UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact name of Registrant as specified in its charter)
|
|
|
(State of Incorporation) |
|
(IRS Employer Identification No.) |
(Address, including zip code, of principal executive offices)
(
(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 |
|
|
|
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.
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).
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
The aggregate number of shares of the Registrant’s Common Stock outstanding on July 29, 2020 was
HERITAGE INSURANCE HOLDINGS, INC.
Table of Contents
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) the impact of the COVID-19 pandemic on the economy in general and on our business, results of operations and financial condition; (ii) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (iii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iv) our estimates and beliefs with respect to tax and accounting matters including the impact on our financial statements and the outcome of any tax examination, as well as the impact of the CARES Act on our financial results, effective tax rate and liquidity; (v) future dividends, if any; (vi) our expectations related to our financing activities; (vii) 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; (viii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements, including to fund our insurance company affiliates’ claims and expenses and satisfy commitments in the event of unforeseen events such as inadequate premium rates or reserve deficiencies, notwithstanding the potential impact of the COVID-19 pandemic; (ix) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (x) our intentions with respect to our credit risk investments; and (xi) 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, non-collectability of reinsurance and our ability to obtain reinsurance on terms and at a cost acceptable to us; |
|
• |
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; |
|
• |
our ability to access sufficient liquidity or obtain additional financing to fund our operations; |
|
• |
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; |
|
• |
the regulation of our insurance operations; |
|
• |
certain characteristics of our common stock; and |
|
• |
the continued and potentially prolonged impact of COVID-19 on the economy, demand for our products and our operations, including measures taken by the governmental authorities to address COVID-19, which may precipitate or exacerbate other risks and/or uncertainties. |
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, 2019. 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, 2020 |
|
|
December 31, 2019 |
|
||
ASSETS |
|
(unaudited) |
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $ |
|
$ |
|
|
|
$ |
|
|
Equity securities, at fair value, (cost $ |
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
Total investments |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
Premiums receivable, net |
|
|
|
|
|
|
|
|
Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $ |
|
|
|
|
|
|
|
|
Prepaid reinsurance premiums |
|
|
|
|
|
|
|
|
Income taxes receivable |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs, net |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Intangibles, net |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
|
|
|
$ |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
$ |
|
|
|
$ |
|
|
Unearned premiums |
|
|
|
|
|
|
|
|
Reinsurance payable |
|
|
|
|
|
|
|
|
Long-term debt, net |
|
|
|
|
|
|
|
|
Deferred income tax, net |
|
|
|
|
|
|
|
|
Advance premiums |
|
|
|
|
|
|
|
|
Accrued compensation |
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Treasury stock, at cost, |
|
|
( |
) |
|
|
( |
) |
Retained earnings |
|
|
|
|
|
|
|
|
Total Stockholders' Equity |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
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, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Change in gross unearned premiums |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gross premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded premiums |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs, net of ceding commission income of $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses, net of ceding commission income of $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating loss, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net realized investment (gains) losses |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Income tax expense related to items of other comprehensive income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total comprehensive income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
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 |
|
|
Total Stockholders' Equity |
|
|||||||
Balance at January 1, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at January 1, 2020 (as adjusted for change in accounting principle) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Net unrealized change in investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Shares tendered for income taxes withholding |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Restricted stock vested |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation on restricted stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock buy-back |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at March 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Net unrealized change in investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Deferred tax adjustment for credit expected losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Restricted stock vested |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation on restricted stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock buy-back |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at June 30, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
4
|
|
Common Shares |
|
|
Par Value |
|
|
Additional Paid-In Capital |
|
|
Retained Earnings |
|
|
Treasury Shares |
|
|
Accumulated Other Comprehensive Income |
|
|
Total Stockholders' Equity |
|
|||||||
Balance at December 31, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Net unrealized change in investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Shares tendered for income taxes withholding |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Restricted stock vested |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation on restricted stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Convertible Option debt extinguishment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock issued on convertible note conversion |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock buy-back |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Tax rate change |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Cash dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at March 31, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Net unrealized change in investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Stock-based compensation on restricted stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock buy-back |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends declared ($ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at June 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
|
For the Six Months Ended June 30, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
Bond amortization and accretion |
|
|
|
|
|
|
|
|
Noncash lease expense |
|
|
|
|
|
|
— |
|
Amortization of original issuance discount on debt |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Net unrealized investment gains |
|
|
— |
|
|
|
( |
) |
Net realized (gains) losses |
|
|
( |
) |
|
|
|
|
Net (gain)/loss from repurchase of debt |
|
|
— |
|
|
|
( |
) |
Deferred income taxes |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
( |
) |
|
|
( |
) |
Premiums receivable, net |
|
|
( |
) |
|
|
( |
) |
Prepaid reinsurance premiums |
|
|
( |
) |
|
|
( |
) |
Reinsurance recoverable on paid and unpaid claims |
|
|
|
|
|
|
( |
) |
Income taxes receivable |
|
|
( |
) |
|
|
|
|
Deferred policy acquisition costs, net |
|
|
( |
) |
|
|
( |
) |
Right of use leased asset |
|
|
|
|
|
|
— |
|
Other assets |
|
|
( |
) |
|
|
( |
) |
Unpaid losses and loss adjustment expenses |
|
|
|
|
|
|
( |
) |
Unearned premiums |
|
|
|
|
|
|
|
|
Reinsurance payable |
|
|
|
|
|
|
|
|
Accrued interest |
|
|
|
|
|
|
|
|
Accrued compensation |
|
|
|
|
|
|
( |
) |
Advance premiums |
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
( |
) |
|
|
( |
) |
Other liabilities |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Fixed maturity securities sales, maturities and paydowns |
|
|
|
|
|
|
|
|
Fixed maturity securities purchases |
|
|
( |
) |
|
|
( |
) |
Equity securities sales |
|
|
|
|
|
|
|
|
Equity securities purchases |
|
|
( |
) |
|
|
( |
) |
Limited partnership interest |
|
|
— |
|
|
|
( |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
|
|
Cost of property and equipment acquired |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Repayment of term note |
|
|
( |
) |
|
|
( |
) |
Mortgage loan payments |
|
|
( |
) |
|
|
( |
) |
Repurchase of convertible notes |
|
|
— |
|
|
|
( |
) |
Purchase of treasury stock |
|
|
( |
) |
|
|
( |
) |
Tax withholdings on share-based compensation awards |
|
|
( |
) |
|
|
( |
) |
Dividends paid |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Increase in cash, cash equivalents, and restricted cash |
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
Issuance of shares on conversion of convertible notes |
|
$ |
— |
|
|
$ |
|
|
6
Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(In thousands) |
|
|||||
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
Restricted cash |
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Restricted cash primarily represents funds held to meet our contractual obligations related to the catastrophe bonds issued by Citrus Re and by the Company’s insurance subsidiaries in certain states in which such subsidiaries conduct business to meet regulatory requirements.
See accompanying notes to unaudited condensed consolidated financial statements.
7
HERITAGE INSURANCE HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. (together with its subsidiaries, the “Company” “we”, “us” or “our”). These statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The accompanying interim condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).
Significant accounting policies
The accounting policies of the Company are set forth in Note 1 to condensed consolidated financial statements contained in the Company’s 2019 Form 10-K.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) Financial Instruments – Credit Losses ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model. Adoption of CECL required the evaluation to establish an allowance for the Company’s reinsurance recoverables, premium receivables and for our available-for-sale debt securities investments. The model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset. We adopted the standard on
Fair Value Measurements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. Other amendments in the update did not materially impact the Company. The standard became effective for the Company on January 1, 2020 with no impact on our condensed consolidated financial statements.
Internal Use Software
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard clarifies the accounting for implementation costs in cloud computing arrangements. The standard was effective on January 1, 2020 with no impact on our condensed consolidated financial statements.
8
Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the condensed consolidated financial statements.
For information regarding other accounting standards that the Company has not yet adopted, refer to our 2019 Form 10-K, filed on March 10, 2020, the section of Note 1 of the notes to the consolidated financial statements entitled “Accounting Pronouncement Not Yet Adopted”.
NOTE 2. INVESTMENTS
Securities Available-for-Sale
The following table summarizes the amortized cost and fair value of securities available-for-sale at June 30, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
June 30, 2020 |
|
Cost or Adjusted / Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Debt Securities Available-for-sale |
|
(In thousands) |
|
|||||||||||||
U.S. government and agency securities (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid securities |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
Includes securities at June 30, 2020 with a carrying amount of $ |
The Company’s unrealized losses on corporate bonds have not been recognized because the bonds are of high credit quality with investment grade ratings of A or higher, the Company does not intend to sell and it is unlikely the Company will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is deemed due to changes in interest rates and other market conditions. The bond issuers continue to make timely principal and interest payments on the bonds. After taking into account these and other factors previously described, we believe these unrealized losses generally were caused by a decrease in market interest rates since the time the securities were purchased.
The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
December 31, 2019 |
|
Cost or Adjusted / Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Debt Securities Available-for-sale |
(In thousands) |
|
||||||||||||||
U.S. government and agency securities (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid securities |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Industrial and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
Includes securities at December 31, 2019 with a carrying amount of $ |
9
Proceeds received, and the gross realized gains and losses from sales of available-for-sale securities, for the three and six months ended, June 30, 2020 and 2019 are as follows:
|
|
Proceeds |
|
Gross Realized Gains |
|
Gross Realized Losses |
||||||
|
|
(In thousands) |
|
|||||||||
Three months ended June 30, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Three months ended June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds |
|
Gross Realized Gains |
|
Gross Realized Losses |
||||||
|
|
(In thousands) |
|
|||||||||
Six months ended June 30, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Six months ended June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company reviews credit losses and the valuation allowance for expected credit losses each quarter. When all or a portion of a debt security is identified as uncollectible and written off, the valuation allowance for expected credit losses is reduced by the same amount. In general, a security is considered uncollectible no later than when all efforts to collect contractual cash flows have been exhausted. The Company considers the following considerations when deeming a security uncollectible:
|
• |
sufficient information was available to determine the issuer of the security is insolvent; |
|
• |
receipt of notice of filed bankruptcy, and the collectability is expected to be adversely impacted; |
|
• |
issuer has violated multiple debt covenants; |
|
• |
the extent to which the market value of the security has been below its cost or amortized costs; and |
|
• |
receipt of notice indicating that the issuer does not intend to pay the contractual principal and interest. |
For the three and six months ended June 30, 2020 the Company sold
For the three months ended June 30, 2019, the Company received proceeds from the sale of marketable securities of approximately $
The table below summarizes the Company’s fixed maturity securities at June 30, 2020 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.
|
|
At June 30, 2020 |
|
|||||||||||||
|
|
Cost or Amortized Cost |
|
|
Percent of Total |
|
|
Fair Value |
|
|
Percent of Total |
|
||||
Maturity dates: |
|
(In thousands) |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
||
Due in one year or less |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
Due after one year through five years |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
Due after five years through ten years |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
Due after ten years |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
Total |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
10
The following table summarizes the Company’s net investment income by major investment category for the three and six months ended June 30, 2020 and 2019, respectively:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
(In thousands) |
|
|
(In thousands) |
|
||||||||||
Debt securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Equity securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Investment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income, less investment expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following tables summarizes debt securities available-for-sale in an unrealized loss position at June 30, 2020, aggregated by major security category and length of time in a continued unrealized loss position (in thousands):
|
|
Less Than Twelve Months |
|
|
Twelve Months or More |
|
||||||||||||||||||
June 30, 2020 |
|
Number of Securities |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Number of Securities |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Industrial and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturity securities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
The Company evaluates expected credit losses for available-for-sale securities (“AFS”) when fair value is below amortized cost. AFS securities are evaluated for potential credit loss on an individual security level but the evaluation may use assumptions consistent with expectations of credit losses for a group of similar securities. If the Company has the intent to sell or will be required to sell the security before recovery, the entire impairment loss will be recorded through income to net realized gains and losses. If the Company does not have the intent to sell or will not be required to sell the security before recovery, an allowance for credit losses is established and the portion of loss that relates to credit losses is recorded in income to net realized and unrealized gains (losses) and the portion of the loss that relates to the non-credit loss is recorded in Other comprehensive income. At June 30, 2020, the Company did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that it will be required to sell these securities before recovery of their amortized cost basis. Further, the Company did not believe it had a credit event and therefore did
The following tables summarizes debt securities available-for-sale in an unrealized loss position at December 31, 2019, aggregated by major security category and length of time in a continued unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months |
|
|
Twelve Months or More |
|
||||||||||||||||||
December 31, 2019 |
|
Number of Securities |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Number of Securities |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
11
Other Investments
Classified in other investments, the Company has interest in limited partnerships (“LPs”), Partnership Real Estate Investment Trust (REITs) and Limited Liability Companies (“LLCs”) totaling $
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is determined based on the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
|
• |
Level 1 – Inputs to the valuation based on quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date. |
|
• |
Level 2 – Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data. |
|
• |
Level 3 – Inputs to the valuation that are unobservable inputs for the asset or liability. |
The highest priority is assigned Level 1 inputs and the lowest priority to Level 3 inputs.
We did not hold any Level 3 assets or liabilities as of June 30, 2020 or December 31, 2019.
The carrying value of premium receivables and accounts payable, accrued expense, revolving loans and borrowings under our senior secured credit facility approximate their fair value. The rate at which revolving loans and borrowings under our senior secured credit facility bear interest resets periodically at market interest rates. All of these items are considered Level 1 assets and liabilities.
Investments excluded from the fair value hierarchy
The Company has interests in LPs, REITs and LLCs. This investment categorization has the potential for higher returns but also the potential for higher degrees of risk, including less than stable rates of returns and may provide less liquidity. These investments are carried at net asset value, as reported by the managers of the funds, and are excluded from the fair value hierarchy.
The table below presents the balances of our invested assets measured at fair value on a recurring basis:
June 30, 2020 |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Invested Assets: |
|
(in thousands) |
|
|||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Special revenue |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Hybrid securities |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Industrial and miscellaneous |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Investments reported at NAV(1) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
12
December 31, 2019 |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Invested Assets: |
|
(in thousands) |
|
|||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Special revenue |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Hybrid securities |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Industrial and miscellaneous |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Investments reported at NAV(1) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
(1) |
Includes $ |
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, were based on Level 3 unobservable inputs. For the quarters ended June 30, 2020 and 2019, these non-recurring fair value inputs consisted of brand, agent relationships, renewal rights, customer relations, trade names, non-compete and goodwill. To evaluate such assets for a potential impairment, we determine the fair value of the goodwill and intangible assets using a combination of a discounted cash flow approach and market approaches, which contain significant unobservable inputs and therefore are considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.
There were
NOTE 4. OTHER COMPREHENSIVE INCOME
|
|
For the Three Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2020 |
|
|
2019 |
|
||||||||||||||||||
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on investments, net |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Reclassification adjustment of realized losses (gains) included in net income |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Effect on other comprehensive income |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
For the Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2020 |
|
|
2019 |
|
||||||||||||||||||
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on investments, net |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Reclassification adjustment of realized losses (gains) included in net income |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
Effect on other comprehensive income |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
13
NOTE 5. LEASES
The Company has entered into operating and financing leases primarily for real estate and vehicles. The Company will determine whether an arrangement is a lease at inception of the agreement. The operating leases have terms of
Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine present value of the lease payments. The Company used the implicit rates within the finance leases.
Components of the Company’s lease costs for the three and six months ended June 30, 2020 and 2019 are as follows (in thousands):
|
|
Three Months Ended June 30, 2020 |
|
|
Three Months Ended June 30, 2019 |
|
||
Amortization of ROU assets - Finance leases |
|
$ |
|
|
|
$ |
|
|
Interest on lease liabilities - Finance leases |
|
|
|
|
|
|
|
|
Variable lease cost (cost excluded from lease payments) |
|
|
|
|
|
|
|
|
Operating lease cost (cost resulting from lease payments) |
|
|
|
|
|
|
|
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
|
|
Six Months Ended June 30, 2020 |
|
|
Six Months Ended June 30, 2019 |
|
||
Amortization of ROU assets - Finance leases |
|
$ |
|
|
|
$ |
|
|
Interest on lease liabilities - Finance leases |
|
|
|
|
|
|
|
|
Variable lease cost (cost excluded from lease payments) |
|
|
|
|
|
|
|
|
Operating lease cost (cost resulting from lease payments) |
|
|
|
|
|
|
|
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow information and non-cash activity related to our operating and financing leases as of June 30, 2020 and 2019 are as follows (in thousands):
|
|
June 30, 2020 |
|
|
June 30, 2019 |
|
||
Finance lease - Operating cash flows |
|
$ |
|
|
|
$ |
|
|
Finance lease - Financing cash flows |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Operating lease - Operating cash flows (fixed payments) |
|
$ |
|
|
|
$ |
|
|
Operating lease - Operating cash flows (liability reduction) |
|
$ |
|
|
|
$ |
|
|
Supplemental balance sheet information related to our operating and financing leases as of June 30, 2020 are as follows (in thousands):
|
|
Balance Sheet Classification |
|
June 30, 2020 |
|
|
Right-of-use assets - operating |
|
Other assets |
|
$ |
|
|
Right-of-use assets - finance |
|
Other assets |
|
$ |
|
|
Lease Liability (1) - operating |
|
Accounts payable and other liabilities |
|
$ |
( |
) |
Lease Liability - finance |
|
Accounts payable and other liabilities |
|
$ |
( |
) |
|
|
|
|
|
|
|
(1) Includes $ |
|
Weighted-average remaining lease term and discount rate for our operating and financing leases as of June 30, 2020 are as follows:
|
|
June 30, 2020 |
|
|
Weighted average lease term - Finance leases |
|
|
|
|
Weighted average lease term - Operating leases |
|
|
|
|
Weighted average discount rate - Finance leases |
|
|
|
% |
Weighted average discount rate - Operating leases |
|
|
|
% |
14
Maturities of lease liabilities by fiscal year for our operating and financing leases as of June 30, 2020 are as follows (in thousands):
|
|
June 30, 2020 |
|
|
2020 remaining |
|
$ |
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at June 30, 2020 and December 31, 2019:
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(In thousands) |
|
|||||
Land |
|
$ |
|
|
|
$ |
|
|
Building |
|
|
|
|
|
|
|
|
Computer hardware and software |
|
|
|
|
|
|
|
|
Office furniture and equipment |
|
|
|
|
|
|
|
|
Tenant and leasehold improvements |
|
|
|
|
|
|
|
|
Vehicle fleet |
|
|
|
|
|
|
|
|
Total, at cost |
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation and amortization expense for property and equipment was $
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Assets
At June 30, 2020 and December 31, 2019 goodwill was $
|
|
Goodwill |
|
|
|
|
(in thousands) |
|
|
Balance as of December 31, 2019 |
|
$ |
|
|
Goodwill acquired |
|
— |
|
|
Impairment |
|
— |
|
|
Balance as of June 30, 2020 |
|
$ |
|
|
Our annual goodwill impairment analysis was performed as of October 1, 2019. Management had determined that an impairment review was appropriate for the first quarter of 2020 given the potential impact of the COVID-19 pandemic. We qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived assets were impaired as of March 31, 2020. For the second quarter of 2020 there had been no change in the Company’s qualitative assessment results for its goodwill assessment, and based on that assessment management determined that our goodwill and indefinite-lived assets are not impaired for the period ended June 30, 2020.
15
Other Intangible Assets
Our intangible assets consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses. Finite-lived intangibles assets are amortized over their useful lives from 2.5 to
Amortization expense of our intangible assets was $
Estimated annual pretax amortization of intangible assets for each of the next five years and thereafter is as follows (in thousands):
Year |
|
Amount(1) |
|
|
2020 - remaining |
|
$ |
|
|
2021 |
|
$ |
|
|
2022 |
|
$ |
|
|
2023 |
|
$ |
|
|
2024 |
|
$ |
|
|
Thereafter |
|
$ |
|
|
Total |
|
$ |
|
|
|
(1) |
|
NOTE 8. OTHER ASSETS
The following table summarizes the Company’s other assets for the periods indicated:
Description |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(In thousands) |
|
|||||
Other amounts receivable |
|
|
|
|
|
|
|
|
State underwriting pooling & assoc. |
|
|
|
|
|
|
|
|
Prepaid expense |
|
|
|
|
|
|
|
|
Right to use assets |
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Premium tax |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
|
|
|
$ |
|
|
Recorded in other amounts receivable are
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods indicated.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders (000's) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders (000's) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
16
NOTE 10. DEFERRED REINSURANCE CEDING COMMISSION
The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the quarter ended June 30, 2020 and 2019, the Company allocated ceding commission income of $
The table below depicts the activity with regard to deferred reinsurance ceding commission during the three and six months ended June 30, 2020 and 2019.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Beginning balance of deferred ceding commission income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Ceding commission deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: ceding commission earned |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Ending balance of deferred ceding commission income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 11. DEFERRED POLICY ACQUISITION COSTS
The Company incurs incremental policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance; (ii) policy administration fees paid to a third-party administrator at the time of policy issuance; (iii) premium taxes; and (iv) inspection fees. The Company capitalizes incremental policy acquisition costs that are directly related to the successful efforts of acquiring new or renewed insurance contracts to the extent recoverable, then the Company amortizes those costs over the contract period of the related policy. The Company defers the incurred incremental policy acquisition costs, commonly referred to as deferred policy acquisition costs (“DPAC”), which are amortized over the effective period of the related insurance policies.
The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC during the three and six months ended June 30, 2020 and 2019.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Beginning Balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Policy acquisition costs deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Ending Balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 12. INCOME TAXES
For the three months ended June 30, 2020 and 2019, the Company recorded $
17
The table below summarizes the significant components of our net deferred tax liability for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Deferred tax assets: |
|
(In thousands) |
|
|||||
Unearned premiums |
|
$ |
|
|
|
$ |
|
|
Unearned commission |
|
|
|
|
|
|
|
|
Tax-related discount on loss reserve |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
Leases |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
Unrealized gains |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
|
|
|
|
|
|
Note discount |
|
|
|
|
|
|
|
|
Basis in purchased investments |
|
|
|
|
|
|
|
|
Basis in purchased intangibles |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
( |
) |
|
$ |
( |
) |
In April 2019, the Company was notified by the tax authority that the federal income tax returns for the years 2015, 2016 and 2017 will be examined. The Company does not believe the examination results will have an adverse impact on the condensed consolidated financial statements.
At June 30, 2020 and December 31, 2019, we had
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that we are deferring to future periods. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation may have on our business and financial results.
NOTE 13. REINSURANCE
Overview
The Company’s reinsurance program is designed, utilizing the Company’s risk management methodology, to address its exposure to catastrophes or large non-catastrophic losses. The Company’s program provides reinsurance protection for catastrophes including hurricanes, tropical storms, tornadoes and winter storms. The Company’s reinsurance agreements are part of its catastrophe management strategy, which is intended to provide its stockholders an acceptable return on the risks assumed in its property business, and to reduce variability of earnings, while providing protection to the Company’s policyholders.
In order to limit our potential exposure to catastrophic events, we purchase significant reinsurance from third party reinsurers. The catastrophe reinsurance may be on an excess of loss or quota share basis. We also purchase reinsurance for non-catastrophe losses on a quota share, per risk or facultative basis. Purchasing a sufficient amount of reinsurance to cover catastrophic losses from single or multiple events or significant non-catastrophe losses is an important part of our risk strategy, and premiums ceded to reinsurers is one of our largest costs. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss.
Our reinsurance agreements are prospective contracts. We record an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize our catastrophe reinsurance premiums over the
18
In the event that we incur losses and loss adjustment expenses recoverable under our reinsurance program, we record amounts recoverable from our reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of our liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to our estimate of unpaid losses. As a result, a reasonable possibility exists that an estimated recovery may change significantly in the near term from the amounts included in our consolidated financial statements.
Our insurance regulators and rating agency require all insurance companies, like us, to have a certain amount of capital and reinsurance coverage in order to cover losses and loss adjustment expenses upon the occurrence of a catastrophic event. Our 2020-2021 reinsurance program provides reinsurance in excess of our state regulator and rating agency requirements. The nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a particular catastrophic event could be a one-in-100-year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company. We also purchase reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. We share portions of our reinsurance program coverage among our insurance company affiliates.
Catastrophe Excess of Loss Reinsurance
Effective June 1, 2020, we entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”). The catastrophe reinsurance programs are allocated amongst traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”) and Osprey Re Ltd (“Osprey”), our captive reinsurer. The FHCF covers Florida risks only and we elected to participate at
The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The 2020-2021 reinsurance program provides first event coverage up to $
The majority of our program was placed on a cascading basis which provides greater horizontal protection in a multiple small events scenario and features additional coverage enhancements.
We are responsible for all losses and loss adjustment expenses in excess of our reinsurance program. For second or subsequent catastrophic events, our total available coverage depends on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $
The Company's estimated net cost for the 2020-2021 catastrophe reinsurance programs is approximately $
Gross Quota Share Reinsurance
NBIC did not enter into a gross quota share reinsurance program for the contract term beginning June 1, 2019, nor was a gross quota share reinsurance program entered into in 2020. For the 2018 contract term, NBIC purchased an
Net Quota Share Reinsurance
Our Net Quota Share coverage is proportional reinsurance, which applies to business underwritten by NBIC, for which certain of our other reinsurance (property catastrophe excess of loss and the second layer of the general excess of loss) inures to the quota share program. An occurrence limit of $
19
Aggregate Coverage
$
Additionally, for business underwritten by NBIC, we placed
We placed
Per Risk Coverage
For losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms, the Company purchased property per risk coverage for losses and loss adjustment expenses in excess of $
In addition, the Company purchased facultative reinsurance for losses in excess of $
General Excess of Loss
Our general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. The coverage is in
In addition, we purchased facultative reinsurance for losses underwritten by NBIC in excess of $
Effect of Reinsurance
The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated statement of income for the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
(In thousands) |
|
|
(In thousands) |
|
||||||||||
Premium written: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Loss and Loss Adjustment Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
20
NOTE 14. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company determines the reserve for unpaid losses and loss adjustment expenses (“LAE”) on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date.
The table below summarizes the activity related to the Company’s reserve for unpaid losses and LAE:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
|
(In thousands) |
|
|||||||||||||
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Less: reinsurance recoverable on unpaid losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total incurred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: reinsurance recoverable on unpaid losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As of June 30, 2020, the Company reported $
NOTE 15. LONG-TERM DEBT
Convertible Senior Notes
In August 2017 and September 2017, the Company issued in aggregate $
As of June 30, 2020, the Company had $
Debt Extinguishment
On February 19, 2019, the Company reacquired $
Senior Secured Credit Facility
In December 2018, the Company entered into a
Term Loan Facility: The principal amount of the Term Loan Facility amortizes in quarterly installments, beginning with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $
21
Revolving Credit Facility: The Revolving Credit Facility allows for borrowings of up to $
On April 27, 2020, the Company amended its Credit Agreement by entering into the Second Amendment to Credit Agreement (the “Second Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent.
On June 1, 2020, the Company amended the Credit Agreement by entering into the Third Amendment to Credit Agreement (the “Third Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Third Amendment modified the Credit Agreement to increase the letter of credit sublimit from $
At June 30, 2020, the Company’s effective interest rate for the Term Loan Facility was
Mortgage Loan
In October 2017, the Company and its subsidiary, Skye Lane Properties LLC, jointly obtained a commercial real estate mortgage loan in the amount of $
FHLB Loan Agreements
In December 2018, a subsidiary of the Company received a
The following table summarizes the Company’s debt and credit facilities as of June 30, 2020 and December 31, 2019:
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(in thousands) |
|
|||||
Convertible debt |
|
$ |
|
|
|
$ |
|
|
Mortgage loan |
|
|
|
|
|
|
|
|
Term loan facility |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
|
|
|
|
|
|
FHLB loan agreement |
|
|
|
|
|
|
|
|
Total principal amount |
|
$ |
|
|
|
$ |
|
|
Less: unamortized discount and issuance costs |
|
$ |
|
|
|
$ |
|
|
Total long-term debt |
|
$ |
|
|
|
$ |
|
|
As of the date of this report, we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Agreement, Convertible Notes indenture, cash borrowings and other loans. Our ability to secure future debt financing depends, in part, on our ability to remain in such compliance. Provided there is no default or an event of default, we are permitted to payout dividends in an aggregate amount not to exceed $
22
The schedule of principal payments on long-term debt as of June 30, 2020 is as follows:
Year |
|
Amount |
|
|
|
|
(In thousands) |
|
|
2020 remaining |
|
$ |
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
NOTE 16. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following as of June 30, 2020 and December 31, 2019:
Description |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(In thousands) |
|
|||||
Deferred ceding commission |
|
$ |
|
|
|
$ |
|
|
Accounts payable and other payables |
|
|
|
|
|
|
|
|
Lease obligations |
|
|
|
|
|
|
|
|
Accrued interest and issuance costs |
|
|
|
|
|
|
|
|
Accrued dividends |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Commission payables |
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
|
|
|
$ |
|
|
NOTE 17. STATUTORY ACCOUNTING AND REGULATIONS
State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, restrict the allowable investment types and investment mixes, and subject the Company’s insurers to assessments.
The Company’s insurance subsidiaries Heritage P&C, NBIC, Zephyr, and PIC must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain capital and surplus equal to the
NOTE 18. COMMITMENTS AND CONTINGENCIES
The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.
23
NOTE 19. RELATED PARTY TRANSACTIONS
The Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders as set forth below. The Company has entered into each of these arrangements without obligation to continue its effect in the future and the associated expense was immaterial to its results of operations or financial position as of June 30, 2020 and 2019.
|
• |
In January 2017, the Company entered into a consulting agreement with Mrs. Shannon Lucas, the wife of the Chairman and CEO, in which she agreed to provide consulting services related to the Company’s catastrophe reinsurance and risk management program at a rate of $ |
|
• |
In July 2019, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for our insurance company affiliates. The Company pays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a director. For the three and six months ended June 30, 2020 and 2019, the Company paid agency commission to Comegys of approximately $ |
NOTE 20. EMPLOYEE BENEFIT PLANS
The Company provides a
The Company provides its employees with a partially self-insured healthcare plan and benefits. For the three months ended June 30, 2020 and 2019, incurred medical premium costs amounted to an aggregate of $
NOTE 21. EQUITY
The total amount of authorized capital stock consists of
As more fully disclosed in our audited consolidated financial statements for the year ended December 31, 2019, there were,
Common Stock
Holders of common stock are entitled to
24
Stock Repurchase Program
On August 1, 2018, the Company announced that its Board of Directors authorized a stock repurchase program authorizing the Company to repurchase up to $
At June 30, 2020, the Company has the capacity to repurchase $
Dividends
On February 27, 2020, the Company’s Board of Directors declared a $
The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors and will depend on a variety of factors including the Company’s financial condition and results of operations.
NOTE 22. STOCK-BASED COMPENSATION
Common and Restricted Stock
The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22, 2014. The Plan authorized
At June 30, 2020 there were
In April 2020, the Company entered into a Restricted Stock Award Agreement granting
The Plan authorizes the Company to grant stock options at exercise prices equal to the fair market value of the Company’s stock on the dates the options are granted. Any options granted would typically have a maximum term of
The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employee’s vest in equal installments generally over a
period from the grant date subject to the recipient’s continued employment. The fair value of restricted stock awards is estimated by the market price at the date of grant and amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards have the right to receive dividends.
Restricted stock activity for the six months ended June 30, 2020 is as follows:
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
|
|
Number of shares |
|
|
Value per Share |
|
||
Non-vested, at December 31, 2019 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
Canceled and surrendered |
|
|
( |
) |
|
|
|
|
Non-vested, at June 30, 2020 |
|
|
|
|
|
$ |
|
|
25
Awards are being amortized to expense over the
NOTE 23. SUBSEQUENT EVENTS
The Company performed an evaluation of subsequent events through the date the condensed consolidated financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of June 30, 2020.
On July 1, 2020, Regions issued an irrevocable standby Letter of Credit in the amount of $
On
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and information included and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.
FINANCIAL HIGHLIGHTS
Overview
Heritage Insurance Holdings, Inc., is a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance through its insurance company subsidiaries. We are vertically integrated and control or manage substantially all aspects of insurance underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting.
On an admitted basis, we provide personal residential insurance in twelve eastern states and commercial residential insurance in three of those states. We also write personal residential insurance on an admitted basis in Hawaii and in California on an excess and surplus lines basis.
Our operating subsidiaries include, but are not limited to: Heritage Property & Casualty Insurance Company (“Heritage P&C”), which provides personal and commercial residential property insurance and commercial general liability insurance; Narragansett Bay Insurance Company (“NBIC”), which provides personal and commercial residential property insurance; Zephyr Insurance Company (“Zephyr”), which provides personal residential wind-only property and multi-peril property insurance in Hawaii; Osprey Re Ltd. (“Osprey”), our captive reinsurance subsidiary that may provide a portion of the reinsurance protection purchased by our insurance company subsidiaries; Heritage MGA, LLC, our managing general agent; NBIC Service Company, which provides services to NBIC; and Contractors’ Alliance Network, LLC (“CAN”), our vendor network manager for claims and provider of restoration, emergency and recovery services.
Impact of Coronavirus
We continue to monitor the short- and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020. During the six months ended June 30, 2020, we saw limited impact to our business. As a residential property insurer, we view our business to be somewhat insulated, as property owners and renters generally view our products as a necessity. The majority of our gross and net premiums written are from renewals of expiring policies. New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio. In a prolonged recessionary and social-distancing environment, we could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition.
Although we have not experienced a significant amount of payment delays, or non-payment, there may be delays in premium payments in geographies that require us to grant policyholders additional time to pay their premiums and, under prolonged recessionary economic conditions, we could experience more significant delays in premium payments and possibly non-payment of premiums.
Global credit and financial markets have experienced extreme volatility and disruptions as a result of the COVID-19 pandemic, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Notwithstanding these actual and potential impacts, we currently believe that our cash on hand, revolving credit facility and expected earnings give us sufficient liquidity to fund our operations. However, if we need additional liquidity at a time when equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive.
Coronavirus Aid, Relief, and Economic Security Act
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that we are deferring to future periods. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation may have on our business and financial results.
27
Financial Results Highlights for the Second Quarter of 2020
|
• |
Net income for the quarter was $4.1 million, or $0.15 per diluted share. |
|
• |
Book value per share increased to $16.67, up 11.2% from June 30, 2019 and 6.4% (12.9% annualized growth rate) from year-end 2019. |
|
• |
Gross premiums written of $290.4 million, up 14.0% year-over-year. Premiums-in-force of $994.6 million, representing a 15.3% annualized growth rate from first quarter 2020. |
|
• |
Favorable prior year reserve development of $5.0 million, representing the eighth consecutive quarter of favorable prior year reserve development. |
|
• |
Net current accident quarter weather losses of $26.8 million, including $17.6 million of net current accident quarter catastrophe losses. In the prior year quarter, net current accident quarter weather losses were $21.5 million, including catastrophe losses of $13.4 million. |
|
• |
Repurchased 163,456 shares for $2.0 million at an average price of $12.31 per share, 26.2% below second quarter 2020 book value per share. Total capital returned to shareholders of $3.7 million, including $0.06 per share regular quarterly dividend. |
|
• |
Began writing homeowners insurance in Mississippi. |
Results of Operations
Comparison of the Three Months Ended June 30, 2020 and 2019
Revenue
|
|
For the Three Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
REVENUE: |
|
(in thousands) |
|
|||||||||||||
Gross premiums written |
|
$ |
290,432 |
|
|
$ |
254,840 |
|
|
$ |
35,592 |
|
|
|
14 |
% |
Change in gross unearned premiums |
|
|
(48,640 |
) |
|
|
(24,882 |
) |
|
|
(23,758 |
) |
|
|
95 |
% |
Gross premiums earned |
|
|
241,792 |
|
|
|
229,958 |
|
|
|
11,834 |
|
|
|
5 |
% |
Ceded premiums |
|
|
(112,735 |
) |
|
|
(115,875 |
) |
|
|
3,140 |
|
|
|
(3 |
)% |
Net premiums earned |
|
|
129,057 |
|
|
|
114,083 |
|
|
|
14,974 |
|
|
|
13 |
% |
Net investment income |
|
|
3,296 |
|
|
|
3,830 |
|
|
|
(534 |
) |
|
|
(14 |
)% |
Net realized gains |
|
|
(38 |
) |
|
|
1,303 |
|
|
|
(1,341 |
) |
|
NM |
|
|
Other revenue |
|
|
3,697 |
|
|
|
3,627 |
|
|
|
70 |
|
|
|
2 |
% |
Total revenue |
|
$ |
136,012 |
|
|
$ |
122,843 |
|
|
$ |
13,169 |
|
|
|
11 |
% |
NM= Not Meaningful
Gross premiums written
Gross premiums written were $290.4 million in second quarter 2020, up 14.0% from $254.8 million in the prior year quarter. The increase reflects 69.0% commercial residential growth, 11.3% personal residential growth outside Florida and 6.1% personal residential growth in Florida.
Premiums-in-force were $994.6 million in second quarter 2020, representing a 15.3% annualized growth rate from first quarter 2020. The increase stems from the same items impacting gross premiums written.
Gross premiums earned
Gross premiums earned were $241.8 million in second quarter 2020, up 5.1% from $230.0 million in the prior year quarter. The increase reflects higher gross premiums written over the past twelve months.
28
Ceded premiums
Ceded premiums were $112.7 million in second quarter 2020, down 2.7% from $115.9 million in the prior year quarter. The decrease is primarily attributable to a reduction in the cost of our 2019-2020 catastrophe reinsurance program and a reduction in overall quota share reinsurance coverage, partly offset by the higher cost of our 2020-2021 catastrophe reinsurance program. The higher cost of the 2020-2021 catastrophe excess-of-loss reinsurance program was partially diluted by increased use of our captive reinsurer, Osprey Re. Our gross quota share reinsurance program was reduced from 18.75% to 8.0% effective June 1, 2018 and was eliminated effective June 1, 2019, while our net quota share reinsurance program increased from 52.0% to 56.0% effective December 31, 2019. Our excess-of-loss catastrophe reinsurance programs incept on June 1st of each year and run for twelve months.
Net premiums earned
Net premiums earned were $129.1 million in second quarter 2020, up 13.1% from $114.1 million in the prior year quarter. The increase reflects higher gross premiums earned and lower ceded premiums earned, as described above.
Net investment income
Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $3.3 million in second quarter 2020, down $1.8 million from $5.1 million in the prior year quarter. The decrease is primarily due to unrealized gains on equity securities in the prior year quarter.
Other revenue
Other revenue of $3.7 million in second quarter 2020 was relatively flat in comparison year over year.
Total revenue
Total revenue was $136.0 million in second quarter 2020, up 10.7% from $122.8 million in the prior year quarter. The increase primarily stems from higher net premiums earned, as described above.
|
|
For the Three Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
OPERATING EXPENSES: |
|
(in thousands) |
|
|||||||||||||
Losses and loss adjustment expenses |
|
|
78,869 |
|
|
|
74,299 |
|
|
|
4,570 |
|
|
|
6 |
% |
Policy acquisition costs |
|
|
30,237 |
|
|
|
27,087 |
|
|
|
3,150 |
|
|
|
12 |
% |
General and administrative expenses |
|
|
19,943 |
|
|
|
18,384 |
|
|
|
1,559 |
|
|
|
8 |
% |
Total operating expenses |
|
|
129,049 |
|
|
|
119,770 |
|
|
|
9,279 |
|
|
|
8 |
% |
Losses and loss adjustment expenses
Losses and loss adjustment expenses (“LAE”) were $78.9 million in second quarter 2020, up 6.2% from $74.3 million in the prior year quarter. The increase primarily stems from higher retained weather losses in the current year quarter and lower income from vertically integrated operations, partly offset by higher favorable prior year reserve development. Weather losses in the second quarters of 2020 and 2019 were higher-than-normal.
Policy acquisition costs
Policy acquisition costs were $30.2 million in second quarter of 2020, up 11.6% from $27.1 million in the prior year quarter. The increase is primarily attributable to higher acquisition costs associated with gross premiums written growth and reduced ceding commission income. Ceding commissions decreased in the current year period due to a reduction to our overall quota share reinsurance program, as described above.
29
General and administrative expenses
General and administrative expenses were $19.9 million in second quarter 2020, up 8.5% from $18.4 million in the prior year quarter. The increase is primarily attributable to increased headcount associated with premium growth and lower ceding commission income associated with a reduction to our overall quota share reinsurance program, as described above.
|
|
For the Three Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in thousands, except per share and share amounts) |
|
|||||||||||||
Operating income |
|
|
6,963 |
|
|
|
3,073 |
|
|
|
3,890 |
|
|
|
127 |
% |
Interest expense, net |
|
|
1,721 |
|
|
|
1,984 |
|
|
|
(263 |
) |
|
|
(13 |
)% |
Other non-operating expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
NM |
|
|
Income before income taxes |
|
|
5,242 |
|
|
|
1,089 |
|
|
|
4,153 |
|
|
|
381 |
% |
Provision for income taxes |
|
|
1,110 |
|
|
|
368 |
|
|
|
742 |
|
|
|
202 |
% |
Net income |
|
$ |
4,132 |
|
|
$ |
721 |
|
|
$ |
3,411 |
|
|
|
473 |
% |
Basic net income per share |
|
$ |
0.15 |
|
|
$ |
0.02 |
|
|
$ |
0.13 |
|
|
|
641 |
% |
Diluted net income per share |
|
$ |
0.15 |
|
|
$ |
0.02 |
|
|
$ |
0.13 |
|
|
|
640 |
% |
Interest expense, net
Net interest expense was $1.7 million in second quarter 2020 compared to $2.0 million in the prior year quarter. The decrease is associated with a lower principal amount of long-term debt, coupled with a lower blended interest rate.
Provision for income taxes
Provision for income taxes was $1.1 million in second quarter 2020 compared to $368,000 in the prior year quarter. The effective tax rate was 21.2% in second quarter 2020, 12.6 points below the prior year quarter’s 33.8% rate. The second quarter 2020 effective tax rate benefitted from a $422,000 tax year 2018 state income tax refund associated with a temporary tax reduction related to 2017 federal income tax reform. The lower effective tax rate in the current year quarter also stemmed from lower pre-tax income in the prior year quarter, which had a significant adverse impact on that period’s effective tax rate due to the impact of permanent tax differences. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.
Net income
Second quarter 2020 net income was $4.1 million, up from $721,000 in the prior year quarter. The increase primarily reflects higher net premiums earned, lower net loss and expense ratios, and a lower effective tax rate, partly offset by lower investment gains.
Ratios
|
|
For the Three Months Ended June 30, |
|
|||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
||
Ceded premium ratio |
|
|
46.6 |
% |
|
|
50.4 |
% |
|
|
|
|
|
|
|
|
|
Net loss and LAE ratio |
|
|
61.1 |
% |
|
|
65.1 |
% |
Net expense ratio |
|
|
38.9 |
% |
|
|
39.9 |
% |
Net combined ratio |
|
|
100.0 |
% |
|
|
105.0 |
% |
Ceded premium ratio
The ceded premium ratio was 46.6% in second quarter 2020, down 3.8 points from 50.4% in the prior year quarter. The decrease is primarily attributable to a reduction in the cost of our 2019-2020 catastrophe reinsurance program and a reduction in overall quota share reinsurance coverage, partly offset by the higher cost of our 2020-2021 catastrophe excess-of-loss reinsurance program.
Net loss and LAE ratio
The net loss ratio was 61.1% in second quarter 2020, down 4.0 points from 65.1% in the prior year quarter. The decrease primarily stems from higher favorable prior year reserve development and a lower ceded premium ratio, partly offset by lower income from vertically integrated operations and a higher current accident year weather net loss ratio.
30
Net expense ratio
The net expense ratio was 38.9% in second quarter 2020, down 1.0 point from 39.9% in the prior year quarter. The decrease primarily stems from modestly lower net PAC and G&A ratios, which benefited from a lower ceded premium ratio.
Net combined ratio
The net combined ratio was 100.0% in second quarter 2020, down 5.0 points from 105.0% in the prior year quarter. The decrease stems from lower net loss and expense ratios, as described above.
Comparison of the Six Months Ended June 30, 2020 and 2019
|
|
For the Six Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
REVENUE: |
|
(in thousands) |
|
|||||||||||||
Gross premiums written |
|
$ |
519,534 |
|
|
$ |
465,188 |
|
|
$ |
54,346 |
|
|
|
12 |
% |
Change in gross unearned premiums |
|
|
(43,026 |
) |
|
|
(6,640 |
) |
|
|
(36,386 |
) |
|
|
548 |
% |
Gross premiums earned |
|
|
476,508 |
|
|
|
458,548 |
|
|
|
17,959 |
|
|
|
4 |
% |
Ceded premiums |
|
|
(221,445 |
) |
|
|
(234,774 |
) |
|
|
13,329 |
|
|
|
(6 |
)% |
Net premiums earned |
|
|
255,063 |
|
|
|
223,774 |
|
|
|
31,289 |
|
|
|
14 |
% |
Net investment income |
|
|
6,966 |
|
|
|
7,502 |
|
|
|
(536 |
) |
|
|
(7 |
)% |
Net realized and unrealized gains (losses) |
|
|
22 |
|
|
|
2,327 |
|
|
|
(2,306 |
) |
|
NM |
|
|
Other revenue |
|
|
6,668 |
|
|
|
7,501 |
|
|
|
(833 |
) |
|
|
(11 |
)% |
Total revenue |
|
$ |
268,719 |
|
|
$ |
241,104 |
|
|
$ |
27,614 |
|
|
|
11 |
% |
Gross premiums written
Gross premiums written were $519.5 million for the six months ended June 30, 2020, up 11.7% from $465.2 million in the prior year period. The increase reflects 11.8% growth outside Florida and 11.5% growth in Florida, with positive growth across all states and lines of business. Commercial residential business represented 45.9% of the Florida growth.
Gross premiums earned
Gross premiums earned were $476.5 million for the six months ended June 30, 2020, up 3.9% from $458.5 million in the prior year quarter. The increase reflects higher gross premiums written over the past twelve months.
Ceded premiums earned
Ceded premiums earned were $221.4 million for the six months ended June 30, 2020, down 5.7% from $234.8 million in the prior year quarter. The decrease is primarily attributable to a reduction in the cost of our 2019-2020 catastrophe reinsurance program and a reduction in overall quota share reinsurance coverage, partly offset by the higher cost of our 2020-2021 catastrophe reinsurance program. The higher cost of the 2020-2021 catastrophe excess-of-loss reinsurance program was partially diluted by increased use of our captive reinsurer, Osprey Re. Our gross quota share reinsurance program was reduced from 18.75% to 8.0% effective June 1, 2018 and was eliminated effective June 1, 2019, while our net quota share reinsurance program increased from 52.0% to 56.0% effective December 31, 2019. Our excess-of-loss catastrophe reinsurance programs incept on June 1st of each year and run for twelve months.
Net premiums earned
Net premiums earned were $255.1 million for the six months ended June 30, 2020, up 14.0% from $223.8 million in the prior year period. The increase reflects higher gross premiums earned and lower ceded premiums earned, as described above.
Net investment income
Net investment income, inclusive of realized investment gains and unrealized gains on equity securities for the six months ended June 30, 2020, was $7.0 million, down from $9.8 million in the prior year period. The decrease is primarily due to unrealized gains on equity securities in the prior year period. Investment income on the fixed income portfolio declined by $536,000 due to lower interest rates.
Other revenue
Other revenue was $6.7 million for the six months ended June 30, 2020, down from $7.5 million in the prior year period. The decline primarily stems from a reduction in non-insurance income.
31
Total revenue
Total revenue was $268.7 million for the six months ended June 30, 2020, up 11.5% from $241.1 million in the prior year period. The increase primarily stems from higher net premiums earned, as described above.
|
|
For the Six Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
OPERATING EXPENSES: |
|
(in thousands) |
|
|||||||||||||
Losses and loss adjustment expenses |
|
|
147,050 |
|
|
|
136,438 |
|
|
|
10,612 |
|
|
|
8 |
% |
Policy acquisition costs |
|
|
60,284 |
|
|
|
53,107 |
|
|
|
7,177 |
|
|
|
14 |
% |
General and administrative expenses |
|
|
41,661 |
|
|
|
36,988 |
|
|
|
4,673 |
|
|
|
13 |
% |
Total operating expenses |
|
|
248,995 |
|
|
|
226,533 |
|
|
|
22,463 |
|
|
|
10 |
% |
Losses and loss adjustment expenses
Losses and loss adjustment expenses (“LAE”) were $147.1 million for the six months ended June 30, 2020, up $10.6 million from $136.4 million in the prior year period. The increase primarily stems from higher retained weather losses and lower cost savings from vertically integrated operations, partly offset by more favorable prior year reserve development.
Policy acquisition costs
Policy acquisition costs were $60.3 million for the six months ended June 30, 2020, up 13.5% from $53.1 million in the prior year period. The increase is primarily attributable to higher acquisition costs associated with gross premiums written growth and reduced ceding commission income. Ceding commissions decreased in the current year period due to a reduction to our overall quota share reinsurance program, as described above.
General and administrative expenses
General and administrative expenses were $41.7 million for the six months ended June 30, 2019, up 12.6% from $37.0 million in the prior year period. The increase is primarily attributable to increased headcount associated with premium growth and lower ceding commission income associated with a reduction to our overall quota share reinsurance program, as described above.
|
|
For the Six Months Ended June 30, |
|
|||||||||||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
(in thousands, except per share and share amounts) |
|
|||||||||||||
Operating income |
|
|
19,724 |
|
|
|
14,571 |
|
|
|
5,153 |
|
|
|
35 |
% |
Interest expense, net |
|
|
3,688 |
|
|
|
4,101 |
|
|
|
(413 |
) |
|
|
(10 |
)% |
Other non-operating expense, net |
|
|
— |
|
|
|
48 |
|
|
|
(48 |
) |
|
NM |
|
|
Income before income taxes |
|
|
16,036 |
|
|
|
10,422 |
|
|
|
5,615 |
|
|
|
54 |
% |
Provision for income taxes |
|
|
4,284 |
|
|
|
2,737 |
|
|
|
1,547 |
|
|
|
57 |
% |
Net income |
|
$ |
11,752 |
|
|
$ |
7,685 |
|
|
$ |
4,068 |
|
|
|
53 |
% |
Basic net income per share |
|
$ |
0.42 |
|
|
$ |
0.26 |
|
|
$ |
0.16 |
|
|
|
60 |
% |
Diluted net income per share |
|
$ |
0.42 |
|
|
$ |
0.26 |
|
|
$ |
0.16 |
|
|
|
60 |
% |
Interest expense, net
Interest expense was $3.7 million for the six months ended June 30, 2020, down $413,000 from $4.1 million in the prior year period. The year-over-year decrease stems from a lower principal amount of outstanding debt and a lower blended interest rate.
Provision for income taxes
Provision for income taxes was $4.3 million and $2.7 million for the six months ended June 30, 2020 and 2019, respectively. The effective tax rate for the current year period was 26.7%, 0.4 points higher than the prior year’s 26.3%. The higher effective tax rate relates to permanent tax differences and a higher overall state income tax rate associated with our diversification outside Florida. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year.
32
Net income
Net income for the six months ended June 30, 2020 was $11.8 million ($0.42 per diluted share) compared to $7.7 million ($0.26 cents per diluted share) in the prior year period. The increase primarily reflects higher net premiums earned and a lower net loss ratio, partly offset by lower investment gains and other income and a modestly higher effective tax rate.
|
|
For the Six Months Ended June 30, |
|
|||||
(Unaudited) |
|
2020 |
|
|
2019 |
|
||
Ceded premium ratio |
|
|
46.5 |
% |
|
|
51.2 |
% |
|
|
|
|
|
|
|
|
|
Net loss and LAE ratio |
|
|
57.7 |
% |
|
|
61.0 |
% |
Net expense ratio |
|
|
40.0 |
% |
|
|
40.3 |
% |
Net combined ratio |
|
|
97.6 |
% |
|
|
101.3 |
% |
Ceded premium ratio
The ceded premium ratio was 46.5% for the six months ended June 30, 2020, down 4.7 points from 51.2 % in the prior year period. The decrease is primarily attributable to a reduction in the cost of our 2019-2020 catastrophe reinsurance program and a reduction in overall quota share reinsurance coverage, partly offset by the higher cost of our 2020-2021 catastrophe excess-of-loss reinsurance program.
Net loss and LAE ratio
The net loss and LAE ratio was 57.7% for the six months ended June 30, 2020, down 3.3 points from 61.0% in the prior year period. The decrease primarily stems from higher favorable prior year reserve development and a lower ceded premium ratio, partly offset by lower income from vertically integrated operations and higher retained weather losses. Catastrophe and weather losses in the current six month period primarily stemmed from hail, tornado and wind events in the southeast.
Net expense ratio
The net expense ratio was 40.0% for the six months ended June 30, 2020, relatively flat from 40.3% in the prior year period. The decrease primarily stems from modest reductions in both the policy acquisition costs ratio and the G&A ratio resultant from the increase in net earned premiums.
Net combined ratio
The net combined ratio was 97.6% for six months ended June 30, 2020, down 3.7 points from 101.3% in the prior year period. The decrease stems from lower net loss and expense ratios, as described above.
Liquidity and Capital Resources
As of June 30, 2020, we had $288.3 million of cash and cash equivalents, which primarily consisted of cash and money market accounts. We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey Re Ltd. (“Osprey”), our captive reinsurance company. In addition, we have $11.8 million in restricted cash primarily related our contractual obligations related to the catastrophe bonds issued by Citrus Re Ltd. as well as state insurance department depository requirements.
Osprey is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates. At June 30, 2020, approximately $20.0 million was held in Osprey’s trust account.
Although we can provide no assurances, we believe that we maintain sufficient liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as inadequate premium rates or reserve deficiencies. We believe our current capital resources, including funds available under our revolving credit facility, together with cash provided from our operations, will be sufficient to meet currently anticipated working capital requirements for at least the next twelve months. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.
33
Cash Flows
|
|
For the Six Months Ended June 30, |
|
|||||||||
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
|
(in thousands) |
|
|||||||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
131,797 |
|
|
$ |
76,415 |
|
|
$ |
55,382 |
|
Investing activities |
|
|
(97,015 |
) |
|
|
(36,772 |
) |
|
|
(60,243 |
) |
Financing activities |
|
|
(17,599 |
) |
|
|
(25,740 |
) |
|
|
8,141 |
|
Net increase in cash and cash equivalents |
|
$ |
17,183 |
|
|
$ |
13,903 |
|
|
$ |
3,280 |
|
Operating Activities
Net cash provided by operating activities was $131.8 million for the six months ended June 30, 2020 compared to cash provided of $76.4 million for the comparable period in 2019. The increase in cash from operating activities relates primarily to timing of cash flows associated with gross written premium, claim payments and reinsurance reimbursements during the first six months of 2020 compared to the first six months of 2019.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2020 was $97.0 million as compared to cash used of $36.8 million for the comparable period in 2019. The change in cash used for investing activities relates to the timing of allocations of funds for investment.
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2020 was $17.6 million, as compared to cash used in financing activities of $25.7 million for the comparable period in 2019. More funds were available for investment in the current year over the prior year. The reduction in cash used in financing activities relates primarily to payment of our term note in the first six months of 2019, partially offset by the increase in stock repurchases period over period.
Credit Facilities
On December 14, 2018, the Company, as borrower, entered into a credit agreement (as amended, the “Credit Agreement”) by and among the Company, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners.
Pursuant to the Credit Agreement, the participating Lenders agreed to provide (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $50 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). As of June 30, 2020, the Company had in aggregate $65.6 million principal outstanding under the Term Loan Facility and $10.0 million of borrowings outstanding under the Revolving Credit Facility.
At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00%, plus an applicable margin.
The applicable margin for loans under the Credit Facilities varies from 3.25% per annum to 3.75% per annum (for LIBOR loans) and 2.25% to 2.75% per annum (for base rate loans) based on our consolidated leverage ratio. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of June 30, 2020, the Company’s effective interest rate for the Term Loan Facility was 4.10% per annum and 4.36% per annum for the Revolving Credit Facility.
In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined based on our consolidated leverage ratio.
34
Each of the Revolving Credit Facility and the Term Loan Facility mature on December 14, 2023. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ended March 31, 2019, in an amount equal to $1,875,000 per quarter, payable monthly or quarterly, with the balance payable at maturity.
The Company may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of LIBOR loans. In addition, the Company is required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).
All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”).
The Company and the Guarantors entered into a Pledge and Security Agreement, on December 14, 2018 (the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.
The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 3.25 to 1.00 for each fiscal quarter ending on or before December 31, 2019, stepping down on each of the three anniversaries thereafter; (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.
Convertible Notes
On August 10, 2017, the Company and Heritage MGA, LLC (the “Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”) (the “Offering”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the Offering, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The Offering was completed on August 16, 2017.
The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”).
The Convertible Notes bear interest at a rate of 5.875% per year. Interest began accruing on August 16, 2017 and is payable semi-annually in arrears, on February 1 and August 1 of each year, starting on February 1, 2018. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.
The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.
Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.
35
During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.
The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture) that occur prior to August 5, 2022.
Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 but prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date.
The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Notes automatically become immediately due and payable.
In the second quarter of 2018, the Company repurchased $10.6 million principal amount of Convertible Notes for cash. In the fourth quarter of 2018 and first quarter of 2019, the Company repurchased Convertible Notes in the aggregate principal amount of $81.6 million for a combination of cash and the issuance of an aggregate of 3,880,653 shares of the Company’s common stock, leaving $23.4 million in aggregate principal amount outstanding. There were no repurchases of Convertible Notes in the third and fourth quarters of 2019 or in the first or second quarters of 2020.
FHLB Loan Agreements
In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $31.0 million as collateral and received $19.2 million in a cash loan under an advance agreement with the Federal Home Loan Bank (“FHLB”) Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan was used to prepay the Company’s Senior Secured Notes due 2023 (“Senior Notes”) in 2018.
Critical Accounting Policies and Estimates
When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three months ended June 30, 2020, we reassessed our critical accounting policies and estimates as disclosed within our 2019 Form 10-K. As disclosed in Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” we adopted on January 1, 2020, ASU 2016-13, Financial Instruments – Credit Losses, and we have made no further material changes or additions with regard to such policies and estimates.
36
Contractual Obligations
The following table represents our contractual obligations for which cash flows are fixed or determinable as of June 30, 2020:
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 Years |
|
|||||
|
(In thousands) |
|
|||||||||||||||||
Convertible debt |
$ |
38,429 |
|
|
$ |
1,261 |
|
|
$ |
2,751 |
|
|
$ |
2,751 |
|
|
$ |
31,666 |
|
Note Payable (1) |
|
84,181 |
|
|
|
7,135 |
|
|
|
19,893 |
|
|
|
57,153 |
|
|
|
— |
|
Mortgage loan |
|
20,164 |
|
|
|
446 |
|
|
|
1,786 |
|
|
|
1,786 |
|
|
|
16,145 |
|
FHLB agreement |
|
21,339 |
|
|
|
332 |
|
|
|
1,205 |
|
|
|
19,802 |
|
|
|
— |
|
Lease obligations |
|
10,172 |
|
|
|
765 |
|
|
|
3,114 |
|
|
|
2,599 |
|
|
|
3,694 |
|
Total Contractual Obligations |
$ |
174,284 |
|
|
$ |
9,939 |
|
|
$ |
28,750 |
|
|
$ |
84,091 |
|
|
$ |
51,505 |
|
|
(1) |
Represents the principal and interest payments per the terms of the Credit Facility debt. |
Seasonality of our Business
Our insurance business is seasonal as hurricanes typically occur during the period from June 1 through November 30 each year and winter storms generally impact the first and fourth quarters of each year. With our catastrophe reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base, will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments.
Off-Balance Sheet Arrangements
We do not have transactions with unconsolidated entities, such as entities often referred to as structured financial or special purpose entities, whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financial, liquidity, market risk, or credit risk support to us.
Recent Accounting Pronouncements
The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our investment portfolios at June 30, 2020 included fixed maturity and equity securities, the purposes of which are not for trading or speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet policyholder obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities’ prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Investment securities are managed by a group of nationally recognized asset managers and are overseen by the investment committee appointed by our board of directors. Our investment portfolios are primarily exposed to interest rate risk, credit risk and equity price risk. We classify our fixed maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. We evaluate our available-for-sale securities for future expected credit losses and report any allowance in the income statement. We classify our equity securities as available-for-sale and report any unrealized gains or losses in the income statement. As such, any material temporary changes in the fair value of such securities can adversely impact the carrying value of our stockholders’ equity.
Interest Rate Risk
Our fixed maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.
37
The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed maturity securities at June 30, 2020 (in thousands):
Hypothetical Change in Interest rates |
|
Estimated Fair Value After Change |
|
|
Change in Estimated Fair Value |
|
|
Percentage Increase (Decrease) in Estimated Fair Value |
|
|||
300 basis point increase |
|
$ |
632,167 |
|
|
$ |
(66,110 |
) |
|
|
-9.468 |
% |
200 basis point increase |
|
$ |
654,291 |
|
|
$ |
(43,985 |
) |
|
|
-6.3 |
% |
100 basis point increase |
|
$ |
676,328 |
|
|
$ |
(21,949 |
) |
|
|
-3.1 |
% |
100 basis point decrease |
|
$ |
717,136 |
|
|
$ |
18,859 |
|
|
|
2.7 |
% |
200 basis point decrease |
|
$ |
726,524 |
|
|
$ |
28,248 |
|
|
|
4.0 |
% |
300 basis point decrease |
|
$ |
728,369 |
|
|
$ |
30,093 |
|
|
|
4.3 |
% |
In addition, we have variable interest rate indebtedness under our Credit Facilities which bears interest at a rate that references LIBOR. As of June 30, 2020, we had in aggregate $65.6 million principal outstanding under the Term Loan Facility bearing interest at 4.10% per annum and $10.0 million of borrowings outstanding under the Revolving Credit Facility bearing interest at 4.36% per annum. There is currently uncertainty about whether LIBOR will continue to exist after 2021. The discontinuation of LIBOR after 2021 and the replacement with an alternative reference rate may adversely impact interest rates and our interest expense could increase
Credit Risk
Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed maturities. We mitigate this risk by investing in fixed maturities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector. A majority of the securities in an unrealized gain position as of June 30, 2020 held an A rating or better. We do not intend to sell these investments until recovery of their amortized cost basis or maturity, and further believe that it is not more-likely-than-not that we will be required to sell these investments prior to that time.
The following table presents the composition of our fixed maturity portfolio by rating at June 30, 2020 (in thousands):
|
|
Amortized Cost |
|
|
% of Total Amortized Cost |
|
|
Estimated Fair Value |
|
|
% of total Estimated Fair Value |
|
||||
AAA |
|
$ |
180,069 |
|
|
|
26.8 |
% |
|
$ |
186,771 |
|
|
|
26.7 |
% |
AA+, AA, AA- |
|
$ |
262,632 |
|
|
|
39.1 |
% |
|
$ |
272,706 |
|
|
|
39.1 |
% |
A+, A, A-1+ |
|
$ |
157,523 |
|
|
|
23.4 |
% |
|
$ |
164,453 |
|
|
|
23.6 |
% |
BBB+, BBB, BBB- |
|
$ |
71,570 |
|
|
|
10.7 |
% |
|
$ |
74,177 |
|
|
|
10.6 |
% |
Not rated |
|
$ |
167 |
|
|
|
0.0 |
% |
|
$ |
170 |
|
|
|
0.0 |
% |
Total |
|
$ |
671,961 |
|
|
|
100 |
% |
|
$ |
698,277 |
|
|
|
100 |
% |
Equity Price Risk
Our equity investment portfolio at June 30, 2020 consists of $1.6 million of Federal Home Loan Bank common stock, the investment is recorded at cost and adjusted, if and when subsequent price changes are provided by the institution. Such changes in the basis of the equity investment are recognized in net realized and unrealized gains and losses on the Company’s consolidated statements of operations. As of June 30, 2020, the Company recorded in aggregate $46,300 in dividends and reduced its membership stock holdings by $25,700.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Due to the COVID-19 pandemic, a portion of our employees continue to work from home. Established business continuity plans have been activated in order to continue business operations while mitigating any adverse impact to our control environment, operating procedures, data and internal controls. The design of our processes and controls allow for remote execution with accessibility to secure data.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
38
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant changes to our internal control over financial reporting for the period ending June 30, 2020.
39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our condensed consolidated financial position results of operations or cash flow.
Item 1A. Risk Factors
The risk factors disclosed in the section entitled “Risk Factors” in our 2019 Form 10-K set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition, and operating results. Those risk factors continue to be relevant to an understanding of our business, financial condition, and operating results.
The coronavirus (COVID-19) global pandemic may adversely affect our business, including revenues, profitability, results of operations, and/or cash flows, in a manner and to a degree that cannot be predicted but could be material.
Beginning in March 2020, the global pandemic related to the novel coronavirus COVID-19 began to impact the global economy and our results of operations. The cumulative effects of COVID-19 on the Company, and the effect of any other epidemic, pandemic or public health outbreak, cannot be predicted at this time, but could include, without limitation:
|
• |
We expect that the impact of COVID-19 on general economic activity could negatively impact our premium volumes. While we did not experience this impact for the first quarter of 2020, we anticipate premium volumes, particularly in new sales volumes, could be adversely affected prospectively if economic conditions worsen and home purchases in our geographies decline materially. If premium volumes were to decrease materially, our earned premium would also decline and we could experience an increase in our net operating expense ratio. |
|
• |
States and local governments have launched measures to combat the spread of COVID-19, including travel bans, quarantines and lock-downs of affected areas which could cause disruption to our distribution channel of independent agents which may have a negative impact on our revenues and financial condition. |
|
• |
In an effort to support insurance consumers during this pandemic, most states where we market our products have issued mandates or requests such as moratoriums on policy cancellations or non-renewals for non-payments of premiums, forbearance on premium collections, waivers of late payment fees and extended periods in which policyholders may make their missed payments. Such actions may result in delayed premium receipts, disrupting cash flows and increasing credit risk from policyholders unable to make timely premium payments. |
|
• |
Increased claims, losses, litigation, and related expenses, as well as higher costs related to delays in adjusting claims, as a result of stay-at-home orders and quarantines; |
|
• |
increased volatility and declines in financial markets which, could negatively impact liquidity and credit availability and could continue to reduce the fair market value of, or result in the impairment of, invested assets held by the Company; and |
|
• |
the decline in interest rates which could reduce future investment results. |
The situation surrounding COVID-19 remains fluid. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future, and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally. For this reason, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease.
40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities
A summary of our common stock repurchases during the three months ended June 30, 2020 is set forth in the table below (in thousands, except shares):
|
|
Total Number of Shares Purchased |
|
Average Price Paid Per Share (1) |
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
|
Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
Apr 1 - Apr 30, 2020 |
|
— |
|
— |
|
— |
|
$25,830 |
May 1 - May 31, 2020 |
|
— |
|
— |
|
— |
|
$25,830 |
June 1 - June 30, 2020 |
|
163,456 |
|
$12.28 |
|
163,456 |
|
$23,818 |
Total |
|
163,456 |
|
|
|
163,456 |
|
|
|
(1) |
Average price paid per share excludes cash paid for commissions. |
|
(2) |
On August 1, 2018, the Company announced that its Board of Directors authorized a stock repurchase program authorizing the Company to repurchase up to $50.0 million of its common stock through December 31, 2020. At June 30, 2020, the Company has the capacity to repurchase $23.8 million of its common shares until December 2020. |
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
On June 1, 2020, the Company amended its Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Third Amendment to Credit Agreement (the “Third Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent.
The Third Amendment amend the Credit Agreement to increase the letter of credit sublimit under the Credit Agreement from $5 million to $40 million and to make related modifications to certain of the negative covenants in the Credit Agreement.
The above summary description of the Third Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Third Amendment, a copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference herein.
41
Item 6. Exhibits
The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q.
Index to Exhibits
Exhibit Number |
|
Description |
|
|
|
3.1 |
|
|
3.2 |
|
|
4 |
|
|
4.1 |
|
|
4.2 |
|
|
10.1 |
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101 |
|
The following financial information from the Quarterly Report on Form 10-Q of Heritage Insurance Holdings, Inc. for the quarter ended June 30, 2020, filed electronically herewith, and formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet; (ii) Condensed Consolidated Income Statement; (iii) Condensed Consolidated Cash Flow Statement; (iv) Condensed Consolidated Statement of Stockholders' Equity; and (v) Notes to the Condensed Consolidated Financial Statements |
104 |
|
Inline XBRL for the cover page from the Quarterly Report on Form 10-Q of Heritage Insurance Holdings, Inc. for the quarter ended June 30, 2020, files electronically herewith, included in the Exhibit (101) inline XBRL Document Set. |
|
|
|
* Filed herewith
** Furnished herewith
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
HERITAGE INSURANCE HOLDINGS, INC. |
||
|
|
|
|
Date: August 4, 2020 |
By: |
|
/s/ BRUCE LUCAS |
|
|
|
Bruce Lucas |
|
|
|
Chairman and Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) |
|
|
|
|
Date: August 4, 2020 |
By: |
|
/s/ KIRK LUSK |
|
|
|
Kirk Lusk |
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
43