hrtg-10q_20200930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2020

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

Commission File Number

001-36462

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

45-5338504

(State of Incorporation)

(IRS Employer

Identification No.)

2600 McCormick Drive, Suite 300

Clearwater, Florida 33759

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

(727) 362-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	HRTG	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒	Emerging growth company	☐
Non-accelerated filer	☐	Smaller reporting company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate number of shares of the Registrant’s Common Stock outstanding on October 30, 2020 was 28,058,873

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: September 30, 2020 (unaudited) and December 31, 2019		2
Condensed Consolidated Statements of Operations and Other Comprehensive Income: Three and Nine months ended September 30, 2020 and 2019 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three and Nine months ended September 30, 2020 and 2019 (unaudited)		4
Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2020 and 2019 (unaudited)		6
Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3 Quantitative and Qualitative Disclosures about Market Risk		38
Item 4 Controls and Procedures		39
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		40
Item 1A Risk Factors		40
Item 6 Exhibits		41
Signatures		42

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about (i) 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, 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) our intent to re-invest cash proceeds from gains from certain investments; (x) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (xi) our intentions with respect to our credit risk investments; and (xii) 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)

	September 30, 2020			December 31, 2019
ASSETS	(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $437,036 and $577,789)	$	445,481		$	587,256
Equity securities, at fair value, (cost $1,599 and $1,618)		1,599			1,618
Other investments		26,774			6,375
Total investments		473,854			595,249
Cash and cash equivalents		509,596			268,351
Restricted cash		5,437			14,657
Accrued investment income		2,637			4,377
Premiums receivable, net		70,038			63,685
Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $54		424,157			428,903
Prepaid reinsurance premiums		307,997			224,102
Income taxes receivable		16,250			3,171
Deferred policy acquisition costs, net		86,140			77,211
Property and equipment, net		19,134			20,753
Intangibles, net		63,864			68,642
Goodwill		152,459			152,459
Other assets		16,827			18,110
Total Assets	$	2,148,390		$	1,939,670
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	662,997		$	613,533
Unearned premiums		552,627			486,220
Reinsurance payable		240,857			156,351
Long-term debt, net		122,589			129,248
Deferred income tax, net		12,448			12,623
Advance premiums		31,618			16,504
Accrued compensation		11,617			5,347
Accounts payable and other liabilities		70,497			71,045
Total Liabilities	$	1,705,250		$	1,490,871

Commitments and contingencies (Note 18)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 28,058,873 shares issued and 27,748,606 shares outstanding at September 30, 2020; 28,996,452 shares issued and 28,650,918 shares outstanding at December 31, 2019		3			3
Additional paid-in capital		333,332			329,568
Accumulated other comprehensive income		6,525			7,330
Treasury stock, at cost, 9,279,839 and 8,349,483 shares, respectively		(115,365	)		(105,368	)
Retained earnings		218,645			217,266
Total Stockholders' Equity		443,140			448,799
Total Liabilities and Stockholders' Equity	$	2,148,390		$	1,939,670

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
REVENUES:
Gross premiums written	$	278,242		$	237,303		$	797,776		$	702,491
Change in gross unearned premiums		(23,260	)		(5,686	)		(66,287	)		(12,326	)
Gross premiums earned		254,982			231,617			731,489			690,165
Ceded premiums		(116,752	)		(107,755	)		(338,197	)		(342,529	)
Net premiums earned		138,230			123,862			393,292			347,636
Net investment income		2,817			3,655			9,783			11,157
Net realized and unrealized gains		20,355			805			20,377			3,132
Other revenue		3,717			3,377			10,385			10,878
Total revenues		165,119			131,699			433,837			372,803
EXPENSES:
Losses and loss adjustment expenses		119,718			70,052			266,769			206,490
Policy acquisition costs, net of ceding commission income of $10.6 and $32.3 ⁽¹⁾		31,960			26,686			92,243			79,793
General and administrative expenses, net of ceding commission income of $3.5 and $10.6 ⁽¹⁾		17,923			21,477			59,583			58,465
Total expenses		169,601			118,215			418,595			344,748
Operating (loss) income		(4,482	)		13,484			15,242			28,055
Interest expense, net		2,251			2,401			5,939			6,502
Other non-operating loss, net		—			—			—			48
(Loss) Income before income taxes		(6,733	)		11,083			9,303			21,505
(Benefit) provision for income taxes		(1,500	)		2,950			2,784			5,687
Net (loss) income	$	(5,233	)	$	8,133		$	6,519		$	15,818
OTHER COMPREHENSIVE (LOSS) INCOME
Change in net unrealized gains on investments		2,480			4,429			19,330			19,533
Reclassification adjustment for net realized investment (gains) losses		(20,355	)		(103	)		(20,377	)		291
Income tax (expense) benefit related to items of other comprehensive income		4,137			(1,035	)		242			(4,747	)
Total comprehensive (loss) income	$	(18,971	)	$	11,424		$	5,714		$	30,895
Weighted average shares outstanding
Basic		27,739,839			29,109,962			28,053,959			29,329,742
Diluted		27,739,839			29,168,392			28,073,570			29,352,756
(Loss) Earnings per share
Basic	$	(0.19	)	$	0.28		$	0.23		$	0.54
Diluted	$	(0.19	)	$	0.28		$	0.23		$	0.54

(1)

Parenthetical values are presented in millions for the three and nine months ended September 30, 2020

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

At September 30, 2020

(Unaudited)

(Amounts in thousands, except share amounts)

	Common Shares Outstanding			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance at January 1, 2020		28,650,918		$	3	$	329,568		$	217,266		$	(105,368	)	$	7,330		$	448,799
Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020		—			—		—			(34	)		—			—			(34	)
Balance at January 1, 2020 (as adjusted for change in accounting principle)		28,650,918			3		329,568			217,232			(105,368	)		7,330			448,765
Net unrealized change in investments, net of tax		—			—		—			—			—			1,512			1,512
Shares tendered for income taxes withholding		(17,500	)		—		(233	)		—			—			—			(233	)
Restricted stock vested and released		25,000			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		1,345			—			—			—			1,345
Stock buy-back		(766,900	)		—		—			—			(7,986	)		—			(7,986	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,726	)		—			—			(1,726	)
Net income		—			—		—			7,620			—			—			7,620
Balance at March 31, 2020		27,891,518		$	3	$	330,680		$	223,126		$	(113,354	)	$	8,842		$	449,297
Net unrealized change in investments, net of tax		—			—		—			—			—			11,421			11,421
Deferred tax adjustment for credit expected losses		—			—		—			(4	)		—			—			(4	)
Restricted stock vested and released		10,000			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		1,357			—			—			—			1,357
Stock buy-back		(163,456	)		—		—			—			(2,011	)		—			(2,011	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,693	)		—			—			(1,693	)
Net income		—			—		—			4,132			—			—			4,132
Balance at June 30, 2020		27,738,062		$	3	$	332,037		$	225,561		$	(115,365	)	$	20,263		$	462,499
Net unrealized change in investments, net of tax		—			—		—			—			—			(13,738	)		(13,738	)
Surrendered shares for tax withholding		(4,723	)		—		(64	)		—			—			—			(64	)
Restricted stock vested and released		10,267			—		—			—			—			—			—
Issued restricted stock		5,000			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		1,359			—			—			—			1,359
Dividends declared on common stock		—			—		—			(1,683	)		—			—			(1,683	)
Net income		—			—		—			(5,233	)		—			—			(5,233	)
Balance at September 30, 2020		27,748,606			3		333,332			218,645