Item 2.01. Completion of Acquisition or Disposition of Assets
Closing of Majority Investment in Monarch National Insurance Company
On June 30, 2022, FedNat Holding Company (the "Company") closed the previously
announced transaction in which a group of investors managed by Hale Partnership
Capital Management LLC (the "Hale Investors") invested $15 million in Monarch
National Insurance Company ("Monarch") in exchange for 60% of Monarch's common
stock. The Company also invested $10 million into Monarch for the remaining 40%
of Monarch's common stock and retains two seats on Monarch's board of directors
(such investments are collectively referred to herein as the "Monarch
Transaction").
Monarch has assumed, effective June 1, 2022, approximately 78,000 insurance
policies issued by FedNat Insurance Company ("FNIC"), resulting in Monarch's
policy count totaling approximately 83,000 policies. The Company's wholly owned
subsidiary, FedNat Underwriters, Inc. ("FNU"), will continue as managing general
agent, including policy servicing and claims administration, for Monarch
following the closing. FNIC's remaining Florida insurance policies were
cancelled effective June 29, 2022 and FNIC's non-Florida insurance policies have
been cancelled, expired or assumed.
Prior to the investments by the Hale Investors and the Company, Monarch redeemed
from FNIC all of its outstanding common stock (except for one share, which was
transferred by FNIC immediately after the closing) in exchange for a surplus
note equal to $2,560,165.95.
In connection with the closing of the Monarch Transaction, the parties entered
into the following:
•Omnibus Amendment Agreement dated as of June 30, 2022 (the "Omnibus Amendment")
among Monarch, FNIC, the Company and Hale Partnership Capital Management, LLC
("HPCM"), which amended certain provisions of the Master Restructure Agreement
dated as of May 13, 2022 (the "Restructure Agreement") among Monarch, FNIC, the
Company and HPCM, and the Stock Investment and Subscription Agreement dated as
of May 13, 2022 (the "Subscription Agreement") among the Hale Investors, FNIC,
the Company and Monarch. Among other things, the Omnibus Amendment clarified
that the expected negotiations with the holders of the Company's outstanding
senior unsecured notes will occur following closing and modified the condition
to closing that Demotech, Inc. reconfirm its rating of Monarch prior to closing.
A copy of the Omnibus Amendment is filed as Exhibit 10.1 to this Current Report
on Form 8-K, and is incorporated by reference herein.
•Management Agreement effective as of June 1, 2022 between Monarch and HPCM
pursuant to which HPCM provides Monarch with management services relating to
financial, compliance, investment and cash management, tax and strategic
planning matters for a management fee equal to 60 basis points on Monarch's
assets.
•Management Advisory Services Agreement dated as of July 1, 2022 (the "Advisory
Services Agreement") between HG Managing Agency, LLC, an affiliate of HPCM
("HGMA"), and FNU pursuant to which HGMA will assist FNU and the Company in
developing a restructuring plan for the Company's non-statutory entities,
including identifying cost savings and other necessary or advisable steps in
connection therewith and, upon approval of such plan by the Company's Board of
Directors, oversee the implementation of such plan. The term of the Advisory
Services Agreement is until July 1, 2025 and HGMA's fee for its services under
the Advisory Services Agreement equals 1.5% of gross earned premium per annum of
Monarch and, solely with respect to its policies in Texas, Maison Insurance
Company.
•Shareholders' Agreement dated and effective as of July 1, 2022 among Monarch,
the Hale Investors and the Company (the "Shareholders' Agreement"), which
provides for the relative rights and preferences of the Hale Investors and the
Company as shareholders of Monarch following the closing of the Monarch
Transaction. The Shareholders' Agreement, among other things: (a) provides for a
five-member board of directors, of which three members are designated by the
Hale Investors and two members are designated by the Company, with such
designation rights subject to maintaining stated levels of ownership in Monarch,
except that the initial Company designees, Dave Michelson and Jenifer Kimbrough,
shall be Monarch directors for two years following the closing notwithstanding
any subsequent change in the Company's ownership of Monarch shares; and (b)
provides for customary restrictions on transfer of the Monarch shares, with a
drag-along right in favor of the Hale Investors and a tag-along right in favor
of the Company. A copy of the Shareholders' Amendment is filed as Exhibit 10.2
to this Current Report on Form 8-K, and is incorporated by reference herein.
•FNIC and Monarch entered into binding term sheets for the acquisition by
Monarch following the closing of (a) FNIC's National Flood Insurance Program
(the "Flood Book") for an agreed price, subject to a 45-day "go shop" right; and
(b) FNIC's commercial general liability ("CGL") insurance policies, which are
currently in run off, pursuant to which Monarch
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will assume 100% of all net retained losses for the CGL book. FNU will retain
responsibility for claims administration for the CGL book following the closing.
•The Company and the Hale Investors entered into a binding term sheet pursuant
to which, for the 90-day period following the closing, if the Company's
non-statutory cash is below an agreed level, the Company may sell to the Hale
Investors, and the Hale Investors may purchase from the Company, 30,000 of the
shares of Monarch common stock held by the Company for a purchase price of $2.5
million.
•The parties also entered into an amendment to the existing managing general
agency agreement between FNU and Monarch and a new cost sharing agreement to
replace the existing cost sharing agreement between FNU and Monarch, both to
clarify the costs payable separately by Monarch and included in FNU's managing
general agent fee following the closing.
In connection with the closing of the Monarch transaction, on June 30, 2022 the
Florida Office of Insurance Regulation (the "Florida OIR") issued an amendment
(the "Amended Consent Order") to its consent order issued on May 23, 2022
approving the Monarch Transaction. In the Amended Consent Order, the Florida OIR
approved the timing of the Monarch Transaction closing to be June 30, 2022 and
approved the agreements described above and the termination of certain existing
related party agreements.
The Company also received from the holders of its outstanding senior notes their
consent to the closing of the Monarch Transaction and their waiver, for a period
not to exceed the later of (i) 60 days from the closing of the Monarch
Transaction or (ii) the finalization of the anticipated debt restructuring, of
their right to provide notice of default as a result of the previously disclosed
withdrawal of the Egan Jones rating of the senior notes.
HPCM and its affiliates are, collectively, currently the largest shareholder of
FNHC, and beneficially own in the aggregate 11.27% of the outstanding FNHC
common stock (as to which they have filed a disclaimer of control affidavit with
the Florida OIR). HPCM's manager, Steven A. Hale II, is also serving as an
advisor to the Strategic Review Committee of the Company's Board of Directors.
Item 7.01. Regulation FD Disclosures
On July 6, 2022, the Company issued a press release announcing the closing of
the transaction described under Item 2.01 of this Current Report on Form 8-K.
The Company's press release is attached to this Current Report on Form 8-K as
Exhibit 99.1 and is incorporated herein by reference.
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The information in Item 7.01 of this Current Report on Form 8-K and Exhibit 99.1
hereto are hereby intended to be furnished and, as provided in General
Instruction B.2 of Form 8-K, such information shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise subject to the liabilities of that section, and it
shall not be deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, or under the Exchange Act, whether made before or after
the date hereof, except as expressly set forth by specific reference in such
filing to this Current Report on Form 8-K.
This Current Report on Form 8-K contains statements that may be deemed
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements generally may be identified by the use of
forward-looking terminology such as "anticipate," "believe," "budget,"
"contemplate," "continue," "could," "envision," "estimate," "expect,"
"forecast," "guidance," "indicate," "intend," "may," "might," "outlook," "plan,"
"possibly," "potential," "predict," "probably," "pro-forma," "project," "seek,"
"should," "target," "will," "would," "will be," "will continue" or the negative
thereof or other variations thereon or comparable terminology. The Company has
based these forward-looking statements on its current expectations, assumptions,
estimates and projections. While the Company believes these expectations,
assumptions, estimates and projections are reasonable, such forward-looking
statements are only predictions and involve a number of risks and uncertainties,
many of which are beyond the Company's control. Management cautions that any
such forward-looking statements are not guarantees of future performance, and
readers cannot assume that such statements will be realized or that the
forward-looking events and circumstances will occur. Factors that might cause
such a difference include, without limitation, the impact on the Company of the
transaction described herein, as well as the risks and uncertainties discussed
under "Risk Factors" in the Company's 2021 Form 10-K, as amended, and discussed
from time to time in the Company's other reports subsequently filed with the
Securities and Exchange Commission. These and other important factors may cause
the Company's actual results, performance or achievements to differ materially
from any future results, performance or achievements expressed or implied by
these forward-looking statements. The Company expressly disclaims any intent,
obligation or undertaking to update or revise any forward-looking statements
made herein to reflect any change in the Company's with regard thereto or any
change in events, conditions or circumstances on which any such statements are
based.
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Item 9.01. Financial Statements and Exhibits.
Exhibits. The following exhibit index lists the exhibits that are either filed or
(d) furnished with this Current Report on Form 8-K.
Omnibus Amendment Agreement dated as of June 30, 2022 among Monarch National
Insurance Company, FedNat Insurance Company, FedNat Holding Company and Hale
10.1 Partnership Capital Management, LLC
Shareholders' Agreement dated and effective as of July 1, 2022 among Monarch
National Insurance Company, the Hale Investors (as defined therein) and FedNat
10.2 Holding Company
99.1 FedNat Holding Company Press Release dated July 6 , 2022
Cover Page Interactive File (the cover page tags are embedded within the Inline
104 XBRL document).
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