UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2017March 31, 2021

OR

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

Commission File Number

001-36462

 

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

45-5338504

(State of Incorporation)

 

(IRS Employer

Identification No.)

2600 McCormick Drive, Suite 300

Clearwater, Florida 33759

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

(727) 362-7200

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

HRTG

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes No

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

 

Large accelerated filer

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company    

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

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

The aggregate number of shares of the Registrant’s Common Stock $0.0001 par value, outstanding on November 1, 2017May 3, 2021 was 24,400,174.27,965,190

 

 

 


HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

Item 1 Unaudited Financial Statements

 

 

Condensed Consolidated Balance Sheets: September 30, 2017March 31, 2021 (unaudited) and December 31, 20162020

 

2

Condensed Consolidated Statements of Income (Loss):Operations and Other Comprehensive Income: Three and Nine months ended September 30, 2017March 31, 2021 and 20162020 (unaudited)

 

3

Condensed Consolidated Statements of Other Comprehensive Income (Loss):Stockholders’ Equity: Three and Nine months ended September 30, 2017March 31, 2021 and 20162020 (unaudited)

 

4

Condensed Consolidated Statements of Stockholders’ Equity: NineCash Flows: Three months ended September 30, 2017March 31, 2021 and 20162020 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2017 and 2016 (unaudited)

6

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

3323

Item 3 Quantitative and Qualitative Disclosures about Market Risk

 

4330

Item 4 Controls and Procedures

 

4430

PART II – OTHER INFORMATION

 

 

Item 1 Legal Proceedings

 

4531

Item 1A Risk Factors

 

4531

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

4531

Item 4 Mine Safety Disclosures6 Exhibits

 

4531

Item 6 ExhibitsSignatures

 

45

Signatures

4733

 

 

 

 


 

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 anticipated growth in revenue, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and(i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. 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:

our limited operating history;

the possibility that actual losses may exceed reserves;

the possibility that actual losses may exceed reserves;

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

the concentration of our business in Florida and Hawaii;

our exposure to catastrophic weather events;

our exposure to catastrophic events;

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

the fluctuation in our results of operations;

the fluctuation in our results of operations;

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

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;

increased competition, competitive pressures, and market conditions;

increased competition, competitive pressures, and market conditions;

our failure to accurately price the risks we underwrite;

our failure to accurately access and price the risks we underwrite;

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

our failure to identify suitable business acquisitions, effectively manage our growth and integrate acquired companies;

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

our failure to execute our diversification strategy;

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

our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents;

our failure to execute our growth strategy, including through acquisitions and expansion into geographic markets in which we do not currently operate;

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

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

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

our lack of significant redundancy in our operations;

our inability to maintain our financial stability rating;

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

our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business;

our inability to generate investment income;

our inability to generate investment income;

our inability to maintain our financial stability rating;

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

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

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

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

lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write;

The failure to obtain stockholder approval relating to the issuance of common stock upon conversion of our convertible senior notes; and

the regulation of our insurance operations;

changes in regulations and our failure to meet increased regulatory requirements, including minimum capital and surplus requirements;

litigation or regulatory actions;

regulation limiting rate increases or that require us to participate in loss sharing or assessments;

the terms of our indebtedness;

our ability to maintain effective internal controls over financial reporting;

certain characteristics of our common stock;

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;

failure of our information technology systems or those of our key service providers and unsuccessful development and implementation of new technologies;

a lack of redundancy in our operations; and

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

the items set forth 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, 2016.


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, 2016 and in our other filings with the SEC.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 – FINANCIALFINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

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

 

 

September 30, 2017

 

 

December 31, 2016

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

(unaudited)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

Fixed maturity securities, available for sale, at fair value (amortized

cost of $492,794 and $576,911 in 2017 and 2016, respectively)

 

$

494,484

 

 

$

571,011

 

Equity securities, available for sale, at fair value (cost of $27,728 and $34,190

in 2017 and 2016, respectively)

 

 

25,396

 

 

 

31,971

 

Fixed maturities, available-for-sale, at fair value (amortized cost of $625,773 and $553,172)

 

$

622,923

 

 

$

561,011

 

Equity securities, at cost

 

 

1,415

 

 

 

1,599

 

Other investments

 

 

26,409

 

 

 

26,409

 

Total investments

 

 

519,880

 

 

 

602,982

 

 

 

650,747

 

 

 

589,019

 

Cash and cash equivalents

 

 

352,321

 

 

 

105,817

 

 

 

402,770

 

 

 

440,956

 

Restricted cash

 

 

19,853

 

 

 

20,910

 

 

 

5,427

 

 

 

5,427

 

Accrued investment income

 

 

4,635

 

 

 

4,764

 

 

 

2,872

 

 

 

2,737

 

Premiums receivable, net

 

 

35,326

 

 

 

42,720

 

 

 

84,336

 

 

 

77,471

 

Reinsurance recoverable on paid and unpaid claims

 

 

370,751

 

 

 

 

Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $45

 

 

326,276

 

 

 

355,037

 

Prepaid reinsurance premiums

 

 

153,955

 

 

 

106,609

 

 

 

172,223

 

 

 

245,818

 

Income taxes receivable

 

 

1,649

 

 

 

10,713

 

 

 

29,896

 

 

 

32,224

 

Deferred policy acquisition costs, net

 

 

41,888

 

 

 

42,779

 

 

 

88,876

 

 

 

89,265

 

Property and equipment, net

 

 

16,198

 

 

 

17,179

 

 

 

18,674

 

 

 

18,685

 

Intangibles, net

 

 

22,967

 

 

 

26,542

 

 

 

60,689

 

 

 

62,277

 

Goodwill

 

 

46,454

 

 

 

46,454

 

 

 

152,459

 

 

 

152,459

 

Other assets

 

 

13,107

 

 

 

5,775

 

 

 

19,549

 

 

 

18,004

 

Total Assets

 

$

1,598,984

 

 

$

1,033,244

 

 

$

2,014,794

 

 

$

2,089,379

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

489,580

 

 

$

140,137

 

 

$

637,882

 

 

$

659,341

 

Unearned premiums

 

 

313,843

 

 

 

318,024

 

 

 

573,411

 

 

 

569,618

 

Reinsurance payable

 

 

158,122

 

 

 

96,667

 

 

 

144,206

 

 

 

161,918

 

Long-term debt

 

 

188,634

 

 

 

72,905

 

Deferred income taxes

 

 

4,493

 

 

 

3,003

 

Funds held by company under reinsurance treaties

 

 

61,732

 

 

 

 

Long-term debt, net

 

 

119,501

 

 

 

120,998

 

Deferred income tax, net

 

 

11,109

 

 

 

18,477

 

Advance premiums

 

 

20,397

 

 

 

18,565

 

 

 

21,497

 

 

 

18,268

 

Accrued compensation

 

 

6,955

 

 

 

4,303

 

 

 

8,112

 

 

 

9,325

 

Derivative liability, accounts payable and other liabilities

 

 

53,547

 

 

 

21,681

 

Accounts payable and other liabilities

 

 

71,628

 

 

 

89,090

 

Total Liabilities

 

$

1,297,303

 

 

$

675,285

 

 

$

1,587,346

 

 

$

1,647,035

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 50,000,000 shares authorized, 24,400,176 shares issued and 23,500,174 outstanding at September 30, 2017 and 29,740,441 shares issued and 28,840,443 outstanding at December 31, 2016

 

 

2

 

 

 

3

 

Common stock, $0.0001 par value, 50,000,000 shares authorized, 27,965,190 shares issued and 27,904,923 shares outstanding at March 31, 2021; 27,883,873 shares issued and 27,748,606 shares outstanding at December 31, 2020

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

209,338

 

 

 

205,727

 

 

 

332,000

 

 

 

331,867

 

Accumulated other comprehensive loss

 

 

(422

)

 

 

(5,018

)

Treasury stock, at cost, 7,099,597 shares at September 30, 2017 and 1,759,330 shares at December 31, 2016

 

 

(87,185

)

 

 

(25,562

)

Accumulated other comprehensive (loss) income

 

 

(2,145

)

 

 

6,057

 

Treasury stock, at cost, 9,279,839 and 9,279,839 shares

 

 

(115,365

)

 

 

(115,365

)

Retained earnings

 

 

179,948

 

 

 

182,809

 

 

 

212,955

 

 

 

219,782

 

Total Stockholders' Equity

 

 

301,681

 

 

 

357,959

 

 

 

427,448

 

 

 

442,344

 

Total Liabilities and Stockholders' Equity

 

$

1,598,984

 

 

$

1,033,244

 

 

$

2,014,794

 

 

$

2,089,379

 

 

See accompanying notes to unaudited condensed consolidated financial statements.


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)

(Unaudited)

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

For the Three Months Ended

March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

Gross premiums written

 

$

154,355

 

 

$

147,232

 

 

$

455,845

 

 

$

471,793

 

 

$

274,181

 

 

$

229,102

 

Change in gross unearned premiums

 

 

(1,292

)

 

 

17,464

 

 

 

4,180

 

 

 

8,483

 

 

 

(3,770

)

 

 

5,614

 

Gross premiums earned

 

 

153,063

 

 

 

164,696

 

 

 

460,025

 

 

 

480,276

 

 

 

270,411

 

 

 

234,716

 

Ceded premiums

 

 

(57,855

)

 

 

(63,141

)

 

 

(182,189

)

 

 

(163,461

)

 

 

(128,212

)

 

 

(108,710

)

Net premiums earned

 

 

95,208

 

 

 

101,555

 

 

 

277,836

 

 

 

316,815

 

 

 

142,199

 

 

 

126,006

 

Net investment income

 

 

2,735

 

 

 

2,326

 

 

 

8,210

 

 

 

6,586

 

 

 

1,293

 

 

 

3,670

 

Net realized gains

 

 

365

 

 

 

1,119

 

 

 

1,011

 

 

 

1,762

 

 

 

80

 

 

 

59

 

Other revenue

 

 

3,466

 

 

 

4,306

 

 

 

10,948

 

 

 

10,988

 

 

 

3,671

 

 

 

2,971

 

Total revenue

 

 

101,774

 

 

 

109,306

 

 

 

298,005

 

 

 

336,151

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

147,243

 

 

 

132,706

 

EXPENSES:

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

64,035

 

 

 

53,906

 

 

 

156,728

 

 

 

169,663

 

 

 

97,909

 

 

 

68,181

 

Policy acquisition costs

 

 

20,906

 

 

 

22,597

 

 

 

66,086

 

 

 

61,478

 

General and administrative expenses

 

 

15,420

 

 

 

14,191

 

 

 

48,826

 

 

 

44,602

 

Total operating expenses

 

 

100,361

 

 

 

90,694

 

 

 

271,640

 

 

 

275,743

 

Operating income

 

 

1,413

 

 

 

18,612

 

 

 

26,365

 

 

 

60,408

 

Policy acquisition costs, net of ceding commission income (1)

 

 

35,366

 

 

 

30,047

 

General and administrative expenses, net of ceding commission income (2)

 

 

19,800

 

 

 

21,718

 

Total expenses

 

 

153,075

 

 

 

119,946

 

Operating (loss) income

 

 

(5,832

)

 

 

12,760

 

Interest expense, net

 

 

3,076

 

 

 

 

 

 

7,010

 

 

 

 

 

 

1,878

 

 

 

1,966

 

Amortization of debt issuance costs

 

 

675

 

 

 

 

 

 

1,153

 

 

 

 

Other non-operating expense, net

 

 

6,883

 

 

 

 

 

 

6,883

 

 

 

 

(Loss) income before income taxes

 

 

(9,221

)

 

 

18,612

 

 

 

11,319

 

 

 

60,408

 

 

 

(7,710

)

 

 

10,794

 

(Benefit) provision for income taxes

 

 

(525

)

 

 

7,682

 

 

 

7,390

 

 

 

23,688

 

 

 

(2,562

)

 

 

3,174

 

Net (loss) income

 

 

(8,696

)

 

 

10,930

 

 

 

3,929

 

 

 

36,720

 

 

$

(5,148

)

 

$

7,620

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Change in net unrealized (losses) gains on investments

 

 

(10,597

)

 

 

2,027

 

Reclassification adjustment for net realized investment gains

 

 

(80

)

 

 

(59

)

Income tax expense (benefit) related to items of other comprehensive income

 

 

2,475

 

 

 

(456

)

Total comprehensive (loss) income

 

$

(13,350

)

 

$

9,132

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

 

 

27,827,804

 

 

 

28,548,830

 

Diluted

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,786,156

 

 

 

27,827,804

 

 

 

28,549,012

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

 

$

(0.19

)

 

$

0.27

 

Diluted

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

 

$

(0.19

)

 

$

0.27

 

 

 

(1)

Policy acquisition costs includes $11.3 million and $10.4 million of ceding commission income for the three months ended March 31, 2021 and 2020, respectively.

(2)

General and administration includes $3.7 million and $3.5 million of ceding commission income for the three months ended March 31, 2021 and 2020, respectively.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Other Comprehensive Income (Loss)Stockholders’ Equity

(Unaudited)

(Amounts in thousands)thousands, except share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (loss) income

 

 

(8,696

)

 

 

10,930

 

 

 

3,929

 

 

 

36,720

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized (losses) gains on investments

 

 

593

 

 

 

(1,237

)

 

 

8,473

 

 

 

11,773

 

Reclassification of gains included in net income

 

 

(365

)

 

 

(1,119

)

 

 

(1,011

)

 

 

(1,762

)

Income tax benefit (expense) related to items of other comprehensive income

 

 

(81

)

 

 

908

 

 

 

(2,866

)

 

 

(3,862

)

Total comprehensive (loss) income

 

$

(8,549

)

 

$

9,482

 

 

$

8,525

 

 

$

42,869

 

 

 

Common Shares

 

 

Par Value

 

 

Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2020

 

 

27,748,606

 

 

$

3

 

 

$

331,867

 

 

$

219,782

 

 

$

(115,365

)

 

$

6,057

 

 

$

442,344

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,202

)

 

 

(8,202

)

Shares tendered for income taxes withholding

 

 

(12,500

)

 

 

 

 

 

(127

)

 

 

 

 

 

 

 

 

 

 

 

(127

)

Restricted stock vested

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued restricted stock

 

 

143,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

260

 

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,679

)

 

 

 

 

 

 

 

 

(1,679

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,148

)

 

 

 

 

 

 

 

 

(5,148

)

Balance at March 31, 2021

 

 

27,904,923

 

 

$

3

 

 

$

332,000

 

 

$

212,955

 

 

$

(115,365

)

 

$

(2,145

)

 

$

427,448

 

 

 

 

 

Common Shares

 

 

Par Value

 

 

Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive Income

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2019

 

 

28,650,918

 

 

$

3

 

 

$

329,568

 

 

$

217,266

 

 

$

(105,368

)

 

$

7,330

 

 

$

448,799

 

Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

(34

)

Balance at January 1, 2020 (as adjusted for change in accounting principle)

 

 

28,650,918

 

 

 

3

 

 

 

329,568

 

 

 

217,232

 

 

 

(105,368

)

 

 

7,330

 

 

 

448,765

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,512

 

 

 

1,512

 

Shares tendered for income taxes withholding

 

 

(17,500

)

 

 

 

 

 

(233

)

 

 

 

 

 

 

 

 

 

 

 

(233

)

Restricted stock vested

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

1,345

 

 

 

 

 

 

 

 

 

 

 

 

1,345

 

Stock buy-back

 

 

(766,900

)

 

 

 

 

 

 

 

 

 

 

 

(7,986

)

 

 

 

 

 

(7,986

)

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,726

)

 

 

 

 

 

 

 

 

(1,726

)

Net income

 

 

 

 

 

 

 

 

 

 

 

7,620

 

 

 

 

 

 

 

 

 

7,620

 

Balance at March 31, 2020

 

 

27,891,518

 

 

$

3

 

 

$

330,680

 

 

$

223,126

 

 

$

(113,354

)

 

$

8,842

 

 

$

449,297

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

statements.

 


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

Nine Months ended September 30, 2017 and 2016

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

Common Shares

 

 

Par Value

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

(Deficit)

 

 

Treasury Shares

 

 

Accumulated

Other Comprehensive Income (Loss)

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2016

 

 

28,840,443

 

 

$

3

 

 

$

205,727

 

 

$

182,809

 

 

 

(25,562

)

 

$

(5,018

)

 

$

357,959

 

Stock buy-back

 

 

(5,340,267

)

 

 

(1

)

 

 

 

 

 

 

 

 

(61,623

)

 

 

 

 

 

(61,624

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,611

 

 

 

 

 

 

 

 

 

 

 

 

3,611

 

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(6,790

)

 

 

 

 

 

 

 

 

(6,790

)

Net unrealized change in investments,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,596

 

 

 

4,596

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,929

 

 

 

 

 

 

 

 

 

3,929

 

Balance at September 30, 2017

 

 

23,500,176

 

 

$

2

 

 

$

209,338

 

 

$

179,948

 

 

$

(87,185

)

 

$

(422

)

 

$

301,681

 

 

 

Common Shares

 

 

Par Value

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

(Deficit)

 

 

Treasury Shares

 

 

Accumulated

Other Comprehensive Income (Loss)

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2015

 

 

30,441,410

 

 

$

3

 

 

$

202,628

 

 

$

155,955

 

 

$

 

 

$

(2,033

)

 

$

356,553

 

Stock buy-back

 

 

(1,424,666

)

 

 

 

 

 

 

 

 

 

 

 

(20,562

)

 

 

 

 

 

(20,562

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,612

 

 

 

 

 

 

 

 

 

 

 

 

3,612

 

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(5,228

)

 

 

 

 

 

 

 

 

(5,228

)

Net unrealized change in investments,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,149

 

 

 

6,149

 

Net income

 

 

 

 

 

 

 

 

 

 

 

36,720

 

 

 

 

 

 

 

 

 

36,720

 

Balance at September 30, 2016

 

 

29,016,744

 

 

$

3

 

 

$

206,240

 

 

$

187,447

 

 

$

(20,562

)

 

$

4,116

 

 

$

377,244

 

See accompanying notes to unaudited condensed consolidated financial statements.


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

Nine Months Ended September 30,

 

 

For the Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,929

 

 

$

36,720

 

Adjustments to reconcile net income to net cash provided by operating

activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,148

)

 

$

7,620

 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,611

 

 

 

3,612

 

 

 

260

 

 

 

1,345

 

Amortization of bond discount

 

 

6,810

 

 

 

5,924

 

Bond amortization and accretion

 

 

917

 

 

 

1,359

 

Amortization of original issuance discount on debt

 

 

455

 

 

 

349

 

Depreciation and amortization

 

 

5,904

 

 

 

6,075

 

 

 

2,020

 

 

 

2,024

 

Change in fair value of long-term debt conversion feature

 

 

6,883

 

 

 

 

Allowance for bad debt

 

 

76

 

 

 

 

Net realized investment gains

 

 

(1,011

)

 

 

(1,762

)

 

 

(80

)

 

 

(59

)

Deferred income taxes, net of acquired

 

 

(1,376

)

 

 

11,069

 

Deferred income taxes

 

 

(4,893

)

 

 

(4,452

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

 

129

 

 

 

(1,215

)

 

 

(135

)

 

 

115

 

Premiums receivable, net

 

 

7,394

 

 

 

(3,194

)

 

 

(6,941

)

 

 

771

 

Restricted cash

 

 

1,057

 

 

 

(6,176

)

Prepaid reinsurance premiums

 

 

(47,346

)

 

 

(85,341

)

 

 

73,595

 

 

 

78,073

 

Reinsurance recoverable

 

 

(370,751

)

 

 

 

Reinsurance recoverable on paid and unpaid claims

 

 

28,761

 

 

 

53,880

 

Income taxes receivable

 

 

9,064

 

 

 

(5,280

)

 

 

2,328

 

 

 

3,171

 

Deferred policy acquisition costs, net

 

 

891

 

 

 

(7,329

)

 

 

389

 

 

 

2,316

 

Right of use leased asset

 

 

245

 

 

 

110

 

Other assets

 

 

(7,332

)

 

 

225

 

 

 

(1,790

)

 

 

(8,739

)

Unpaid losses and loss adjustment expenses

 

 

349,443

 

 

 

41,973

 

 

 

(21,459

)

 

 

(6,356

)

Unearned premiums

 

 

(4,180

)

 

 

(8,483

)

 

 

3,793

 

 

 

(5,593

)

Reinsurance payable

 

 

61,455

 

 

 

117,657

 

 

 

(17,712

)

 

 

(54,391

)

Funds held by company under reinsurance treaties

 

 

61,732

 

 

 

 

Accrued interest

 

 

(1,363

)

 

 

 

 

 

(666

)

 

 

(1,172

)

Income taxes payable

 

 

 

 

 

(2,092

)

Accrued compensation

 

 

2,652

 

 

 

1,977

 

 

 

(1,213

)

 

 

2,890

 

Advance premiums

 

 

1,832

 

 

 

6,153

 

 

 

3,229

 

 

 

12,890

 

Income taxes payable

 

 

 

 

 

8,878

 

Operating lease liabilities

 

 

(271

)

 

 

(264

)

Other liabilities

 

 

9,276

 

 

 

(10,918

)

 

 

(16,533

)

 

 

(9,068

)

Net cash provided by operating activities

 

 

98,703

 

 

 

99,595

 

 

 

39,227

 

 

 

85,697

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of investments available for sale

 

 

96,467

 

 

 

135,802

 

Purchases of investments available for sale

 

 

(11,702

)

 

 

(203,091

)

Acquisition of a business, net of cash acquired

 

 

 

 

 

(110,319

)

Fixed maturity securities sales, maturities and paydowns

 

 

40,470

 

 

 

58,462

 

Fixed maturity securities purchases

 

 

(113,890

)

 

 

(83,891

)

Equity securities sales

 

 

177

 

 

 

26

 

Equity securities purchases

 

 

 

 

 

(6

)

Cost of property and equipment acquired

 

 

(195

)

 

 

(1,639

)

 

 

(421

)

 

 

(76

)

Net cash provided by (used in) investing activities

 

 

84,570

 

 

 

(179,247

)

Net cash used in investing activities

 

 

(73,664

)

 

 

(25,485

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of secured convertible debt

 

 

136,750

 

 

 

 

Debt acquisition costs

 

 

(5,105

)

 

 

 

Dividends

 

 

(6,790

)

 

 

(5,228

)

Repayment of term note

 

 

(1,875

)

 

 

(3,750

)

Mortgage loan payments

 

 

(77

)

 

 

(72

)

Purchase of treasury stock

 

 

(61,624

)

 

 

(20,562

)

 

 

 

 

 

(7,986

)

Net cash provided by (used in) financing activities

 

 

63,231

 

 

 

(25,790

)

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

246,504

 

 

 

(105,442

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

105,817

 

 

 

236,277

 

Cash, cash equivalents and restricted cash at end of period

 

$

352,321

 

 

$

130,835

 

Supplemental Cash Flows Disclosures:

 

 

 

 

 

 

 

 

Income taxes paid, net

 

$

 

 

$

27,912

 

Tax withholdings on share-based compensation awards

 

 

(127

)

 

 

(233

)

Dividends paid

 

 

(1,670

)

 

 

(1,750

)

Net cash used in financing activities

 

 

(3,749

)

 

 

(13,791

)

(Decrease) increase in cash, cash equivalents, and restricted cash

 

 

(38,186

)

 

 

46,421

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

446,383

 

 

 

283,008

 

Cash, cash equivalents and restricted cash, end of period

 

$

408,197

 

 

$

329,429

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

 

Interest paid

 

$

5,969

 

 

$

 

 

$

1,808

 

 

$

2,418

 

 

Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.


 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

402,770

 

 

$

440,956

 

Restricted cash

 

 

5,427

 

 

 

5,427

 

Total

 

$

408,197

 

 

$

446,383

 

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.


Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements asinclude the accounts of and for the three and nine months ended September 30, 2017 and 2016 include Heritage Insurance Holdings, Inc. (“Parent Company”) and(together with its wholly-owned subsidiaries: Heritage Property & Casualty Insurance Company (“Heritage P&C”), which provides personal and commercial residential insurance; Heritage MGA, LLC,subsidiaries, the managing general agent that manages substantially all aspects of our Florida insurance subsidiary’s business; Contractors’ Alliance Network, LLC (“CAN”“Company”), our vendor network manager for Florida claims which includes BRC Restoration Specialists, Inc. (“BRC”), our provider of restoration, emergency and recovery services; Zephyr Acquisition Company (“ZAC”) and its wholly-owned subsidiary, Zephyr Insurance Company, Inc. (“Zephyr”), our provider for writing insurance policies for residential wind insurance within the State of Hawaii; Skye Lane Properties, LLC, our property management subsidiary; First Access Insurance Group, LLC, our retail agency; Osprey Re Ltd. (“Osprey”), our reinsurance subsidiary that may provide a portion of the reinsurance protection purchased by our insurance subsidiaries; and Heritage Insurance Claims, LLC, an inactive subsidiary reserved for future development. The assets of BRC, a building restoration company, were acquired and merged into CAN in 2015. The assets of SVM Restoration Services Inc. (“SVM”), a water mitigation company, were acquired and merged into CAN in 2014. In September 2017, in connection with the pending acquisition of Narragansett Bay Insurance, Inc. (“NBIC”) a wholly-owned subsidiary of NBIC Holdings, Inc., the Company formed Gator Acquisition Merger Sub, Inc., a wholly-owned subsidiary of the Parent Company.

Through our insurance subsidiaries, Heritage P&C and Zephyr, we write personal residential insurance for single-family homeowners and condominium owners, and rental property insurance in the states of Florida, Hawaii, North Carolina, South Carolina, Alabama and Georgia. We also provide commercial residential insurance for Florida properties and are also licensed in the state of Mississippi. We are vertically integrated and control or manage substantially all aspects of insurance underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. We conduct our operations under a single reporting segment.

The condensed consolidated financial information included herein as of and for the three and nine months ended September 30, 2017 and 2016 does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. However, such information reflects all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for a fair statement of the financial condition and results of operations for the interim periods. The results for the three and nine months ended September 30, 2017 and 2016 are not indicative of annual results. The accompanying unaudited condensed consolidated financial. 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 December 31, 2016accompanying interim condensed consolidated balance sheet was derived fromfinancial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016.

For further information, refer to the consolidated financial statements andrelated footnotes thereto included in Heritage Insurance Holdings, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. References to “we,” “us,” “our,” or the “Company” refer to Heritage Insurance Holdings, Inc. and its consolidated subsidiaries.

The Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, the Company is eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. The Company intends to continue to take advantage of some, but not all, of the exemptions available to emerging growth companies until such time that it is no longer an emerging growth company. The Company has, however, irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Changes to significant accounting policies

We have added one new policy to our significant accounting policies as reported in ourCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.2020 (the “2020 Form 10-K”).


New Accounting PolicySignificant accounting policies

Long-term debt instrument with embedded features such as conversion and redemption options is evaluated to determine whether bifurcation and derivativeThe accounting is applicable. If such instrument is not subject to derivative accounting, it is further evaluated to determine ifpolicies of the Company is requiredare set forth in Note 1 to separately account for the liability and equity components.

To determine the carrying values of the debt and derivative components at issuance, the Company measures the fair value of a similar liability, including any embedded features other than the conversion option, and assigns such value to the liability or equity component. The liability component’s fair value is then subtracted from the initial proceeds to determine the carrying value of the debt instrument’s derivative component. The conversion option liability is revalued each quarter. Any gain or loss is recorded as a non-operating expense on the Condensed Consolidated Statements of Income (Loss) and Other Comprehensive Income (Loss).

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The amendments in ASU 2016-09 intend to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 requires that companies elect to account for forfeitures based on an estimate of the number of awards for which the requisite service period will not be rendered or to account for forfeitures as they occur. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company adopted the new guidance in ASU 2016-09 in the quarter ended June 30, 2017. At the time of adoption, the Company did not have any excess tax benefits recorded on the consolidated balance sheets, statement of operations or statement of cash flows for the periods ended September 30, 2017 or 2016. The adoption of ASU 2016-09 on ourcondensed consolidated financial statements had no impact.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 describes below recent pronouncements that may have ahas documented the summary of its significant effect onaccounting policies in its financial statements or on its disclosures upon future adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on, or are unrelated to, its financial condition, results of operations, or related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting, clarifying when a changeNotes to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’sAudited Consolidated Financial Statements as it is notannual 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 practice to change eitheraccounting policies since the terms or conditionsfiling of share-based payment awards once they are granted.that report.

In March 2017, the FASB issued ASU No 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, this update shortens the amortization period of certain purchased callable debt securities to the earliest call date. The new guidance is effective for the Company beginning with the first quarter of 2019. Early adoption is permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 intend to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard is effective for the Company in the first quarter of 2020 on a prospective basis with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or


businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is aother new accounting standard that will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This updated guidance ispronouncements issued but not yet effective on January 1, 2018, and will require adoption on a retrospective basis with early adoption permitted. The Company has not experienced any transactions that are within the scope of this guidance and accordingly will evaluate the effect of this guidance further if and when any such transactions occur.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Measurement of Credit Losses on Financial Instruments.  The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset in order to present the net carrying value at the amount expected to be collected on the financial asset on the consolidated balance sheet. The guidance also amends the current accounting for other-than-temporary impairment model by requiring an estimate of the expected credit loss only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer impact the determination of whether a potential credit loss exists. The available-for-sale debt security model will also require the use of a valuation allowance as compared to the current practice of writing down the asset. The standard is effective for the Company in the first quarter of 2020 with early adoption permitted in the first quarter of 2019. The Company is in the early stages of evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU 2016-01, which will significantly change the income statement impact of equity investments held by an entity, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. The guidance requires equity investments to be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accountinghad, or those that result in consolidation of the investee) and an assessment of a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The standard is effective for the Company in the first quarter of 2018. The Company is in the early stages of evaluating the effect that the updated standard will have on the Company’s Consolidated Financial Statements and related disclosures. The effect of adopting this guidance will be principally affected by the level of unrealized gains or losses associated with equity investments with readily determinable market values. Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment with future unrealized gains or losses reflected in the statement of income and comprehensive income. Refer to Note 3 for the current status of such unrealized gains and losses levels that are currently recognized as other comprehensive income.

In May 2014, the FASB issued ASU Topic 2014-09, Revenue from Contracts with Customers. This guidance is not applicable to insurance contracts. The ASU 2014-09 creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The standard is effective for the Company in the first quarter of 2018 with early adoption permitted. The Company has determined that this pronouncement is not applicable to its insurance contracts and will not be material to the Company’s Consolidated Financial Statements.

There are no other recently issued accounting standards that apply to the Company or that are expected to have, a material impact on the Company’sour results of operations or financial condition, or cash flows.position.

NOTE 2. ACQUISITIONINVESTMENTS

Pending Acquisitions

On August 8, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Gator Acquisition Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), and NBIC Holdings, Inc. (“NBIC”) and PBRA, LLC, in its capacity as Stockholder Representative. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into NBIC, resulting in NBIC becoming a wholly-owned subsidiary of the


Company (the “Acquisition”). NBIC owns 100% of the stock of Narragansett Bay Insurance Company, a provider of homeowners’ insurance in the northeast, with a presence in New York, New Jersey, Connecticut, Rhode Island and Massachusetts.Securities Available-for-Sale

The purchase price for the Acquisition will consist of $210 million in cash (the “Cash Consideration”), plus approximately $40 millionamortized cost, gross unrealized gains and losses, and fair value of the Company’s common stock (the “Stock Consideration”), subject to a post-closing book value adjustment. The value of each share of the Company’s common stock will be based on the volume-weighted average price of the Company’s common stock during the five business-day period ending on the business day immediately preceding closing. The Stock Consideration will be issued at closing in an exempt private placement pursuant to Section 4(a)(2) of the Securities Act of 1933,debt securities available-for-sale are as amended (the “Securities Act”). Following the closing of the Acquisition, the Company intends to file a shelf registration statement on Form S-3 with the SEC providingfollows for the registered resale of the Stock Consideration. In accordance with the Merger Agreement, a certain portion of the Stock Consideration will be placed in an escrow account at closing to secure any amounts payable pursuant to the post-closing book value adjustment provisions set forth in the Merger Agreement. The size of this escrow will be either $12.5 million or $25.0 million of the Stock Consideration (depending on the preliminary, pre-closing estimate of the closing book value of NBIC and its subsidiaries, and subject to further potential adjustment depending on whether there are any disputes between the Company and NBIC with respect to this pre-closing estimate that remain unresolved as of the closing). The Company estimates completion of the Acquisition to occur in the fourth quarter of 2017.

Completed Acquisitions

On March 21, 2016, the Company completed its acquisition of ZAC and acquired 100% of its outstanding stock and its wholly-owned subsidiary, Zephyr, in exchange for approximately $110.3 million in cash, net of cash acquired. Zephyr is a specialty property insurance provider that offers policies for residential customers in Hawaii that only cover the peril of windstorm-hurricane events.

The purchase consideration for this acquisition has been allocated to the estimated fair market value of the net assets acquired, including approximately $31.8 million in identifiable intangible assets (primarily value of business acquired (“VOBA”), brand, customer relationships and trade name), and a residual amount of goodwill of approximately $38.4 million. This acquisition furthers the Company’s strategic push to diversify business operations and achieve potential reinsurance synergies while expanding growth opportunities outside of Florida.

The following table sets forth the allocation of the purchase consideration for the acquisition of ZAC.periods:

 

Purchase Consideration

 

 

 

  Cash, net of cash acquired

$

110,319

 

 

 

 

 

Assets acquired

 

 

 

Investments

$

76,543

 

Premiums and agent's receivable

 

1,403

 

Other assets

 

526

 

Prepaid reinsurance premiums

 

4,792

 

Intangible assets – value of business acquired

 

7,600

 

Intangible assets

 

24,245

 

Total assets acquired

$

115,109

 

Total liabilities assumed

$

(43,216

)

 

 

 

 

Net assets acquired

$

71,893

 

Goodwill

 

38,426

 

Total purchase price

$

110,319

 

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)

 

$

43,089

 

 

$

433

 

 

$

3

 

 

$

43,519

 

States, municipalities and political subdivisions

 

 

97,804

 

 

 

312

 

 

 

1,191

 

 

 

96,925

 

Special revenue

 

 

291,277

 

 

 

1,779

 

 

 

2,970

 

 

 

290,086

 

Hybrid securities

 

 

99

 

 

 

1

 

 

 

 

 

 

100

 

Industrial and miscellaneous

 

 

193,504

 

 

 

1,439

 

 

 

2,650

 

 

 

192,293

 

Total

 

$

625,773

 

 

$

3,964

 

 

$

6,814

 

 

$

622,923

 

(1)

Includes securities at March 31, 2021 with a carrying amount of $22.2 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.


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)

 

$

29,985

 

 

$

609

 

 

$

1

 

 

$

30,593

 

States, municipalities and political subdivisions

 

 

84,597

 

 

 

1,077

 

 

 

4

 

 

 

85,670

 

Special revenue

 

 

271,194

 

 

 

3,154

 

 

 

27

 

 

 

274,321

 

Hybrid securities

 

 

100

 

 

 

 

 

 

 

 

 

100

 

Industrial and miscellaneous

 

 

167,296

 

 

 

3,070

 

 

 

39

 

 

 

170,327

 

Total

 

$

553,172

 

 

$

7,910

 

 

$

71

 

 

$

561,011

 

 


(1)

Includes securities at December 31, 2020 with a carrying amount of $20.2 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

Pro Forma Information

The following table presents selected pro forma information, assuming the acquisition of ZAC had occurred on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results that the Company would have achieved had the transaction taken place on January 1, 2016 and the unaudited pro forma information does not purport to be indicative of future financial results.

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2016

 

 

(In thousands, except per share)

 

Revenue

$

109,306

 

 

$

344,972

 

Net income

$

10,930

 

 

$

38,673

 

Basic, earnings per share

$

0.37

 

 

$

1.33

 

Diluted, earnings per share

$

0.37

 

 

$

1.33

 

NOTE 3. INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2017 and December 31, 2016:

 

 

Cost or Adjusted /

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

 

(In thousands)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

30,369

 

 

$

15

 

 

$

381

 

 

$

30,003

 

States, municipalities and political

   subdivisions

 

 

274,468

 

 

 

2,276

 

 

 

1,077

 

 

 

275,667

 

Special revenue

 

 

55,103

 

 

 

53

 

 

 

416

 

 

 

54,740

 

Industrial and miscellaneous

 

 

128,182

 

 

 

1,451

 

 

 

227

 

 

 

129,406

 

Redeemable preferred stocks

 

 

4,672

 

 

 

21

 

 

 

25

 

 

 

4,668

 

Total fixed maturities

 

 

492,794

 

 

 

3,816

 

 

 

2,126

 

 

 

494,484

 

Nonredeemable preferred stocks

 

 

14,305

 

 

 

60

 

 

 

85

 

 

 

14,280

 

Equity securities

 

 

13,423

 

 

 

442

 

 

 

2,749

 

 

 

11,116

 

Total equity securities

 

 

27,728

 

 

 

502

 

 

 

2,834

 

 

 

25,396

 

Total Investments

 

$

520,522

 

 

$

4,318

 

 

$

4,960

 

 

$

519,880

 

 

 

Cost or Adjusted /

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

 

(In thousands)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

107,968

 

 

$

29

 

 

$

449

 

 

$

107,548

 

States, municipalities and political

   subdivisions

 

 

281,935

 

 

 

298

 

 

 

4,872

 

 

 

277,361

 

Special revenue

 

 

53,726

 

 

 

29

 

 

 

759

 

 

 

52,996

 

Industrial and miscellaneous

 

 

129,687

 

 

 

535

 

 

 

577

 

 

 

129,645

 

Redeemable preferred stocks

 

 

3,595

 

 

 

15

 

 

 

149

 

 

 

3,461

 

Total fixed maturities

 

 

576,911

 

 

 

906

 

 

 

6,806

 

 

 

571,011

 

Nonredeemable preferred stocks

 

 

14,935

 

 

 

40

 

 

 

460

 

 

 

14,515

 

Equity securities

 

 

19,255

 

 

 

1,197

 

 

 

2,996

 

 

 

17,456

 

Total equity securities

 

 

34,190

 

 

 

1,237

 

 

 

3,456

 

 

 

31,971

 

Total Investments

 

$

611,101

 

 

$

2,143

 

 

$

10,262

 

 

$

602,982

 


The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. The Company determines the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following tables detail the Company’s net realized gains (losses) by major investment categoryon the Company’s debt securities available-for-sale for the three and nine months ended September 30, 2017March 31, 2021 and 2016.

2020, respectively:

 

 

2017

 

 

2016

 

 

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

 

(In thousands)

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

413

 

 

$

253,673

 

 

$

1,091

 

 

$

17,301

 

Equity securities

 

 

1,260

 

 

 

16,454

 

 

 

289

 

 

 

1,739

 

Total realized gains

 

 

1,673

 

 

 

270,127

 

 

 

1,380

 

 

 

19,040

 

Fixed maturities

 

 

(23

)

 

 

26,602

 

 

 

(232

)

 

 

575

 

Equity securities

 

 

(1,285

)

 

 

6,781

 

 

 

(29

)

 

 

445

 

Total realized losses

 

 

(1,308

)

 

 

33,383

 

 

 

(261

)

 

 

1,020

 

Net realized gain

 

$

365

 

 

$

303,510

 

 

$

1,119

 

 

$

20,060

 

 

 

2017

 

 

2016

 

 

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

 

(In thousands)

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

448

 

 

$

463,538

 

 

$

2,668

 

 

$

166,350

 

Equity securities

 

 

2,231

 

 

 

22,848

 

 

 

46

 

 

 

7,855

 

Total realized gains

 

 

2,679

 

 

 

486,386

 

 

 

2,714

 

 

 

174,205

 

Fixed maturities

 

 

(197

)

 

 

40,192

 

 

 

(66

)

 

 

12,973

 

Equity securities

 

 

(1,471

)

 

 

10,610

 

 

 

(886

)

 

 

2,948

 

Total realized losses

 

 

(1,668

)

 

 

50,802

 

 

 

(952

)

 

 

15,921

 

Net realized gain

 

$

1,011

 

 

$

537,188

 

 

$

1,762

 

 

$

190,126

 

 

 

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

 

$

83

 

 

$

10,431

 

 

$

60

 

 

$

8,510

 

Total realized losses

 

 

(3

)

 

 

642

 

 

 

(1

)

 

 

256

 

Net realized gains and (losses)

 

$

80

 

 

$

11,073

 

 

$

59

 

 

$

8,766

 

 

The table below summarizes the Company’s fixed maturitiesmaturity securities at September 30, 2017March 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.

 

 

September 30, 2017

 

 

At March 31, 2021

 

 

Cost or Amortized Cost

 

 

Percent of Total

 

 

Fair Value

 

 

Percent of Total

 

 

Cost or Amortized Cost

 

 

Percent of Total

 

 

Fair Value

 

 

Percent of Total

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Due one year or less

 

$

65,863

 

 

 

13

%

 

$

65,879

 

 

 

13

%

Maturity dates:

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Due in one year or less

 

$

78,937

 

 

 

13

%

 

$

79,291

 

 

 

13

%

Due after one year through five years

 

 

142,019

 

 

 

29

%

 

 

142,550

 

 

 

29

%

 

 

177,382

 

 

 

28

%

 

 

178,603

 

 

 

29

%

Due after five years through ten years

 

 

160,873

 

 

 

33

%

 

 

161,468

 

 

 

33

%

 

 

204,746

 

 

 

33

%

 

 

200,886

 

 

 

32

%

Due after ten years

 

 

124,039

 

 

 

25

%

 

 

124,587

 

 

 

25

%

 

 

164,708

 

 

 

26

%

 

 

164,143

 

 

 

26

%

Total

 

$

492,794

 

 

 

100

%

 

$

494,484

 

 

 

100

%

 

$

625,773

 

 

 

100

%

 

$

622,923

 

 

 

100

%

 

The following table summarizes the Company’s net investment income by major investment category for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, respectively:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

 

(In thousands)

 

 

(In thousands)

 

 

(In thousands)

 

Fixed maturities

 

$

2,479

 

 

$

2,338

 

 

$

7,640

 

 

$

6,368

 

Debt securities

 

$

1,418

 

 

$

4,162

 

Equity securities

 

 

479

 

 

 

495

 

 

 

1,458

 

 

 

1,465

 

 

 

 

 

 

 

Cash, cash equivalents and short-term Investments

 

 

441

 

 

 

79

 

 

 

544

 

 

 

215

 

Cash and cash equivalents

 

 

28

 

 

 

352

 

Other investments

 

 

(24

)

 

 

14

 

 

 

(24

)

 

 

(96

)

 

 

371

 

 

 

94

 

Net investment income

 

 

3,375

 

 

 

2,926

 

 

 

9,618

 

 

 

7,952

 

 

 

1,817

 

 

 

4,608

 

Investment expenses

 

 

640

 

 

 

600

 

 

 

1,408

 

 

 

1,366

 

Less: Investment expenses

 

 

524

 

 

 

938

 

Net investment income, less investment expenses

 

$

2,735

 

 

$

2,326

 

 

$

8,210

 

 

$

6,586

 

 

$

1,293

 

 

$

3,670

 

 


The following tables present, for all debt securities available-for-sale in an agingunrealized loss position (including securities pledged), the aggregate fair value and gross unrealized loss by length of ourtime the security has continuously been in an unrealized investment losses by investment class as of September 30, 2017loss position at March 31, 2021 and December 31, 2016:2020, respectively:

 

 

 

Less Than Twelve Months

 

 

Twelve Months or More

 

 

 

Number of

Securities

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Number of

Securities

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(In thousands)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

68

 

 

$

353

 

 

$

27,694

 

 

 

6

 

 

$

28

 

 

$

874

  

States, municipalities and political

   subdivisions

 

 

104

 

 

 

902

 

 

 

98,619

 

 

 

18

 

 

 

174

 

 

 

16,142

 

Special revenue

 

 

155

 

 

 

162

 

 

 

38,331

 

 

 

14

 

 

 

65

 

 

 

2,244

 

Industrial and miscellaneous

 

 

200

 

 

 

339

 

 

 

40,090

 

 

 

51

 

 

 

78

 

 

 

4,841

 

Redeemable preferred stocks

 

 

20

 

 

 

21

 

 

 

2,416

 

 

 

5

 

 

 

4

 

 

 

61

 

Total fixed maturities

 

 

547

 

 

 

1,777

 

 

 

207,150

 

 

 

94

 

 

 

349

 

 

 

24,162

 

Nonredeemable preferred stocks

 

 

123

 

 

 

78

 

 

 

7,847

 

 

 

17

 

 

 

8

 

 

 

208

 

Equity securities

 

 

32

 

 

 

296

 

 

 

1,913

 

 

 

74

 

 

 

2,452

 

 

 

5,564

 

Total equity securities

 

 

155

 

 

 

374

 

 

 

9,760

 

 

 

91

 

 

 

2,460

 

 

 

5,772

 

Total Investments

 

 

702

 

 

$

2,151

 

 

$

216,910

 

 

 

185

 

 

$

2,809

 

 

$

29,934

 

 

 

Less Than Twelve Months

 

 

Twelve Months or More

 

 

 

Number of Securities

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Number of Securities

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

 

(In thousands)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

35

 

 

$

448

 

 

$

24,649

 

 

 

2

 

 

$

1

 

 

$

200

 

States, municipalities and political subdivisions

 

 

265

 

 

 

4,869

 

 

 

220,034

 

 

 

2

 

 

 

3

 

 

 

1,497

 

Special revenue

 

 

161

 

 

 

571

 

 

 

56,996

 

 

 

2

 

 

 

6

 

 

 

974

 

Industrial and miscellaneous

 

 

189

 

 

 

631

 

 

 

44,712

 

 

 

11

 

 

 

129

 

 

 

1,828

 

Redeemable preferred stocks

 

 

19

 

 

 

143

 

 

 

2,425

 

 

 

1

 

 

 

6

 

 

 

212

 

Total fixed maturities

 

 

669

 

 

 

6,662

 

 

 

348,816

 

 

 

18

 

 

 

145

 

 

 

4,711

 

Nonredeemable preferred stocks

 

 

77

 

 

 

439

 

 

 

11,298

 

 

 

5

 

 

 

20

 

 

 

234

 

Equity securities

 

 

26

 

 

 

191

 

 

 

2,542

 

 

 

29

 

 

 

2,805

 

 

 

7,317

 

Total equity securities

 

 

103

 

 

 

630

 

 

 

13,840

 

 

 

34

 

 

 

2,825

 

 

 

7,551

 

Total Investments

 

 

772

 

 

$

7,292

 

 

$

362,656

 

 

 

52

 

 

$

2,970

 

 

$

12,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4

 

 

$

3

 

 

$

361

 

 

$

 

 

$

 

 

$

 

States, municipalities and political subdivisions

 

 

66

 

 

 

1,191

 

 

 

55,427

 

 

 

 

 

 

 

 

 

 

Special revenue

 

 

159

 

 

 

2,966

 

 

 

127,866

 

 

 

10

 

 

 

4

 

 

 

101

 

Industrial and miscellaneous

 

 

131

 

 

 

2,650

 

 

 

102,756

 

 

 

 

 

 

 

 

 

 

Total fixed maturity securities

 

 

360

 

 

$

6,810

 

 

$

286,410

 

 

 

10

 

 

$

4

 

 

$

101

 

 

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 0t record any credit allowance for securities that were in an unrealized loss position at March 31, 2021. We attribute the price decline and subsequent increase in our unrealized losses to interest rates rather than any sort of fundamental deterioration.

 

 

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

 

 

3

 

 

$

1

 

 

$

73

 

 

 

1

 

 

$

 

 

$

7

 

States, municipalities and political subdivisions

 

 

6

 

 

 

4

 

 

 

5,158

 

 

 

 

 

 

 

 

 

 

Special revenue

 

 

27

 

 

 

24

 

 

 

16,439

 

 

 

9

 

 

 

3

 

 

 

73

 

Industrial and miscellaneous

 

 

26

 

 

 

39

 

 

 

16,025

 

 

 

 

 

 

 

 

 

 

Total fixed maturity securities

 

 

62

 

 

$

68

 

 

$

37,695

 

 

 

10

 

 

$

3

 

 

$

80

 

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 $7.5 million and $9.9 million. The preferred units are measured at amortized cost under the guidance of ASC 320 and are subject to a fixed principal and interest payment schedule with maturity dates of February 1, 2023 and April 1, 2021, respectively. For the three months ended March 31, 2021, the Company received $348,000 in interest payments from the preferred units. There is no active market for these investments.


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

 

$

26,409

 

 

$

26,409

 

 

$

6,375

 

 

$

6,375

 

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 4.3. FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS

ForFair value is determined based on the Company’s investmentsexchange price that would be received to sell an asset or paid to transfer a liability in U.S government securities that do not have pricesthe principal or most advantageous market for the asset or liability in active markets, agency securities, state and municipal governments, and corporate bonds,an orderly transaction between market participants at the Company obtains themeasurement date.

We are required to use an established hierarchy for fair value from its third-partymeasurements based upon the inputs to the valuation service and we evaluate the relevant inputs, assumptions, methodologies and conclusions associated with such valuations. The valuation service calculates prices for the Company’s investmentsdegree to which they are observable or not observable in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporatemarket. 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 from various sources. The modeland the valuation service useslowest priority to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account forLevel 3 inputs. We did not hold any early redemption features, then adds final spreads to the U.S. Treasury curveLevel 3 assets or liabilities as of quarter end. The inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, and therefore represent Level 2 inputs.March 31, 2021 or December 31, 2020.

The following tablestable 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

 

$

43,519

 

 

$

370

 

 

$

43,149

 

 

$

 

States, municipalities and political subdivisions

 

 

96,925

 

 

 

 

 

 

96,925

 

 

 

 

Special revenue

 

 

290,086

 

 

 

 

 

 

290,086

 

 

 

 

Hybrid securities

 

 

100

 

 

 

 

 

 

100

 

 

 

 

Industrial and miscellaneous

 

 

192,293

 

 

 

 

 

 

192,293

 

 

 

 

Total investments

 

$

622,923

 

 

$

370

 

 

$

622,553

 

 

$

 


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

 

$

30,593

 

 

$

371

 

 

$

30,222

 

 

$

 

States, municipalities and political subdivisions

 

 

85,670

 

 

 

 

 

 

85,670

 

 

 

 

Special revenue

 

 

274,321

 

 

 

 

 

 

274,321

 

 

 

 

Hybrid securities

 

 

100

 

 

 

 

 

 

100

 

 

 

 

Industrial and miscellaneous

 

 

170,327

 

 

 

 

 

 

170,327

 

 

 

 

Total investments

 

$

561,011

 

 

$

371

 

 

$

560,640

 

 

$

 

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 ninequarters 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 0 non-recurring fair value adjustments to intangible assets and goodwill during the first quarters of 2021 and 2020. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.

NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOME

The following table is a summary of other comprehensive (loss) income and discloses the tax impact of each component of other comprehensive (loss) income for the three months ended September 30, 2017March 31, 2021 and the year ended December 31, 2016, there were no transfers in or out of Level 1, 2, and 3.2020, respectively:

 

September 30, 2017

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Fixed maturities Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

30,003

 

 

$

2,844

 

 

$

27,159

 

 

$

 

States, municipalities and political

   subdivisions

 

 

275,667

 

 

 

 

 

 

275,667

 

 

 

 

Special revenue

 

 

54,740

 

 

 

27,427

 

 

 

27,313

 

 

 

 

Industrial and miscellaneous

 

 

129,406

 

 

 

 

 

 

129,406

 

 

 

 

Redeemable preferred stocks

 

 

4,668

 

 

 

4,668

 

 

 

 

 

 

 

Total fixed maturities Investments

 

$

494,484

 

 

$

34,939

 

 

$

459,545

 

 

$

 

Nonredeemable preferred stocks

 

 

14,280

 

 

 

14,280

 

 

 

 

 

 

 

Equity securities

 

 

11,116

 

 

 

11,116

 

 

 

 

 

 

 

Total equity securities

 

$

25,396

 

 

$

25,396

 

 

$

 

 

$

 

Total Investments

 

$

519,880

 

 

$

60,335

 

 

$

459,545

 

 

$

 

 

 

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

 

$

(10,597

)

 

$

2,457

 

 

$

(8,140

)

 

$

2,027

 

 

$

(469

)

 

$

1,558

 

Reclassification adjustment of realized gains included in net income

 

 

(80

)

 

 

18

 

 

 

(62

)

 

 

(59

)

 

 

13

 

 

 

(46

)

Effect on other comprehensive (loss) income

 

$

(10,677

)

 

$

2,475

 

 

$

(8,202

)

 

$

1,968

 

 

$

(456

)

 

$

1,512

 

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 one to ten years, and often include one or more options to renew. These renewal terms can extend the lease term from two to ten years, and are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company considers these options in determining the lease term used in establishing our right-of-use assets and lease obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.


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

 

$

37

 

 

$

22

 

Interest on lease liabilities - Finance leases

 

 

9

 

 

 

6

 

Variable lease cost (cost excluded from lease payments)

 

 

121

 

 

 

130

 

Operating lease cost (cost resulting from lease payments)

 

 

340

 

 

 

343

 

Total lease cost

 

$

507

 

 

$

501

 

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

 

$

9

 

 

$

6

 

Finance lease - Financing cash flows

 

$

30

 

 

$

18

 

 

 

 

 

 

 

 

 

 

Operating lease - Operating cash flows (fixed payments)

 

$

367

 

 

$

368

 

Operating lease - Operating cash flows (liability reduction)

 

$

271

 

 

$

264

 

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

 

$

5,747

 

Right-of-use assets - finance

 

Other assets

 

$

469

 

Lease liability - operating (1)

 

Accounts payable and other liabilities

 

$

7,371

 

Lease liability - finance

 

Accounts payable and other liabilities

 

$

515

 

 

 

 

 

 

 

 

(1) Includes $1.3 million in lease incentives received in the first quarter of 2019.

 

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

 

3.54 yrs.

 

 

3.42 yrs.

 

Weighted average lease term - Operating leases

 

6.78 yrs.

 

 

7.68 yrs.

 

Weighted average discount rate - Finance leases

 

 

6.9

%

 

 

7.1

%

Weighted average discount rate - Operating leases

 

 

5.3

%

 

 

5.3

%

Maturities of lease liabilities by fiscal year for our operating and financing leases were as follows (in thousands):

 

 

March 31, 2021

 

2021 remaining

 

$

1,242

 

2022

 

 

1,660

 

2023

 

 

1,550

 

2024

 

 

1,183

 

2025

 

 

885

 

Thereafter

 

 

2,906

 

Total lease payments

 

 

9,426

 

Less: imputed interest

 

 

(1,540

)

Present value of lease liabilities

 

$

7,886

 

 

December 31, 2016

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Fixed maturities Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

107,548

 

 

$

103,997

 

 

$

3,551

 

 

$

 

States, municipalities and political

   subdivisions

 

 

277,361

 

 

 

 

 

 

277,361

 

 

 

 

Special revenue

 

 

52,996

 

 

 

 

 

 

52,996

 

 

 

 

Industrial and miscellaneous

 

 

129,645

 

 

 

 

 

 

129,645

 

 

 

 

Redeemable preferred stocks

 

 

3,461

 

 

 

3,461

 

 

 

 

 

 

 

Total fixed maturities Investments

 

$

571,011

 

 

$

107,458

 

 

$

463,553

 

 

$

 

Nonredeemable preferred stocks

 

 

14,515

 

 

 

14,515

 

 

 

 

 

 

 

Equity securities

 

 

17,456

 

 

 

17,456

 

 

 

 

 

 

 

Total equity securities

 

$

31,971

 

 

$

31,971

 

 

$

 

 

$

 

Total Investments

 

$

602,982

 

 

$

139,429

 

 

$

463,553

 

 

$

 


 

NOTE 5.6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at September 30, 2017March 31, 2021 and December 31, 2016:2020:

 

 

September 30, 2017

 

 

December 31, 2016

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(In thousands)

 

 

(In thousands)

 

Land

 

$

2,582

 

 

$

2,582

 

 

$

2,582

 

 

$

2,582

 

Building

 

 

10,301

 

 

 

10,301

 

 

 

10,141

 

 

 

10,141

 

Computer hardware and software

 

 

3,122

 

 

 

3,113

 

 

 

6,680

 

 

 

6,358

 

Office furniture and equipment

 

 

759

 

 

 

759

 

 

 

2,034

 

 

 

2,027

 

Tenant and leasehold improvements

 

 

3,547

 

 

 

3,334

 

 

 

8,225

 

 

 

8,133

 

Vehicle fleet

 

 

815

 

 

 

842

 

 

 

850

 

 

 

850

 

Total, at cost

 

 

21,126

 

 

 

20,931

 

 

 

30,512

 

 

 

30,091

 

Less: accumulated depreciation and amortization

 

 

4,928

 

 

 

3,752

 

 

 

(11,838

)

 

 

(11,406

)

Property and equipment, net

 

$

16,198

 

 

$

17,179

 

 

$

18,674

 

 

$

18,685

 

 

Depreciation and amortization expense for property and equipment was $394 thousand$432,300 and $797 thousand$432,000 for the three months ended September 30, 2017March 31, 2021 and 2016, and for the nine months ended $ 1.2 million and $1.2 million,2020, respectively. The Company’s real estate consists of 1415 acres of land and four5 buildings with a gross area of 191 thousand191,200 square feet.feet and a parking garage. Approximately 75% of the building in Clearwater is leased to unaffiliated tenants. Following our planned relocation to our new Tampa headquarters, which is expected to occur in the second half of 2021, we intend to sublease the remaining available space at the Clearwater location to unaffiliated tenants.

NOTE 6.7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Intangible Assets

As of September 30, 2017,

At March 31, 2021 and December 31, 20162020 goodwill was $46.5$152.5 million and intangible assets were $23.0$60.7 million and $26.5$62.3 million, respectively. The Company has determined the useful life of the value of the business acquired (see Note 2) to be one


year. The Company has determined the useful life of the other intangible assets to range between 2.5-15 years. The Company has recorded $175 thousand$1.3 million relating to an insurance licenselicenses and has classified the licenses as an indefinite lived intangible which is subject to annual impairment testing.testing concurrent with goodwill.

 

 

Goodwill

 

 

 

(in thousands)

 

Balance as of December 31, 2020

 

$

152,459

 

Goodwill acquired

 

 

Impairment

 

 

Balance as of March 31, 2021

 

$

152,459

 

 

Other Intangible Assets

Our intangible assets resulted primarily from the acquisition of Zephyr and consistsconsist of brand, agent relationships, renewal rights, customer relations, trade names, non-competenon-competes and insurance licenses. Finite-lived intangible assets are amortized over their useful lives from one to fifteen years.

Amortization expense of our intangible assets was $55 thousand$1.6 million and $3.6$1.6 million for the three and nine months ended September 30, 2017,March 31, 2021 and 2020, respectively. Amortization expense of our intangible assets was $2.1 million and $4.9 million for the three and nine months ended September 30, 2016, respectively.  NoNaN impairment in the value of amortizing or non-amortizing intangiblesintangible assets was recognized during the three and nine months ended September 30, 2017.March 31, 2021 or 2020.

The tables below detail the finite-lived intangibles assets, net as of September 30, 2017 and December 31, 2016, respectively (in thousands).

September 30, 2017

Weighted -average Amortization (years)

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangible Assets, net

 

Amortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brand

 

15

 

 

$

1,210

 

 

$

(174

)

 

$

1,036

 

Agent relationships

 

12

 

 

 

4,800

 

 

 

(600

)

 

 

4,200

 

Renewal rights

 

15

 

 

 

16,600

 

 

 

(1,660

)

 

 

14,940

 

Customer relations

 

10

 

 

 

870

 

 

 

(188

)

 

 

682

 

Trade names

 

10

 

 

 

2,000

 

 

 

(300

)

 

 

1,700

 

Value of business acquired

 

1

 

 

 

7,600

 

 

 

(7,600

)

 

 

 

Non-compete

 

2.5

 

 

 

790

 

 

 

(556

)

 

 

234

 

Non-amortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License acquired

 

 

 

 

 

175

 

 

 

 

 

 

175

 

Total intangible assets

 

 

 

 

$

34,045

 

 

$

(11,078

)

 

$

22,967

 

December 31, 2016

Weighted -average Amortization (years)

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangible Assets, net

 

Amortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brand

 

15

 

 

$

1,210

 

 

$

(114

)

 

$

1,096

 

Agent relationships

 

12

 

 

 

4,800

 

 

 

(300

)

 

 

4,500

 

Renewal rights

 

15

 

 

 

16,600

 

 

 

(830

)

 

 

15,770

 

Customer relations

 

10

 

 

 

870

 

 

 

(123

)

 

 

747

 

Trade names

 

10

 

 

 

2,000

 

 

 

(150

)

 

 

1,850

 

Value of business acquired

 

1

 

 

 

7,600

 

 

 

(5,700

)

 

 

1,900

 

Non-compete

 

2.5

 

 

 

790

 

 

 

(286

)

 

 

504

 

Non-amortizing intangible assets (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License acquired

 

 

 

 

 

175

 

 

 

 

 

 

175

 

Total intangible assets

 

 

 

 

$

34,045

 

 

$

(7,503

)

 

$

26,542

 


Estimated annual pretax amortization of intangible assets for remainder of 2017 and each of the next five years and thereafter is as follows (in thousands):

 

Year

 

Amount

 

2017

 

$

558

 

2018

 

$

1,982

 

2019

 

$

1,898

 

2020

 

$

1,888

 

2021

 

$

1,875

 

2022

 

$

1,875

 

Thereafter

 

$

12,716

 

 

 

$

22,792

 

Year

 

Amount(1)

 

2021 - remaining

 

$

4,763

 

2022

 

$

6,351

 

2023

 

$

6,351

 

2024

 

$

6,351

 

2025

 

$

6,315

 

Thereafter

 

$

29,243

 

Total

 

$

59,374

 

 


(1)

Excludes insurance licenses valued at $1.3 million and classified as an indefinite lived intangible which is subject to annual impairment testing and not amortized.

NOTE 7. (LOSS)8. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted (loss) earnings per share (“EPS”) for the periods indicated.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

Basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders (000's)

 

$

(8,696

)

 

$

10,930

 

 

$

3,929

 

 

$

36,720

 

 

$

(5,148

)

 

$

7,620

 

Weighted average shares outstanding

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

 

 

27,827,804

 

 

 

28,548,830

 

Basic (loss) earnings per share:

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

 

$

(0.19

)

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to common stockholders (000's)

 

$

(8,696

)

 

$

10,930

 

 

$

3,929

 

 

$

36,720

 

 

$

(5,148

)

 

$

7,620

 

Weighted average shares outstanding

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

 

 

27,827,804

 

 

 

28,548,830

 

Weighted average dilutive shares

 

 

 

 

 

 

 

 

 

 

 

43,172

 

 

 

 

 

 

182

 

Total weighted average dilutive shares

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,786,156

 

 

 

27,827,804

 

 

 

28,549,012

 

Diluted (loss) earnings per share:

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

 

$

(0.19

)

 

$

0.27

 

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 1,629,503 and 1,889,770 antidilutive shares as of March 31, 2021 and 2020, respectively.

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 $11.3 million and $10.4 million to policy acquisition costs and $3.7 million and $3.5 million to general and administrative expense, respectively.

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

 

$

39,995

 

 

$

37,464

 

Ceding commission deferred

 

 

13,029

 

 

 

10,845

 

Less: ceding commission earned

 

 

(15,033

)

 

 

(13,929

)

Ending balance of deferred ceding commission income

 

$

37,991

 

 

$

34,380

 

 

NOTE 8.10. DEFERRED POLICY ACQUISITION COSTS

The Company defers certain costs in connection with written policies, called deferred policy acquisition Costscosts (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called deferred reinsurance ceding commissions (“DRCC”). Net DPAC iswhich are amortized over the effective period of the related insurance policies.

The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC duringfor the three months ended March 31, 2021 and nine month periods ended September 30, 2017 and 2016:2020.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

 

(In thousands)

 

(In thousands)

 

Beginning Balance

 

$

41,792

 

 

$

42,568

 

 

$

42,779

 

 

$

34,800

 

 

$

89,265

 

 

$

77,211

 

Policy acquisition costs deferred

 

 

21,002

 

 

 

22,158

 

 

 

65,195

 

 

 

68,807

 

 

 

46,675

 

 

 

38,131

 

Amortization

 

 

(20,906

)

 

 

(22,597

)

 

 

(66,086

)

 

 

(61,478

)

 

 

(47,064

)

 

 

(40,447

)

Ending Balance

 

$

41,888

 

 

$

42,129

 

 

$

41,888

 

 

$

42,129

 

 

$

88,876

 

 

$

74,895

 


 

NOTE 9.11. INCOME TAXES

DuringFor the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, the Company recorded $7.4an income tax benefit of $(2.6) million and $23.7 million, respectively, ofan income tax expense of $3.2 million, respectively, which corresponds to an estimated annualeffective tax rates of 33.2% and 29.4%, respectively. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each three month period was affected by various permanent tax differences, predominately disallowed executive compensation deductions which were further limited in 2018 and future years upon the enactment of 65.2%H.R.1, commonly referred to as the Tax Cuts and 39.2%, respectively. The increaseJobs Act (“Tax Act”). Additionally, the state effective income tax rate can also fluctuate as a result of changes in the geographic dispersion of our business. The effective tax rate in 2017 primarily relates to certain non-deductible financial charges related tocan fluctuate throughout the issuance of convertible notes during the current quarter coupled with the write off of the deferred tax asset related to non-qualified stock options upon the expiration of the Company’s stock options occurringyear as estimates used in the current quarter.tax provision for each quarter are updated as more information becomes available throughout the year.


The table below summarizes the significant components of our net deferred tax assets (liabilities):liability:

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

March 31, 2021

 

 

December 31, 2020

 

Deferred tax assets:

 

(In thousands)

 

 

(In thousands)

 

Unearned premiums

 

$

16,730

 

 

$

17,209

 

 

$

19,271

 

 

$

15,303

 

Unearned commission

 

 

8,807

 

 

 

9,272

 

Net operating loss

 

 

1,484

 

 

 

1,885

 

Tax-related discount on loss reserve

 

 

1,677

 

 

 

1,829

 

 

 

3,426

 

 

 

3,322

 

Unrealized loss

 

 

246

 

 

 

3,113

 

Stock-based compensation

 

 

2,363

 

 

 

1,604

 

 

 

114

 

 

 

113

 

Prepaid expenses

 

 

1,438

 

 

 

1,482

 

Convertible notes option liability

 

 

6,446

 

 

 

 

Accrued expenses

 

 

1,110

 

 

 

982

 

Leases

 

 

379

 

 

 

394

 

Unrealized losses

 

 

661

 

 

 

 

Other

 

 

304

 

 

 

312

 

 

 

358

 

 

 

343

 

Total deferred tax asset

 

 

29,204

 

 

 

25,549

 

 

 

35,610

 

 

 

31,614

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred acquisition costs

 

 

15,898

 

 

 

16,377

 

 

 

20,604

 

 

 

20,694

 

Convertible notes option discount

 

 

6,446

 

 

 

 

Prepaid expenses

 

 

202

 

 

 

236

 

Unrealized gains

 

 

 

 

 

1,814

 

Property and equipment

 

 

355

 

 

 

355

 

 

 

1,605

 

 

 

1,669

 

Note discount

 

 

286

 

 

 

326

 

Basis in purchased investments

 

 

1,600

 

 

 

1,697

 

 

 

48

 

 

 

53

 

Basis in purchased intangibles

 

 

9,066

 

 

 

9,791

 

 

 

15,346

 

 

 

15,693

 

Internal revenue code 481(a)-Accounting method change

 

 

7,505

 

 

 

8,577

 

Other

 

 

332

 

 

 

332

 

 

 

1,123

 

 

 

1,029

 

Total deferred tax liabilities

 

 

33,697

 

 

 

28,552

 

 

 

46,719

 

 

 

50,091

 

Less: valuation allowance

 

 

 

 

 

 

Net deferred tax liability

 

$

(4,493

)

 

$

(3,003

)

 

$

(11,109

)

 

$

(18,477

)

In assessing the net realizable value of deferred tax assets, the Company considered whether it is more likely than not that it will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

The statute of limitations related to our federal and state income tax returns remains open from our first filings for 20132018 through 2016. For2020. In April 2019, the 2014Company was notified by the tax year,authority that the federal income tax return was examined byreturns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority resulting infor the examined tax years, reporting that the returns were accepted as final. No further action will be required and no material adjustment.  Currently, no taxing authoritiesother tax years are examining any of our federal or state income tax returns.under examination.

As of September 30, 2017,At March 31, 2021 and December 31, 2016,2020, we had no0 significant uncertain tax positions.positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.

NOTE 10.12. 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


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 designed, utilizingan important part of our risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the Company’s risk management methodology,exposure on policies we write to address its exposureanother insurer, known as a reinsurer. To the extent that our reinsurers are unable to catastrophes or large non-catastrophic losses. The Company’s program providesmeet the obligations they assume under our reinsurance protectionagreements, we remain liable for catastrophes including hurricanes, tropical storms and tornadoes. the entire insured loss.

The Company’s reinsurance agreements are part of its catastrophe management strategy, which is intended to provide its stockholdersprospective contracts. We record an acceptable return on the risks assumed in its property business,asset, prepaid reinsurance premiums, and to reduce variability of earnings, while providing protection to the Company’s policyholders.

2017 - 2018 Reinsurance Program

The Company placed itsa liability, reinsurance programpayable, for the period from June 1, 2017 through May 31, 2018 during the second quarter of 2017. This reinsurance program incorporates the catastrophe riskentire contract amount upon commencement of our two insurance subsidiaries, Heritage P&C, a Florida based insurer writing property insurance in multiple states, and Zephyr, a Hawaii based insurer. The programs are allocated amongst traditional reinsurers, catastrophe bonds issued by Citrus Re Ltd., a Bermuda special purpose insurer formed in 2014 (“Citrus Re”), and the Florida Hurricane Catastrophe Fund (“FHCF”). Coverage is specific to each insurer unless otherwise noted. The 2017-2018 reinsurance program provides, including retention, first event coverage up to $1.75 billion in Florida, first event coverage up to $731 million in Hawaii, and multiple event coverage up to $2.6 billion. This coverage exceeds the requirements established by the Company’s rating agency, Demotech, Inc., the Florida Office of Insurance Regulation, and the Hawaii Insurance Division.  

The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The Company’s 2017-2018 reinsurance program incorporates the mandatory coverage required by law to be placed with FHCF, which is available only for Florida catastrophe risk. For the 2017 hurricane season, the Company maintained the prior year selected participation percentage in the FHCF at 45%. The Company also purchased private reinsurance below and alongside


the FHCF layer, as well as aggregate reinsurance coverage. The Company is not utilizing its captive, Osprey, for any catastrophe risk for the 2017 hurricane season. The Company has a primary retention of the first $20 million of losses and loss adjustment expenses. Additionally, the December 1, 2016 treaty between Heritage P&C and Osprey was commuted effective June 1, 2017.

Heritage P&C provides property insurance coverage for states other than Hawaii. The following describes the various layers of its June 1, 2017 to May 31, 2018 reinsurance program:

Heritage P&C’s Retention. If a first catastrophic event strikes a Heritage P&C risk, its primary retention is the first $20 million ($15 million plus $5 million co-participation on the Top and Aggregate layer described below) of losses and loss adjustment expenses. If a second catastrophic event strikes a Heritage P&C risk, its primary retention decreases to $16 million and the remainder of the losses are ceded to third parties. In a first event exceeding approximately $878 million, there is an additional co-participation of 20% subject to a maximum co-participation of $727,000. Assuming a 1-100yr 1st event, a second event exceeding approximately $420 million, results in an additional Company co-participation of 11.5% subject to a maximum co-participation of $36 million. Heritage P&C has a $16 million (including 20% co-participation) primary retention after a 1-100 yr. 1st event for events beyond the second catastrophic event.

Shared Layers. Immediately above the retention, the Company has purchased $372 million of reinsurance from third party reinsurers. This coverage includes the following layers: Top and Aggregate layer, Underlying layer, Layer 1, Layer 2 and a private sliver alongside those layers. Through the payment of a reinstatement premium, Heritage P&C and Zephyr are able to reinstate $352 million of this reinsurance one time. There is $20 million of shared coverage subject to a seasonal aggregate of $68 million.

FHCF Layer. Heritage P&C’s FHCF program provides coverage for Florida events only and includes an estimated maximum provisional limit of 45% of $1.3 billion, in excess of its retention of $414 million. The limit and retention of the FHCF coverage is subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. Heritage P&C has purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re. To the extent the FHCF coverage is adjusted, this private reinsurance with third party reinsurers and Citrus Re will adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events.

Layers alongside the FHCF. The Heritage P&C reinsurance program includes third party layers alongside the FHCF. These include 2015 B and 2015 C series catastrophe bonds, 2016 D and 2016 E catastrophe bonds and 2017-2 catastrophe bonds issued by Citrus Re, which total $412.5 million of coverage, as discussed below, as well as a traditional reinsurance layer providing $5 million of coverage.

2017-2 Notes: During May 2017, Heritage P&C entered into a catastrophe reinsurance agreement with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2017. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $35 million of principal-at-risk variable notes due March 2020 to fund the reinsurance trust account and its obligations to Heritage P&C for $35 million of coverage under thenew reinsurance agreements. The limit of coverageCompany generally amortizes its catastrophe reinsurance premiums ratably over the 12-month contract period, which is fully collateralized by aJune 1 through May 31. Its quota share reinsurance trust account foris amortized over the benefit of Heritage P&C. The maturity date of the notes12-month contract period and may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

2016 Class D and E Notes: During February 2016, Heritage P&C and Zephyr entered into two catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2016. For the 2017 hurricane seasons these notes provide coverage only to Heritage P&C who pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $250 million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class D notes provide $150 million of coverage and the Class E notes provide $100 million of coverage. The Class D and Class E notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

2015 Class B and C Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class B notes provide $97.5 million of coverage, and the Class C notes provide $30 million of coverage. The Class B and Class C notes provide


reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

Layers above the FHCF - Florida program

2017-1 Notes: During March 2017, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2017. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due March 2020 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The notes provide $125 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

2015 Class A Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class A notes provide $150 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

Multi-Zonal Layers. The Company purchased additional layers which provide coverage for Heritage P&C for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii is a counterpart to the multi-state catastrophe bond layers and FHCF layer. There is a total of $254 million of reinsurance coverage purchased on this basis, for whicha calendar or fiscal year basis.

In the event that the Company has a prepaid reinstatement.

Aggregate Coverage. In addition to what is described above, much of the reinsurance is structured in a way to provide aggregate coverage. $984 million of limit is structured on this basis (Top and Aggregate, Underlying, Layer 1, Layer 2, Private layers, Multi-Zonal, 2017-1 Notes, 2017-2 Notes, and 2015 Class A Notes). To the extent that this coverage is not fully exhausted in the first catastrophic event, it provides coverage commencing at its reduced retention for second and subsequent events where underlying coverage has been previously exhausted. $606 million has a reinstatement, which is prepaid. Layers (with exception to FHCF, 2016 Class D & E Notes, and 2015 Class B & C Notes) are “net” of a $40 million attachment point. Layers inure to the subsequent layers if the aggregate limit of the preceding layer(s) is exhausted, and the subsequent layer cascades down in its place.

Zephyr provides property insurance coverage for Hawaii. The various layers of its 2017-2018 reinsurance program area as follows:

Zephyr’s Retention. If a first catastrophic event strikes Hawaii, Zephyr has a primary retention of the first $20 million ($15 million plus $5 million co-participation on the Top and Aggregate layer) of losses and loss adjustment expenses. If a second event strikes Hawaii, Zephyr’s primary retention decreases to $16 million and the remainder of losses are ceded to third parties. In a first event exceeding approximately $386 million, there is an additional co-participation of 3.8% subject to a maximum co-participation of $12 million. Assuming a 1-100-year event, a second event exceeding approximately $386 million results in an additional co-participation of 117.7%, subject to a maximum co-participation of $56 million.  Zephyr has a $16 million primary retention for events beyond the second catastrophic event.

Shared Layers above retention. Immediately above the retention, the Company has purchased $372 million of reinsurance from third party reinsurers. This coverage includes the following layers: Top and Aggregate layer, Underlying layer, Layer 1, Layer 2 and a private sliver alongside those layers. Through the payment of a reinstatement premium, Heritage P&C and Zephyr are able to reinstate $352 million of this reinsurance one time. There is $20 million of shared coverage subject to a seasonal aggregate of $68 million.

Multi-Zonal Layers. The Company purchased additional layers which provide coverage for Florida for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii is a counterpart to the multi-state catastrophe bond layers and FHCF layer. There is a total of $302 million of reinsurance coverage purchased on this basis, with $254 million having a prepaid reinstatement. The multi-zonal occurrence layer provides first and second event coverage of $254 million for Hawaii and second event coverage of $254 million for Florida. A Top and Aggregate multi-


zonal layer provides first event coverage of $48 million for Hawaii and second or subsequent event coverage of $48 million for Florida.

Top Hawaii only layer. Zephyr has an additional layer purchased from third party reinsurers which provides $26 million of coverage for Hawaii only losses.  This layer has one free reinstatement.

Aggregate Coverage. In addition to what is described above, much of the reinsurance is structured in a way to provide aggregate coverage. An aggregate of $700 million of limit is structured on this basis (Top and Aggregate, Underlying, Layer 1, Layer 2, Private Layers, Multi-Zonal, Hawaii Only). To the extent that this coverage is not fully exhausted in the first catastrophic event, it provides coverage commencing at its reduced retention for second and subsequent events where underlying coverage has been previously exhausted. $632 million has a reinstatement, which is prepaid or free.

For a first catastrophic event striking Florida, our reinsurance program provides coverage up to $1.75 billion ofincurs losses and loss adjustment expenses including our retention,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 we are responsible for allreinsurance 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 such amount. For a firstits state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event striking Hawaii, our reinsurance program provides coverage upestimated to $731 millionoccur once in every 100 years based on its portfolio of lossesinsured risks. The nature, severity and location of the event giving rise to such a probable maximum loss adjustment expenses, including our retention, and we are responsiblediffers for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage dependseach insurer depending on the magnitudeinsurer’s portfolio of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $632 million of limit purchased in 2017 includes a reinstatement, all of which is prepaid or free. In total, we have purchased $2.6 billion of potential reinsurance coverage,insured risks, including, our retention, for multiple catastrophic events. Our ability to access this coverage, however, will be subject to the severity and frequency of such events. Hurricane losses in states other than Hawaii would be covered under the Heritage P&C program with the exception of the FHCF and the series 2015, 2016 and 2017 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina, South Carolina, Georgia and Alabama.

In placing our 2017-2018 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate uncertainty surrounding the future cost of our reinsurance by negotiating multi-year arrangements. The $687.5 million of aggregate coverage we have purchased from Citrus Re Ltd, which includes the 2015 Class A, B, and C notes, the 2016 Class D & E notes, and the 2017 Series notes extends $277.5 million of coverage until May 2018, $250 million of coverage for another two-year period and $160 million of coverage for a three-year period. To the extent coverage is all or partially exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage from Citrus Re Ltd accounts for approximately 26% of our purchases of private reinsurance for the 2017 hurricane season. The terms of each of the multi-year coverage arrangements described above are subject to adjustment depending on, among other things, the size and composition of our portfoliogeographic concentration of insured risks in future periods.

2016 - 2017 Reinsurance Program

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 placedalso 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 for the period from June 1, 2016 through May 31, 2017 during the second quarter of 2016. This reinsurance program incorporated the catastrophe risk of our twocoverage among its insurance subsidiaries, Heritage P&C, a Florida based insurer and Zephyr, a Hawaii based insurer, into one reinsurance structure. The programs were incorporated into one reinsurance structure and are allocated amongst traditional reinsurers, catastrophe bonds issued by Citrus Re and the FHCF. Coverage was shared by both insurers unless otherwise noted. The 2016-2017 reinsurance program provided, including retention, first event coverage up to $1.9 billion in Florida, first event coverage up to $1.1 billion in Hawaii, and multiple event coverage up to $3 billion.company affiliates.

The reinsurance program, which was segmented into layers of coverage, protected the Company for excess property catastrophe losses and loss adjustment expenses. The Company’s 2016-2017 reinsurance program incorporates the mandatory coverage required by law to be placed with FHCF, which was available only for Florida catastrophe risk. For the 2016 hurricane season, the Company reduced its selected participation percentage in the FHCF from 75% to 45%. The Company also purchased private reinsurance below, alongside and above the FHCF layer, as well as aggregate reinsurance coverage. The following describes the various layers of the Company’s June 1, 2016 to May 31, 2017 reinsurance program.

The Company’s Retention. If a first catastrophic event struck Florida, the Company had a primary retention of the first $40 million of losses and loss adjustment expenses, of which Osprey was responsible for $20 million. If a first catastrophic event struck Hawaii, the Company had a primary retention of the first $30 million of losses and loss adjustment expenses, of which Osprey was responsible for $15 million. If a second catastrophic event struck Florida, Heritage P&C’s primary retention decreased to $15 million and the remainder of the losses were ceded to third parties. If a second event struck Hawaii, Zephyr’s primary retention decreased to $5 million. In the second event only for a loss exceeding $190 million, there was an additional Company co-participation of 5.4% subject to a maximum co-participation of $11.6 million. Heritage P&C and Zephyr each had a $5 million primary retention for events beyond the second catastrophic event. Osprey had no primary retention beyond the first catastrophic event in Florida or Hawaii. Additionally, Osprey was responsible for payment of up to $5.3 million of reinstatement premium, depending on the amount of losses incurred.


Shared Layers above retention and below FHCF. Immediately above the retention, the Company purchased $374 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $374 million or a portion thereof was exhausted in a first catastrophic event, the Company purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage.

FHCF Layer. The Company’s FHCF program provided coverage for Florida events only and included an estimated maximum provisional limit of 45% of $1.5 billion, in excess of its retention of $460 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re. To the extent the FHCF coverage was adjusted, this private reinsurance with third party reinsurers and Citrus Re would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage could be reinstated once exhausted, but it did provide coverage for multiple events.

Layers alongside the FHCF. The Florida reinsurance program included third party layers alongside the FHCF. These included 2015 C and 2015 B series catastrophe bonds, which covered Florida only for the 2016 season, and 2016 D and 2016 E catastrophe bond series issued by Citrus Re, which total $377.5 million of coverage, as discussed below, as well as a traditional reinsurance layer providing $200 million of coverage. Through a reinstatement, the Company was able to reinstate the full amount of the $200 million of reinsurance one time. These 2016 catastrophe bonds and the traditional reinsurance layer provided coverage for both Florida and Hawaii catastrophe losses.

2016 Class D and E Notes: During February 2016, Heritage P&C and Zephyr entered into two catastrophe reinsurance agreements with Citrus Re. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2016. Heritage P&C and Zephyr pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $250 million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to Heritage P&C and Zephyr under the reinsurance agreements. The Class D notes provided $150 million of coverage and the Class E notes provided $100 million of coverage. The Class D and Class E notes provided reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage was fully collateralized by a reinsurance trust account for the benefit of Heritage P&C and Zephyr. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

2015 Class B and C Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The 2015 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class B notes provided $97.5 million of coverage, and the Class C notes provided $30 million of coverage. The Class B and Class C notes provided reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.


Layers above the FHCF - Florida program

2015 Class A Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The 2015 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C paid a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class A notes provided $150 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

2014 Class A Notes: Coverage immediately below and above the 2015 Class A notes was provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re provided $150 million of coverage immediately below 2015 Class A, and the second contract provided an additional $50 million of coverage which sits immediately above 2015 Class A. During April 2014, Heritage P&C entered into two catastrophe reinsurance agreements with Citrus Re. The 2014 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provide for three years of coverage from catastrophe losses caused by certain named storms, including hurricanes, beginning on June 1, 2014. The limit of coverage of $200 million is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued $200 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

Multi-Zonal Layers. The Company purchased additional layers which provided coverage for Florida for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii was a counterpart to the Florida-only catastrophe bond layers and FHCF layer. There was a total of $282 million of reinsurance coverage purchased on this basis, with $260 million having a prepaid reinstatement. The multi-zonal occurrence layer provides first and second event coverage of $260 million for Hawaii and second event coverage of $260 million for Florida. A top and drop multi-zonal layer provides first and subsequent event coverage of $22 million for Hawaii and second or subsequent event coverage of $22 million for Florida.

Aggregate Coverage. In addition to what is described above, much of the reinsurance is structured in a way to provide aggregate coverage. An aggregate of $682 million of limit is structured on this basis. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention for second and subsequent events where underlying coverage had been previously exhausted. An aggregate of $460 million had a reinstatement, which was prepaid.

For a first catastrophic event striking Florida,detailed discussion of our reinsurance program provided coverage2020-2021 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 $2 billion of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For a first catastrophic event striking Hawaii, our reinsurance program provides coverage for $1.1 billion of losses and loss adjustment expenses, including our retention, and we were responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depended on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $860 million of limit purchased in 2016 included a reinstatement, with $825 million being prepaid. In total, we purchased $3.1 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however,year ended December 31, 2020, which was subject to the severity and frequency of such events. Hurricane losses in states other than Hawaii would have been covered under the Heritage P&C programfiled with the exceptionSEC on March 9, 2021.

Effect of the FHCF and the series 2015 and 2016 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina and South Carolina.Reinsurance

In placing our 2016-2017 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate uncertainty surrounding the future cost of our reinsurance by negotiating multi-year arrangements. The $727.5 million of aggregate coverage we have purchased from Citrus Re Ltd, which included the 2014 Class A & B notes, the 2015 Class A, B, and C notes, and the 2016 Class D & E notes extends $200 million until May of 2017, $277.5 million for another two-year period and $250 million for a three-year period. To the extent coverage is all or partially exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage from Citrus Re Ltd accounts for approximately 42% of our purchases of private reinsurance for the 2016 hurricane season. The terms of each of the multi-year coverage arrangements described above are subject to adjustment depending on, among other things, the size and composition of our portfolio of insured risks in future periods.


2015 – 2016 Reinsurance Program

During the second quarter of 2015, the Company placed its reinsurance program for the period from June 1, 2015 through May 31, 2016. The Company’s reinsurance program, which was segmented into layers of coverage, protected it for excess property catastrophe losses and loss adjustment expenses. The Company’s 2015-2016 reinsurance program incorporatedarrangements had the mandatory coverage required by law to be placed with FHCF. For the 2015 hurricane season, the Company selected 75% participationfollowing effect on certain items in the FHCF. The Company also purchased private reinsurance below, alongside and above the FHCF layer, as well as aggregate reinsurance coverage. The following describes the various layerscondensed consolidated statement of the Company’s June 1, 2015 to May 31, 2016 reinsurance program.

The Company’s Retention. For the first catastrophic event, the Company had a primary retention of the first $35 million of losses and loss adjustment expenses, of which Osprey was responsible for $20 million. For a second event, Heritage P&C’s primary retention decreases to $5 million and Osprey was responsible for $10 million. To the extent that there was reinsurance coverage remaining, Heritage P&C has a $5 million primary retention for events beyond the second catastrophic event. Osprey has no primary retention beyond the second catastrophic event.

Layers Below FHCF. Immediately above the Company’s retention, the Company purchased $440 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $440 million or a portion thereof was exhausted in a first catastrophic event, the Company purchased reinstatement premium protection insurance to pay the required premium necessaryincome for the reinstatement of this coverage. A portion of this coverage wrapped around the FHCFthree months ended March 31, 2021 and provided coverage alongside and above the FHCF.

FHCF Layer. The Company’s FHCF coverage includes an estimated maximum provisional limit of 75% of $920 million, or $690 million, in excess of its retention and private reinsurance of $336 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re Ltd To the extent the FHCF coverage was adjusted, this private reinsurance with third party reinsurers and Citrus Re Ltd would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events.

CAT Bond Layer alongside the FHCF. During April 2015 Heritage P&C entered into three catastrophe reinsurance agreements with Citrus Re Ltd. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $277.5 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. These notes were issued in three classes. The Class A notes provide $150 million of coverage for the layer immediately above the FHCF. The Class B notes provide $97.5 million of coverage, and the Class C notes provide $30 million of coverage. The Class B and Class C notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

CAT Bond Layer above the FHCF. Immediately above the FHCF layer was the coverage provided by the 2015 reinsurance agreement entered into with Citrus Re as described above in this footnote. The Citrus Re 2015 Class A notes provided up to $150 million of coverage immediately above the FHCF layer. Coverage immediately above the 2015 Class A notes is provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re provides $150 million of coverage and the second contract provided an additional $50 million of coverage.

Aggregate Coverage. In addition to the layers described above, the Company also purchased $125 million of aggregate reinsurance coverage for losses and loss adjustment expenses in excess of $1.648 billion for a first catastrophic event. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention for second and subsequent events and where underlying coverage has been previously exhausted. There is no reinstatement of the aggregate reinsurance coverage once exhausted, but it does provide coverage for multiple events.


For a first catastrophic event, our reinsurance program provided coverage for $1.8 billion of losses and loss adjustment expenses, including our retention, and we were responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depended on the magnitude of the first event, as we may have had coverage remaining from layers that were not previously fully exhausted. We also have purchased reinstatement premium protection insurance to provide an additional $440.0 million of coverage. Our aggregate reinsurance layer also provided coverage for second and subsequent events to the extent not exhausted in prior events. In total, we purchased $2.3 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, was subject to the severity and frequency of such events.

Property Per Risk Coverage

For the 2017 hurricane season, the Company also purchased property per risk coverage for losses and loss adjustment expenses in excess of $1.0 million per claim. The limit recovered for an individual loss is $9.0 million and the total limit for all losses is $27.0 million. There are two reinstatements available with additional premium due based on the amount of the layer exhausted. In addition, the Company purchased facultative reinsurance in excess of $10.0 million for any commercial properties it insured for which the total insured value exceeded $10.0 million.

Assumption Transactions and Assumed Premiums Written

The following table depicts written premiums, earned premiums and losses, showing the effects that the Company’s assumption transactions have on these components of the Company’s consolidated statements of income (loss):2020:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

 

(In thousands)

 

 

(In thousands)

 

 

(In thousands)

 

Premium written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

154,355

 

 

$

147,691

 

 

$

455,900

 

 

$

463,778

 

 

$

274,181

 

 

$

229,102

 

Assumed

 

 

 

 

 

(459

)

 

 

(55

)

 

 

8,015

 

Ceded

 

 

1,199

 

 

 

(5,164

)

 

 

(229,535

)

 

 

(248,823

)

 

 

(54,617

)

 

 

(30,637

)

Net premium written

 

$

155,554

 

 

$

142,068

 

 

$

226,310

 

 

$

222,970

 

Change in unearned premiums:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

(1,292

)

 

$

8,538

 

 

$

3,735

 

 

$

(32,143

)

Assumed

 

 

 

 

 

8,926

 

 

 

445

 

 

 

40,626

 

Ceded

 

 

(59,054

)

 

 

(57,977

)

 

 

47,346

 

 

 

85,362

 

Net increase

 

$

(60,346

)

 

$

(40,513

)

 

$

51,526

 

 

$

93,845

 

Net

 

$

219,564

 

 

$

198,465

 

Premiums earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

153,063

 

 

$

156,229

 

 

$

459,635

 

 

$

431,635

 

 

$

270,411

 

 

$

234,716

 

Assumed

 

 

 

 

 

8,467

 

 

 

390

 

 

 

48,641

 

Ceded

 

 

(57,855

)

 

 

(63,141

)

 

 

(182,189

)

 

 

(163,461

)

 

 

(128,212

)

 

 

(108,710

)

Net premiums earned

 

$

95,208

 

 

$

101,555

 

 

$

277,836

 

 

$

316,815

 

Losses and LAE incurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

142,199

 

 

$

126,006

 

Loss and Loss Adjustment Expenses

 

 

 

 

 

 

 

 

Direct

 

$

416,842

 

 

$

59,381

 

 

$

513,233

 

 

$

141,181

 

 

$

125,495

 

 

$

107,365

 

Assumed

 

 

15,501

 

 

 

(3,753

)

 

 

18,508

 

 

 

30,208

 

Ceded

 

 

(368,308

)

 

 

(1,722

)

 

 

(375,013

)

 

 

(1,726

)

 

 

(27,585

)

 

 

(39,184

)

Net losses and LAE incurred

 

$

64,035

 

 

$

53,906

 

 

$

156,728

 

 

$

169,663

 

Net

 

$

97,909

 

 

$

68,181

 


The following table highlights the effects that the Company’s assumption transactions have on unpaid losses and loss adjustment expenses and unearned premiums:

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Unpaid losses and loss adjustment expenses:

 

 

 

 

 

 

 

 

Direct

 

$

460,616

 

 

$

119,339

 

Assumed

 

 

28,964

 

 

 

20,798

 

Gross unpaid losses and LAE

 

 

489,580

 

 

 

140,137

 

Ceded

 

 

(368,310

)

 

 

 

Net unpaid losses and LAE

 

$

121,270

 

 

$

140,137

 

Unearned premiums:

 

 

 

 

 

 

 

 

Direct

 

$

313,843

 

 

$

317,579

 

Assumed

 

 

 

 

 

445

 

Gross unearned premiums

 

 

313,843

 

 

 

318,024

 

Ceded

 

 

(153,955

)

 

 

(106,609

)

Net unearned premiums

 

$

159,888

 

 

$

211,415

 

 

NOTE 11.13. 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.


The table below summarizes the activity related to the Company’s reserve for unpaid losses:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

 

(In thousands)

 

 

(In thousands)

 

 

(In thousands)

 

Balance, beginning of period

 

$

122,785

 

 

$

117,485

 

 

$

140,137

 

 

$

83,722

 

 

$

659,341

 

 

$

613,533

 

Less: reinsurance recoverable on paid losses

 

 

2,499

 

 

 

 

 

 

589

 

 

 

 

Less: reinsurance recoverable on unpaid losses

 

 

397,688

 

 

 

393,630

 

Net balance, beginning of period

 

 

120,286

 

 

 

117,485

 

 

 

139,548

 

 

 

83,722

 

 

 

261,653

 

 

 

219,903

 

Incurred related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

60,436

 

 

 

50,746

 

 

 

155,255

 

 

 

152,372

 

 

 

99,504

 

 

 

72,331

 

Prior years

 

 

3,599

 

 

 

3,160

 

 

 

1,473

 

 

 

17,291

 

 

 

(1,595

)

 

 

(4,150

)

Total incurred

 

 

64,035

 

 

 

53,906

 

 

 

156,728

 

 

 

169,663

 

 

 

97,909

 

 

 

68,181

 

Paid related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

62,842

 

 

 

33,330

 

 

 

102,079

 

 

 

71,383

 

 

 

25,826

 

 

 

21,236

 

Prior years

 

 

16,198

 

 

 

12,366

 

 

 

88,917

 

 

 

56,307

 

 

 

62,266

 

 

 

47,308

 

Total paid

 

 

79,040

 

 

 

45,696

 

 

 

190,996

 

 

 

127,690

 

 

 

88,092

 

 

 

68,544

 

Unpaid claim liabilities from Sawgrass

 

 

15,991

 

 

 

 

 

 

 

15,991

 

 

 

 

 

Net balance, end of period

 

 

121,270

 

 

 

125,695

 

 

 

121,270

 

 

 

125,695

 

 

 

271,470

 

 

 

219,540

 

Plus: reinsurance recoverable on unpaid losses

 

 

368,310

 

 

 

 

 

 

368,310

 

 

 

 

 

 

366,412

 

 

 

387,637

 

Balance, end of period

 

$

489,580

 

 

$

125,695

 

 

$

489,580

 

 

$

125,695

 

 

$

637,882

 

 

$

607,177

 

 

As of September 30, 2017, weMarch 31, 2021, the Company reported $121.3$271.5 million in unpaid losses and loss adjustment expenses, net of reinsurance. We reportedreinsurance which included $205.0 million attributable to IBNR net of $173.4 millionreinsurance recoverable, or 75.5% of which $75.6 million relates to non-Irma claims.

The Company’snet reserves for unpaid losses incurred for the nine months ended September 30, 2017 and 2016 reflect a prior year deficiency of $1.5 million and a deficiency of $17.3 million, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. The $1.5 million of unfavorable development for the nine months ended September 30, 2017 resulted from $6.1 million of unfavorable development from catastrophe losses related to Hurricane Matthew, offset by $4.6 million favorable development non-catastrophe losses. Most of the unfavorable development during the nine months ended September 30, 2016 was from personal lines. Additionally, most of the unfavorable emergence came from the second, third and fourth quarters of 2015, primarily related to claims involving litigation and claims that were represented by attorneys, public adjusters or others (sometimes referred to as Assignment of Benefits). Also, a majority of the unfavorable development in the nine months ended September 30, 2016 was isolated to the tri-county region of Florida (the counties of Miami-


Dade, Broward and Palm Beach). The favorable development recorded in the first nine months ended September 30, 2017 is generally related to lower expected loss adjustment expenses.

Catastrophe Management

The Company writes insurance in the states of Florida, North Carolina, South Carolina, Hawaii, Alabama and Georgia, any of which could be exposed to hurricanes or other natural catastrophes. Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, such an event is unlikely to be so material as to disrupt our overall normal operations. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter. The Company believes that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the September 30, 2017.

The Company actively monitors its catastrophe risk within the United States. Current year catastrophe losses by the event and magnitude are shown in the following table for the nine months ended September 30, 2017 and 2016, respectively.

 

 

2017

 

 

2016

 

 

 

Number of Events

 

 

Incurred Loss and LAE (1)

 

 

Combined Ratio Impact

 

 

Number of Events

 

 

Incurred Loss and LAE (1)

 

 

Combined Ratio Impact

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period catastrophe losses incurred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$10 million to $50 million (2)

 

 

1

 

 

$

20,000

 

 

 

 

 

 

 

 

$

 

 

 

 

$1 million to $10 million (3)

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

4,094

 

 

 

 

Total

 

 

1

 

 

$

20,000

 

 

 

 

 

 

1

 

 

$

4,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserve, net of losses ceded to reinsurers. During the third quarter of 2017, we incurred losses and LAE from one named storm, Hurricane Irma.

(2)

Reflects 2017 losses from hurricane Irma in September 2017, net of reinsurance recoverables.

(3)

Reflects 2016 losses from Hurricane Hermine.

NOTE 12.14. LONG-TERM DEBT

Long-term debt as September 30, 2017, consisted of the following:

 

Principal

 

 

Unamortized Debt Issuance Costs

 

 

(In thousands)

 

Senior Secured Notes, due December 15, 2023 (interest computed at 8.75% plus 3 month Libor average, at September 30, 2017)

$

79,500

 

 

$

5,985

 

Convertible Senior Notes, due August 1, 2037 (interest computed at 5.875% per annum, at September 30, 2017)

$

136,750

 

 

$

5,105

 

Senior Secured Notes

On December 15, 2016, we issued $79.5 million aggregate amounts of Senior Secured Notes (“Secured Notes”) to six accredited investors. The Secured Notes bear interest of 8.75% per annum plus the three month average of LIBOR. Principal and interest is paid quarterly. Interest payments commenced on March 15, 2017 and the quarterly principal payments commence on December 31, 2018. At September 30, 2017, we owed $73.3 million on the Secured Notes, net of issuance costs which totaled approximately $6.2 million. For the nine-month period ended September 30, 2017, the Company made interest payments of approximately $3.9 million.

The Secured Notes contain customary restrictive covenants relating to merger, modification of the indenture, subordination, issuance of debt securities and sale of assets, the most significant of which include limitations with respect to certain designated subsidiaries on the incurrence of additional indebtedness or guarantees secured by any security interest on any shares of their capital stock. The Secured Notes covenants also limit the Company’s ability to sell or otherwise dispose of any shares of capital stock of such designated subsidiaries. The Secured Notes do not have the benefit of any sinking funds. They also contain customary limitations and lien provisions as well as customary events of default provisions, which if breached, could result in the accelerated maturity of the


Secured Notes. The Company was in compliance with the Senior Notes covenants for the three and nine months ended September 30, 2017.

Subject to the replacement capital covenant, the Secured Notes may be redeemed, in whole or in part, at any time on or after December 15, 2018, based on the quarterly payment date, at the following redemption prices (as a percentage of outstanding principal amount of the notes to be redeemed) plus accrued and unpaid interest and principal: 2018 – 103%; 2019 – 102%; 2020 – 101%; and thereafter at 100%. If there is a change in control, a holder has the right to require the Company to purchase such holder’s Secured Notes at a price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any.

At September 30, 2017, the effective interest rate, taking into account the stated interest expense and amortization of debt issuance costs, approximates 10%.

Convertible Senior Notes

OnIn August 16,2017 and September 2017, the Company issued $125.0in aggregate $136.8 million aggregate principal amount of 5.875% Convertible Senior Notes due(“Convertible Notes”) maturing on August 1, 2037, (the “Convertible Notes”) under an Indenture (the “Indenture”) by and among the Company, as issuer, Heritage MGA, LLC, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes were issued in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended. On September 7, 2017, the Company issued an additional $11.75 million aggregate principal amount of Convertible Notes pursuant to the initial purchaser’s option.

The Convertible Notes bear interest at a rate of 5.875% per year.unless earlier repurchased, redeemed or converted. Interest accrues from August 16, 2017 and will beis payable semi-annually in arrears, on February 1, and August 1 of each year, beginning on February 1,commencing in 2018. The Convertible Notes are senior unsecured obligations

As of March 31, 2021, the Company that will rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Guarantor, which will fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

The Convertible Notes will mature on August 1, 2037 (the “Maturity Date”), 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 pricehad $22.3 million of the Convertible Notes outstanding, net of issuance and debt discount costs in effectaggregate of approximately, $1.1 million. For the three months ended March 31, 2021 and 2020, the Company made interest payments, net of affiliated Convertible Notes of approximately $687,800 and $687,800 respectively 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%Notes.

Senior Secured Credit Facility

In December 2018, the Company entered into a five-year, $125.0 million credit agreement (the “Credit Agreement”) with a syndicate of lenders consisting of $75.0 million senior secured term loan facility (the “Term Loan Facility”) and a $50.0 million senior secured revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

Term Loan Facility: The principal amount 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 toTerm Loan Facility amortizes in quarterly installments, beginning with the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.

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 the Maturity Date, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.

Unless and until the Company obtains shareholder approval under Rule 312.03 of The New York Stock Exchange Listed Company Manual for the issuance of the Company’s common stock in excess of the limitations set forth therein, the Company will pay to any converting holder in respect of each $1,000 principal amount of Convertible Notes being converted solely cashfiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, with the sumremaining balance payable at maturity. As of December 31, 2020, there was $60.0 million in aggregate principal outstanding on the Term Loan Facility. As of March 31, 2021, the balance of the daily conversion values (as definedterm loan was $58.1 million. For the three months ended March 31, 2021 and 2020, the Company made interest payments of approximately $706,800 and $1.2 million on the term loan, respectively.

Revolving Credit Facility: The Revolving Credit Facility allows for borrowings of up to $50.0 million inclusive of a $5.0 million sublimit for the issuance of letters of credit and a $10.0 million sublimit for swingline loans. As of March 31, 2021, and December 31, 2020, the Company had $10.0 million of borrowings and 0 letters of credit outstanding under the Revolving Credit Facility. For the three months ended March 31, 2021 and 2020, the Company made interest payments of approximately $116,805 and $265,900 under the revolving credit facility, respectively.

At March 31, 2021, the Company’s, effective interest rate for the Term Loan and for the Revolving Credit Facility was 3.38%. The Company monitors the rates prior to the reset date which allows it to establish if the payment is monthly or quarterly based on the most beneficial rate used to calculate the interest payment.

At March 31, 2021, the Company closed the July 1, 2020 standby letter of credit in the Indenture)amount of $31.5 million that was issued by Regions Bank.

On June 1, 2020, the Company amended the Credit Agreement by entering into the Third Amendment to Credit Agreement (the “Third Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent


and collateral agent. The Third Amendment modified the Credit Agreement to increase the letter of credit sublimit from $5 million to $40 million and to make related modifications to certain of the negative covenants in the Credit Agreement.

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. The Second Amendment modified the negative covenants in the Credit Agreement to permit the Company to make acquisitions and investments if, after giving effect to the acquisition or investment, either (1) the Company has an aggregate of $25.0 million in cash and availability under the revolving credit facility or (2) the consolidated leverage ratio under the Credit Agreement is at least a quarter turn less than the required ratio for the trailing four quarters. The amendment gives the Company more flexibility to make acquisitions and investments in the future. All other material terms of the Credit Agreement remain unchanged.

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 $12.7 million, bearing interest of 4.95% per annum and maturing on October 30, 2027. On October 30, 2022, the interest rate shall adjust to an interest rate equal to the annualized interest rate of the United States 5-year Treasury Notes as reported by Federal Reserve on a weekly average basis plus 3.10%. The Company makes monthly principal and interest payments towards the loan. For each of the 40 consecutive trading days duringrespective three-month periods ended March 31, 2021 and 2020, the related conversion period (as definedCompany made principal and interest payments of approximately $223,200 on the mortgage loan.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. In connection with the loan agreement, the subsidiary became a member of FHLB. Membership in the Indenture). FollowingFHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. Additionally, the Company’s receipttransaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of shareholder approval,March 31, 2021, the fair value of the collateralized securities was $22.2 million and the equity investment in FHLB common stock was $1.2 million. As of March 31, 2021, and 2020, the Company will settle conversionsmade quarterly interest payments as per the terms of Convertible Notes through payment or delivery, as the case may be,loan agreement of cash, sharesapproximately $150,160 and $150,000, respectively. As of itsMarch 31, 2021, and December 31, 2020, the Company also holds other common stock or a combination of cashfrom FHLB Des Moines, and shares of its common stock,FHLB Boston valued at its election, based on such daily conversion values (other than for settlement only in shares). The conversion rate for the Convertible Notes is 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,$139,300 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 Indenture)) that occur prior to August 5, 2022.


Upon the occurrence of a fundamental change (as defined in the Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the 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.$76,600, respectively.

Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. If the NBIC Acquisition is not consummated for any reason by June 8, 2018, or if the acquisition agreement relating to the NBIC Acquisition is terminated for any reason (other than by consummation of the NBIC Acquisition), the Company may redeem all, but not less than all, of the outstanding Convertible Notes for cash on a redemption date to occur on or prior to August 31, 2018 for a redemption price for each $1,000 principal amount of Convertible Notes equal to the sum of (i) $1,010, (ii) accrued and unpaid interest on such Convertible Notes to, but excluding, the redemption date and (iii) 75% of the excess, if any, of the redemption conversion value (as defined in the Indenture) over the initial conversion value (as defined in the Indenture). 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 will be 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 Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Convertible Notes will automatically become immediately due and payable.

 

The following table summarizes the Company’s long-term debt.debt and credit facilities as of March 31, 2021 and December 31, 2020:

 

September 30, 2017

 

 

December 31, 2016

 

 

March 31, 2021

 

 

December 31, 2020

 

(In thousands)

 

 

(in thousands)

 

5.85% Convertible Senior Notes, due August 2037

$

136,750

 

 

$

 

Senior Secured Note, due December 15, 2023

 

79,500

 

 

 

79,500

 

Convertible debt

 

$

23,413

 

 

$

23,413

 

Mortgage loan

 

 

11,750

 

 

 

11,827

 

Term loan facility

 

 

58,125

 

 

 

60,000

 

Revolving credit facility

 

 

10,000

 

 

 

10,000

 

FHLB loan agreement

 

 

19,200

 

 

 

19,200

 

Total principal amount

 

216,250

 

 

 

79,500

 

 

$

122,488

 

 

$

124,440

 

Less: unamortized discount and issuance costs

 

27,616

 

 

 

6,595

 

 

$

2,987

 

 

$

3,442

 

Total long-term debt

$

188,634

 

 

$

72,905

 

 

$

119,501

 

 

$

120,998

 

 

The trading priceAs of the underlying Secured Notedate 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 $10.0 million in any fiscal year.

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.


The schedule of principal payments on long-term debt as of September 30, 2017 was approximately 1.07 of par value. Debt issuance costs are capitalized and presentedMarch 31, 2021 is as a deduction from the carrying value of the debt. The debt discount and issuance costs are amortized to interest expense over the expected life of the underlying debt of 5 years. As there are offsetting puts and calls on the debt security in August 2022 at par, it will be economically beneficial for one party, either the company or the noteholders to exercise their option.

The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statement of operations. The embedded derivatives are valued using the Convertible Lattice model at issuance and at the end of each quarter and marked to fair value with corresponding adjustment as “gain or loss” on change in fair values included in Other Non-Operating expense in the condensed consolidated statements of operations. For the three and nine month periods ended September 30, 2017, the Company recognized a loss on change in the fair value totaling $6.9 million.

The valuation of the embedded derivatives within the convertible note was completed with the following assumptions.follows:

 

Assumptions

 

August 10, 2017

 

 

September 30, 2017

 

Dividend yield

 

 

2.13

%

 

 

1.82

%

Yield

 

 

10.2

%

 

 

8.5

%

Risk-free rate

 

 

2.55

%

 

 

2.63

%

Volatility

 

 

25.8

%

 

 

20.5

%

Remaining Term (years)

 

4.98

 

 

4.84

 

Stock price

 

$

11.26

 

 

$

13.21

 


The following table summarizes the derivative liability activity for the period ending September 30, 2017. See Note 13 Derivative liability, accounts payable and other liabilities.

 

 

 

 

 

Description

 

Derivative Liabilities

 

 

 

(In thousands)

 

Fair value at issuance

 

$

16,838

 

Change due to issuances

 

 

 

Change in fair value

 

 

6,883

 

Fair value at September 30, 2017

 

$

23,721

 

Year

 

Amount

 

 

 

(In thousands)

 

2021 remaining

 

$

5,855

 

2022

 

 

7,822

 

2023

 

 

74,539

 

2024

 

 

354

 

2025

 

 

374

 

Thereafter

 

 

33,544

 

Total

 

$

122,488

 

 

The following table summarizes the Company’s interest expense in relation to the long-term debt for the periods stated:

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest Expense:

 

(In thousands)

 

Contractual interest

 

$

3,076

 

 

$

 

 

$

7,010

 

 

$

 

Non-cash expense (1)

 

 

675

 

 

 

 

 

 

1,153

 

 

 

 

Total interest expense

 

$

3,751

 

 

$

 

 

$

8,163

 

 

$

 

(1)

Represents amortization of debt issuance costs and debt discount.

NOTE 13. DERIVATIVE LIABILTY,15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

OtherAccounts payable and other liabilities consist of the following as of September 30, 2017March 31, 2021 and December 31, 2016:2020:

 

Description

 

September 30, 2017

 

 

December 31, 2016

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(In thousands)

 

 

(In thousands)

 

Deferred ceding commission

 

$

37,991

 

 

$

39,995

 

Outstanding claim checks

 

 

 

 

 

10,864

 

Accounts payable and other payables

 

$

20,982

 

 

$

6,804

 

 

 

7,951

 

 

 

9,248

 

Lease obligations

 

 

7,886

 

 

 

8,155

 

Accrued interest and issuance costs

 

 

1,363

 

 

 

5,704

 

 

 

167

 

 

 

833

 

Accrued dividends

 

 

1,784

 

 

 

1,784

 

 

 

1,678

 

 

 

1,670

 

Escrow

 

 

1,210

 

 

 

1,210

 

Conversion option liability

 

 

23,721

 

 

 

 

Premium tax

 

 

1,886

 

 

 

 

Other liabilities

 

 

676

 

 

 

80

 

Commission payables

 

 

4,487

 

 

 

6,179

 

 

 

13,395

 

 

 

18,245

 

Total other liabilities

 

$

53,547

 

 

$

21,681

 

 

$

71,628

 

 

$

89,090

 

 

NOTE 14.16. 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 are required to file with state insurance regulatory authorities an “Annual Statement” which reports, among other items, net incomeHeritage Property & Casualty Insurance Company (“Heritage P&C)”, Narragansett Bay Insurance Company (“NBIC”), Zephyr Insurance Company (“Zephyr”), and surplus as regards policyholders, which is called stockholders’ equity under GAAP. On a combined basis, the Company’s insurance subsidiaries reported statutory net loss of $12.1 million and a net income of $24 thousand for the nine months ended September 30, 2017 and 2016, respectively. The Company’s insurance subsidiariesPawtucket 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 greater of $15 million or 10% of itstheir respective liabilities. Zephyr is required to maintain a deposit of $750 thousand$750,000 in a federally insured financial institution. NBIC is required to maintain capital and surplus of $3.0 million. The insurance subsidiaries combined statutory surplus for Heritage P&C, Zephyr, NBIC and PIC was $257.6 million and $276.1$305.6 million at September 30, 2017March 31, 2021 and $333.3 million at December 31, 2016, respectively.2020. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, and risk-based capital requirements with which the Company is in compliance. At September 30, 2017,March 31, 2021, our insurance subsidiaries met the financial and regulatory requirements of each of the states in which they doconduct business.


NOTE 15.17. 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. When determinable,

In July 2020, the Company disclosesentered into a ten year, non-cancellable operating lease agreement for approximately 88,600 square feet of office space located in Tampa, Florida. The Company anticipates relocating from the range of possible losses in excess of those accrued and for reasonably possible losses.

At September 30, 2017, the Company was not involved in any material non-claims-related legal actions. See Note 12 for information regarding commitments relatedClearwater Corporate office to the Senior Secured Notesnew location during the second half of 2021. The anticipated principal contractual commitments based on the terms and Convertible Notes.conditions of the agreement is approximately $29.7 million through 2031.


NOTE 16.18. RELATED PARTY TRANSACTIONS

TheFrom 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 September 30, 2017March 31, 2021 and 2016.2020.

The Company has entered into an agreement with a real estate management company controlled by one of its directors to manage its Clearwater office space. Management services are provided at a fixed fee, plus ordinary and necessary out of pocket expenses. Fees for additional services, such as the oversight of construction activity, are provided for on an as-needed basis. For the nine month periods ended September 30, 2017 and 2016, the Company paid the management service company approximately $75 thousand and $86 thousand, respectively.

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 $309,800 and $179,800, respectively.

In January 2017, the Company entered into a consulting agreement with Mrs. Shannon Lucas, the wife of the Chairman and CEO, in which she agreed to provide consulting services related to the Company’s catastrophe reinsurance and risk management program at a rate of $400 per hour. The consulting agreement has no specific term and either party may terminate the agreement upon providing written notice. Additionally, she serves as a director of Heritage P&C with an annual compensation of $150 thousand. For the nine-month period ended September 30, 2017, the Company paid consulting fees to Ms. Lucas of approximately $371 thousand.

NOTE 17.19. EMPLOYEE BENEFIT PLANPLANS

The Company provides a 401(k) plan for substantially all of its employees. The Company contributesprovides a matching contribution of 100% on the first 3% of employees’ salary, up tocontribution and 50% on the maximum allowable contribution, regardlessnext 2% of the employees’ level of participation incontribution to the plan. The maximum match is 4%. For the nine-month periodsthree months ended September 30, 2017March 31, 2021 and 2016,2020, the Company’s contributions made to the plan on behalf of the participating employees were $478 thousandapproximately $322,200 and $408 thousand,$339,300, respectively.

The Company provides for its employees with a partially self-insured healthcare plan and benefits. For the ninethree months ended September 30, 2017March 31, 2021 and 2016, the Company2020, incurred medical premium costs in theamounted to an aggregate of $2.2$990,100 and $910,000, respectively. An additional liability of approximately $1.8 million and $1.4 million respectively. The Company alsois recorded approximately $298 thousand asfor unpaid claims as of September 30, 2017.March 31, 2021 and December 31, 2020, respectively. A stop loss reinsurance policy caps the maximum loss that could be incurred by the Company under the self-insured plan. The Company’s stop loss coverage per employee is $60 thousand,$125,000 for which any excess cost would be covered by the reinsurer subject to an aggregate limit for losses in excess of $1.5 million which would provide up to $1.0 million of coverage. Any excess of the $1.5 million retention and the $1 million of aggregate coverage limits would be borne by the Company. The aggregate stop loss commences once our expenses exceed 125%120% of the annual aggregate expected claims.

NOTE 18.20. EQUITY

The total amount of authorized capital stock consists of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of September 30, 2017,March 31, 2021, the Company had 23,500,17427,904,923 shares of common stock outstanding, 7,099,5979,279,839 treasury shares of common stock and 900,000219,084 unvested shares of restricted common stock issued reflecting total paid-in capital of $209.3$332.0 million as of such date.

As more fully disclosed in our audited consolidated financial statements for the year ended December 31, 2016,2020, there were, 28,840,44327,748,606 shares of common stock outstanding, 1,149,9239,279,839 treasury shares of common stock options outstanding, and 900,000100,267 unvested shares of restricted common stock, grants, representing $205.7$331.9 million of additional paid-in capital at December 31, 2016.capital.


Common Stock

Holders of common stock are entitled to one vote for each share held on all matters subject to a vote of stockholders, subject to the rights of holders of any outstanding preferred stock. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the rights of holders of any outstanding preferred stock. Holders of common stock will be entitled to receive ratably any dividends that the board of directors may declare out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to receive ratably its net assets available after the payment of all debts and other liabilities and subject to the prior rights of holders of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There isare no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of the Company’s capital stock are fully paid and nonassessable.non-assessable.

Stock Repurchase Program

On May 4, 2016,August 1, 2019, the Company announced that the Company’sits Board of Directors authorizedratified a stock repurchase program authorizing the Company to repurchase up to $70$50.0 million of the Company’sits common stock. The stock repurchase program expireswhich had expired on December 31, 2017.  

During the quarter ended March2020. As of December 31, 2017,2020, the Company repurchased anin aggregate of 361,211 shares at a cost of $4.5 million through open market or private transactions. During the quarter ended June 30, 2017, the Company repurchased an aggregate of 322,811 shares of the Company’s stock in open market transactions for $4.1 million. During the quarter ended September 30, 2017, the Company repurchased an aggregate of 1,103,848 shares of the Company’s common stock in open market transactions for $13.0 million. As of September 30, 2017, the Company had $22.8 million remaining to purchase shares under its authorized $70 million shares repurchase plan. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.

In connection with the issuance of the Convertible Notes as described in Note 12Long-Term Debt, the Board authorized the repurchase of up to $40.0 million of the Company’s common stock with the net proceeds of the Convertible Notes. During the quarter ended September 30, 2017, the Company repurchased 3,552,3972,065,042 shares of its common stock at a price of $11.26 per share from institutional investors. This $40 millionsince authorizing the stock repurchase of the Company’s common stock was approved by program for $26.2 million. On November 2, 2020, the Board of Directors and is in addition to the Company’sextended our existing $70 millionshare repurchase program from December 31, 2020 to December 31, 2021 and increased the authorization under the program from the $23.8 million remaining to $50.0 million, which expires inrepurchases may be made under our current Rule 10b5-1 trading plan, which allows the Company to purchase shares below a predetermined price per share, or otherwise. NaN shares were repurchased during the three months ended March 31, 2021 under the share repurchase program.


At March 31, 2021 the Company has the capacity to repurchase $50 million of its common shares until December 2017.31, 2021.

Dividends

On November 8, 2016, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on January 4, 2017 to stockholders of record as of December 15, 2016. On March 2, 2017,3, 2021, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on April 4, 2017,6, 2021, to stockholders of record as of March 15, 2017. On May 2, 2017, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on July 5, 2017, to stockholders of record June 15, 2017. On August 3, 2017, the Company announced that its Board of Directors declared a third quarter dividend of $0.06 per common share. The dividend is payable on October 2, 2017 to stockholders of record on September 15, 2017. 2021.

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 19.21. 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 2,981,737 shares of common stock for issuance under the Plan for future grants. Our plan allows for a variety of equity awards including stock options, restricted stock awards and performance-based awards.

At September 30, 2017 and DecemberMarch 31, 2016,2021 there were 413,814 and 170,814981,709 shares available for grant under the Plan, respectively.

Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards.

During the quarter ended March 31, 2021, the Board of Directors awarded to its Chief Executive Officer 95,878 performance-based restricted shares with a market value at the time of grant of $10.43 per share. The restricted shares have a three-year performance period beginning on January 1, 2021 and ending on December 31, 2023 and will vest following the end of the performance period but no later than March 5, 2024. The number of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In addition, the Board issued this executive 47,939 time-based restricted shares with a market value at the time of grant of $10.43 per share. The restricted shares will vest in three equal installments of 15,979 on December 31, 2021, and 15,980 on December 31, 2022 and 2023, respectively.

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 grantsexpenses 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. TheAny options granted would typically have a maximum term of ten years from the date of grant and vest primarily in equal annual installments over a range of one to five yearsfive-year periods following the date of grant for employee options. If a participant’s employment relationship ends, the participant’s vested awards will remain exercisable for the shorter of a period of 30 days or the period ending on the latest date on which such award could have been exercisable. The fair value of each option grant is separately estimated for each grant date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company estimates the fair value of all stock option awards as of the date of the grant by applying


the Black-Scholes-Merton multiple-option pricing valuation model (“Black-Scholes model”). The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.

Stock Options and Restricted Stock

Stock Options

A summary of information related tohas not granted any stock options since 2015 and restricted stock outstanding at September 30, 2017 is as follows:

 

 

Stock Options

 

 

Weighted-Average Grant Date Fair Value

 

Balance at December 31, 2016

 

 

1,149,923

 

 

$

2.99

 

Granted

 

 

 

 

 

 

 

Expired

 

 

(243,000

)

 

$

2.70

 

Exercised

 

 

 

 

 

 

 

Balance at September 30, 2017

 

 

906,923

 

 

$

3.07

 

Vested and exercisable as of September 30, 2017

 

 

906,923

 

 

$

3.07

 

No compensation expense was recognized forall unexercised stock options granted above for the three and nine months ended September 30, 2017 and 2016.

Restricted Stockhave since been forfeited.

The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employeesemployee’s vest in equal installments generally over a five-year period from the grant date subject to the recipient’s continued employment. The fair valuesvalue of restricted stock awards areis 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. No restricted stock was granted as of September 30, 2017.

Restricted stock activity duringfor the nine monthsquarter ended September 30, 2017March 31, 2021 is as follows:

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date Fair

 

 

 

Number of shares

 

 

Value per Share

 

Non-vested, at December 31, 2016

 

 

900,000

 

 

$

18.82

 

Granted

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

Canceled and forfeited

 

 

 

 

 

 

 

Non-vested, at September 30, 2017

 

 

900,000

 

 

$

18.82

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant-Date Fair

 

 

 

Number of shares

 

 

Value per Share

 

Non-vested, at December 31, 2020

 

 

100,267

 

 

$

15.37

 

Granted - Performance-based restricted stock

 

 

95,878

 

 

 

10.43

 

Granted - Time-based restricted stock

 

 

47,939

 

 

 

10.43

 

Vested

 

 

(12,500

)

 

 

16.35

 

Canceled and surrendered

 

 

(12,500

)

 

 

16.35

 

Non-vested, at March 31, 2021

 

 

219,084

 

 

$

12.02

 

 

Awards are being amortized to expense over the five yearone to five-year vesting period. The Company recognized $3.6 million$260,000 and $3.6$1.3 million of compensation expense for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. ThereFor the three months ended March 31, 2021, 25,000 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, 12,500 shares were withheld by the Company to cover withholding taxes of $127,000.

At March 31, 2021 and 2020 there was approximately $14.9$2.0 million ofand $4.2 million, representing unrecognized compensation expense related to the non-vested stock which is expected to be recognized over the remaining restriction periods as described in the table below.


Additional information regarding our outstanding non-vested restricted stock at September 30, 2017. The Company expects to recognize the remaining compensation expense over a weighted average period of 3.2 years.March 31, 2021 is as follows:

Grant date

 

Restricted shares unvested

 

 

Share Value at Grant Date Per Share

 

 

Remaining Restriction Period (Years)

 

February 12, 2018

 

 

50,000

 

 

$

16.35

 

 

 

2.00

 

September 3, 2018

 

 

10,267

 

 

$

15.08

 

 

 

0.80

 

April 24, 2020

 

 

10,000

 

 

$

10.60

 

 

 

1.50

 

September 21, 2020

 

 

5,000

 

 

$

10.83

 

 

 

0.80

 

January 4, 2021

 

 

143,817

 

 

$

10.43

 

 

 

3.00

 

 

 

 

219,084

 

 

 

 

 

 

 

 

 

 

NOTE 20.22. 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 October 31, 2017,May 5, 2021, the Company announced that its Board of Directors declared a fourth quarter dividend of $0.06 per common share. Theshare quarterly dividend is payable on December 15, 2017July 6, 2021 to stockholders of record on November 17, 2017.

On October 30, 2017, the Company entered into a ten-year term, 25-year amortization Term-Loan for $12.7 million. The interest rate is fixed at 4.95% for the first five years with the remaining years repriced at the 5-year Treasury Security plus 3.10%. The loan is collateralized by our real estate located at 2600 and 2650 McCormick Drive, Clearwater, FL. 33759, including assignmentas of leases, rents and profits.

June 15, 2021.

 


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, 20162020 (“20162020 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we,” “us,”“we”, “us”, “our”, “the Company”, “our” “the Company,” “our company,” 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.


Financial Results Highlights for the Three and Nine Months Ended September 30, 2017

Approximately 331,330 policies in-force at September 30, 2017,First Quarter of which approximately 43.8% were assumed from Citizens, 50.9% were from voluntary sales and 5.3% were acquired in connection with the Zephyr acquisition2021

Gross premiums written of $455.8 million and total revenue of $298.0 million

Net premiums earned of $277.8 million

Net income of $3.9 million

Combined ratio of 103.4% on a gross basis and 105.5% on a net basis, inclusive of the effects of Hurricane Irma

Cash, cash equivalents and investments of $872.2 million with total assets of $1.6 billion

Recent Developments

NBIC Acquisition Agreement

On September 1, 2017, Heritage Property & Casualty Insurance Company (“HPCI”) entered into an Administrative Supervision Plan Agreement (“the Agreement”) with Sawgrass Mutual Insurance Company (“Sawgrass”) which was approved by the Florida Office of Insurance Regulation. Pursuant to the agreement, HPCI has the right to offer a new policy of insurance, effective September 1, 2017 to all Sawgrass policyholders having in force policies without the need for Sawgrass policyholders to file a new application with HPCI or pay premium that had already been paid to Sawgrass. As of September 1, 2017, Sawgrass had 17,778 policies in force, representing approximately $31.2 million of in force premium and unearned premium of $16.5 million. The coverage on those policies will terminate at the end of the original Sawgrass policy period. Upon termination of each of these policies, HPCI will offer to renew such policies using HPCI forms and rates. HPCI was assigned the unearned premium, premium receivable, loss reserves and reinsurance recoverable on paid and unpaid claims and received a partial payment of these amounts on September 1, 2017. At September 30, 2017, 17,455 policies were in force representing approximately $30.8 million of annualized premium. HPCI assumed no other liability or obligation, direct or indirect, absolute or contingent, other than the liability and any reinsurance recoveries for Sawgrass policy claims incurred prior to the Agreement date.  


Results of Operations

The following table reports our unaudited results of operations for the three and nine months ended September 30, 2017 and 2016:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(unaudited)

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

154,355

 

 

$

147,232

 

 

$

455,845

 

 

$

471,793

 

Change in gross unearned premiums

 

 

(1,292

)

 

 

17,464

 

 

 

4,180

 

 

 

8,483

 

Gross premiums earned

 

 

153,063

 

 

 

164,696

 

 

 

460,025

 

 

 

480,276

 

Ceded premiums

 

 

(57,855

)

 

 

(63,141

)

 

 

(182,189

)

 

 

(163,461

)

Net premiums earned

 

 

95,208

 

 

 

101,555

 

 

 

277,836

 

 

 

316,815

 

Net investment income

 

 

2,735

 

 

 

2,326

 

 

 

8,210

 

 

 

6,586

 

Net realized gains

 

 

365

 

 

 

1,119

 

 

 

1,011

 

 

 

1,762

 

Other revenue

 

 

3,466

 

 

 

4,306

 

 

 

10,948

 

 

 

10,988

 

Total revenue

 

 

101,774

 

 

 

109,306

 

 

 

298,005

 

 

 

336,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

64,035

 

 

 

53,906

 

 

 

156,728

 

 

 

169,663

 

Policy acquisition costs

 

 

20,906

 

 

 

22,597

 

 

 

66,086

 

 

 

61,478

 

General and administrative expenses

 

 

15,420

 

 

 

14,191

 

 

 

48,826

 

 

 

44,602

 

Total operating expenses

 

 

100,361

 

 

 

90,694

 

 

 

271,640

 

 

 

275,743

 

Operating income

 

 

1,413

 

 

 

18,612

 

 

 

26,365

 

 

 

60,408

 

Interest expense, net

 

 

3,076

 

 

 

 

 

 

7,010

 

 

 

 

Amortization of debt issuance costs

 

 

675

 

 

 

 

 

 

1,153

 

 

 

 

Other non-operating expense, net

 

 

6,883

 

 

 

 

 

 

6,883

 

 

 

 

(Loss) income before income taxes

 

 

(9,221

)

 

 

18,612

 

 

 

11,319

 

 

 

60,408

 

Provision for income taxes

 

 

(525

)

 

 

7,682

 

 

 

7,390

 

 

 

23,688

 

Net (loss) income

 

$

(8,696

)

 

$

10,930

 

 

$

3,929

 

 

$

36,720

 

Diluted (loss) earnings per share

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

Selected Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share (1)

 

$

12.84

 

 

$

13.00

 

 

$

12.84

 

 

$

13.00

 

Growth in book value per share

 

 

(1.2

)%

 

 

18.4

%

 

 

(1.2

)%

 

 

18.4

%

Return on average equity (2)

 

 

(10.4

)%

 

 

11.7

%

 

 

1.6

%

 

 

13.3

%

 

 

(1)

Book valueNet loss for the quarter was $5.1 million, or ($0.19) per share is calculated by dividing shareholders’ equity by total outstanding shares, as of the end of the period.diluted share.

 

(2)

Return on average equity is calculated by dividing the annualized net income by the average shareholders’ equity for the endBook value per share of the period.$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 September 30, 2017March 31, 2021 and 20162020

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 increased to $154.4were $274.2 million forin first quarter 2021, up 19.7% from $229.1 million in the three months ended September 30, 2017 as compared to $147.2 million for the three months ended September 30, 2016.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 relates to $18.7 milliongrowth, 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 additional premium associated withfirst quarter 2021, representing a 16.0% annualized growth rate from year-end 2020. The increase stems from the Sawgrass transaction, which was partially offset by a reduction insame items impacting gross premiums written by Heritage P&C of approximately $10 million and a reduction of Zephyr premium of approximately $1.2 million. Additionally, new business production in the month of September was adversely impacted by Hurricane Irma. Heritage P&C’s premium in force decreased $9.3 million during the third quarter of 2017 as we continued to manage exposure in geographic locations which have produced a disproportionate share of attritional losses and geographic risks for which the price to manage catastrophe risk is not cost efficient. Personal residential business accounted for $139.9 million and commercial residential accounted for $14.5 million of the total gross premiums written for the three months ended September 30, 2017. There was no business assumed from Citizens for either period.written.


Gross premiums earned

Gross premiums earned decreased to $153.1were $270.4 million forin first quarter 2021, up 15.2% from $234.7 million in the three months ended September 30, 2017 as compared to $164.7 million for the three months ended September 30, 2016. This decrease is consistent with the quarter-over-quarter change inprior year quarter. The increase reflects higher gross premiums written beforeover the addition of the Sawgrass business, for which only one month of premium was earned this quarter.past twelve months.

Ceded premiums

Ceded premiums decreased to $57.9were $128.2 million for the three months ended September 30, 2017 as compared to $63.1in first quarter 2021, up 17.9% from $108.7 million for the three months ended September 30, 2016. Our catastrophe reinsurance programs renew each year on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared to $247.0 million for the 2016 season. The reduction in premium in force described previously resulted in a reduction in the amount of catastrophe reinsurance purchased from approximately $3.1 billionprior year quarter. The increase is primarily attributable to an increase in the 2016 season to approximately $2.6 billion for the 2017 season. As describedcost of our catastrophe excess of loss reinsurance program and an increase in Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million for the first event compared to $40.0 million for the 2016 season for a first event.  total insured value (“TIV”) associated with premium growth.

Net premiums earned

Net premiums earned decreased to $95.2were $142.2 million forin first quarter 2021, up 12.9% from $126.0 million in the three months ended September 30, 2017 as compared to $101.6 million for the three months ended September 30, 2016.prior year quarter. The decrease in netincrease primarily stems from higher gross premiums earned, relates to the decrease in gross premium earned partiallypartly offset by the decrease inhigher ceded premiumpremiums, as described above.


Net investment income

Net investment income, inclusive of realized investment gain or loss, decreased to $3.1gains and unrealized gains on equity securities, was $1.4 million for the three months ended September 30, 2017 asin first quarter 2021, down 62.1% compared to $3.4$3.7 million forin the three months ended September 30, 2016.prior year quarter. The decrease resultedis primarily from a decrease in realized gains of approximately $.8 million, partially offset by an increase in net investment income due to invested proceedslower yields associated with the Secured Notes issued in December 2016 and Convertible Notes issued in August 2017.continued low interest rate environment.

Other revenue

Other revenue decreasedwas $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 $3.5 million for the three months ended September 30, 2017 as compared to $4.3 million for the three months ended September 30, 2016. The decrease in other revenue is primarily attributable to the timing of certain items being recorded in 2016 and a reduction in non-insurance construction revenuepolicy fee income associated with BRC third party construction projects in 2016.policy count growth.

Total revenue

Total revenue decreased to $101.8was $147.2 million forin first quarter 2021, up 11.0% from $132.7 million in the three months ended September 30, 2017 as compared to $109.3 million for the three months ended September 30, 2016.prior year quarter. The reduction in total revenue relatesincrease primarily to the decrease instems from higher net premiums earned, as described above.

Expenses

 

 

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”) increased to $64.0were $97.9 million forin first quarter 2021, up 43.6% from $68.2 million in the three months ended September 30, 2017 as compared to $53.9 million for the three months ended September 30, 2016.prior year quarter.  The increase in lossesstems from higher attritional and LAE relates primarily to retained losses incurredweather net loss ratios and from Hurricane Irma. Our retention for Hurricane Irma losses is $20 million,a larger book of which the excess of our projected losses of $388 million will be recovered from reinsurance compared to $4.0 million of catastrophe losses associated with Hurricane Hermine as of September 30, 2016.business.

Policy acquisition costs

Policy acquisition costs decreasedwere $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 $20.9 million for the three months ended September 30, 2017 as compared to $22.6 million for the three months ended September 30, 2016. The variance relates primarily to the reductionhigher acquisition costs associated with growth in gross earned premium quarter over quarter.premiums written.


General and administrative expenses

General and administrative expenses increasedwere $19.8 million in first quarter 2021, down 9% from $21.7 million in the prior year quarter. The decrease is primarily attributable to $15.4 million for the three months ended September 30, 2017 as compared to $14.2 million for the three months ended September 30, 2016. This increase relates primarily to approximately $1.1 million of transaction costscompensation associated with the upcoming acquisitionexecutive management changes in late 2020 as well as a reduction in stock compensation as larger tranches of NBIC as describedrestricted stock were fully vested in Note 2 to our unaudited condensed consolidated financial statements in this Form 10-Q.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, and amortization of debt issuance costsnet

As described in Note 12 – Long-Term Debt to our unaudited condensed consolidated financial statement appearing elsewhere in this Form 10-Q, Heritage issued $79.5Net interest expense was $1.9 million in Secured Notes due 2023 on December 15, 2016 and issued $136.8 million in Convertible Notes in the thirdfirst quarter of 2017, resulting in interest expense of $3.1 million and amortization of debt issuance costs of $0.7 million for the quarter. The interest expense includes approximately $0.3 million of amortization of the original issue discount related to the Convertible Notes.2021, effectively flat quarter-over-quarter.

Other non-operating expense, net

As described in Note 12- Long-Term Debt to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, the conversion option of the Convertible Notes will be accounted for as a separate derivative instrument liability in accordance with applicable U.S. GAAP guidance until shareholder approval is obtained to settle the conversion option liability in common stock. As such, until stockholder approval to settle the conversion option has occurred, the Company must assess the fair value of the conversion option liability on a quarterly basis, and any changes to the fair value are recorded in the statement of income as a financial gain or loss.  

For the quarter ended September 30, 2017, the fair value of the conversion option increased approximately $6.9 million due to the increase in our stock price and is presented in the Income Statement as a charge to non-operating earnings. For tax purposes, any financial gain or loss associated with the change in the value of the conversion option is not deductible.

Once stockholder approval is obtained, the terms of the Convertible Notes provide that the Company will have the option to settle the conversion option in shares of common stock, cash or a combination thereof, and at such time the conversion option of the Convertible Notes will (subject to ongoing evaluation of variance factor) qualify for equity classification and will no longer be accounted for as a separate derivative instrument liability in accordance with applicable U.S. GAAP guidance. A stockholder vote seeking approval to settle the conversion option in common stock has been scheduled for later in the fourth quarter of 2017.

Provision(Benefit) provision for income taxes

The(Benefit) provision (benefit) for income taxes was $(525) thousand and $7.7($2.6) million forin first quarter 2021 compared to $3.2 million in the three months ended September 30, 2017 and 2016, respectively. Ourprior year quarter. The effective tax rate forwas 33.2% in first quarter 2021, 3.8 points above the three months ended September 30, 2017 and 2016 was 5.7% and 41.3%, respectively.prior year quarter’s 29.4% rate. The charges for amortization of conversion option discount and valuation of the conversion option associated with the Convertible Notes for the quarter ended September 30, 2017 are not deductible for income tax purposes. This had a significant adverse impact on thehigher effective tax rate for the quarter. Additionally, the expiration of unexercised stock options in September 2017 adversely affected the effectiverelates to permanent tax rate for the quarter.differences. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision for each quarter are updated as more information becomes available throughout the year.  with additional information.


Net (loss) income

NetFirst quarter 2021 net loss was $8.7$5.1 million for the quarter ended September 30, 2017 compared to(($0.19) per diluted share), down 167.6% from net income of $10.9 million for the quarter ended September 30, 2016. Operating related items, primarily Hurricane Irma and adverse development on Hurricane Matthew caused the variance. In addition, non-operating items, particularly the non-cash charge in valuation of the convertible option feature and interest expense caused $9.5 million in variance.

Comparison of the Nine Months Ended September 30, 2017 and 2016

Revenue

Gross premiums written

Gross premiums written decreased to $455.8 million for the nine months ended September 30, 2017 as compared to $471.8 million for the nine months ended September 30, 2016. The decrease in gross premiums written relates primarily to a reduction in gross premium written by Heritage P&C partially offset by an increase related to the addition of Sawgrass business and an increase in


Zephyr premium written due to the timing of the Zephyr acquisition in late March 2016. Gross premium written for the nine months ended September 30, 2017 includes nine months of Zephyr written premium whereas approximately six months of Zephyr premium was included for the nine months ended September 30, 2016. Heritage P&C’s premium in force decreased from September 30, 2016 as we continue to manage exposure in geographic locations which have produced a disproportional share of attritional losses as well as for geographic risks for which the price to manage catastrophe risk is not cost efficient. There was no business assumed from Citizens during 2017 compared to approximately $8$7.6 million of business assumed from Citizens during the nine months ended September 30, 2016. Personal residential business accounted for $387.4 million and commercial residential accounted for $68.4 million of the total gross premiums written for the nine months ended September 30, 2017.

Gross premiums earned

Gross premiums earned decreased to $460.0 million for the nine months ended September 30, 2017 as compared to $480.3 million for the nine months ended September 30, 2016. Our premiums in force as of September 30, 2017 and September 30, 2016 were approximately $625.6 million and $646.0 million, respectively, including the Sawgrass business acquired on September 1, 2017, which contributed $30.8 million of in-force business. The premiums earned from Sawgrass were $2.6 million for the nine-month period ending September 30, 2017.

Ceded premiums

Ceded premiums increased to $182.2 million for the nine months ended September 30, 2017 as compared to $163.5 million for the nine months ended September 30, 2016. Our catastrophe reinsurance programs renew each year on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared to the cost for the 2016 season of $247.0 million. The reduction in premium in force described previously resulted in a reduction in the amount of catastrophe reinsurance purchased from approximately $3.1 billion in the 2016 season to approximately $2.6 billion for the 2017 season. As described in Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million compared to $40.0 million for the 2016 season for a first event.

Reinsurance costs are amortized over a twelve-month period, reflecting the term of the coverage, which begins June 1. As such, we incur the cost of the previous year’s program from January through May of each year. The cost of the 2015 catastrophe reinsurance program was significantly lower than the 2016 reinsurance program due to a smaller amount of premium in force coupled with the mix of business. In 2016, the reinsurance cost increased and that higher cost was reflected in the months June 2016 through May 2017. The 2017 catastrophe reinsurance program is approximately $20 million less than the 2016 program. As such, the 2017 catastrophe reinsurance cost is higher for the first five months of the year than 2016 before we recognize the benefit of the lower cost of the 2017 program starting in June 2017. We also have reinsurance costs associated with our larger risks which could vary monthly depending upon the business written.

Net premiums earned

Net premiums earned decreased to $277.8 million for the nine months ended September 30, 2017 as compared to $316.8 million for the nine months ended September 30, 2016. The decrease in net premiums earned is primarily attributable to the decrease in the amount of premium in force during the nine months ended September 30, 2017 as compared to the same period in 2016, coupled with the increased ceded premiums earned.

Net investment income

Net investment income inclusive of realized investment gains, increased to $9.2 million for the nine months ended September 30, 2017 as compared to $8.3 million for the nine months ended September 30, 2016. The increase in net investment income is due to the increase in cash and invested assets during the nine months ended September 31, 2017 over the prior year. The increase resulted primarily from invested proceeds associated with the Secured Notes and Convertible Notes, coupled with the additional investment income from Zephyr in 2017 due to the timing of the acquisition.

Other revenue

Other revenue remained stable at approximately $11.0 million for both periods.

Total revenue

Total revenue decreased to $298.0 million for the nine months ended September 30, 2017 as compared to $336.2 million for the nine months ended September 30, 2016. The decrease in total revenue was due primarily to the reduction in premium in force


throughout the nine months ended September 30, 2017 which resulted in a lesser amount of gross premiums earned as compared to the same period($0.27 per diluted share) in the prior year coupled with an increase in ceded premiums earned.

Expenses

Losses and loss adjustment expenses

Losses and LAE decreased to $156.7 million for the nine months ended September 30, 2017 as compared to $169.7 million for the nine months ended September 30, 2016.quarter. The decrease is primarily due toreflects 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 reduction in earned premiums. Additionally, the Company’s losses incurred during the nine months ended September 30, 2017 and 2016 reflect a prior year deficiency of $1.5 million and a deficiency of $17.3 million, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience.

Policy acquisition costs

Policy acquisition costs increased to $66.1 million for the nine months ended September 30, 2017 as compared to $61.5 million for the nine months ended September 30, 2016.quarter. The increase is primarily attributable to having a full nine months of policy acquisition costs related to Zephyr in 2017 compared to just six months in 2016 due to timing of that acquisition, as well as the favorable impact of assumed premiums from Citizens for the nine months ended September 30, 2016.

General and administrative expenses

General and administrative expenses increased to $48.8 million for the nine months ended September 30, 2017 as compared to $44.0 million for the nine months ended September 30, 2016. The increase relates to acquisitionhigher costs associated with NBIC and nine months of general and administrative expenses associated with Zephyr for the nine months ended September 30, 2017 whereas only six months of Zephyr expenses were included for the nine months ended September 30, 2016.

Interest expense and amortization of debt issuance costs

As described in Note 12 – Long-Term Debt to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, Heritage issued $79.5 million in Secured Notes due 2023 on December 15, 2016 and issued $136.8 million in Convertible Notes in the third quarter of 2017, resulting in interest expense of $7.0 million and amortization of debt issuance costs of $1.2 million for the nine months ended September 30, 2017. Interest expense includes approximately $0.3 million of amortization of the original issue discount related to the Convertible Notes.

Other non-operating expense, net

For the quarter ended September 30, 2017, the fair value of the conversion option increased approximately $6.9 million and is presented on the Income Statement as a charge to non-operating expense. For tax purposes, any financial gain or loss associated with the change in the value of the conversion option is not deductible.

Provision for income taxes

The provision for income taxes was $7.4 million and $23.7 million for the nine months ended September 30, 2017 and 2016, respectively. Our effective tax rate for the nine months ended September 30, 2017 and 2016 was 65.3% and 39.2%, respectively. The amortization of the conversion option discount and valuation change for the conversion option associated with the Convertible Notes for the nine months ended September 30, 2017 are not deductible for income tax purposes. This had a significant adverse impact on the effective tax rate for the nine months ended September 30, 2017. Excluding the impact of the non-deductible items related to the convertible note, the 2017 year-to-date effective tax rate would be 41.1%. The effective tax rate can fluctuate throughout the year as estimates used in the tax provision for each quarter are updated as more information becomes available throughout the year.

Net income

Our results for the nine months ended September 30, 2017 reflect net income of $3.9 million compared to $36.7 million for the nine months ended September 30, 2016. Operating related items discussed above caused $22.7 million of the variance. Non-operating items, particularly interest expense and non-cash change in valuation of the convertible option feature caused $10.2 million of the variance.


Ratios

Due to the impact ourcatastrophe excess-of-loss reinsurance costs have on net premiums earned from period to period, our management believes the ratios discussed below are more meaningful when viewed on aprogram, partly offset by higher gross basis.

 

 

Three Months Ended September 30,

 

 

 

 

2017

 

 

2016

 

 

Ratios to Gross Premiums Earned:

 

(unaudited)

Ceded premium ratio

 

 

37.8

%

 

 

38.4

%

 

Loss ratio

 

 

41.8

%

 

 

32.7

%

 

Operating expense ratio

 

 

23.8

%

 

 

22.3

%

 

Combined ratio

 

 

103.4

%

 

 

93.4

%

 

 

 

 

 

 

 

 

 

 

 

Ratios to Net Premiums Earned:

 

 

 

 

 

 

 

 

 

Loss ratio (1)

 

 

67.3

%

 

 

53.1

%

 

Operating expense ratio (2)

 

 

38.2

%

 

 

36.2

%

 

Combined ratio (3)

 

 

105.5

%

 

 

89.3

%

 

(1)

The net loss ratio is calculated as losses and LAE divided by net premiums earned.

(2)

The net expense ratio is calculated as all operating expenses divided by net premiums earned.

(3)

The net combined ratio is calculated as the sum of losses and LAE and all operating expenses divided by net premiums earned.

Ceded premium ratio

Our ceded premium ratio decreased to 37.8% for the three months ended September 30, 2017 compared to 38.4% for the three months ended September 30, 2016. As described above, both gross earned premium and ceded premium decreased quarter over quarter. The proportional decrease in ceded premium for the 2017 hurricane season reinsurance program over the 2016 hurricane season was greater than the decrease in gross earned premium and thereby reduced the ceded premium ratio.

Gross loss ratio

Our gross loss ratio increased to 41.8% for the three months ended September 30, 2017 compared to 32.7% for the three months ended September 30, 2016. The increase in the loss ratio was primarily attributable to retained losses associated with Hurricane Irma.  

Net loss ratio

OurThe net loss ratio increased to 67.3% for the three months ended September 30, 2017 compared to 53.1% for the three months ended September 30, 2016, primarily related to net retained losses associated with Hurricane Irma, partially offset by the decreasewas 68.9% in first quarter 2021, up 14.7 points from 54.1% in the ceded premium ratio.prior year quarter. The increase primarily stems from higher current accident year attritional and weather net loss ratios and lower favorable reserve development.

Gross operatingNet expense ratio

Our gross operatingThe net expense ratio increased to 23.8% forwas 38.8% in first quarter 2021, down 2.3 points from 41.1% in the three months ended September 30, 2017 compared to 22.3% forprior 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 three months ended September 30, 2016.prior year quarter. The increase relates primarily to transaction costs associated with the upcoming acquisition of NBIC.

Net operating expense ratio

Our net operating expense ratio increased to 38.2% for the three months ended September 30, 2017 compared to 36.2% for the three months ended September 30, 2016, primarily due to the increase in the gross expense ratio discussed above, slightly offset by the lower ceded premium ratio.

Combined ratio

Our combined ratio onstems from a gross basis increased to 103.4% for the three months ended September 30, 2017 compared to 93.4% for the three months ended September 30, 2016. Our combined ratio on a net basis increased to 105.5% for the three months ended September 30, 2017 compared to 89.3% for the three months ended September 30, 2016. The gross combined ratio increased due to the increase in the loss and gross expense ratios slightly offset by the decrease in the ceded premium ratio as described above.


Ratios

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the ratios discussed below are more meaningful when viewed on a gross basis.

 

 

Nine Months Ended September 30,

 

 

 

 

2017

 

 

2016

 

 

Ratios to Gross Premiums Earned:

 

(unaudited)

Ceded premium ratio

 

 

39.6

%

 

 

34.0

%

 

Loss ratio

 

 

34.1

%

 

 

35.3

%

 

Operating expense ratio

 

 

25.0

%

 

 

22.1

%

 

Combined ratio

 

 

98.7

%

 

 

91.4

%

 

 

 

 

 

 

 

 

 

 

 

Ratios to Net Premiums Earned:

 

 

 

 

 

 

 

 

 

Loss ratio (1)

 

 

56.4

%

 

 

53.6

%

 

Operating expense ratio (2)

 

 

41.4

%

 

 

33.4

%

 

Combined ratio (3)

 

 

97.8

%

 

 

87.0

%

 

Ceded premium ratio

Our ceded premium ratio increased to 39.6% for the nine months ended September 30, 2017 compared to 34.0% for the nine months ended September 30, 2016. The variance relates to higher reinsurance costs for the first six months of 2017 compared to 2016 due to timing of the reinsurance placement as previously discussed. The 2016 ratio also benefitted from approximately $32.1 million of Citizens assumption activity that occurred in the fourth quarter of 2015 and approximately $9.1 million in the first quarter of 2016 compared to no assumptions in the last quarter of 2016 or the throughout 2017. Citizens assumptions provided a benefit for the nine months ended September 30, 2016 due to the favorable timing of reinsurance costs associated with assumed premium. Additionally, the reinsurance ratio in the first half of 2017 was adversely impacted by reinstatements for the per risk treaty which were triggered by large losses.

Gross loss ratio

Our gross loss ratio decreased to 34.1% for the nine months ended September 30, 2017 compared to 35.3% for the nine months ended September 30, 2016. The nine months ended September 30, 2017 included retained losses from Hurricane Irma and $6.1 million of adverse development from Hurricane Matthew losses partially offset by $4.6 million of favorable development on non-catastrophe losses. The nine months ended September 30, 2016 included Hurricane Hermine losses of $4.1 million as well as adverse development on prior accident year losses of approximately $17.0 million.

Net loss ratio

Our net loss ratio, increased to 56.4% for the nine months ended September 30, 2017 compared to 53.6% for the nine months ended September 30, 2016 due to the increase in the ceded premium ratio as discussed above.

Gross operating expense ratio

Our gross expense ratio increased to 25.0% for the nine months ended September 30, 2017 compared to 22.1% for the nine months ended September 30, 2016. The increase relates to a combination of the favorable effect of Citizens take-out activity on the 2016 ratio, transaction costs associated with the NBIC acquisition in 2017 and fixed personnel and other costs which were diluted in 2016 due to higher gross earned premium. Assumptions from Citizens had a favorable impact on the 2016 expense ratio because assumed policies have no acquisition costs until the policies renew onto Heritage policy forms.

Net operating expense ratio

Our net expense ratio increased to 41.4% for the nine months ended September 30, 2017 compared to 33.4% for the nine months ended September 30, 2016, due to the gross operating expense ratio variance discussed above coupled with the increase in the ceded premium ratio.


Combined ratio

Our combined ratio on a gross basis increased to 98.7% for the nine months ended September 30, 2017 compared to 91.4% for the nine months ended September 30, 2016. Our combined ratio on a net basis increased to 97.8% for the nine months ended September 30, 2017 compared to 87.0% for the nine months ended September 30, 2016. The gross combined ratio increased due to the increases in the ceded premiums ratio and gross operating expense ratio, partiallypartly offset by a lower gross loss ratio.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 September 30, 2017,March 31, 2021, we had $352.3$402.8 million of cash and cash equivalents which primarily consistedand $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 money market accounts. 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 typicallygenerally hold substantial cash balances to meet seasonal liquidity needs which includesincluding amounts to pay quarterly reinsurance installments. 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 held additional funds inbelieve that our sources of cash and cash equivalents at September 30, 2017 to fund catastrophe claim payments associated with Hurricane Irma and to provide resources for the purchase of Narragansett Bay Insurance, which we plan to close in the fourth quarter of 2017. In addition, we held approximately $61 million of advances from reinsurers for Hurricane Irma claim payments. We also had $18.4 million in restricted cashare adequate to meet our contractual obligations related to the catastrophe bonds issued by Citrus Re Ltd. Although we can provide no assurances, we believe that we maintain sufficient liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as inadequate premium rates or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

Although we can provide no assurance, we believe our current capital resources, together with cash provided from our operations, will be sufficient to meet currently anticipated working capital requirements for at least the next twelve months.

We 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.


Cash Flows

 

 

Nine Months Ended September 30,

 

 

For the Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

 

(in thousands)

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

98,703

 

 

$

99,595

 

 

$

(892

)

 

$

39,227

 

 

$

85,697

 

 

$

(46,470

)

Investing activities

 

 

84,570

 

 

 

(179,247

)

 

 

263,817

 

 

 

(73,664

)

 

 

(25,485

)

 

 

(48,179

)

Financing activities

 

 

63,231

 

 

 

(25,790

)

 

 

89,021

 

 

 

(3,749

)

 

 

(13,791

)

 

 

10,042

 

Net increase (decrease) in cash and cash equivalents

 

$

246,504

 

 

$

(105,442

)

 

$

351,946

 

Net (decrease) increase in cash and cash equivalents

 

$

(38,186

)

 

$

46,421

 

 

$

(84,607

)

 

Operating Activities

Cash provided by operating activities increased to $98.7 million for the nine months ended September 30, 2017 compared to $99.6 million for the nine months ended September 30, 2016. The increase inNet 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 due to lowertiming of cash flows associated with claim payments and reinsurance premium paid and advance payments made by reinsurers in anticipation of Hurricane Irma claim payment somewhat offset by a large amount of claims payments, particularly related to Hurricanes Matthew and Irma, madereimbursements during the ninefirst three months ended September 30, 2017of 2021 compared to the same periodfirst three months of 2016.2020.

Investing Activities

Net cash provided byused in investing activities for the ninethree months ended September 30, 2017March 31, 2021 was $84.6$73.7 million as compared to net cash used by investing activities of $179.2$25.5 million for the comparable period in 2016.2020. The change in cash provided by (used in)used for investing activities relates primarily relates to $110.3 million paidinvestment of proceeds from fixed income securities sold during 2020 as well as the timing of allocations of funds for the acquisition of Zephyr, net of cash acquired. In addition, we liquidated a portion of our invested assets in preparation for our upcoming acquisition of NBIC in 2017.investment.

Financing Activities

Net cash provided byused in financing activities for the ninethree months ended September 30, 2017March 31, 2021 was $63.2$3.7 million, as compared to net cash usingused in financing activities of $25.8$13.8 million for the comparable period in 2016.2020. The increasereduction in cash provided byused in financing activities relatesis due primarily to proceedsthe decrease in the amount of the Convertible Notes issued partially offset by sharesstock 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.


Senior SecuredThe 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 following table summarizesCompany issued the principalConvertible 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 payment termsat 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 listed below:Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

Maturity Date

Interest Payment Due Date

8.75% plus LIBOR Senior Secured Notes (0.95%)

December 15, 2023

March 15, June 15, September 15 and December 15

5.875% Convertible Senior Notes

August 1, 2037

February 1 and August 1 - semi annual

The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.

See Note 12 –” Long-Term Debt”Holders may convert their Convertible Notes at any time prior to our unaudited consolidated financial statements under Itemthe close of business on the business day immediately preceding February 1, of this Quarterly Report on Form 10Q for additional information.

Seasonality of our Business

Our insurance business is seasonal as hurricanes typically occur2037, other than during the period from, Juneand including, February 1, through November2022 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, each year. With our reinsurance program effective on June 1 each year, any variation2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the costperiod of our reinsurance, whether due30 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 changesthe close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.


During the period from and including February 1, 2022 to reinsurance ratesthe close of business on the second business day immediately preceding August 5, 2022, and on or changesafter 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 total insuredConvertible 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 our policy base, will occur$31.0 million as collateral and be reflectedreceived $19.2 million in our financial results beginning June 1a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of each year, subject3.094% 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 certain adjustments.

Contractual Obligations

The following table represents our contractual obligations for which cash flows are fixed or determined aswithdraw any portion of September 30, 2017.

 

Payments Due by Period

 

 

Total

 

 

2017

 

 

2018-2019

 

 

2020-2021

 

 

After 2021

 

 

(in thousands)

 

Senior secured notes (1)

$

79,500

 

 

$

 

 

$

1,987

 

 

$

7,465

 

 

$

70,048

 

Convertible senior notes (1)

 

136,750

 

 

 

 

 

 

 

 

 

 

 

 

136,750

 

Interest on notes

 

148,502

 

 

 

2,024

 

 

 

15,816

 

 

 

15,549

 

 

 

115,113

 

Reinsurance (2)

 

200,645

 

 

 

 

 

 

200,645

 

 

 

 

 

 

 

Total Contractual Obligations

$

565,397

 

 

$

2,024

 

 

$

218,448

 

 

$

23,014

 

 

$

321,911

 

1. See Part 1. Financial information, Item 1. Financial Statements, Note 12-Long-Term Debt.

2. Representsthe pledged collateral over the minimum paymentcollateral requirement at any time, other than in the event of reinsurance premiums under multi-year reinsurance contacts.

Off-Balance Sheet Arrangements

We obtained a $12.7 million irrevocable letter of creditdefault by the subsidiary. The proceeds from a financial institutionthe loan was used to secure Osprey’s obligations arising from our reinsurance program. We collateralized this letter of credit facility with otherwise unencumbered real estate. The letter of credit, which terminated on May 31, 2017, was not renewed becauseprepay the treaties with Osprey either terminated or were commuted.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”)(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 ninethree months ended September 30, 2017,March 31, 2021, we reassessed our critical accounting policies and estimates as disclosed within our 20162020 Annual Report on Form 10-K; we10-K.


Contractual Obligations

As of March 31, 2021, there have madebeen no material changes or additions with regard to such policiesthe contractual obligations table disclosed in Item 7. “Management’s Discussion and estimates.Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K.

JOBS ActSeasonality of our Business

We qualify as an “emerging growth company” underOur insurance business is seasonal; hurricanes typically occur during the JOBS Act. Section 107 ofperiod from June 1 through November 30 and winter storms generally impact the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail


ourselves of this extended transition periodfirst and as a result, we will adopt new or revised accounting standardsfourth quarters each year. With our catastrophe reinsurance program effective on the relevant dates on which adoption of such standards is required for other public companies.

We areJune 1 each year, any variation in the processcost of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subjectour reinsurance, whether due to certain conditions set forthchanges to reinsurance rates or changes in the JOBS Act, if as an emerging growth company we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the marketinsured value of our common stock thatpolicy 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 heldincorporated herein by non-affiliates exceeds $700.0 million as of the last business day ofreference. We do not expect any recently issued accounting pronouncements to have a material effect on our prior second fiscal quarter, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk.

Our investment portfolios at September 30, 2017 included fixed maturity and equity securities,The duration of the purposes of whichfinancial instruments held in our portfolio that are not for trading or speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet policyholder obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities’ prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Investment securities are managed by a group of nationally recognized asset managers and are overseen by the investment committee appointed by our board of directors. Our investment portfolios are primarily exposedsubject 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 risk and equity price risk. We classify our fixed maturity and equity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in the fair value of such securities can adversely impact the carrying value of our stockholders’ equity.

Interest Rate Risk

Ourquality fixed maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manageportfolio. As of March 31, 2021, the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustratesestimated weighted-average credit quality rating of the impact of hypothetical changes in interest rates to the fair value of our fixed maturity securities portfolio was A+, at September 30, 2017 (in thousands):fair value, consistent with the average rating at December 31, 2020.

Hypothetical Change in Interest rates

 

Estimated Fair Value After Change

 

 

Change in Estimated Fair

Value

 

 

Percentage Increase

(Decrease) in Estimated

Fair Value

 

300 basis point increase

 

$

436,574

 

 

$

(57,910

)

 

 

(12

)%

200 basis point increase

 

$

455,874

 

 

$

(38,610

)

 

 

(8

)%

100 basis point increase

 

$

475,178

 

 

$

(19,306

)

 

 

(4

)%

100 basis point decrease

 

$

513,763

 

 

$

19,279

 

 

 

4

%

200 basis point decrease

 

$

530,443

 

 

$

35,959

 

 

 

7

%

300 basis point decrease

 

$

536,843

 

 

$

42,359

 

 

 

9

%

Credit Risk

Credit risk can expose usWe have not experienced a material impact when compared to potential losses arising principally from adverse changes in the financial condition of the issuertabular presentations of our fixed maturities. We mitigate thisinterest rate and market risk by investingsensitive instruments in fixed maturities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector.


The following table presents2020 Annual Report on Form 10-K for the composition of our fixed maturity portfolio by rating at September 30, 2017 (in thousands):year ended

Comparable

Rating

 

Amortized

Cost

 

 

% of Total

Amortized

Cost

 

 

Estimated

Fair Value

 

 

% of total

Estimated

Fair Value

 

AAA

 

$

35,436

 

 

 

7

%

 

$

35,690

 

 

 

7

%

AA+

 

$

36,053

 

 

 

7

%

 

$

36,414

 

 

 

7

%

AA

 

$

48,256

 

 

 

10

%

 

$

48,613

 

 

 

10

%

AA-

 

$

69,568

 

 

 

14

%

 

$

69,878

 

 

 

14

%

A+

 

$

42,853

 

 

 

9

%

 

$

43,106

 

 

 

9

%

A

 

$

66,114

 

 

 

13

%

 

$

66,203

 

 

 

13

%

A-

 

$

148,161

 

 

 

30

%

 

$

147,508

 

 

 

30

%

BBB+

 

$

700

 

 

 

0

%

 

$

707

 

 

 

0

%

BBB

 

$

104

 

 

 

0

%

 

$

103

 

 

 

0

%

BBB-

 

$

706

 

 

 

0

%

 

$

720

 

 

 

0

%

BB

 

$

604

 

 

 

0

%

 

$

604

 

 

 

0

%

BB+

 

$

574

 

 

 

0

%

 

$

571

 

 

 

0

%

BB-

 

$

9,837

 

 

 

2

%

 

$

9,985

 

 

 

2

%

B+

 

$

4,892

 

 

 

1

%

 

$

4,989

 

 

 

1

%

B

 

$

27,409

 

 

 

6

%

 

$

27,867

 

 

 

6

%

NA and NR

 

$

1,526

 

 

 

0

%

 

$

1,526

 

 

 

0

%

Total

 

$

492,794

 

 

 

100

%

 

$

494,484

 

 

 

100

%

Equity Price Risk

Our equity investment portfolio at September 30, 2017 consists of common stocks and redeemable and non-redeemable preferred stocks. We may incur potential losses due to adverse changes in equity security prices. We manage this risk primarily through industry and issuer diversification and asset allocation techniques.

The following table illustrates the composition of our equity portfolio at September 30, 2017 (in thousands):

 

 

 

 

 

 

% of Total

 

 

 

Estimated

Fair Value

 

 

Estimated

Fair value

 

Stocks by sector:

 

 

 

 

 

 

 

 

Financial

 

$

2,106

 

 

 

8

%

Energy

 

 

10,957

 

 

 

43

%

Other

 

 

12,173

 

 

 

48

%

Subtotal

 

$

25,236

 

 

 

99

%

Mutual Funds and ETF by type:

 

 

 

 

 

 

 

 

Equity

 

$

160

 

 

 

1

%

Total

 

$

25,396

 

 

 

100

%

Foreign Currency Exchange Risk

At September 30, 2017, we did not have any material exposure to foreign currency related risk.

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 September 30, 2017.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.


PART II. OTHER INFORMATION

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 disclosed in the section entitled “Risk Factors” in our Annual ReportItem 1A of Part I of its annual report on Form 10-K for the year ended December 31, 2016,2020 filed on March 15, 2017 set forth information relating9, 2021. There have been no material changes to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Thosethe Company’s risk factors continue to be relevant to an understandingsince the filing of our business, financial condition and operating results. No material changes have occurred with respect to those risk factors.that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities

During the third quarterthree months ended September 30, 2017, we purchased 1,103,848March 31, 2021, the Company acquired 12,500 shares of commonits stock for an aggregate purchasea total cost of $13.0 million under our$127,000 that were not part of the publicly announced share repurchase program. We purchased 3,552,397program authorization. These shares of common stock for an aggregate purchase price of $40.0 millionwere delivered to the Company by employees to satisfy tax withholding obligations in connection with the issuancevesting of the Convertible Notes. restricted stock awards.

A summary of our common stock repurchases during the quarterthree months ended September 30, 2017 under our share repurchase programMarch 31, 2021 is set forth in the table below (in thousands, except shares):

 

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share (1)

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

 

July 1, 2017 through July 31, 2017

 

 

 

 

 

 

 

 

 

 

$

35,831

 

August 1, 2017 through August 30, 2017

 

 

3,808,709

 

 

$

11.52

 

 

 

256,312

 

 

$

32,836

 

September 1, 2017 through September 30, 2017

 

 

847,536

 

 

$

11.77

 

 

 

847,536

 

 

$

22,836

 

Total

 

 

4,656,245

 

 

 

 

 

 

 

1,103,848

 

 

 

 

 

 

 

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

 

 

 

 

 

(1)

Average price paid per share excludes cash paid for commissions.

Item 4. Mine Safety Disclosures

None

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

Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)

  3.2

By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)

  4

Form of Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)

4.1

 

Form of 5.875% Convertible Senior Notes due 2037 (included in Exhibit 4.1), incorporated by reference to 4.21.1 to our Form 8-K filed on August 16, 2017

  

4.2

 

Indenture, dateddate as of August 16, 2017, by and among the Company,Company. Heritage MGA, LLC as guarantor, and Wilmington Trust, National Association, as trustee, incorporated by reference to Exhibit 4.1 to our Form 8-K filed on August 16, 2017.2017

4.310.18

 

Employment Agreement dated January 5, 2021 between Heritage Insurance Holdings, Inc. and PlanErnie Garateix, (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 6, 2021)

10.19

Employment Agreement dated April 13, 2021 between Heritage Insurance Holdings, Inc. and Kirk Lusk, (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on April 14, 2021)

10.20*

Employment Agreement dated January 1, 2015 between Heritage Insurance Holdings, Inc. and Sharon Binnun

10.21*

Employment Agreement dated April 2, 2018 between Zephyr Insurance Company, Inc. and Tim Johns


10.22*

Form of Merger,Restricted Stock Award Agreement (Time-Based and Performance-Based Vesting)

10.23*

Fourth Amendment to Credit Agreement, dated as of August 8, 2017, by andMarch 24, 2021, among Heritage Insurance Holdings, Inc., Gator Acquisition Merger Sub, Inc. and NBICcertain subsidiaries of Heritage Insurance Holdings, Inc. from time to time party as guarantors, the lenders from time to time party, and PBRA, LLC, in its capacityRegions Bank, as Stockholder Representative, incorporated by reference to Exhibit 2.1 to our Form 8-K filed on August 8, 2017Administrative Agent and Collateral Agent

4.431.1*

 

Supplemental Indenture, dated August 16, 2017, to that certain Indenture, dated December 15, 2016, by and among the Company, The Bank of New York Mellon, a New York banking corporation, as trustee, The Bank of New York Mellon, London Branch, as paying agent, and The Bank of New York Mellon (Luxembourg) S.A., as registrar, incorporated by reference to Exhibit 4.1 to our Form 8-K on August 22, 2017

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.231.2*

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.132.1**

 

Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.232.2**

 

Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

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.INS101.SCH*

 

Inline XBRL InstanceTaxonomy Extension Schema Document

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.SCH101.DEF*

 

101. SCHInline XBRL Taxonomy Extension Schema.Definition Linkbase Document

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Data Document

101.CAL101.PRE*

 

101. CALInline XBRL Taxonomy Extension Calculation Linkbase.Presentation Linkbase Document

104

 

101.DEF

101. DEFCover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB

101. LAB XBRL Taxonomy Extension Label Linkbase.

101.PRE

101. PRE XBRL Taxonomy Extension Presentation Linkbase.and contained in Exhibit 101)

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.*   Filed herewith

**   Furnished herewith

 

 


SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HERITAGE INSURANCE HOLDINGS, INC.

 

 

 

 

Date: November 2, 2017May 7, 2021

By:

 

/s/ BRUCE LUCASERNESTO GARATEIX

 

 

 

Bruce LucasErnesto Garateix

 

 

 

Chairman and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

 

 

 

 

Date: November 2, 2017May 7, 2021

By:

 

/s/ STEVEN MARTINDALEKIRK LUSK

 

 

 

Steven MartindaleKirk Lusk

 

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

4733