% of subject property and casualty losses. The 2019 Core program covered the remainder of the Company’s business and was placed at 90% of property losses and 73.5% of casualty losses. Both programs were effective for the period January 1, 2019 through December 31, 2019, and were subject to certain limits, which varied by participating reinsurer, for single loss occurrences and/or aggregate losses.
Property catastrophe excess of loss treaties which were in effect through March 31, 2019, developed over three layers and limited the Company’s net retention to $1.0 million per loss occurrence. Effective April 1, 2019, the Company purchased property catastrophe excess of loss reinsurance from third party reinsurers which develops over 3 layers to provide coverage up to a net loss of $125 million, in excess of a maximum retained loss of $1.0 million per occurrence. Effective from July 1, 2019, through December 31, 2019, the Company purchased additional property catastrophe reinsurance, extending the limit of coverage to $155 million.
The Company purchased property per risk reinsurance covering non-weather losses in excess of $500,000 per occurrence for all property coverage lines, to limit the Company’s net retained loss to $50,000 per covered event. The Company also entered into a per risk casualty excess of loss reinsurance program providing coverage up to $400,000, in excess of $100,000 per event. These contracts are subject to certain limits for single loss occurrences and/or aggregate losses and provide a certain number of free reinstatements during the treaty period, all of which varies by contract.
The effects of reinsurance on premiums written and earned were as follows, for the years ended December 31:
| 2020 | 2019 | |||||||||||||||
| Written | Earned | Written | Earned | |||||||||||||
| Direct premiums | $ | 239,552,848 | $ | 212,557,602 | $ | 190,975,038 | $ | 172,732,104 | ||||||||
| Ceded premiums | (223,296,321 | ) | (200,794,930 | ) | (179,424,547 | ) | (162,706,299 | ) | ||||||||
| Net Premiums | $ | 16,256,527 | $ | 11,762,672 | $ | 11,550,491 | $ | 10,025,805 | ||||||||
Included in direct written and earned premiums is Texas Fair Plan assessment recoupment in the amount of $397,692 and $327,559 for the years ended December 31, 2020 and 2019, respectively.
F-35
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 8. | Reinsurance (Continued) |
Following is a summary of the Company’s reinsurance balances under the above described reinsurance treaties as of December 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Ceded premiums payable | $ | 13,924,990 | $ | 10,925,495 | ||||
| Ceded loss adjustment expenses | 11,896,918 | 10,228,883 | ||||||
| Ceded loss and loss adjustment expense reserve | 30,763,131 | 24,768,466 | ||||||
| Ceded unearned premium reserve | 114,377,052 | 91,875,661 | ||||||
| Ceded earned premiums | 200,794,930 | 162,706,299 | ||||||
The following is a summary of the names of each of the Company’s significant reinsurers and the amount due from each for paid losses, LAE and unearned premium.
| 2020 | 2019 | |||||||||||||||||||||||
| Paid Losses & LAE | Unearned Premium | Total Receivable | Paid Losses & LAE | Unearned Premium | Total Receivable | |||||||||||||||||||
| Munich Re | $ | 1,456,478 | $ | 23,495,832 | $ | 24,952,311 | $ | 998,107 | $ | 19,096,470 | $ | 20,094,577 | ||||||||||||
| R+V Versicherung AG | 1,684,844 | 23,002,136 | 24,686,980 | 869,828 | 13,211,122 | 14,080,950 | ||||||||||||||||||
| Everest Reinsurance | 1,204,317 | 14,645,332 | 15,849,649 | 971,763 | 12,694,191 | 13,665,954 | ||||||||||||||||||
| Catlin Reinsurance | 1,025,278 | 14,645,332 | 15,670,610 | 772,431 | 12,694,191 | 13,466,622 | ||||||||||||||||||
| Qatar Reinsuance | 742,970 | 10,251,732 | 10,994,702 | 812,897 | 13,608,802 | 14,421,699 | ||||||||||||||||||
| Arch Reinsurance Co | 419,787 | 8,060,098 | 8,479,885 | 128,744 | 3,658,445 | 3,787,189 | ||||||||||||||||||
| Verto | 447,341 | 6,581,256 | 7,028,597 | 391,721 | 6,838,567 | 7,230,288 | ||||||||||||||||||
| China Re | 203,743 | 3,398,957 | 3,602,700 | 100,845 | 2,218,196 | 2,319,041 | ||||||||||||||||||
| Taiping | 206,393 | 2,929,066 | 3,135,459 | 156,177 | 2,538,838 | 2,695,015 | ||||||||||||||||||
| Pioneer Re | 122,695 | 1,708,622 | 1,831,317 | 128,054 | 2,115,698 | 2,243,752 | ||||||||||||||||||
| Korean Re | 86,152 | 1,612,020 | 1,698,171 | 45,061 | 1,280,456 | 1,325,517 | ||||||||||||||||||
| Third Point | 83,398 | 1,612,020 | 1,695,417 | 31,909 | 914,611 | 946,520 | ||||||||||||||||||
| Navigators | 42,344 | 806,010 | 848,354 | 16,093 | 457,306 | 473,399 | ||||||||||||||||||
| Waypoint | 29,695 | 564,207 | 593,902 | 12,847 | 365,845 | 378,692 | ||||||||||||||||||
| DEVK | 24,783 | 483,606 | 508,389 | 6,382 | 182,922 | 189,304 | ||||||||||||||||||
| Berkley Re | 24,309 | 483,606 | 507,915 | - | - | - | ||||||||||||||||||
| Lloyds Syndicates | 127,833 | - | 127,833 | 273,815 | - | 273,815 | ||||||||||||||||||
| Other non listed | 18,969 | 94,697 | 113,666 | 8,530 | - | 8,530 | ||||||||||||||||||
| New India | 67,086 | - | 67,086 | 29,154 | - | 29,154 | ||||||||||||||||||
| Aspen Insurance | 33,080 | 2,523 | 35,603 | 30,990 | - | 30,990 | ||||||||||||||||||
| Poseidon Re | 4,394 | - | 4,394 | 1,731 | - | 1,731 | ||||||||||||||||||
| American Standard Insurance Co | 3,678 | - | 3,678 | 3,913 | - | 3,913 | ||||||||||||||||||
| Allied World Assurance Co | 3,584 | - | 3,584 | 4,892 | - | 4,892 | ||||||||||||||||||
| XL Re Limited | 3,543 | - | 3,543 | 3,913 | - | 3,913 | ||||||||||||||||||
| National Union Fire | 2,724 | - | 2,724 | 2,064 | - | 2,064 | ||||||||||||||||||
| MS Amlin | 2,156 | - | 2,156 | 2,935 | - | 2,935 | ||||||||||||||||||
| Endurance Specialty | 2,142 | - | 2,142 | 2,302 | - | 2,302 | ||||||||||||||||||
| Hannover Re Ltd | 2,110 | - | 2,110 | 1,957 | - | 1,957 | ||||||||||||||||||
| Mapfre Reinsurance | 1,793 | - | 1,793 | 2,446 | - | 2,446 | ||||||||||||||||||
| Shelter Mutual Insurance Co | 1,075 | - | $ | 1,075 | 1,467 | - | 1,467 | |||||||||||||||||
| Validus | 670 | - | 670 | 1,810 | - | 1,810 | ||||||||||||||||||
| Total | $ | 8,079,362 | $ | 114,377,052 | $ | 122,456,414 | $ | 5,814,778 | $ | 91,875,660 | $ | 97,690,438 | ||||||||||||
F-36
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 9. | Commitments and Contingencies |
Operating Leases
The Company leases its corporate office space and certain office equipment under non-cancelable operating leases which expire at various dates through 2024.
On June 1, 2017, the Company entered into an office lease agreement with a term of 87 months. The lease agreement provides a renewal option, which may be exercised by the Company before the expiration date of the current lease term. The agreement also has an expansion option, which provides the Company with a one-time right of first refusal to lease any adjacent contiguous space. The lease costs are allocated in accordance with the Cost Sharing Agreement between HAIC, HAMGA, and HAHC.
Future minimum lease payments required under the non-cancelable operating leases for corporate office space are as follows for the years ending December 31:
| 2021 | $ | 373,463 | |||
| 2022 | 384,163 | ||||
| 2023 | 394,863 | ||||
| 2024 | 268,613 | ||||
| $ | 1,421,102 | ||||
Future minimum lease payments required under the non-cancelable operating leases for certain office equipment are as follows for the years ending December 31:
| 2021 | $ | 80,762 | |||
| 2022 | 80,762 | ||||
| 2023 | 72,326 | ||||
| 2024 | 27,427 | ||||
| $ | 261,277 |
Rent expense under such leases in the year ended December 31, 2020, and December 31, 2019, was $356,438 and $278,006, respectively.
Litigation
The Company is the defendant in routine litigation involving matters that are incidental to the claims function of the Company’s insurance business for which estimated losses are included in unpaid loss and loss adjustment expense reserves in the Company’s consolidated financial statements. It is management’s opinion that these lawsuits are not material individually or in the aggregate to the Company’s financial position, results of operations, or cash flow.
F-37
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 9. | Commitments and Contingencies (Continued) |
Assessments
Periodically, assessments are levied on Texas domiciled insurance companies by the Guaranty Association of the State of Texas. Such assessments are made to cover the policyholder claims of insolvent insurers. HAIC, the Company’s subsidiary, is subject to such assessments.
Covid-19
The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on consumer confidence and spending, all of which are highly uncertain.
| 10. | Property, Equipment, and Software |
Property, equipment, and software net of accumulated depreciation and amortization consist of the following as of December 31, 2020 and 2019, respectively:
| 2020 | 2019 | Useful Life | ||||||||
| Computer equipment | $ | 656,668 | $ | 556,584 | 3 years | |||||
| Office equipment | 113,951 | 20,541 | 5 years | |||||||
| Furniture and fixtures | 476,423 | 341,587 | 5 years | |||||||
| Leasehold improvements | 309,994 | 87,787 | 7 years | |||||||
| Software installation and development | 3,397,187 | 3,389,003 | 3-5 years | |||||||
| Total, at cost | 4,954,223 | 4,395,502 | ||||||||
| Less accumulated depreciation and amortization | (2,553,286 | ) | (1,910,590 | ) | ||||||
| Property and equipment, net | $ | 2,400,937 | $ | 2,484,912 | ||||||
Depreciation and amortization expense for property, equipment and software totaled $642,696 and $244,825 for the years ended December 31, 2020 and 2019, respectively.
F-38
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 11. | Concentration of Credit Risk |
The Company has exposure and remains liable in the event of an insolvency of one of its primary reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer base companies.
Financial instruments which potentially subject the Company to credit risk consist principally of cash, money market accounts on deposit with financial institutions, money market funds, certificates of deposit and fixed-maturity securities, as well as premium balance in the course of collection. At December 31, 2020, bank balances in excess of United States Federal Deposit Insurance Corporation insured limits were $18,703,158.
The concentration of credit risk with respect to premium balances in the course of collection is limited, due to the large number of insureds comprising the Company’s customer base. However, substantially all of the Company’s revenues are derived from customers in Texas, which could be adversely affected by economic conditions, an increase in competition, or other environmental changes.
| 12. | Deferred Policy Acquisition Costs |
Total capitalized deferred policy acquisition costs as of December 31, 2020 and 2019, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were $2,991,959 and $2,126,293, respectively.
Changes in deferred policy acquisition costs for the years ended December 31, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||||
| Deferred policy acquisition charges, beginning of the period | $ | 2,126,293 | $ | 1,844,259 | ||||
| Capitalized costs | 5,761,094 | 3,935,746 | ||||||
| Amortized costs | (4,895,428 | ) | (3,653,712 | ) | ||||
| Deferred policy acquisition charges, end of the period | $ | 2,991,959 | $ | 2,126,293 | ||||
F-39
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 13. | Earnings Per Share |
The following table represents the reconciliation of the Company’s basic earnings per common share and diluted earnings per common share computations reported on the consolidated statements of income for the year ended December 31, 2020 and 2019:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Basic earnings per common share | ||||||||
| Net income | $ | 5,230,144 | $ | 7,991,045 | ||||
| Weighted average common shares outstanding | 10,709,540 | 10,666,435 | ||||||
| Basic earnings per common share | $ | 0.49 | $ | 0.75 | ||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Diluted earnings per common share | ||||||||
| Net income | $ | 5,230,144 | $ | 7,991,045 | ||||
| Weighted average common shares outstanding | 10,709,540 | 10,666,435 | ||||||
| Effect of diluted securities: | ||||||||
| Stock options | 1,842,809 | 1,722,437 | ||||||
| Diluted common shares outstanding | 12,552,349 | 12,388,872 | ||||||
| Diluted earnings per common share | $ | 0.42 | $ | 0.65 | ||||
F-40
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 14. | Stock-Based Compensation |
The Company accounts for stock-based compensation under the fair value recognition provision of FASB ASC Topic 718 – Compensation – Stock Compensation.
Incentive Plans
The Company’s 2005 Management Incentive Plan (the “2005 Plan”) provides for granting of stock options to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company. Under the 2005 Plan, options may be granted to purchase a total not to exceed 789,475 shares in the aggregate, made up of original issue shares, treasury share or a combination of the two. At December 31, 2020 and 2019, options to purchase 783,750 shares have been granted under the 2005 Plan.
The Company’s 2013 Equity Compensation Plan (the “2013 Plan”) provides for granting of stock options, incentive stock options, stock awards, and restricted stock units to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company. Under the 2013 Plan, options may be granted to purchase a total not to exceed 2,925,000 shares of common stock, made up of original issue shares, treasury shares or a combination of the two. At December 31, 2020, options to purchase 2,225,000 shares of common stock and 84,000 shares of common stock in the form of a stock award had been granted under the 2013 Plan. At December 31, 2019, options to purchase 2,150,000 shares of common stock and 86,000 shares of common stock in the form of a stock award had been granted under the 2013 Plan.
A summary of the activity of the Company’s stock option plan for the years ended December 31, 2020 and 2019 is as follows:
| Number of Options | Weighted Avg. Exercise Price | Weighted Avg.
Remaining Cont. Term | Aggregate Intrinsic Value (in thousands) | ||||||||||||||
| Outstanding at December 31, 2018 | 2,230,000 | $ | 0.56 | 4.35 | $ | 3,798 | |||||||||||
| Granted | 185,000 | 1.75 | |||||||||||||||
| Exercised | (90,000 | ) | 0.61 | ||||||||||||||
| Expired | (75,000 | ) | 0.83 | ||||||||||||||
| Outstanding at December 31, 2019 | 2,250,000 | 0.63 | 4.02 | $ | 5,671 | ||||||||||||
| Granted | 75,000 | 2.00 | |||||||||||||||
| Exercised | - | - | |||||||||||||||
| Expired | (75,000 | ) | 1.00 | ||||||||||||||
| Outstanding at December 31, 2020 | 2,250,000 | 0.67 | 3.35 | $ | 13,933 | ||||||||||||
| Exercisable at December 31, 2020 | 2,027,000 | $ | 0.54 | 2.79 | $ | 12,813 | |||||||||||
F-41
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 14. | Stock-Based Compensation (Continued) |
There were 75,000 and 185,000 stock options granted in 2020 and 2019, respectively.
The Company records stock-based compensation expense related to granting stock options in general and administrative expenses. The Company recognized compensation expense as follows for the year ended December 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Total gross compensation expense | $ | 28,831 | $ | 29,052 | ||||
| Total tax benefit associated with compensation expense | - | - | ||||||
| Total net compensation expense | $ | 28,831 | $ | 29,052 | ||||
As of December 31, 2020, the Company expects to record compensation expense in the future as follows:
| 2021 | 2022 | 2023 | ||||||||||
| Total gross unrecognized compensation expense | $ | 28,963 | $ | 28,963 | $ | 28,963 | ||||||
| Tax benefit associated with unrecognized compensation expense | - | - | - | |||||||||
| Total net unrecognized compensation expense | $ | 28,963 | $ | 28,963 | $ | 28,963 | ||||||
| 15. | Debt |
Line of Credit
The Company entered into a three-year, $5.0 million revolving line of credit (“RLOC”) with Prosperity Bank (formerly Legacy Texas Bank) on November 16, 2017, in order to provide funding for capital stock reacquisitions and/or to fund changes in its reinsurance structure. Outstanding balances under the RLOC bear interest at the Wall Street Journal Prime + 0%. In addition, the Company pays 0.25% per annum of the daily-unused portion of the RLOC. The Company is not required to maintain a restricted cash collateral account at Prosperity Bank for the RLOC.
Collateral for the RLOC includes all assets of HAHC and its subsidiaries as well as the stock from HAIC. The credit agreement is subject to standard financial covenants and reporting requirements. At December 31, 2020 and 2019, the Company was in compliance with all required covenants.
Outstanding borrowings on the RLOC at December 31, 2020 and 2019, were $4.0 million and $2.75 million, respectively. These borrowings were utilized primarily to increase HAIC’s capital surplus. For the years ended December 31, 2020 and 2019, interest expense totaled $69,485 and $14,030, respectively.
F-42
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 15. | Debt (Continued) |
Term Loan Facility
On December 17, 2020, the Holding Company established a nine-year, $10 million term loan facility with Prosperity Bank and extended the maturity of the existing RLOC to November 16, 2022. The Holding Company is the guarantor of the debt, and the stock of HAIC is pledged by the Holding Company as collateral. As of December 31, 2020 the Company has made no borrowings on the term loan facility.
| 16. | Regulatory Requirements and Restrictions |
HAIC is subject to the laws and regulations of the State of Texas and the regulations of any other states in which HAIC conducts business. State regulations cover all aspects of HAIC’s business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of stockholders. The Texas Insurance Code requires all property and casualty insurers to have a minimum of $2.5 million in capital stock and $2.5 million in surplus. HAIC has capital and surplus in excess of this requirement.
As of December 31, 2020, HAIC’s total statutory surplus was $42,431,984 (capital stock of $3,000,000 and surplus of $39,431,984).
As of December 31, 2019, HAIC’s total statutory surplus was $33,586,416 (capital stock of $3,000,000 and surplus of $30,586,416).
As of December 31, 2020 and 2019, HAIC had restricted cash and investments totaling $3.7 million and $3.7 million, respectively, pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. See Note 1 Organization and Summary of Significant Accounting Policies, Investments for additional disclosure.
The Texas Insurance Code limits dividends from insurance companies to their stockholders to net income accumulated in the Company’s surplus account, or “earned surplus”. The maximum dividend that may be paid without approval of the Insurance Commissioner is limited to the greater of 10% of the statutory surplus at the end of the preceding calendar year or the statutory net income of the preceding calendar year. No dividends were paid by HAIC in 2020 or 2019.
HAIC prepares its statutory-based financial statements in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance. Prescribed statutory accounting practices primarily include those published as statements of SAP by the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practice not so prescribed. As of December 31, 2020 and 2019, there were no material permitted statutory accounting practice utilized by HAIC.
F-43
HOMEOWNERS OF AMERICA HOLDING CORPORATION
Notes to Consolidated Financial Statements (Continued)
December 31, 2020 and 2019
| 17. | Retirement Plan |
The Company sponsors a defined contribution savings plan covering substantially all employees of the Company. The Company will match employee deferrals up to 3% of salary. Employer contributions to the plan were $197,782 and $165,947 for the years ended December 31, 2020 and 2019, respectively.
| 18. | Subsequent Events |
The Company performed an evaluation of subsequent events through June 11, 2021, the date the consolidated financial statements were available to be issued and determined there were no recognized or unrecognized events that would require an adjustment or additional disclosure in the consolidated financial statements as of December 31, 2020.
Merger
On January 13, 2021 the Company entered into an Agreement and Plan of Merger with Porch Group, Inc., a publicly traded company listed on the NASDAQ. The transaction was approved by the Texas Department of Insurance on March 31, 2021 and was closed on April 5, 2021. As a result of this transaction the Company became a wholly-owned subsidiary of Porch Group, Inc.
Reinsurance Changes
On March 31, 2021, the Company completed the placement of its catastrophe excess of loss coverage for the treaty year April 1, 2021 – March 31, 2022. The program provides coverage up to $270.0 million of net losses, after quota share reinsurance recoveries and a company retention of $2.0 million per event. The upper limit represents coverage for a return period of approximately 115 years.
F-44
Exhibit 99.2
HOMEOWNERS OF AMERICA HOLDING CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| As of March 31, 2021 | As of December 31, 2020 | |||||||
| Assets | ||||||||
| Investments: | ||||||||
| Fixed maturities available for sale, at fair value (amortized cost $52,284,721 as of March 31, 2021 and $38,949,513 as of December 31, 2020) | $ | 52,481,692 | $ | 40,039,273 | ||||
| Restricted fixed maturities available for sale, fair value (amortized cost $1,080,877 as of March 31,2021 and $1,080,415 as of December 31, 2020) | 1,091,451 | 1,098,295 | ||||||
| Short-term investments | 3,965,855 | 7,201,744 | ||||||
| Long-term investments | 6,151,155 | 13,052,643 | ||||||
| Restricted certificates of deposit | 2,335,703 | 2,335,703 | ||||||
| Total fixed maturity and short-term investments | 66,025,856 | 63,727,658 | ||||||
| Cash, cash equivalents and restricted cash equivalents | 18,201,728 | 23,855,019 | ||||||
| Restricted cash equivalents | 313,822 | 313,817 | ||||||
| Accrued investment income | 258,550 | 262,633 | ||||||
| Premiums receivable | 8,572,457 | 8,225,387 | ||||||
| Reinsurance recoverable | 211,862,252 | 154,351,811 | ||||||
| Property, equipment and software, net | 2,256,066 | 2,400,937 | ||||||
| Deferred policy acquisition costs | 2,721,183 | 2,991,959 | ||||||
| Prepaid expenses and other | 2,284,545 | 2,502,689 | ||||||
| Deferred tax assets, net | 2,657,574 | 1,741,549 | ||||||
| Total assets | $ | 315,154,033 | $ | 260,373,459 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Losses and loss adjustment expense reserves | $ | 85,615,858 | $ | 34,114,346 | ||||
| Advance premiums | 7,569,673 | 3,015,832 | ||||||
| Ceded reinsurance premiums payable | 20,803,485 | 14,456,104 | ||||||
| Unearned premiums | 130,174,136 | 129,980,412 | ||||||
| Unearned ceding commissions | 11,509,491 | 10,843,495 | ||||||
| Commissions payable | 6,239,302 | 7,290,073 | ||||||
| General and other accrued expenses payable | 7,477,041 | 4,449,469 | ||||||
| Line of credit | 3,942,428 | 3,940,776 | ||||||
| Funds held under reinsurance treaty | 3,491,499 | 14,504,546 | ||||||
| Federal income tax payable | 1,361,935 | 124,879 | ||||||
| Taxes, licenses and other fees payable | 647,307 | 2,439,202 | ||||||
| Total liabilities | 278,832,155 | 225,159,134 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.0001 par value per share; 40,000,000 shares authorized, 18,483,684 shares issued and 10,722,518 outstanding as of March 31, 2021 and 18,483,684 shares issued and 10,717,518 outstanding as of December 31, 2020 | 1,072 | 1,071 | ||||||
| Treasury stock, $.0001 par value per share; 7,761,166 common shares as of March 31, 2021 and 7,781,166 common shares as of December 31, 2020 | (776 | ) | (777 | ) | ||||
| Additional paid-in capital | 1,971,503 | 1,954,786 | ||||||
| Accumulated other comprehensive loss | 164,484 | 888,534 | ||||||
| Retained earnings | 34,185,595 | 32,370,711 | ||||||
| Total stockholders’ equity | 36,321,878 | 35,214,325 | ||||||
| Total liabilities and stockholders’ equity | $ | 315,154,033 | $ | 260,373,459 | ||||
See notes to condensed consolidated financial statements (unaudited).
F-1
HOMEOWNERS OF AMERICA HOLDING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
For the Three Months Ended March 31, 2021
(Unaudited)
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Premiums earned | $ | 60,504,120 | $ | 48,452,753 | ||||
| Premiums ceded | (56,752,270 | ) | (45,737,613 | ) | ||||
| Net premiums earned | 3,751,850 | 2,715,140 | ||||||
| Policy fees | 4,092,927 | 3,182,456 | ||||||
| Ceding commissions and reinsurance profit share | 2,046,392 | 2,292,152 | ||||||
| Loss adjustment and other fee income | 4,455,269 | 1,322,830 | ||||||
| Net realized investment (losses) gains | (32,222 | ) | 4,831 | |||||
| Investment income, net of investment expenses | 298,599 | 311,942 | ||||||
| Total revenues | 14,612,815 | 9,829,351 | ||||||
| Expenses: | ||||||||
| Losses and loss adjustment expenses | 3,225,725 | 2,348,195 | ||||||
| Policy acquisition and other underwriting expenses | 1,544,655 | 1,386,500 | ||||||
| General and administrative expenses | 6,254,058 | 4,250,079 | ||||||
| Transaction costs | 1,259,993 | 0 | ||||||
| Total expenses | 12,284,431 | 7,984,774 | ||||||
| Net income before income tax expense | 2,328,384 | 1,844,577 | ||||||
| Provision (benefit) for income taxes: | ||||||||
| Current | 1,237,055 | 409,043 | ||||||
| Deferred | (723,556 | ) | (9,124 | ) | ||||
| Total income tax expense | 513,499 | 399,919 | ||||||
| Net income | $ | 1,814,884 | $ | 1,444,658 | ||||
See notes to condensed consolidated financial statements (unaudited).
F-2
HOMEOWNERS OF AMERICA HOLDING CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
For
the Three Months Ended March 31, 2021
(Unaudited)
| Common
Shares |
Common Stock Amount |
Treasury Shares |
Treasury Stock Amount |
Additional Paid-in Capital |
Accumulated
other Comprehensive Income, net of tax |
Retained Earnings |
Total
Shareholders’ Equity |
|||||||||||||||||||||||||
| Balance at January 1, 2021 | 10,717,518 | $ | 1,071 | 7,766,166 | $ | (777 | ) | $ | 1,954,786 | $ | 888,534 | $ | 32,370,711 | $ | 35,214,325 | |||||||||||||||||
| Net income | — | — | — | — | — | — | 1,814,884 | 1,814,884 | ||||||||||||||||||||||||
| Total other comprehensive income, net of income tax | — | — | — | — | — | (724,050 | ) | — | (724,050 | ) | ||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued | 5,000 | 1 | (5,000 | ) | 1 | 9,509 | — | — | 9,511 | |||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | 7,208 | — | — | 7,208 | ||||||||||||||||||||||||
| Balance at March 31, 2021 | 10,722,518 | $ | 1,072 | 7,761,166 | $ | (776 | ) | $ | 1,971,503 | $ | 164,484 | $ | 34,185,595 | $ | 36,321,878 | |||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
F-3
HOMEOWNERS OF AMERICA HOLDING CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2021
(Unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 1,814,844 | $ | 1,444,658 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 173,719 | 150,570 | ||||||
| Accounting charge related to stock-based compensation expense | 7,208 | 7,208 | ||||||
| Common stock compensation for management services | — | — | ||||||
| Employee compensation stock issuance expense | 9,509 | — | ||||||
| Amortization of premium/accretion of discount, net | 75,856 | 19,363 | ||||||
| Net realized (losses) gains on investments | (32,222 | ) | 4,831 | |||||
| Deferred tax assets | (723,556 | ) | (9,124 | ) | ||||
| (Increase) decrease in: | ||||||||
| Accrued investment income | 4,083 | 6,549 | ||||||
| Premium receivable | (347,070 | ) | 102,389 | |||||
| Reinsurance recoverable | (57,510,441 | ) | 1,006,886 | |||||
| Deferred policy acquisition costs | 270,776 | (182,672 | ) | |||||
| Prepaid expenses and other | 218,144 | (595,840 | ) | |||||
| Increase (decrease) in: | ||||||||
| Losses and loss adjustment expense reserves | 51,501,512 | 1,702,302 | ||||||
| Advance premiums | 4,553,841 | 1,880,002 | ||||||
| Ceded reinsurance premiums payable | 6,347,381 | 2,993,858 | ||||||
| Unearned premiums | 193,724 | (2,610,295 | ) | |||||
| Unearned ceding commissions | 665,996 | (428,568 | ) | |||||
| Commissions payable | (1,050,771 | ) | (510,792 | ) | ||||
| General and other accrued expenses payable | 3,027,572 | 2,127,093 | ||||||
| Funds held under reinsurance treaty | (17,013,047 | ) | (1,991 | ) | ||||
| Federal income tax payable | 1,237,056 | 409,043 | ||||||
| Taxes, licenses and other fees payable | (1,791,895 | ) | (1,575,277 | ) | ||||
| Cash provided by operating activities | $ | (2,367,741 | ) | $ | 5,940,193 | |||
| Cash flows from investing activities: | ||||||||
| Purchase of long-term certificates of deposit | — | (2,056,863 | ) | |||||
| Purchase of short-term investments | — | $ | (150,879 | ) | ||||
| Maturities, sales of long-term investments | 500,000 | 1,968,000 | ||||||
| Maturities, sales of short-term investments | 1,244,000 | 3,215,000 | ||||||
Purchases of fixed-maturity securities, available for sale | (9,871,708 | ) | (7,007,801 | ) | ||||
| Calls, sales, maturity of fixed maturity securities, available for sale | 4,804,913 | 1,379,005 | ||||||
| Additions to furniture, equipment and software | 35,598 | (28,483 | ) | |||||
| Cash used by investing activities | (3,287,197 | ) | (2,682,021 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from stock options exercised | — | — | ||||||
| Payments for treasury stock repurchased | — | — | ||||||
| Net borrowings under line-of-credit agreement | 1,652 | — | ||||||
| Cash (used) provided by financing activities | 1,652 | — | ||||||
| Net increase in cash, cash equivalents and restricted cash equivalents | (5,653,836 | ) | 3,258,172 | |||||
| Cash, cash equivalents and restricted cash equivalents at January 1 | 24,168,836 | 16,106,579 | ||||||
| Cash, cash equivalents and restricted cash equivalents at March 31 | $ | 18,515,550 | $ | 19,364,751 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for income tax | $ | — | $ | — | ||||
See notes to condensed consolidated financial statements (unaudited).
F-4
HOMEOWNERS OF AMERICA HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2021
1. Organization and Summary of Significant Accounting Policies
Homeowners of America Holding Corporation (“HAHC”) is an insurance holding company established to hold insurance entities for the purpose of marketing personal lines insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company (“HAIC”). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. Coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. (“HAMGA”), a Texas Corporation, formed to provide marketing and claims administration services. HAHC, along with its subsidiaries HAIC and HAMGA, are collectively referred to as (“the Company”).
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Homeowners of America Holding Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Condensed financial statements are presented in considerably less detail than complete financial statements that are intended to present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. For this reason, they should be read in conjunction with the entity’s most recent complete financial statements that include all the disclosures required by generally accepted accounting principles.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid short-term investments, with original maturities of three months or less. The amount is carried at cost, which approximates fair value. At March 31, 2021 , cash and cash equivalents consist of cash on deposit with financial institutions, as well as money market mutual funds.
Investments
The Company’s investments are comprised of short-term and fixed-maturity securities classified as available- for-sale as of March 31, 2021 . Restricted investments are described below. Short-term investments include certificates of deposit and U.S. Treasury notes. Short-term certificates of deposit have original maturities greater than three months and maturities of one year or less. Due to the short-term nature of the certificate of deposits, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, short-term certificates of deposit are carried at cost, which approximates fair value. Short-term U.S. Treasury notes have remaining maturities of less than one year from acquisition date and are carried at fair value. Fixed- maturity securities are classified as available-for-sale when it is not management’s intent to make profits by buying and selling the securities within a short period of time or when it is not management’s intent to hold the securities to maturity.
Fixed-maturity securities classified as available-for-sale are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders’ equity as a part of Accumulated Other Comprehensive Income (loss) (“AOCI”) and, as such, are not included in the determination of net income (loss).
The Company has restricted cash and investments pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors.
The following table provides the Company’s restricted cash, cash equivalents and investments as of March 31:
| 2021 | ||||
| Certificates of deposit | $ | 2,335,703 | ||
| Money market | 313,822 | |||
| U.S. treasury notes | 1,091,451 | |||
| $ | 3,740,976 | |||
F-5
The Company’s fixed-maturity securities classified as available-for-sale are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses are recorded to AOCI, except where such securities are deemed to be other-than-temporarily impaired. Where applicable, the Company assesses investments of an issuer currently carrying a net unrealized loss.
If in management’s judgment, the decline in value is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in determining whether an impairment exists include financial condition, business prospects and creditworthiness of the issuer, the length of time and magnitude that the asset value has been less than cost, and the ability and intent to hold such investments until the fair value recovers.
Mortgage-Backed Securities
Mortgage-backed securities are stated at fair market value. Significant changes in estimated cash flow are accounted for using the prospective method. Principal prepayments affect the cash flow pattern and yield of mortgage-backed securities. The amortization of discounts and premiums takes into consideration actual and future estimated principal prepayments. The Company utilizes estimated prepayment speed information obtained from published sources. The effects on the yield of a security from changes in principal prepayments are recognized prospectively. The degree to which a security is susceptible to yield adjustments is influenced by the difference between its carrying value and par, the relative sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment, and the repayment priority for structured securities such as collateralized mortgage obligations.
Comprehensive Income
FASB ASC Topic 220 — Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes its fixed income portfolio as available-for-sale securities when it is not management’s intent to make profits by buying and selling the securities within a short period of time or when it is not management’s intent to hold the securities to maturity, with appropriate adjustments to other comprehensive income.
Recognition of Premium Revenues
Premiums are recognized as revenue on a daily pro rata basis over the policy term. The portion of premiums related to the unexpired term of policies in force as of the end of the measurement period and to be earned over the remaining term of those polices, is deferred and reported as unearned premiums.
Ceding Commissions and Reinsurance Profit Share
Ceding commissions represent acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the associated policy. Reinsurance profit share is additional ceding commissions payable to the Company based upon attaining specified loss ratios within individual treaty years. Reinsurance profit share income is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses.
Policy Fees
Policy fee income is collected by HAMGA, and includes application fees, which are intended to offset the costs incurred in establishing the insurance. Policy fees on policies where premium is traditionally paid in full upon inception of the policy are recognized when written.
Loss Adjustment and Other Fee Income
Loss adjustment and other fee income is recognized as income when collected. Loss adjustment fee income for the three months ended March 31, 2021, was in excess of 30% of total revenue on the consolidated statement of operations.
Property, Equipment and Software
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from three to seven years. The cost and related accumulated depreciation of assets sold or disposed are removed from the accounts and the resulting gain or loss is included in the consolidated statements of operations (See Note 10). Maintenance and repairs are expensed as incurred.
Software installation and development is stated at cost, net of accumulated amortization. Amortization is calculated on a straight-line basis method over three years.
F-6
Impairment of Long-Lived Assets
Long-lived assets, such as property, equipment and software, are reviewed for impairment whenever business events or circumstances could lead to or indicate that the value of the asset may not be recoverable. The assessment of possible impairment is based on whether the carrying amount of the assets exceeds its fair value. The Company uses estimates of undiscounted future cash flows in determining the recoverability of long-lived assets. As of March 31, 2021 , no impairment has been recorded.
Deferred Policy and Acquisition Costs
Deferred policy acquisitions costs (“DAC”) as of March 31, 2021 , consist of commissions, premium taxes and policy underwriting and production expenses which are incurred through and vary directly with, the level of production of new and renewal insurance business and are amortized over the terms of the policies to which they relate. The method used in calculating DAC limits the amount of the deferred cost to their estimated realizable value, which gives effect to allocating their expense along with other period costs associated with the insurance business, in relation to the amount of gross premium earned on policies to which they relate and investment income. DAC is reduced for ceding commissions representing recoveries of acquisition costs deferred.
Due and Deferred Premiums
Due and deferred premiums consist of uncollateralized premiums and agents’ balances in the course of collection as well as premiums booked but not yet due.
Reserve for Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses (“LAE”) is an estimate of the amounts required to cover known incurred losses and LAE, developed through the review and assessment of loss reports, along with the development of known claims.
In addition, loss and loss adjustment expense reserves include management’s estimate of an amount for losses incurred but not reported (“IBNR”), determined from reviewing overall loss reporting patterns as well as the loss development cycles of individual claim cases. Such liabilities are necessarily based on estimates and while management believes that the amount is adequate, the ultimate liability may be more or less than the amounts provided. The approach and methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in current earnings.
Reinsurance
In the normal course of business, the Company seeks to reduce the overall exposure to losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses only quality, financially rated reinsurers and continually monitors the financial ratings of these companies through its brokers. The amount and type of reinsurance purchased each year is based on management’s analysis of liquidity and its estimate of its probable maximum loss and the conditions within the reinsurance market. The Company continually monitors its risk exposure through the use of the AIR modeling system and other modeling tools provided by its reinsurance brokers. Reinsurance premiums, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums paid for reinsurance are reported as reductions of earned premium income.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss carryforwards, and liabilities are measured using enacted tax rates over the period they are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Uncertain Tax Positions
The Company recognizes uncertain tax positions in the consolidated financial statements when it is more- likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. At March 31, 2021, the Company’s tax years from 2017 through 2020 remain subject to examination.
F-7
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company’s primary areas of estimate are for liabilities for unpaid losses and loss adjustment expenses, deferred policy acquisition costs, deferred tax asset valuation, and reinsurance. Actual results could differ significantly from those estimates.
Fair Value of Cash, Cash Equivalents, Short-term Investments
The carrying value for the Company’s cash and cash equivalents and short-term investments approximate fair values as of March 31, 2021 , due to their short-term nature. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurement.
Fair Value of Fixed-Maturity Securities held as Available-for-Sale
The Company’s fixed-maturity securities held as available-for-sale are carried at fair value as of March 31, 2021 . Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurement.
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition provisions of FASB ASC Topic 718 — Compensation — Stock Compensation, which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with FASB ASC Topic 718, the Company recognizes stock-based compensation, if any, in the consolidated statements of operations on a straight-line basis over the vesting period of the stock award. For those stock awards vesting 100% at the issue date, the Company recognizes stock-based compensation immediately.
Earnings Per Share
Basic earnings per share of common stock is computed by dividing net income or loss, less cumulative preferred stock dividends for the period whether or not earned or paid, by the weighted-average number of common shares during the period.
Diluted earnings per share of common stock is computed by dividing net income or loss attributable to common stockholders, adjusted for the effect of potentially dilutive securities, by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include convertible notes payable, outstanding convertible preferred stock and common stock options.
2. Related Party Transactions
In August 2013, HAHC entered into an agreement or the “Advisory Agreement”, with Inter-Atlantic Advisors III, Ltd., or “Inter-Atlantic”, under which Inter-Atlantic agrees to perform certain management services for the Company. A number of the Company directors are among the beneficial owners of Inter-Atlantic. The Advisory Agreement has an initial term of six years, to be automatically renewed from year-to-year thereafter, unless terminated by either party upon 60 days’ notice prior to the termination of the initial or any renewal term. For its services, the Company paid Inter-Atlantic an annual fee of $300,000, as well as, an annual grant of shares of our common stock with an aggregate fair market value of $150,000 at the time of grant, plus reimbursed Inter-Atlantic’s expenses incurred in connection with the performance of its service. The Advisory Agreement terminated on June 30, 2019, and the directors of HAHC that were affiliated with Inter- Atlantic Advisors began receiving a director’s fee in the amount of $85,000 per director, per year, beginning in the third quarter of 2019.
For the three months ended March 31, 2021, the Company incurred an expense of $85,000 (no shares of common stock were issued) for services performed under the Advisory Agreement.
HAIC and HAMGA are related parties through common ownership. HAMGA functions as the primary producer and claims administrator for HAIC and substantial transactions occur between the entities that are eliminated through the consolidation process.
F-8
| 3. | Investments |
Investment income, net of investment expenses totaled $298,599 for the three months ended March 31, 2021.
For the three months ended March 31, 2021, there were $113,006 in unrealized gains on fixed-maturity securities held as available-for-sale.
For the three months ended March 31, 2021, there were $75,569 of realized gains recognized and $86,391 of realized losses recognized for the period. The intent is to hold to maturity certificates of deposit carried at amortized cost.
The following table provides the Company’s restricted investment holdings by type of financial instruments that were used to estimate the fair value disclosures for financial instruments:
| March 31, 2021 | ||||||||
| Cost/ Amortized Cost | Fair Value/ Carrying Value | |||||||
| Restricted certificates of deposit | $ | 2,335,041 | $ | 2,335,703 | ||||
| Restricted money markets | 313,822 | 313,822 | ||||||
| Restricted fixed-maturity securities | 1,080,877 | 1,091,451 | ||||||
| $ | 3,729,740 | $ | 3,740,976 | |||||
The following table provides the amortized cost, market value and unrealized gains and (losses) of Company’s debt securities:
| March 31, 2021 | ||||||||||||||||
| Gross Unrealized | ||||||||||||||||
| Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
| U.S. government obligations | $ | 6,371,321 | $ | 13,472 | $ | (1,175 | ) | $ | 6,383,618 | |||||||
| U.S. political subdivisions | 3,439,461 | 76,227 | (15,283 | ) | 3,500,405 | |||||||||||
| Industrial and miscellaneous | 30,939,929 | 256,649 | (314,290 | ) | 30,882,288 | |||||||||||
| Mortgage-backed securities | 13,942,001 | 226,310 | (144,350 | ) | 14,023,961 | |||||||||||
| Other loan-backed and structured securities | 6,065,143 | 35,084 | (19,638 | ) | 6,080,589 | |||||||||||
| Short-term investments | 5,059,794 | 148,761 | (53,560 | ) | 5,154,995 | |||||||||||
| Total | $ | 65,817,649 | $ | 756,503 | $ | (548,296 | ) | $ | 66,025,856 | |||||||
The amortized cost and fair value of securities at March 31, 2021, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| 2021 | ||||||||
| Remaining Time to Maturity | Amortized Cost Basis | Fair Value | ||||||
| Due in one year or less | $ | 10,480,592 | $ | 10,492,608 | ||||
| Due after one year through five years | 22,192,777 | 22,388,792 | ||||||
| Due after five years through ten years | 11,620,646 | 11,515,109 | ||||||
| Due after ten years | 1,516,490 | 1,524,797 | ||||||
| Mortgage-backed securities | 13,942,001 | 14,023,961 | ||||||
| Other loan-backed and structured securities | 6,065,143 | 6,080,589 | ||||||
| Total | $ | 65,817,649 | $ | 66,025,856 | ||||
Other-than-temporary Impairment (“OTTI”)
The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
| • | the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; |
| • | the length of time and the extent to which the market value of the security has been below its cost or amortized cost; |
F-9
| • | general market conditions and industry or sector specific factors; |
| • | nonpayment by the issuer of its contractually obligated interest and principal payments; and |
| • | the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs. |
Securities with gross unrealized loss positions at March 31, 2021, and March 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
| As of March 31, 2021 | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | Gross Unrealized Loss | Estimated Fair Value | ||||||||||||||||||
| U.S. government obligations | $ | (81 | ) | $ | 999,922 | (15,818 | ) | 1,147,103 | (15,899 | ) | 2,147,025 | |||||||||||||
| U.S. political subdivisions | (15,283 | ) | 944,718 | - | - | (15,283 | ) | 944,718 | ||||||||||||||||
| Industrial and miscellaneous | (272,702 | ) | 9,612,700 | (41,589 | ) | 857,421 | (314,291 | ) | 10,470,121 | |||||||||||||||
| Mortgage-backed securities | (107,496 | ) | 5,752,716 | (36,854 | ) | 1,567,214 | (144,350 | ) | 7,319,930 | |||||||||||||||
| Other loan-backed and structured securities | (18,523 | ) | 3,001,204 | (1,115 | ) | 437,375 | (19,638 | ) | 3,438,579 | |||||||||||||||
| Short-term investments | (19,536 | ) | 812,415 | (19,299 | ) | 791,530 | (38,835 | ) | 1,603,945 | |||||||||||||||
| Total | $ | (433,621 | ) | $ | 21,123,675 | (114,675 | ) | 4,800,643 | (548,296 | ) | 25,924,318 | |||||||||||||
At March 31, 2021, there were 31 securities in an unrealized loss position. Of these securities, 4 securities had been in an unrealized loss position for 12 months or greater.
The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes. It is expected that the securities would not be settled at a price less than par value of the investments. Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at March 31, 2021 .
| 4. | Fair Value of Financial Instruments |
The Company’s financial assets carried at fair value have been classified, for disclosure purposes, based on the hierarchy established within FASB ASC Topic 820-10 – Fair Value Measurement. When market prices are not available, fair value is generally estimated utilizing valuation techniques that vary by asset class and incorporate available trade, bid and other market information, when available. The acceptable valuation techniques include (a) market approach, which uses prices or relevant information derived from market transactions for identical or comparable assets or liabilities, (b) the income approach, which converts future amounts such as cash flows or earnings to a single present value amount based on current market expectations about those future amounts, and (c) the cost approach, which is based on the amount that currently would be required to replace the service capacity of an asset. In certain circumstances, these valuation techniques may involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk premium inherent in a particular methodology, model or input used.
F-10
The fair value hierarchy is used to prioritize valuation inputs into three levels:
| Level 1 — | unadjusted quoted prices in active markets for identical assets or liabilities. These inputs are considered to be the most reliable evidence of fair value. |
| Level 2 — | quoted prices for similar assets in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the investment. Such inputs include market interest rates and volatilities, spreads and yield curves. |
| Level 3 — | termed unobservable inputs which are utilized in situations where there is little or no market activity for the asset or liability at the measurement date. The approach typically involves a significant subjective management judgment toward the pricing of the security. |
The Company’s short-term investments are comprised of certificates of deposit held at financial institutions which are measured at fair value on a recurring basis. A portion of the Company’s cash and cash equivalents include money market mutual fund accounts held at financial institutions which are measured at fair value on a recurring basis. Fixed-maturity securities held as available-for-sale are carried at fair value in the consolidated financial statements.
The following tables provide information as of March 31, 2021 , about the Company’s financial assets measured at fair value on a recurring basis:
| Fair Value Hierarchy | ||||||||||||||||
| As of March 31, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Money market mutual funds | $ | 17,894,602 | $ | — | $ | — | $ | 17,894,602 | ||||||||
| Restricted money market mutual funds | 313,822 | — | — | 313,822 | ||||||||||||
| Short-term investments | 1,091,451 | 4,063,544 | — | 5,154,995 | ||||||||||||
| Fixed-maturity securities: | ||||||||||||||||
| U.S. government obligations | 6,383,618 | — | — | 6,383,618 | ||||||||||||
| U.S. political subdivisions | — | 3,500,405 | — | 3,500,405 | ||||||||||||
| Industrial and miscellaneous | — | 30,882,288 | — | 30,882,288 | ||||||||||||
| Mortgage-backed securities | — | 14,023,961 | — | 14,023,961 | ||||||||||||
| Other loan-backed and structured securities | — | 6,080,589 | — | 6,080,589 | ||||||||||||
| Total | $ | 25,683,493 | $ | 58,550,787 | $ | — | $ | 84,234,280 | ||||||||
The following methods and assumptions were used to estimate the fair value disclosures for financial instruments:
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2021 or 2020.
| 5. | Unpaid Losses and Loss Adjustment Expenses |
Losses and loss adjustment expenses (LAE), less related reinsurance and deductibles, are charged to operations as incurred. Unpaid losses and LAE are based on claims adjusters’ estimates of the cost of settlement plus an estimate for IBNR losses based upon historical experience, industry loss experience, and management’s estimates. Loss reserves reflect Company management’s best estimate of the total cost of (i) claims that have been incurred but not yet paid, and (ii) claims that have been incurred, but not yet reported (IBNR). Loss reserves that are established by Company management are not an exact calculation of the liability, but rather loss reserves represent management’s best estimate for the Company’s liability based on the application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known as of the balance sheet date. The process of setting reserves is complex and necessarily imprecise. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. To arrive at its best estimate for losses, the Company uses damage estimating software developed and owned by acknowledged industry leader, Insurance Service Office. Reserve factors for IBNR are reviewed monthly by a Company employee who is an ACAS (Associate Casualty Actuarial Society) and MAAA (Member of American Academy of Actuaries). In addition, the appointed independent actuary, a Fellow in the Casualty Actuarial Society, attests to the adequacy of our unpaid claim reserve, including IBNR, at calendar year end. The Company had no significant changes in reserving assumptions or methodologies.
F-11
Losses and Loss Adjustment Expenses
The following table provides the reconciliation of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for March 31, 2021:
| 2021 | ||||
| Reserve for losses and LAE, beginning of year | $ | 34,114,346 | ||
| Reinsurance recoverables on losses and LAE | (30,763,131 | ) | ||
| Reserve for losses and LAE, net of reinsurance recoverables at beginning of year | 3,351,215 | |||
| Add provision for claims and LAE occurring in: | ||||
| Current year | 2,940,052 | |||
| Prior years | 285,673 | |||
| Net incurred losses and LAE during the current year | 3,225,725 | |||
| Deduct payments for claims and LAE occurring in: | ||||
| Current year | 3,775,622 | |||
| Prior years | 1,792,260 | |||
| Net claim and LAE payments during the current year | 5,567,882 | |||
| Reserve for losses and LAE, net of reinsurance recoverables, at end of year | 1,009,058 | |||
| Reinsurance recoverables on losses and LAE | 84,606,800 | |||
| Losses and loss adjustment expenses at March 31 | $ | 85,615,858 | ||
As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of claims and claim adjustment expenses were made resulting in an increase of $285,673 for the period ended March 31, 2021.
| 6. | Stockholders’ Equity |
Preferred Stock
As of March 31, 2021 the Company has 20,500,000 shares of preferred stock, convertible, 12.50 % cumulative, $0.0001 par value per share, authorized and none issued and outstanding.
Common Stock
As of March 31, 2021, the Company had 40,000,000 shares authorized and 18,483,684 shares issued and 10,722,518 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders. However, for shareholders owning or controlling more than 9.9% of the total combined voting power of the Company’s common stock entitled to vote, the voting rights attached to such stock, will be reduced so that such person may not exercise and is not attributed more than 9.9% of the total combined voting power.
There were no common stock warrants issued or outstanding during the periods ended March 31, 2021.
| 7. | Reinsurance |
Certain premiums and benefits are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide HAIC with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Ceded reinsurance contracts do not relieve HAIC from its obligations to policyholders. HAIC remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements.
To minimize its exposure to significant losses from reinsurer insolvencies, HAIC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers.
2021 Program:
The Company’s third-party quota share reinsurance program is split into two separate placements to maximize coverage and cost efficiency. The 2021 Coastal program, which covers the Company’s business in certain Texas coastal regions and the Houston metropolitan area as well as all business in South Carolina, is placed at 86.25% of subject property and casualty losses. The 2021 Core program covers the remainder of the Company’s business and is placed at 90% of subject property losses and 65% of subject casualty losses. Both programs are effective for the period January 1, 2021, through December 31, 2021, and are subject to certain limits, which vary by participating reinsurer, for single loss occurrences and/or aggregate losses.
Property catastrophe excess of loss treaties which were in effect through March 31, 2021, developed over three layers and limited the Company’s net retention to $1.0 million per loss occurrence. Effective April 1, 2021, the Company purchased property catastrophe excess of loss reinsurance from third party reinsurers which develops over 3 layers to provide coverage up to a net loss of $155 million, in excess of a maximum retained loss of $1.5 million per occurrence. Effective from July 1, 2021 through December 31, 2021, the Company purchased additional property catastrophe reinsurance, extending the limit of coverage to $185 million.
The Company purchases property per risk reinsurance covering non-weather losses in excess of $500,000 per occurrence for all property coverage lines, to limit the Company’s net retained loss to $50,000 per covered event. The Company also entered into a per risk casualty excess of loss reinsurance program providing coverage for the Company’s Core program in excess of $35,000 per subject event, and for the Coastal program in excess of $13,750 per subject event. These contracts are subject to certain limits for single loss occurrences and/or aggregate losses and provide a certain number of free reinstatements during the treaty period, all of which varies by contract.
F-12
2020 Program:
The Company’s third-party quota share reinsurance program was split into two separate placements to maximize coverage and cost efficiency. The 2020 Coastal program, which covered the Company’s business in certain Texas coastal regions and the Houston metropolitan area, was placed at 90% of subject property and casualty losses. The 2020 Core program covered the remainder of the Company’s business and was placed at 90% of property losses
and 73.5% of casualty losses. Both programs were effective for the period January1, 2020, through December 31, 2020, and were subject to certain limits, which varied by participating reinsurer, for single loss occurrences and/or aggregate losses.
Property catastrophe excess of loss treaties which were in effect through March 31, 2020, developed over three layers and limited the Company’s net retention to $1.0 million per loss occurrence. Effective April 1, 2020, the Company purchased property catastrophe excess of loss reinsurance from third party reinsurers which develops over 3 layers to provide coverage up to a net loss of $125 million, in excess of a maximum retained loss of $1.0 million per occurrence. Effective from July 1, 2020, through December 31, 2020, the Company
purchased additional property catastrophe reinsurance, extending the limit of coverage to $155 million.
The Company purchased property per risk reinsurance covering non-weather losses in excess of $500,000 per occurrence for all property coverage lines, to limit the Company’s net retained loss to $50,000 per covered event. The Company also entered into a per risk casualty excess of loss reinsurance program providing coverage up to $400,000, in excess of $100,000 per event. These contracts are subject to certain limits for single loss occurrences and/or aggregate losses and provide a certain number of free reinstatements during the treaty period, all of which varies by contract.
The effects of reinsurance on premiums written and earned were as follows, for the three months ended March 31:
| 2021 | ||||||||
| Written | Earned | |||||||
| Direct premiums | $ | 60,697,844 | $ | 60,504,120 | ||||
| Ceded premiums | (58,428,583 | ) | (56,752,270 | ) | ||||
| Net Premiums | $ | 2,269,261 | $ | 3,751,850 | ||||
F-13
| 8. | Property, Equipment, and Software |
Property, equipment, and software net of accumulated depreciation and amortization consist of the following as of March 31, 2021, respectively:
| 2021 | Useful Life | |||||
| Computer equipment | $ | 677,017 | 3 years | |||
| Office equipment | 113,951 | 5 years | ||||
| Furniture and fixtures | 483,149 | 5 years | ||||
| Leasehold improvements | 311,767 | 7 years | ||||
| Software installation and development | 3,397,187 | 3-5 years | ||||
| Construction in progress | — | |||||
| Total, at cost | 4,983,071 | |||||
| Less accumulated depreciation and amortization | (2,727,005 | ) | ||||
| Property and equipment, net | $ | 2,256,066 | ||||
Depreciation and amortization expense for property, equipment and software totaled $173,719 for the three months ended March 31, 2021.
| 9. | Concentration of Credit Risk |
The Company has exposure and remains liable in the event of an insolvency of one of its primary reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer base companies.
Financial instruments which potentially subject the Company to credit risk consist principally of cash, money market accounts on deposit with financial institutions, money market funds, certificates of deposit and fixed- maturity securities, as well as premium balance in the course of collection.
The concentration of credit risk with respect to premium balances in the course of collection is limited, due to the large number of insureds comprising the Company’s customer base. However, substantially all of the Company’s revenues are derived from customers in Texas, which could be adversely affected by economic conditions, an increase in competition, or other environmental changes.
| 10. | Deferred Policy Acquisition Costs |
Total capitalized deferred policy acquisition costs as of March 31, 2021, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were
$2,721,183.
Changes in deferred policy acquisition costs for the three months ended March 31, 2021 , are as follows:
| 2021 | ||||
| Deferred policy acquisition charges, beginning of the period | $ | 24,930,410 | ||
| Capitalized costs | 11,799,423 | |||
| Amortized costs | (11,656,744 | ) | ||
| Deferred policy acquisition charges, end of the period (gross) | 25,073,089 | |||
| Ceded deferred policy acquisition charges | (22,351,906 | ) | ||
| Deferred policy acquisition charges, end of the period (net) | $ | 2,721,183 | ||
| 11. | Earnings Per Share |
The following table represents the reconciliation of the Company’s basic earnings per common share and diluted earnings per common share computations reported on the Consolidated Statements of Income for the three months ended March 31, 2021 :
| Three Months Ended March 31, | ||||
| 2021 | ||||
| Basic earnings per common share | ||||
| Net income | $ | 1,814,844 | ||
| Weighted average common shares outstanding | 10,719,007 | |||
| Basic earnings per common share | $ | 0.17 | ||
| Three Months Ended March 31, | ||||
| 2021 | ||||
| Diluted earnings per common share | ||||
| Net income | $ | 1,814,844 | ||
| Weighted average common shares outstanding | 10,719,007 | |||
| Effect of diluted securities: | ||||
| Stock options | 2,027,000 | |||
| Diluted common shares outstanding | 12,746,007 | |||
| Diluted earnings per common share | $ | 0.14 | ||
F-14
| 12. | Long-Term Debt |
Line of Credit
The Company entered into a three-year, $5.0 million revolving line of credit (“RLOC”) with Legacy Texas Bank on November 16, 2017, in order to provide funding for capital stock reacquisitions and/or to fund changes in its reinsurance structure. Outstanding balances under the RLOC bear interest at the Wall Street Journal Prime + 0%. In addition, the Company pays 0.25% per annum of the daily-unused portion of the RLOC. The Company is not required to maintain a restricted cash collateral account at Legacy Texas Bank for the RLOC. On December 17, 2020 the RLOC was amended to extend its maturity date to November 16, 2022.
Collateral for the RLOC includes all assets of HAHC and its subsidiaries as well as the stock from HAIC. The credit agreement is subject to standard financial covenants and reporting requirements. At March 31, 2021, the Company was in compliance with all required covenants.
Outstanding borrowings on the RLOC at March 31, 2021 were $4.0 million. These borrowings were utilized primarily to increase HAIC’s capital surplus. For the quarter ended March 31, 2021, interest expense totaled $33,792.
Term Loan Facility
On December 17, 2020, the Holding Company established a nine-year, $10 million term loan facility with Prosperity Bank. The Holding Company is the guarantor of the debt, and the stock of HAIC is pledged by the Holding Company as collateral. As of March 31, 2021 the Company has made no borrowings on the term loan facility.
| 13. | Regulatory Requirements and Restrictions |
HAIC is subject to the laws and regulations of the State of Texas and the regulations of any other states in which HAIC conducts business. State regulations cover all aspects of HAIC’s business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of stockholders. The Texas Insurance Code requires all property and casualty insurers to have a minimum of $2.5 million in capital stock and $2.5 million in surplus. HAIC has capital and surplus in excess of this requirement.
As of March 31, 2021, HAIC’s total statutory surplus was $46,403,280 (capital stock of $3,000,000 and surplus of $43,403,280.
As of March 31, 2021 HAIC had restricted cash and investments totaling $3,740,976 and
pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. See Note 1 Organization and Summary of Significant Accounting Policies, Investments for additional disclosure.
The Texas Insurance Code limits dividends from insurance companies to their stockholders to net income accumulated in the Company’s surplus account, or “earned surplus”. The maximum dividend that may be paid without approval of the Insurance Commissioner is limited to the greater of 10% of the statutory surplus at the end of the preceding calendar year or the statutory net income of the preceding calendar year. No dividends were paid by HAIC in 2021 or 2020.
HAIC prepares its statutory-based financial statements in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance. Prescribed statutory accounting practices primarily include those published as statements of SAP by the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practice not so prescribed. As of March 31, 2021 , there were no material permitted statutory accounting practice utilized by HAIC.
F-15
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is presented to aid you in your analysis of the financial aspects of the completed acquisition of Homeowners of America Holding Corporation and Subsidiaries (“HOA”) (the “acquisition”) by Porch Group.
The following unaudited pro forma condensed combined financial information presents the combination of the financial information of HOA and Porch Group adjusted to give effect to the acquisition. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”. The unaudited pro forma condensed combined balance sheet as of March 31, 2021 combines the historical balance sheet of HOA and the historical balance sheet of Porch Group on a pro forma basis as if the acquisition, summarized below, had been consummated on March 31, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020, and the three months ended March 31, 2021, combine the historical statements of operations of HOA and Porch Group for such periods as if the acquisition, summarized below, had been consummated on January 1, 2020, the beginning of the earliest period presented.
The following unaudited pro forma condensed combined balance sheet as of March 31, 2021, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, and the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2021 are based on the historical financial statements of HOA and Porch Group. The unaudited pro forma adjustments are based on information currently available, assumptions, and estimates underlying the pro forma adjustments and are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information.
This information should be read together with the accompanying notes to the unaudited pro forma condensed combined financial statements included herein, the HOA and Porch Group unaudited and audited financial statements and related notes.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2021
(in thousands)
| Porch Group (Historical) | HOA (Historical) After Reclassifications (Note 6) | Transaction Accounting Adjustments (Note 7) | Pro Forma Combined | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 222,948 | $ | 18,202 | $ | (81,287 | )(a) | $ | 159,669 | |||||||
| (194 | )(i) | |||||||||||||||
| Accounts receivable, net | 9,629 | 8,572 | - | 18,201 | ||||||||||||
| Short term investments | - | 6,302 | - | 6,302 | ||||||||||||
| Reinsurance balance due | - | 211,862 | - | 211,862 | ||||||||||||
| Prepaid expenses and other current assets | 7,869 | 2,980 | (2,721 | )(b) | 8,128 | |||||||||||
| Restricted cash | 10,435 | 314 | - | 10,749 | ||||||||||||
| Total current assets | 250,881 | 248,232 | (84,202 | ) | 414,911 | |||||||||||
| Property, equipment, and software, net | 5,328 | 2,256 | - | 7,584 | ||||||||||||
| Goodwill | 50,120 | - | 44,750 | (c) | 94,870 | |||||||||||
| Long-term investments | - | 59,724 | - | 59,724 | ||||||||||||
| Intangible assets, net | 22,715 | - | 43,222 | (d) | 65,937 | |||||||||||
| Long-term insurance commissions receivable | 4,748 | - | 4,748 | |||||||||||||
| Other assets, noncurrent | 444 | 4,942 | (2,658 | )(k) | 2,728 | |||||||||||
| Total assets | $ | 334,236 | $ | 315,154 | $ | 1,112 | $ | 650,502 | ||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable | $ | 6,384 | $ | 1,785 | $ | - | $ | 8,169 | ||||||||
| Accrued expenses and other current liabilities | 15,268 | 7,701 | (734 | )(i) | 22,235 | |||||||||||
| Deferred revenue | 4,346 | 141,684 | - | 146,030 | ||||||||||||
| Refundable customer deposit | 2,026 | - | - | 2,026 | ||||||||||||
| Current portion of long-term debt | 7,480 | - | - | 7,480 | ||||||||||||
| Losses and loss adjustment expense reserves | - | 85,616 | - | 85,616 | ||||||||||||
| Other insurance liabilities, current | - | 34,613 | - | 34,613 | ||||||||||||
| Total current liabilities | 35,504 | 271,399 | (734 | ) | 306,169 | |||||||||||
| Long-term debt | 42,624 | 3,942 | - | 46,566 | ||||||||||||
| Refundable customer deposit, non-current | 396 | 396 | ||||||||||||||
| Earnout liability, at fair value | 43,193 | 43,193 | ||||||||||||||
| Private warrant liability, at fair value | 47,444 | 47,444 | ||||||||||||||
| Other liabilities | 3,068 | 3,491 | 1,830 | (n) | 8,389 | |||||||||||
| Total liabilities | 172,229 | 278,832 | 1,096 | 452,157 | ||||||||||||
| Stockholders' equity (deficit) | ||||||||||||||||
| Common stock | 9 | 1 | (1 | )(e) | 9 | |||||||||||
| Additional paid-in capital | 544,605 | 1,972 | 27,486 | (e) | 574,063 | |||||||||||
| Accumulated other comprehensive loss | - | 164 | (164 | )(e) | - | |||||||||||
| Accumulated equity (deficit) | (382,607 | ) | 34,185 | (34,185 | )(e) | (375,727 | ) | |||||||||
| (194 | )(i) | |||||||||||||||
| 7,074 | (k) | |||||||||||||||
| Total stockholders' equity (deficit) | 162,007 | 36,322 | 16 | 198,345 | ||||||||||||
| Total liabilities and stockholders' equity (deficit) | $ | 334,236 | $ | 315,154 | $ | 1,112 | $ | 650,502 | ||||||||
| - | - | - | - | |||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021
(in thousands, except share and per share data)
| Porch Group (Historical) | HOA (Historical) After Reclassifications (Note 6) | Transaction Accounting Adjustments (Note 7) | Pro Forma Combined | |||||||||||||
| Revenue | $ | 26,742 | $ | 14,346 | $ | - | $ | 41,088 | ||||||||
| Operating expenses: | ||||||||||||||||
| Cost of revenue | 5,930 | 5,707 | - | 11,637 | ||||||||||||
| Selling and marketing | 14,638 | 1,545 | 423 | (f) | 16,606 | |||||||||||
| Product and technology | 11,789 | 555 | - | 12,344 | ||||||||||||
| General and administrative | 24,016 | 4,478 | 651 | (f) | 27,635 | |||||||||||
| 224 | (j) | |||||||||||||||
| (1,734 | )(i) | |||||||||||||||
| Total operating expenses | 56,373 | 12,285 | (436 | ) | 68,222 | |||||||||||
| Operating income (loss) | (29,631 | ) | 2,061 | 436 | (27,134 | ) | ||||||||||
| Other Income (expense): | ||||||||||||||||
| Interest expense | (1,223 | ) | - | - | (1,223 | ) | ||||||||||
| Change in fair value of earnout liability | (18,770 | ) | - | - | (18,770 | ) | ||||||||||
| Change in fair value of private warrant liability | (15,910 | ) | - | - | (15,910 | ) | ||||||||||
| Other income (expense), net | 83 | - | - | 83 | ||||||||||||
| Investment income and realized gains | 267 | - | 267 | |||||||||||||
| Total other income (expense) | (35,820 | ) | 267 | - | (35,553 | ) | ||||||||||
| Income (loss) before income taxes | (65,451 | ) | 2,328 | 436 | (62,687 | ) | ||||||||||
| Income tax expense (benefit) | (350 | ) | 513 | (513 | )(g) | (350 | ) | |||||||||
| Net income (loss) | $ | (65,101 | ) | $ | 1,815 | $ | 949 | $ | (62,337 | ) | ||||||
| Weighted average common shares outstanding - basic and diluted | 85,331,575 | 1,292,430 | (m) | 86,624,005 | ||||||||||||
| Net earnings (loss) per share - basic and diluted | $ | (0.76 | ) | - | $ | (0.72 | ) | |||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2020
(in thousands, except share and per share data)
| Porch Group (Historical) | HOA (Historical) After Reclassifications (Note 6) | Transaction Accounting Adjustments (Note 7) | Pro Forma Combined | |||||||||||||
| Revenue | $ | 72,299 | $ | 42,036 | $ | - | $ | 114,335 | ||||||||
| Operating expenses: | ||||||||||||||||
| Cost of revenue | 17,562 | 17,361 | - | 34,923 | ||||||||||||
| Selling and marketing | 41,665 | 6,187 | (1,970 | )(h) | 47,972 | |||||||||||
| 2,090 | (f) | |||||||||||||||
| Product and technology | 28,546 | 1,472 | - | 30,018 | ||||||||||||
| General and administrative | 28,199 | 11,287 | 2,605 | (f) | 46,596 | |||||||||||
| 3,608 | (i) | |||||||||||||||
| 896 | (j) | |||||||||||||||
| Loss (gain) on divestiture of businesses | (1,442 | ) | - | - | (1,442 | ) | ||||||||||
| Total operating expenses | 114,530 | 36,307 | 7,230 | 158,067 | ||||||||||||
| Operating income (loss) | (42,231 | ) | 5,729 | (7,230 | ) | (43,732 | ) | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (14,734 | ) | - | - | (14,734 | ) | ||||||||||
| Other income (expense), net | 1,244 | - | - | 1,244 | ||||||||||||
| Investment income and realized gains | 1,058 | - | 1,058 | |||||||||||||
| Total other income (expense) | (13,490 | ) | 1,058 | - | (12,432 | ) | ||||||||||
| Income (loss) before income taxes | (55,721 | ) | 6,787 | (7,230 | ) | (56,164 | ) | |||||||||
| Income tax (benefit) expense | (1,689 | ) | 1,557 | (7,074 | )(l) | (8,763 | ) | |||||||||
| (1,557 | )(g) | |||||||||||||||
| Net income (loss) | (54,032 | ) | 5,230 | 1,401 | (47,401 | ) | ||||||||||
| Induced conversion of preferred stock | (17,284 | ) | - | - | (17,284 | ) | ||||||||||
| Net income (loss) available to common shareholders | $ | (71,316 | ) | $ | 5,230 | $ | 1,401 | $ | (64,685 | ) | ||||||
| Weighted average common shares outstanding - basic | 36,344,234 | 1,292,430 | (m) | 37,636,664 | ||||||||||||
| Weighted average common shares outstanding - diluted | 36,374,215 | 1,292,430 | (m) | 37,666,645 | ||||||||||||
| Net earnings (loss) per share - basic | $ | (1.96 | ) | $ | (1.72 | ) | ||||||||||
| Net earnings (loss) per share - diluted | $ | (2.03 | ) | $ | (1.78 | ) | ||||||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
| 1. | Description of Transaction |
On April 5, 2021, the Company acquired HOA, a leading property and casualty insurance company focused on products in the residential homeowner space, in a cash and stock transaction with estimated total consideration of $112.6 million consisting of (i) approximately $105.9 million, as adjusted in accordance with the terms of the definitive agreement, of which $22.8 million was payable in common stock at the election of the Company (the “Stock Election”) and $1.8 million in future cash payable was held back for satisfying indemnities, adjustments, and representations, (ii) 500,000 additional shares of common stock subject to the trading price of common stock exceeding $22.50 for twenty (20) out of thirty (30) consecutive trading days in the two (2) year period following the consummation of the HOA acquisition and (iii) a retention pool under the 2020 Porch Group, Inc. Stock Incentive Plan (the “2020 Plan”) of shares of restricted common stock in an amount equal to $510 thousand and up to 100,000 options for acquisition of common stock to retain key employees of HOA, in each case upon the terms and subject to the conditions of the definitive agreement. HOA is a managing general agent (“MGA”) and carrier hybrid with a strong reinsurance strategy that currently operates in six states. The HOA acquisition is expected to enable Porch to offer its own line of homeowner’s insurance alongside its existing insurance agency which partners with many other top carriers and provide consumers with flexibility and choice. See Note 4 for financial terms of the transaction.
| 2. | Basis of Presentation |
The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting and are based on the historical consolidated financial statements of HOA and Porch Group.
The acquisition method of accounting is based on ASC 805, Business Combinations, and uses the fair value concepts defined in ASC 820, Fair Value Measurement.
ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In addition, ASC 805 requires that the consideration transferred be measured at the date the acquisition is completed at the then-current market price. Therefore, the allocation of the HOA purchase price as reflected in the unaudited pro forma condensed combined financial information is based upon management’s preliminary estimates of the acquisition purchase price and fair market value of the assets acquired and liabilities assumed. Definitive allocations of the purchase price will be performed and finalized after the transaction closes and final determination of the estimated fair value of HOA’s assets and liabilities, and associated tax adjustments have been completed. Any adjustments to the preliminary estimated fair value amounts could have a significant impact on the unaudited pro forma condensed combined financial information contained herein and our future results of operations and financial position. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
ASC 820 defines the term “fair value,” sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, Porch Group may be required to record the fair value of assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect Porch Group’s intended use of those assets. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
Under the acquisition method of accounting, the assets acquired and liabilities assumed will be recorded, as of completion of the acquisition, primarily at their respective fair values and added to those of Porch Group’s. Financial statements and reported results of operations of Porch Group issued after completion of the acquisition will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of HOA.
Under ASC 805, acquisition-related transaction costs (e.g., advisory, legal and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Total acquisition-related transaction costs expected to be incurred by Porch Group for the acquisition of HOA are estimated to be approximately $0.7 million. During the three months ended March 31, 2021, Porch Group incurred approximately $0.5 million in acquisition-related transaction costs for the acquisition of HOA.
The unaudited pro forma condensed combined balance sheet as of March 31, 2021 is required to include adjustments which give effect to events that are directly attributable to the acquisition regardless of whether they are expected to have a continuing impact on the combined results or are non-recurring. Therefore, acquisition-related transaction costs expected to be incurred by Porch Group for the acquisition of HOA subsequent to March 31, 2021 of approximately $0.2 million are reflected as a pro forma adjustment to the unaudited pro forma condensed combined balance sheet as of March 31, 2021, with the impact presented as a decrease to cash and increase in accumulated deficit.
The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the acquisition taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of Porch Group. They should be read in conjunction with the historical financial statements and notes thereto of HOA and the Porch Group.
| 3. | Accounting Policies |
As part of the preparation of these unaudited pro forma condensed combined financial statements, certain reclassifications were made to align HOA financial statement presentation as identified in Note 6. Upon completion of acquisition, management will perform a comprehensive review of the acquired entity’s accounting policies. As a result of the review, management may identify differences between the accounting policies of the acquired entity which, when conformed, could have a material impact on the financial statements of the Company. Based on its initial analysis of HOA, the Company has identified the presentation differences that would have an impact on the unaudited pro forma condensed combined financial information and recorded the necessary adjustments.
| 4. | Estimate of Consideration Expected to be Transferred |
The preliminary estimate of consideration expected to be transferred to effect the acquisition of HOA is $112.6 million, which consists of $81.3 million of cash, 1,292,430 shares or an estimated $22.8 million of Porch Group common stock, up to $1.8 million in future cash payable held back for satisfying indemnities, adjustments, and representations, and an estimated fair value of contingent consideration of $6.7 million. Contingent consideration consists of 500,000 shares of Porch common stock if the Company’s share price trades at or above $22.50 for 20 days within a consecutive 30-day trading period during the next 24 months. The estimated fair value of the contingent consideration on the date of the acquisition is $6.7 million.
| 5. | Preliminary Purchase Price Allocation |
The unaudited pro forma condensed combined financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of HOA based on management’s best estimates of fair value. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the assets acquired and liabilities assumed. Accordingly, the pro forma adjustments are preliminary and have been made solely for illustrative purposes.
The following table shows the preliminary allocation of the purchase price for HOA to the assets acquired and liabilities assumed based on the Company’s current best estimates:
| (In thousands) | ||||
| Total purchase consideration paid | $ | 112,575 | ||
| Purchase price allocation: | ||||
| Cash and cash equivalents | 18,202 | |||
| Accounts receivable, net | 8,572 | |||
| Short-term investments | 6,302 | |||
| Reinsurance balance due | 211,862 | |||
| Prepaid expenses and other current assets | 259 | |||
| Restricted cash | 314 | |||
| Property, equipment, and software, net | 2,256 | |||
| Long-term investments | 59,724 | |||
| Intangible assets | 43,222 | |||
| Other assets, noncurrent | 2,284 | |||
| Accounts payable | (1,785 | ) | ||
| Accrued expenses and other current liabilities | (6,967 | ) | ||
| Deferred revenue | (141,684 | ) | ||
| Losses and loss adjustment expense reserves | (85,616 | ) | ||
| Other insurance liabilities, current | (34,613 | ) | ||
| Long-term debt | (3,942 | ) | ||
| Other liabilities, noncurrent | (10,565 | ) | ||
| Total identifiable net assets | 67,825 | |||
| Goodwill | 44,750 | |||
| Net assets acquired | $ | 112,575 | ||
Acquired intangible assets are comprised of the following, including the estimated amortization expense included in the respective unaudited pro forma condensed combined statement of operations:
| Identifiable Intangible Assets | Estimated
Fair Value | Estimated
Useful Life in Years | Amortization Classification within Statement of Operations | Year ended
December 31, 2020 Amortization Expense | Three Months
ended March 31, 2021 Amortization Expense | |||||||||||||
| Trade Name | $ | 10,600 | 10 | General and administrative | $ | 1,060 | $ | 265 | ||||||||||
| Customer relationships | 16,900 | 10 | Selling and marketing | 1,690 | 423 | |||||||||||||
| State insurance licenses | 4,960 | Indefinite | N/A | - | - | |||||||||||||
| Developed technology | 2,000 | 4 | General and administrative | 500 | 125 | |||||||||||||
| Value of business acquired | 400 | 1 | Selling and marketing | 400 | - | |||||||||||||
| Renewal rights | 8,362 | 8 | General and administrative | 1,045 | 261 | |||||||||||||
| $ | 43,222 | $ | 4,695 | $ | 1,074 | |||||||||||||
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma condensed combined balance sheet and statements of operations. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, equipment, and software (2) changes in allocations to intangible assets such as trade names, customer relationships, state insurance licenses, value of business acquired, developed technology, and customer relationships as well as goodwill, (3) changes in fair value of contingent consideration (4) insurance related reserves, and (5) other changes to assets and liabilities.
| 6. | Reclassification Adjustments for HOA |
Acquisition accounting rules require evaluation of certain assumptions, estimates, or determination of financial statement classifications which are completed during the measurement period as defined in current accounting standards. Certain balances were reclassified from HOA’s historical financial statements so that their presentation would be consistent with that of Porch Group. These reclassification adjustments are based on management’s preliminary analysis and calculations. Additional differences or reclassification adjustments may be identified that, when conformed, could have a material impact on this unaudited pro forma condensed combined financial information.
| HOA | ||||||||||||
| Historical Balance Sheet | ||||||||||||
| As of March 31, 2021 | ||||||||||||
| (in thousands) | ||||||||||||
| Historical HOA - Before Reclassifications | Reclassifications | Historical HOA - After Reclassifications | ||||||||||
| Fixed maturities available for sale, at fair value | $ | 52,482 | $ | (52,482 | )(a) | $ | - | |||||
| Restricted fixed maturities available for sale, at fair value | 1,091 | (1,091 | )(a) | - | ||||||||
| Short-term investments, at fair value | 3,966 | (3,966 | )(b) | - | ||||||||
| Long-term investments | 6,151 | (6,151 | )(a) | - | ||||||||
| Restricted certificates of deposit | 2,336 | (2,336 | )(b) | - | ||||||||
| Total fixed maturity, short-term and long-term investments | 66,026 | (66,026 | ) | - | ||||||||
| Cash and cash equivalents | 18,202 | 18,202 | ||||||||||
| Restricted cash equivalents | 314 | (314 | )(x) | - | ||||||||
| Accounts receivable, net | - | 8,572 | (c) | 8,572 | ||||||||
| Accrued investment income | 259 | (259 | )(d) | - | ||||||||
| Short-term investments | - | 3,966 | (b) | 6,302 | ||||||||
| 2,336 | (b) | |||||||||||
| Dues and deferred premiums | 8,572 | (8,572 | )(c) | - | ||||||||
| Reinsurance balance due | 211,862 | - | 211,862 | |||||||||
| Prepaid expenses and other current assets | - | 259 | (d) | 2,980 | ||||||||
| 2,721 | (e) | |||||||||||
| Restricted cash | 314 | (x) | 314 | |||||||||
| Property, equipment and software, net | 2,256 | - | 2,256 | |||||||||
| Deferred policy acquisition costs | 2,721 | (2,721 | )(e) | - | ||||||||
| Long-term investments | - | 52,482 | (a) | 59,724 | ||||||||
| 1,091 | (a) | |||||||||||
| 6,151 | (a) | |||||||||||
| Prepaid expenses and other | 2,284 | (2,284 | )(f) | - | ||||||||
| Deferred tax assets, net | 2,658 | (2,658 | )(g) | - | ||||||||
| Other assets, noncurrent | - | 2,284 | (f) | 4,942 | ||||||||
| 2,658 | (g) | |||||||||||
| Total assets | $ | 315,154 | $ | - | $ | 315,154 | ||||||
| Accounts payable | - | 1,785 | (m) | 1,785 | ||||||||
| Losses and loss adjustment expense reserves | 85,616 | - | 85,616 | |||||||||
| Advance premiums | 7,570 | (7,570 | )(h) | - | ||||||||
| Ceded reinsurance premiums payable | 20,804 | (20,804 | )(i) | - | ||||||||
| Unearned premiums | 130,174 | (130,174 | )(j) | - | ||||||||
| Unearned ceding commissions | 11,510 | (11,510 | )(k) | - | ||||||||
| Deferred revenue | - | 130,174 | (j) | 141,684 | ||||||||
| 11,510 | (k) | |||||||||||
| Commissions payable, reinsurers and agents | 6,239 | (6,239 | )(l) | - | ||||||||
| General and other accrued expenses payable | 7,477 | (7,477 | )(m) | - | ||||||||
| Accrued expenses and other current liabilities | - | 5,692 | (m) | 7,701 | ||||||||
| 1,362 | (n) | |||||||||||
| 647 | (o) | |||||||||||
| Other insurance liabilities, current | - | 7,570 | (h) | 34,613 | ||||||||
| 20,804 | (i) | |||||||||||
| 6,239 | (l) | |||||||||||
| Line of credit | 3,942 | (3,942 | )(y) | - | ||||||||
| Long term debt | 3,942 | (y) | 3,942 | |||||||||
| Funds held under reinsurance treaty | 3,491 | (3,491 | )(p) | - | ||||||||
| Federal income tax payable | 1,362 | (1,362 | )(n) | - | ||||||||
| Taxes, licenses and other fees payable | 647 | (647 | )(o) | - | ||||||||
| Otherl;iabilities, noncurrent | - | 3,491 | (p) | 3,491 | ||||||||
| Total liabilities | 278,832 | - | 278,832 | |||||||||
| Common stock | 1 | - | 1 | |||||||||
| Treasury stock | (1 | ) | 1 | (q) | - | |||||||
| Additional paid-in capital | 1,972 | - | 1,972 | |||||||||
| Accumulated other comprehensive loss | 164 | - | 164 | |||||||||
| Retained earnings | 34,186 | (1 | )(q) | 34,185 | ||||||||
| Total stockholders’ equity | 36,322 | - | 36,322 | |||||||||
| Total liabilities and stockholders' equity | $ | 315,154 | $ | - | $ | 315,154 | ||||||
HOA
Historical Statement of Operations
Three Months Ended March 31, 2021
(in thousands)
| Historical HOA - Before Reclassifications | Reclassifications | Historical HOA - After Reclassifications | ||||||||||
| Revenues: | ||||||||||||
| Premiums earned | $ | 60,504 | $ | (60,504 | )(r) | $ | - | |||||
| Premiums ceded | (56,752 | ) | 56,752 | (r) | - | |||||||
| Net premiums earned | 3,752 | (3,752 | ) | - | ||||||||
| Policy fees | 4,093 | (4,093 | )(r) | - | ||||||||
| Ceding commissions and reinsurance profit share | 2,046 | (2,046 | )(r) | - | ||||||||
| Loss adjustment and other fee income | 4,455 | (4,455 | )(r) | - | ||||||||
| Investment income, net of investment expenses | 299 | (299 | )(s) | - | ||||||||
| Net realized gain (loss) on investments | (32 | ) | 32 | (v) | ||||||||
| Total revenues | 14,613 | (14,613 | ) | - | ||||||||
| Revenues | 14,346 | (r) | 14,346 | |||||||||
| Expenses: | ||||||||||||
| Losses and loss adjustment expenses | 3,226 | (3,226 | )(t) | - | ||||||||
| Policy acquisition and other underwriting expenses | 1,545 | (1,545 | )(u) | - | ||||||||
| General and administrative expenses | 6,254 | (3,036 | )(w) | 4,478 | ||||||||
| 1,260 | (z) | |||||||||||
| Transaction costs | 1,260 | (1,260 | )(z) | - | ||||||||
| Cost of revenue | - | 3,226 | (t) | 5,707 | ||||||||
| 2,481 | (w) | |||||||||||
| Selling and marketing | - | 1,545 | (u) | 1,545 | ||||||||
| Product and technology | - | 555 | (w) | 555 | ||||||||
| Total expenses | 12,285 | - | 12,285 | |||||||||
| Investment income and realized gains | - | 299 | (s) | 267 | ||||||||
| (32 | )(v) | |||||||||||
| Net income before income tax expense | 2,328 | - | 2,328 | |||||||||
| Provision expense (benefit) for income taxes: | ||||||||||||
| Current | 1,237 | - | 1,237 | |||||||||
| Deferred | (724 | ) | - | (724 | ) | |||||||
| Total income tax expense | 513 | - | 513 | |||||||||
| Net income | $ | 1,815 | $ | - | $ | 1,815 | ||||||
HOA
Historical Statement of Operations
Year Ended December 31, 2020
(in thousands)
| Historical HOA - Before Reclassifications | Reclassifications | Historical HOA - After Reclassifications | ||||||||||
| Revenues: | ||||||||||||
| Premiums earned | $ | 212,558 | $ | (212,558 | )(r) | $ | - | |||||
| Premiums ceded | (200,795 | ) | 200,795 | (r) | - | |||||||
| Net premiums earned | 11,763 | (11,763 | ) | - | ||||||||
| Policy fees | 16,245 | (16,245 | )(r) | - | ||||||||
| Ceding commissions and reinsurance profit share | 6,665 | (6,665 | )(r) | - | ||||||||
| Loss adjustment and other fee income | 7,363 | (7,363 | )(r) | - | ||||||||
| Investment income, net of investment expenses | 1,087 | (1,087 | )(s) | - | ||||||||
| Net realized gain (loss) on investments | (29 | ) | 29 | (v) | - | |||||||
| Total revenues | 43,094 | (43,094 | ) | - | ||||||||
| Revenues | 42,036 | (r) | 42,036 | |||||||||
| Expenses: | ||||||||||||
| Losses and loss adjustment expenses | 12,564 | (12,564 | )(t) | - | ||||||||
| Policy acquisition and other underwriting expenses | 6,187 | (6,187 | )(u) | - | ||||||||
| General and administrative expenses | 17,556 | (6,269 | )(w) | 11,287 | ||||||||
| Cost of revenue | - | 12,564 | (t) | 17,361 | ||||||||
| 4,797 | (w) | |||||||||||
| Selling and marketing | - | 6,187 | (u) | 6,187 | ||||||||
| Product and technology | - | 1,472 | (w) | 1,472 | ||||||||
| Total expenses | 36,307 | - | 36,307 | |||||||||
| Investment income and realized gains | 1,087 | (s) | 1,058 | |||||||||
| (29 | )(v) | |||||||||||
| Net income before income tax expense | 6,787 | - | 6,787 | |||||||||
| Provision expense (benefit) for income taxes: | ||||||||||||
| Current | 2,042 | - | 2,042 | |||||||||
| Deferred | (485 | ) | - | (485 | ) | |||||||
| Total income tax expense | 1,557 | - | 1,557 | |||||||||
| Net income | $ | 5,230 | $ | - | $ | 5,230 | ||||||
| (a) | To reclassify “Fixed maturities available for sale, at fair value,” “Restricted fixed maturities available for sale, at fair value,” and "Long-term investments" included within "Total fixed maturity, short-term and long-term investments" to “Long-term investments” |
| (b) | To reclassify “Short term investments, at fair value” and "Restricted certificates of deposit" to “Short-term investments” |
| (c) | To reclassify “Dues and deferred premiums” to “Accounts receivable, net” |
| (d) | To reclassify “Accrued investment income” to “Prepaid expenses and other current assets” |
| (e) | To reclassify “Deferred policy acquisition costs” to “Prepaid expenses and other current assets” |
| (f) | To reclassify “Prepaid expenses and other” to “Other assets, noncurrent” |
| (g) | To reclassify “Deferred tax assets, net” to “Other assets, noncurrent” |
| (h) | To reclassify “Advance premiums” to “Other insurance liabilities, current” |
| (i) | To reclassify “Ceded reinsurance premiums payable” to “Other insurance liabilities, current” |
| (j) | To reclassify “Unearned premiums” to “Deferred revenue” |
| (k) | To reclassify “Unearned ceding commissions” to “Deferred revenue” |
| (l) | To reclassify “Commissions payable, reinsurers and agents” to “Other insurance liabilities, Current” |
| (m) | To reclassify “General and other accrued expenses payable” to “Accounts payable” and “Accrued expenses and other current liabilities” |
| (n) | To reclassify “Federal income tax payable” to “Accrued expenses and other current liabilities” |
| (o) | To reclassify “Taxes, licenses and other fees payable” to “Accrued expenses and other current liabilities” |
| (p) | To reclassify “Funds held under reinsurance treaty” to “Other liabilities, noncurrent” |
| (q) | To reclassify “Treasury stock” to “Retained earnings” |
| (r) | To reclassify amounts included in “Total Revenue”, excluding “Investment income, net of investment expenses”, and “Net realized gain (loss) on investments” to “Revenues” |
| (s) | To reclassify “Investment income, net of investment expenses” to “Investment income and realized gains” |
| (t) | To reclassify “Losses and loss adjustment expenses” to “Cost of revenue” |
| (u) | To reclassify “Policy acquisition and other underwriting expenses” to “Selling and marketing” |
| (v) | To reclassify “Net realized gain (loss) on investments” to “Investment income and realized gains” |
| (w) | To reclassify amounts included within “General and administrative expenses” to “Cost of revenue” and “Product and technology” expenses |
| (x) | To reclassify current "Restricted cash equivalents" to "Restricted cash" |
| (y) | To reclassify “Line of credit” to “Long-term debt” |
| (z) | To reclassify “Transaction costs” to “General and administrative expenses” |
| 7. | Pro Forma Adjustments |
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the acquisition and has been prepared for informational purposes only. Porch Group expects that it is more likely than not that it will not recognize the benefits of federal and state net deferred tax assets and as a result established a valuation allowance. For pro forma purposes, it is assumed that this conclusion will continue subsequent to closing of the acquisition and as such, a 0% effective tax rate is reflected in the pro forma adjustments below.
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2021, unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and for the three months ended March 31, 2021 are as follows:
| (a) | Represents the estimated HOA purchase consideration funded by existing cash, of which $2.9 million was paid to the sellers’ service providers pursuant to the definitive agreement. Purchase consideration also consists of Porch common stock with an estimated fair value of $22.8 million and future potential cash payable for holdback amounts of $1.8 million. See (e) and (n). |
| (b) | To adjust “Prepaid expenses and other current assets” to their estimated fair value by eliminating HOA’s historical deferred policy acquisition costs. |
| (c) | Reflects adjustment to record estimated goodwill associated with the acquisition of HOA as shown in Note 5. |
| (d) | Reflects adjustment to record the estimated fair value of HOA identifiable intangible assets acquired by the Company. See Note 5 for further information on acquired intangible assets. |
| (e) | Represents the elimination of the historical equity of HOA, issuance of 1,292,430 shares of Porch Group common stock, with an estimated fair value of $22.8 million reflected in “Additional paid-in capital”, and recording of $6.7 million estimated fair value of contingent consideration associated with the HOA acquisition reflected in “Additional paid-in capital”. |
| (f) | Reflects estimated amortization of acquired HOA intangible assets. See Note 5 for further information on acquired intangible assets, including preliminary estimated useful lives and classification on the Statement of Operations. |
| (g) | Reflects elimination of historical HOA tax expense to reflect utilization of tax attributes of the pro forma combined Porch Group and HOA entity. |
| (h) | Reflects adjustment to Selling and marketing expense to eliminate HOA’s historical deferred acquisition cost amortization expense. |
| (i) | Represents the estimated transaction costs, including acquiree-incurred transaction costs, of $3.6 million related to the HOA acquisition that was not previously recorded during the year ended December 31, 2020. Of the total, $1.7 million was incurred during the three months ended March 31, 2021. Of the remaining amount, $1.7 million is expected to be incurred by the acquiree and $0.2 million is expected to be incurred by Porch Group subsequent to March 31, 2021. This is a nonrecurring adjustment. |
| (j) | Reflects new compensation arrangements with an executive of the ongoing HOA entity, resulting in a $0.9 million and $0.2 million increase in expected compensation expense for the year ended December 31, 2020 and the three months ended March 31, 2021, respectively. |
| (k) | Reflects the deferred tax liabilities resulting from the acquisition of HOA. The estimated gross increase in deferred tax liabilities of $9.7 million is based on the fair value adjustments for intangible assets based on an estimated tax rate of 24% (See (b) and (d) for specific adjustments tax effected). The gross increase in deferred tax liabilities results in a reduction of deferred tax assets of $2.7 million recorded in “Other assets, noncurrent”, and a decrease in “Accumulated deficit” of $7.1 million. The decrease in “Accumulated deficit is due to a reduction in valuation allowance resulting from the establishment of deferred tax liabilities upon acquisition of HOA. See (l). The estimate of deferred income tax balances is preliminary and subject to change based on management’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. |
| (l) | Reflects estimated tax benefit resulting from a reduction in Porch Group valuation allowance on certain deferred tax assets due to the establishment of deferred tax liabilities upon acquisition of HOA. |
| (m) | Represents the increase in the weighted average shares in connection with the issuance of an estimated 1,292,430 of Porch Group common shares as purchase consideration. The unaudited pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon the number of Porch Group shares outstanding, assuming the acquisition occurred on January 1, 2020. |
| (n) | Represents HOA cash purchase consideration held back for satisfying indemnities, adjustments, and representations. |
| 8. | Forward-Looking Statements |
The unaudited pro forma condensed combined financial information is forward-looking and involves a number of risks and uncertainties. There are a number of important factors that could cause actual events to differ materially from those suggested or indicated by such forward-looking statements and you should not place undue reliance on any such forward-looking statements. These factors include risks and uncertainties related to, among other things: the possibility that the expected synergies from the acquisition of HOA will not be realized, or will not be realized within the expected time period; the risk that the business will not be integrated successfully; the possibility that disruption from the acquisition may make it more difficult to maintain business and operational relationships; difficulty in integrating personnel, operations and financial and other controls and systems, and retaining key employees and customers; the Company’s and HOA’s ability to accurately predict future market conditions; and the risk of new and changing regulation and public policy in the U.S. These forward-looking statements speak only as of the date of this Registration Statement and the Company does not assume any obligation to update or revise any forward- looking statements, whether as a result of new information, future events and developments or otherwise, except as required by law.