hrtg-10q_20190930.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 September 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 November 4, 2019 was 29,534,375

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements		2
Condensed Consolidated Balance Sheets: September 30, 2019 (unaudited) and December 31, 2018		2
Condensed Consolidated Statements of Operations and Other Comprehensive Income: Three and Nine months ended September 30, 2019 and 2018 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three and Nine months ended September 30, 2019 and 2018 (unaudited)		4
Condensed Consolidated Statements of Cash Flows: Nine months ended September 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		28
Item 3 Quantitative and Qualitative Disclosures about Market Risk		38
Item 4 Controls and Procedures		39
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		40
Item 1A Risk Factors		40
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 4 Mine Safety Disclosures		40
Item 6 Exhibits		40
Signatures		42

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 including the impact on our financial statements; (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; (ix) our intentions with respect to our credit risk investments; and (x) 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 models 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)

	September 30, 2019			December 31, 2018
ASSETS	(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $604,821 and $518,391)	$	616,084		$	509,649
Federal Home Loan Bank (FHLB) stock, at cost		1,618			1,422
Equity securities, at fair value, (cost $18,698)		—			15,034
Other investments		27,372			2,488
Total investments		645,074			528,593
Cash and cash equivalents		229,996			250,117
Restricted cash		13,789			12,253
Accrued investment income		4,665			4,468
Premiums receivable, net		58,115			57,000
Reinsurance recoverable on paid and unpaid claims		274,116			317,930
Prepaid reinsurance premiums		270,645			233,071
Income taxes receivable		10,611			35,586
Deferred policy acquisition costs, net		75,613			73,055
Property and equipment, net		20,873			17,998
Intangibles, net		70,569			76,850
Goodwill		152,459			152,459
Other assets		16,354			9,333
Total Assets	$	1,842,879		$	1,768,713
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	417,586		$	432,359
Unearned premiums		484,849			472,357
Reinsurance payable		254,152			166,975
Long-term debt, net		130,849			148,794
Deferred income tax, net		14,278			7,705
Advance premiums		21,244			20,000
Accrued compensation		8,263			9,226
Accounts payable and other liabilities		66,428			85,964
Total Liabilities	$	1,397,649		$	1,343,380

Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 29,534,375 shares issued and 28,963,841 shares outstanding at September 30, 2019; 30,083,559 shares issued and 29,477,756 shares outstanding at December 31, 2018		3			3
Additional paid-in capital		331,558			325,292
Accumulated other comprehensive income (loss)		8,550			(6,527	)
Treasury stock, at cost, 8,036,560 and 7,214,797 shares, respectively		(101,078	)		(89,185	)
Retained earnings		206,197			195,750
Total Stockholders' Equity		445,230			425,333
Total Liabilities and Stockholders' Equity	$	1,842,879		$	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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUES:
Gross premiums written	$	237,303		$	233,613		$	702,491		$	701,643
Change in gross unearned premiums		(5,686	)		551			(12,326	)		(9,345	)
Gross premiums earned		231,617			234,164			690,165			692,298
Ceded premiums		(107,755	)		(115,926	)		(342,529	)		(356,748	)
Net premiums earned		123,862			118,238			347,636			335,550
Net investment income		3,655			3,847			11,157			9,704
Net realized and unrealized gains (losses)		805			(123	)		3,132			(1,234	)
Other revenue		3,377			3,333			10,878			11,273
Total revenues		131,699			125,295			372,803			355,293
EXPENSES:
Losses and loss adjustment expenses		70,052			58,695			206,490			177,775
Policy acquisition costs, net of ceding commission income for the three and nine months ended September 30, 2019 of $11.3 million and $36.8 million, respectively		26,686			26,569			79,793			58,167
General and administrative expenses, net of ceding commission income for the three and nine months ended September 30, 2019 of $3.7 million and $12 million, respectively		21,477			25,815			58,465			72,167
Total expenses		118,215			111,079			344,748			308,109
Operating income		13,484			14,216			28,055			47,184
Interest expense, net		2,401			5,225			6,502			15,431
Other non-operating (income)/loss, net		—			—			48			(542	)
Income before income taxes		11,083			8,991			21,505			32,295
Provision for income taxes		2,950			3,002			5,687			9,068
Net income	$	8,133		$	5,989		$	15,818		$	23,227
OTHER COMPREHENSIVE INCOME
Change in net unrealized gains (losses) on investments		4,429			(2,895	)		19,533			(9,918	)
Reclassification adjustment for net realized investment losses		(103	)		(5	)		291			307
Income tax (expense) benefit related to items of other comprehensive income		(1,035	)		1,665			(4,747	)		3,249
Total comprehensive income	$	11,424		$	4,754		$	30,895		$	16,865
Weighted average shares outstanding
Basic		29,109,962			25,631,871			29,329,742			25,663,415
Diluted		29,168,392			26,046,938			29,352,756			26,340,759
Earnings per share
Basic	$	0.28		$	0.23		$	0.54		$	0.91
Diluted	$	0.28		$	0.23		$	0.54		$	0.88

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 Issued			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, net of tax		—			—		(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	)
Tax rate change		—			—		48			—			—			—			48
Dividends declared on common stock		—			—		—			(1,807	)		—			—			(1,807	)
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
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
Net unrealized change in investments, net of tax		—			—		—			—			—			3,291			3,291
Restricted stock vested, net of surrendered shares		5,647			—		(68	)		—			—			—			(68	)
Stock-based compensation on vested restricted stock		—			—		1,345			—			—			—			1,345
Stock buy-back		(316,383	)		—		—			—			(4,549	)		—			(4,549	)
Dividends declared on common stock		—			—		—			(1,772	)		—			—			(1,772	)
Net income		—			—		—			8,133			—			—			8,133
Balance at September 30, 2019		28,963,841		$	3	$	331,558		$	206,197		$	(101,078	)	$	8,550		$	445,230

	Common Shares Issued			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
Net unrealized change in investments, net of tax		—			—		—			—			—			(4,428	)		(4,428	)
Stock repurchase		(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	)		—
APIC deferred tax adj		—			—		970			—			—			—			970
Dividends declared on common stock		—			—		—			(1,601	)		—			—			(1,601	)
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
Stock-based compensation on vested restricted stock		—			—		1,306			—			—			—			1,306
Convertible Option debt extinguishment, net of tax		—			—		(4,235	)		—			—			—			(4,235	)
Dividends declared on common stock		—			—		—			(1,593	)		—			—			(1,593	)
Net unrealized change in investments, net of tax		—			—		—			—			—			(699	)		(699	)
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
Net unrealized change in investments, net of tax		—			—		—			—			—			(1,235	)		(1,235	)
Stock-based compensation on vested restricted stock		—			—		1,317			—			—			—			1,317
Dividends declared on common stock		—			—		—			(1,595	)		—			—			(1,595	)
Net income		—			—		—			5,989			—			—			5,989
Balance at September 30, 2018		25,769,806		$	3	$	295,500		$	193,821		$	(89,185	)	$	(9,583	)	$	390,556

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 Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES
Net income	$	15,818		$	23,227
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		4,034			3,929
Bond amortization and accretion		3,896			4,935
Amortization of original issuance discount on debt		1,073			3,188
Depreciation and amortization		8,274			21,408
Net realized losses		291			307
Net unrealized investment gains		(3,423	)		—
Net (gain)/loss from repurchase of debt		48	&n