hrtg-10q_20200331.htm

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.

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

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:

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.

	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.

	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

See accompanying notes to unaudited condensed consolidated financial statements.

	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.

	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

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

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.

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”).

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.

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

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.

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.

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.

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”.

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

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.

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:

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

		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

	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

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