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 March 31, 2020

OR

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

Commission File Number

001-36462

 

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

45-5338504

(State of Incorporation)

 

(IRS Employer

Identification No.)

2600 McCormick Drive, Suite 300

Clearwater, Florida 33759

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

(727) 362-7200

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

HRTG

New York Stock Exchange

Indicate by check mark whether the 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 April 30, 2020 was 28,212,052

 

 

 


HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

Item 1 Unaudited Financial Statements

 

 

Condensed Consolidated Balance Sheets: March 31, 2020 (unaudited) and December 31, 2019

 

2

Condensed Consolidated Statements of Operations and Other Comprehensive Income: Three months ended March 31, 2020 and 2019 (unaudited)

 

3

Condensed Consolidated Statements of Stockholders’ Equity: Three months ended March 31, 2020 and 2019 (unaudited)

 

4

Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2020 and 2019 (unaudited)

 

5

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

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

 

23

Item 3 Quantitative and Qualitative Disclosures about Market Risk

 

30

Item 4 Controls and Procedures

 

32

PART II – OTHER INFORMATION

 

 

Item 1 Legal Proceedings

 

33

Item 1A Risk Factors

 

33

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

34

Item 4 Mine Safety Disclosures

 

34

Item 6 Exhibits

 

34

Signatures

 

36

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about (i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (ii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) our estimates with respect to tax and accounting matters including the impact on our financial statements; (iv) future dividends, if any; (v) our expectations related to our financing activities; (vi) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; (vii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements; (viii) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (ix) our intentions with respect to our credit risk investments; and (x) the potential effects of our current legal proceedings.

These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

 

 

the possibility that actual losses may exceed reserves;

 

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

 

our exposure to catastrophic weather events;

 

the fluctuation in our results of operations;

 

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

 

our failure to identify suitable acquisition candidates, effectively manage our growth and integrate acquired companies;

 

increased competition, competitive pressures, and market conditions;

 

our failure to accurately price the risks we underwrite;

 

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

 

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

 

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

 

our failure to execute our diversification strategy;

 

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

 

a lack of redundancy in our operations;

 

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

 

our inability to generate investment income;

 

our inability to maintain our financial stability rating;

 

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

 

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

 

our reliance on independent agents to write voluntary insurance policies;

 

changes in regulations and our failure to meet increased regulatory requirements;

 

our ability to maintain effective internal controls over financial reporting;

 

the regulation of our insurance operations;

 

certain characteristics of our common stock; and

 

the impact of COVID-19 on the economy, demand for our products and our operations, including measures taken by the governmental authorities to address COVID-19, which may precipitate or exacerbate other risks and/or uncertainties.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 


 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

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

 

 

 

March 31, 2020

 

 

December 31, 2019

 

ASSETS

 

(unaudited)

 

 

 

 

 

Fixed maturities, available-for-sale, at fair value (amortized cost of $601,890 and $577,789)

 

$

613,355

 

 

$

587,256

 

Equity securities, at fair value, (cost $1,618 and $1,618)

 

 

1,599

 

 

 

1,618

 

Other investments

 

 

6,375

 

 

 

6,375

 

Total investments

 

 

621,329

 

 

 

595,249

 

Cash and cash equivalents

 

 

313,360

 

 

 

268,351

 

Restricted cash

 

 

16,069

 

 

 

14,657

 

Accrued investment income

 

 

4,262

 

 

 

4,377

 

Premiums receivable, net

 

 

62,914

 

 

 

63,685

 

Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $44

 

 

374,994

 

 

 

428,903

 

Prepaid reinsurance premiums

 

 

146,029

 

 

 

224,102

 

Income taxes receivable

 

 

 

 

 

3,171

 

Deferred policy acquisition costs, net

 

 

74,895

 

 

 

77,211

 

Property and equipment, net

 

 

20,395

 

 

 

20,753

 

Intangibles, net

 

 

67,051

 

 

 

68,642

 

Goodwill

 

 

152,459

 

 

 

152,459

 

Other assets

 

 

26,738

 

 

 

18,110

 

Total Assets

 

$

1,880,495

 

 

$

1,939,670

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

607,177

 

 

$

613,533

 

Unearned premiums

 

 

480,627

 

 

 

486,220

 

Reinsurance payable

 

 

101,960

 

 

 

156,351

 

Long-term debt, net

 

 

125,775

 

 

 

129,248

 

Income taxes payable

 

 

4,439

 

 

 

 

Deferred income tax, net

 

 

8,627

 

 

 

12,623

 

Advance premiums

 

 

29,394

 

 

 

16,504

 

Accrued compensation

 

 

8,237

 

 

 

5,347

 

Accounts payable and other liabilities

 

 

64,962

 

 

 

71,045

 

Total Liabilities

 

$

1,431,198

 

 

$

1,490,871

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 50,000,000 shares authorized, 28,212,052 shares issued and 27,891,518 shares outstanding at March 31, 2020; 28,996,452 shares issued and 28,650,918 shares outstanding at December 31, 2019

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

330,680

 

 

 

329,568

 

Accumulated other comprehensive income

 

 

8,842

 

 

 

7,330

 

Treasury stock, at cost, 9,116,383 and 8,349,483 shares, respectively

 

 

(113,354

)

 

 

(105,368

)

Retained earnings

 

 

223,126

 

 

 

217,266

 

Total Stockholders' Equity

 

 

449,297

 

 

 

448,799

 

Total Liabilities and Stockholders' Equity

 

$

1,880,495

 

 

$

1,939,670

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


 

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

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

 

 

 

For the Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

REVENUES:

 

 

 

 

 

 

 

 

Gross premiums written

 

$

229,102

 

 

$

210,348

 

Change in gross unearned premiums

 

 

5,614

 

 

 

18,242

 

Gross premiums earned

 

 

234,716

 

 

 

228,590

 

Ceded premiums

 

 

(108,710

)

 

 

(118,899

)

Net premiums earned

 

 

126,006

 

 

 

109,691

 

Net investment income

 

 

3,670

 

 

 

3,672

 

Net realized and unrealized gains

 

 

59

 

 

 

1,024

 

Other revenue

 

 

2,971

 

 

 

3,874

 

Total revenues

 

 

132,706

 

 

 

118,261

 

EXPENSES:

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

68,181

 

 

 

62,139

 

Policy acquisition costs, net of ceding commission income of $10.4 and $12.9 (1)

 

 

30,047

 

 

 

26,020

 

General and administrative expenses, net of ceding commission income of $3.5 and $4.3(1)

 

 

21,718

 

 

 

18,604

 

Total expenses

 

 

119,946

 

 

 

106,763

 

Operating income

 

 

12,760

 

 

 

11,498

 

Interest expense, net

 

 

1,966

 

 

 

2,117

 

Other non-operating loss, net

 

 

 

 

 

48

 

Income before income taxes

 

 

10,794

 

 

 

9,333

 

Provision for income taxes

 

 

3,174

 

 

 

2,369

 

Net income

 

$

7,620

 

 

$

6,964

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Change in net unrealized gains on investments

 

 

2,027

 

 

 

8,036

 

Reclassification adjustment for net realized investment (gains) losses

 

 

(59

)

 

 

335

 

Income tax expense related to items of other comprehensive income

 

 

(456

)

 

 

(2,408

)

Total comprehensive income

 

$

9,132

 

 

$

12,927

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

28,548,830

 

 

 

29,540,514

 

Diluted

 

 

28,549,012

 

 

 

29,544,563

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.24

 

Diluted

 

$

0.27

 

 

$

0.24

 

 

 

(1)

Parenthetical values are presented in millions

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

 

Common Shares

 

 

Par Value

 

 

Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive Income

 

 

Total

Stockholders'

Equity

 

Balance at January 1, 2020

 

 

28,650,918

 

 

$

3

 

 

$

329,568

 

 

$

217,266

 

 

$

(105,368

)

 

$

7,330

 

 

$

448,799

 

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

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

(34

)

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

 

 

28,650,918

 

 

 

3

 

 

 

329,568

 

 

 

217,232

 

 

 

(105,368

)

 

 

7,330

 

 

 

448,765

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,512

 

 

 

1,512

 

Shares tendered for income taxes withholding

 

 

(17,500

)

 

 

 

 

 

(233

)

 

 

 

 

 

 

 

 

 

 

 

(233

)

Restricted stock vested

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

1,345

 

 

 

 

 

 

 

 

 

 

 

 

1,345

 

Convertible option debt extinguishment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock buy-back

 

 

(766,900

)

 

 

 

 

 

 

 

 

 

 

 

(7,986

)

 

 

 

 

 

(7,986

)

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,726

)

 

 

 

 

 

 

 

 

(1,726

)

Net income

 

 

 

 

 

 

 

 

 

 

 

7,620

 

 

 

 

 

 

 

 

 

7,620

 

Balance at March 31, 2020

 

 

27,891,518

 

 

$

3

 

 

$

330,680

 

 

$

223,126

 

 

$

(113,354

)

 

$

8,842

 

 

$

449,297

 

 

 

 

Common Shares

 

 

Par Value

 

 

Additional Paid-In Capital

 

 

Retained

Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive Income

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2018

 

 

29,477,756

 

 

$

3

 

 

$

325,292

 

 

$

195,750

 

 

$

(89,185

)

 

$

(6,527

)

 

$

425,333

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,963

 

 

 

5,963

 

Restricted stock vested, net of surrendered shares

 

 

17,000

 

 

 

 

 

 

(118

)

 

 

 

 

 

 

 

 

 

 

 

 

(118

)

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

1,345

 

 

 

 

 

 

 

 

 

 

 

 

1,345

 

Convertible Option debt extinguishment, net of tax

 

 

 

 

 

 

 

 

(1,840

)

 

 

 

 

 

 

 

 

 

 

 

(1,840

)

Stock issued on convertible note conversion

 

 

285,201

 

 

 

 

 

 

4,210

 

 

 

 

 

 

 

 

 

 

 

 

4,210

 

Stock buy-back

 

 

(347,740

)

 

 

 

 

 

 

 

 

 

 

 

(5,011

)

 

 

 

 

 

(5,011

)

Tax rate change

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

48

 

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,807

)

 

 

 

 

 

 

 

 

(1,807

)

Net income

 

 

 

 

 

 

 

 

 

 

 

6,964

 

 

 

 

 

 

 

 

 

6,964

 

Balance at March 31, 2019

 

 

29,432,217

 

 

$

3

 

 

$

328,937

 

 

$

200,907

 

 

$

(94,196

)

 

$

(564

)

 

$

435,087

 

 

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 Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

7,620

 

 

$

6,964

 

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,345

 

 

 

1,345

 

Bond amortization and accretion

 

 

1,359

 

 

 

1,229

 

Amortization of original issuance discount on debt

 

 

349

 

 

 

390

 

Depreciation and amortization

 

 

2,024

 

 

 

2,696

 

Net realized investment gains

 

 

(59

)

 

 

(1,024

)

Net (gain)/loss from repurchase of debt

 

 

 

 

 

48

 

Deferred income taxes

 

 

(4,452

)

 

 

(4,098

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accrued investment income

 

 

115

 

 

 

(150

)

Premiums receivable, net

 

 

771

 

 

 

1,904

 

Prepaid reinsurance premiums

 

 

78,073

 

 

 

72,056

 

Reinsurance recoverable on paid and unpaid claims

 

 

53,880

 

 

 

54,664

 

Income taxes receivable

 

 

3,171

 

 

 

35,221

 

Deferred policy acquisition costs, net

 

 

2,316

 

 

 

3,171

 

Right of use leased asset

 

 

110

 

 

 

 

Other assets

 

 

(8,739

)

 

 

(5,898

)

Unpaid losses and loss adjustment expenses

 

 

(6,356

)

 

 

(27,875

)

Unearned premiums

 

 

(5,593

)

 

 

(18,132

)

Reinsurance payable

 

 

(54,391

)

 

 

(52,712

)

Accrued interest

 

 

(1,172

)

 

 

127

 

Accrued compensation

 

 

2,890

 

 

 

(1,474

)

Advance premiums

 

 

12,890

 

 

 

7,892

 

Income taxes payable

 

 

8,878

 

 

 

5,725

 

Other liabilities

 

 

(9,332

)

 

 

3,253

 

Net cash provided by operating activities

 

 

85,697

 

 

 

85,322

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Fixed maturity securities sales, maturities and paydowns

 

 

58,462

 

 

 

25,486

 

Fixed maturity securities purchases

 

 

(83,891

)

 

 

(37,203

)

Equity securities sales

 

 

26

 

 

 

2,291

 

Equity securities purchases

 

 

(6

)

 

 

(1,617

)

Limited partnership interest

 

 

 

 

 

(19,205

)

Proceeds from sale of assets

 

 

 

 

 

71

 

Cost of property and equipment acquired

 

 

(75

)

 

 

(3,994

)

Net cash used in investing activities

 

 

(25,485

)

 

 

(34,171

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of term note

 

 

(3,750

)

 

 

(11,875

)

Mortgage loan payments

 

 

(72

)

 

 

(70

)

Repurchase of convertible notes

 

 

 

 

 

(2,869

)

Purchase of treasury stock

 

 

(7,986

)

 

 

(5,011

)

Tax withholdings on share-based compensation awards

 

 

(233

)

 

 

(118

)

Dividends paid

 

 

(1,750

)

 

 

(1,601

)

Net cash used in financing activities

 

 

(13,791

)

 

 

(21,544

)

Increase in cash, cash equivalents, and restricted cash

 

 

46,421

 

 

 

29,607

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

283,008

 

 

 

262,370

 

Cash, cash equivalents and restricted cash, end of period

 

$

329,429

 

 

$

291,977

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

 

Interest paid

 

$

2,418

 

 

$

2,977

 

Issuance of shares on conversion of convertible notes

 

$

 

 

$

4,210

 

 

5


 

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

313,360

 

 

$

268,351

 

Restricted cash

 

 

16,069

 

 

 

14,657

 

Total

 

$

329,429

 

 

$

283,008

 

 

Restricted cash primarily represents funds held to meet our contractual obligations related to the catastrophe bonds issued by Citrus Re and by the Company’s insurance subsidiaries in certain states in which such subsidiaries conduct business to meet regulatory requirements.

See accompanying notes to unaudited condensed consolidated financial statements.

 


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 for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The accompanying interim condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).

Significant accounting policies

The accounting policies of the Company are set forth in Note 1 to condensed consolidated financial statements contained in the Company’s 2019 Form 10-K.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recently Adopted Accounting Pronouncements

In 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) Financial Instruments – Credit Losses ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model. Adoption of CECL required the evaluation to establish an allowance for the Company’s reinsurance recoverables, premium receivables and for our available-for-sale debt securities investments. The model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset. We adopted the standard on January 1, 2020, and based on the composition of our reinsurance recoverables, investment portfolio and other financial assets, current economic conditions and historical credit loss activity, the adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures. While the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements, it required changes to the Company’s process to establish and estimated expected credit losses on available-for-sale investments, reinsurance recoverables and premium receivables.

Fair Value Measurements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. Other amendments in the update did not materially impact the Company. The standard became effective for the Company on January 1, 2020 with no impact on our condensed consolidated financial statements.

Internal Use Software

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard clarifies the accounting for implementation costs in cloud computing arrangements. The standard was effective on January 1, 2020 with no impact on our condensed consolidated financial statements.

7


 

Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the condensed consolidated financial statements.

For information regarding other accounting standards that the Company has not yet adopted, refer to our 2019 Form 10-K, filed on March 10, 2020, the section of Note 1 of the notes to the consolidated financial statements entitled “Accounting Pronouncement Not Yet Adopted”.

NOTE 2. INVESTMENTS

Securities Available-for-Sale

The following table summarizes the amortized cost and fair value of securities available-for-sale at March 31, 2020 and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

 

March 31, 2020

 

Cost or Adjusted /

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Debt Securities Available-for-sale

 

(In thousands)

 

U.S. government and agency securities (1)

 

$

67,928

 

 

$

1,770

 

 

$

1

 

 

$

69,697

 

States, municipalities and political subdivisions

 

 

80,598

 

 

 

2,164

 

 

 

25

 

 

 

82,737

 

Special revenue

 

 

250,744

 

 

 

5,925

 

 

 

226

 

 

 

256,443

 

Hybrid securities

 

 

99

 

 

 

 

 

 

7

 

 

 

92

 

Industrial and miscellaneous

 

 

202,521

 

 

 

3,043

 

 

 

1,178

 

 

 

204,386

 

Total

 

$

601,890

 

 

$

12,902

 

 

$

1,437

 

 

$

613,355

 

 

The Company’s unrealized losses on corporate bonds have not been recognized because the bonds are of high credit quality with investment grade ratings of A or higher, the Company does not intend to sell and it is unlikely the Company will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is deemed due to changes in interest rates and other market conditions. The issuers continues to make timely principal and interest payments on the bonds. After taking into account these and other factors previously described, we believe these unrealized losses generally were caused by an increase in market interest rates since the time of the securities were purchased.

 

December 31, 2019

 

Cost or Adjusted /

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Debt Securities Available-for-sale

(In thousands)

 

U.S. government and agency securities (1)

 

$

53,836

 

 

$

383

 

 

$

28

 

 

$

54,191

 

States, municipalities and political subdivisions

 

 

74,755

 

 

 

1,641

 

 

 

41

 

 

 

76,355

 

Special revenue

 

 

246,791

 

 

 

3,689

 

 

 

254

 

 

 

250,226

 

Hybrid securities

 

 

100

 

 

 

1

 

 

 

 

 

 

101

 

Industrial and miscellaneous

 

 

202,307

 

 

 

4,097

 

 

 

21

 

 

 

206,383

 

Total

 

$

577,789

 

 

$

9,811

 

 

$

344

 

 

$

587,256

 

 

 

(1)

Includes securities at March 31, 2020 and December 31, 2019 with a carrying amount of $19.4 million and $20.2 million, respectively that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

8


 

The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. The Company determines the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following tables detail the Company’s net realized gains (losses) for the three months ended March 31, 2020 and 2019.

 

 

 

2020

 

 

2019

 

Three Months Ended March 31,

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

Gains

(Losses)

 

 

Fair Value at Sale

 

 

 

(In thousands)

 

Debt Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total realized gains

 

$

60

 

 

$

8,510

 

 

$

5

 

 

$

24,414

 

Total realized losses

 

 

(1

)

 

 

256

 

 

 

(67

)

 

 

6,141

 

Net realized gains and (losses)

 

$

59

 

 

$

8,766

 

 

$

(62

)

 

$

30,555

 

 

For the three months ended March 31, 2020 the Company sold no equity securities nor did it hold any marketable equity securities as of that date. For the three months ended March 31, 2019, the Company recorded a net unrealized holding gain of $1.1 million resulting from a net loss from equities sold of approximately $273,000 offset by the unrealized equity securities gains still held at the end of period in the amount of $1.4 million.

The table below summarizes the Company’s fixed maturity securities at March 31, 2020 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.

 

 

 

At March 31, 2020

 

 

 

Cost or Amortized Cost

 

 

Percent of Total

 

 

Fair Value

 

 

Percent of Total

 

Maturity dates:

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Due in one year or less

 

$

75,247

 

 

 

13

%

 

$

76,521

 

 

 

12

%

Due after one year through five years

 

 

206,284

 

 

 

34

%

 

 

208,059

 

 

 

34

%

Due after five years through ten years

 

 

122,633

 

 

 

20

%

 

 

126,435

 

 

 

21

%

Due after ten years

 

 

197,726

 

 

 

33

%

 

 

202,340

 

 

 

33

%

Total

 

$

601,890

 

 

 

100

%

 

$

613,355

 

 

 

100

%

 

The following table summarizes the Company’s net investment income by major investment category for the three months ended March 31, 2020 and 2019, respectively:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Fixed maturity securities

 

$

4,162