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Item 7.01.
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Regulation FD Information.
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Impairment of Goodwill
Coinciding with the preparation of the financial statements required to be included in the Company’s Form 10-K for the year ended December 31, 2020, the Company’s annual goodwill impairment testing has resulted in the conclusion that the goodwill intangible asset established in conjunction with the acquisition of Maison Insurance Company (“MIC”) and related entities (collectively, “Maison”) in December 2019 is impaired. Our operating results for the quarter ended December 31, 2020 will include a non-cash impairment charge of approximately $11.0 million, against which there is no tax offset, representing the write-off of the full amount of the Maison goodwill asset. The Company’s impairment analysis considered the earnings and share price of the Company and comparable companies, as well as projected cash flows. Continued adverse storm activity, higher excess of loss catastrophe reinsurance costs and the continued unfavorable claims environment in the state of Florida reduced the previously modeled fair value of the Company. These impacts, along with other information received in the fourth quarter and beyond that is relevant to the estimated fair value of the Company, including the trading price of our shares, resulted in the impairment conclusion.
Liquidity and Capital Resources Update
Factoring in the fourth quarter earnings impacts disclosed herein, the Company projects that it will finish 2020 with statutory surplus in each of its insurance carriers sufficient to support risk-based capital ratios in excess of 300%. Furthermore, the Company currently expects to have approximately $50 million of liquidity in place at the holding company heading into 2021, after taking into account any surplus infusions to our three carriers that may occur effective as of December 31, 2020. The Company’s statutory reporting process is ongoing, and therefore, these estimates are subject to change.
Reinsurance Update
The Company is providing certain updates to its reinsurance program, which was previously described in a Current Report on Form 8-K filed with the SEC on June 1, 2020 (the “Reinsurance 8-K”), as updated by subsequent filings on Form 8-K filed on September 9, 2020, September 21, 2020 and October 19, 2020, and on Form 10-Q for the period ended September 30, 2020 (the “Q3 2020 Form 10-Q”).
FNIC Non-Florida Quota-Share Reinsurance. As previously disclosed in our Q3 2020 Form 10-Q, effective December 1, 2020, FNIC, with the agreement of Anchor Re, increased its cession percentage from 50% to 80% on its non-Florida homeowners book of business, on an in-force, new and renewal basis. This treaty includes limits on the loss ratio and overall net loss that Anchor Re can realize during the treaty year.
MIC – Purchase of Aggregate Reinsurance Cover. Effective January 1, 2021, the Company entered into a new Aggregate Excess of Loss program on its Maison book of business. This new program provides coverage, excluding named storms, of 65% of $15 million excess of $10 million with an $850,000 occurrence deductible and a $4.15 million occurrence limit at an approximate annual cost of $2.3 million.
FNIC – Florida Homeowners Quota-Share Reinsurance. Effective October 1, 2020, with the agreement of Swiss Re, FNIC increased its cession percentage on its existing quota-share treaty from 10% to 20% on an in-force, new and renewal basis. This treaty excludes named storms and includes a cap on non-named storm catastrophe losses (as previously disclosed).
Effective November 15, 2020, FNIC entered into a new 10% quota-share reinsurance treaty through November 15, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes all catastrophe losses and provides coverage only on attritional losses and is subject to certain limitations.
Effective December 31, 2020, FNIC entered into an additional new 10% quota-share reinsurance treaty through December 31, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes named storms, but otherwise contains no caps with respect to non-named storm catastrophe losses.
As a result of these three actions, the Company now has 40% quota-share coverage in place through June 30, 2021, at which point 20% of this coverage will be up for renewal. It is the Company’s current intent to seek such renewal.
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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. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. 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 and, in this report includes our statements regarding estimated catastrophe losses, strengthening of loss reserves, the effects of a non-cash impairment charge, the expected incremental premiums resulting from rate increases, and the expected statutory surplus and liquidity as of December 31, 2020. 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. 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. 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, that final results regarding catastrophe losses, the impairment charge, and expected statutory surplus and expected liquidity will be different than our preliminary estimates, that renewal rates on policies affected by the rate increases may be different than we estimate as well as the risks and uncertainties discussed under “Risk Factors” in the Company's Annual Report on Form 10-K, and discussed from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company expressly disclaims any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based.