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 June 30,March 31, 20222023
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.) |
1401 N. Westshore Blvd
Tampa, FL 33607
(Address, including zip code, of principal executive offices)
(727) 362-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | HRTG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate number of shares of the Registrant’s Common Stock outstanding on AugustMay 2, 20222023 was 26,569,09626,469,720.
HERITAGE INSURANCE HOLDINGS, INC.
Table of Contents
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements aboutregarding: (i) our core strategy and ability to meetfully execute our investment objectivesbusiness plan; (ii) our growth, including by geographic expansion, new lines of business, additional policies and to managenew products and mitigate market risk with respectservices, competitive strengths, proprietary capabilities, processes and new technology, results of operations and liquidity; (iii) strategic initiatives and their impact on shareholder value; statements concerning projections, predictions, expectations, estimates or forecasts as to our investments; (ii)business, financial and operational results and future economic performance; (iv) statements of management’s goals and objectives, including intentions to pursue certain business and the adequacyhandling of certain claims; (v) projections of revenue, earnings, capital structure, reserves and other financial items; (vi) assumptions underlying our reinsurance programcritical accounting policies and estimates; (vii) assumptions underlying statements regarding us and our ability to diversify riskbusiness; (viii) statements regarding the impact of legislation; (ix) expectations regarding claims and safeguardrelated expenses, and our reinsurers’ obligations; (x) beliefs regarding pending legal proceedings and their effect on our financial position; (iii) business and risk management strategies, including acquisitions, strategic investments(xi) other similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks and risk diversification; (iv)uncertainties that could cause actual results and events to differ. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included throughout this filing and particularly in Item 1A: "Risk Factors" set forth in our estimates with respect2022 Annual Report on Form 10-K and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in this quarterly report on Form 10-Q. All forward-looking statements included in this document are based on information available to taxus on the date hereof, and accounting matters including the impact on our financial statements; (v) future dividends, if any; (vi) our expectations relatedwe assume no obligation to our financing activities; (vii) the sufficiency of our liquidityrevise or publicly release any revision to pay our insurance company affiliates’ claims and expenses,any such forward-looking statement, except as well as to satisfy commitments in the event of unforeseen events; (viii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements and the source of funds needed to fund our business and risk management strategies; (ix) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (x) our ability to successfully mitigate the effects of inflation on our business; (xi) our intentions with respect to our credit risk investments; (xii) the future impact of the COVID-19 pandemic; and (xiii) the potential effects of our current legal proceedings.may otherwise be required by law.
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:
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 validspeak only as of the date of our Form 10-Qon which they are made, 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, 2021. Exceptexcept 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, futurestatement to reflect events or otherwise.circumstances after the date on which the statement is made or to reflect the occurrences of anticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in the forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share and share amounts)
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||
ASSETS |
| (unaudited) |
|
|
|
|
| (unaudited) |
|
|
|
| ||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $689,163 and $675,245) |
| $ | 635,458 |
|
| $ | 669,354 |
| ||||||||
Equity securities, at fair value, (cost $1,514 and $1,415) |
|
| 1,514 |
|
|
| 1,415 |
| ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $671,018 and $705,548) |
| $ | 613,176 |
|
| $ | 635,572 |
| ||||||||
Equity securities, at fair value, (cost $1,495 and $1,514) |
|
| 1,495 |
|
|
| 1,514 |
| ||||||||
Other investments, net |
|
| 17,352 |
|
|
| 23,929 |
|
|
| 14,283 |
|
|
| 16,484 |
|
Total investments |
|
| 654,324 |
|
|
| 694,698 |
|
|
| 628,954 |
|
|
| 653,570 |
|
Cash and cash equivalents |
|
| 290,932 |
|
|
| 359,337 |
|
|
| 329,965 |
|
|
| 280,881 |
|
Restricted cash |
|
| 5,416 |
|
|
| 5,415 |
|
|
| 6,699 |
|
|
| 6,691 |
|
Accrued investment income |
|
| 3,215 |
|
|
| 3,167 |
|
|
| 3,536 |
|
|
| 3,817 |
|
Premiums receivable, net |
|
| 81,277 |
|
|
| 71,925 |
|
|
| 80,775 |
|
|
| 92,749 |
|
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45 |
|
| 289,106 |
|
|
| 269,391 |
| ||||||||
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $197 and $45 |
|
| 681,844 |
|
|
| 805,059 |
| ||||||||
Prepaid reinsurance premiums |
|
| 468,748 |
|
|
| 265,873 |
|
|
| 188,760 |
|
|
| 306,977 |
|
Income tax receivable |
|
| 13,281 |
|
|
| 11,739 |
|
|
| 4,264 |
|
|
| 12,118 |
|
Deferred income tax asset, net |
|
| 9,762 |
|
|
| 0 |
|
|
| 17,962 |
|
|
| 16,841 |
|
Deferred policy acquisition costs, net |
|
| 99,468 |
|
|
| 93,881 |
|
|
| 98,035 |
|
|
| 99,617 |
|
Property and equipment, net |
|
| 19,622 |
|
|
| 17,426 |
|
|
| 27,603 |
|
|
| 25,729 |
|
Right-of-use lease asset, net |
|
| 26,047 |
|
|
| 27,753 |
| ||||||||
Right-of-use lease asset, finance |
|
| 19,490 |
|
|
| 20,132 |
| ||||||||
Right-of-use lease asset, operating |
|
| 7,563 |
|
|
| 7,335 |
| ||||||||
Intangibles, net |
|
| 52,751 |
|
|
| 55,926 |
|
|
| 47,987 |
|
|
| 49,575 |
|
Goodwill |
|
| 0 |
|
|
| 91,959 |
| ||||||||
Other assets |
|
| 15,956 |
|
|
| 12,272 |
|
|
| 15,344 |
|
|
| 11,509 |
|
Total Assets |
| $ | 2,029,905 |
|
| $ | 1,980,762 |
|
| $ | 2,158,781 |
|
| $ | 2,392,600 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
| ||||||
Unpaid losses and loss adjustment expenses |
| $ | 553,909 |
|
| $ | 590,166 |
|
| $ | 980,992 |
|
| $ | 1,131,807 |
|
Unearned premiums |
|
| 655,351 |
|
|
| 590,419 |
|
|
| 649,864 |
|
|
| 656,641 |
|
Reinsurance payable |
|
| 375,284 |
|
|
| 191,728 |
|
|
| 95,900 |
|
|
| 199,803 |
|
Long-term debt, net |
|
| 122,990 |
|
|
| 120,757 |
|
|
| 126,700 |
|
|
| 128,943 |
|
Deferred income tax liability, net |
|
| 0 |
|
|
| 9,426 |
| ||||||||
Advance premiums |
|
| 37,827 |
|
|
| 24,504 |
|
|
| 39,642 |
|
|
| 26,516 |
|
Accrued compensation |
|
| 7,730 |
|
|
| 8,014 |
|
|
| 5,349 |
|
|
| 6,594 |
|
Lease liability |
|
| 29,647 |
|
|
| 31,172 |
| ||||||||
Lease liability, finance |
|
| 22,012 |
|
|
| 22,557 |
| ||||||||
Lease liability, operating |
|
| 8,890 |
|
|
| 8,690 |
| ||||||||
Accounts payable and other liabilities |
|
| 66,621 |
|
|
| 71,525 |
|
|
| 74,708 |
|
|
| 80,010 |
|
Total Liabilities |
| $ | 1,849,359 |
|
| $ | 1,637,711 |
|
| $ | 2,004,057 |
|
| $ | 2,261,561 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
| ||||||
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
| ||||||
Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,569,096 shares issued and 26,544,096 outstanding at June 30, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021 |
|
| 3 |
|
|
| 3 |
| ||||||||
Common stock, $0.0001 par value, 50,000,000 shares authorized, 37,790,425 shares issued and 25,558,751 outstanding at March 31, 2023 and 37,796,107 shares issued and 25,539,433 outstanding at December 31, 2022 |
|
| 3 |
|
|
| 3 |
| ||||||||
Additional paid-in capital |
|
| 333,747 |
|
|
| 332,797 |
|
|
| 335,098 |
|
|
| 334,711 |
|
Accumulated other comprehensive loss, net of taxes |
|
| (41,194 | ) |
|
| (4,573 | ) |
|
| (44,295 | ) |
|
| (53,585 | ) |
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at June 30, 2022 and December 31, 2021 |
|
| (128,557 | ) |
|
| (123,557 | ) | ||||||||
Retained earnings |
|
| 16,547 |
|
|
| 138,381 |
| ||||||||
Treasury stock, at cost, 12,231,674 shares at each March 31, 2023 and December 31, 2022 |
|
| (130,900 | ) |
|
| (130,900 | ) | ||||||||
Retained deficit |
|
| (5,182 | ) |
|
| (19,190 | ) | ||||||||
Total Stockholders' Equity |
|
| 180,546 |
|
|
| 343,051 |
|
|
| 154,724 |
|
|
| 131,039 |
|
Total Liabilities and Stockholders' Equity |
| $ | 2,029,905 |
|
| $ | 1,980,762 |
|
| $ | 2,158,781 |
|
| $ | 2,392,600 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive LossIncome (Loss)
(Unaudited)
(Amounts in thousands, except per share and share amounts)
|
| For the Three Months Ended |
|
| For the Six Months Ended |
|
| For the Three Months Ended |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||||
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Gross premiums written |
| $ | 365,284 |
|
| $ | 337,700 |
|
| $ | 648,480 |
|
| $ | 611,881 |
|
| $ | 310,309 |
|
| $ | 283,196 |
|
Change in gross unearned premiums |
|
| (69,073 | ) |
|
| (52,054 | ) |
|
| (64,901 | ) |
|
| (55,824 | ) |
|
| 6,713 |
|
|
| 4,172 |
|
Gross premiums earned |
|
| 296,211 |
|
|
| 285,646 |
|
|
| 583,579 |
|
|
| 556,057 |
|
|
| 317,022 |
|
|
| 287,368 |
|
Ceded premiums earned |
|
| (137,940 | ) |
|
| (139,147 | ) |
|
| (272,379 | ) |
|
| (267,359 | ) | ||||||||
Ceded premiums |
|
| (150,993 | ) |
|
| (134,439 | ) | ||||||||||||||||
Net premiums earned |
|
| 158,271 |
|
|
| 146,499 |
|
|
| 311,200 |
|
|
| 288,698 |
|
|
| 166,029 |
|
|
| 152,929 |
|
Net investment income |
|
| 2,163 |
|
|
| 956 |
|
|
| 4,163 |
|
|
| 2,249 |
|
|
| 5,582 |
|
|
| 2,000 |
|
Net realized losses |
|
| (102 | ) |
|
| (1,000 | ) |
|
| (118 | ) |
|
| (920 | ) | ||||||||
Net realized gains (losses) |
|
| 1,898 |
|
|
| (16 | ) | ||||||||||||||||
Other revenue |
|
| 3,438 |
|
|
| 3,742 |
|
|
| 7,133 |
|
|
| 7,414 |
|
|
| 3,412 |
|
|
| 3,695 |
|
Total revenues |
|
| 163,770 |
|
|
| 150,197 |
|
|
| 322,378 |
|
|
| 297,441 |
|
|
| 176,921 |
|
|
| 158,608 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Losses and loss adjustment expenses |
|
| 101,522 |
|
|
| 100,834 |
|
|
| 241,560 |
|
|
| 198,743 |
|
|
| 97,452 |
|
|
| 140,038 |
|
Policy acquisition costs, net of ceding commission income (1) |
|
| 38,375 |
|
|
| 37,833 |
|
|
| 76,632 |
|
|
| 73,199 |
|
|
| 40,324 |
|
|
| 38,257 |
|
General and administrative expenses, net of ceding commission income(2) |
|
| 17,466 |
|
|
| 15,520 |
|
|
| 37,190 |
|
|
| 35,320 |
|
|
| 19,054 |
|
|
| 19,724 |
|
Goodwill impairment |
|
| 91,959 |
|
|
| 0 |
|
|
| 91,959 |
|
|
| 0 |
| ||||||||
Total expenses |
|
| 249,322 |
|
|
| 154,187 |
|
|
| 447,341 |
|
|
| 307,262 |
|
|
| 156,830 |
|
|
| 198,019 |
|
Operating Loss |
|
| (85,552 | ) |
|
| (3,990 | ) |
|
| (124,963 | ) |
|
| (9,821 | ) | ||||||||
Operating income (loss) |
|
| 20,091 |
|
|
| (39,411 | ) | ||||||||||||||||
Interest expense, net |
|
| 1,751 |
|
|
| 1,925 |
|
|
| 3,723 |
|
|
| 3,803 |
|
|
| 2,881 |
|
|
| 1,972 |
|
Loss before income taxes |
|
| (87,303 | ) |
|
| (5,915 | ) |
|
| (128,686 | ) |
|
| (13,624 | ) | ||||||||
Income (loss) before income taxes |
|
| 17,210 |
|
|
| (41,383 | ) | ||||||||||||||||
Provision (benefit) for income taxes |
|
| 563 |
|
|
| (1,965 | ) |
|
| (10,061 | ) |
|
| (4,527 | ) |
|
| 3,202 |
|
|
| (10,624 | ) |
Net loss |
| $ | (87,866 | ) |
| $ | (3,950 | ) |
| $ | (118,625 | ) |
| $ | (9,097 | ) | ||||||||
OTHER COMPREHENSIVE LOSS |
|
|
|
|
|
|
|
|
| |||||||||||||||
Change in net unrealized losses on investments |
|
| (16,161 | ) |
|
| 3,625 |
|
|
| (47,932 | ) |
|
| (6,972 | ) | ||||||||
Reclassification adjustment for net realized investment losses (gains) |
|
| 102 |
|
|
| (22 | ) |
|
| 118 |
|
|
| (102 | ) | ||||||||
Income tax benefit (expense) related to items of other comprehensive losses (gains) |
|
| 3,759 |
|
|
| (835 | ) |
|
| 11,193 |
|
|
| 1,640 |
| ||||||||
Total comprehensive loss |
| $ | (100,166 | ) |
| $ | (1,182 | ) |
| $ | (155,246 | ) |
| $ | (14,531 | ) | ||||||||
Net income (loss) |
| $ | 14,008 |
|
| $ | (30,759 | ) | ||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
| |||||||||||||||||||
Change in net unrealized gains (losses) on investments |
|
| 12,143 |
|
|
| (31,770 | ) | ||||||||||||||||
Reclassification adjustment for net realized investment losses |
|
| 2 |
|
|
| 16 |
| ||||||||||||||||
Income tax (expense) benefit related to items of other comprehensive income (loss) |
|
| (2,855 | ) |
|
| 7,433 |
| ||||||||||||||||
Total comprehensive income (loss) |
| $ | 23,298 |
|
| $ | (55,080 | ) | ||||||||||||||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
| 26,453,456 |
|
|
| 27,904,923 |
|
|
| 26,620,418 |
|
|
| 27,866,364 |
|
|
| 25,558,305 |
|
|
| 26,787,379 |
|
Diluted |
|
| 26,453,456 |
|
|
| 27,904,923 |
|
|
| 26,620,418 |
|
|
| 27,866,364 |
|
|
| 25,617,568 |
|
|
| 26,787,379 |
|
Loss per share |
|
|
|
|
|
|
|
|
| |||||||||||||||
Earnings (loss) per share |
|
|
|
|
| |||||||||||||||||||
Basic |
| $ | (3.32 | ) |
| $ | (0.14 | ) |
| $ | (4.46 | ) |
| $ | (0.33 | ) |
| $ | 0.55 |
|
| $ | (1.15 | ) |
Diluted |
| $ | (3.32 | ) |
| $ | (0.14 | ) |
| $ | (4.46 | ) |
| $ | (0.33 | ) |
| $ | 0.55 |
|
| $ | (1.15 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
3
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except share amounts)
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive Loss |
|
| Total |
| |||||||
Balance at December 31, 2021 |
|
| 26,753,511 |
|
| $ | 3 |
|
| $ | 332,797 |
|
| $ | 138,381 |
|
| $ | (123,557 | ) |
| $ | (4,573 | ) |
| $ | 343,051 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24,321 | ) |
|
| (24,321 | ) |
Shares tendered for income taxes withholding |
|
| (9,849 | ) |
|
| — |
|
|
| (89 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (89 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issued restricted stock |
|
| 397,176 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 505 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 505 |
|
Stock buy-back |
|
| (721,118 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,000 | ) |
|
| — |
|
|
| (5,000 | ) |
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
Balance at March 31, 2022 |
|
| 26,444,720 |
|
| $ | 3 |
|
| $ | 333,213 |
|
| $ | 106,001 |
|
| $ | (128,557 | ) |
| $ | (28,894 | ) |
| $ | 281,766 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,300 | ) |
|
| (12,300 | ) |
Adjustment to shares tendered for income taxes withholding |
|
| — |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31 |
|
Issued restricted stock |
|
| 99,376 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 503 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 503 |
|
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,588 | ) |
|
| — |
|
|
| — |
|
|
| (1,588 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (87,866 | ) |
|
| — |
|
|
| — |
|
|
| (87,866 | ) |
Balance at June 30, 2022 |
|
| 26,544,096 |
|
| $ | 3 |
|
| $ | 333,747 |
|
| $ | 16,547 |
|
| $ | (128,557 | ) |
| $ | (41,194 | ) |
| $ | 180,546 |
|
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Total |
| |||||||
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 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,768 |
|
|
| 2,768 |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 287 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287 |
|
Issued restricted stock |
|
| 42,018 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,950 | ) |
|
| — |
|
|
| — |
|
|
| (3,950 | ) |
Balance at June 30, 2021 |
|
| 27,946,941 |
|
| $ | 3 |
|
| $ | 332,287 |
|
| $ | 207,325 |
|
| $ | (115,365 | ) |
| $ | 623 |
|
| $ | 424,873 |
|
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
| Accumulated Other Comprehensive Loss |
|
| Total |
| ||||||||
Balance at December 31, 2022 |
|
| 25,539,433 |
|
| $ | 3 |
|
| $ | 334,711 |
|
| $ | (19,190 | ) |
| $ | (130,900 | ) |
| $ | (53,585 | ) |
| $ | 131,039 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,290 |
|
|
| 9,290 |
|
Shares tendered for income taxes withholding |
|
| (4,200 | ) |
|
| — |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture on restricted stock |
|
| (1,482 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 395 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 395 |
|
Net Income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,008 |
|
|
| — |
|
|
| — |
|
|
| 14,008 |
|
Balance at March 31, 2023 |
|
| 25,558,751 |
|
| $ | 3 |
|
| $ | 335,098 |
|
| $ | (5,182 | ) |
| $ | (130,900 | ) |
| $ | (44,295 | ) |
| $ | 154,724 |
|
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
| Accumulated Other Comprehensive Loss |
|
| Total |
| ||||||||
Balance at December 31, 2021 |
|
| 26,753,511 |
|
| $ | 3 |
|
| $ | 332,797 |
|
| $ | 138,381 |
|
| $ | (123,557 | ) |
| $ | (4,573 | ) |
| $ | 343,051 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24,321 | ) |
|
| (24,321 | ) |
Shares tendered for income taxes withholding |
|
| (9,849 | ) |
|
| — |
|
|
| (89 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (89 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issued restricted stock |
|
| 397,176 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 505 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 505 |
|
Stock buy-back |
|
| (721,118 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,000 | ) |
|
| — |
|
|
| (5,000 | ) |
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
Balance at March 31, 2022 |
|
| 26,444,720 |
|
| $ | 3 |
|
| $ | 333,213 |
|
| $ | 106,001 |
|
| $ | (128,557 | ) |
| $ | (28,894 | ) |
| $ | 281,766 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
| For the Six Months Ended June 30, |
|
| For the Three Months Ended March 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
| $ | (118,625 | ) |
| $ | (9,097 | ) | ||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
| |||||||||||
Net income (loss) |
| $ | 14,008 |
|
| $ | (30,759 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
| |||||||||||
Stock-based compensation |
|
| 1,008 |
|
|
| 547 |
|
|
| 395 |
|
|
| 505 |
|
Bond amortization and accretion |
|
| 1,745 |
|
|
| 1,960 |
|
|
| (279 | ) |
|
| 910 |
|
Amortization of original issuance discount on debt |
|
| 776 |
|
|
| 830 |
|
|
| 117 |
|
|
| 521 |
|
Goodwill impairment |
|
| 91,959 |
|
|
| 0 |
| ||||||||
Depreciation and amortization |
|
| 4,100 |
|
|
| 4,042 |
|
|
| 2,127 |
|
|
| 2,047 |
|
Allowance for bad debt |
|
| 4 |
|
|
| 111 |
|
|
| 27 |
|
|
| (14 | ) |
Expected credit allowance on reinsurance |
|
| 152 |
|
|
| — |
| ||||||||
Net realized investment gains |
|
| 118 |
|
|
| (102 | ) |
|
| (1,898 | ) |
|
| 16 |
|
Net change for unrealized losses in other investments |
|
| 0 |
|
|
| 1,022 |
| ||||||||
Deferred income taxes |
|
| (7,995 | ) |
|
| 2,780 |
|
|
| (3,976 | ) |
|
| (14,444 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accrued investment income |
|
| (48 | ) |
|
| (265 | ) |
|
| 281 |
|
|
| (123 | ) |
Premiums receivable, net |
|
| (9,356 | ) |
|
| (6,288 | ) |
|
| 11,947 |
|
|
| (2,573 | ) |
Prepaid reinsurance premiums |
|
| (202,875 | ) |
|
| (170,812 | ) |
|
| 118,217 |
|
|
| 87,308 |
|
Reinsurance recoverable on paid and unpaid claims |
|
| (19,715 | ) |
|
| 40,119 |
|
|
| 123,063 |
|
|
| (19,388 | ) |
Income taxes receivable |
|
| (1,542 | ) |
|
| (7,776 | ) |
|
| 7,854 |
|
|
| 10,374 |
|
Deferred policy acquisition costs, net |
|
| (5,587 | ) |
|
| (6,702 | ) |
|
| 1,582 |
|
|
| 3,240 |
|
Right of use leased asset |
|
| 1,706 |
|
|
| (22,889 | ) |
|
| 414 |
|
|
| 790 |
|
Other assets |
|
| (3,684 | ) |
|
| (4,313 | ) |
|
| (3,835 | ) |
|
| (1,042 | ) |
Lease incentives |
|
| 1,622 |
|
|
| 1,470 |
| ||||||||
Unpaid losses and loss adjustment expenses |
|
| (36,257 | ) |
|
| (33,362 | ) |
|
| (150,815 | ) |
|
| (1,746 | ) |
Unearned premiums |
|
| 64,932 |
|
|
| 55,894 |
|
|
| (6,777 | ) |
|
| (4,183 | ) |
Reinsurance payable |
|
| 183,556 |
|
|
| 230,865 |
|
|
| (103,903 | ) |
|
| (75,510 | ) |
Accrued interest |
|
| 95 |
|
|
| (210 | ) |
|
| (87 | ) |
|
| (342 | ) |
Accrued compensation |
|
| (284 | ) |
|
| (585 | ) |
|
| (1,245 | ) |
|
| (2,244 | ) |
Advance premiums |
|
| 13,323 |
|
|
| 18,357 |
|
|
| 13,126 |
|
|
| 14,663 |
|
Operating lease liabilities |
|
| (1,525 | ) |
|
| 23,685 |
|
|
| (345 | ) |
|
| (697 | ) |
Other liabilities |
|
| (4,986 | ) |
|
| (14,879 | ) |
|
| (5,204 | ) |
|
| (6,515 | ) |
Net cash (used in) provided by operating activities |
|
| (47,535 | ) |
|
| 104,402 |
| ||||||||
Net cash provided by (used in) operating activities |
|
| 14,946 |
|
|
| (39,206 | ) | ||||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturity securities sales, maturities and paydowns |
|
| 43,188 |
|
|
| 84,902 |
|
|
| 145,070 |
|
|
| 22,132 |
|
Purchases in other investments |
|
| (7,500 | ) |
|
| 0 |
| ||||||||
Fixed maturity securities purchases |
|
| (58,969 | ) |
|
| (176,381 | ) |
|
| (110,251 | ) |
|
| (58,969 | ) |
Return of capital in other investments |
|
| 14,077 |
|
|
| 784 |
| ||||||||
Sale on other investments and return of capital |
|
| 4,119 |
|
|
| 9,368 |
| ||||||||
Equity securities reinvestments of dividends |
|
| (99 | ) |
|
| 0 |
|
|
| — |
|
|
| (2 | ) |
Leasehold improvements |
|
| (3,358 | ) |
|
| (1,470 | ) | ||||||||
Software in progress |
|
| (2,376 | ) |
|
| — |
| ||||||||
Cost of property and equipment acquired |
|
| (1,385 | ) |
|
| (747 | ) |
|
| (37 | ) |
|
| (177 | ) |
Net cash used in investing activities |
|
| (14,046 | ) |
|
| (92,912 | ) | ||||||||
Net cash provided by (used in) investing activities |
|
| 36,525 |
|
|
| (27,648 | ) | ||||||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Repayment of term note |
|
| (1,750 | ) |
|
| (1,875 | ) |
|
| (2,375 | ) |
|
| (875 | ) |
Mortgage loan payments |
|
| (160 | ) |
|
| (152 | ) | ||||||||
Mortgage loan adjustments (payments) |
|
| 15 |
|
|
| (81 | ) | ||||||||
Draw from revolver |
|
| 15,000 |
|
|
| 0 |
|
|
| — |
|
|
| 15,000 |
|
Repurchase of convertible notes |
|
| (11,633 | ) |
|
| 0 |
|
|
| — |
|
|
| (11,633 | ) |
Purchase of treasury stock |
|
| (5,000 | ) |
|
| 0 |
|
|
| — |
|
|
| (5,000 | ) |
Tax withholdings on share-based compensation awards |
|
| (58 | ) |
|
| (127 | ) |
|
| (8 | ) |
|
| (89 | ) |
Dividends paid |
|
| (3,222 | ) |
|
| (3,349 | ) |
|
| (11 | ) |
|
| (1,634 | ) |
Net cash used in financing activities |
|
| (6,823 | ) |
|
| (5,503 | ) |
|
| (2,379 | ) |
|
| (4,312 | ) |
(Decrease) increase in cash, cash equivalents, and restricted cash |
|
| (68,404 | ) |
|
| 5,987 |
| ||||||||
Increase (decrease) in cash, cash equivalents, and restricted cash |
|
| 49,092 |
|
|
| (71,166 | ) | ||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 364,752 |
|
|
| 446,383 |
|
|
| 287,572 |
|
|
| 364,752 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 296,348 |
|
| $ | 452,370 |
|
| $ | 336,664 |
|
| $ | 293,586 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
| ||||||
Income taxes paid |
| $ | 5,885 |
|
| $ | 489 |
| ||||||||
Income taxes (refund) paid |
| $ | (676 | ) |
| $ | — |
| ||||||||
Interest paid |
| $ | 2,273 |
|
| $ | 2,721 |
|
| $ | 2,376 |
|
| $ | 1,578 |
|
5
Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||
|
| (In thousands) |
| |||||
Cash and cash equivalents |
| $ | 329,965 |
|
| $ | 280,881 |
|
Restricted cash |
|
| 6,699 |
|
|
| 6,691 |
|
Total |
| $ | 336,664 |
|
| $ | 287,572 |
|
|
|
|
|
|
|
| ||
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (In thousands) |
| |||||
Cash and cash equivalents |
| $ | 290,932 |
|
| $ | 359,337 |
|
Restricted cash |
|
| 5,416 |
|
|
| 5,415 |
|
Total |
| $ | 296,348 |
|
| $ | 364,752 |
|
Restricted cash primarily represents funds held to meet regulatory requirements in certain states in which the Company operates.
See accompanying notes to unaudited condensed consolidated financial statements.
6
HERITAGE INSURANCE HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. (together with its subsidiaries, the “Company”). These statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The accompanying interim condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 filed on March 14, 202213, 2023 (the “2021“2022 Form 10-K”).
Significant accounting policies
The accounting policies of the Company are set forth in Note 1 to the condensed consolidated financial statements contained in the Company’s 20212022 Form 10-K.
Reclassification
Certain prior year amounts reported on the condensed consolidated balance sheet have been reclassified to conform to the current year presentation.
Accounting Pronouncements adopted
In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" . The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity. The if-converted method will be the only permissible method for computing the dilutive effect of the convertible debt instruments. Interest expense no longer includes amortization of debt discount. The Company adopted the guidance of ASU 2020-06 on January 1, 2022, reporting no material impact to the Company's consolidated condensed financial statements or disclosures.
Accounting Pronouncements not yet adopted
In March 2022, the FASB issued ASU 2022-02, “2022-02 Financial Instruments-Credit Losses” (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for annual periods beginning after December 15, 2022, including interim periods within those periods. Early adoption is permitted. The Company will adopt ASU 2022-02 during the first quarter of 2023 and will provide the required disclosures, if determined to be material.
The Company has documented the summary of its significant accounting policies in its Notes to the Audited Consolidated Financial Statements annual report oncontained in the Company’s 2022 Form 10-K. There have been no material changes to the Company’s accounting policies since the filing of that report.
No other new accounting pronouncements issued, but not yet effectiveadopted, have had, or are expected to have, a material impact on the Company’s results of operations or financial position.
7
NOTE 2. INVESTMENTS
Securities Available-for-Sale
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows for the periods presented:
June 30, 2022 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||||||||||||||||||
March 31, 2023 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||||||||||||||||||
Debt Securities Available-for-sale |
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
U.S. government and agency securities (1) |
| $ | 102,663 |
|
| $ | 0 |
|
| $ | 3,203 |
|
| $ | 99,460 |
|
| $ | 104,455 |
|
| $ | 62 |
|
| $ | 3,071 |
|
| $ | 101,446 |
|
States, municipalities and political subdivisions |
|
| 105,378 |
|
|
| 4 |
|
|
| 9,561 |
|
|
| 95,821 |
|
|
| 102,209 |
|
|
| — |
|
|
| 10,604 |
|
|
| 91,605 |
|
Special revenue |
|
| 296,842 |
|
|
| 22 |
|
|
| 25,172 |
|
|
| 271,692 |
|
|
| 281,872 |
|
|
| 12 |
|
|
| 28,823 |
|
|
| 253,061 |
|
Industrial and miscellaneous |
|
| 184,280 |
|
|
| 28 |
|
|
| 15,823 |
|
|
| 168,485 |
|
|
| 182,482 |
|
|
| 173 |
|
|
| 15,591 |
|
|
| 167,064 |
|
Total |
| $ | 689,163 |
|
| $ | 54 |
|
| $ | 53,759 |
|
| $ | 635,458 |
|
| $ | 671,018 |
|
| $ | 247 |
|
| $ | 58,089 |
|
| $ | 613,176 |
|
December 31, 2022 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||
Debt Securities Available-for-sale | (In thousands) |
| ||||||||||||||
U.S. government and agency securities (1) |
| $ | 121,811 |
|
| $ | 24 |
|
| $ | 4,093 |
|
| $ | 117,742 |
|
States, municipalities and political subdivisions |
|
| 104,361 |
|
|
| — |
|
|
| 12,734 |
|
|
| 91,627 |
|
Special revenue |
|
| 284,946 |
|
|
| 1 |
|
|
| 34,817 |
|
|
| 250,130 |
|
Industrial and miscellaneous |
|
| 194,430 |
|
|
| 90 |
|
|
| 18,447 |
|
|
| 176,073 |
|
Total |
| $ | 705,548 |
|
| $ | 115 |
|
| $ | 70,091 |
|
| $ | 635,572 |
|
December 31, 2021 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||
Debt Securities Available-for-sale | (In thousands) |
| ||||||||||||||
U.S. government and agency securities (1) |
| $ | 73,923 |
|
| $ | 184 |
|
| $ | 282 |
|
| $ | 73,825 |
|
States, municipalities and political subdivisions |
|
| 106,727 |
|
|
| 242 |
|
|
| 1,270 |
|
|
| 105,699 |
|
Special revenue |
|
| 291,005 |
|
|
| 1,084 |
|
|
| 3,520 |
|
|
| 288,569 |
|
Hybrid securities |
|
| 99 |
|
|
| — |
|
|
| — |
|
|
| 99 |
|
Industrial and miscellaneous |
|
| 203,491 |
|
|
| 636 |
|
|
| 2,965 |
|
|
| 201,162 |
|
Total |
| $ | 675,245 |
|
| $ | 2,146 |
|
| $ | 8,037 |
|
| $ | 669,354 |
|
Net Realized (Losses) Gains7
The proceeds fromCompany’s unrealized losses on corporate bonds have not been recognized because the salebonds are of debt securitiesa high credit quality with investment grade ratings. The average rating was an A+ for the three and six months ended June 30, 2022March 31, 2023. The unrealized losses are deemed to be caused by interest rates rising after the bonds were purchased and 2021 were $no credit loss allowance was recorded for the three months ended March 31, 2023 or for the year ended December 31, 2022.
Net Realized Gains (Losses)5.9 million and $9.0 million and $15.1 million and $29.5 million, respectively.
The following table presents net realized gains (losses) gains on the Company’s debt securities available-for-sale for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively:respectively:
|
| 2023 |
|
| 2022 |
| ||||||||||
Three Months Ended March 31, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| Fair Value at Sale |
| ||||
|
| (In thousands) |
| |||||||||||||
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized gains |
| $ | — |
|
| $ | — |
|
| $ | 7 |
|
| $ | 910 |
|
Total realized losses |
|
| (2 | ) |
|
| 356 |
|
|
| (23 | ) |
|
| 1,685 |
|
Net realized (losses) gains |
| $ | (2 | ) |
| $ | 356 |
|
| $ | (16 | ) |
| $ | 2,595 |
|
The following table presents the reconciliation of net realized gains (losses) on the Company’s investments reported for the three months ended March 31, 2023 and 2022, respectively:
|
| 2022 |
|
| 2021 |
| ||||||||||
Three Months Ended June 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| Fair Value at Sale |
| ||||
|
| (In thousands) |
| |||||||||||||
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized gains |
| $ | 28 |
|
| $ | 1,291 |
|
| $ | 22 |
|
| $ | 12,464 |
|
Total realized losses |
|
| (130 | ) |
|
| 4,546 |
|
|
| 0 |
|
|
| 175 |
|
Net realized (losses) and gains |
| $ | (102 | ) |
| $ | 5,837 |
|
| $ | 22 |
|
| $ | 12,639 |
|
|
| As of March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Gross realized gains on sales of available-for-sale securities |
| $ | — |
|
| $ | 23 |
|
Gross realized losses on sales of available-for-sale securities |
|
| (2 | ) |
|
| (39 | ) |
Gross realized gains on sale of other investments |
|
| 1,900 |
|
|
| — |
|
Net realized gains (losses) |
| $ | 1,898 |
|
| $ | (16 | ) |
During the first quarter of March 31, 2023, the Company sold its investment in an Insurtech company for $
4.0
|
| 2022 |
|
| 2021 |
| ||||||||||
Six Months Ended June 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| Fair Value at Sale |
| ||||
|
| (In thousands) |
| |||||||||||||
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized gains |
| $ | 32 |
|
| $ | 2,336 |
|
| $ | 105 |
|
| $ | 22,895 |
|
Total realized losses |
|
| (150 | ) |
|
| 6,096 |
|
|
| (3 | ) |
|
| 817 |
|
Net realized (losses) and gains |
| $ | (118 | ) |
| $ | 8,432 |
|
| $ | 102 |
|
| $ | 23,712 |
|
million, resulting in a $
81.9 million realized gain on the investment.
The table below summarizes the Company’s debt securities at June 30, 2022March 31, 2023 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.
|
| At June 30, 2022 |
|
| At March 31, 2023 |
| ||||||||||||||||||||||||||
|
| Cost or Amortized Cost |
|
| Percent of Total |
|
| Fair Value |
|
| Percent of Total |
|
| Cost or Amortized Cost |
|
| Percent of Total |
|
| Fair Value |
|
| Percent of Total |
| ||||||||
Maturity dates: |
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
| ||||||||||
Due in one year or less |
| $ | 53,698 |
|
|
| 8 | % |
| $ | 53,190 |
|
|
| 8 | % |
| $ | 102,233 |
|
|
| 15.2 | % |
| $ | 100,237 |
|
|
| 16.3 | % |
Due after one year through five years |
|
| 336,935 |
|
|
| 49 | % |
|
| 316,690 |
|
|
| 50 | % |
|
| 336,998 |
|
|
| 50.2 | % |
|
| 311,151 |
|
|
| 50.7 | % |
Due after five years through ten years |
|
| 222,938 |
|
|
| 32 | % |
|
| 195,700 |
|
|
| 31 | % |
|
| 171,332 |
|
|
| 25.5 | % |
|
| 146,215 |
|
|
| 23.8 | % |
Due after ten years |
|
| 75,592 |
|
|
| 11 | % |
|
| 69,878 |
|
|
| 11 | % |
|
| 60,456 |
|
|
| 9.0 | % |
|
| 55,573 |
|
|
| 9.1 | % |
Total |
| $ | 689,163 |
|
|
| 100 | % |
| $ | 635,458 |
|
|
| 100 | % |
| $ | 671,018 |
|
|
| 100.0 | % |
| $ | 613,176 |
|
|
| 100.0 | % |
Net Investment Income
The following table summarizes the Company’s net investment income by major investment category for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||
Debt securities |
| $ | 2,428 |
|
| $ | 1,760 |
|
| $ | 4,703 |
|
| $ | 3,178 |
|
| $ | 3,023 |
|
| $ | 2,275 |
|
Equity securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 33 |
|
|
| — |
|
Cash and cash equivalents |
|
| 144 |
|
|
| 27 |
|
|
| 160 |
|
|
| 54 |
|
|
| 2,204 |
|
|
| 16 |
|
Other investments |
|
| 82 |
|
|
| 216 |
|
|
| 312 |
|
|
| 588 |
|
|
| 730 |
|
|
| 230 |
|
Net investment income |
|
| 2,654 |
|
|
| 2,003 |
|
|
| 5,175 |
|
|
| 3,820 |
|
|
| 5,990 |
|
|
| 2,521 |
|
Less: Investment expenses |
|
| 491 |
|
|
| 1,047 |
|
|
| 1,012 |
|
|
| 1,571 |
|
|
| 408 |
|
|
| 521 |
|
Net investment income, less investment expenses |
| $ | 2,163 |
|
| $ | 956 |
|
| $ | 4,163 |
|
| $ | 2,249 |
|
| $ | 5,582 |
|
| $ | 2,000 |
|
The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged) and for which 0no credit loss allowance has been established to date, the aggregate fair value and gross unrealized loss by
8
length of time the security has continuously been in an unrealized loss position at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively:
|
| Less Than Twelve Months |
|
| Twelve Months or More |
|
| Less Than Twelve Months |
|
| Twelve Months or More |
| ||||||||||||||||||||||||||||||||||||
June 30, 2022 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
March 31, 2023 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
U.S. government and agency securities |
|
| 93 |
|
| $ | 3,203 |
|
| $ | 99,221 |
|
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 16 |
|
| $ | 167 |
|
| $ | 14,750 |
|
|
| 73 |
|
| $ | 2,904 |
|
| $ | 81,806 |
|
States, municipalities and political subdivisions |
|
| 114 |
|
|
| 8,972 |
|
|
| 84,638 |
|
|
| 8 |
|
|
| 589 |
|
|
| 5,202 |
|
|
| 5 |
|
|
| 15 |
|
|
| 1,531 |
|
|
| 116 |
|
|
| 10,589 |
|
|
| 67,028 |
|
Special revenue |
|
| 468 |
|
|
| 21,921 |
|
|
| 209,925 |
|
|
| 42 |
|
|
| 3,251 |
|
|
| 24,998 |
|
|
| 51 |
|
|
| 145 |
|
|
| 8,370 |
|
|
| 465 |
|
|
| 28,678 |
|
|
| 216,363 |
|
Industrial and miscellaneous |
|
| 231 |
|
|
| 9,684 |
|
|
| 128,596 |
|
|
| 59 |
|
|
| 6,139 |
|
|
| 37,668 |
|
|
| 30 |
|
|
| 104 |
|
|
| 10,251 |
|
|
| 232 |
|
|
| 15,487 |
|
|
| 144,875 |
|
Total fixed maturity securities |
|
| 906 |
|
| $ | 43,779 |
|
| $ | 522,380 |
|
|
| 109 |
|
| $ | 9,980 |
|
| $ | 67,868 |
|
|
| 102 |
|
| $ | 431 |
|
| $ | 34,902 |
|
|
| 886 |
|
| $ | 57,658 |
|
| $ | 510,072 |
|
|
| Less Than Twelve Months |
|
| Twelve Months or More |
| ||||||||||||||||||
December 31, 2021 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agency securities |
|
| 43 |
|
| $ | 282 |
|
| $ | 57,420 |
|
|
| — |
|
| $ | — |
|
| $ | — |
|
States, municipalities and political |
|
| 98 |
|
|
| 1,270 |
|
|
| 80,972 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Special revenue |
|
| 253 |
|
|
| 3,485 |
|
|
| 195,450 |
|
|
| 14 |
|
|
| 35 |
|
|
| 1,214 |
|
Industrial and miscellaneous |
|
| 191 |
|
|
| 2,387 |
|
|
| 146,746 |
|
|
| 18 |
|
|
| 578 |
|
|
| 11,598 |
|
Total fixed maturity securities |
|
| 585 |
|
| $ | 7,424 |
|
| $ | 480,588 |
|
|
| 32 |
|
| $ | 613 |
|
| $ | 12,812 |
|
|
| Less Than Twelve Months |
|
| Twelve Months or More |
| ||||||||||||||||||
December 31, 2022 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agency securities |
|
| 61 |
|
| $ | 2,040 |
|
| $ | 56,389 |
|
|
| 36 |
|
| $ | 2,053 |
|
| $ | 56,389 |
|
States, municipalities and political |
|
| 28 |
|
|
| 1,967 |
|
|
| 17,730 |
|
|
| 95 |
|
|
| 10,767 |
|
|
| 68,852 |
|
Special revenue |
|
| 273 |
|
|
| 5,832 |
|
|
| 57,881 |
|
|
| 259 |
|
|
| 28,985 |
|
|
| 167,384 |
|
Industrial and miscellaneous |
|
| 95 |
|
|
| 1,535 |
|
|
| 32,387 |
|
|
| 197 |
|
|
| 16,912 |
|
|
| 134,462 |
|
Total fixed maturity securities |
|
| 457 |
|
| $ | 11,374 |
|
| $ | 164,386 |
|
|
| 587 |
|
| $ | 58,717 |
|
| $ | 427,087 |
|
9
The Company completes a detailed analysis each quarter to assess whetherCompany’s unrealized losses on corporate bonds have not been recognized because the decline in the fair value of any investment below its cost basis is the resultbonds are of a high credit loss. All available-for-sale securitiesquality with unrealized losses are reviewed.investment grade ratings. The Company considers many factors in completing its quarterly review ofdoes not intend to sell and it is unlikely the Company will be required to sell the securities with unrealized losses for credit-related impairmentprior to determine whether a credit loss exists, including the extent to which fair value is below cost, the implied yield to maturity, rating downgrades of the securitytheir anticipated recovery, and whether or not the issuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of the issuer and industry factors that could negatively impact the capital markets.
If the decline in fair value of an available-for-sale security below its amortized cost is considereddeemed due to bechanges in interest rates and other market conditions. The debt issuers continue to make timely principal and interest payments on the result of a credit loss,bonds. After taking into account these and other factors previously described, the Company comparesbelieves these unrealized losses generally were caused by a decrease in market interest rates since the estimated present value oftime the cash flows expected to be collected to the amortized cost of the security. For the threesecurities were purchased and six months ending June 30, 2022, management concluded that the decline in the fair value was not as a result of credit losses but rather as a direct result from the increase in the market interest rates. Therefore, the Company did 0t have an allowance for credit losses as of June 30, 2022 or December 31, 2021.losses.
Quarterly, the Company considers whether it intends to sell an available-for-sale security or if it is more likely than not that it will be required to sell the security before recovery of its amortized costs. In these instances, a decline in fair value is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.
Other Investments
Non-Consolidating Variable Interest Entities (“VIEs”)
The Company makes passive investments in limited partnerships (“LPs”), which are accounted for using the equity method, with income reported in earnings. The Company also makesholds a passive investmentsinvestment in a Real Estate Investment Trust (“REIT”) and an Insurtech company,, which areis accounted for using the measurement alternative method, which isand reported at cost less impairment (if any), plus or minus changes from observable price changes.
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at June 30, 2022March 31, 2023 and December 31, 2021:2022, respectively:
|
| As of June 30, 2022 |
|
| As of December 31, 2021 |
| ||||||||||
|
| Carrying Value |
|
| Maximum Loss Exposure |
|
| Carrying Value |
|
| Maximum Loss Exposure |
| ||||
|
| (in thousands) |
| |||||||||||||
Investments in non-consolidated VIEs - Equity Method |
| $ | 3,785 |
|
| $ | 3,785 |
|
| $ | 3,852 |
|
| $ | 3,852 |
|
Investments in non-consolidated VIEs - Amortized Cost |
| $ | 8,490 |
|
| $ | 8,490 |
|
| $ | 15,000 |
|
| $ | 15,000 |
|
Investments in non-consolidated VIEs - Measure Alternative |
| $ | 5,077 |
|
| $ | 5,077 |
|
| $ | 5,077 |
|
| $ | 5,077 |
|
Total non-consolidated VIEs |
| $ | 17,352 |
|
| $ | 17,352 |
|
| $ | 23,929 |
|
| $ | 23,929 |
|
|
| As of March 31, 2023 |
|
| As of December 31, 2022 |
| ||||||||||
|
| Carrying Value |
|
| Maximum Loss Exposure |
|
| Carrying Value |
|
| Maximum Loss Exposure |
| ||||
Investments in non-consolidated VIEs - Equity method |
| $ | 3,416 |
|
| $ | 3,416 |
|
| $ | 3,517 |
|
| $ | 3,517 |
|
Investments in non-consolidated VIEs - Amortized cost |
| $ | 8,490 |
|
| $ | 8,490 |
|
| $ | 8,490 |
|
| $ | 8,490 |
|
Investments in non-consolidated VIEs - Measurement alternative |
| $ | 2,377 |
|
| $ | 2,377 |
|
| $ | 4,477 |
|
| $ | 4,477 |
|
Total non-consolidated VIEs |
| $ | 14,283 |
|
| $ | 14,283 |
|
| $ | 16,484 |
|
| $ | 16,484 |
|
9
No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment.
NOTE 3. FAIR VALUE OF FINANCIAL MEASUREMENTS
Fair value is determined based on the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs. The Company did not hold any Level 3 assets or liabilities as of June 30, 2022 orAt March 31, 2023 and December 31, 2021.2022, there were no transfers in or out of Level 1, 2, and 3.
10
The following table presents 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 tables below present the balances of the Company’s invested assets measured at fair value on a recurring basis:
June 30, 2022 |
| Total |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||||||||||||||
March 31, 2023 |
| 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) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
U.S. government and agency securities |
| $ | 99,460 |
|
| $ | 0 |
|
| $ | 99,460 |
|
| $ | 0 |
|
| $ | 101,446 |
|
| $ | — |
|
| $ | 101,446 |
|
| $ | — |
|
States, municipalities and political subdivisions |
|
| 95,821 |
|
|
| 0 |
|
|
| 95,821 |
|
|
| 0 |
|
|
| 91,605 |
|
|
| — |
|
|
| 91,605 |
|
|
| — |
|
Special revenue |
|
| 271,692 |
|
|
| 0 |
|
|
| 271,692 |
|
|
| 0 |
|
|
| 253,061 |
|
|
| — |
|
|
| 253,061 |
|
|
| — |
|
Industrial and miscellaneous |
|
| 168,485 |
|
|
| 0 |
|
|
| 168,485 |
|
|
| 0 |
|
|
| 167,064 |
|
|
| — |
|
|
| 167,064 |
|
|
| — |
|
Total investments |
| $ | 635,458 |
|
| $ | 0 |
|
| $ | 635,458 |
|
| $ | 0 |
|
| $ | 613,176 |
|
| $ | — |
|
| $ | 613,176 |
|
| $ | — |
|
December 31, 2021 |
| Total |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||||||||||||||
December 31, 2022 |
| 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) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
U.S. government and agency securities |
| $ | 73,825 |
|
| $ | 364 |
|
| $ | 73,461 |
|
| $ | 0 |
|
| $ | 117,742 |
|
| $ | — |
|
| $ | 117,742 |
|
| $ | — |
|
States, municipalities and political subdivisions |
|
| 105,699 |
|
|
| 0 |
|
|
| 105,699 |
|
|
| 0 |
|
|
| 91,627 |
|
|
| — |
|
|
| 91,627 |
|
|
| — |
|
Special revenue |
|
| 288,569 |
|
|
| — |
|
|
| 288,569 |
|
|
| 0 |
|
|
| 250,130 |
|
|
| — |
|
|
| 250,130 |
|
|
| — |
|
Hybrid securities |
|
| 99 |
|
|
| — |
|
|
| 99 |
|
|
| 0 |
| ||||||||||||||||
Industrial and miscellaneous |
|
| 201,162 |
|
|
| — |
|
|
| 201,162 |
|
|
| 0 |
|
|
| 176,073 |
|
|
| — |
|
|
| 176,073 |
|
|
| — |
|
Total investments |
| $ | 669,354 |
|
| $ | 364 |
|
| $ | 668,990 |
|
| $ | 0 |
|
| $ | 635,572 |
|
| $ | — |
|
| $ | 635,572 |
|
| $ | — |
|
Financial Instruments excluded from the fair value hierarchy
The carrying value of premium receivables, and accounts payable, accrued expense, revolving loans and borrowings under the Company’s senior secured credit facility approximate their fair value. The rate at which revolving loans and borrowings under the Company’s senior secured credit facility bear interest resets periodically at market interest rates.
10
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. To evaluate suchFor the three months ended March 31, 2023, there were no assets for a potential impairment, the Company determines theor liabilities that were measured at fair value of the goodwill and intangible assets usingon 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.non-recurring basis.
Certain of ourthe Company's investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. For the year ended December 31, 2021, the Company recorded a goodwill impairment following its annual valuation review of approximately $61 million. In addition, in the second quarter of 2021, the Company recognized an impairment in other investments of approximately $1.0 million based on the estimated fair value of the Company's ownership interest. During the second quarter of 2022, Management concluded that it had a full impairment of its goodwill and that its carrying value of $92.0 million should be written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) our market cap was below book value.
11
NOTE 4. OTHER COMPREHENSIVE LOSSINCOME (LOSS)
The following table is a summary ofsummarizes other comprehensive lossincome (loss) and discloses the tax impact of each component of other comprehensive lossincome (loss) for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively:
|
| For the Three Months Ended June 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| Pre-tax |
|
| Tax |
|
| After-tax |
|
| Pre-tax |
|
| Tax |
|
| After-tax |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in unrealized losses on investments, net |
| $ | (16,161 | ) |
| $ | 3,783 |
|
| $ | (12,378 | ) |
| $ | 3,625 |
|
| $ | (840 | ) |
| $ | 2,785 |
|
Reclassification adjustment of realized losses (gains) included in net loss |
|
| 102 |
|
|
| (24 | ) |
|
| 78 |
|
|
| (22 | ) |
|
| 5 |
|
|
| (17 | ) |
Effect on other comprehensive loss |
| $ | (16,059 | ) |
| $ | 3,759 |
|
| $ | (12,300 | ) |
| $ | 3,603 |
|
| $ | (835 | ) |
| $ | 2,768 |
|
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||
|
| Pre-tax |
|
| Tax |
|
| After-tax |
|
| Pre-tax |
|
| Tax |
|
| After-tax |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in unrealized losses on investments, net |
| $ | (47,932 | ) |
| $ | 11,220 |
|
| $ | (36,712 | ) |
| $ | (6,972 | ) |
| $ | 1,616 |
|
| $ | (5,356 | ) |
Reclassification adjustment of realized losses (gains) included in net loss |
|
| 118 |
|
|
| (27 | ) |
|
| 91 |
|
|
| (102 | ) |
|
| 24 |
|
|
| (78 | ) |
Effect on other comprehensive loss |
| $ | (47,814 | ) |
| $ | 11,193 |
|
| $ | (36,621 | ) |
| $ | (7,074 | ) |
| $ | 1,640 |
|
| $ | (5,434 | ) |
|
| For the Three Months Ended March 31, |
| |||||||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Pre-tax |
|
| Tax |
|
| After-tax |
|
| Pre-tax |
|
| Tax |
|
| After-tax |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in unrealized gains (losses) on investments, net |
| $ | 12,143 |
|
| $ | (2,855 | ) |
| $ | 9,288 |
|
| $ | (31,770 | ) |
| $ | 7,437 |
|
| $ | (24,333 | ) |
Reclassification adjustment of realized losses included in net income (loss) |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| 16 |
|
|
| (4 | ) |
|
| 12 |
|
Effect on other comprehensive income (loss) |
| $ | 12,145 |
|
| $ | (2,855 | ) |
| $ | 9,290 |
|
| $ | (31,754 | ) |
| $ | 7,433 |
|
| $ | (24,321 | ) |
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 the Company’s right-of-use assets and lease obligations. The Company’s 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 the Company’s lease costs for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
|
| Three Months Ended |
|
| Three Months Ended |
| ||
Amortization of ROU assets - Finance leases |
| $ | 646 |
|
| $ | 637 |
|
Interest on lease liabilities - Finance leases |
|
| 246 |
|
|
| 252 |
|
Variable lease cost (cost excluded from lease payments) |
|
| 185 |
|
|
| 140 |
|
Operating lease cost (cost resulting from lease payments) |
|
| 352 |
|
|
| 339 |
|
Total lease cost |
| $ | 1,429 |
|
| $ | 1,368 |
|
|
| For The Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Operating lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations |
| $ | 393 |
|
| $ | 353 |
|
Finance lease cost: |
|
|
|
|
|
| ||
Amortization of assets, included in General & Administrative expenses on the Consolidated Statements of Operations |
|
| 645 |
|
|
| 646 |
|
Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Operations |
|
| 227 |
|
|
| 249 |
|
Total finance lease cost |
| $ | 872 |
|
| $ | 895 |
|
Variable lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations |
| $ | 409 |
|
| $ | 186 |
|
Short-term lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations |
| $ | 30 |
|
| $ | 32 |
|
|
| Six Months Ended |
|
| Six Months Ended |
| ||
Amortization of ROU assets - Finance leases |
| $ | 1,292 |
|
| $ | 674 |
|
Interest on lease liabilities - Finance leases |
|
| 495 |
|
|
| 261 |
|
Variable lease cost (cost excluded from lease payments) |
|
| 426 |
|
|
| 261 |
|
Operating lease cost (cost resulting from lease payments) |
|
| 705 |
|
|
| 679 |
|
Total lease cost |
| $ | 2,919 |
|
| $ | 1,875 |
|
12
Supplemental cash flowbalance sheet information and non-cash activity related to the Company’s operating and financing leases were as follows (in thousands):
|
| At June 30, 2022 |
|
| At June 30, 2021 |
| ||
Finance lease - Operating cash flows |
| $ | 493 |
|
| $ | 18 |
|
Finance lease - Financing cash flows |
| $ | 1,022 |
|
| $ | 61 |
|
|
|
|
|
|
|
| ||
Operating lease - Operating cash flows (fixed payments) |
| $ | 792 |
|
| $ | 746 |
|
Operating lease - Operating cash flows (liability reduction) |
| $ | 625 |
|
| $ | 554 |
|
|
|
|
| |||||
Operating Leases |
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Right of use assets |
| $ | 7,563 |
|
| $ | 7,335 |
|
Lease liability |
| $ | 8,890 |
|
| $ | 8,690 |
|
Finance Leases |
|
|
|
|
|
| ||
Right of use assets |
| $ | 19,490 |
|
| $ | 20,132 |
|
Lease liability |
| $ | 22,012 |
|
| $ | 22,557 |
|
Supplemental balance sheet information related to the Company’s operating and financing leases as of June 30, 2022 were as follows (in thousands):
11
|
| Balance Sheet |
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Right-of-use assets - operating |
| Right-of-use lease asset, net |
| $ | 4,654 |
|
| $ | 5,035 |
|
Right-of-use assets - finance |
| Right-of-use lease asset, net |
| $ | 21,393 |
|
| $ | 22,718 |
|
Lease liability - operating |
| Lease liability |
| $ | 6,084 |
|
| $ | 6,551 |
|
Lease liability - finance |
| Lease liability |
| $ | 23,563 |
|
| $ | 24,621 |
|
Weighted-average remaining lease term and discount rate for the Company’s operating and financing leases for the periods presented below were as follows:
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Weighted average lease term - Finance leases |
| 8.63 yrs. |
|
| 9.62 yrs. |
| ||
Weighted average lease term - Operating leases |
| 5.86 yrs. |
|
| 6.60 yrs. |
| ||
Weighted average discount rate - Finance leases |
|
| 4.2 | % |
|
| 4.2 | % |
Weighted average discount rate - Operating leases |
|
| 5.4 | % |
|
| 5.3 | % |
Weighted-average remaining lease term |
| March 31, 2023 |
|
| December 31, 2022 |
|
| ||
Operating lease |
|
| 6.31 |
| yrs. |
| 6.49 |
| yrs. |
Finance lease |
|
| 7.90 |
| yrs. |
| 8.13 |
| yrs. |
Weighted-average discount rate |
|
|
|
|
|
|
| ||
Operating lease |
|
| 4.9 |
| % |
| 5.14 |
| % |
Finance lease |
|
| 4.2 |
| % |
| 4.16 |
| % |
Maturities of lease liabilities by fiscal year for the Company’s operating and financing leases were as follows (in thousands):
|
| June 30, 2022 |
|
| Financing Lease |
|
| Operating Lease |
| |||
2022 remaining |
| $ | 2,298 |
| ||||||||
2023 |
|
| 4,545 |
|
| $ | 2,316 |
|
| $ | 1,243 |
|
2024 |
|
| 4,238 |
|
|
| 3,101 |
|
|
| 1,656 |
|
2025 |
|
| 3,970 |
|
|
| 3,166 |
|
|
| 1,548 |
|
2026 |
|
| 3,990 |
|
|
| 3,197 |
|
|
| 1,558 |
|
Thereafter |
|
| 16,224 |
| ||||||||
2027 |
|
| 3,190 |
|
|
| 1,595 |
| ||||
2028 and thereafter |
|
| 10,920 |
|
|
| 2,846 |
| ||||
Total lease payments |
|
| 35,265 |
|
|
| 25,890 |
|
|
| 10,446 |
|
Less: imputed interest |
|
| (5,618 | ) |
|
| (3,878 | ) |
|
| (1,556 | ) |
Present value of lease liabilities |
| $ | 29,647 |
|
| $ | 22,012 |
|
| $ | 8,890 |
|
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at June 30, 2022March 31, 2023 and December 31, 2021:2022:
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Land |
| $ | 2,582 |
|
| $ | 2,582 |
|
| $ | 2,582 |
|
| $ | 2,582 |
|
Building |
|
| 10,141 |
|
|
| 10,141 |
|
|
| 9,599 |
|
|
| 9,599 |
|
Software in progress |
|
| 9,260 |
|
|
| 6,884 |
| ||||||||
Computer hardware and software |
|
| 8,578 |
|
|
| 7,204 |
|
|
| 8,876 |
|
|
| 8,851 |
|
Office furniture and equipment |
|
| 1,366 |
|
|
| 1,355 |
|
|
| 1,394 |
|
|
| 1,381 |
|
Tenant and leasehold improvements |
|
| 9,990 |
|
|
| 8,255 |
|
|
| 10,485 |
|
|
| 10,485 |
|
Vehicle fleet |
|
| 720 |
|
|
| 720 |
|
|
| 594 |
|
|
| 594 |
|
Total, at cost |
|
| 33,377 |
|
|
| 30,257 |
|
|
| 42,790 |
|
|
| 40,376 |
|
Less: accumulated depreciation and amortization |
|
| (13,755 | ) |
|
| (12,831 | ) |
|
| (15,187 | ) |
|
| (14,647 | ) |
Property and equipment, net |
| $ | 19,622 |
|
| $ | 17,426 |
|
| $ | 27,603 |
|
| $ | 25,729 |
|
For the three months ended March 31, 2023, the Company invested $2.4 million for software development and implementation services for a new policy, billing and claims system for which one component is anticipated to be completed and placed in service during the second quarter of 2023 with the remaining components anticipated to be placed in service in early 2024.
Depreciation and amortization expense for property and equipment was approximately $466,000539,000 and $432,000459,000 for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively and $925,000 and $864,000 for the six months ended June 30, 2022 and 2021, respectively. The Company’sCompany owns real estate consistsconsisting of 1513 acres of land, 2two buildings with a gross area of 88,378 square feet and a parking garage.
13
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Assets
At June 30, 2022March 31, 2023 and December 31, 2021, goodwill was $0 and $92.0 million and2022, intangible assets were $52.848.0 million and $55.949.6 million, respectively. The Company has determined the useful life of the otherits intangible assets to range between 2.5-15 years. Intangible assets include $1.3 million relating to insurance licenses which is classified as an indefinite lived intangible and is subject to annual impairment testing concurrent with goodwill.
|
| Goodwill |
| |
|
| (in thousands) |
| |
Balance as of December 31, 2021 |
| $ | 91,959 |
|
Goodwill acquired |
| 0 |
| |
Impairment |
|
| (91,959 | ) |
Balance as of June 30, 2022 |
| $ | 0 |
|
Management tests goodwill and other intangible assets for impairment annually during the fourth quarter, or more frequently should events or changes in circumstances indicate that goodwill or our other intangible assets might be impaired. Management has concluded a triggering event has occurred for which it deemed an interim evaluation of goodwill is appropriate. During the second quarter of 2022, Management concluded the remaining balance of its goodwill is fully impaired and that its carrying value of $92.0 million be written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) our market cap was below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $92.0 million goodwill impairment charge, most of which is not tax deductible.
Other Intangible Assetstesting.
The Company’s intangible assets consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses.
Amortization expense of the Company’s intangible assets for each of the respective three monthsmonth periods ended June 30,March 31, 2023 and 2022 and 2021 was $1.6 million and for the six months ended June 30, 2022 and 2021 was $3.2million. NaNNo impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three and six months ended June 30, 2022March 31, 2023 or 2021.2022.
12
Estimated annual pretax amortization of intangible assets for each of the next five years and thereafter is as follows (in thousands):
Year |
| Amount |
|
| Amount |
| ||
2022 - remaining |
| $ | 3,176 |
| ||||
2023 |
| $ | 6,351 |
| ||||
2023 - remaining |
| $ | 4,763 |
| ||||
2024 |
| $ | 6,351 |
|
| $ | 6,351 |
|
2025 |
| $ | 6,315 |
|
| $ | 6,315 |
|
2026 |
| $ | 6,114 |
|
| $ | 6,114 |
|
2027 |
| $ | 5,917 |
| ||||
Thereafter |
| $ | 23,129 |
|
| $ | 17,212 |
|
Total |
| $ | 51,436 |
|
| $ | 46,672 |
|
NOTE 8. LOSSEARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted lossearnings (loss) per share (“EPS”) for the periods indicated.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Basic loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable to common stockholders (000's) |
| $ | (87,866 | ) |
| $ | (3,950 | ) |
| $ | (118,625 | ) |
| $ | (9,097 | ) |
Weighted average shares outstanding |
|
| 26,453,456 |
|
|
| 27,904,923 |
|
|
| 26,620,418 |
|
|
| 27,866,364 |
|
Basic loss per share: |
| $ | (3.32 | ) |
| $ | (0.14 | ) |
| $ | (4.46 | ) |
| $ | (0.33 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable to common stockholders (000's) |
| $ | (87,866 | ) |
| $ | (3,950 | ) |
| $ | (118,625 | ) |
| $ | (9,097 | ) |
Weighted average shares outstanding |
|
| 26,453,456 |
|
|
| 27,904,923 |
|
|
| 26,620,418 |
|
|
| 27,866,364 |
|
Total weighted average dilutive shares |
|
| 26,453,456 |
|
|
| 27,904,923 |
|
|
| 26,620,418 |
|
|
| 27,866,364 |
|
Diluted loss per share: |
| $ | (3.32 | ) |
| $ | (0.14 | ) |
| $ | (4.46 | ) |
| $ | (0.33 | ) |
14
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Basic earnings (loss) per share: |
|
|
|
|
|
| ||
Net income (loss) attributable to common stockholders (000's) |
| $ | 14,008 |
|
| $ | (30,759 | ) |
Weighted average shares outstanding |
|
| 25,558,305 |
|
|
| 26,787,379 |
|
Basic earnings (loss) per share: |
| $ | 0.55 |
|
| $ | (1.15 | ) |
|
|
|
|
|
|
| ||
Diluted earnings (loss) per share: |
|
|
|
|
|
| ||
Net income (loss) attributable to common stockholders (000's) |
| $ | 14,008 |
|
| $ | (30,759 | ) |
Weighted average shares outstanding |
|
| 25,558,305 |
|
|
| 26,787,379 |
|
Weighted average dilutive shares |
|
| 59,263 |
|
|
| — |
|
Total weighted average dilutive shares |
|
| 25,617,568 |
|
|
| 26,787,379 |
|
Diluted earnings (loss) per share: |
| $ | 0.55 |
|
| $ | (1.15 | ) |
The Company had 2,370,531 and 2,452,4121,903,039 antidilutive shares for the six-month period ended June 30, 2022 and 2021, respectively.March 31, 2022. The convertible notes were excluded from the computations because the conversion price on these notes was greater than the average market price of ourthe Company's common sharesstock during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the "if converted" method under the guidance of ASU 2020-06, adopted by the Company on January 1, 2022.
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 June 30,March 31, 2023 and 2022, and 2021, the Company allocated ceding commission income of $11.512.9 million and $11.911.7 million to policy acquisition costs, respectively, and $3.94.2 million and $3.9 million to general and administrative expense, respectively. For the six months ended June 30, 2022 and 2021, the Company allocated ceding commission income of $23.2 million and $23.2 million to policy acquisition costs and $7.7 million and $7.6 million to general and administrative expense, respectively.
The table below depicts the activity regarding deferred reinsurance ceding commission includedduring the three months ended March 31, 2023 and 2022.
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
| (In thousands) |
| ||||||
Beginning balance of deferred ceding commission income |
| $ | 42,757 |
|
| $ | 40,405 |
|
Ceding commission deferred |
|
| 15,021 |
|
|
| 12,454 |
|
Less: ceding commission earned |
|
| (17,089 | ) |
|
| (15,614 | ) |
Ending balance of deferred ceding commission income |
| $ | 40,689 |
|
| $ | 37,245 |
|
Deferred ceding commission income is classified in accounts“Accounts payable and other liabilities duringliabilities” on the three and six months ended June 30, 2022 and 2021.Company’s condensed consolidated balance sheet.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (In thousands) |
| |||||||||||||
Beginning balance of deferred reinsurance ceding commission income |
| $ | 37,245 |
|
| $ | 37,991 |
|
| $ | 40,405 |
|
| $ | 39,995 |
|
Ceding commission deferred |
|
| 16,610 |
|
|
| 17,759 |
|
|
| 29,064 |
|
|
| 30,788 |
|
Less: ceding commission earned |
|
| (15,326 | ) |
|
| (15,810 | ) |
|
| (30,940 | ) |
|
| (30,843 | ) |
Ending balance of deferred reinsurance ceding commission income |
| $ | 38,529 |
|
| $ | 39,940 |
|
| $ | 38,529 |
|
| $ | 39,940 |
|
NOTE 10. DEFERRED POLICY ACQUISITION COSTS
The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“DPAC”), which are amortized over the effective period of the related insurance policies.
The Company anticipates that its DPAC will be fully recoverable in the near term. The table below depicts the activity regarding DPAC for the three and six months ended June 30, 2022March 31, 2023 and 2021.2022.
13
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (In thousands) |
| |||||||||||||
Beginning Balance |
| $ | 90,641 |
|
| $ | 88,876 |
|
| $ | 93,881 |
|
| $ | 89,265 |
|
Policy acquisition costs deferred |
|
| 49,842 |
|
|
| 49,729 |
|
|
| 99,834 |
|
|
| 96,404 |
|
Amortization |
|
| (41,015 | ) |
|
| (42,638 | ) |
|
| (94,247 | ) |
|
| (89,702 | ) |
Ending Balance |
| $ | 99,468 |
|
| $ | 95,967 |
|
| $ | 99,468 |
|
| $ | 95,967 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
| (In thousands) |
| ||||||
Beginning Balance |
| $ | 99,617 |
|
| $ | 93,881 |
|
Policy acquisition costs deferred |
|
| 53,180 |
|
|
| 49,992 |
|
Amortization |
|
| (54,762 | ) |
|
| (53,232 | ) |
Ending Balance |
| $ | 98,035 |
|
| $ | 90,641 |
|
NOTE 11. INCOME TAXES
For the three months ended June 30,March 31, 2023 and 2022, and 2021, the Company recorded a tax provision of $563,000 and an income tax benefit ($2.0) million, respectively, which corresponds to effective tax rates of (0.6)% and 33.2%, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded an income tax provision of $3.2 million and a tax benefit of $10.1 million and $4.510.6 million, respectively, which corresponds to effective tax rates of 7.818.6% and 33.225.7%, respectively. The effective tax rate for the three and six months ended June 30, 2022 was impacted by the mostly non-deductible goodwill impairment charge described in Note 7. Goodwill and Other Intangible Assets. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each period was affected by various permanent tax differences, including disallowed executive compensation deductions which was further limited in 2018 and future years upon the enactment of H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Additionally, the state effective income tax rate can also fluctuate as a result of changes in the geographic dispersion of the Company’s business. 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.
15
The table below summarizes the significant components of the Company’s net deferred asset (liability):tax assets:
|
|
|
|
|
| |||||||||||
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||
Deferred tax assets: |
| (In thousands) |
|
| (in thousands) |
| ||||||||||
Unearned premiums |
| $ | 9,184 |
|
| $ | 15,805 |
|
| $ | 23,251 |
|
| $ | 17,060 |
|
Unearned commission |
|
| 9,019 |
|
|
| 9,459 |
|
|
| 9,566 |
|
|
| 10,053 |
|
Net operating loss |
|
| 1,486 |
|
|
| 1,222 |
|
|
| 567 |
|
|
| 1,189 |
|
Tax-related discount on loss reserve |
|
| 4,216 |
|
|
| 3,872 |
|
|
| 4,705 |
|
|
| 4,902 |
|
Stock-based compensation |
|
| 224 |
|
|
| 84 |
|
|
| 386 |
|
|
| 297 |
|
Accrued expenses |
|
| 1,251 |
|
|
| 1,182 |
|
|
| 997 |
|
|
| 1,016 |
|
Leases |
|
| 822 |
|
|
| 792 |
|
|
| 892 |
|
|
| 885 |
|
Unrealized losses |
|
| 13,106 |
|
|
| 1,913 |
|
|
| 14,131 |
|
|
| 16,987 |
|
Federal net operating loss carryforward |
|
| 10,661 |
|
|
| 0 |
| ||||||||
Dual Consolidated loss limitation |
|
| 6,960 |
|
|
| 9,740 |
| ||||||||
Other |
|
| 450 |
|
|
| 472 |
|
|
| 277 |
|
|
| 238 |
|
Total deferred tax asset |
|
| 50,419 |
|
|
| 34,801 |
|
|
| 61,732 |
|
|
| 62,367 |
|
Valuation allowance |
|
| (4,712 | ) |
|
| (6,376 | ) | ||||||||
Adjusted deferred tax asset |
|
| 57,020 |
|
|
| 55,991 |
| ||||||||
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deferred acquisition costs |
|
| 23,284 |
|
|
| 21,977 |
|
| $ | 23,048 |
|
| $ | 23,420 |
|
Prepaid expenses |
|
| 144 |
|
|
| 177 |
|
|
| 256 |
|
|
| 180 |
|
Property and equipment |
|
| 1,313 |
|
|
| 1,504 |
|
|
| 2,358 |
|
|
| 2,200 |
|
Note discount |
|
| 85 |
|
|
| 187 |
|
|
| 290 |
|
|
| 290 |
|
Basis in purchased investments |
|
| 32 |
|
|
| 34 |
|
|
| 26 |
|
|
| 28 |
|
Basis in purchased intangibles |
|
| 11,811 |
|
|
| 14,550 |
|
|
| 10,823 |
|
|
| 11,178 |
|
Internal revenue code 481(a)-Accounting method change |
|
| 2,208 |
|
|
| 4,416 |
| ||||||||
Internal revenue code 481(a) |
|
| — |
|
|
| — |
| ||||||||
Other |
|
| 1,780 |
|
|
| 1,382 |
|
|
| 2,257 |
|
|
| 1,854 |
|
Total deferred tax liabilities |
|
| 40,657 |
|
|
| 44,227 |
|
|
| 39,058 |
|
|
| 39,150 |
|
Net deferred tax asset (liability) |
| $ | 9,762 |
|
| $ | (9,426 | ) | ||||||||
Net deferred tax assets |
| $ | 17,962 |
|
| $ | 16,841 |
|
As14
The income tax (benefit) expense differs from the amounts computed by applying the U.S. federal income tax rate of June 30,as indicated below to pretax income as a result of the following (in thousands):
|
| March 31, 2023 |
|
|
| March 31, 2022 |
|
| Change |
|
| |||
Expected income tax expense at federal rate |
|
| 21.0 |
| % |
|
| 21.0 |
| % |
| 0.0 |
| % |
Tax exempt interest |
|
| (0.3 | ) | % |
|
| 0.1 |
| % |
| (0.3 | ) | % |
Executive compensation 162(m) |
|
| 0.2 |
| % |
|
| (0.2 | ) | % |
| 0.4 |
| % |
Permanent items |
|
| 1.1 |
| % |
|
| (0.3 | ) | % |
| 1.4 |
| % |
State tax expense |
|
| 5.4 |
| % |
|
| 2.8 |
| % |
| 2.6 |
| % |
Prior period adjustment/penalties/interest |
|
| 0.9 |
| % |
|
| 0.6 |
| % |
| 0.3 |
| % |
Valuation allowance |
|
| (9.7 | ) | % |
|
| 0.0 |
| % |
| (9.7 | ) | % |
Non-deductible stock compensation |
|
| 0.0 |
| % |
|
| 0.0 |
| % |
| 0.0 |
| % |
Goodwill impairment |
|
| 0.0 |
| % |
|
| 1.7 |
| % |
| (1.7 | ) | % |
Reported income tax expense |
|
| 18.6 |
| % |
|
| 25.7 |
| % |
| (7.0 | ) | % |
For the quarters ended March 31, 2023 and 2022, the Company has a gross operating loss carryforward for federaleffective tax rate was 18.6% and 25.7%, respectively. The 7.0 point change can be attributed to the impact of permanent differences to the pre-tax income or loss. For the quarter ended March 31, 2022, the effective tax rate was impacted primarily by the goodwill impairment and state incometaxes. For the three months ended March 31, 2023, the effective tax purposes ofrate was impacted primarily by the valuation allowance that was reduced from $45.56.4 million to $4.7 million and state taxes, which will expire after had a favorable impact on the effective tax rate for the quarter.
2042. The statute of limitations related to the Company’s federal and state income tax returns remains open from the Company’s filings for 20182019 through 2021.
Osprey Re, our reinsurance affiliate, based in Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S. corporation.2022.
At June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had 0no significant uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.
NOTE 12. REINSURANCE
Overview
In order to limit the Company’s potential exposure to individual risks and catastrophic events, the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of the Company’s risk strategy, and premiums ceded to reinsurers is one of the Company’s 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, 2021 and 2022, 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”Osprey Re”). Additionally, for theThe Company also sponsored catastrophe bonds in 2022 hurricane season, the Company purchased a portion of our catastrophe excess of loss reinsurance program fromthrough Citrus Re Ltd. (“Citrus Re), a Bermuda special purpose insurer formed in 2014, through the 2022-1 notes, which cover catastrophe losses incurred for specific states. 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 an important part of the Company’s risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies we writethe Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to
16
meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss.
The Company’s reinsurance agreements are prospective contracts. The Company records an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of the Company’s new reinsurance agreements. The Company generally amortizes its catastrophe reinsurance premiums ratably over the 12-month contract period, which is June 1 through May 31. Its quota share reinsurance is amortized over the 12-month contract period and may be purchased on a calendar or fiscal year basis.
In the event that the Company incurs losses and loss adjustment expenses recoverable under its reinsurance program, the Company records amounts recoverable from its reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of its liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to its estimate of unpaid losses. As a result, a reasonable possibility exists that an estimated recovery may change significantly in the near term from the amounts included in the Company’s condensed consolidated financial statements.
The Company’s insurance regulators require all insurance companies, like us,the Company, to have a certain amount of capital and reinsurance coverage in order to cover losses and loss adjustment expenses upon the occurrence of a catastrophic event. The Company’s reinsurance program provides reinsurance in excess of its state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event estimated to occur once in every 100 years based on its portfolio of insured risks. The nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a particular catastrophic event could be a one-in-100-year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company. The Company also purchases reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. The Company shares portions of its reinsurance program coverage among its insurance company affiliates.
2022-2023 Reinsurance Program
Catastrophe Excess of Loss Reinsurance
Effective June 1, 2022, the Company entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”). The catastrophe reinsurance programs are allocated among traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”), Citrus Re Ltd., and Osprey Re Ltd (“Osprey”), the Company’s captive reinsurer. The FHCF covers Florida risks only and the Company elected to participate at 90% for the 2022 hurricane season. Osprey Re will provide reinsurance for a portion of the Heritage P&C, NBIC and Zephyr programs. The Company’s third-party reinsurers are either rated “A-” or higher by A.M. Best or S&P or are fully collateralized, to reduce credit risk. Osprey Re is fully collateralized.
The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The 2022-2023 reinsurance program provides first event coverage up to $1.3 billion for Heritage P&C, first event coverage up to $1.2 billion for NBIC, and first event coverage up to $780.0 million for Zephyr. The Company’s first event retention in a 1 in 100-year event would include retention for the respective insurance company as well as any retention by Osprey. The first event maximum retention up to a 1 in 100-year event for each insurance company subsidiary is as follows: Heritage P&C – $40.0 million, of which $35.0 million would be ceded to Osprey; NBIC – $30.0 million of which $30 million would be ceded to Osprey in a shared contract with Zephyr; and Zephyr – $40 million, of which $30 million would be ceded to Osprey in a shared contract with NBIC.
The Company is responsible for all losses and loss adjustment expenses in excess of our reinsurance program. For second or subsequent catastrophic events, the Company’s total available coverage depends on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $3.2 billion of limit purchased in 2022 includes reinstatement through the purchase of reinstatement premium protection. The amount of coverage, however, will be subject to the severity and frequency of such events.
The Company's estimated net cost for the 2022-2023 catastrophe excess of loss reinsurance programs is approximately $359.5 million. This cost estimate is based on projected exposures for which there is a true up as of August 31, 2022.
Additionally, the Company placed an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2021, expiring December 31, 2022. The limit on the contract is $20.0 million with a retention of $20.0 million and has 1 reinstatement available.
The Company placed an aggregate contract for the Company’s business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 1, 2021, expiring March 31, 2022. The limit on the contract is $20.0 million with an aggregate retention of $21.0 million, with a $21.0 million per occurrence cap, and a $1.0 million franchise deductible.
1715
Net Quota Share Reinsurance
The Company’s Net Quota Share coverage is proportional reinsurance, which applies to business underwritten by NBIC, for which certain of the Company’s other reinsurance (property catastrophe excess of loss and the second layer of the general excess of loss) inures to the quota share program. An occurrence limit of $20.0 million for catastrophe losses is in effect on the quota share program, subject to certain aggregate loss limits that vary by reinsurer. The amount and rate of ceding commissions slide, within a prescribed minimum and maximum, depending on loss performance. The Net Quota Share program was renewed on December 31, 2021 ceding 50.0% of the net premiums and losses and 5% of the prior year quota share is in run off.
Per Risk Coverage
For losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms, the Company purchased property per risk coverage for losses and loss adjustment expenses in excess of $1.0 million per claim. The limit recovered for an individual loss is $9.0 million and total limit for all losses is $27.0 million. There are 2 reinstatements available with additional premium due based on the amount of the layer exhausted. For losses arising from commercial residential business underwritten by NBIC, the Company also purchased property per risk coverage for losses and loss adjustments expenses in excess of $750,000 per claim. The limit recovered for an individual loss is $250,000 and total limit for all losses is $750,000. There are 2 reinstatements available with additional premium due based on the amount of the layer exhausted.
In addition, the Company purchased facultative reinsurance for losses in excess of $10.0 million for any properties it insured where the total insured value exceeded $10.0 million. This coverage applies to losses arising from business underwritten by Heritage P&C and losses arising commercial residential business underwritten by NBIC, excluding losses from named storms.
General Excess of Loss
The Company’s general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. For the contract period of July 1, 2021 through June 30, 2022, the coverage is in 2 layers in excess of the Company’s retention of the first $500,000 of loss. The first layer is $250,000 excess $500,000 for property and casualty losses and the second layer for property losses is $2.75 million excess $750,000. The second layer for casualty losses is $1.25 million excess $750,000.
In addition, the Company purchased facultative reinsurance for losses underwritten by NBIC in excess of $3.5 million.
For a detailed discussion of the Company’s 2021-20222022-2023 Reinsurance Programplease Refer to Part II, Item 8, “Financial Statements and Supplementary Data” and “Note 12. Reinsurance” in the Company’s 20212022 Form 10-K. Additionally, please refer to Note 17, Commitments and Contingencies, for discussion related to the upcoming commutation of the Company’s 2017 reinsurance contract with the FHCF.
Effect of Reinsurance
The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated statement of income for the three and six months ended June 30, 2022March 31, 2023 and 2021:2022:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||||
|
| (In thousands) |
|
| (In thousands) |
|
| (In thousands) |
| |||||||||||||||
Premium written: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Direct |
| $ | 365,284 |
|
| $ | 337,700 |
|
| $ | 648,480 |
|
| $ | 611,881 |
|
| $ | 310,309 |
|
| $ | 283,196 |
|
Ceded |
|
| (428,124 | ) |
|
| (383,555 | ) |
|
| (475,254 | ) |
|
| (438,172 | ) |
|
| (32,776 | ) |
|
| (47,131 | ) |
Net |
| $ | (62,839 | ) |
| $ | (45,855 | ) |
| $ | 173,226 |
|
| $ | 173,709 |
|
| $ | 277,533 |
|
| $ | 236,065 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Direct |
| $ | 296,211 |
|
| $ | 285,646 |
|
| $ | 583,579 |
|
| $ | 556,057 |
|
| $ | 317,022 |
|
| $ | 287,368 |
|
Ceded |
|
| (137,940 | ) |
|
| (139,147 | ) |
|
| (272,379 | ) |
|
| (267,359 | ) |
|
| (150,993 | ) |
|
| (134,439 | ) |
Net |
| $ | 158,271 |
|
| $ | 146,499 |
|
| $ | 311,200 |
|
| $ | 288,698 |
|
| $ | 166,029 |
|
| $ | 152,929 |
|
Loss and Loss Adjustment Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Direct |
| $ | 137,582 |
|
| $ | 162,788 |
|
| $ | 337,250 |
|
| $ | 288,282 |
|
| $ | 162,817 |
|
| $ | 199,668 |
|
Ceded |
|
| (36,060 | ) |
|
| (61,954 | ) |
|
| (95,689 | ) |
|
| (89,539 | ) |
|
| (65,365 | ) |
|
| (59,630 | ) |
Net |
| $ | 101,522 |
|
| $ | 100,834 |
|
| $ | 241,560 |
|
| $ | 198,743 |
|
| $ | 97,452 |
|
| $ | 140,038 |
|
NOTE 13. RESERVE FOR UNPAID LOSSES
The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date. The
18
Company estimates its IBNR reserves by projecting its 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 June 30, |
|
| Six Months Ended June 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||
Balance, beginning of period |
| $ | 588,420 |
|
| $ | 637,882 |
|
| $ | 590,166 |
|
| $ | 659,341 |
|
| $ | 1,131,807 |
|
| $ | 590,166 |
|
Less: reinsurance recoverable on unpaid losses |
|
| 276,737 |
|
|
| 366,412 |
|
|
| 301,757 |
|
|
| 397,688 |
|
|
| 759,682 |
|
|
| 301,757 |
|
Net balance, beginning of period |
|
| 311,683 |
|
|
| 271,470 |
|
|
| 288,409 |
|
|
| 261,653 |
|
|
| 372,125 |
|
|
| 288,409 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current year |
|
| 101,441 |
|
|
| 101,445 |
|
|
| 239,065 |
|
|
| 200,949 |
|
|
| 98,914 |
|
|
| 137,626 |
|
Prior years |
|
| 81 |
|
|
| (611 | ) |
|
| 2,495 |
|
|
| (2,206 | ) |
|
| (1,462 | ) |
|
| 2,412 |
|
Total incurred |
|
| 101,522 |
|
|
| 100,834 |
|
|
| 241,560 |
|
|
| 198,743 |
|
|
| 97,452 |
|
|
| 140,038 |
|
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current year |
|
| 59,713 |
|
|
| 69,795 |
|
|
| 99,341 |
|
|
| 95,621 |
|
|
| 30,374 |
|
|
| 39,628 |
|
Prior years |
|
| 34,822 |
|
|
| 43,409 |
|
|
| 111,958 |
|
|
| 105,675 |
|
|
| 78,429 |
|
|
| 77,136 |
|
Total paid |
|
| 94,535 |
|
|
| 113,204 |
|
|
| 211,299 |
|
|
| 201,296 |
|
|
| 108,803 |
|
|
| 116,764 |
|
Net balance, end of period |
|
| 318,670 |
|
|
| 259,100 |
|
|
| 318,670 |
|
|
| 259,100 |
|
|
| 360,774 |
|
|
| 311,683 |
|
Plus: reinsurance recoverable on unpaid losses |
|
| 235,239 |
|
|
| 366,879 |
|
|
| 235,239 |
|
|
| 366,879 |
|
|
| 620,218 |
|
|
| 276,737 |
|
Balance, end of period |
| $ | 553,909 |
|
| $ | 625,979 |
|
| $ | 553,909 |
|
| $ | 625,979 |
|
| $ | 980,992 |
|
| $ | 588,420 |
|
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 balance sheet date.
As of June 30, 2022,March 31, 2023, the Company reported $318.7360.8 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $236.3284.0 million attributable to IBNR net of reinsurance recoverable, or 74.178.7% of net reserves for unpaid losses and loss adjustment expenses.
Reinsurance recoverable on unpaid losses includes expected reinsurance recoveries associated with reinsurance contracts the Company has in place. The amount may include recoveries from catastrophe excess of loss reinsurance, net quota share reinsurance,
16
per risk reinsurance, and facultative reinsurance contracts. Refer toNote 17, Commitments and Contingencies, for discussion related to the upcoming commutation of the Company’s 2017 reinsurance contract with the FHCF.
NOTE 14. LONG-TERM DEBT
Convertible Senior Notes
In August 2017 and September 2017, the Company issued in aggregate $136.8 million of 5.875% Convertible Senior Notes (“Convertible Notes”) maturing on August 1, 2037, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears, on February 1, and August 1 of each year. As of March 31, 2023, pursuant to the guidance of ASU 2020-06, the outstanding Convertible Notes would have been converted into 59,263 shares of the Company's common stock as they are dilutive and as such have been included in the Company's quarterly diluted earnings per share results. For the three months ended March 31, 2022, the Company was in a net loss position, therefore the diluted earnings per share would not be considered for the conversion as the Convertible Notes were anti-dilutive for that period.
As of June 30, 2022,March 31, 2023, the Company had approximately $11.8885,000 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately $25,700 and net of $21.1 million of Convertible Notes held by an insurance company subsidiary. For each of the three-month periods ended June 30,March 31, 2023 and 2022, and 2021, the Company made interest payments, net of affiliated Convertible Notes, of approximately $680,15026,000 and $687,500630,650, on the outstanding Convertible Notes, respectively.
In January 2022, the Company reacquired and retired $11.7 million of its outstanding Convertible Senior Notes. Payment was made in cash and the Convertible Notes were retired at the time of repurchase. In addition, the Company expensed $242,700 which representswas the proportionate amount of the unamortized issuance and debt discount costs associated with this repurchase.
Senior Secured Credit Facility
The Company is party to a five-year, $150.0 million credit agreement dated as of December 14, 2018 (as amended from time to time, the “Credit Agreement”) with a syndicate of lenders.
The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75100 million (the “Term Loan Facility”) and (2) afive-year senior secured revolving credit facility in an aggregate principal amount of $7550 million (inclusive of a $5 million sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a $10 million sublimit for swingline loans)loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).
Term Loan Facility:Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $1.32.4 million per quarter commencing with the quarter ending December 31, 2024,2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27,28, 2026. On DecemberAs of March 31, 2021,2023, there was $69.186.8 million in aggregate principal outstanding onunder the Term Loan Facility. As of June 30, 2022,Facility and after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $67.410 million in aggregate principal outstanding onunder the Term LoanRevolving Credit Facility.
For the sixthree months ended June 30,March 31, 2023 and 2022, the Company made principal and interest payments of approximately $1.84.1 million and $783,400, respectively and for the comparable period of 2021, the Company made principal and interest payments of $1.9 million $1.02.6 million, respectively, on the Term Loan Facility.
19
On May 4, 2022, the Company and its subsidiary guarantors amended the Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Sixth Amendment to Credit Agreement (the “Sixth Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent.
Pursuant to the Sixth Amendment, the consolidated fixed charge coverage ratio included in the Credit Agreement will be calculated based on the Company’s consolidated tangible net worth, rather than the Company’s consolidated net worth as was required under the existing Credit Agreement. Specifically, the Sixth Amendment provides that, effective as of March 31, 2022 and for future fiscal quarters, the Company’s consolidated tangible net worth, which is gross of accumulated other comprehensive income, as of the end of a fiscal quarter may not be less than the sum of (1) $162,333,750, plus (2) 25% of the sum of the positive consolidated net income of the Company and its subsidiaries with respect to each full fiscal quarter, plus (3) 100% of the net cash proceeds of certain equity issuance transactions of the Company and its subsidiaries. All other material terms of the Credit Agreement remained unchanged.
Revolving Credit Facility: The Revolving Credit Facility allows for borrowings of up to $7550 million inclusive of a $5 million sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a $10 million sublimit for swingline loans.loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of December 31, 2021, the Company2022, we had $010.0 million in borrowings and $032.6 million letters of credit outstanding under the Revolving Credit Facility. AsIn connection with the incurrence of June 30,additional amounts under the Term Loan Facility pursuant to a November 2022 amendment to the Credit Agreement, the borrowings under the Revolving Credit Facility were repaid in full. On December 23, 2022, the Company drew $10 million from the amended Revolving Credit Facility, resulting in an outstanding principal balance under the Revolving Credit Facility in the amount of $10 million. At December 31, 2022, the Company had multiple letters of credit that total $15.032.6 million outstanding under the Revolving Credit Facility. At January 31, 2023, $22.6 million of borrowingsthe letters of credit were terminated and at March 31, 2023, there remained a single letter of credit in the amount of $7.510 million letter of creditand $10 million outstanding under the Revolving Credit Facility. For the sixthree months ended June 30, 2022 and 2021,March 31, 2023, the Company made interest payments in aggregate of approximately $100,406, and $168,369188,670 underon the Revolving Credit Facility, respectively.Facility.
At ourthe Company's 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,SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the greatesthighest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicableadjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin.
17
At June 30 2022,March 31 2023, the effective interest rate on for the Term Loan Facility and Revolving Credit Facility was 3.5267.884% and 4.06257.661%, respectively. The Company monitors the rates prior to the reset date which allows it to establish if the payment is monthly or quarterly payment based on the most beneficial rate used to calculate the interest payment.
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. OnPursuant to the terms of the mortgage loan, on October 30, 2022, the interest rate shall adjustadjusted 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%., which resulted in an increase of the rate from 4.95% to 7.42% per annum. The Company makes monthly principal and interest payments towardagainst the loan. For each of the respective six-month periodsthree months ended June 30,March 31, 2023 and 2022, and 2021, the Company made principal and interest payments of approximately $446,425223,212 on the mortgage loan.loan, respectively.
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 the FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of June 30, 2022,March 31, 2023, the fair value of the collateralized securities was $22.2 million and the equity investment in FHLB common stock was $1.2 million. For each of the six-month periodsthree months ended June 30,March 31, 2023, and 2022, and 2021, the Company made quarterly interest payments as per the terms of the loan agreement of approximately $300,320148,500. and $150,160, respectively. As of June 30, 2022,March 31, 2023 and at December 31, 2021,2022, the Company also holds other common stock from FHLB Des Moines and FHLB Boston valued atfor a combined value of $319,100, classified as equity securities and $215,900, respectively.reported at fair value on the condensed consolidated financial statements.
The following table summarizes the Company’s long-term debt and credit facilities as of June 30, 2022March 31, 2023 and December 31, 2021:2022:
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Convertible debt |
| $ | 11,779 |
|
| $ | 23,413 |
|
| $ | 885 |
|
| $ | 885 |
|
Mortgage loan |
|
| 11,361 |
|
|
| 11,521 |
|
|
| 11,214 |
|
|
| 11,199 |
|
Credit loan facility |
|
| 67,375 |
|
|
| 69,125 |
| ||||||||
Term loan facility |
|
| 86,750 |
|
|
| 89,125 |
| ||||||||
Revolving credit facility |
|
| 15,000 |
|
|
| 0 |
|
|
| 10,000 |
|
|
| 10,000 |
|
FHLB loan agreement |
|
| 19,200 |
|
|
| 19,200 |
|
|
| 19,200 |
|
|
| 19,200 |
|
Total principal amount |
| $ | 124,715 |
|
| $ | 123,259 |
|
| $ | 128,049 |
|
| $ | 130,409 |
|
Deferred finance costs |
| $ | 1,725 |
|
| $ | 2,502 |
|
| $ | 1,349 |
|
| $ | 1,466 |
|
Total long-term debt |
| $ | 122,990 |
|
| $ | 120,757 |
|
| $ | 126,700 |
|
| $ | 128,943 |
|
20
As of the date of this report, the Company was in compliance with the applicable terms of all its covenants and other requirements under the Credit Agreement, Convertible Notes, indenture, cash borrowings and other loans. The Company’s ability to secure future debt financing depends, in part, on its ability to remain in such compliance. Provided there is no default or an eventThe covenants in the Credit Agreement may limit the Company’s flexibility in connection with future financing transactions and in the allocation of default,capital in the Company is permittedfuture, including the Company’s ability to pay out 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 the Company is subject to with respectmake stock repurchases, and contribute capital to its long-term debt.insurance subsidiaries that are not parties to the Credit Agreement.
The schedule of principal payments on long-term debt as of June 30, 2022March 31, 2023 is as follows:
Year |
| Amount |
| |
|
| (In thousands) |
| |
2022 remaining |
| $ | 1,912 |
|
2023 |
|
| 23,039 |
|
2024 |
|
| 4,292 |
|
2025 |
|
| 5,624 |
|
2026 |
|
| 68,331 |
|
Thereafter |
|
| 21,517 |
|
Total |
| $ | 124,715 |
|
Year |
| Amount |
| |
|
| (In thousands) |
| |
2023 remaining |
| $ | 26,679 |
|
2024 |
|
| 9,854 |
|
2025 |
|
| 9,874 |
|
2026 |
|
| 71,018 |
|
2027 |
|
| 414 |
|
Thereafter |
|
| 10,210 |
|
Total |
| $ | 128,049 |
|
NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following as of June 30, 2022 and December 31, 2021:following:
18
Description |
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (In thousands) |
| |||||
Deferred reinsurance ceding commission |
| $ | 38,529 |
|
| $ | 40,406 |
|
Accounts payable and other payables |
|
| 8,616 |
|
|
| 10,086 |
|
Accrued interest and issuance costs |
|
| 831 |
|
|
| 735 |
|
Accrued dividends |
|
| 1,626 |
|
|
| 1,634 |
|
Premium tax |
|
| — |
|
|
| 871 |
|
Other liabilities |
|
| 110 |
|
|
| 195 |
|
Commission payables |
|
| 16,909 |
|
|
| 17,598 |
|
Total other liabilities |
| $ | 66,621 |
|
| $ | 71,525 |
|
Description |
| March 31, 2023 |
|
| December 31, 2022 |
| ||
|
| (In thousands) |
| |||||
Deferred ceding commission |
| $ | 40,689 |
|
|
| 42,758 |
|
Accounts payable and other payables |
|
| 16,454 |
|
|
| 17,660 |
|
Accrued dividends |
|
| 61 |
|
|
| 72 |
|
Accrued interest and issuance costs |
|
| 648 |
|
|
| 733 |
|
Other liabilities |
|
| 468 |
|
|
| 229 |
|
Premium tax |
|
| 2,129 |
|
|
| 1,001 |
|
Commission payables |
|
| 14,259 |
|
|
| 17,558 |
|
Total other liabilities |
| $ | 74,708 |
|
| $ | 80,010 |
|
NOTE 16. STATUTORY ACCOUNTING AND REGULATIONS
State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as the Company’s insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, restrict the allowable investment types and investment mixes, and subject the Company’s insurers to assessments.
The Company’s insurance subsidiaries Heritage Property & Casualty Insurance Company (“Heritage P&C, NBIC,&C)”, Narragansett Bay Insurance Company (“NBIC”), Zephyr Insurance Company (“Zephyr”), and Pawtucket Insurance Company (“PIC”) must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain capital and surplus equal to thegreater of $1515.0 million or 10% of theirits respective liabilities.liabilities. Zephyr is required to maintain a deposit of $750,000 in a federally insured financial institution. NBIC is required to maintain capital and surplus of $3.0 million. The combined statutory surplus for Heritage P&C, Zephyr, NBIC and PICNBIC was $296.8260.5 million at June 30, 2022March 31, 2023 and $302.1276.3 million at December 31, 2021.2022. 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 isCompany's insurance subsidiaries are in compliance. At June 30, 2022,March 31, 2023, the Company’s insurance subsidiaries met the financial and regulatory requirements of each of the states in which they conduct business.
NOTE 17. COMMITMENTS AND CONTINGENCIES
The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.
21The Company’s Florida insurance company affiliate is required to enter into a reinsurance contract with the FHCF for a portion of its catastrophe risk transfer each year. Since the Company’s inception in 2012, few catastrophic events have resulted in losses which pierced the FHCF layer and resulted in reimbursements from the FHCF. To date, losses from only Hurricane Irma, which struck in 2017, and Hurricane Ian, which struck in 2022, have triggered the Company’s FHCF coverage. The Company’s 2017 reinsurance agreement with the FHCF is consistent among Florida insurance companies and requires a commutation no later than 60 months after the end of the contract year, which the commutation process is expected to begin in June 2023. This commutation represents an agreement between Heritage and the FHCF to terminate the 2017 reinsurance agreement and agree on the conditions under which all obligations for both parties are discharged. The terms of the 2017 reinsurance agreement with the FHCF provide for the commutation process as well as the process to settle any disagreements as to the present value of outstanding losses that will serve as the basis for determining the amount payable by FHCF upon termination of the reinsurance agreement. The commutation process has not yet begun, and the Company cannot predict whether the loss estimates determined by Heritage and the loss estimates determined by the FHCF will differ. As such, there is no assurance that the reported reinsurance recoverable for Hurricane Irma losses from the FHCF will differ from the final amount that will be paid by the FHCF. Further, social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims could result in adverse development of these claims, which create uncertainty as to the ultimate cost to settle the remaining Hurricane Irma claims. Accordingly, the final amount that will be paid by the FHCF could vary from the Company’s current or future estimation of losses to be recovered from the FHCF. The commutation process will be final and binding on both parties once complete.
NOTE 18. RELATED PARTY TRANSACTIONS
From time to time the Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders, including as set forth below. The Company has entered into each of these arrangements without obligation to continue its effect in the future and the associated expense was immaterial to its results of operations or financial position as of June 30, 2022March 31, 2023 and 2021.2022.
19
NOTE 19. EMPLOYEE BENEFIT PLANS
The Company provides a 401(k) plan for substantially all qualifying employees. The Company provides a matching contribution of 100% on the first 3% of employees’ contribution and 50% on the next 2% of the employees’ contribution to the plan. The maximum match is 4%. For the three and six months ended June 30,March 31, 2023 and 2022, the contributions made to the plan on behalf of the participating employees were approximately $334,800399,200 and $731,400, respectively. For the three and six months ended June 30, 2021, the contributions made to the plan on behalf of the participating employees were approximately $365,100 and $687,300396,600, respectively.
Effective September 1, 2021, the Company terminated its self-insured healthcare plan and enrolled in a flex healthcare plan which allows employees the choice of three medical plans with a range of coverage levels and costs. For the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, the Company incurred medical premium costs including the new 2021-2022 healthcare premiums of $2.41.5 million and $1.01.2 million, respectively. As of June 30, 2022 and 2021, the Company had $122,000 and $679,200 of unapplied insurance premiums and additional liability recorded for unpaid claims, respectively.
NOTE 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 June 30, 2022,March 31, 2023, the Company had 26,544,09625,558,751 shares of common stock outstanding, 11,257,85512,231,674 treasury shares of common stock and 727,876622,011 unvested restricted common stock with accrued dividends reflecting totaladditional paid-in capital of $333.7335.1 million as of such date.
As more fully disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2021,2022, as of December 31, 2022, there were 26,753,51125,539,433 shares of common stock outstanding, 10,536,73712,231,674 treasury shares of common stock and 283,092648,493 unvested shares of restricted common stock with accrued dividends, representing $332.8334.7 million of additional paid-in 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 itsthe Company's 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 is no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of the Company’s capital stock are fully paid and non-assessable.
Stock Repurchase Program
On December 19, 2021,15, 2022, the Board of Directors established a new share repurchase program plan to commence uponon December 31, 20212022, for the purpose orof repurchasing up to an aggregate of $25.010.0 million of Common Stock,common stock, through the open market or in such other manner as will comply with the terms of applicable federal and state securities laws and regulations, including without limitation, Rule 10b-18 under the Securities Act at any time or from time to time on or prior to December 31, 20222023 (the "New Share Repurchase Plan"). For the six months ended June 30, 2022, the Company repurchased in aggregate 721,118 shares of its common stock under its repurchase program for $5.0 million.
At June 30, 2022,March 31, 2023, the Company has the capacity under the New Share Repurchase Plan to repurchase $$120.00.0 million of its common sharesstock until December 31, 2022.2023.
22
Dividends
On March 4, 2022, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on April 6, 2022 to stockholders of record as of March 17, 2022.
On May 5, 2022, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on July 5, 2022 to stockholders of record as of June 14, 2022.
The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors and will depend on a variety of factors including the Company’s financial condition and results of operations.
NOTE 21. STOCK-BASED COMPENSATION
Common,
Restricted and Performance-based Stock
The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22, 2014. The Plan authorized 2,981,737 shares of common stock for issuance under the Plan for future grants. The Plan allows for a variety of equity awards including stock options, restricted stock awards and performance-based awards.
20
At June 30, 2022March 31, 2023, there were 374,181388,085 shares available for grant under the Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards.
Effective January 1, 2022, the Board of Directors approved the recommendations made by the Compensation Committee to revise the non-employee director compensation policy to provide that: (i) each non‐ employee director of the Company is entitled to an annual cash fee of $125,000, payable quarterly; (ii) each member of a committee of the Board is entitled to an additional annual cash fee of $2,500; (iii) each chair of a committee of the Board is entitled to an additional $5,000 annual cash fee; (iv) the chair of the Board, to the extent the chair is a non‐employee director, is entitled to an additional annual cash fee of $20,000; and (v) each non‐employee director of the Company is granted annually a number of shares of restricted stock with a value equal to $40,000 at the date of issuance, a grant date of the date of the annual meeting of stockholders of the Company and which restricted stock will vest on the earlier of the one‐year anniversary of the date of issuance and the day immediately prior to the date of the following year’s annual meeting of stockholders of the Company.
During the 2022 first quarter, the Company awarded 3,636 and 115,327 shares of time-based restricted stock with at the time of grant a fair value of $5.50 and $6.72 per share, respectively to certain employees. The time-based restricted stock will vest in two and three year equal installments on December 27, 2022, 2023 and 2024, respectively. In addition, the Company awarded 10,909 shares and 245,536 of performance-based restricted stock with at the time grant a fair value of $5.50 and $6.72 per share, respectively. The performance-based restricted stock has a three-year performance period beginning on January 1, 2022 and ending on December 31, 2024 and will vest following the end of the performance period but no later than March 5, 2025.
In January 2022, the Company awarded to non-employee directors in aggregate 21,768 shares of restricted stock with a fair value at the time of grant of $5.88 per share. The awards shall vest on the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date. The Company's annual shareholders meeting was held on June 23, 2022, at which time the restricted stock was effectively vested.
In June 2022, the Company awarded to non-employee directors in aggregate 99,376 shares of restricted stock with a fair value at the time of grant of $3.22 per share. The awards shall vest on the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date.
For the performance-based restricted stock, the numbersnumber 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.
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. The Company has not granted any stock options since 2015 and all unexercised stock options have since been forfeited.
Restricted Stock
The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employee’s vest in equal installments generally over a two to five year period from the grant date subject to the recipient’s continued employment. The fair value of restricted stock awards is estimated by the market price at the date of grant and amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards granted prior to 2021 have the right to receive dividends; dividends accrue but are not paid until vesting for recipients of restricted stock awards granted 2021 and thereafter.
23
Restricted stock activity for the sixthree months ended June 30, 2022March 31, 2023 is as follows:
|
|
|
| Weighted-Average |
|
|
|
| Weighted-Average |
| ||||||
|
|
|
| Grant-Date Fair |
|
|
|
| Grant-Date Fair |
| ||||||
|
| Number of shares |
|
| Value per Share |
|
| Number of shares |
|
| Value per Share |
| ||||
Non-vested, at December 31, 2021 |
|
| 283,092 |
|
| $ | 9.32 |
| ||||||||
Non-vested, at December 31, 2022 |
|
| 648,493 |
|
| $ | 9.32 |
| ||||||||
Granted - Performance-based restricted stock |
|
| 256,445 |
|
|
| 6.67 |
|
|
| — |
|
|
| — |
|
Granted - Time-based restricted stock |
|
| 240,107 |
|
|
| 5.18 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (41,919 | ) |
|
| 4.81 |
|
|
| (25,000 | ) |
|
| 1.80 |
|
Canceled and surrendered |
|
| (9,849 | ) |
|
| 5.88 |
|
|
| (1,482 | ) |
|
| 6.77 |
|
Non-vested, at June 30, 2022 |
|
| 727,876 |
|
| $ | 7.33 |
| ||||||||
Non-vested, at March 31, 2023 |
|
| 622,011 |
|
| $ | 9.63 |
|
Awards are being amortized to expense over the two to five-year vesting period. The Company recognized $394,624 and $505,730 of compensation expense for the three months ended March 31, 2023 and 2022, respectively. For the three months ended June 30, 2022 and 2021, the Company recognized $March 31, 2023, 505,000 and $260,000 of compensation expense, respectively. The Company recognized $1.0 million and $1.4 million of compensation expense for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, 51,76825,000 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, 4,200 shares were withheld by the Company to cover withholding taxes of $7,560. For the comparable period of 2022, 25,000 shares of restricted stock were vested and released, of the shares released to employees, 9,849 shares were withheld by the Company to cover withholding taxes of $58,000. For the comparable period of 2021, 30,000 shares were vested and released of which 12,500 shares were withheld by the Company to cover withholding taxes of $127,00089,000.
At June 30, 2022,March 31, 2023, there was approximately $1.6723,100 million unrecognized expense related to time-based non-vested restricted stock and an additional $1.5895,625 million for performance-based restricted stock, net of expected forfeitures which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in 2021,2022, there was in aggregate $2.13.3 million of unrecognized expense.
Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at June 30, 2022March 31, 2023 is as follows:
Grant date |
| Restricted shares unvested |
|
| Share Value at Grant Date Per Share |
|
| Remaining Restriction Period (Years) |
| Restricted shares unvested |
|
| Share Value at Grant Date Per Share |
|
| Remaining Restriction Period (Years) |
| |||||||
February 12, 2018 |
|
| 25,000 |
|
|
| 16.35 |
|
|
| 0.75 |
| ||||||||||||
April 24, 2020 |
|
| 127,837 |
|
|
| 10.43 |
|
|
| 2.00 |
| ||||||||||||
September 21, 2020 |
|
| 37,349 |
|
|
| 10.71 |
|
|
| 2.00 |
| ||||||||||||
January 4, 2021 |
|
| 62,906 |
|
|
| 6.89 |
|
|
| 2.00 |
|
| 111,857 |
|
|
| 10.43 |
|
|
| 0.8 |
| |
April 13, 2021 |
| 32,681 |
|
|
| 10.71 |
|
|
| 0.8 |
| |||||||||||||
October 18, 2021 |
| 56,363 |
|
|
| 6.89 |
|
|
| 0.8 |
| |||||||||||||
March 3, 2022 |
|
| 14,545 |
|
|
| 5.50 |
|
|
| 2.88 |
|
|
| 12,727 |
|
|
| 5.50 |
|
|
| 1.0 |
|
March 16, 2022 |
|
| 360,863 |
|
|
| 6.72 |
|
|
| 2.88 |
|
|
| 321,429 |
|
|
| 6.72 |
|
|
| 1.8 |
|
June 23, 2022 |
|
| 99,376 |
|
|
| 3.22 |
|
|
| 1.00 |
|
|
| 86,954 |
|
|
| 3.22 |
|
|
| 0.3 |
|
|
|
| 727,876 |
|
|
|
|
|
|
|
| 622,011 |
|
|
|
|
|
|
NOTE 22. SUBSEQUENT EVENTS
The Company performed an evaluation of subsequent events through the date the condensed consolidated financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of June 30, 2022.March 31, 2023.
Holders of the 5.875% Convertible Senior Notes due 2037 (the “Notes”) issued by the Company had an optional put right, pursuant to the indenture governing the Notes, to require the Company to repurchase the aggregate principal amount of Notes that are validly tendered. The Company has received notice from the Depositary for the Notes that, on July 29, 2022, $10,895,000 aggregate principal amount of the Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Notes, and the Company has requested that the trustee cancel the Notes tendered. The outstanding balance as of June 30, 2022 of non-affiliated Notes was $11.8 million. On August 1, 2022, the Company made payments for the principal amount of the Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million from its revolver to replenish the cash used to pay the $10.9 million for the purchase of the tendered Notes.
The Company expects to use its revolving credit facility to issue a standby letter of credit in the amount of $31.8 million to serve as collateral for a reinsurance agreement Osprey Re will enter into with our insurance company affiliates.
On August 3, 2022, the Board of Directors decided for the second quarter of 2022 to allocate the $0.06 per share typically used to pay a quarterly dividend to shareholders to repurchase common stock. The Board of Directors will re-evaluate dividend distribution on a quarterly basis and will make a determination, in part, based on the current stock trading price as compared to book value.
24
21
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 other information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 20212022 (“20212022 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.
Overview
We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, New Jersey, New York, North Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York. We provide personal residential insurance in Florida on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.
Trends
Inflation, UnderwritingRecent Developments
Economic and PricingMarket Factors
We continue to address rising reinsurancemonitor the effects of general changes in economic and loss costs in the property insurance sector through continued implementation of increased rates, resulting in an increase in the average premium per policy of 11.5% for the quarter ended June 30, 2022 as compared to the prior year quarter. New rates, which are subject to approval bymarket conditions on our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year.business. As a result of this timing, it takes an average of eighteen months for the impact of a rate change to be fully recognized in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.
We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our retention has remained steadily in the range of 90% despite the rate increasesgeneral inflationary pressures, we have implemented, in large part due to a challenging property insurance market in most of the regions in which we operate. Weather lossesexperienced, and a higher cost of reinsurance have impacted these markets. While we believe our rates are generally competitive with private market insurers operating in our space, we are committed to achieving rate adequacy to address a higher cost of doing business in our markets.
Wemay continue to experience, rising inflation in the formincreased cost of increasedmaterials and labor needed for repairs and material costs, which drive up claim coststo otherwise remediate claims throughout all states in which we conduct business. SomeAdditionally, we anticipate continued rising costs and constrained availability of catastrophe reinsurance. We mitigate these conditions by continued exposure management, implementation of increased rates and the use of inflation guard, which increases the insured value of a property to reflect the inflationary impact on costs to repair properties.
The table below provides policy count, premiums-in-force, and TIV for Florida and all other states as of March 31, 2023 and compares these metrics to the first quarter of 2022. One of our goals has been to reduce personal lines exposure in Florida, given historical abusive claims practices. Florida policies-in-force declined from the prior year quarter by 15.6% with a 13.2% increase in premiums-in-force, and a TIV increase of only 1.8%. The increase in Florida premiums-in-force was driven by rate increases, organic growth of our commercial residential business, and use of inflation guard, partly offset by premium reductions associated with fewer policies. Use of inflation guard, partly offset by fewer personal residential policies, also increased TIV from the prior year quarter. Compared to the first quarter of 2022, premiums-in-force for markets are also seeing claim costs impacted by litigated claims, which substantially increases loss costs. Our response to this phenomenon is a combination of raising rates and reducing exposure, particularly in the geographic regions which generate the highest number of litigated claims. We initiated an exposure reduction plan for the tri-county areaoutside of Florida in 2016increased while the policy count decreased due to claims abuse from water damage claims. We have since experienced a claims surge throughout much of Florida, generated from assignment of benefits, excessive roof claims,rate actions and unwarranted litigated claims which far exceeded levels experienced in other states. Our exposure reduction plan then expandedmanagement.
The Supplemental Information table demonstrates progress made compared to the entire statefirst quarter 2022.
Policies-in-force: | | Q1 2023 |
|
| Q1 2022 |
|
| % Change |
|
| |||
Florida | |
| 172,425 |
| |
| 204,406 |
| |
| (15.6 | ) | % |
Other States | |
| 336,647 |
| |
| 355,090 |
| |
| (5.2 | ) | % |
Total | |
| 509,072 |
| |
| 559,496 |
| |
| (9.0 | ) | % |
| |
|
| |
|
| |
|
| | |||
Premiums-in-force: | |
|
| |
|
| |
|
| | |||
Florida | $ |
| 624,931,522 |
| $ |
| 551,962,357 |
| |
| 13.2 |
| % |
Other States | |
| 681,407,015 |
| |
| 626,010,221 |
| |
| 8.8 |
| % |
Total | $ |
| 1,306,338,537 |
| $ |
| 1,177,972,578 |
| |
| 10.9 |
| % |
| |
|
| |
|
| |
|
| | |||
Total Insured Value: | |
|
| |
|
| |
|
| | |||
Florida | $ |
| 104,735,498,939 |
| $ |
| 102,863,325,053 |
| |
| 1.8 |
| % |
Other States | |
| 302,701,975,889 |
| |
| 293,478,796,893 |
| |
| 3.1 |
| % |
Total | $ |
| 407,437,474,828 |
| $ |
| 396,342,121,946 |
| |
| 2.8 |
| % |
Strategic Profitability Initiatives
The following provides an update to our strategic initiatives that are expected to enable us to achieve consistent long-term quarterly earnings and drive shareholder value.
22
The following table, which provides policy count, in-force premium, and TIV, demonstrates the results of our exposure management as relates to Florida. Florida premiums-in-force declined 5.7% as of June 30, 202216.8% as compared to the prior year quarter despite much larger reductionsperiod.
25
|
| At June 30, |
|
| YOY % Change |
| ||||||
|
| 2022 |
|
| 2021 |
|
|
|
| |||
Policies in force: |
|
|
|
|
|
|
|
|
| |||
Florida |
|
| 195,987 |
|
|
| 241,581 |
|
|
| -18.9 | % |
Other States |
|
| 354,534 |
|
|
| 352,205 |
|
|
| 0.7 | % |
Total |
|
| 550,521 |
|
|
| 593,786 |
|
|
| -7.3 | % |
|
|
|
|
|
|
|
|
|
| |||
Premiums in force: |
|
|
|
|
|
|
|
|
| |||
Florida | $ |
| 564,814,121 |
| $ |
| 598,869,936 |
|
|
| -5.7 | % |
Other States |
|
| 648,621,713 |
|
|
| 574,888,835 |
|
|
| 12.8 | % |
Total | $ |
| 1,213,435,834 |
| $ |
| 1,173,758,771 |
|
|
| 3.4 | % |
|
|
|
|
|
|
|
|
|
| |||
Total Insured Value: |
|
|
|
|
|
|
|
|
| |||
Florida | $ |
| 103,200,520,845 |
| $ |
| 121,256,973,834 |
|
|
| -14.9 | % |
Other States |
|
| 299,177,714,835 |
|
|
| 280,332,366,098 |
|
|
| 6.7 | % |
Total | $ |
| 402,378,235,680 |
| $ |
| 401,589,339,932 |
|
|
| 0.2 | % |
Recent Developments
COVID-19 and Other Matters
We continue to monitor the short- and long-term impactscommercial business, no state represents over 26% of the COVID-19 virus and its variants. ForCompany's TIV.
While we acknowledge uncertainties associated with future economic conditions, we do not expect a material impact to our business going forward relating to COVID-19 other than supply chain related issues which may cause inflation to the cost of building material. We will continue to monitor economic conditions and, in the case of a prolonged economic slowdown as a result of COVID-19, will take necessary actions to mitigate any negative impacts to our business, operations or financial results.
Goodwill Impairment Charge
We evaluate goodwill and other intangible assets for impairment annually, or whenever events or changes in circumstances indicate that it is likely that the carrying amount of goodwill and other intangible assets may exceed the implied fair value. Any impairment is charged to operations in the period that the impairment is identified. The evaluation of goodwill impairment requires considerable management judgment and includes a review of a variety of factors as described below. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial results. During the second quarter of 2022, we concluded it was appropriate to perform an interim evaluation of goodwill for potential impairment given a variety of market factors as described below. analysis, we impairedtop five personal lines states represented 71.5% of all TIV at first quarter 2023 compared to 73.3% of all TIV at first quarter 2022.
Reinsurance Commutation
As further described in Note 17, Commitments and Contingencies, to the condensed consolidated financial statements, our 2017 reinsurance agreement with the FHCF requires a commutation no later than 60 months after the end of the contract year, which reduced our carrying valuecommutation process is expected to begin in June 2023. As part of goodwill from $92.0 million to $0 basedthis process, Heritage and FHCF will terminate the 2017 reinsurance agreement and agree on the following factors: (i) disruptionsamount that FHCF will be required to pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process will ultimately result in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma, with the potential for payment by the FHCF to Heritage of a larger or lesser amount than would otherwise have been the FHCF’s responsibility if the commutation were not required by Florida statutes and the contract terms. The commutation process has not yet begun, and the Company cannot predict whether the loss estimates determined by Heritage and the loss estimates determined by the FHCF will differ. As such, there is no assurance that the reported reinsurance recoverable for Hurricane Irma losses from the FHCF will differ from the final amount that will be paid by the FHCF. Further, social inflation and the litigated claims environment in the equity markets, specifically for propertyState of Florida, which affected Hurricane Irma claims could result in adverse development of these claims which, create uncertainty as to the ultimate cost to settle of all the remaining Hurricane Irma claims. Accordingly, the final amount that will be paid by the FHCF could vary from the Company’s current or future estimation of losses to be recovered from the FHCF. The commutation process will be final and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) trading of our stock below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $92.0 million non-cash goodwill impairment charge, most of which is not tax deductible.binding on both parties once complete.
Overview of 2023 Financial Results
Second Quarter 2022 Financial ResultsIn the following section, we discuss our financial condition and results of operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
23
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, including certain key performance indicators such as net combined ratio, ceded premium ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial
26
statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere inincluded under Item 1 of this document.Quarterly Report on Form 10-Q.
24
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
Revenue
For the Three Months Ended March 31, |
| |||||||||||||||
(Unaudited) | 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||||||
|
| (in thousands) |
| |||||||||||||
REVENUE: |
|
|
|
|
| |||||||||||
Gross premiums written | $ | 310,309 |
|
| $ | 283,196 |
|
| $ | 27,113 |
|
|
| 9.6 | % | |
Change in gross unearned premiums |
|
| 6,713 |
|
|
| 4,172 |
|
|
| 2,541 |
|
|
| 60.9 | % |
Gross premiums earned |
| 317,022 |
|
|
| 287,368 |
|
|
| 29,654 |
|
|
| 10.3 | % | |
Ceded premiums |
| (150,993 | ) |
|
| (134,439 | ) |
|
| (16,554 | ) |
|
| 12.3 | % | |
Net premiums earned |
| 166,029 |
|
|
| 152,929 |
|
|
| 13,100 |
|
|
| 8.6 | % | |
Net investment income |
| 5,582 |
|
|
| 2,000 |
|
|
| 3,582 |
|
|
| 179.1 | % | |
Net realized gains |
| 1,898 |
|
|
| (16 | ) |
|
| 1,914 |
|
| NM |
| ||
Other revenue |
| 3,412 |
|
|
| 3,695 |
|
|
| (283 | ) |
|
| (7.6 | )% | |
Total revenue | $ | 176,921 |
|
| $ | 158,608 |
|
| $ | 18,313 |
|
|
| 11.5 | % |
NM= Not Meaningful
Gross premiums written
Gross premiums written were $310.3 million, up 9.6% from $283.2 million in the prior year quarter, reflecting higher average premium per policy throughout the book of business, partly offset by intentional exposure management related reductions in Florida personal lines business and business outside of Florida of 10.0% and 1.0%, respectively, and a plannedstrategic increase in Florida commercial lines business of 92.4%.
Premiums-in-force of $1.3 billion as of March 31, 2023, representing a 10.9% increase from first quarter 2022, primarily due to continued proactive underwriting and rate actions, despite a policy count reduction of approximately Gross premiums earned of For the Three Months Ended June 30, (Unaudited) 2022 2021 $ Change % Change (in thousands) REVENUE: Gross premiums written $ 365,284 $ 337,700 $ 27,584 8.2 % Change in gross unearned premiums (69,073 ) (52,054 ) (17,019 ) 32.7 % Gross premiums earned 296,211 285,646 10,565 3.7 % Ceded premiums earned (137,940 ) (139,147 ) 1,207 (0.9 )% Net premiums earned 158,271 146,499 11,772 8.0 % Net investment income 2,163 956 1,207 126.3 % Net realized losses (102 ) (1,000 ) 898 (89.8 )% Other revenue 3,438 3,742 (304 ) (8.1 )% Total revenue $ 163,770 $ 150,197 $ 13,573 9.0 % Net premiums earned Net premiums earned were Net investment income Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was Other revenue Other revenue was $3.4 million in For the Three Months Ended June 30, (Unaudited) 2022 2021 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses $ 101,522 $ 100,834 $ 688 0.7 % Policy acquisition costs 38,375 37,833 542 1.4 % General and administrative expenses 17,466 15,520 1,946 12.5 % Goodwill impairment 91,959 — 91,959 NM Total operating expenses 249,322 154,187 95,135 61.7 % Total Total 25 For the Three Months Ended March 31, (Unaudited) 2023 2022 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses 97,452 140,038 (42,586 ) (30.4 )% Policy acquisition costs 40,324 38,257 2,067 5.4 % General and administrative expenses 19,054 19,724 (670 ) (3.4 )% Total operating expenses 156,830 198,019 (41,188 ) (20.8 )% Losses and loss adjustment expenses Losses and Policy acquisition costs Policy acquisition costs were General and administrative expenses General and administrative expenses were For the Three Months Ended March 31, (Unaudited) 2023 2022 $ Change % Change (in thousands, except per share amounts) Operating income (loss) 20,091 (39,411 ) 59,502 (151.0 )% Interest expense, net 2,881 1,972 909 46.1 % Income (loss) before income taxes 17,210 (41,383 ) 58,593 (141.6 )% Provision (benefit) for income taxes 3,202 (10,624 ) 13,826 (130.1 )% Net income (loss) $ 14,008 $ (30,759 ) $ 44,767 (145.5 )% Basic earnings (loss) per share $ 0.55 $ (1.15 ) $ 1.70 (147.7 )% Diluted earnings (loss) per share $ 0.55 $ (1.15 ) $ 1.70 (147.6 )% For the Three Months Ended June 30, (Unaudited) 2022 2021 $ Change % Change (in thousands, except per share and share amounts) Operating income (loss) $ (85,552 ) $ (3,990 ) $ (81,562 ) NM Interest expense, net 1,751 1,925 (174 ) (9.0 )% Income (loss) before income taxes (87,303 ) (5,915 ) (81,388 ) NM Provision (benefit) for income taxes 563 (1,965 ) 2,528 (128.7 )% Net income (loss) $ (87,866 ) $ (3,950 ) $ (83,916 ) NM Basic net income (loss) per share $ (3.32 ) $ (0.14 ) $ (3.18 ) NM Diluted net income (loss) per share $ (3.32 ) $ (0.14 ) $ (3.18 ) NM Interest expense, net Provision For the Three Months Ended June 30, (Unaudited) 2022 2021 Ceded premium ratio 46.6 % 48.7 % Net loss and LAE ratio 64.1 % 68.8 % Net expense ratio 35.3 % 36.4 % Net combined ratio 99.4 % 105.2 % Ratios For the Three Months Ended March 31, (Unaudited) 2023 2022 Ceded premium ratio 47.6 % 46.8 % Net loss and LAE ratio 58.7 % 91.6 % Net expense ratio 35.8 % 37.9 % Net combined ratio 94.5 % 129.5 % 26 Ceded premium ratio The ceded premium ratio was Net loss and LAE ratio The net loss and LAE ratio was For the Six Months Ended June 30, 2022 2021 $ Change % Change (Unaudited) (in thousands) REVENUE: Gross premiums written $ 648,480 $ 611,881 $ 36,599 6.0 % Change in gross unearned premiums (64,901 ) (55,824 ) (9,077 ) 16.3 % Gross premiums earned 583,579 556,057 27,522 4.9 % Ceded premiums earned (272,379 ) (267,359 ) (5,020 ) 1.9 % Net premiums earned 311,200 288,698 22,502 7.8 % Net investment income 4,163 2,249 1,914 85.1 % Net realized losses (118 ) (920 ) 802 (87.2 )% Other revenue 7,133 7,414 (281 ) (3.8 )% Total revenue $ 322,378 $ 297,441 $ 24,938 8.4 % For the Six Months Ended June 30, (Unaudited) 2022 2021 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses $ 241,560 $ 198,743 $ 42,817 21.5 % Policy acquisition costs 76,632 73,199 3,433 4.7 % General and administrative expenses 37,190 35,320 1,870 5.3 % Goodwill impairment 91,959 — 91,959 NM Total operating expenses 447,341 307,262 140,079 45.6 % For the Six Months Ended June 30, (Unaudited) 2022 2021 $ Change % Change (in thousands, except per share and share amounts) Operating income (loss) $ (124,963 ) $ (9,821 ) $ (115,142 ) NM Interest expense, net 3,723 3,803 (80 ) (2.1 )% Income (loss) before income taxes (128,686 ) (13,624 ) (115,062 ) 844.5 % Provision (benefit) for income taxes (10,061 ) (4,527 ) (5,534 ) 122.2 % Net income (loss) $ (118,625 ) $ (9,097 ) $ (109,528 ) NM Basic net income (loss) per share $ (4.46 ) $ (0.33 ) $ (4.13 ) NM Diluted net income (loss) per share $ (4.46 ) $ (0.33 ) $ (4.13 ) NM For the Six Months Ended June 30, (Unaudited) 2022 2021 Ceded premium ratio 46.7 % 48.1 % Net loss and LAE ratio 77.6 % 68.8 % Net expense ratio 36.6 % 37.6 % Net combined ratio 114.2 % 106.4 % Net expense ratio The net expense ratio of 35.8%, down 2.1 points from the prior year quarter amount of 37.9%, driven by higher policy acquisition costs from by the growth in gross premiums written partly offset by lower general and administrative expenses, and the benefit of higher gross premiums earned over the prior year quarter. Net combined ratio The net combined ratio was Liquidity and Capital Resources Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey Re, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates. We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months. We may Cash Flows For the Three Months Ended March 31, 2023 2022 Change (in thousands) Net cash provided by (used in): Operating activities $ 14,946 $ (39,206 ) $ 54,152 Investing activities 36,525 (27,648 ) 64,173 Financing activities (2,379 ) (4,312 ) 1,933 Net increase (decrease) in cash and cash equivalents $ 49,092 $ (71,166 ) $ 120,258 For the Six Months Ended June 30, 2022 2021 Change (in thousands) Net cash provided by (used in): Operating activities $ (47,535 ) $ 104,402 $ (151,937 ) Investing activities (14,046 ) (92,912 ) 78,866 Financing activities (6,823 ) (5,503 ) (1,320 ) Net (decrease) increase in cash and cash equivalents $ (68,404 ) $ 5,987 $ (74,391 ) Operating Activities Net cash provided by operating activities was $14.9 million for the three months ended March 31, 2023 compared to net cash used in operating activities Investing Activities Net cash 27 Financing Activities Net cash used in financing activities for the Credit Facilities The Company is party to a 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 (as amended from time to time, the “Credit Agreement”). The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to Revolving Credit At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to The applicable margin for loans under the Credit Facilities varies from 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. We 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 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 are party to a Pledge and Security Agreement, (as amended from time to time 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 28 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (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 Convertible Notes On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017. The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis. The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted. Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances. The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022. Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal 29 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. 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 Convertible Notes automatically become immediately due and payable. In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of As discussed above, holders of the Convertible Notes issued by the Company had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase the aggregate principal amount of Convertible Notes that are validly tendered. The Company 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 Critical Accounting Policies and Estimates When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. Recent Accounting Pronouncements The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements. 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The duration of the financial instruments held in our portfolio that are subject to interest rate risk was Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures 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 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 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our condensed consolidated financial position results of operations or cash flow. Item 1A. Risk Factors The Company documented its risk factors in Item 1A of Part I of its Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 5. Other Information 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 3.1 3.2 4 31.1* 31.2* 32.1** 32.2** 101.INS* Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Data Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith 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: By: /s/ ERNESTO GARATEIX Ernesto Garateix Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) Date: By: /s/ KIRK LUSK Kirk Lusk Chief Financial Officer (Principal Financial Officer)46,000 property insurance policies in50,000 policies. In addition, our intentional growth of the stateCompany’s commercial product, and use of Florida, a strategy designed to improve underwriting results.oOur efforts to increasingly diversify business outside Florida and into markets in the Northeast, Mid-Atlantic, West, and Pacific regions have resulted in the following reductions in Florida: an 18.9% reduction in policies-in-force, and a 14.9% reduction of Total Insured Value (“TIV”) resulting in only a 5.7% reduction in premiums-in-force year-over-year, driven by higher policy rates.oOverallinflation guard, favorably impacted premiums-in-force. Concurrently, TIV increased by 0.2%, despite the total reduction in policy count of approximately 43,000, due to higher average TIV for most states reflecting continued selective underwritingonly 2.8%..•Gross premiums earned$296.2$317.0 million were up 3.7%10.3% from $285.6$287.4 million in the prior year quarter, reflecting higher gross premiums written over precedingthe last twelve monthsdriven by thea higher average premium per policy.•Gross premiums written of $365.3 million, up 8.2% from $337.7 million the prior year quarter, driven by an increasepolicy and organic growth in average premium per policy of 11.5%. Higher rates resulted in a 4.6% gross written premium increase in Florida, and a 12.1% increase in gross written premium in other regions, which also experienced a moderate increase in policy count.•Total capital returned to shareholders of $1.6 million, reflecting $0.06 per share regular quarterly dividend.•Continued execution of our diversification strategy, with 74.4% of TIV outside of Florida, up from 69.8% as of second quarter 2021.27Results of Operationscommercial residential business.Comparison of the Three Months Ended June 30, 2022 and 2021Ceded premiumsRevenueTotal revenueTotal revenue was $163.8Ceded premiums were $151.0 million in secondfirst quarter 2022,2023, up 9.0%12.3% from $150.2$134.4 million in the prior year quarter. The increase primarily stems from higher net premiums earned andis attributable to an increase in investment income, as describedthe cost of our catastrophe excess of loss reinsurance program driven by an increase in detail below.Gross premiums writtenGross premiums written were $365.3 million, up 8.2% from $337.7 millionTIV and higher reinsurance costs for the prior year quarter, reflecting a 4.6% growth in Florida and 12.1% growth in other states, primarily from increased ratesrespective reinsurance contract periods as well as a small increase in policy count in states outside of Florida. Rate increases continued to meaningfully benefit written premiums throughout the book of business.Premiums-in-force were $1.2 billion in second quarter 2022, up 3.4% from second quarter 2021, while policies-in-force were down 7.3%, with the difference largely stemming from rate increases. The reduction in policies-in-force from the second quarter of 2021 reflects our exposure management initiatives.Gross premiums earnedGross premiums earned were $296.2 million in second quarter 2022, up 3.7% from $285.6 million in the prior year quarter. The increase reflects higher gross premiums written over the last twelve months, which is primarily related to higher rates on a smaller book of business based on policy count.Ceded premiums earnedCeded premiums earned were $137.9 million in second quarter 2022, down 0.9% from $139.1 million in the prior year quarter. The decrease is driven by higher ceded premiumcost for the second quarter of 2021 associated with our severe convective storm reinsurance contract, partly offset by higher ceded premium on our net quota share reinsurance program, which is driven byassociated with premium growth in our northeast business, and higher ceded premium on our June 1, 2022 catastrophe excess of loss program driven by higher TIV and higher reinsurance rates due to current market conditions.the northeast.$158.3$166.0 million in secondfirst quarter 2022,2023, up 8.0%8.6% from $146.5$153.0 million in the prior year quarter. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums, earned, as described above.$2.1$7.5 million in secondfirst quarter 2022,2023, compared to a net investment loss of $44,000$2.0 million in the prior year quarter. The increase is driven byprimarily due to higher yields on cash and invested assets associated with higher interest rates, coupled with a realized loss recognizedgain on an investment held outside our managed portfolio in the prior year quarter as well as higher balances in our fixed income portfolio than the prior year quarter.sale of other investments.secondfirst quarter 2022,2023, slightly down by 8.1% from $3.7 million incompared to the prior year quarter, driven primarily by a decline inreduction of policy fee income associated withas the reduction of policies in force.28NM -Not meaningfulpolicy count declined.operating expensesrevenueoperating expenses wererevenue was $176.9 million in first quarter 2023, up $95.111.5% from $158.6 million or 61.7% in the second quarter 2022,prior year quarter. The increase primarily due to the previously mentioned $92.0 million goodwill impairment charge taken in the quarter.stems from higher net premiums earned and investment income as described above.loss adjustment expenses (“LAE”)LAE were $101.5$97.5 million in secondfirst quarter 2022, slightly up2023, down 30.4% from $100.8$140.0 million in the prior year quarter. Net current accident yearThe decrease stems from significantly lower net weather losses, include $38.1 million, up 7.3% from $35.5 million inas described above. Refer to Note 17, Commitments and Contingencies, to the prior year quarter. Current accident year weather losses include $32.1 millioncondensed consolidated financial statements for discussion related to the upcoming commutation of net current accident quarter catastrophe losses, up from $24.5 million inour 2017 reinsurance contract with the prior year quarter, and $6.0 million of other weather losses, down from $11.0 million in the prior year quarter. We experienced a 4.0% decline in attritional losses from the prior year quarter, despite the increase in gross earned premiums.FHCF.$38.4$40.3 million in secondfirst quarter 2022,2023, up 1.4%5.4% from $37.8$38.3 million in the prior year quarter. The increase is primarily attributable to growth in gross premiums written.written and is partly offset by higher ceding commission income.$17.5$19.1 million in secondfirst quarter 2022, up 12.5%2023, down 3.4% from $15.5 million in the prior year quarter. The increase isreduction was driven primarily attributable to a state tax credit of $1.5 million recorded in the prior year quarter.by IT costs and certain costs which vary with policy count, such as printing and postage.Goodwill impairmentAs a result of our analysis, at June 30, 2022 we impaired the entire amount of remaining goodwill, reducing our carrying value of goodwill from $92.0 million to $0. See the section titled “Goodwill Impairment Charge” above for more detail on our goodwill impairment charge.NM -Not meaningfulNet lossSecond quarter 2022 net loss was $87.9 million ($3.32 loss per share), down from net loss of $4.0 million ($0.14 loss per share) in the prior year quarter, with the reduction stemming primarily from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge (contributing a $3.43 loss per share), partly offset by underwriting income for the quarter.Net interestInterest expense, net was $1.8$2.9 million in the second quarter of 2022, down due to a reduction in debt discount associated with the repurchase of convertible notes in the first quarter of 2022.2023, up 46.2% from the prior year quarter and driven by higher variable interest rates on our debt.29(benefit)(Benefit) for income taxesProvisionThe provision for income taxes was $563,000$3.2 million in secondfirst quarter 20222023 compared to a tax benefit for income taxes of $2.0$10.6 million in the prior year quarter. The effective tax rate was 18.6% compared to 25.7% in secondthe prior year quarter, 2022 was impacteddriven by the mostly non-deductible goodwill impairment charge described above. The impact of permanent tax differences on projected results of operations forin relation to the calendar year impactspre-tax income or loss each quarter. In addition, the Company reduced its valuation allowance from fourth quarter 2022 by $1.7 million, favorably impacting the effective tax rate whichfor the quarter. The valuation allowance relates to certain tax elections made by Osprey Re, the Company’s captive reinsurer domiciled in Bermuda. The effective tax rate can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.RatiosNet income (loss)Net combined ratioTheFirst quarter 2023 net combined ratioincome was 99.4% in second quarter 2022, down 5.8 points$14.0 million ($0.55 earnings per share), up from 105.2%net loss of $30.8 million or ($1.15 loss per share) in the prior year quarter. The decreasequarter-over-quarter change primarily stems from improvements in all three of our key operating ratios, resultant from a focus on rate adequacyhigher underwriting income driven by higher rates and effective exposure management,investment income and significantly lower weather losses, as described above.46.6% in second quarter 2022, down 2.147.6%, up 0.8 points from 48.7%46.8% in the prior year quarter reflectingdriven by a higher cost of the growth in2022-2023 catastrophe excess of loss program and net quota share program, as described above, partly offset by higher gross premiums earned outpacing the growth in ceded premiums earned described above.earned.64.1%58.7% in secondfirst quarter 2022,2023, down 4.732.9 points from 68.8%91.6% in the prior year quarter, driven by relatively flat losses and an increase in net premiums earned as described above.Net expense ratioThe net expense ratio was 35.3% in second quarter 2022, down 1.1 point from 36.4% in the prior year quarter, driven by asignificantly lower PAC ratio.Results of OperationsComparison of the Six Months Ended June 30, 2022 and 2021Total revenueTotal revenue was $322.4 million for the six months ended June 30, 2022, up 8.4% from $297.4 million in the prior year period. The increase primarily stems from higher net premiums earned and investment income, as described below.Gross premiums written30Gross premiums written were $648.5 million for the six months ended June 30. 2022, up 6.0% from $611.9 million in the prior year period. We experienced growth of 11.8% outside of Florida and 0.7% growth in Florida. Growth throughout our book of business was largely driven by rate increases resulting in a higher average premium per policy as described above.Premiums-in-force were $1.2 billion at second quarter 2022, up 3.4% from second quarter 2021, while policies-in-force were down 7.3%, with the difference largely stemming from rate increases. The reduction in policies in force from the second quarter of 2021 reflects our exposure management initiatives.Gross premiums earnedGross premiums earned were $583.6 million for the six months ended June 30. 2022, up 4.9% from $556.1 million in the prior year period. The increase reflects higher gross premiums written over the preceding twelve months.Ceded premiums earnedCeded premiums earned were $272.4 million for the six months ended June 30, 2022, up 1.9% from $267.4 million in the prior year period. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program driven by an increase in TIV for the respective reinsurance contract periods and higher rate-on-line, as well as higher premium ceded under our net quota share program driven by growth in our northeast business, partly offset by higher premium for the six months ended June 30, 2021 for our severe convective storm reinsurance program.Net premiums earnedNet premiums earned were $311.2 million for the six months ended June 30, 2022, up 7.8% from $288.7 million in the prior year period. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums earned, as described above.Net investment incomeNet investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $4.0 million for the six months ended June 30, 2022, compared to $1.3 million in the prior year period. The increase is primarily due to higher balances in our fixed income portfolio than the prior six-month period, coupled with a realized loss recognized on an investment held outside our managed portfolio in the prior year quarter.Other revenueOther revenue was $7.1 million for the six months ended June 30, 2022, down 3.8% from $7.4 million in the prior year period, driven primarily by a decline in policy fee income associated with the reduction of policies in force.NM -Not meaningfulTotal operating expensesTotal operating expenses were $447.3 million for the six months ended June 30, 2022, up 45.6% from $307.3 million in the prior year period, primarily due to the previously mentioned $92.0 million goodwill impairment charge taken in the quarter, and a $42.8 million increase in losses and loss adjustment expenses detailed below.Losses and loss adjustment expensesLosses and LAE were $241.6 million for the six months ended June 30, 2022, up 21.5% from $198.7 million in the prior year period. Net current accident year weather losses include $101.9 million, up 52.3% from $66.9 million in the prior year period. Current accident year weather losses include $77.2 million of net current accident year catastrophe losses, up from $39.8 million in the prior year period, and $24.7 million of other weather losses, down from $27.1 million in the prior year period. We experienced a 2.3% increase in attritional losses from the prior year period.31Policy acquisition costsPolicy acquisition costs were $76.6 million for the six months ended June 30, 2022, up 4.7% from $73.2 million in the prior year period. The increase is primarily attributable to growth in gross premiums written.General and administrative expensesGeneral and administrative expenses were $37.2 million for the six months ended June 30, 2022, up 5.3% from $35.3 million in the prior year period. The increase is primarily attributable to a $1.5 million state tax credit recorded in the prior year period.Goodwill impairmentAs a result of our analysis on June 30, 2022, we impaired the entire amount of remaining goodwill, reducing our carrying value of goodwill from $92.0 million to $0. See the section titled “Goodwill Impairment Charge” above for more detail on our goodwill impairment charge.NM -Not meaningfulNet lossNet loss for the six months ended June 30, 2022 was $118.6 million ($4.46 loss per share), compared to a net loss of $9.1 million ($0.33 loss per share) in the prior year period. The year-over-year change primarily stems from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge (contributing a $3.41 loss per share), coupled with an underwriting loss generated for the six-month period driven by higher weather losses over the prior period, as described above.Interest expense, netNet interest expense was $3.7 million for the six months ended June 30, 2022, slightly down from the prior year period.Provision (benefit) for income taxesBenefit for income taxes was $10.1 million for the six months ended June 30, 2022 compared to $4.5 million in the prior year period. The effective tax rate was 7.8% for the six months ended June 30, 2022 compared to 33.2% for the prior year period. The effective tax rate for the six months ended June 30, 2022 was impacted by the mostly non-deductible goodwill impairment charge as described above. The impact of permanent tax differences on projected results of operations for the calendar year impacts the effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.Ratios32Net combined ratioThe net combined ratio was 114.2% for the six-month period ended June 30, 2022, up 7.8 points from 106.4% in the prior year period. The increase primarily stems from a higher net loss and LAE ratio, partly offset by a decrease in the net expense ratio.Ceded premium ratioThe ceded premium ratio was 46.7% for the six-month period ended June 30, 2022, down 1.4 points from 48.1% in the prior year period, reflecting the growth in gross premiums earned outpacing the growth in ceded premiums earned as described above.Net loss and LAE ratioThe net loss and LAE ratio was 77.6% for the six-month period ended June 30, 2022, up 8.8 points from 68.8% in the prior year period, driven by higher weather losses compared to the prior year period, which was partly offset by the 7.8% increase inquarter, as described above, coupled with higher net premiums earned.36.6% for the six-month period ended June 30, 2022,94.5% in first quarter 2023, down 1.0 point35.0 points from 37.6%129.5% in the prior year period, driven by aquarter. The decrease primarily stems from lower PAC ratio.net loss and LAE and net expense ratios as described above.credit facilities.Credit Facilities. As of June 30, 2022,March 31, 2023, we had $290.9$336.7 million of cash and cash equivalents and $654.3$629.0 million in investments, compared to $359.3$287.6 million and $694.7$653.6 million, respectively, as of December 31, 2021.2022. The decreaseincrease in cash and cash equivalents was primarily due to the timingstrategic investment of reinsurance payments for our catastrophe excess of loss ("XOL") program as well as timing of reinsurance recoveries. The decrease in investments is dueproceeds from investment maturities into short term treasury bills to the unrealized losses on the Company’s available-for-sale fixed income securities portfolio. The unrealized losses resulted from the sharp decline in bond prices during 2022 asachieve a result of the higher interest rate environment. The Company’s fixed income portfolio averageyield without increasing credit rating is A+ with a duration of 3.6 years at June 30, 2022.risk, and to increase liquidity.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.business strategies. 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.was $47.5 million for the six months ended June 30, 2022 compared to net cash provided by operating activities of $104.4$39.2 million for the comparable period in 2021.2022. The decreaseincrease in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first sixthree months of 20222023 compared to the first sixthree months of 2021.2022.33used inprovided by investing activities for the sixthree months ended June 30, 2022March 31, 2023 was $14.0$36.5 million as compared to net cash used in investing activities of $92.9$27.6 million for the comparable period in 2021.2022. The change in cash used inprovided by investing activities relates primarily to allocationsthe timing of funds for investment in each period. Strategic salesmaturities and related re-investment of investments to yield realized gains in 2020 produced proceeds which were re-invested in 2021, driving up the cash used for investing activities.into short-term treasury bills.sixthree months ended June 30, 2022March 31, 2023 was $6.8$2.4 million, as compared to cash used in financing activities of $5.5$4.3 million for the comparable period in 2021.2022. The increasechange in net cash used forin financing activities was driven by ourrelates primarily to the repurchase of $5 million in treasury stock and a $15 million draw from our Revolving Credit Facility (defined below) to purchase and retire $11.7 million of Convertible Notes and our purchase of $5 million of treasury stock(defined below) during the first halfquarter of 2022.2022, as described in Note 14 to the condensed consolidated financial statements.$75$100 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $75$50 million (inclusive of a $5 million sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a $10 million sublimit for swingline loans)loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).$1.3$2.4 million per quarter commencing with the quarter ending December 31, 2024,2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27,28, 2026. As of June 30, 2022,March 31, 2023, there was $67.4$86.8 million in aggregate principal outstanding onunder the Term Loan Facility.Facility.Facility. The Revolving Credit Facility allows for borrowings of up to $75$50 million inclusive of a $5 million sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a $10 million sublimit for swingline loans.loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of June 30, 2022, weMarch 31, 2023, the Company had $15drawn $10.0 million in borrowings and a $7.5 million letters of credit outstanding under the Revolving Credit Facility.Facility and had unused letter of credit of $10.0 million.LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements,SOFR, plus an applicable margin (described below) and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the greatesthighest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicableadjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin. The Credit Agreement provides for mechanisms for the transition away from LIBOR as a benchmark interest rate and replacement of LIBOR with an alternative benchmark rate.margin (described below).2.5%2.75% per annum to 3.0%3.25% per annum (for LIBORSOFR loans) and 1.5%1.75% to 2.0%2.25% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1. 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 LIBORSOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of June 30, 2022,March 31, 2023, the borrowingborrowings under ourthe Term Loan Facility and Revolving Credit Facilities wereFacility are accruing interest at a rate of 3.5625%7.884% and 7.661% per annum.annum, respectively.LIBORSOFR loans. In addition, we are 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).34subsidiaries.subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. 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.35Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 butAt any time 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.June 30, 2022,March 31, 2023, there was $11.7 million$885,000 principal amount of outstanding Convertible Notes.Notes, net of $21.1 million of Convertible Notes held by an insurance company subsidiary.has received notice from the DepositaryDepository for the Convertible Notes that, on July 29, 2022, $10,895,000$10.9 million aggregate principal amount of the Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, and the Company has requested that the trusteeTrustee cancel the Convertible Notes tendered. The outstanding balance as of June 30, 2022March 31, 2023 of non-affiliated Notes was $11.8 million.$885,000. On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million from its revolverthe Revolving Credit Facility to replenish the cash used to pay the $10.9 million for the purchase of the tendered Convertible Notes.$31.0$24.3 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of the 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. As of March 31, 2023, the common stock was valued at $1.2 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan waswere used to prepay the Company’s Senior Secured Notes due 2023 in 2018.During the six months ended June 30, 2022, we reassessed our critical accountingWe have made no material changes or additions with regard to those policies and estimates as disclosed withinin our 2021 Annual Report on Form 10-K.Seasonality of our BusinessOur insurance business is seasonal; hurricanes typically occur during10-K for the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters each year. With our catastrophe reinsurance program effective on June 1 each year any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments.ended December 31, 2022.363.6293.168 years and 3.8013.758 years at June 30,March 31, 2023 and 2022, and 2021, and 3.9033.179 years at December 31, 2021.2022. As interest rates continue to rise, the fair value of our fixed rate debt securities are subject to decline. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of June 30, 2022,March 31, 2023, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at DecemberMarch 31, 2021.2022.On July 28, 2021, the Company amended its Credit Agreement to provide mechanics relating to a transition away from LIBOR as a benchmark interest rate for its indebtedness under the Credit Agreement and replace LIBOR with an alternative benchmark rate.The The Federal Reserve has tightened monetary policy, including multiple interest rate increases in the first half of 2022; however, the outlook is less certain for longer-term rates during the second half of 2022 and beyond. At June 30, 2022, weWe have not experienced a material impact when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.2022.June 30, 2022.March 31, 2023.June 30, 2022.March 31, 2023.3731annual reportAnnual Report on Form 10-K for the year ended December 31, 20212022 filed on March 14, 2022.13, 2023. There have been no material changes to the Company’s risk factors since the filing of that report.NoneNot ApplicableNoneNot Applicable4.14.210.1383932AugustMay 8, 20222023AugustMay 8, 202220234033