FUNDAMENTAL GLOBAL INC. You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included elsewhere in this annual report on Form 10-K. You should review the "Risk Factors" section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the information contained in this discussion and analysis and set forth elsewhere in this annual report on Form 10-K includes forward-looking statements that involve risks and uncertainties.
Unless context denotes otherwise, the terms "Company," "FGF," "we," "us," and
"our," refer to
OverviewFG Financial Group, Inc. ("FGF", the "Company", "we", or "us") is a reinsurance, merchant banking and asset management holding company. We focus on opportunistic collateralized and loss-capped reinsurance, while allocating capital in partnership with Fundamental Global®, and from time to time, other strategic investors, to merchant banking activities. The Company's principal business operations are conducted through its subsidiaries and affiliates. The Company also provides asset management services. From our inception inOctober 2012 throughDecember 2019 , we operated as an insurance holding company, writing property and casualty insurance throughout the states ofLouisiana ,Florida , andTexas . OnDecember 2, 2019 , we sold our three former insurance subsidiaries, and embarked upon our current strategy focused on reinsurance, merchant banking
and asset management. As ofDecember 31, 2022 ,Fundamental Global GP, LLC ("FG"), a private partnership focused on long-term strategic holdings, and its affiliated entity collectively beneficially owned approximately 60.0% of our common stock.D. Kyle Cerminara , Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG. Sale of Insurance Business
On
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Actual results may differ materially from these estimates. The business and economic uncertainty resulting from the coronavirus (COVID-19) pandemic has made such estimates and assumptions difficult to calculate. Set forth below is qualitative and quantitative information necessary to understand the estimation uncertainty and the impact the critical accounting estimate has had or is reasonably likely to have on financial condition or results of operations, to the extent the information is material and reasonably available. Other Investments
Other investments consist, in part, of equity investments made in privately held companies accounted for under the equity method. As discussed further in Note 4, certain investments held by our equity method investees are valued using Monte-Carlo simulation and option pricing models. Inherent in Monte-Carlo simulation and option pricing models are assumptions related to expected volatility and discount for lack of marketability of the underlying investment. Our investees estimate the volatility of these investments based on the historical performance of various broad market indices blended with various peer companies which they consider as having similar characteristics to the underlying investment, as well as consideration of price and volatility of relevant publicly traded securities such as SPAC warrants. Our investees also consider the probability of a successful merger when valuing SPAC equity. 17
Valuation of Net Deferred Income Taxes
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company's consolidated financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of net deferred income taxes. The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company's temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company's past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of income and comprehensive income. Premium Revenue Recognition
The Company participates in reinsurance quota-share contracts and estimates the ultimate premiums for the contract period. These estimates are based on information received from the ceding companies, whereby premiums are recorded as written in the same periods in which the underlying insurance contracts are written and are based on cession statements from cedents. These statements are received quarterly and in arrears, and thus, for any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period. Premium estimates are reviewed by management periodically. Such review includes a comparison of actual reported premiums to expected ultimate premiums. Based on management's review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premiums receivable, are not unusual and may result in significant adjustments in any period. A significant portion of amounts included in the caption "Reinsurance balances receivable" in the Company's consolidated balance sheets represent estimated premiums written, net of commissions, brokerage, and loss and loss adjustment expense, and are not currently due based on the terms of the underlying contracts. Premiums written are generally recognized as earned over the contract period in proportion to the risk covered. Additional premiums due on a contract that has no remaining coverage period are earned in full when written. Unearned premiums represent the unexpired portion of reinsurance provided.
Deferred Policy Acquisition Costs
Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal reinsurance business, and consist principally of commissions, taxes, and brokerage expenses. If the sum of a contract's expected losses and loss expenses and deferred acquisition costs exceeds associated unearned premiums and expected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are written off to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs, then a liability is accrued for the excess deficiency. There were no premium deficiency adjustments recognized during the periods presented herein.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserve estimates are based on estimates derived from reports received from ceding companies. These estimates are periodically reviewed by the Company's management and adjusted as necessary. Since reserves are estimates, the final settlement of losses may vary from the reserves established and any adjustments to the estimates, which may be material, are recorded in the period they are determined. 18 Loss estimates may also be based upon actuarial and statistical projections, an assessment of currently available data, predictions of future developments, estimates of future trends and other factors. Significant assumptions used by the Company's management and third-party actuarial specialists include loss development factor selections, initial expected loss ratio selections, and weighting of methods used. The final settlement of losses may vary, perhaps materially, from the reserves recorded. All adjustments to the estimates are recorded in the period in which they are determined.U.S. GAAP does not permit establishing loss reserves, which include case reserves and IBNR loss reserves, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future loss events. Generally, the Company obtains regular updates of premium and loss related information for the current and historical periods, which are utilized to update the initial expected loss ratio. We also experience lag between (i) claims being reported by the underlying insured to the Company's cedent and (ii) claims being reported by the Company's cedent to the Company. This lag may impact the Company's loss reserve estimates. Cedent reports have pre-determined due dates (for example, thirty days after each month end). As a result, the lag depends in part upon the terms of the specific contract. The timing of the reporting requirements is designed so that the Company receives premium and loss information as soon as practicable once the cedent has closed its books. Accordingly, there should be a short lag in such reporting. Additionally, most of the contracts that have the potential for large single event losses have provisions that such loss notifications are provided to the Company immediately upon the occurrence of an event.
Stock-Based Compensation Expense
The Company uses the fair-value method of accounting for stock-based compensation awards granted. The Company has determined the fair value of its outstanding stock options on their grant date using the Black-Scholes option pricing model along with multipleMonte Carlo simulations to determine a derived service period as the options vest based upon meeting certain performance conditions. The Company determines the fair value of restricted stock units ("RSUs") on their grant date using the fair value of the Company's common stock on the date the RSUs were issued (for those RSU which vest solely based upon the passage of time). The fair value of these awards is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, or correspondingly, when the RSUs vest, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders' equity.
Recent Accounting Pronouncements
See Item 8, Note 3 - Recently Adopted and Issued Accounting Standards in the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
Analysis of Financial Condition
As of
Investments
The table below summarizes, by type, the Company's investments held at fair
value as of
($ in thousands)
Gross Gross
Unrealized Unrealized
As of December 31, 2022 Cost Basis Gains Losses Carrying Amount
Hagerty common stock $ 889 $ - $ 48 $ 841
Total investments $ 889 $ - $ 48 $ 841
Gross Gross
Unrealized Unrealized
As of December 31, 2021 Cost Basis Gains Losses Carrying Amount
FedNat common stock $ 14,495 $ - $ 13,074 $ 1,421
Total investments $ 14,495 $ - $ 13,074 $ 1,421
19
Hagerty Common Stock
OnDecember 15, 2022 ,FG Merchant Partners, LP ("FGMP") distributed 99,999 common shares of Hagerty to the Company, which it now owns directly. On the date of distribution, the common shares had an aggregate fair value of approximately$889,000 . FedNat Common Stock
The Company sold its remaining
Deconsolidation of Subsidiary
At the time of the Company's initial investment intoFG Special Situations Fund, LP ("Fund"), inSeptember 2020 , the Company had determined that its investment represented an investment in a variable interest entity ("VIE"), in which the Company was the primary beneficiary, and, as such, had consolidated the financial results of the Fund throughNovember 30, 2021 . At each reporting date, the Company evaluates whether it remains the primary beneficiary and continuously reconsiders that conclusion. OnDecember 1, 2021 , the Company's investment became that of a limited partner, and it no longer had the power to govern the financial and operating policies of the Fund and accordingly derecognized the related assets, liabilities, and noncontrolling interests of the Fund as of that date. The Company did not receive any consideration in the deconsolidation of the Fund, nor did it record any gain, or loss upon deconsolidation. The assets and liabilities of the Fund, over which the Company lost control are as follows: As ofDecember 1, 2021 (in thousands) Cash and cash equivalents$ 100 Investments in private placements 15,734 Investments in public SPACs 22 Other assets 18 Other liabilities (34 ) Net assets deconsolidated$ 15,840
While the Company's investments in the Fund are no longer consolidated, the Company has retained its interest in all of the investments held at the Fund. Accordingly, the Company has not presented its investment in the Fund as a discontinued operation. EffectiveDecember 1, 2021 , the Company began accounting for its investment in the Fund under the equity method of accounting. Equity Method Investments
Other investments on the Company's Consolidated Balance Sheets consists of
equity method investments, which as of
OnJanuary 4, 2021 , FGMP was formed as aDelaware limited partnership to co-sponsor newly formed SPACs with their founders or partners, as well as other merchant banking interests. The Company is the sole managing member of the general partner of FGMP and holds a limited partner interest in FGMP directly and through its subsidiaries. FGMP participates as a co-sponsor of the SPACs launched under our SPAC Platform as well as merchant banking initiatives. For the twelve months endedDecember 31, 2022 , the Company has contributed$0.1 million into FGMP, and has received distributions in the approximate amount of$2.2 million . The Company has recorded equity method gains from FGMP of approximately$4.0 million for the twelve months endedDecember 31, 2022 . The carrying value of our investment in FGMP as ofDecember 31, 2022 , was approximately$5.7 million , compared to$3.8 million as ofDecember 31, 2021 . Of the$5.7 million carrying value of our investment in FGMP atDecember 31, 2022 , the Company may allocate up to approximately$1.0 million to incentivize and compensate individuals and entities for the successful merger of SPAC's launched under our platform. Equity method investments also include our investment in the Fund as ofDecember 31, 2022 . UntilDecember 1, 2021 , we had consolidated the Fund as a variable interest entity, however, effectiveDecember 1, 2021 , we began accounting for this investment under the equity method of accounting. For the twelve months endedDecember 31, 2022 , the Company has contributed$6.7 million into the Fund, and has received cash distributions in the approximate amount of$3.2 million . The Company has recorded equity method gains from the Fund of approximately$3.6 million for the twelve months endedDecember 31, 2022 . As ofDecember 31, 2022 , the carrying value of our investment in the Fund was approximately$16.8 million , compared to$9.7 million as ofDecember 31, 2021 . 20 Certain investments held by our equity method investees are valued using Monte-Carlo simulation and option pricing models. Inherent in Monte-Carlo simulation and option pricing models are assumptions related to expected volatility and discount for lack of marketability of the underlying investment. Our investees estimate the volatility of these investments based on the historical performance of various broad market indices blended with various peer companies which they consider as having similar characteristics to the underlying investment, as well as consideration of price and volatility of relevant publicly traded securities such as SPAC warrants. Our investees also consider the probability of a successful merger when valuing SPAC equity.
Investments without Readily Determinable Fair Value
In addition to our equity method investments, other investments, as listed on our balance sheet, consist of equity we have purchased in companies for which there do not exist readily determinable fair values. This includes the Company's$2.0 million direct investment in FGC. The Company accounts for these investments at their cost, subject to any adjustment from time to time due to impairment or observable price changes in orderly transactions. Any profit distributions the Company receives on these investments are included in net investment income. The Company's total investment in companies without a readily determinable fair value was approximately$2.3 million and$0.5 million as ofDecember 31, 2022 and 2021, respectively.
For the years ended
Funds Deposited with Reinsured Companies
"Funds Deposited with Reinsured Companies" on the Company's consolidated balance sheets includes amounts held by cedents provided to support our reinsurance contracts. OnNovember 12, 2020 ,Fundamental Global Reinsurance Ltd. ("FGRe"), ourCayman Islands based reinsurance subsidiary, initially funded a trust account atLloyd's with approximately$2.4 million cash, to collateralize its obligations under a quota-share agreement with a Funds atLloyd syndicate. The initial contract covered our quota share percentage of all risks written by the syndicate for the 2021 calendar year. OnNovember 30, 2021 , we entered into an agreement with the same syndicate, slightly increasing our quota-share percentage of the risks the syndicate writes for the 2022 calendar year. This resulted in FGRe's depositing additional collateral of approximately$1.0 million into the account. InJune 2022 , FGRe received approximately$0.4 million in a partial return of initial collateral. InDecember 2022 , we entered into another agreement with the syndicate, slightly increasing our quota-share percentage of the risks the syndicate writes for the 2023 calendar year. This resulted in FGRe depositing additional collateral of approximately$2.4 million in cash to the account.
During 2021, we also deposited cash collateral in the approximate amount of$1.0 million , to support our automotive insurance quota-share agreement entered onApril 1, 2021 . We entered into an additional agreement with the same automotive insurance company onApril 1, 2022 , and in the third quarter of 2022, we deposited additional collateral of approximately$0.2 million . In the third quarter of 2022, FGRe deposited cash collateral of approximately$1.1 million and deposited approximately$1.4 million in premiums received from the cedent, to support the homeowners' property catastrophe excess of loss reinsurance contract that became effectiveApril 1, 2022 . The cash is held in a segregated account until such time that the Company's liability for losses ascribed have been commuted, or all losses have been closed or settled for this contract. The named tropical storm season started onJune 1, 2022 and ended
onNovember 30, 2022 . During 2022, the Company also deposited collateral of approximately$0.1 million to support the startup homeowners insurance quota-share agreement, and deposited additional collateral of approximately$0.1 million to support the specialty insurance company that provides hired and non-owned automotive insurance quota share-agreement. As ofDecember 31, 2022 , andDecember 31, 2021 , the total cash collateral on deposit to support all our reinsurance treaties was approximately$9.3 million and$4.4 million , respectively. 21 InJanuary 2023 , the losses ascribed were commuted for the homeowners' property catastrophe excess of loss reinsurance contract that became effectiveApril 1, 2022 . This resulted in$2.5 million of collateral being returned to the Company.
Current Income Taxes Recoverable
Current income taxes recoverable were$0 as ofDecember 31, 2022 andDecember 31, 2021 , representing the estimate of both the Company's state and federal income taxes receivable as of each date. In the third quarter of 2021, we received a refund on our federal taxes in the amount of approximately$1.5 million associated with a carryback refund request filed for our 2018, 2017
and 2014 tax years.
Reinsurance Balances Receivable
Reinsurance balances receivable were$9.3 million as ofDecember 31, 2022 , compared to$3.9 million as ofDecember 31, 2021 , representing net amounts due to the Company under our quota-share agreements. As the Company estimates the ultimate premiums, loss expenses and other costs associated with some of these contracts, based on information received by us from the ceding companies, a significant portion of this balance is based on estimates and, ultimately, may not be collected by the Company. Net Deferred Taxes
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes, as compared to the amounts used for income tax purposes. The Company's gross deferred tax assets and liabilities are$9.1 million and$3.6 million , respectively, as ofDecember 31, 2022 . The Company has recorded a valuation allowance against its deferred tax assets of$5.5 million , as ofDecember 31, 2022 , due to the uncertain nature surrounding our ability to realize these tax benefits in the future. Significant components of the Company's net deferred taxes are as follows: ($ in thousands) As of December 31, 2022 2021 Deferred income tax assets: Net operating loss carryforward$ 4,171 $
3,010
Loss and loss adjustment expense reserve 39
25 Unearned premium reserves 287 152 Capital loss carryforward 4,313 1,114 Share-based compensation 242 253 Investments 5 1,692 Other 9 3 Deferred income tax assets$ 9,066 $ 6,249 Less: Valuation allowance (5,463 )
(5,715 )
Deferred income tax assets net of valuation allowance
Deferred income tax liabilities: Investments$ 3,282 $
369
Deferred policy acquisition costs 321
165
Deferred income tax liabilities$ 3,603 $
534
Net deferred income tax asset (liability) $ - $
- As ofDecember 31, 2022 , the Company had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately$19.9 million , which will be available to offset future taxable income. Approximately$0.5 million will expire onDecember 31, 2039 ,$0.2 million will expire onDecember 31, 2040 , and$1.6 million of the Company's NOLs will expire onDecember 31, 2041 . The remaining$17.6 million of the Company's NOLs do not expire under current tax law. Additionally, the Company has approximately$20.5 million of capital loss carryforward that can only be used to offset capital gains, and which will expire inDecember 2026 if not used prior. 22
Loss and Loss Adjustment Expense Reserves
A significant degree of judgment is required to determine amounts recorded in
the consolidated financial statements for the provision for loss and loss
adjustment expense ("LAE") reserves. The process for establishing this provision
reflects the uncertainties and significant judgmental factors inherent in
predicting future results of both known and unknown loss events. The process of
establishing the provision for loss and LAE reserves relies on the judgment and
opinions of many individuals, including the opinions of the Company's
management, Company's outside actuaries, as well as the management of ceding
companies and their actuaries.
In estimating losses, the Company may assess any of the following:
? a review of in-force treaties that may provide coverage and incur losses;
? general forecasts, catastrophe and scenario modelling analyses and results
shared by cedents;
? reviews of industry insured loss estimates and market share analyses; and
? management's judgment.
Assumptions which served as the basis for the Company's estimates of reserves for the COVID-19 pandemic losses and LAE include:
? Loss development factor selections, initial expected loss ratio selections, and
weighting of methods used;
? the scope of coverage provided by the underlying policies, particularly those
that provide for business interruption coverage;
? the regulatory, legislative, and judicial actions that could influence contract
interpretations across the insurance industry;
? the extent of economic contraction caused by the COVID-19 pandemic and
associated actions; and
? the ability of the cedents and insured to mitigate some or all of their losses.
Under the terms of certain of our quota-share agreements, and due to the nature of claims and premium reporting, a lag exists between (i) claims being reported by the underlying insured to the Company's cedent and (ii) claims being reported by the Company's cedent to the Company. This lag may impact the Company's loss and LAE reserve estimates. The reports we receive from our cedents have pre-determined due dates. In the case of the Company's FAL contract, fourth quarter 2022 premium and loss information was not made available to the Company in a manner that allowed for the timely filing of this annual report. Thus, our fourth quarter results, including the loss and LAE reserves presented herein, have been based upon a combination of first, second, and third quarter actual results as well as full-year forecasts reported to us by the ceding companies, which we used to approximate fourth quarter results. The Company obtains regular updates of premium and loss related information for the current and historical periods, which we use to update the initial expected loss ratios on our reinsurance contracts. While the Company believes its estimate of loss and LAE reserves are adequate as ofDecember 31, 2022 , based on available information, actual losses may ultimately differ materially from the Company's current estimates. The Company will continue to monitor the appropriateness of its assumptions as new information is provided. 23
A summary of changes in outstanding loss and LAE reserves for the twelve months
ended
(in thousands) Twelve months ended December 31,
2022 2021
Balance, beginning of period $ 2,133 $ -
Incurred related to: - -
Current year 6,628 4,338
Prior year 856 -
Paid related to:
Current year (3,822 ) (2,205 )
Prior years (1,386 ) -
Balance, December 31 $ 4,409 $ 2,133
Off Balance Sheet Arrangements
None. Shareholders' Equity
8.00% Cumulative Preferred Stock, Series A
OnMay 21, 2021 , we completed the underwritten public offering of an additional 194,580 shares of our preferred stock designated as 8.00% Cumulative Preferred Stock, Series A, par value$25.00 per share (the "Series A Preferred Stock"), for net proceeds of approximately$4.2 million . As ofDecember 31, 2022 , the total number of Series A Preferred Stock shares outstanding was 894,580. Dividends on the Series A Preferred Stock are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December of each year, when, as and if declared by our Board of Directors. Dividends are payable out of amounts legally available therefor at a rate equal to 8.00% per annum per$25.00 of stated liquidation preference per share, or$2.00 per share of Series A Preferred Stock per year. Our Board of Directors declared the first quarter 2023 dividend on the shares of Series A Preferred Stock onFebruary 1, 2023 . The Series A Preferred Stock shares trade on theNasdaq Stock Market under the symbol "FGFPP". Common Stock In the fourth quarter of 2021, we sold a total of 750,000 shares of our common stock, at a price of$4.00 per share, for net proceeds of approximately$2.5 million . Also in the fourth quarter, the Company completed a rights' offering to holders of its common stock. Pursuant to the rights offering, 691,735 shares were subscribed for, for net proceeds of approximately$2.7 million . The Company intends to use the net proceeds from the issuance of its common shares for working capital and other general corporate purposes. InJune 2022 , we sold a total of 2,750,000 shares of our common stock in an underwritten public offering, at a price of$1.58 per share, for net proceeds of approximately$3.8 million . OnAugust 2, 2022 ,ThinkEquity , the underwriter with respect to the public offering, partially exercised its overallotment option and we sold an additional 71,770 shares of our common stock, at a price of$1.58 per share, for net proceeds of$0.1 million . The Company intends to use the net proceeds from the underwritten public offering for working capital and other general corporate purposes. OnNovember 3, 2022 , the Company entered into a Sales Agreement withThinkEquity LLC , pursuant to which the Company may offer and sell, from time to time throughThinkEquity LLC , shares of the Company's common stock, having an aggregate offering price of up to$2,575,976 , subject to the terms and conditions of the Sales Agreement. The Company filed a prospectus supplement to its registration statement on Form S-3. Under the Sales Agreement, theThinkEquity LLC may sell the Shares in sales deemed to be an "at-the-market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933. The Company is not obligated to make any sales of the shares under the Sales Agreement. As ofDecember 31, 2022 , the Company had not yet sold any shares under this Sales
Agreement. 24
Retirement of Treasury Stock
OnAugust 19, 2021 , the Board approved the retirement of all 1,281,511 common stock treasury shares owned by the Company. Accordingly, these shares have been classified as authorized, but unissued shares on the Company's balance sheet, as ofDecember 31, 2021 .
Change in Shareholders' Equity
The table below presents the primary components of changes to total
shareholders' equity for the years ended
Preferred
Shares Common Shares Treasury Total Shareholders'
Outstanding Outstanding Shares Equity.
Balance, January 1, 2021 700,000 4,988,310 1,281,511 $ 34,193
Retirement of Treasury Stock - - (1,281,511 ) -
Stock compensation - 67,160 - 559
Series A Preferred Share
issuance 194,580 4,217
Dividends declared on Series
A Preferred Stock - - - (1,692 )
Issuance of common stock 1,441,735 5,246
Net loss - - - (8,514 )
Balance, December 31, 2021 894,580 6,497,205 - $ 34,009
Balance, January 1, 2022 894,580 6,497,205 - $ 34,009
Stock compensation - 91,498 - 255
Dividends declared on Series
A Preferred Stock - - - (1,789 )
Issuance of common stock - 2,821,770 - 3,732
Net income - - - 1,088
Balance, December 31, 2022 894,580 9,410,473
- $ 37,295
Results of Operations
Year Ended
Net Premiums Earned Net premiums earned represent actual premiums earned on our reinsurance agreements as well as estimated premiums earned on our FAL agreement as disclosed previously. All actual and estimated premiums earned are the result of property and casualty assumed premium. For the twelve months endedDecember 31, 2022 and 2021, earned premiums are approximately$13.0 million and$4.9 million , respectively. The increase in reinsurance premiums was due primarily to the additional reinsurance agreements signed during the current year. Net Investment Income Net investment income for the years endedDecember 31, 2022 and 2021 is as follows: (in thousands) Year EndedDecember 31, 2022 2021 Investment income (loss):
Realized loss on FedNat common stock$ (13,797 ) $ (5,452 ) Unrealized holding loss on Hagerty common stock (48 ) - Unrealized holding gain on private placement investments -
5,267
Change in unrealized holding loss on
(865 )
Equity method earnings 7,618 3,448
Other (loss) income (70 ) 147
Net investment income $ 6,777 $ 2,545
25
Other Income
Other income was approximately $320,000 , compared to $186,000 , for the years
ended December 31, 2022 , and 2021, respectively, and is comprised of fees earned
under the investment advisory and transition services agreements between the
Company and FedNat . Also included in other income for the twelve months ended
December 31, 2022 and 2021 is service fee revenue we have earned under our SPAC
Platform, whereby we provide certain accounting, regulatory, strategic,
advisory, and other administrative services.
Net Losses and Loss Adjustment Expenses
Net losses and LAE for the twelve months endedDecember 31, 2022 and 2021, were$7.5 million and$4.3 million , respectively. The increase in net losses and loss adjustment expenses was due primarily to the additional reinsurance agreements signed during the current year. As discussed under Note 5, Loss and Loss Adjustment Expense Reserves, a portion of this charge represents an estimate based upon a full calendar year forecast of results provided to us by the ceding companies under our FAL arrangements.
General and Administrative Expenses
General and administrative expenses decreased by$0.8 million to$8.4 million for the twelve months endedDecember 31, 2022 , compared to$9.2 million for the twelve months endedDecember 31, 2021 . The decrease was primarily due to lower legal and professional fees, stock compensation expense and salaries and benefits for the year endedDecember 31, 2022 . Also included in general and administrative expenses are payments toFundamental Global Management, LLC ("FGM"), pursuant to a shared services agreement entered into onMarch 31, 2020 . Under the agreement, FGM provides the Company with certain services related to the day-to-day management of the Company, including assisting with regulatory compliance, evaluating the Company's financial and operational performance, providing a management team to supplement the executive officers of the Company, and such other services consistent with those customarily performed by executive officers and employees of a public company. In exchange for these services, the Company pays FGM a fee of approximately$456,000 per quarter, plus reimbursement of expenses incurred by FGM in connection with the performance of the services, subject to certain limitations approved by the Company's Board of Directors or Compensation Committee, from time to time. The Company paid$1.8 million and$1.8 million to FGM under the agreement, for the years endedDecember 31, 2022 and 2021, respectively. FGM is an affiliate of FG, the Company's largest shareholder.
Income Tax Expense (Benefit)
Our actual effective tax rate varies from the statutory federal income tax rates as shown in the following table.
($ in thousands) Year Ended December 31,
2022 2021
Amount % Amount %
Provision for taxes at U.S.
statutory marginal income tax rate
of 21% $ 229 21.0 % $ (1,540 ) 21.0 %
Valuation allowance for deferred
tax assets deemed unrealizable (252 ) (23.1 )% 1,782 (24.3 )%
State income tax (net of federal
benefit) - - % (114 ) 1.6 %
Minority Interest - - % (279 ) 3.8 %
Other 23 2.1 % 6 (0.1 )%
Income tax benefit $ - - % $ (145 ) 2.0 %
Income tax benefit - from
continuing operations $ - - % $ - - %
Income tax benefit - from
discontinued operations $ - - % $ (145 ) 2.0 %
26
Due to the sale of our former insurance business, these operations have been
classified as discontinued operations in the Company's financial statements
presented herein. For the year ended December 31, 2021 , we recognized a gain
from the sale of these operations of approximately $145,000 , related to a final
true-up and settlement for income taxes due to the Company under the sale
agreement.
We have also recorded a benefit of $252,000 and a charge of $1.8 million for the
years ended December 31, 2022 and 2021, respectively, as a valuation allowance
against all of our net deferred tax assets, due to uncertainty regarding our
ability to realize these tax benefits in the future, reducing the net deferred
income tax asset to $0 , as of December 31, 2022 .
Net Loss
Information regarding our net loss and loss per share for the years ended
($ in thousands) Year EndedDecember 31, 2022 2021 Basic and diluted:
Net income (loss) from continuing operations$ 1,088 $ (7,333 ) Loss attributable to noncontrolling interest - (1,326 ) Dividends declared on Series A Preferred Shares (1,789 )
(1,692 )
Loss attributable to
(701 ) (10,351 )
Weighted average common shares 8,030,106 5,212,772
Loss per common share from continuing operations
(1.99 )
Gain on sale of former insurance business $ -$ (145 ) Weighted average common shares outstanding 8,030,106
5,212,772
Income per common share from discontinued operations $ - $
0.03
Loss per share attributable to common shareholders
(1.96 )
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations and from the proceeds from the sales of our common and preferred stock. Cash provided from these sources has historically been used for making investments, loss and LAE payments, as well as other operating expenses. Cash Flows
The following table summarizes the Company's consolidated cash flows for the
years ended
($ in thousands) Year ended December 31, Summary of Cash Flows 2022 2021
Cash and cash equivalents - beginning of period
12,132
Net cash used by operating activities (11,022 ) (14,406 ) Net cash (used) provided by investing activities (3,453 )
5,898
Net cash provided by financing activities 1,943
11,918
Net (decrease) increase in cash and cash equivalents (12,532 )
3,410
Cash and cash equivalents - end of period$ 3,010 $
15,542 27 For the year endedDecember 31, 2022 , the Company's net cash used by operating activities was approximately$11.0 million , the major drivers of which were
as follows:
? Our net income of approximately
? Approximately
unrealized holding loss on our equity investments, and approximately
a non-cash charge related to income from equity method investments, offset by
common stock.
? A cash outflow of approximately
as collateral, pursuant to our quota-share agreements.
For the year ended December 31, 2022 , the Company's net cash used by investing
activities primarily consists of approximately $8.8 million from the purchase of
other investments, offset by sales of other investments in the amount of $4.7
million and $0.7 million from the sale of equity securities.
For the year ended December 31, 2022 , the Company's net cash provided by
financing activities consist of proceeds of approximately $3.7 million from the
issuance of common stock, offset by the payments of dividends in the amount of
$1.8 million on our Series A Preferred Shares.
For the year ended December 31, 2021 , the Company's net cash used by operating
activities was approximately $14.4 million , the major drivers of which wereas follows:
? Our net loss of approximately
? Approximately
holding gains on our various investments, offset by
loss on sale associated with our shares of
? A cash outflow of approximately
as collateral, pursuant to our quota-share agreements.
? A cash outflow of approximately
sponsorships through the Fund. As this investment was made by our former
investment company subsidiary, we are required to show these cash outflows as
operating activities.
For the year ended
For the year ended
? The payments of dividends in the amount of$1.7 million on our Series A Preferred Shares.
? Net proceeds from the issuance of our Series A Preferred Shares in the amount
of approximately
? Net proceeds from the issuance of our common stock in the amount of
approximately
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