ACQUISITIONS

12 Months Ended

Dec. 31, 2019

3. ACQUISITIONS

On December 2, 2019, the Company completed its acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc. ("PIH"). Specifically, the Company purchased from PIH all of the outstanding equity of MIC, Maison Managers, Inc., and ClaimCor LLC (collectively, the "Maison Companies"). The Maison Companies provide multi-peril and wind/hail only coverage to personal residential dwellings and manufactured/mobile homes in Louisiana, Texas and Florida. The acquisition enables us to increase geographic diversification of our book of business outside Florida and generate additional business with operating synergies and general and administrative expense savings.

The purchase price was $51.0 million, which includes $25.5 million in cash and shares of the Company’s common stock equal to $25.5 million, which amounted to 1,773,102 shares of the Company's common stock. The number of shares was determined by the closing price of 20 trading days immediately preceding the closing date, December 2, 2019. The resale of these shares was registered and are subject to a standstill agreement. We recognized the fair value of the shares as of the acquisition date, net of issuance costs, by increasing shareholders' equity by $24.4 million

In addition to the purchase price, PIH received five-year right of first refusal to provide reinsurance of up to 7.5% of any layer in FedNat’s catastrophe reinsurance program. PIH also agreed to a non-compete for five years following the closing with respect to residential property insurance in Alabama, Florida, Georgia, Louisiana, South Carolina and Texas.

Since the effective acquisition date the revenues and net income of the business acquired have been $4.4 million and $1.4 million, respectively. We recognized $1.3 million of acquisition-related costs, pre-tax, for the twelve months ended December 31, 2019. These costs are included in the general and administrative expenses line item of the consolidated statement of operations. We also capitalized $0.5 million in application development costs to property and equipment included in the other asset line item on the consolidated balance sheet.

The acquisition date fair values of certain assets and liabilities, including VOBA and intangible assets, are provisional and subject to revision within one year of the acquisition date. As such, our estimates of fair values are pending finalization, which may result in adjustments to goodwill. The following presents (in thousands) the preliminary acquisition date fair values of the net assets acquired related to the Maison Companies as of December 2, 2019:


	December 2,
	2019
Assets:	(In thousands)
Debt securities, available-for-sale	$	56,929
Cash and cash equivalents	35,968
Prepaid reinsurance premium	25,279
Premiums receivable	2,977
Reinsurance recoverable	7,603
Deferred acquisition costs and value of business acquired, net	8,721
Other assets	3,507
Total assets acquired	140,984

Liabilities:
Loss and adjustment expense reserves	16,660
Unearned premiums	50,513
Reinsurance payable	24,071
Income taxes, net	1,778
Deferred revenue	1,515
Other liabilities	7,487
Total liabilities assumed	102,024

Net specifically identifiable assets acquired	38,960
Goodwill	10,997
Net assets acquired	$	49,957

As of December 31, 2019, we anticipate that all the gross contractual amounts of acquired receivables will be fully collected.

The goodwill recorded as part of the acquisition includes the expected synergies and other benefits that management believes will result from the acquisition including reinsurance savings and reduction in operating and general and administrative expenses.

Value of Business Acquired

The entire $8.7 million acquired VOBA balance will be amortized by December 31, 2020.

Identifiable Intangible Assets

The following presents the fair value of identifiable intangible assets acquired as of the acquisition date:


			Weighted-
			Average
	Fair		Amortization
	Value		Period
	(In thousands)		(In years)
Trade name (1)	$	1,800	—
Non-compete agreements	300		2
Insurance licenses (1)	182		—
Total	$	2,282

(1) These intangibles have an indefinite useful life.

These identifiable intangible assets were estimated using a discounted cash flow method. Significant inputs to the valuation models include estimates of expected premiums, persistency rates, investment returns, claim costs, expenses and discount rates.

The identifiable intangible assets included in other assets on the consolidated balance sheet were:


	As of December 31, 2019
	Gross
	Carrying		Accumulated
	Amount		Amortization
	(In thousands)
Trade name	$	1,800	$	—
Non-competes	300		13
Insurance licenses	182		—
Total	$	2,282	$	13

Pro Forma Financial Information

The following unaudited pro forma condensed consolidated statements of operations of the Company assume that the acquisition of the Maison Companies was completed on January 1, 2018:


	For the Years Ended
	2019		2018
	(In thousands)
Revenue	$	60,904	$	58,376
Net income (loss)	(8,678)		2,504

Pro forma adjustments include the revenue and net income (loss) of the Maison Companies for each period as well as estimates for amortization of identifiable intangible assets acquired and fair value adjustments associated with investments, VOBA (different than deferred acquisition costs) and reinsurance recoverable. Other pro forma adjustments include the incremental increase to interest expense attributable to financing the acquisition and the impact of reflecting acquisition and integration costs in 2018, instead of 2019.