10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____________________ to _______________________
Commission
file number 001-36366
FG
Financial Group, Inc.
(Exact
name of registrant as specified in its charter)
(State of incorporation) (I.R.S Employer Identification No.)
970 Lake Carillon Dr., Suite 318, St. Petersburg, FL 33716
(Address of principal executive offices) (Zip Code)
(727)-304-5666
(Registrant’s
telephone number)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share FGF The Nasdaq Stock Market LLC
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [X]
Emerging Growth Company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the Registrant’s common stock held by non-affiliates was $8,769,613 on June 30, 2020, computed
on the basis of the closing sale price of the Registrant’s common stock on that date.
As
of March 12, 2021, the total number of common shares outstanding of the Registrant’s common stock was 4,988,310.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
FG
FINANCIAL GROUP, INC.
Table of Contents
PART I 2
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 5
ITEM 1B. UNRESOLVED STAFF COMMENTS 16
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. MINE SAFETY DISCLOSURES 16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31
ITEM 9A. CONTROLS AND PROCEDURES 58
ITEM 9B. OTHER INFORMATION 58
PART III 59
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 59
ITEM 11. EXECUTIVE COMPENSATION 66
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 79
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 79
SIGNATURES 82
FG
FINANCIAL GROUP, INC.
PART
I
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements
may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,”
“can,” “contemplate,” “continue,” “could,” “envision,” “estimate,”
“expect,” “evaluate,” “forecast,” “goal,” “guidance,” “indicate,”
“intend,” “likely,” “may,” “might,” “outlook,” “plan,”
“possibly,” “potential,” “predict,” “probable,” “probably,” “pro-forma,”
“project,” “seek,” “should,” “target,” “view,” “will,”
“would,” “will be,” “will continue,” “will likely result” or the negative thereof
or other variations thereon or comparable terminology. In particular, discussions and statements regarding the Company’s
future business plans and initiatives are forward-looking in nature. We have based these forward-looking statements on our current
expectations, assumptions, estimates, and projections. While we believe these to be reasonable, such forward-looking statements
are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important
factors may cause our actual results, performance, or achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements, and may impact our ability to implement and execute on
our future business plans and initiatives. Management cautions that the forward-looking statements in this Annual Report on Form
10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-looking
events and circumstances will occur. Factors that might cause such a difference include, without limitation: risks associated
with our limited business operations since the sale of our insurance operations in December 2019 (the “Asset Sale”);
risks associated with our inability to identify and realize business opportunities, and the undertaking of any new such opportunities,
following the Asset Sale; our ability to spend or invest the net proceeds from the Asset Sale in a manner that yields a favorable
return; general conditions in the global economy, including the impact of health and safety concerns from the current outbreak
of the COVID-19 coronavirus; our lack of operating history or established reputation in the reinsurance industry; our inability
to obtain or maintain the necessary approvals to operate reinsurance subsidiaries; risks associated with operating in the reinsurance
industry, including inadequately priced insured risks, credit risk associated with brokers we may do business with, and inadequate
retrocessional coverage; our inability to execute on our investment and investment management strategy, including our strategy
to invest in real estate assets; potential loss of value of investments; risk of becoming an investment company; fluctuations
in our short-term results as we implement our new business strategy; risks of not being unable to attract and retain qualified
management and personnel to implement and execute on our business and growth strategy; failure of our information technology systems,
data breaches and cyber-attacks; our ability to establish and maintain an effective system of internal controls; our limited operating
history as a publicly traded company; the requirements of being a public company and losing our status as a smaller reporting
company or becoming an accelerated filer; any potential conflicts of interest between us and our controlling stockholders and
different interests of controlling stockholders; potential conflicts of interest between us and our directors and executive officers;
volatility or decline of the shares of FedNat Holding Company common stock received by us as consideration in the Asset Sale or
limitations and restrictions with respect to our ownership of such shares; risks of being a minority stockholder of FedNat Holding
Company; and risks of our inability to continue to satisfy the continued listing standards of the Nasdaq following completion
of the Asset Sale.
Our
expectations and future plans and initiatives may not be realized. If one of these risks or uncertainties materialize, or if our
underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. You are
cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included or incorporated by
reference to the Form 10-K are made only as of the date hereof and do not necessarily reflect our outlook at any other point in
time. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results
of any revisions to any such statements to reflect new information, future events or developments.
FG
FINANCIAL GROUP, INC.
ITEM
1. BUSINESS
Overview
FG
Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance
and investment management holding company focused on opportunistic collateralized and loss capped reinsurance, while allocating
capital to SPAC and SPAC sponsor-related businesses. The Company’s principal business operations are conducted through
its subsidiaries and affiliates. We were incorporated on October 2,
2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and changed our legal name to 1347 Property Insurance
Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed an initial public offering of our common stock. Prior to
the offering, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway
Financial Services Inc., or KFSI, a publicly owned Delaware holding company. From our inception through December 2, 2019, we operated
as an insurance holding company, writing property and casualty insurance throughout the states of Louisiana, Florida and Texas
through our subsidiaries. On December 2, 2019 we sold our three insurance subsidiaries as further described below, and embarked
on a new strategy focused on insurance, reinsurance, real estate and related businesses and asset management. Accordingly, on
December 14, 2020, our shareholders approved a change in our corporate name to FG Financial Group, Inc., to better align with
this new business strategy.
As
of December 31, 2020, Fundamental Global Investors, LLC, a privately owned investment management company, and its affiliates,
or FGI, beneficially owned approximately 61% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board
of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI.
Sale
of the Maison Business
On
December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s then wholly-owned
subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor”
and, together with Maison and MMI, the “Maison Business” or the “Insurance Companies”), to FedNat Holding
Company, a Florida corporation (“FedNat”), pursuant to the terms and conditions of the Equity Purchase Agreement,
dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company and each of Maison, MMI and ClaimCor,
on the one hand, and FedNat, on the other hand (the “Asset Sale”).
As
consideration for the Asset Sale, FedNat paid the Company $51.0 million, consisting of $25.5 million in cash and $25.5 million
in FedNat’s common stock, or 1,773,102 shares of common stock. In addition, upon the closing of the Asset Sale, $18.0 million
of outstanding surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, was repaid to
the Company.
All
of the employees of the Company became employees of FedNat as of the closing of the Asset Sale, other than John S. Hill, then
serving as Vice President, Chief Financial Officer and Secretary of the Company and now serving as Executive Vice President, Chief
Financial Officer and Secretary, and Brian D. Bottjer, then serving as Controller of the Company and now serving as Senior Vice
President and Controller.
On
December 31, 2019, the shares of FedNat common stock issued to the Company in connection with the Asset Sale were registered under
the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the terms of the Registration Rights Agreement
entered into by the Company and FedNat at the closing of the Asset Sale.
In
addition to the Registration Rights Agreement, the Company and FedNat entered into a Standstill Agreement, a Reinsurance Capacity
Right of First Refusal Agreement (the “Reinsurance Agreement”), an Investment Advisory Agreement and a Transition
Services Agreement at the closing of the Asset Sale.
Standstill
Agreement
The
Standstill Agreement imposes certain limitations and restrictions with respect to the voting securities of FedNat (including shares
of FedNat common stock) that are owned or held beneficially or of record by the Company. Under the Standstill Agreement, the Company
has agreed to vote all of the voting securities of FedNat beneficially owned by the Company in accordance with the recommendation
of the board of directors of FedNat with respect to any matter that is before the stockholders of FedNat for a vote by such stockholders.
The Standstill Agreement imposes limitations on the sale of voting securities of FedNat held by the Company and restricts the
Company from taking certain actions as a holder of voting securities of FedNat. The term of the Standstill Agreement is five years.
For
insurance regulatory purposes, the Company has waived any rights that it may have to exercise control of FedNat.
FG
FINANCIAL GROUP, INC.
Reinsurance
Capacity Right of First Refusal Agreement
The
Reinsurance Agreement provides the Company with a right of first refusal to sell reinsurance coverage to the insurance company
subsidiaries of FedNat, providing reinsurance on up to 7.5% of any layer in FedNat’s catastrophe reinsurance program, subject
to the annual reinsurance limit of $15.0 million, on the terms and subject to the conditions set forth in the Reinsurance Agreement.
All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement in such
form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance
Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement
is five years. As of December 31, 2020, the Company has not provided any reinsurance coverage to FedNat under the Reinsurance
Agreement.
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement, FG Strategic Consulting, LLC (“FGSC”, formerly Fundamental Global Advisors LLC)
a wholly-owned subsidiary of the Company, was formed to provide investment advisory services to FedNat, including identifying,
analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending
investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory
services, FedNat has agreed to pay FGSC an annual fee of $100,000. FGI Funds Management, LLC serves as the manager to FGSC. FGI
Funds Management, LLC is affiliated with Fundamental Global Investors, LLC (“FGI”), the Company’s largest stockholder.
The term of the Investment Advisory Agreement is five years.
Transition
Services Agreement
To
facilitate the transition following the Asset Sale, the Company and FedNat entered into a Transition Services Agreement, pursuant
to which the Company agreed to provide certain transition accounting services to FedNat and the Insurance Companies, as requested,
and FedNat has agreed to arrange for certain prior employees of the Company who became employees of the FedNat in connection with
the Asset Sale to provide transition accounting services to the Company, as requested, on the terms and conditions set forth in
the Transition Services Agreement. The term of the Transition Services Agreement was one year, having expired on December
2, 2020.
Current
Business
Our
strategy has evolved to focus on opportunistic collateralized and loss capped reinsurance, while allocating capital to special
purpose acquisition companies (“SPACs”) and SPAC sponsor-related businesses. Accordingly, in the first quarter 2021,
we have launched our “SPAC Platform,” as further discussed below. As part of our refined focus, we have adopted the
following capital allocation philosophy:
“Grow intrinsic value
per share with a long-term focus using fundamental research, allocating capital to asymmetric
risk/reward opportunities.”
Historically, the Company has operated
a real estate business through its subsidiary, FGI Metrolina Property Income Fund, LP, however, the Company does not anticipate
that its real estate business will be a significant component of its future business plans.
Reinsurance:
The
Company has formed a wholly-owned reinsurance subsidiary, Fundamental Global Reinsurance Ltd. (“FGRe”), a Cayman Islands
limited liability company, to provide specialty property and casualty reinsurance. FGRe has been granted a Class B (iii) insurer
license in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto and is subject to regulation
by the Cayman Islands Monetary Authority (the “Authority”). The terms of the license require FGRe to receive a capital
infusion in the amount of $5.0 million, which the Company effected in July 2020 via the transfer of 156,000 shares of FedNat
common stock from the Company along with approximately $3.3 million in cash. The terms of the insurer license also require
advance approval from the Authority should FGRe wish to enter into any reinsurance agreements which are not fully collateralized
to their aggregate exposure limit. In November 2020, FGRe entered into its first reinsurance transaction, through a Funds at Lloyds
syndicate. The maximum loss exposure in the transaction is approximately $2.9 million and covers all risks written by the syndicate
during the 2021 calendar year. On November 12, 2020 FGRe initially funded a trust account at Lloyd’s with approximately
$2.4 million to collateralize its obligations under the contract.
FG
FINANCIAL GROUP, INC.
Asset
Management:
FGSC
serves as an investment advisor to FedNat Holding Company under the investment advisory agreement entered into at the closing
of the Asset Sale. The Company has also formed Fundamental Global Asset Management, LLC, a joint venture with a wholly owned subsidiary
of FGI, to sponsor investment advisors that will manage private funds ranging the full spectrum of alternative equities, fixed
income, private equity and real estate. In September 2020, the joint venture sponsored the launch of FG Special Situations Fund
via an investment of $5.0 million. Approximately $4.0 million of this investment represented the sponsorship of our first special
purpose acquisition company, or “SPAC”.
See
Item 7. Management’s Discussion and Analysis—Limited Liability Investments and —Related Party Transactions,
for further information regarding the Company’s investment and investment management activities.
Insurance
FGRe
is currently in the process of establishing and seeking regulatory approvals for a Risk Retention Group (“RRG”) to
be domiciled in the state of Vermont for the purpose of providing directors and officers insurance coverage to special purpose
acquisition vehicles. The Company expects to begin operation of the RRG in the 4th quarter of 2021. FGRe would anticipate
providing capital, along with others, to facilitate the underwriting of such insurance coverage. The Company will focus on fee
income derived from originating, underwriting, and servicing the insurance business, while mitigating our financial risk with
external reinsurance partners.
SPAC
Platform
On
December 21, 2020 we formed FG SPAC Solutions LLC (“FGSS”), a Delaware company, to facilitate the launch of our “SPAC
Platform”. Under the SPAC Platform, we plan to provide various strategic, administrative, and regulatory support services to
newly formed SPACs for a monthly fee. The Company co-founded a partnership to participate as a co-sponsor for newly formed SPACs. The Company also participates in the risk capital investments associated with the launch of such SPACs through
its Asset Management business, specifically FG Special Situations Fund, LP. The first transaction entered into under the SPAC Platform
occurred on January 11, 2021 by and among FGSS and Aldel Investors, LLC, the sponsor of Aldel Financial, Inc. (“Aldel”),
a special purpose acquisition company which filed its initial registration statement with the Securities and Exchange Commission
on February 16, 2021, but has not yet consummated an initial public offering. Under the agreement between FGSS and Aldel Investors,
LLC (the “Agreement”), FGSS has agreed to provide certain accounting, regulatory, strategic advisory, and other administrative
services to Aldel, which include assistance with negotiations with a potential merger target for the SPAC as well as assistance
with the de-SPAC process. Additional information regarding our formation of FGSS and our SPAC
Platform can be found in Item 13 of this report under the heading “Formation of FG SPAC Partners, LP.”
Employees
As
of December 31, 2020 we had three employees. We are not a party to any collective bargaining agreement and believe that relations
with our employees are satisfactory. Each of our employees has entered into confidentiality agreements with us.
Website
Our
corporate website is www.fgfinancial.com. Information contained at the website is not a part of this report.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Industry, Business and Operations
We
have had limited operations upon which to predict our future performance, since the sale of the Maison Business.
We
sold our Maison Business at the end of 2019 and, since then, have begun to implement our business plans to operate as a diversified
insurance, reinsurance, real estate, and investment management holding company. Accordingly, our historical financial statements
provide little basis upon which to predict our future performance. Our revenue has also been reduced, as we have limited assets
with which to generate revenue. Our failure to secure additional sources of revenue may have a material impact on our results
of operations and financial condition. In addition, the uncertainty surrounding our future operations and business prospects may
negatively impact the value and liquidity of our common stock. If we are unable to implement our business plans successfully,
our financial condition and results of operations will be impaired, and your investment in our Company will be at risk.
FG
FINANCIAL GROUP, INC.
We
incurred a substantial loss during our first year following the sale of the Maison Business.
We
sustained a loss of $22,457,000 during 2020, the first year following the sale of the Maison Business. If we continue to incur
such losses, we may be unable to continue our business, and you could lose your entire investment in the Company.
We
may need additional capital in the future in order to grow and operate our business. Such capital may not be available to us or
may not be available to us on favorable terms. Furthermore, our raising additional capital could dilute your ownership interest
in our company.
We
expect that we will need to raise additional capital in the future through public or private equity or debt offerings or otherwise
in order to further capitalize our reinsurance subsidiary and implement our business strategy, fund liquidity needs caused by
underwriting or investment losses, replace capital lost in the event of significant reinsurance losses or adverse reserve developments,
meet applicable statutory jurisdiction requirements; and/or expand business to include the sponsorship of a risk retention group
to address the D&O liability insurance needs of the SPAC market.
If
we were required to raise additional capital, equity or debt financing may not be available at all or may be available only on
terms that are not favorable to us. In the case of equity financings, dilution to our shareholders’ ownership could result,
and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders.
If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations
as well as covenants and specific financial ratios that may restrict our ability to operate our business or pay dividends. If
we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could
be materially adversely affected.
We
intend to participate in a risk retention group which will provide director’s and officer’s insurance to special purpose
acquisition companies and represents a line of insurance for which we do not have previous experience.
Risk
retention groups (“RRG”) are mutual companies, or companies owned by the members of the group that allow businesses
with similar insurance needs to pool their risks and form an insurance company that operates under state regulated guidelines.
Risk retention groups are treated differently from traditional insurance companies in that they are exempted from having to obtain
a license in every state in which they write insurance, and are also exempt from other various state laws that regulate insurance.
As a result, a RRG may not be adequately capitalized and able to remain solvent if faced with continuing losses. While we intend
to mitigate this risk through the purchase of reinsurance, there can be no guarantee that we will be able to purchase adequate
reinsurance on favorable terms. Due to our inexperience in providing director’s and officer’s insurance, we run the
risk of underwriting our coverage at levels that do not provide adequate returns for our shareholders. Furthermore, we run the
risk of not generating external interest in our RRG after incurring significant start-up and regulatory costs associated with
the formation of the group.
We
do not have an operating history or established reputation in the reinsurance industry, and our lack of an established operating
history and reputation may make it difficult for us to attract or retain business.
As
part of our business going forward, we plan to provide specialty property and casualty reinsurance through FGRe. We will not have
an operating history on which we can base an estimate of our future earnings prospects. We also do not have an established reputation
in the reinsurance industry. Reputation is a very important factor in the reinsurance industry, and competition for business is,
in part, based on reputation. Although we expect that our reinsurance policies will be fully collateralized, we will be a relatively
newly formed reinsurance company and do not yet have a well-established reputation in the reinsurance industry. Our lack of an
established reputation may make it difficult for us to attract or retain business. We will compete with major reinsurers, all
of which have substantially greater financial marketing and management resources than we do, which may make it difficult for us
to effectively market our products or offer our products at a profit. In addition, we do not have, nor do we currently
intend to obtain financial strength ratings, which may discourage certain counterparties from entering into reinsurance contracts
with us and may prevent us from writing certain types of business.
As
a reinsurer, we will depend on our clients’ evaluations of the risks associated with their insurance underwriting, which
may subject us to reinsurance losses.
In
the proportional reinsurance business, in which we will assume an agreed percentage of each underlying insurance contract being
reinsured, or quota share contracts, we do not plan to separately evaluate each of the original individual risks assumed under
these reinsurance contracts. We will therefore be largely dependent on the original underwriting decisions made by ceding companies,
which will subject us to the risk that the clients may not have adequately evaluated the insured risks and that the premiums ceded
may not adequately compensate us for the risks we assume. Those risks could be concentrated in relatively few industries, companies,
geographic regions, asset types or other areas of risk. This limited diversification could expose us to losses which are disproportionate
to the overall insurance market. We also have non-exclusive contracts with third parties for their underwriting services.
We also do not plan to separately evaluate each of the individual claims made on the underlying insurance contracts under quota
share arrangements, in which case we will be dependent on the original claims decisions made by our clients.
The
involvement of reinsurance brokers may subject us to their credit risk.
As
a standard practice of the reinsurance industry, reinsurers frequently pay amounts owed on claims under their policies to reinsurance
brokers, and these brokers, in turn, remit these amounts to the ceding companies that have reinsured a portion of their liabilities
with the reinsurer. In some jurisdictions, if a broker fails to make such a payment, the reinsurer might remain liable to the
client for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions,
when the client pays premiums for policies to reinsurance brokers for payment to the reinsurer, these premiums are considered
to have been paid and the client will no longer be liable to the reinsurer for these premiums, whether or not the reinsurer has
actually received them from the broker. Consequently, as a reinsurer, we expect to assume a degree of credit risk associated with
the brokers that we intend to do business with.
We
may not be successful in carrying out our investment and investment management strategy, and the fair value of our investments
will be subject to a loss in value.
We
have formed an investment advisory firm subsidiary, FGSC which is a relying advisor of an affiliated investment advisor
registered with the SEC, to carry out our investment advisory services. We have also formed Fundamental Global Asset Management,
LLC, a joint venture with Fundamental Global Investors, LLC to sponsor investment advisors that we anticipate will manage private
funds ranging the full spectrum of alternative equities, fixed income, private equity and real estate. In exchange for seeding
the new funds, we expect to receive a special interest in each new fund (or its general partner). Since we plan to conduct our
investment activities through private funds, our contributions made to those funds may be subject to lock-up agreements and our
ability to access this capital may be limited for a defined period, which may increase a risk of loss of all or a significant
portion of value. Our investments may also become concentrated. A significant decline in the values of these investments may produce
a large decrease in our consolidated shareholders’ equity and can have a material adverse effect on our consolidated book
value per share and earnings.
FG
FINANCIAL GROUP, INC.
As
discussed above under Item 1. “Business,” in connection with the Asset Sale, the Advisor and FedNat have entered into
an investment advisory agreement in which the Advisor has agreed to provide investment advisory services to FedNat, including
identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization,
recommending investment dispositions, and providing advice regarding macro-economic conditions. Any fees received for such services
may not be commensurate with the services provided. We also may not be able to enter into such advisory management agreements
with other entities on favorable terms, or at all. Any of these events could have a material adverse effect on our business.
We
have purchased interests in income producing real estate assets, and seek to benefit from underlying rental income on long-term
leases with high quality tenants as well as the capital appreciation from the underlying real estate assets. Investments in real
estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted
to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions.
Investments in real estate assets are also subject to adverse changes in general economic conditions which may reduce the demand
for rental space. Moreover, we may not be able to acquire quality, income producing real estate assets or attract high-quality
tenants on favorable terms, if at all. We also expect to compete with numerous other persons or entities seeking to buy real estate
assets, including real estate investment trusts or other real estate operating companies with greater experience and financial
strength. Any of these factors could impact our real estate investment strategy and have a material adverse impact on our business.
The
insurance and reinsurance business is highly competitive, and we may not be able to compete successfully in our industry.
The
insurance and reinsurance industry is highly competitive. We compete with major U.S. and non-U.S. insurers and reinsurers, many
of which have greater financial, marketing and management resources than we do. There has been significant consolidation in the
insurance and reinsurance sector in recent years, and we may experience increased competition as a result of that consolidation,
with consolidated entities having enhanced market power. These consolidated entities may use their enhanced market power and broader
capital base to negotiate price reductions for products and services that compete with ours, and we may experience rate declines
and possibly write less business. Any failure by us to effectively compete could adversely affect our financial condition and
results of operations.
The
insurance and reinsurance industry is highly cyclical, and we may at times experience periods characterized by excess underwriting
capacity and unfavorable premium rates.
Historically,
insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence
or severity of catastrophic events, levels of capacity, general economic conditions, changes in equity, debt and other investment
markets, changes in legislation, case law and prevailing concepts of liability and other factors. Demand for reinsurance is influenced
significantly by the underwriting results of primary insurers and prevailing general economic conditions. The supply of insurance
and reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes
in rates of return being realized in the insurance and reinsurance industry on both underwriting and investment sides. As a result,
the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition
due to excessive underwriting capacity, as well as periods when shortages of capacity permitted favorable premium levels and changes
in terms and conditions. Until recently, the supply of insurance and reinsurance had increased over the past several years, and
may again in the future, either as a result of capital provided by new entrants or by the commitment of additional capital by
existing insurers or reinsurers. Continued increases in the supply of insurance and reinsurance may have consequences for us,
including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable
policy terms and conditions.
FG
FINANCIAL GROUP, INC.
Climate
change, as well as increasing regulation in the area of climate change, may adversely affect our insurance and reinsurance business,
financial condition and results of operations.
Changing
weather patterns and climatic conditions, such as global warming, may have added to the unpredictability and frequency of natural
disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. Although the loss
experience of catastrophe insurers and reinsurers has historically been characterized as low frequency, there is a growing concern
today that climate change increases the frequency and severity of extreme weather events, and, in recent years, the frequency
of major catastrophes appears to have resumed historical levels or increased and may continue to increase in the future.
Claims
for catastrophic events, or an unusual frequency of smaller losses in a particular period, could expose us to large losses, cause
substantial volatility in our results of operations and could have a material adverse effect on our ability to write new business
if we are not able to adequately assess and reserve for the increased frequency and severity of catastrophes resulting from these
environmental factors. Additionally, catastrophic events could result in declines in the value of investments we hold and significant
disruptions to our physical infrastructure, systems, and operations. Climate change-related risks may also specifically adversely
impact the value of the securities that we hold.
Changes
in security asset prices may impact the value of our real estate investments, resulting in realized or unrealized losses on our
invested assets. These risks are not limited to, but can include: (i) changes in supply/demand characteristics for fossil fuels
(e.g., coal, oil, natural gas); (ii) advances in low-carbon technology and renewable energy development; and (iii) effects of
extreme weather events on the physical and operational exposure of industries and issuers, and the transition that these companies
make towards addressing climate risk in their own businesses.
However,
we cannot predict how legal, regulatory and/or social responses to concerns around global climate change may impact our business.
There can be no assurance that our reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting
from one or more catastrophic events. As a result, the occurrence of one or more catastrophic events and the continuation and
worsening of recent trends could have an adverse effect on our results of operations and financial condition.
Environmental,
Social and Governance and sustainability have become major topics that encompass a wide range of issues, including climate change
and other environmental risks. We are also subject to complex and changing laws, regulation and public policy debates relating
to climate change which are difficult to predict and quantify and may have an adverse impact on our business. Changes in regulations
relating to climate change or our own leadership decisions implemented as a result of assessing the impact of climate change on
our business may result in an increase in the cost of doing business or a decrease in premiums in certain lines of business.
Underwriting
risks and reserving for losses are based on probabilities and related modeling, which are subject to inherent uncertainties.
Our
success is dependent upon our ability to assess accurately the risks associated with the businesses that we insure and reinsure.
We establish reserves for losses and loss adjustment expenses which represent estimates based on actuarial and statistical projections,
at a given point in time, of our expectations of the ultimate future settlement and administration costs of losses incurred. We
utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns
to assist in the establishment of loss reserves. Most or all of these factors are not directly quantifiable, particularly on a
prospective basis, and the effects of these and unforeseen factors could negatively impact our ability to accurately assess the
risks of the policies that we write. Changes in the assumptions used by these models or by management could lead to an increase
in our estimate of ultimate losses in the future. In addition, there may be significant reporting lags between the occurrence
of the insured event and the time it is reported to the insurer and additional lags between the time of reporting and final settlement
of claims. In addition, the estimation of loss reserves is more difficult during times of adverse economic and market conditions
due to unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures
and/or losses, reduced maintenance of insured properties or increased frequency of small claims. Changes in the level of inflation
also result in an increased level of uncertainty in our estimation of loss reserves. As a result, actual losses and loss adjustment
expenses paid can deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.
FG
FINANCIAL GROUP, INC.
If
our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination
with a corresponding reduction in our net income in the period when the deficiency becomes known. It is possible that claims in
respect of events that have occurred could exceed our claim reserves and have a material adverse effect on our results of operations,
in a particular period, or our financial condition in general. As a compounding factor, although most insurance contracts have
policy limits, the nature of property and casualty insurance and reinsurance is such that losses and the associated expenses can
exceed policy limits for a variety of reasons and could significantly exceed the premiums received on the underlying policies,
thereby further adversely affecting our financial condition.
Risks
Relating to Financial Markets and Investments
Adverse
developments in the financial markets could have a material adverse effect on our results of operations, financial position and
our businesses, and may also limit our access to capital.
Adverse
developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result
in realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial position
and our businesses, and may also limit our access to capital required to operate our business. Depending on market conditions,
we could incur additional realized and unrealized losses on our investment portfolio in future periods, which could have a material
adverse effect on our results of operations, financial condition and business. Economic conditions could also have a material
impact on the frequency and severity of claims and therefore could negatively impact our underwriting returns. The volatility
in the financial markets could continue to significantly affect our investment returns, reported results, and shareholders’
equity.
The
capital requirements of our businesses depend on many factors, including regulatory and rating agency requirements, the performance
of our investment portfolio, our ability to write new business successfully, the frequency and severity of catastrophe events
and our ability to establish premium rates and reserves at levels sufficient to cover losses.
Our investments in special purpose
acquisition companies as well as the sponsors of special purpose acquisition companies involve a high degree of risk.
We expect to invest in initial public offerings
(“IPOs”) of special purpose acquisition companies (“SPACs”), including SPACs that are sponsored by our
affiliates. In general, a SPAC is a special purpose vehicle that is formed to raise capital from the public through an IPO with
the purpose, usually, of using the proceeds to acquire a single unspecified business or assets to be identified after the IPO. The
IPO proceeds are held in a trust account until released to fund a business combination or used to redeem shares sold in the IPO.
SPACs are required to either consummate a business combination or liquidate within a set period of time following their IPO. Because,
at the time of the IPO, the SPAC has no operating history or any plans, arrangements or understandings with any prospective investment
targets, we will have no basis upon which to evaluate the SPAC’s ability to achieve its business objectives. If a SPAC fails
to complete its initial business transaction within the required time period, it will never generate any operating revenues and
our SPAC investment may receive only a fixed dollar amount per share upon redemption, or less than such fixed amount in certain
circumstances which could significantly affect our operating results and shareholders’ equity.
Additionally, as of December 31, 2020,
we have invested $4.0 million to acquire equity interests in the sponsor of a SPAC (“Sponsor”) and expect to acquire
additional interests in sponsors of SPACs in the future. By investing in a Sponsor, we have provided risk capital which allows
the Sponsor to launch the IPO of the SPAC. In exchange for this investment, we own interests in the Sponsor that entitle us to
receive distributions of shares and warrants in the SPAC after the lock-up period following the SPACs IPO has expired. These Sponsor
interests do not have redemption rights to receive any portion of our original investment back from the trust account of the SPAC,
as is normally associated with an IPO investment directly into a SPAC. Accordingly, an investment in a Sponsor is subject to a
much higher degree of risk than an investment in a SPAC because the entire investment may be lost if the SPAC is not successful
in consummating a business combination. Such potential loss could have a material effect on our financial results and shareholders’
equity.
Risks
Relating to Sale of Maison Business
The
shares of FedNat common stock we have received as part of the consideration for the Asset Sale are subject to certain limitations
and restrictions.
The
shares of FedNat common stock we have received in the Asset Sale were issued pursuant to the terms of a Standstill Agreement entered
into between the Company and FedNat upon the closing of the Asset Sale. The Standstill Agreement imposes certain limitations and
restrictions with respect to our ownership of FedNat common stock, including, among other things, requiring us to vote all of
the voting securities of FedNat we own in accordance with the recommendation of FedNat’s board of directors and prohibiting
us from publicly advising or influencing any person with respect to the voting of any shares of FedNat common stock and taking
any action to nominate any person for election to FedNat’s board of directors. Our status as a minority stockholder of FedNat
as well as the limitations and restrictions expected to be set forth in the Standstill Agreement may limit our ability to exert
significant influence on FedNat’s management and operations and matters requiring approval of FedNat’s stockholders.
FedNat’s management and holders of a larger percentage of FedNat’s common stock may also take or encourage actions
that decrease the value of our shares of FedNat common stock or are not in our best interests as a minority stockholder.
As
a result of the Asset Sale, we are a very small public company with a large cash balance relative to our market capitalization.
As
of December 31, 2020, we had approximately $12.1 million in cash and cash equivalents and $18.0 million in investments. We expect
to invest significant funds into the implementation of our new business strategy, which will increase our operating expenses.
Until we secure additional revenue streams, we may lose a significant amount of cash, which may have a material adverse effect
on our results of operations and financial condition. In addition, the value of our investments may be materially adversely affected
by financial market performance, general economic conditions, and other factors that may result in the recognition of other-than-temporary
impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio and may adversely affect
our results of operations.
FG
FINANCIAL GROUP, INC.
We
also remain subject to the listing standards of Nasdaq and SEC rules and regulations, including the Dodd-Frank Wall Street Reform
and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, and have an obligation to continue to comply with the applicable
reporting requirements of the Exchange Act even though compliance with these reporting requirements is economically burdensome.
While all public companies face the costs and burdens associated with being publicly traded, given our limited business operations,
the costs and burdens of being a public company may be material.
We
are subject to non-competition and non-solicitation covenants under the Purchase Agreement, which may limit our operations in
certain respects.
We
are subject to the non-competition and non-solicitation covenants in the Purchase Agreement until December 2, 2024. During this