UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

Form 10-Q

 

For the quarterly period ended June 30, 2017

OR

Commission File Number

001-36462

 

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the 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, $0.0001 par value, outstanding on August 3, 2017 was 29,056,421.

 

 

 

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HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

 

 

 

 

 

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FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenue, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. 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, 2016 and in our other filings with the SEC. 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.

 

 

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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)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Income and Other Comprehensive Income

(Unaudited)

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

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months ended June 30, 2017 and 2016

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

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

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

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

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

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

Changes to significant accounting policies

We have made no material changes to our significant accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

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Recently Adopted Accounting Pronouncements

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

Accounting Pronouncements

The Company describes below recent pronouncements that may have a significant effect on its financial statements or on its disclosures upon future adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on, or are unrelated to, its financial condition, results of operations, or related disclosures.

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

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

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Measurement of Credit Losses on Financial Instruments.  The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset in order to present the net carrying value at the amount expected to be collected on the financial asset on the consolidated balance sheet. The guidance also amends the current accounting for other-than-

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temporary impairment model by requiring an estimate of the expected credit loss only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a potential credit loss exists. The available for sale debt security model will also require the use of a valuation allowance as compared to the current practice of writing down the asset. The standard is effective for the Company in the first quarter of 2020 with early adoption permitted in the first quarter of 2019. The Company is in the early stages of evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

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

In May 2014, the FASB issued ASU Topic 2014-09, Revenue from Contracts with Customers. This guidance is not applicable to insurance contracts. The ASU 2014-09 creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The standard is effective for the Company in the first quarter of 2018 with early adoption permitted. Accordingly, while the Company is in the early stages of evaluating the effect of adopting this new guidance, the Company believes the application of this guidance will be less complex in relation to any non-insurance contracts.

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

 

NOTE 2. ACQUISITION

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

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

The following table sets forth the allocation of the purchase consideration.

 

 

Pro Forma Information

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

 

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NOTE 3. INVESTMENTS

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

 

 

 

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

 

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The table below summarizes the Company’s fixed maturities at June 30, 2017 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.

 

 

The following table summarizes the Company’s net investment income by major investment category for the three and six months ended June 30, 2017 and 2016, respectively:

 

 

The Company does not intend to sell investments that are in an unrealized loss position and it is not likely that the Company will be required to sell any investments before recovery of their amortized cost basis. As such, the Company does not consider those investments with an unrealized loss to be other-than-temporarily impaired at June 30, 2017 or December 31, 2016. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the three and six months ended June 30, 2017 and 2016.

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The following tables present an aging of our unrealized investment losses by investment class as of June 30, 2017 and December 31, 2016:

 

 

 

NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company’s investments in U.S government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, the Company obtains the fair value from its third-party valuation service and we evaluate the relevant inputs, assumptions, methodologies and conclusions associated with such valuations. The valuation service calculates prices for the Company’s investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve as of quarter end. The inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, and therefore represent Level 2 inputs.

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The following tables present information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy. For the six months ended June 30, 2017 and the year ended December 31, 2016, there were no transfers in or out of Level 1, 2, and 3.

 

 

 

NOTE 5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at June 30, 2017 and December 31, 2016:

 

 

Depreciation and amortization expense for property and equipment was $782 thousand and $353 thousand for the six months ended June 30, 2017 and 2016, respectively. The Company’s real estate consists of 14 acres of land and four buildings with a gross area of 191 thousand square feet.

 

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NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Intangible Assets

As of June 30, 2017 and December 31, 2016 goodwill was $46.5 million and intangible assets were $23.5 million and $26.5 million, respectively. The Company has determined the useful life of the value of the business acquired (see Note 2) to be one year. The Company has determined the useful life of the other intangible assets to range between 2.5-15 years. The Company has recorded $175 thousand relating to an insurance license and classified as an indefinite lived intangible which is subject to annual impairment testing.

 

 

Other Intangible Assets

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

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

 

 

 

NOTE 7. EARNINGS PER SHARE

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

 

 

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NOTE 8. DEFERRED POLICY ACQUISITION COSTS

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

The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC during the three and six month periods ended June 30, 2017 and 2016:

 

 

NOTE 9. INCOME TAXES

During the six months ended June 30, 2017 and 2016, the Company recorded $7.9 million and $16.0 million, respectively, of income tax expense which corresponds to an estimated annual effective tax rate of 38.5% and 38.3%, respectively.

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

 

 

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

The statute of limitations related to our federal and state income tax returns remains open from our first filings for 2013 through 2016. For the 2014 tax year, the federal income tax return was examined by the tax authority resulting in no material adjustment.  Currently, no taxing authorities are examining any of our federal or state income tax returns.

As of June 30, 2017 and December 31, 2016, we had no significant uncertain tax positions.

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NOTE 10. REINSURANCE

The Company’s reinsurance program is designed, utilizing the Company’s risk management methodology, to address its exposure to catastrophes or large non-catastrophic losses. The Company’s program provides reinsurance protection for catastrophes including hurricanes, tropical storms and tornadoes. The Company’s reinsurance agreements are part of its catastrophe management strategy, which is intended to provide its stockholders an acceptable return on the risks assumed in its property business, and to reduce variability of earnings, while providing protection to the Company’s policyholders.

2017 - 2018 Reinsurance Program

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

The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The Company’s 2017-2018 reinsurance program incorporates the mandatory coverage required by law to be placed with FHCF, which is available only for Florida catastrophe risk. For the 2017 hurricane season, the Company maintained the prior year selected participation percentage in the FHCF at 45%. The Company also purchased private reinsurance below, alongside the FHCF layer, as well as aggregate reinsurance coverage. The Company is not utilizing its captive, Osprey, for any catastrophe risk for the 2017 hurricane season. The Company has a primary retention of the first $20 million of losses and loss adjustment expenses. Additionally, the December 1, 2016 treaty between Heritage P&C and Osprey was commuted effective June 1, 2017.

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

 

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Layers above the FHCF - Florida program

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

For a first catastrophic event striking Florida, our reinsurance program provides coverage up to $1.75 billion of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For a first catastrophic event striking Hawaii, our reinsurance program provides coverage up to $731 million of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depends on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $632 million of limit purchased in 2017 includes a reinstatement, with $632 million being prepaid or free. In total, we have purchased $2.6 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, will be subject to the severity and frequency of such events.  Hurricane losses in states other than Hawaii would be covered under the Heritage P&C program with the exception of the FHCF and the series 2015, 2016 and 2017 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina and South Carolina.

In placing our 2017-2018 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate uncertainty surrounding the future cost of our reinsurance by negotiating multi-year arrangements. The $687.5 million of aggregate coverage we have purchased from Citrus Re Ltd, which includes the 2015 Class A, B, and C notes, the 2016 Class D & E notes, and the 2017 Series notes extends $277.5 million of coverage until May 2018. $250 million of coverage for another two-year period and $160 million of coverage for a three-year period. To the extent coverage is all or partially exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage from Citrus Re Ltd accounts for approximately 26% of our purchases of

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private reinsurance for the 2017 hurricane season. The terms of each of the multi-year coverage arrangements described above are subject to adjustment depending on, among other things, the size and composition of our portfolio of insured risks in future periods.

2016 - 2017 Reinsurance Program

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

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

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Layers above the FHCF - Florida program

For a first catastrophic event striking Florida, our reinsurance program provides coverage for $2 billion of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For a first catastrophic event striking Hawaii, our reinsurance program provides coverage for $1.1 billion of losses and loss

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adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depends on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $860 million of limit purchased in 2016 includes a reinstatement, with $825 million being prepaid. In total, we have purchased $3.1 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, will be subject to the severity and frequency of such events. Hurricane losses in states other than Hawaii would be covered under the Heritage P&C program with the exception of the FHCF and the series 2015, 2016 and 2017 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina and South Carolina.

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

Assuming the reoccurrence of Hurricane Andrew, which is considered to be the most catastrophic single event in Florida’s recorded history, the probable maximum net loss to us in 2016, assuming the reinsurance coverage described above, would be $24.8 million (after tax, net of all reinsurance recoveries and including our retention through Osprey). This loss would have represented 6.9% of our stockholders’ equity at December 31, 2016. We estimate that, based on our portfolio of insured risks as of August 31, 2016, Hurricane Andrew would have represented a catastrophic event likely to occur approximately once every 49 years and would have exhausted approximately 56.6% of our first event expected reinsurance coverage.

For the twelve months ending May 31, 2017, we purchased reinsurance from the following sources: (i) FHCF, (ii) Citrus Re Ltd, (iii) 23 third-party private reinsurers, all of which were rated “A-” or higher by A.M. Best or S&P and (iv) our wholly-owned reinsurance subsidiary, Osprey. Allianz Global Corporate & Specialty SE provides approximately 38% of our third-party reinsurance program, including Citrus Re catastrophe bonds.

2015 – 2016 Reinsurance Program

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

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For a first catastrophic event, our reinsurance program provides coverage for $1.8 billion of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depends on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. We also have purchased reinstatement premium protection insurance to provide an additional $440.0 million of coverage. Our aggregate reinsurance layer also provides coverage for second and subsequent events to the extent not exhausted in prior events. In total, we have purchased $2.3 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, will be subject to the severity and frequency of such events. As of August 31, 2015, the peak of the hurricane season, our total insured value was $76.9 billion, and we had not experienced significant losses and loss adjustment expenses in excess of our retention.

Property Per Risk Coverage

For the 2017 hurricane season the Company also purchased property per risk coverage for losses and loss adjustment expenses in excess of $1 million per claim. The limit recovered for an individual loss is $9 million and the total limit for all losses is $27 million. There are two reinstatements available with additional premium due based on the amount of the layer exhausted. In addition, the Company purchased facultative reinsurance in excess of $10 million for any commercial properties it insured for which the total insured value exceeded $10 million.

 

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Assumption Transactions and Assumed Premiums Written

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

 

 

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

 

 

NOTE 11. 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.

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

 

As of June 30, 2017, we reported $120.3 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $65.3 million attributable to IBNR, or 54.3% of net reserves for unpaid losses and loss adjustment expenses.

The Company’s losses incurred for the six months ended June 30, 2017 and 2016 reflect a prior year redundancy of $2.1 million and a deficiency of $14.1 million, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. Most of the unfavorable development during the six months ended June 30, 2016 was from personal lines. Also, most of the unfavorable emergence came from the second, third and fourth quarters of 2015, primarily related to claims involving litigation and claims that were represented by attorneys, public adjusters or others (sometimes referred to as Assignment of Benefits). Also, a majority of the unfavorable development in the six months ended June 30, 2016 was isolated to the tri-county region of Florida (the counties of Miami-Dade, Broward and Palm Beach). The favorable development recorded in the first six months ended June 30, 2017 is generally related to lower expected loss adjustment expenses.

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

NOTE 12. NOTE PAYABLE

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

Long-term debt at June 30, 2017, consisted of the following:

 

 

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The Secured Notes contain customary restrictive covenants relating to merger, modification of the indenture, subordination, issuance of debt securities and sale of assets, the most significant of which include limitations with respect to certain designated subsidiaries on the incurrence of additional indebtedness or guarantees secured by any security interest on any shares of their capital stock. The Secured Notes covenants also limit the Company’s ability to sell or otherwise dispose of any shares of capital stock of such designated subsidiaries. The Secured Notes do not have the benefit of any sinking funds. They also contain customary limitations and lien provisions as well as customary events of default provisions, which if breached, could result in the accelerated maturity of the Secured Notes. The Company was in compliance with the Senior Notes covenants for the three and six months ended June 30, 2017.

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

At June 30, 2017, the effective interest rate, taking into account the stated interest expense and amortization of debt issuance costs, approximates 10.0%.

 

NOTE 13. OTHER LIABILITIES

At June 30, 2017 and December 31, 2016, other liabilities were approximately $13.9 million and $21.7 million respectively, of which $19 thousand and $178 thousand related to amounts owed to Citizens for policies assumed by the Company, where the policyholder subsequently opted-out of the assumption program. Also included in other liabilities for the six months ended June 30, 2017 and the year ended December 31, 2016 was $5.4 and $6.2 million for commissions payable, $4.5 and $3.5 million for accounts payable and other payables, and $1.2 million held in escrow and $1.8 million and $1.8 million for dividends payable, respectively. At December 31, 2016, other liabilities included $4.8 million relating to debt issuances.

 

NOTE 14. STATUTORY ACCOUNTING AND REGULATIONS

State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, restrict the allowable investment types and investment mixes, and subject the Company’s insurers to assessments.

The Company’s insurance subsidiaries are required to file with state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income and surplus as regards policyholders, which is called stockholder’s equity under GAAP. On a combined basis, the Company’s insurance subsidiaries reported statutory net loss of $4.5 million and $638 thousand for the six months ended June 30, 2017 and 2016, respectively. The Company’s insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain capital and surplus equal to the greater of $15 million or 10% of its respective liabilities. Zephyr is required to maintain a deposit of $750 thousand in a federally insured financial institution. The insurance subsidiaries’ combined statutory surplus was $264.5 million and $276.1 million at June 30, 2017 and December 31, 2016, respectively. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, with which the Company is in compliance. At December 31, 2016, our insurance subsidiaries met the financial and regulatory requirements of the states in which they do business.

NOTE 15. COMMITMENTS AND CONTINGENCIES

The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. When determinable, the Company discloses the range of possible losses in excess of those accrued and for reasonably possible losses.

 

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NOTE 16. RELATED PARTY TRANSACTIONS

The Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders 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, 2017 and 2016.

 

NOTE 17. EMPLOYEE BENEFIT PLAN

The Company provides a 401(k) plan for substantially all of its employees. The Company contributes 3% of employees’ salary, up to the maximum allowable contribution, regardless of the employees’ level of participation in the plan. For the six-month periods ended June 30, 2017 and 2016, the Company’s contributions to the plan on behalf of the participating employees were $425 thousand and $248 thousand, respectively.

The Company provides for its employees a partially self-insured healthcare plan and benefits. For the six months ended June 30, 2017 and 2016, the Company incurred medical premium costs in the aggregate of $1.5 million and $1.4 million, respectively. The Company also recorded approximately $154 thousand as unpaid claims as of June 30, 2017. A stop loss reinsurance policy caps the maximum loss that could be incurred by the Company under the self-insured plan. The Company’s stop loss coverage per employee is $60 thousand for which any excess cost would be covered by the reinsurer subject to an aggregate limit for losses in excess of $1.5 million which would provide up to $1.0 million of coverage. Any excess of the $1.5 million retention and the $1 million of aggregate coverage would be borne by the Company. The aggregate stop loss commences once our expenses exceed 125% of the annual aggregate expected claims.

 

NOTE 18. 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, 2017, the Company had 28,156,421 shares of common stock outstanding, 2,443,352 treasury shares of common stock and 900,000 unvested shares of restricted common stock issued, reflecting total paid-in capital of $208.1 million as of such date.

As more fully disclosed in our audited consolidated financial statements for the year ended December 31, 2016, there were 28,840,443 shares of common stock outstanding, 1,149,923 stock options outstanding, and 900,000 unvested restricted stock grants, representing $205.7 million of additional paid-in capital at December 31, 2016.

Common Stock

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

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Stock Repurchase Program

On May 4, 2016, the Company announced that the Company’s Board of Directors, authorized a stock repurchase program authorizing the Company to repurchase up to $70 million of the Company’s common stock. The stock repurchase program expires on December 31, 2017.  

During the quarter ended March 31, 2017, the Company repurchased an aggregate of 361,211 shares at a cost of $4.5 million through open market or private transactions. During the quarter ended June 30, 2017, the Company repurchased an aggregate of 322,811 shares of the Company’s stock in open market transactions for $4.1 million. As of June 30, 2017, the Company had $35.8 million remaining to purchase shares under its authorized $70 million share repurchase plan. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.

Dividends

On November 8, 2016, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on January 4, 2017 to stockholders of record as of December 15, 2016. On March 2, 2017, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on April 4, 2017, to stockholders of record March 15, 2017. On May 2, 2017, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on July 5, 2017, to stockholders of record June 15, 2017. The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors and will depend on a variety of factors including the Company’s financial condition and results of operations.

 

NOTE 19. STOCK-BASED COMPENSATION

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.

At June 30, 2017 and December 31, 2016, there were 170,814  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. The Company grants stock options at exercise prices equal to the fair market value of the Company’s stock on the dates the options are granted. The options have a maximum term of ten years from the date of grant and vest primarily in equal annual installments over a range of one to five year periods following the date of grant for employee options. If a participant’s employment relationship ends, the participant’s vested awards will remain exercisable for the shorter of a period of 30 days or the period ending on the latest date on which such award could have been exercisable. The fair value of each option grant is separately estimated for each grant date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company estimates the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model (“Black-Scholes model”). The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.

Stock Options and Restricted Stock

Stock Options

A summary of information related to stock options and restricted stock outstanding at June 30, 2017 is as follows:

 

 

No compensation expense was recognized for stock options granted above for the three and six months ended June 30, 2017 and 2016.

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Restricted Stock

The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employees vest in equal installments, generally over a five year period from the grant date, subject to the recipient’s continued employment. The fair values of restricted stock awards are estimated by the market price at the date of grant and amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards have the right to receive dividends. No restricted stock was granted during six months ended June 30, 2017. Restricted stock activity during the six months ended June 30, 2017 is as follows:

 

Awards are being amortized to expense over the five year vesting period. The Company recognized $2.4 million and $2.4 million of compensation expense for the six months ended June 30, 2017 and 2016, respectively. There was approximately $16.1 million of unrecognized compensation expense related to the non-vested restricted stock at June 30, 2017. The Company expects to recognize the remaining compensation expense over a weighted average period of 3.4 years.

 

NOTE 20. SUBSEQUENT EVENTS

On August 3, 2017, the Company announced that its Board of Directors declared a third quarter dividend of $0.06 per common share. The dividend is payable on October 2, 2017 to stockholders of record on September 15, and 2017.

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

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

The Merger Agreement contains customary representations and warranties, covenants and agreements of the parties. The Acquisition is expected to close in the first quarter of 2018, subject to satisfaction of customary closing conditions, including obtaining regulatory clearance.

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

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and information included and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

Financial Results Highlights for the Three and Six Months Ended June 30, 2017

Critical Accounting Policies and Estimates

When we prepare our consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the six months ended June 30, 2017, we reassessed our critical accounting policies and estimates as disclosed within our 2016 Form 10-K; we have made no material changes or additions with regard to such policies and estimates.

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Results of Operations

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

 

 

Comparison of the Three Months Ended June 30, 2017 and 2016

Revenue

Gross premiums written

Gross premiums written decreased to $159.3 million for the three months ended June 30, 2017 as compared to $177.3 million for the three months ended June 30, 2016. The decrease in gross premiums written relates to a reduction in gross premium written by Heritage P&C of approximately $17.1 million and a reduction of Zephyr premium of approximately $700 thousand. Heritage P&C’s premium in force decreased $17.4 million during the second quarter of 2017 as we continued to manage exposure in geographic locations which have produced a disproportionate share of attritional losses and geographic risks for which the price to manage catastrophe risk is not cost efficient. Personal residential business accounted for $134.7 million and commercial residential accounted for $24.6 million of the total gross premiums written for the three months ended June 30, 2017. There was no business assumed from Citizens for either periods.

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Gross premiums earned

Gross premiums earned decreased to $152.3 million for the three months ended June 30, 2017 as compared to $163.6 million for the three months ended June 30, 2016. This decrease is consistent with the quarter-over-quarter change in gross written.

Ceded premiums

Ceded premiums increased to $61.9 million for the three months ended June 30, 2017 as compared to $54.7 million for the three months ended June 30, 2016. Our catastrophe reinsurance programs renew each year on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared to the cost for the 2016 season of $247.0 million. The reduction in premium in force described previously resulted in a reduction in the amount of catastrophe reinsurance purchased from approximately $3.1 billion in the 2016 season to approximately $2.6 billion for the 2017 season. As described in Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million for the first event compared to $40.0 million for the 2016 season for a first event.  

 

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

Net premiums earned

Net premiums earned decreased to $90.5 million for the three months ended June 30, 2017 as compared to $108.9 million for the three months ended June 30, 2016. The decrease in net premiums earned relates to the decrease in gross premium earned coupled with the increase in ceded premium described above.

Net investment income

Net investment income, inclusive of realized investment gain or loss, increased to $2.8 million for the three months ended June 30, 2017 as compared to $2.5 million for the three months ended June 30, 2016. The increase resulted primarily from invested proceeds associated with the Secured Notes.

Other revenue

Other revenue decreased slightly to $3.6 million for the three months ended June 30, 2017 as compared to $3.9 million for the three months ended June 30, 2016. The decrease in other revenue is primarily attributable to the decrease in policy fees associated with the reduction in policies in force over the same period last year.  

Total revenue

Total revenue decreased to $96.9 million for the three months ended June 30, 2017 as compared to $115.3 million for the three months ended June 30, 2016. The reduction in total revenue relates primarily to the decrease in net premiums earned described above.

Expenses

Losses and loss adjustment expenses

Losses and loss adjustment expenses (“LAE”) decreased to $46.0 million for the three months ended June 30, 2017 as compared to $48.8 million for the three months ended June 30, 2016. The decrease in losses and LAE relates primarily to the decrease in premium in force described above. Losses and LAE for the three months ended June 30, 2017 includes net losses paid of $56.0 million, and an $8.8 million decrease in unpaid losses and LAE and ceded losses of $3.2 million. The number of reported claims for the second quarter of 2017 was 3,640 compared to 3,714 new claims during the second quarter of 2016.  As of June 30, 2017, we reported $120.3 million in unpaid losses and LAE, net of reinsurance which included $65.3 million attributable to IBNR, or 54.3% of net reserves for unpaid losses and LAE.

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Policy acquisition costs

Policy acquisition costs increased to $21.7 million for the three months ended June 30, 2017 as compared to $20.8 million for the three months ended June 30, 2016. The increase is primarily attributable to approximately $16.0 million of assumed earned premium in the second quarter 2016 for which we had no acquisition costs.

General and administrative expenses

General and administrative expenses remained relatively constant at $16.1 million for the three months ended June 30, 2017 as compared to $16.0 million for the three months ended June 30, 2016.

Interest and amortization of debt issuance costs

As described in Note 12 – Note Payable to our unaudited condensed consolidated financial statement appearing elsewhere in this Form 10-Q, Heritage issued $79.5 million in Senior Secured Notes (“Secured Notes”) due 2023 on December 15, 2016. In connection with the issuance of the Secured Notes, the Company incurred $6.5 million in debt issuance costs. Debt issuance costs are reflected on the consolidated balance sheet as a contra long-term liability, and amortized using the imputed interest method over the life of the underlying debt instrument. For tax purposes, the debt issuance costs are generally amortized over the life of the debt using the straight-line method.

Provision for income taxes

The provision for income taxes was $4.2 million and $11.4 million for the three months ended June 30, 2017 and 2016, respectively. Our effective tax rate for the three months ended June 30, 2017 and 2016 was 38.7% and 38.3%, respectively. The effective tax rate can fluctuate throughout the year as estimates used in the tax provision for each quarter are updated as more information becomes available throughout the year.

Net income

Our results of operations for the three months ended June 30, 2017 reflect net income of $6.6 million, or $0.23 earnings per diluted common share, compared to net income of $18.4 million, or $0.62 earnings per diluted common share, for the three months ended June 30, 2016. The decrease in net income is attributable to the reduction of gross earned premium described above, the increase in the gross combined ratio, discussed below, as well as due to interest and amortization on the Secured Notes that were issued in December 2016.

 

Comparison of the Six Months Ended June 30, 2017 and 2016

Revenue

Gross premiums written

Gross premiums written decreased to $301.5 million for the six months ended June 30, 2017 as compared to $324.6 million for the six months ended June 30, 2016. The decrease in gross premiums written relates primarily to a reduction in gross premium written by Heritage P&C of approximately $34.7 million offset by an increase in Zephyr premium written of approximately $11.6 million due to the timing of the Zephyr acquisition in late March 2016. As such gross premium written for the six months ended June 30, 2017 includes six months of Zephyr written premium whereas approximately three months of Zephyr premium was included for the six months ended June 30, 2016. Heritage P&C’s premium in force decreased $53.4 million from June 30, 2016 as we continue to manage exposure in geographic locations which have produced a disproportional share of attritional losses as well as for geographic risks for which the price to manage catastrophe risk is not cost efficient. There was no business assumed from Citizens during 2017. Personal residential business accounted for $247.7 million and commercial residential accounted for $53.8 million of the total gross premiums written for the six months ended June 30, 2017.

Gross premiums earned

Gross premiums earned decreased to $307.0 million for the six months ended June 30, 2017 as compared to $315.6 million for the six months ended June 30, 2016. Our premiums in force as of June 30, 2017 and June 30, 2016 were approximately $604.2 million and $659.6 million, respectively, and this decrease impacted our gross premiums earned for the respective periods.

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Ceded premiums

Ceded premiums increased to $124.3 million for the six months ended June 30, 2017 as compared to $100.3 million for the six months ended June 30, 2016. Our catastrophe reinsurance programs renew each year on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared to the cost for the 2016 season of $247.0 million. The reduction in premium in force described previously resulted in a reduction in the amount of catastrophe reinsurance purchased from approximately $3.1 billion in the 2016 season to approximately $2.6 billion for the 2017 season. As described in Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million compared to $40.0 million for the 2016 season for a first event.

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

Net premiums earned

Net premiums earned decreased to $182.6 million for the six months ended June 30, 2017 as compared to $215.3 million for the six months ended June 30, 2016. The decrease in net premiums earned is primarily attributable to the decrease in the number of policies in force during the six months ended June 30, 2017 as compared to the same period in 2016, coupled with the increased ceded premiums earned.

Net investment income

Net investment income, inclusive of realized investment gains, increased to $6.1 million for the six months ended June 30, 2017 as compared to $4.9 million for the six months ended June 30, 2016. The increase in net investment income is due to the increase in invested assets from $550.1 million to $601.2 million at June 30, 2016 and June 30, 2017, respectively. The increase resulted primarily from invested proceeds associated with the Secured Notes coupled with the additional investment income from Zephyr in 2017 due to the timing of the acquisition.

Other revenue

Other revenue increased to $7.5 million for the six months ended June 30, 2017 as compared to $6.7 million for the six months ended June 30, 2016. The increase in other revenue is primarily attributable to the policy fees associated with the Zephyr acquisition.  Six months of policies fees were included in 2017 compared to only three months for the same period in 2016 due to the timing of the acquisition.

Total revenue

Total revenue decreased to $196.2 million for the six months ended June 30, 2017 as compared to $226.8 million for the six months ended June 30, 2016. The decrease in total revenue was due primarily to the reduction in premium in force throughout the six months ended June 30, 2017 as compared to the same period in the prior year, coupled with an increase in ceded premiums earned.

Expenses

Losses and loss adjustment expenses

Losses and LAE decreased to $92.7 million for the six months ended June 30, 2017 as compared to $115.8 million for the six months ended June 30, 2016. Additionally, the Company’s losses incurred during the six months ended June 30, 2017 and 2016 reflect a prior year redundancy of $2.1 million and a deficiency of $14.1 million, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. The decrease in losses and LAE resulted from a decrease in the number of policies in force between the respective periods. The number of new claims filed is down 10.4% for the first six months of 2017 compared to the same period in 2016. Losses and LAE for the six months ended June 30, 2017 includes net losses paid of $112.0 million and a $17.4 million decrease in unpaid losses and LAE. At June 30, 2017, we recorded

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$120.3 million in unpaid losses and LAE, net of reinsurance which included $65.3 million attributable to IBNR, or 54.3% of total reserves net of unpaid losses and LAE.

Policy acquisition costs

Policy acquisition costs increased to $45.2 million for the six months ended June 30, 2017 as compared to $38.9 million for the six months ended June 30, 2016. The increase is primarily attributable having a full six months of policy acquisition costs related to Zephyr in 2017 compared to just three months in 2016 due to timing of that acquisition, as well as the favorable impact of assumed premiums from Citizens for the six months ended June 30, 2016.

General and administrative expenses

General and administrative expenses increased to $33.4 million for the six months ended June 30, 2017 as compared to $30.4 million for the six months ended June 30, 2016. The increase was due primarily to six months of general and administrative expenses associated with Zephyr for the six months ended June 30, 2017 whereas only three months of Zephyr expenses were included for the six months ended June 30, 2016.

Provision for income taxes

Provision for income taxes was $7.9 million and $16.0 million for the six months ended June 30, 2017 and 2016, respectively. Our effective tax rate for the six months ended June 30, 2017 and 2016 was 38.5% and 38.3%, respectively.

Net income

Our results of operations for the six months ended June 30, 2017 reflect net income of $12.6 million, or $0.44 earnings per diluted common share, compared to net income of $25.8 million, or $0.86 earnings per diluted common share, for the six months ended June 30, 2016. The decrease relates primarily to the reduction of gross earned premium, the increase in the gross combined ratio discussed below in operating expenses, coupled with interest and amortization on the Secured Note that were issued in December 2016.

Ratios

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

 

Ceded premium ratio

Our ceded premium ratio increased to 40.6% for the three months ended June 30, 2017 compared to 33.5% for the three months ended June 30, 2016. The 2016 ratio benefitted from approximately $32.1 million of Citizens assumption activity that occurred in the fourth quarter of 2015 and approximately $9.1 million in the first quarter of 2016 compared to no assumptions in the last quarter of 2016 or the first quarter of 2017. This provided a 3.3 point benefit for the quarter ended June 30, 2016. The second quarter 2016 ceded premium ratio also benefited by 1.3 percentage points due to lower reinsurance costs associated with the 2015 program that were expensed in April and May of 2016. Additionally, a decrease in earned premium for the second quarter of 2017 resulting from the

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decrease in premiums in force and reinstatements on the per risk treaty as the reinsurance triggered in 2017 caused a 2.5 point unfavorable variance from the prior year.

Gross loss ratio

Our gross loss ratio increased slightly to 30.2% for the three months ended June 30, 2017 compared to 29.8% for the three months ended June 30, 2016.  Our non-catastrophe loss ratio improved from 29.8% for the quarter ended June 30, 2016 to 28.4% for the quarter ended June 30, 2017.

Net loss ratio

Our net loss ratio increased to 50.9% for the three months ended June 30, 2017 compared to 44.8% for the three months ended June 30, 2016, primarily related to the increase in the ceded premium ratio.

Gross operating expense ratio

Our gross operating expense ratio increased to 24.9% for the three months ended June 30, 2017 compared to 22.4% for the three months ended June 30, 2016. Approximately 1.4 percentage points of the increase is due to the Citizens assumptions in 2015 and early 2016 which had a favorable impact on the second quarter of 2016 gross expense ratio. The remainder relates to fixed costs which were relatively consistent quarter-over-quarter but diluted by higher gross earned premium for the quarter ended June 30, 2016.

Net operating expense ratio

Our net operating expense ratio increased to 41.8% for the three months ended June 30, 2017 compared to 33.7% for the three months ended June 30, 2016, primarily due to the increase in the gross expense ratio discussed above, coupled with the higher ceded premium ratio.

Combined ratio

Our combined ratio on a gross basis increased to 95.7% for the three months ended June 30, 2017 compared to 85.7% for the three months ended June 30, 2016. Our combined ratio on a net basis increased to 92.7% for the three months ended June 30, 2017 compared to 78.5% for the three months ended June 30, 2016. The combined ratio increased due to the increases in the ceded premium ratio and the gross operating expense ratio as described above.

Ratios

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

 

 

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Ceded premium ratio

Our ceded premium ratio increased to 40.5% for the six months ended June 30, 2017 compared to 31.8% for the six months ended June 30, 2016.  This relates to the cost of reinsurance and the timing of earning of ceded premium as well as timing of Citizens’ assumptions in 2016 which did not recur in 2017 as previously discussed.

Gross loss ratio

Our gross loss ratio decreased to 30.2% for the six months ended June 30, 2017 compared to 36.7% for the six months ended June 30, 2016. This is primarily due to unfavorable development in 2016 on prior year loss reserves caused by market conditions for Florida personal lines multi-peril business with respect to litigated and attorney represented claims. The observed market conditions were taken into consideration by management when establishing the 2017 loss reserves. In addition, the number of new claims reported is down significantly in the six months of 2017 compared to 2016.

Our net loss ratio decreased to 50.8% for the six months ended June 30, 2017 compared to 53.8% for the six months ended June 30, 2016, primarily as a result of the items discussed above and the increase in the ceded premium ratio.

Gross operating expense ratio

Our gross expense ratio increased to 25.6% for the six months ended June 30, 2017 compared to 22.0% for the six months ended June 30, 2016. This relates to the larger Citizens take-out activity favorably impacting the prior year as referenced above, which has no acquisition costs until the policies renew onto our policy forms, coupled with fixed personnel and other costs which were diluted in 2016 due to higher gross premium written.

Net operating expense ratio

Our net expense ratio increased to 43.0% for the six months ended June 30, 2017 compared to 32.2% for the six months ended June 30, 2016, due to the gross operating expense ratio variance discussed above coupled with the increase in the ceded premium ratio.

Combined ratio

Our combined ratio on a gross basis increased to 96.3% for the six months ended June 30, 2017 compared to 90.5% for the six months ended June 30, 2016. Our combined ratio on a net basis increased to 93.8% for the six months ended June 30, 2017 compared to 86.0% for the six months ended June 30, 2016. The gross combined ratio increased due to the increases in the ceded premiums ratio and gross operating expense ratio, partially offset by a smaller gross loss ratio.

Liquidity and Capital Resources

As of June 30, 2017, we had $134.2 million of cash and cash equivalents, which primarily consisted of cash and money market accounts. We intend to hold substantial cash balances to meet seasonal liquidity needs, which includes amounts to pay quarterly reinsurance installments. We also had $18.4 million in restricted cash to meet our contractual obligations related to the catastrophe bonds issued by Citrus Re Ltd. Although we can provide no assurances, we believe that we maintain sufficient liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as inadequate premium rates or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

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

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Cash Flows

Operating Activities

Cash provided by operating activities decreased to $35.5 million for the three months ended June 30, 2017 compared to $104.3 million for the six months ended June 30, 2016. The decrease in cash provided by operating activities was primarily due to higher reinsurance premium paid, a large amount of claims payments, particularly related to Hurricane Matthew, made during the six months ended June 30, 2017 compared to the same period of 2016, and approximately $16.0 million of assumed premium payments from Citizens in the first half of 2016 compared to no assumed premium received in the first half of 2017. Premium collected for assumed policies is typically paid within 30 days of the assumption, whereas personal lines premium collected for voluntary policies and renewals of assumed policies may be paid via a payment plan.

Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2017 was $5.0 million as compared to net cash used by investing activities of $177.6 million for the comparable period in 2016. The decrease in cash used in investing activities primarily relates to $110.3 million paid for the acquisition of Zephyr, net of cash acquired as well as net purchase of investments of $60.7 million during the period ended June 30, 2016.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2017 was $12.2 million, as compared to $19.9 million for the comparable period in 2016. The decrease in cash used in financing activities is due primarily to the variance between periods in the amount of shares repurchased under the stock repurchase program.

Seasonality of our Business

Our insurance business is seasonal as hurricanes typically occur during the period from June 1 through November 30 each year. With our 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.

Off-Balance Sheet Arrangements

We obtained a $12.7 million irrevocable letter of credit from a financial institution to secure Osprey’s obligations arising from our reinsurance program. We collateralized this letter of credit facility with otherwise unencumbered real estate. The letter of credit, which terminated on May 31, 2017, was not renewed because the treaties with Osprey either terminated or were commuted.

JOBS Act

We qualify as an “emerging growth company” under the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an emerging growth company we choose to rely on such

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

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Interest Rate Risk

Our fixed maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed maturity securities at June 30, 2017 (in thousands):

 

 

Credit Risk

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed maturities. We mitigate this risk by investing in fixed maturities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector.

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The following table presents the composition of our fixed maturity portfolio by rating at June 30, 2017 (in thousands):

 

 

Equity Price Risk

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

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

 

 

Foreign Currency Exchange Risk

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

 

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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.

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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 June 30, 2017.

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.

 

 

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 consolidated financial position results of operations or cash flow.

Item 1A. Risk Factors

The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 15, 2017 set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results. No material changes have occurred with respect to those risk factors.

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

Issuer purchases of equity securities

During the second quarter ended June 30, 2017, we purchased 322,811 shares of common stock for an aggregate purchase of $4.1 million under our share repurchase program. A summary of our common stock repurchases during the quarter ended June 30, 2017 under our share repurchase program is set forth in the table below (in thousands, except shares):

 

 

Item 4. Mine Safety Disclosures

None

Item 6. Exhibits

The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q.

 

 

 

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SIGNATURES

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

 

 

 

 

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Index to Exhibits

 

 

 

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