HRTG 10-Q
Heritage Insurance Holdings, Inc. (HRTG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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)
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(State of Incorporation) |
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(IRS Employer Identification No.) |
(Address, including zip code, of principal executive offices)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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Large accelerated filer |
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Emerging growth company |
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Non-accelerated filer |
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Smaller reporting company |
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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 May 3, 2021 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) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (ii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) our estimates with respect to tax and accounting matters including the impact on our financial statements; (iv) future dividends, if any; (v) our expectations related to our financing activities; (vi) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; (vii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements; (viii) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (ix) our intentions with respect to our credit risk investments; and (x) the potential effects of our current legal proceedings.
These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:
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the possibility that actual losses may exceed reserves; |
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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; |
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our exposure to catastrophic weather events; |
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inherent uncertainty of our models and our reliance on such models as a tool to evaluate risk; |
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the fluctuation in our results of operations; |
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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; |
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increased competition, competitive pressures, and market conditions; |
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our failure to accurately access and price the risks we underwrite; |
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our failure to identify suitable business acquisitions, effectively manage our growth and integrate acquired companies; |
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our failure to execute our diversification strategy; |
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our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents; |
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the failure of our claims department to effectively manage or remediate claims; |
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low renewal rates and failure of such renewals to meet our expectations; |
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our inability to maintain our financial stability rating; |
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our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business; |
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our inability to generate investment income; |
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effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions; |
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the failure of our risk mitigation strategies or loss limitation methods; |
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lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write; |
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the regulation of our insurance operations; |
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changes in regulations and our failure to meet increased regulatory requirements, including minimum capital and surplus requirements; |
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litigation or regulatory actions; |
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regulation limiting rate increases or that require us to participate in loss sharing or assessments; |
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the terms of our indebtedness; |
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our ability to maintain effective internal controls over financial reporting; |
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certain characteristics of our common stock; |
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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; |
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failure of our information technology systems or those of our key service providers and unsuccessful development and implementation of new technologies; |
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a lack of redundancy in our operations; and |
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our failure to attract and retain qualified employees and independent agents or our loss of key personnel. |
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, 2020. 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)
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March 31, 2021 |
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December 31, 2020 |
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ASSETS |
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(unaudited) |
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Fixed maturities, available-for-sale, at fair value (amortized cost of $ |
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$ |
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$ |
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Equity securities, at cost |
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Other investments |
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Total investments |
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Cash and cash equivalents |
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Restricted cash |
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Accrued investment income |
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Premiums receivable, net |
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Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $ |
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Prepaid reinsurance premiums |
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Income taxes receivable |
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Deferred policy acquisition costs, net |
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Property and equipment, net |
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Intangibles, net |
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Goodwill |
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Other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Unpaid losses and loss adjustment expenses |
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$ |
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$ |
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Unearned premiums |
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Reinsurance payable |
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Long-term debt, net |
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Deferred income tax, net |
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Advance premiums |
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Accrued compensation |
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Accounts payable and other liabilities |
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Total Liabilities |
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$ |
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$ |
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Commitments and contingencies (Note 17) |
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Stockholders’ Equity: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive (loss) income |
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( |
) |
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Treasury stock, at cost, |
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( |
) |
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( |
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Retained earnings |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity |
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$ |
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$ |
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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)
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For the Three Months Ended March 31, |
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2021 |
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2020 |
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REVENUES: |
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Gross premiums written |
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$ |
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$ |
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Change in gross unearned premiums |
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( |
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Gross premiums earned |
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Ceded premiums |
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( |
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( |
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Net premiums earned |
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Net investment income |
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Net realized gains |
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Other revenue |
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Total revenues |
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EXPENSES: |
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Losses and loss adjustment expenses |
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Policy acquisition costs, net of ceding commission income (1) |
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General and administrative expenses, net of ceding commission income (2) |
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Total expenses |
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Operating (loss) income |
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( |
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Interest expense, net |
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(Loss) income before income taxes |
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( |
) |
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(Benefit) provision for income taxes |
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( |
) |
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Net (loss) income |
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$ |
( |
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$ |
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OTHER COMPREHENSIVE INCOME |
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Change in net unrealized (losses) gains on investments |
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( |
) |
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Reclassification adjustment for net realized investment gains |
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( |
) |
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( |
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Income tax expense (benefit) related to items of other comprehensive income |
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( |
) |
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Total comprehensive (loss) income |
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$ |
( |
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$ |
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Weighted average shares outstanding |
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Basic |
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Diluted |
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(Loss) earnings per share |
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Basic |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
) |
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$ |
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(1) |
Policy acquisition costs includes $ |
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(2) |
General and administration includes $ |
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)
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Common Shares |
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Par Value |
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Additional Paid-In Capital |
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Retained Earnings |
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Treasury Shares |
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Accumulated Other Comprehensive (Loss) Income |
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Total Stockholders' Equity |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net unrealized change in investments, net of tax |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Shares tendered for income taxes withholding |
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( |
) |
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— |
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( |
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— |
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— |
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— |
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( |
) |
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Restricted stock vested |
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— |
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— |
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— |
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— |
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— |
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— |
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Issued restricted stock |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation on restricted stock |
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— |
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— |
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— |
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— |
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— |
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Cash dividends declared ($ |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
) |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Common Shares |
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Par Value |
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Additional Paid-In Capital |
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Retained Earnings |
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Treasury Shares |
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Accumulated Other Comprehensive Income |
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Total Stockholders' Equity |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020 |
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— |
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— |
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— |
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( |
) |
|
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— |
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— |
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( |
) |
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Balance at January 1, 2020 (as adjusted for change in accounting principle) |
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( |
) |
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Net unrealized change in investments, net of tax |
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— |
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— |
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— |
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— |
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— |
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Shares tendered for income taxes withholding |
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|
( |
) |
|
|
— |
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( |
) |
|
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— |
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— |
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— |
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( |
) |
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Restricted stock vested |
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— |
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— |
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— |
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— |
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|
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— |
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|
— |
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Stock-based compensation on restricted stock |
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— |
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— |
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— |
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— |
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— |
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Stock buy-back |
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( |
) |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Cash dividends declared ($ |
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— |
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— |
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— |
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( |
) |
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— |
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|
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— |
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|
( |
) |
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Net income |
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— |
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— |
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— |
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|
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— |
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|
— |
|
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|
Balance at March 31, 2020 |
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|
|
|
|
$ |
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|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
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For the Three Months Ended March 31, |
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2021 |
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2020 |
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OPERATING ACTIVITIES |
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Net (loss) income |
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$ |
( |
) |
|
$ |
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|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
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Stock-based compensation |
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Bond amortization and accretion |
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Amortization of original issuance discount on debt |
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Depreciation and amortization |
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Allowance for bad debt |
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— |
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Net realized investment gains |
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( |
) |
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( |
) |
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Deferred income taxes |
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( |
) |
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( |
) |
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Changes in operating assets and liabilities: |
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Accrued investment income |
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( |
) |
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Premiums receivable, net |
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( |
) |
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Prepaid reinsurance premiums |
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Reinsurance recoverable on paid and unpaid claims |
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Income taxes receivable |
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Deferred policy acquisition costs, net |
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Right of use leased asset |
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Other assets |
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( |
) |
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( |
) |
|
Unpaid losses and loss adjustment expenses |
|
|
( |
) |
|
|
( |
) |
|
Unearned premiums |
|
|
|
|
|
|
( |
) |
|
Reinsurance payable |
|
|
( |
) |
|
|
( |
) |
|
Accrued interest |
|
|
( |
) |
|
|
( |
) |
|
Accrued compensation |
|
|
( |
) |
|
|
|
|
|
Advance premiums |
|
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
— |
|
|
|
|
|
|
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
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 |
|
|
— |
|
|
|
( |
) |
|
Cost of property and equipment acquired |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Repayment of term note |
|
|
( |
) |
|
|
( |
) |
|
Mortgage loan payments |
|
|
( |
) |
|
|
( |
) |
|
Purchase of treasury stock |
|
|
— |
|
|
|
( |
) |
|
Tax withholdings on share-based compensation awards |
|
|
( |
) |
|
|
( |
) |
|
Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
(Decrease) 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 |
|
$ |
|
|
|
$ |
|
|
Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
|
|
(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.
HERITAGE INSURANCE HOLDINGS, INC.
6
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”). 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, 2020 (the “2020 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 2020 Form 10-K.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Accounting Pronouncements not yet adopted
The Company has documented the summary of its significant accounting policies in its Notes to the Audited Consolidated Financial Statements annual report on Form 10-K for the year ended December 31, 2020, filed on March 9, 2021. There have been no material changes to the Company’s accounting policies since the filing of that report.
No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.
NOTE 2. INVESTMENTS
Securities Available-for-Sale
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows for the periods:
|
March 31, 2021 |
|
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 March 31, 2021 with a carrying amount of $ |
7
|
|
|
December 31, 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 December 31, 2020 with a carrying amount of $ |
The following table presents net realized gains (losses) on the Company’s debt securities available-for-sale for the three months ended March 31, 2021 and 2020, respectively:
|
|
|
2021 |
|
|
2020 |
|
||||||||||
|
Three Months Ended March 31, |
|
Gains (Losses) |
|
|
Fair Value at Sale |
|
|
Gains (Losses) |
|
|
Fair Value at Sale |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized gains |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total realized losses |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net realized gains and (losses) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The table below summarizes the Company’s fixed maturity securities at March 31, 2021 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 March 31, 2021 |
|
|||||||||||||
|
|
|
Cost or Amortized Cost |
|
|
Percent of Total |
|
|
Fair Value |
|
|
Percent of Total |
|
||||
|
Maturity dates: |
|
|
|
|
|
|
|
|
|
(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 |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
The following table summarizes the Company’s net investment income by major investment category for the three months ended March 31, 2021 and 2020, respectively:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Debt securities |
|
$ |
|
|
|
$ |
|
|
|
Equity securities |
|
|
— |
|
|
|
— |
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
Less: Investment expenses |
|
|
|
|
|
|
|
|
|
Net investment income, less investment expenses |
|
$ |
|
|
|
$ |
|
|
8
The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position at March 31, 2021 and December 31, 2020, respectively:
|
|
|
Less Than Twelve Months |
|
|
Twelve Months or More |
|
||||||||||||||||||
|
March 31, 2021 |
|
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 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
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. Further, we did not believe we had a credit event and therefore did
|
|
|
Less Than Twelve Months |
|
|
Twelve Months or More |
|
||||||||||||||||||
|
December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total fixed maturity securities |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Other Investments
Non-Consolidating Variable Interest Entities (“VIEs”)
The Company makes passive investments in limited partnerships (“LPs”), limited liability companies (“LLCs”), and a Real Estate Investment Trusts (“REITs”). These investments are accounted for using the equity method, with income reported in net realized and unrealized gains and losses or the measurement alternative method, which is reported at cost less impairment (if any), plus or minus changes from observable price changes.
These investments are generally of a passive nature and the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. Investments in these entities are by nature less liquid and may involve more risk than other investments. The Company’s maximum exposure to loss with respect to these investments is limited to the investments carrying amounts reported as “other investments” in the Company’s condensed consolidated balance sheet.
In 2020, the Company entered into agreements for preferred units in the amounts of $
9
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at March 31, 2021 and 2020:
|
|
|
For the Three Months Ended March 31, |
|
|||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
||||||
|
|
|
Carrying Value |
|
|
Maximum Loss Exposure |
|
|
Carrying Value |
|
|
Maximum Loss Exposure |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
Investments in non-consolidated VIEs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment.
NOTE 3. FAIR VALUE OF FINANCIAL MEASUREMENTS
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 – Unadjusted quoted prices are available in active markets for identical assets/liabilities as of the reporting date. |
|
|
• |
Level 2 – Valuations based on observable inputs, such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in the markets that are not active; or other inputs that are observable, either directly or indirectly. |
|
|
• |
Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. |
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs. We did not hold any Level 3 assets or liabilities as of March 31, 2021 or December 31, 2020.
The following table present information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy.
The table below present the balances of our invested assets measured at fair value on a recurring basis:
|
March 31, 2021 |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (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 investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
10
|
December 31, 2020 |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (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 investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
Financial Instruments excluded from the fair value hierarchy
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.
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 March 31, 2021 and 2020, these non-recurring fair values 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 (LOSS) INCOME
|
|
|
For the Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
|
2021 |
|
|
2020 |
|
||||||||||||||||||
|
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
Tax |
|
|
After-tax |
|
||||||
|
|
|
(in thousands) |
|
|||||||||||||||||||||
|
Other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) gains on investments, net |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Reclassification adjustment of realized gains included in net income |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Effect on other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
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
11
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 our lease costs for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
|
|
|
Three Months Ended March 31, 2021 |
|
|
Three Months Ended March 31, 2020 |
|
||
|
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 were as follows (in thousands):
|
|
|
Three Months Ended March 31, 2021 |
|
|
Three Months Ended March 31, 2020 |
|
||
|
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 March 31, 2021 were as follows (in thousands):
|
|
|
Balance Sheet Classification |
|
March 31, 2021 |
|
|
|
Right-of-use assets - operating |
|
Other assets |
|
$ |
|
|
|
Right-of-use assets - finance |
|
Other assets |
|
$ |
|
|
|
Lease liability - operating (1) |
|
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 were as follows:
|
|
|
March 31, 2021 |
|
|
March 31, 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 |
|
|
|
% |
|
|
|
% |
Maturities of lease liabilities by fiscal year for our operating and financing leases were as follows (in thousands):
|
|
|
March 31, 2021 |
|
|
|
2021 remaining |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: imputed interest |
|
|
( |
) |
|
Present value of lease liabilities |
|
$ |
|
|
12
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at March 31, 2021 and December 31, 2020:
|
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
|
|
(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 March 31, 2021 and December 31, 2020 goodwill was $
|
|
|
Goodwill |
|
|
|
|
|
(in thousands) |
|
|
|
Balance as of December 31, 2020 |
|
$ |
|
|
|
Goodwill acquired |
|
— |
|
|
|
Impairment |
|
— |
|
|
|
Balance as of March 31, 2021 |
|
$ |
|
|
Other Intangible Assets
Our intangible assets consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses.
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) |
|
|
|
2021 - remaining |
|
$ |
|
|
|
2022 |
|
$ |
|
|
|
2023 |
|
$ |
|
|
|
2024 |
|
$ |
|
|
|
2025 |
|
$ |
|
|
|
Thereafter |
|
$ |
|
|
|
Total |
|
$ |
|
|
13
|
|
(1) |
|
NOTE 8. 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 March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Basic (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders (000's) |
|
$ |
( |
) |
|
$ |
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share: |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders (000's) |
|
$ |
( |
) |
|
$ |
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares |
|
|
— |
|
|
|
|
|
|
Total weighted average dilutive shares |
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share: |
|
$ |
( |
) |
|
$ |
|
|
Due to the net loss for the three months ended March 31, 2021, the number of dilutive shares is the same as the number of basic shares due to the antidilutive impact of the convertible debt and restricted stock under the if-converted method. The convertible notes were excluded from the computations because the conversion price on these notes was greater than the average market price of our common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the treasury method. The Company had
NOTE 9. 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 three months ended March 31, 2021 and 2020, the Company allocated ceding commission income of $
The table below depicts the activity with regard to deferred reinsurance ceding commission during the three months ended March 31, 2021 and 2020.
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
||||||
|
Beginning balance of deferred ceding commission income |
|
$ |
|
|
|
$ |
|
|
|
Ceding commission deferred |
|
|
|
|
|
|
|
|
|
Less: ceding commission earned |
|
|
( |
) |
|
|
( |
) |
|
Ending balance of deferred ceding commission income |
|
$ |
|
|
|
$ |
|
|
NOTE 10. DEFERRED POLICY ACQUISITION COSTS
The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“DPAC”), which are amortized over the effective period of the related insurance policies.
The Company anticipates that its DPAC will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC for the three months ended March 31, 2021 and 2020.
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
(In thousands) |
|
||||||
|
Beginning Balance |
|
$ |
|
|
|
$ |
|
|
|
Policy acquisition costs deferred |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
( |
) |
|
|
( |
) |
|
Ending Balance |
|
$ |
|
|
|
$ |
|
|
14
NOTE 11. INCOME TAXES
For the three months ended March 31, 2021 and 2020, the Company recorded an income tax benefit of $(
The table below summarizes the significant components of our net deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Deferred tax assets: |
|
(In thousands) |
|
|||||
|
Unearned premiums |
|
$ |
|
|
|
$ |
|
|
|
Unearned commission |
|
|
|
|
|
|
|
|
|
Net operating loss |
|
|
|
|
|
|
|
|
|
Tax-related discount on loss reserve |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Leases |
|
|
|
|
|
|
|
|
|
Unrealized losses |
|
|
|
|
|
|
— |
|
|
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 |
|
|
|
|
|
|
|
|
|
Internal revenue code 481(a)-Accounting method change |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
( |
) |
|
$ |
( |
) |
The statute of limitations related to our federal and state income tax returns remains open from our filings for 2018 through 2020. In April 2019, the Company was notified by the tax authority that the federal income tax returns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority for the examined tax years, reporting that the returns were accepted as final. No further action will be required and no other tax years are under examination.
At March 31, 2021 and December 31, 2020, we had
NOTE 12. REINSURANCE
Overview
In order to limit the Company’s potential exposure to individual risks and catastrophic events, we purchase significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of our risk strategy, and premiums ceded to reinsurers is one of our largest costs. The Company has strong relationships with reinsurers, which it attributes to its management’s industry experience, disciplined underwriting, and claims management capabilities. For each of the twelve months beginning June 1, 2019 and 2020, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per
15
risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate.
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. 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.
The Company’s 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. The Company generally amortizes its catastrophe reinsurance premiums ratably over the
In the event that the Company incurs losses and loss adjustment expenses recoverable under its reinsurance program, the Company records amounts recoverable from its 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 its liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to its 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 the Company’s condensed consolidated financial statements.
The Company’s insurance regulators 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. The Company’s reinsurance program provides reinsurance in excess of its state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event estimated to occur once in every 100 years based on its portfolio of insured risks. 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. The Company also purchases reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. The Company shares portions of its reinsurance program coverage among its insurance company affiliates.
For a detailed discussion of our 2020-2021 Reinsurance Program please Refer to Part II, Item 8, “Financial Statements and Supplementary Data” further “Note 12. Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 9, 2021.
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 months ended March 31, 2021 and 2020:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Premium written: |
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
Net |
|
$ |
|
|
|
$ |
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
Net |
|
$ |
|
|
|
$ |
|
|
|
Loss and Loss Adjustment Expenses |
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
Ceded |
|
|
( |
) |
|
|
( |
) |
|
Net |
|
$ |
|
|
|
$ |
|
|
NOTE 13. RESERVE FOR UNPAID LOSSES
The Company determines the reserve for unpaid losses 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. We estimate our IBNR reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses.
16
The table below summarizes the activity related to the Company’s reserve for unpaid losses:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(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 March 31, 2021, the Company reported $
NOTE 14. LONG-TERM DEBT
Convertible Senior Notes
In August 2017 and September 2017, the Company issued in aggregate $
As of March 31, 2021, the Company had $
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 $
Revolving Credit Facility: The Revolving Credit Facility allows for borrowings of up to $
At March 31, 2021, the Company’s, effective interest rate for the Term Loan and for the Revolving Credit Facility was
At March 31, 2021, the Company closed the July 1, 2020 standby letter of credit in the amount of $
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
17
and collateral agent. The Third Amendment modified the Credit Agreement to increase the letter of credit sublimit from $
On April 27, 2020, the Company amended the 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.
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 March 31, 2021 and December 31, 2020:
|
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
|
|
(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 $
The covenants and other requirements under the revolving agreement represent the most restrictive provisions that we are subject to with respect to our long-term debt.
18
The schedule of principal payments on long-term debt as of March 31, 2021 is as follows:
|
Year |
|
Amount |
|
|
|
|
|
(In thousands) |
|
|
|
2021 remaining |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following as of March 31, 2021 and December 31, 2020:
|
Description |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred ceding commission |
|
$ |
|
|
|
$ |
|
|
|
Outstanding claim checks |
|
|
— |
|
|
|
|
|
|
Accounts payable and other payables |
|
|
|
|
|
|
|
|
|
Lease obligations |
|
|
|
|
|
|
|
|
|
Accrued interest and issuance costs |
|
|
|
|
|
|
|
|
|
Accrued dividends |
|
|
|
|
|
|
|
|
|
Premium tax |
|
|
|
|
|
|
— |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
Commission payables |
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
|
|
|
$ |
|
|
NOTE 16. 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 Property & Casualty Insurance Company (“Heritage P&C)”, Narragansett Bay Insurance Company (“NBIC”), Zephyr Insurance Company (“Zephyr”), and Pawtucket Insurance Company (“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 17. 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.
In July 2020, the Company entered into a
19
NOTE 18. RELATED PARTY TRANSACTIONS
From time to time the Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders, including 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 March 31, 2021 and 2020.
|
|
• |
In July 2019, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for Company. 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 months ended March 31, 2021 and 2020, the Company paid agency commission to Comegys of approximately $ |
NOTE 19. 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 March 31, 2021 and 2020, incurred medical premium costs amounted to an aggregate of $
NOTE 20. 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, 2020, there were,
Common Stock
Holders of common stock are entitled to
Stock Repurchase Program
On August 1, 2019, the Company announced that its Board of Directors ratified a stock repurchase program authorizing the Company to repurchase up to $
20
At March 31, 2021 the Company has the capacity to repurchase $
Dividends
On March 3, 2021, 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 21. STOCK-BASED COMPENSATION
Common, Restricted and Performance-based Stock
The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22, 2014. The Plan authorized
At March 31, 2021 there were
During the quarter ended March 31, 2021, the Board of Directors awarded to its Chief Executive Officer
For awards with performance-based vesting conditions expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis until probability of achieving the performance-based conditions changes, if applicable. For awards with only a service condition, the Company expenses stock-based compensation using the straight-line method over the requisite service period for the entire award.
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 quarter ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
|
|
|
Number of shares |
|
|
Value per Share |
|
||
|
Non-vested, at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted - Performance-based restricted stock |
|
|
|
|
|
|
|
|
|
Granted - Time-based restricted stock |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Canceled and surrendered |
|
|
( |
) |
|
|
|
|
|
Non-vested, at March 31, 2021 |
|
|
|
|
|
$ |
|
|
Awards are being amortized to expense over the vesting period. The Company recognized $
At March 31, 2021 and 2020 there was approximately $
21
Additional information regarding our outstanding non-vested restricted stock at March 31, 2021 is as follows:
|
Grant date |
|
Restricted shares unvested |
|
|
Share Value at Grant Date Per Share |
|
|
Remaining Restriction Period (Years) |
|
|||
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 22. 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 March 31, 2021.
On
22
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, 2020 (“2020 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 products across its multi-state footprint. We provide personal residential insurance in sixteen states and commercial residential insurance in three of those states, while maintaining licenses in one additional state. As a vertically integrated insurer, we control or manage substantially all aspects of underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. Our financial strength ratings are important to the Company in establishing our competitive position and can impact our ability to write policies.
The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document.
COVID-19 and Other Matters
With regard to the COVID-19 pandemic, our first priority remains the health and safety of our employees and their families. Approximately 50% of our total personnel are either working from home full-time or on a hybrid schedule between office and home. Our corporate and remote offices remain operational, we are practicing social distancing, and have enhanced cleaning protocols and are using personal protective equipment in addition to employing other preventative measures.
We continue to monitor the short-and long-term impacts of COVID-19 virus and its variants, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020. For the year ended December 31, 2020, we saw virtually no impact to our business. As a residential property insurer, we view our business as somewhat insulated because 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 might 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 experienced extreme volatility and disruptions during the second quarter of 2020 as a result of the COVID-19 pandemic, including diminished liquidity and credit availability, declines in consumer confidence, increases in unemployment rates and uncertainty about economic stability. Although we were relatively unaffected by the condition of the credit markets, if the credit and financial markets again experience significant deterioration at a time when we need additional liquidity, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. 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 liquidity or our financial results, except for the benefit associated with a 5-year carryback of our 2020 tax net operating loss. We will continue to monitor and assess the impact the CARES Act and similar legislation may have on our business and financial results.
23
Financial Results Highlights for the First Quarter of 2021
|
|
• |
Net loss for the quarter was $5.1 million, or ($0.19) per diluted share. |
|
|
• |
Book value per share of $15.32, down 4.9% from $16.11 at March 31, 2020 and down 3.9% from year-end 2020. |
|
|
• |
Gross premiums written of $274.2 million, up 19.7% year-over-year, including 21.9% growth outside Florida and 17.7% growth in Florida. |
|
|
• |
Premiums in force of $1.1 billion, up $167.4 million quarter-over-quarter. |
|
|
• |
Policies-in-force of 591,924, up 10.0% year-over-year. |
|
|
• |
Favorable prior year reserve development of $1.6 million. |
|
|
• |
Net current accident year weather losses of $31.4 million, up substantially from $21.2 million in the prior year quarter. Current accident year weather losses include $15.4 million of net current accident quarter catastrophe losses, down from $17.0 million in the prior year quarter, and $16.1 million of other weather losses, up from $4.1 million in the prior year quarter. |
|
|
• |
Total capital returned to shareholders of $1.7 million, representing a $0.06 per share regular quarterly dividend. |
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
|
|
|
For the Three Months Ended March 31, |
|
|||||||||||||
|
(Unaudited) |
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
|
(in thousands) |
|
|||||||||||||
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
274,181 |
|
|
$ |
229,102 |
|
|
$ |
45,079 |
|
|
|
19.7 |
% |
|
Change in gross unearned premiums |
|
|
(3,770 |
) |
|
|
5,614 |
|
|
|
(9,384 |
) |
|
|
(167.1 |
)% |
|
Gross premiums earned |
|
|
270,411 |
|
|
|
234,716 |
|
|
|
35,695 |
|
|
|
15.2 |
% |
|
Ceded premiums |
|
|
(128,212 |
) |
|
|
(108,710 |
) |
|
|
(19,502 |
) |
|
|
17.9 |
% |
|
Net premiums earned |
|
|
142,199 |
|
|
|
126,006 |
|
|
|
16,193 |
|
|
|
12.9 |
% |
|
Net investment income |
|
|
1,293 |
|
|
|
3,670 |
|
|
|
(2,377 |
) |
|
|
(64.8 |
)% |
|
Net realized gains |
|
|
80 |
|
|
|
59 |
|
|
|
21 |
|
|
|
35.9 |
% |
|
Other revenue |
|
|
3,671 |
|
|
|
2,971 |
|
|
|
700 |
|
|
|
23.6 |
% |
|
Total revenue |
|
$ |
147,243 |
|
|
$ |
132,706 |
|
|
$ |
14,537 |
|
|
|
11.0 |
% |
NM= Not Meaningful
Gross premiums written
Gross premiums written were $274.2 million in first quarter 2021, up 19.7% from $229.1 million in the prior year quarter. The increase reflects 21.9% growth outside Florida and 17.7% growth in Florida. Rate increases materially benefited 2021 gross premiums written growth, particularly in Florida. Growth in all states was organic, including growth via independent agents and strategic partnerships with national carriers.
Premiums-in-force were $1.1 billion as of first quarter 2021, representing a 16.0% annualized growth rate from year-end 2020. The increase stems from the same items impacting gross premiums written.
Gross premiums earned
Gross premiums earned were $270.4 million in first quarter 2021, up 15.2% from $234.7 million in the prior year quarter. The increase reflects higher gross premiums written over the past twelve months.
Ceded premiums
Ceded premiums were $128.2 million in first quarter 2021, up 17.9% from $108.7 million in the prior year quarter. The increase is primarily attributable to an increase in the cost of our catastrophe excess of loss reinsurance program and an increase in total insured value (“TIV”) associated with premium growth.
Net premiums earned
Net premiums earned were $142.2 million in first quarter 2021, up 12.9% from $126.0 million in the prior year quarter. The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums, as described above.
24
Net investment income
Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $1.4 million in first quarter 2021, down 62.1% compared to $3.7 million in the prior year quarter. The decrease is primarily due to lower yields associated with the continued low interest rate environment.
Other revenue
Other revenue was $3.7 million in first quarter 2021, up 23.6% million from $3.0 million in the prior year quarter. The increase relates primarily to policy fee income associated with policy count growth.
Total revenue
Total revenue was $147.2 million in first quarter 2021, up 11.0% from $132.7 million in the prior year quarter. The increase primarily stems from higher net premiums earned, as described above.
|
|
|
For the Three Months Ended March 31, |
|
|||||||||||||
|
(Unaudited) |
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
||||
|
OPERATING EXPENSES: |
|
(in thousands) |
|
|||||||||||||
|
Losses and loss adjustment expenses |
|
|
97,909 |
|
|
|
68,181 |
|
|
|
29,728 |
|
|
|
43.6 |
% |
|
Policy acquisition costs |
|
|
35,366 |
|
|
|
30,047 |
|
|
|
5,319 |
|
|
|
17.7 |
% |
|
General and administrative expenses |
|
|
19,800 |
|
|
|
21,718 |
|
|
|
(1,918 |
) |
|
|
(8.8 |
)% |
|
Total operating expenses |
|
|
153,075 |
|
|
|
119,946 |
|
|
|
33,129 |
|
|
|
27.6 |
% |
Losses and loss adjustment expenses
Losses and loss adjustment expenses (“LAE”) were $97.9 million in first quarter 2021, up 43.6% from $68.2 million in the prior year quarter. The increase stems from higher attritional and weather net loss ratios and from a larger book of business.
Policy acquisition costs
Policy acquisition costs were $35.3 million in first quarter of 2021, up 17.7% from $30.0 million in the prior year quarter. The increase is primarily attributable to higher acquisition costs associated with growth in gross premiums written.
General and administrative expenses
General and administrative expenses were $19.8 million in first quarter 2021, down 9% from $21.7 million in the prior year quarter. The decrease is primarily attributable to compensation associated with executive management changes in late 2020 as well as a reduction in stock compensation as larger tranches of restricted stock were fully vested in 2020.
|
|
|
For the Three Months Ended March 31, |
|
|||||||||||||
|
(Unaudited) |
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
|
(in thousands, except per share and share amounts) |
|
|||||||||||||
|
Operating (loss) income |
|
|
(5,832 |
) |
|
|
12,760 |
|
|
|
(18,592 |
) |
|
|
(145.7 |
)% |
|
Interest expense, net |
|
|
1,878 |
|
|
|
1,966 |
|
|
|
(88 |
) |
|
|
(4.5 |
)% |
|
(Loss) income before income taxes |
|
|
(7,711 |
) |
|
|
10,794 |
|
|
|
(18,505 |
) |
|
|
(171.4 |
)% |
|
(Benefit) provision for income taxes |
|
|
(2,562 |
) |
|
|
3,174 |
|
|
|
(5,736 |
) |
|
|
(180.7 |
)% |
|
Net (loss) income |
|
$ |
(5,148 |
) |
|
$ |
7,620 |
|
|
$ |
(12,768 |
) |
|
|
(167.6 |
)% |
|
Basic net (loss) income per share |
|
$ |
(0.19 |
) |
|
$ |
0.27 |
|
|
$ |
(0.45 |
) |
|
|
(169.3 |
)% |
|
Diluted net (loss) income per share |
|
$ |
(0.19 |
) |
|
$ |
0.27 |
|
|
$ |
(0.45 |
) |
|
|
(169.3 |
)% |
Interest expense, net
Net interest expense was $1.9 million in first quarter 2021, effectively flat quarter-over-quarter.
(Benefit) provision for income taxes
(Benefit) provision for income taxes was ($2.6) million in first quarter 2021 compared to $3.2 million in the prior year quarter. The effective tax rate was 33.2% in first quarter 2021, 3.8 points above the prior year quarter’s 29.4% rate. The higher effective tax rate relates to 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.
25
Net (loss) income
First quarter 2021 net loss was $5.1 million (($0.19) per diluted share), down 167.6% from net income of $7.6 million of net income ($0.27 per diluted share) in the prior year quarter. The decrease primarily reflects a higher net loss ratio, partly offset by a lower net expense ratio.
Ratios
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
(Unaudited) |
|
2021 |
|
|
2020 |
|
||
|
Ceded premium ratio |
|
|
47.4 |
% |
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net loss and LAE ratio |
|
|
68.9 |
% |
|
|
54.1 |
% |
|
Net expense ratio |
|
|
38.8 |
% |
|
|
41.1 |
% |
|
Net combined ratio |
|
|
107.7 |
% |
|
|
95.2 |
% |
Ceded premium ratio
The ceded premium ratio was 47.4% in first quarter 2021, up 1.1 points from 46.3% in the prior year quarter. The increase is primarily attributable to higher costs associated with our catastrophe excess-of-loss reinsurance program, partly offset by higher gross premiums earned.
Net loss ratio
The net loss ratio was 68.9% in first quarter 2021, up 14.7 points from 54.1% in the prior year quarter. The increase primarily stems from higher current accident year attritional and weather net loss ratios and lower favorable reserve development.
Net expense ratio
The net expense ratio was 38.8% in first quarter 2021, down 2.3 points from 41.1% in the prior year quarter. The decrease primarily stems from a lower G&A expense ratio.
Net combined ratio
The net combined ratio was 107.6% in first quarter 2021, up 12.5 points from 95.2% in the prior year quarter. The increase primarily stems from a higher net loss ratio, partly offset by a lower net expense ratio, as described above.
Liquidity and Capital Resources
Our principal sources of liquidity include cash flows generated from operations, our cash, and cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of March 31, 2021, we had $402.8 million of cash and cash equivalents and $650.7 million in investments, compared to $441.0 million and $589.0 million, respectively, as of December 31, 2020. The decrease in cash and cash equivalents was due primarily to the decrease in investment of funds held in cash at December 31, 2020, which was partly offset by cash provided by operating activities.
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, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates.
We believe that our sources of cash are adequate to meet our cash requirements for at least the next twelve months.
We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes.
26
Cash Flows
|
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
39,227 |
|
|
$ |
85,697 |
|
|
$ |
(46,470 |
) |
|
Investing activities |
|
|
(73,664 |
) |
|
|
(25,485 |
) |
|
|
(48,179 |
) |
|
Financing activities |
|
|
(3,749 |
) |
|
|
(13,791 |
) |
|
|
10,042 |
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(38,186 |
) |
|
$ |
46,421 |
|
|
$ |
(84,607 |
) |
Operating Activities
Net cash provided by operating activities was $39.2 million for the three months ended March 31, 2021 compared to net cash provided of $85.7 million for the comparable period in 2020. The decrease in cash from operating activities relates primarily to timing of cash flows associated with claim payments and reinsurance reimbursements during the first three months of 2021 compared to the first three months of 2020.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021 was $73.7 million as compared to net cash used of $25.5 million for the comparable period in 2020. The change in cash used for investing activities relates primarily to investment of proceeds from fixed income securities sold during 2020 as well as the timing of allocations of funds for investment.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2021 was $3.7 million, as compared to cash used in financing activities of $13.8 million for the comparable period in 2020. The reduction in cash used in financing activities is due primarily to the decrease in the amount of stock repurchased under the stock repurchase program.
Credit Facilities
On December 14, 2018, the Company entered into a credit agreement (as amended from time to time, the “Credit Agreement”) by and among the Company, as borrower, 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 December 31, 2020, the Company had in aggregate $60.0 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 or (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 March 31, 2021, the borrowing under our Credit Facilities were accruing interest at a rate of 3.38% per annum.
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 by our consolidated leverage ratio.
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.
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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 2.75 to 1.00 for each fiscal quarter in 2021, stepping down to 2.50 to 1.00 in 2022 and 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 “Notes 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 Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes 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 Notes 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 is payable semi-annually in arrears, on February 1 and August 1 of each year. 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 Notes 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.
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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 Convertible Note 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, valued at $53.0 million, leaving $23.4 million in aggregate principal amount outstanding. There were no repurchases of Convertible Notes subsequent to the first quarter of 2019.
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 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 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 March 31, 2021, we reassessed our critical accounting policies and estimates as disclosed within our 2020 Annual Report on Form 10-K.
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Contractual Obligations
As of March 31, 2021, there have been no material changes to the contractual obligations table disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K.
Seasonality of our Business
Our insurance business is seasonal; hurricanes typically occur during the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters 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.
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.
The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.744 years at March 31, 2021, 3.137 years at March 31, 2020, and 3.615 years at December 31, 2020. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of March 31, 2021, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, 2020.
We have not experienced a material impact when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our 2020 Annual Report on Form 10-K for the year ended
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 or are on a hybrid schedule working both at our offices and 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.
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 March 31, 2021.
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 March 31, 2021.
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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 Company documented its risk factors in Item 1A of Part I of its annual report on Form 10-K for the year ended December 31, 2020 filed on March 9, 2021. There have been no material changes to the Company’s risk factors since the filing of that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities
During the three months ended March 31, 2021, the Company acquired 12,500 shares of its stock for a total cost of $127,000 that were not part of the publicly announced share repurchase program authorization. These shares were delivered to the Company by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards.
A summary of our common stock repurchases during the three months ended March 31, 2021 is set forth in the table below (in thousands, except shares):
|
|
|
Total Number of Shares Purchased |
|
Average Price Paid Per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
|
January 1 - January 31, 2021 |
|
12,500 |
|
$16.35 |
|
— |
|
$50,000 |
|
February 1 - February 29, 2021 |
|
— |
|
$ — |
|
— |
|
$50,000 |
|
March 1 - March 31, 2021 |
|
— |
|
$ — |
|
— |
|
$50,000 |
|
Total |
|
12,500 |
|
|
|
— |
|
|
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 |
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|
|
3.2 |
|
|
|
4 |
|
|
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4.1 |
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|
|
4.2 |
|
|
|
10.18 |
|
|
|
10.19 |
|
|
|
10.20* |
|
|
|
10.21* |
|
Employment Agreement dated April 2, 2018 between Zephyr Insurance Company, Inc. and Tim Johns |
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|
10.22* |
|
Form of Restricted Stock Award Agreement (Time-Based and Performance-Based Vesting) |
|
10.23* |
|
|
|
31.1* |
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
32.1** |
|
|
|
|
|
|
|
32.2** |
|
|
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
|
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Data Document |
|
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith
** Furnished herewith
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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.
|
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HERITAGE INSURANCE HOLDINGS, INC. |
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Date: May 7, 2021 |
By: |
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/s/ ERNESTO GARATEIX |
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|
|
|
Ernesto Garateix |
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|
|
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Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) |
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|
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Date: May 7, 2021 |
By: |
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/s/ KIRK LUSK |
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|
|
|
Kirk Lusk |
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
33