hrtg-10q_20190630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

001-36462

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

45-5338504

(State of Incorporation)

(IRS Employer

Identification No.)

2600 McCormick Drive, Suite 300

Clearwater, Florida 33759

(Address, including zip code, of principal executive offices)

(727) 362-7200

(Registrant’s telephone number, including area code)

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 $0.0001 per share	HRTG	New York Stock Exchange

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 ☒ 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 ☒ 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	☒	Emerging growth company	☒
Non-accelerated filer	☐	Smaller reporting 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate number of shares of the Registrant’s Common Stock outstanding on July 31, 2019 was 29,855,378

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: June 30, 2019 (unaudited) and December 31, 2018		2
Condensed Consolidated Statements of Operations and Other Comprehensive Income: Three and Six months ended June 30, 2019 and 2018 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three and Six months ended June 30, 2019 and 2018 (unaudited)		4
Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2019 and 2018 (unaudited)		6
Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3 Quantitative and Qualitative Disclosures about Market Risk		39
Item 4 Controls and Procedures		40
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		41
Item 1A Risk Factors		41
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 4 Mine Safety Disclosures		41
Item 6 Exhibits		41
Signatures		43

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about (i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (ii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) our estimates with respect to tax and accounting matters; (iv) future dividends, if any; (v) our expectations related to our financing activities; (vi) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; (vii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements; (viii) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results and (ix) the potential effects of our current legal proceedings.

These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

•

the possibility that actual losses may exceed reserves;

•

the concentration of our business in coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms;

•

our exposure to catastrophic weather events;

•

the fluctuation in our results of operations;

•

increased costs of reinsurance, non-availability of reinsurance, and non-collectability of reinsurance;

•

our failure to identify suitable acquisition candidates; effectively manage our growth and integrate acquired companies;

•

increased competition, competitive pressures, and market conditions;

•

our failure to accurately price the risks we underwrite;

•

inherent uncertainty of our models and our reliance on such model as a tool to evaluate risk;

•

the failure of our claims department to effectively manage or remediate claims;

•

low renewal rates and failure of such renewals to meet our expectations;

•

our failure to execute our diversification strategy;

•

failure of our information technology systems and unsuccessful development and implementation of new technologies;

•

a lack of redundancy in our operations;

•

our failure to attract and retain qualified employees and independent agents or our loss of key personnel;

•

our inability to generate investment income;

•

our inability to maintain our financial stability rating;

•

effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;

•

the failure of our risk mitigation strategies or loss limitation methods;

•

our reliance on independent agents to write voluntary insurance policies;

•

changes in regulations and our failure to meet increased regulatory requirements;

•

our ability to maintain effective internal controls over financial reporting;

•

our status as an “emerging growth company”;

•

the regulation of our insurance operations; and

•

certain characteristics of our common stock.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share and share amounts)

	June 30, 2019			December 31, 2018
ASSETS	(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $546,687 and $518,391)		553,619		$	509,649
Equity securities, at fair value (cost of $1,618 and $18,698)		1,618			16,456
Other investments		22,761			2,488
Total investments		577,998			528,593
Cash and cash equivalents		262,489			250,117
Restricted cash		13,784			12,253
Accrued investment income		4,549			4,468
Premiums receivable, net		57,045			57,000
Reinsurance recoverable on paid and unpaid claims		330,406			317,930
Prepaid reinsurance premiums		331,543			233,071
Income taxes receivable		17,731			35,586
Deferred policy acquisition costs, net		74,064			73,055
Property and equipment, net		21,110			17,998
Intangibles, net		72,663			76,850
Goodwill		152,459			152,459
Other assets		18,144			9,333
Total Assets	$	1,933,985		$	1,768,713
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	430,412		$	432,359
Unearned premiums		479,162			472,357
Reinsurance payable		324,834			166,975
Long-term debt, net		132,449			148,794
Deferred income tax, net		17,535			7,705
Advance premiums		24,463			20,000
Accrued compensation		4,758			9,226
Accounts payable and other liabilities		81,522			85,964
Total Liabilities	$	1,495,135		$	1,343,380

Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 29,855,378 shares issued and 29,274,577 shares outstanding at June 30, 2019; 30,083,559 shares issued and 29,477,756 shares outstanding at December 31, 2018		3			3
Additional paid-in capital		330,281			325,292
Accumulated other comprehensive income (loss)		5,259			(6,527	)
Treasury stock, at cost, 7,720,177 and 7,214,797 shares, respectively		(96,529	)		(89,185	)
Retained earnings		199,836			195,750
Total Stockholders' Equity		438,850			425,333
Total Liabilities and Stockholders' Equity	$	1,933,985		$	1,768,713

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

(Amounts in thousands, except per share and share amounts)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
REVENUES:
Gross premiums written	$	254,840		$	263,664		$	465,188		$	468,030
Change in gross unearned premiums		(24,882	)		(32,693	)		(6,640	)		(9,896	)
Gross premiums earned		229,958			230,971			458,548			458,134
Ceded premiums		(115,875	)		(119,767	)		(234,774	)		(240,822	)
Net premiums earned		114,083			111,204			223,774			217,312
Net investment income		3,830			2,555			7,502			5,857
Net realized gains (losses)		1,303			(85	)		2,327			(312	)
Other revenue		3,627			4,298			7,501			7,141
Total revenues		122,843			117,972			241,104			229,998
EXPENSES:
Losses and loss adjustment expenses		74,299			65,989			136,438			119,080
Policy acquisition costs, net of ceding commission income for the three and six months ended June 30, 2019 of $12.1 million and $25 million, respectively		27,087			19,411			53,107			31,598
General and administrative expenses, net of ceding commission income for the three and six months ended June 30, 2019 of $4 million and $8.3 million, respectively		18,384			24,422			36,988			46,352
Total expenses		119,770			109,822			226,533			197,030
Operating income		3,073			8,150			14,571			32,968
Interest expense, net		1,984			5,386			4,101			10,206
Other non-operating (income)/loss, net		—			(542	)		48			(542	)
Income before income taxes		1,089			3,306			10,422			23,304
Provision for income taxes		368			898			2,737			6,066
Net income	$	721		$	2,408		$	7,685		$	17,238
OTHER COMPREHENSIVE INCOME
Change in net unrealized gains (losses) on investments		7,068			(545	)		15,104			(7,023	)
Reclassification adjustment for net realized investment losses		59			85			394			312
Income tax (expense) benefit related to items of other comprehensive income		(1,304	)		(239	)		(3,712	)		1,584
Total comprehensive income	$	6,544		$	1,709		$	19,471		$	12,111
Weighted average shares outstanding
Basic		29,346,234			25,631,871			29,442,363			25,679,448
Diluted		29,352,796			26,316,597			29,447,668			26,480,707
Earnings per share
Basic	$	0.02		$	0.09		$	0.26		$	0.67
Diluted	$	0.02		$	0.09		$	0.26		$	0.65

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance at December 31, 2018		29,477,756		$	3	$	325,292		$	195,750		$	(89,185	)	$	(6,527	)	$	425,333
Net unrealized change in investments, net of tax		—			—		—			—			—			5,963			5,963
Restricted stock vested, net of surrendered shares		17,000			—		(118	)		—			—			—			(118	)
Stock-based compensation on vested restricted stock		—			—		1,345			—			—			—			1,345
Convertible Option debt extinguishment		—			—		(1,840	)		—			—			—			(1,840	)
Stock issued on convertible note conversion		285,201			—		4,210			—			—			—			4,210
Stock buy-back		(347,740	)		—		—			—			(5,011	)		—			(5,011	)
Dividends declared on common stock		—			—		—			(1,807	)		—			—			(1,807	)
Tax rate change		—			—		48			—			—			—			48
Net income		—			—		—			6,964			—			—			6,964
Balance at March 31, 2019		29,432,217		$	3	$	328,937		$	200,907		$	(94,196	)	$	(564	)	$	435,087
Net unrealized change in investments, net of tax		—			—		—			—			—			5,823			5,823
Stock-based compensation on vested restricted stock		—			—		1,344			—			—			—			1,344
Convertible Option debt extinguishment		—			—		—			—			—			—			—
Stock buy-back		(157,640	)		—		—			—			(2,333	)		—			(2,333	)
Dividends declared on common stock		—			—		—			(1,792	)		—			—			(1,792	)
Net income		—			—		—			721			—			—			721
Balance at June 30, 2019		29,274,577		$	3	$	330,281		$	199,836		$	(96,529	)	$	5,259		$	438,850

	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2017, as previously reported		25,885,006		$	3	$	294,836		$	175,226		$	(87,185	)	$	(3,064	)	$	379,816
Cumulative effective of change in accounting principle (ASU 2016-01), net of tax		—			—		—			(267	)		—			267			—
Balance at December 31, 2017, as adjusted		25,885,006			3		294,836			174,959			(87,185	)		(2,797	)		379,816
Stock buy-back		(115,200	)		—		—			—			(2,000	)		—			(2,000	)
Stock-based compensation		—			—		1,306			—			—			—			1,306
Reclassification of income taxes upon early adoption of ASU 2018-02		—			—		—			424			—			(424	)		—
Tax effect of warrant reclassification		—			—		970			—			—			—			970
Dividends declared on common stock		—			—		—			(1,601	)		—			—			(1,601	)
Net unrealized change in investments, net of tax		—			—		—			—			—			(4,428	)		(4,428	)
Net income		—			—		—			14,830			—			—			14,830
Balance at March 31, 2018		25,769,806		$	3	$	297,112		$	188,612		$	(89,185	)	$	(7,649	)	$	388,893
Net unrealized change in investments, net of tax		—			—		—			—			—			(699	)		(699	)
Stock-based compensation on vested restricted stock		—			—		1,306			—			—			—			1,306
Convertible Option debt extinguishment		—			—		(4,235	)		—			—			—			(4,235	)
Dividends declared on common stock		—			—		—			(1,593	)		—			—			(1,593	)
Net income		—			—		—			2,408			—			—			2,408
Balance at June 30, 2018		25,769,806		$	3	$	294,183		$	189,427		$	(89,185	)	$	(8,348	)	$	386,080

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the Six Months Ended June 30,
	2019			2018
OPERATING ACTIVITIES
Net income	$	7,685		$	17,238
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		2,689			2,612
Bond amortization and accretion		2,514			3,454
Amortization of original issuance discount on debt		730			2,050
Depreciation and amortization		5,492			14,041
Net realized losses		394			312
Net unrealized investment gains		(2,721	)		—
Net loss from repurchase of debt		(48	)		(542	)
Deferred income taxes		4,525			(15,579	)
Changes in operating assets and liabilities:
Accrued investment income		(81	)		751
Premiums receivable, net		(45	)		(411	)
Prepaid reinsurance premiums		(98,472	)		(68,160	)
Reinsurance recoverable on paid and unpaid claims		(12,476	)		(110,500	)
Income taxes receivable		17,855			(5,154	)
Deferred policy acquisition costs, net		(1,009	)		(27,970	)
Other assets		(8,811	)		(3,356	)
Unpaid losses and loss adjustment expenses		(1,947	)		18,527
Unearned premiums		6,805			9,896
Reinsurance payable		157,859			258,930
Accrued interest		128			(3,148	)
Accrued compensation		(4,468	)		(9,723	)
Advance premiums		4,463			12,173
Income taxes payable		(14,396	)		—
Other liabilities		9,751			(47,109	)
Net cash provided by operating activities		76,415			48,332
INVESTING ACTIVITIES
Fixed maturity securities sales		61,290			158,251
Fixed maturity securities purchases		(95,336	)		(127,701	)
Proceeds from sales of equity securities		26,529			5,360
Purchase of equity securities		(4,833	)		(4,605	)
Limited partnership interest		(20,006	)		—
Proceeds from sale of assets		71			—
Cost of property and equipment acquired		(4,487	)		(367	)
Net cash (used in) provided by investing activities		(36,772	)		30,938
FINANCING ACTIVITIES
Repayment of term note		(11,875	)		—
Mortgage loan payments		(138	)		(131	)
Repurchase of convertible notes		(2,869	)		(13,248	)
Purchase of treasury stock		(7,344	)		(2,000	)
Tax withholdings on share-based compensation awards		(118	)		—
Dividends paid		(3,396	)		(3,194	)
Net cash used in financing activities		(25,740	)		(18,573	)
Increase in cash, cash equivalents, and restricted cash		13,903			60,697
Cash, cash equivalents and restricted cash, beginning of period </