FG Financial (FGF) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Financial statements classify core insurance operations as discontinued, reporting an $8.0 million net loss for the nine months ended September 30, 2019, with decreased assets and equity - The company entered an Equity Purchase Agreement to sell its insurance operations (Maison, MMI, and ClaimCor), classifying them as discontinued operations for all presented periods[27][29] Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $164,088 | $169,798 | | Assets of discontinued operations | $138,700 | $144,569 | | Total Liabilities | $108,405 | $107,051 | | Liabilities of discontinued operations | $102,809 | $103,319 | | Total Shareholders' Equity | $55,683 | $62,747 | Consolidated Statement of Operations Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net loss from continuing operations | $(817) | $(1,489) | | Net (loss) income from discontinued operations | $(7,152) | $1,461 | | Net Loss | $(7,969) | $(28) | | Loss per share attributable to common shareholders | $(1.50) | $(0.13) | Consolidated Cash Flow Highlights (in thousands) | Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash (used) provided by operating activities | $(6,231) | $21,496 | | Net cash provided (used) by investing activities | $12,977 | $(27,187) | | Net cash (used) provided by financing activities | $(1,082) | $12,140 | | Net increase in cash and cash equivalents | $5,664 | $6,449 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the pending sale of insurance operations, a strategic pivot to reinsurance, and a deteriorated net loss ratio of 80.7% due to catastrophe losses Equity Purchase Agreement with FedNat Holding Company The company agreed to sell its insurance subsidiaries for $51 million, pivoting to reinsurance and investment management, including a 5-year reinsurance right of first refusal - The sale consideration is $51 million, split equally between cash and FedNat common stock, plus the repayment of up to $18 million in surplus notes with accrued interest[205] - Following the sale, the company plans a new growth strategy focused on reinsurance, investment management, and new investment opportunities, utilizing its subsidiary PIH Re[209] - The deal includes a 5-year Reinsurance Right of First Refusal Agreement, allowing the company to sell up to 7.5% of any layer in FedNat's catastrophe reinsurance program, capped at $15 million annually[211] Analysis of Financial Condition Total assets decreased to $164.1 million and shareholders' equity to $55.7 million as of September 30, 2019, driven by an $8.0 million net loss and increased loss reserves - Gross loss and loss adjustment expense reserves increased to $17.8 million as of September 30, 2019, from $15.2 million at year-end 2018, mainly due to wind and hail events in the first and second quarters of 2019[296] - The company anticipates total incurred losses from Hurricane Harvey to be $28.0 million gross and $5.0 million net of reinsurance. Losses from a major Q1 2019 hailstorm are expected to be $22.0 million gross and $0 net of reinsurance[297] Changes in Shareholders' Equity (in thousands) | Description | Amount | | :--- | :--- | | Balance, January 1, 2019 | $62,747 | | Net loss | $(7,969) | | Dividends declared on Series A Preferred Stock | $(1,050) | | Unrealized gains on investment portfolio (net) | $1,783 | | Stock compensation expense | $162 | | Adoption of new accounting standards | $10 | | Balance, September 30, 2019 | $55,683 | Results of Operations The company reported an $8.0 million net loss for the nine months ended September 30, 2019, driven by a $7.2 million loss from discontinued operations and an 80.7% net loss ratio from catastrophe events Gross Premiums Written by State (in thousands) | State | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change | | :--- | :--- | :--- | :--- | | Louisiana | $36,692 | $37,720 | $(1,028) | | Texas | $26,928 | $28,258 | $(1,330) | | Florida | $11,534 | $4,605 | $6,929 | | Total | $75,154 | $70,583 | $4,571 | Underwriting Ratios (Discontinued Operations) | Ratio | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Loss Ratio | 80.7% | 50.2% | | Catastrophe Loss Ratio | 26.7% | 17.3% | | Weather-related Non-catastrophe Loss Ratio | 33.3% | 13.2% | - The increase in the net loss ratio was primarily driven by catastrophe losses of $10.9 million and weather-related non-catastrophe losses of $13.6 million for the nine months ended September 30, 2019, largely from hailstorms in Texas[344][345] Liquidity and Capital Resources Cash and cash equivalents increased to $36.6 million as of September 30, 2019, driven by investing activities, offsetting operating cash usage, and a new $7.0 million line of credit was secured - On September 30, 2019, the company made a $7.0 million capital contribution to its subsidiary, Maison, to ensure it met minimum capital surplus requirements in Louisiana and Florida, resulting in a capital surplus of $40.4 million[361] - The company entered into a new $7.0 million non-revolving line of credit on August 20, 2019, which expires upon the earlier of January 20, 2020, or the closing of the Asset Sale. The line was undrawn as of the report date[363][364] Summary of Cash Flows (in thousands) | Activity | Nine Months Ended Sep 30, 2019 | | :--- | :--- | | Net cash used by operating activities | $(6,231) | | Net cash provided by investing activities | $12,977 | | Net cash used by financing activities | $(1,082) | | Net increase in cash and cash equivalents | $5,664 | Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable - The company states that quantitative and qualitative disclosures about market risk are not applicable for this reporting period[380] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2019 - Based on an evaluation as of September 30, 2019, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[381] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[382] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings and litigation that arise in the ordinary course of business - The company is involved in legal proceedings and litigation arising in the ordinary course of business, but the outcomes and potential financial impact cannot be reasonably estimated at this time[383] Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018, have been reported[384] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[385] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[386] Mine Safety Disclosures This item is not applicable to the company - Not applicable[389] Other Information The company reported no other information for the period - None[390] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, loan agreements, and officer certifications