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EX-32 - EX-32 - UNIVERSAL INSURANCE HOLDINGS, INC.uve-ex32_6.htm
EX-31.2 - EX-31.2 - UNIVERSAL INSURANCE HOLDINGS, INC.uve-ex312_9.htm
EX-31.1 - EX-31.1 - UNIVERSAL INSURANCE HOLDINGS, INC.uve-ex311_8.htm
EX-15.1 - EX-15.1 - UNIVERSAL INSURANCE HOLDINGS, INC.uve-ex151_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from                      to                     

Commission File Number 001-33251

 

UNIVERSAL INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

65-0231984

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309

(Address of principal executive offices)

(954) 958-1200

(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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,938,872 shares of common stock, par value $0.01 per share, outstanding on October 29, 2018.

 

 

 

 

 


UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Page No.

 

  

 

 

Item 1.

 

Financial Statements:

  

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2018 and 2017 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2.

 

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

 

27

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

 

48

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

49

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

 

 

 

 

 

Item 1A.

 

Risk Factors

 

50

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

 

 

 

 

 

Item 6.

 

Exhibits

 

50

 

 

 

 

 

Signatures

 

51

 

 

 

2


 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To The Board of Directors and Stockholders of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida

 

 

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries (the “Company”) as of September 30, 2018 and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2018 and 2017 and the related condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2018 and 2017.   These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Universal Insurance Holdings, Inc. and Subsidiaries as of December 31, 2017 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 23, 2018. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

 

/s/ Plante & Moran, PLLC

Chicago, Illinois

October 31, 2018

 

 

 

3


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

 

As of

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Available-for-sale debt securities

$

760,408

 

 

$

639,334

 

Available-for-sale short-term investments

 

 

 

 

10,000

 

Equity securities

 

69,108

 

 

 

62,215

 

Investment real estate, net

 

23,720

 

 

 

18,474

 

Total invested assets

 

853,236

 

 

 

730,023

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

252,289

 

 

 

213,486

 

Restricted cash and cash equivalents

 

2,635

 

 

 

2,635

 

Prepaid reinsurance premiums

 

228,408

 

 

 

132,806

 

Reinsurance recoverable

 

158,603

 

 

 

182,405

 

Reinsurance receivable, net

 

961

 

 

 

 

Premium receivable, net

 

66,017

 

 

 

56,500

 

Property and equipment, net

 

35,632

 

 

 

32,866

 

Deferred policy acquisition costs

 

90,643

 

 

 

73,059

 

Income taxes recoverable

 

5,174

 

 

 

9,472

 

Deferred income tax asset, net

 

7,948

 

 

 

9,286

 

Other assets

 

21,723

 

 

 

12,461

 

Total assets

$

1,723,269

 

 

$

1,454,999

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

$

158,667

 

 

$

248,425

 

Unearned premiums

 

629,693

 

 

 

532,444

 

Advance premium

 

32,839

 

 

 

26,216

 

Accounts payable

 

2,809

 

 

 

2,866

 

Book overdraft

 

30,334

 

 

 

36,715

 

Reinsurance payable, net

 

261,133

 

 

 

110,381

 

Other liabilities and accrued expenses

 

65,005

 

 

 

45,096

 

Long-term debt

 

11,765

 

 

 

12,868

 

Total liabilities

 

1,192,245

 

 

 

1,015,011

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Cumulative convertible preferred stock, $.01 par value

 

 

 

 

 

Authorized shares - 1,000

 

 

 

 

 

 

 

Issued shares - 10 and 10

 

 

 

 

 

 

 

Outstanding shares - 10 and 10

 

 

 

 

 

 

 

Minimum liquidation preference, $9.99 and $9.99 per share

 

 

 

 

 

 

 

Common stock, $.01 par value

 

463

 

 

 

458

 

Authorized shares - 55,000

 

 

 

 

 

 

 

Issued shares - 46,318 and 45,778

 

 

 

 

 

 

 

Outstanding shares - 34,933 and 34,735

 

 

 

 

 

 

 

Treasury shares, at cost - 11,385 and 11,043

 

(116,239

)

 

 

(105,123

)

Additional paid-in capital

 

88,231

 

 

 

86,186

 

Accumulated other comprehensive income (loss), net of taxes

 

(9,898

)

 

 

(6,281

)

Retained earnings

 

568,467

 

 

 

464,748

 

Total stockholders' equity

 

531,024

 

 

 

439,988

 

Total liabilities and stockholders' equity

$

1,723,269

 

 

$

1,454,999

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

4


 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

$

309,176

 

 

$

274,744

 

 

$

921,941

 

 

$

816,350

 

 

Change in unearned premium

 

(20,772

)

 

 

(19,935

)

 

 

(97,249

)

 

 

(80,543

)

 

Direct premium earned

 

288,404

 

 

 

254,809

 

 

 

824,692

 

 

 

735,807

 

 

Ceded premium earned

 

(99,466

)

 

 

(80,292

)

 

 

(260,905

)

 

 

(230,722

)

 

Premiums earned, net

 

188,938

 

 

 

174,517

 

 

 

563,787

 

 

 

505,085

 

 

Net investment income (expense)

 

6,642

 

 

 

3,085

 

 

 

17,213

 

 

 

9,012

 

 

Net realized gains (losses) on sale of securities

 

403

 

 

 

803

 

 

 

(2,093

)

 

 

2,450

 

 

Net change in unrealized gains (losses) of equity securities

 

(2,473

)

 

 

 

 

 

(9,103

)

 

 

 

 

Commission revenue

 

5,658

 

 

 

5,304

 

 

 

16,638

 

 

 

14,546

 

 

Policy fees

 

5,204

 

 

 

4,861

 

 

 

15,743

 

 

 

14,594

 

 

Other revenue

 

1,783

 

 

 

1,673

 

 

 

5,258

 

 

 

4,917

 

 

Total premiums earned and other revenues

 

206,155

 

 

 

190,243

 

 

 

607,443

 

 

 

550,604

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

85,947

 

 

 

116,375

 

 

 

251,715

 

 

 

267,129

 

 

General and administrative expenses

 

69,041

 

 

 

57,269

 

 

 

191,614

 

 

 

171,582

 

 

Total operating costs and expenses

 

154,988

 

 

 

173,644

 

 

 

443,329

 

 

 

438,711

 

 

INCOME BEFORE INCOME TAXES

 

51,167

 

 

 

16,599

 

 

 

164,114

 

 

 

111,893

 

 

Income tax expense

 

13,787

 

 

 

6,635

 

 

 

40,595

 

 

 

41,354

 

 

NET INCOME

$

37,380

 

 

$

9,964

 

 

$

123,519

 

 

$

70,539

 

 

Basic earnings per common share

$

1.07

 

 

$

0.29

 

 

$

3.54

 

 

$

2.02

 

 

Weighted average common shares outstanding - Basic

 

34,861

 

 

 

34,686

 

 

 

34,870

 

 

 

34,927

 

 

Diluted earnings per common share

$

1.04

 

 

$

0.28

 

 

$

3.45

 

 

$

1.96

 

 

Weighted average common shares outstanding - Diluted

 

35,919

 

 

 

35,615

 

 

 

35,754

 

 

 

35,917

 

 

Cash dividend declared per common share

$

0.16

 

 

$

0.14

 

 

$

0.44

 

 

$

0.42

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net income

$

37,380

 

 

$

9,964

 

 

$

123,519

 

 

$

70,539

 

 

Other comprehensive income (loss), net of taxes

 

(737

)

 

 

251

 

 

 

(6,636

)

 

 

4,201

 

 

Comprehensive income

$

36,643

 

 

$

10,215

 

 

$

116,883

 

 

$

74,740

 

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

 

5


 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

224,454

 

 

$

286,195

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

30

 

 

 

17

 

Purchases of property and equipment

 

(6,141

)

 

 

(3,655

)

Purchases of equity securities

 

(23,568

)

 

 

(47,070

)

Purchases of available-for-sale debt securities

 

(349,617

)

 

 

(114,593

)

Purchases of investment real estate, net

 

(5,553

)

 

 

(5,023

)

Proceeds from sales of equity securities

 

8,285

 

 

 

75,027

 

Proceeds from sales of available-for-sale debt securities

 

132,801

 

 

 

19,643

 

Maturities of available-for-sale debt securities

 

83,188

 

 

 

75,770

 

Maturities of available-for-sale short-term investments

 

10,000

 

 

 

5,000

 

Net cash provided by (used in) investing activities

 

(150,575

)

 

 

5,116

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Preferred stock dividend

 

(8

)

 

 

(8

)

Common stock dividend

 

(15,400

)

 

 

(9,803

)

Issuance of common stock for stock option exercises

 

102

 

 

 

 

Purchase of treasury stock

 

(11,116

)

 

 

(17,884

)

Payments related to tax withholding for share-based compensation

 

(7,551

)

 

 

(1,367

)

Repayment of debt

 

(1,103

)

 

 

(1,803

)

Net cash provided by (used in) financing activities

 

(35,076

)

 

 

(30,865

)

Cash and cash equivalents, and restricted cash and cash equivalents:

 

 

 

 

 

 

 

Net increase (decrease) during the period

 

38,803

 

 

 

260,446

 

Balance, beginning of period

 

216,121

 

 

 

108,365

 

Balance, end of period

$

254,924

 

 

$

368,811

 

 

 

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Condensed Consolidated Balance Sheets (in thousands):

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

$

252,289

 

 

$

213,486

 

Restricted cash and cash equivalents (1)

 

2,635

 

 

 

2,635

 

Total cash and cash equivalents and restricted cash and cash equivalents

$

254,924

 

 

$

216,121

 

 

(1)

See “—Note 5 (Insurance Operations),” for a discussion of the nature of the restrictions for restricted cash and cash equivalents.

 

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 

 

6


 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. (“UVE”) is a Delaware corporation incorporated in 1990. UVE with its wholly-owned subsidiaries (the “Company”) is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned insurance company subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), together referred to as the “Insurance Entities,” the Company is principally engaged in the property and casualty insurance business offered primarily through its network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is residential homeowners’ insurance currently offered in seventeen states as of September 30, 2018, including Florida, which comprises the vast majority of the Company’s in-force policies. See “—Note 5 (Insurance Operations)” for more information regarding the Company’s insurance operations.

The Company generates revenues primarily from the collection of premiums and invests funds in excess of those retained for claims-paying obligations and insurance operations. Other significant sources of revenue include brokerage commissions collected from reinsurers on certain reinsurance programs placed by the Insurance Entities, policy fees collected from policyholders by our wholly-owned managing general agent subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments. Our wholly-owned adjusting company receives claims-handling fees from the Insurance Entities. The Insurance Entities are reimbursed for these fees on claims that are subject to recovery under the Insurance Entities’ respective reinsurance programs. These fees, after expenses, are recorded in the Condensed Consolidated Financial Statements as an adjustment to losses and loss adjustment expense.

Basis of Presentation

The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the Financial Statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) for annual financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 23, 2018. The condensed consolidated balance sheet at December 31, 2017, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.

To conform to the current period presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity.  

The Financial Statements include the accounts of UVE and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Management must make estimates and assumptions that affect amounts reported in the Company’s Financial Statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

 

 

 

7


 

2. Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2017. The following are new or revised disclosures or disclosures required on a quarterly basis.

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the recognition and measurement of financial instruments. The new ASU requires certain investments in equity securities to be measured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in Other Comprehensive Income (“OCI”). The Company adopted this ASU effective January 1, 2018 using the modified retrospective transition method and recorded a cumulative effect adjustment of $3.6 million to the Condensed Consolidated Balance Sheets to reclassify unrealized losses on investments in equity securities to retained earnings from accumulated other comprehensive income (“AOCI”). The adoption of this ASU also resulted in the recognition of the change in unrealized gains and losses for equity security investments as a separate component in the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2018.

In August 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new ASU applies to: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. Historically, the items outlined above have not been applicable to the Company. The Company adopted this ASU effective January 1, 2018 and the adoption did not have an impact on our Condensed Consolidated Statements of Cash Flows.

In November 2016, the FASB revised U.S. GAAP, Statement of Cash Flows (Topic 230): Restricted Cash with the issuance of the ASU 2016-18, to reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. The new ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company is required to reconcile such total to amounts on the Condensed Consolidated Balance Sheets and disclose the nature of the restrictions. The Company adopted this ASU effective January 1, 2018, which only resulted in a change in the presentation of the Condensed Consolidated Statements of Cash Flows.

In February 2018, the FASB revised U.S. GAAP, Comprehensive Income (Topic 220), with the issuance of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in response to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on December 22, 2017. The new ASU permits a company to reclassify the disproportionate income tax effects of the Tax Act on items within AOCI to retained earnings and requires certain new disclosures. The Company adopted this guidance effective January 1, 2018 and made an election to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. Retained earnings were reduced by approximately $0.6 million due to this reclassification. The reclassification represents the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances at the date of enactment of the Tax Act related to items remaining in AOCI. The Company follows an aggregate portfolio approach and considers that it had two portfolios, an available for sale debt equity portfolio and an available for sale equity portfolio, the disproportionate tax effects relating to the available for sale equity portfolio were included in the transition adjustment when adopting ASU 2016-01.

 

 

 

8


 

3. Investments

Securities Available for Sale

The following table provides the amortized cost and fair value of debt and short-term investment securities available for sale as of the dates presented (in thousands):

 

 

September 30, 2018

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

67,442

 

 

$

15

 

 

$

(1,459

)

 

$

65,998

 

Corporate bonds

 

415,600

 

 

 

532

 

 

 

(6,165

)

 

 

409,967

 

Mortgage-backed and asset-backed securities

 

275,128

 

 

 

23

 

 

 

(5,923

)

 

 

269,228

 

Municipal bonds

 

3,401

 

 

 

 

 

 

(123

)

 

 

3,278

 

Redeemable preferred stock

 

11,922

 

 

 

206

 

 

 

(191

)

 

 

11,937

 

Total

$

773,493

 

 

$

776

 

 

$

(13,861

)

 

$

760,408

 

 

 

 

December 31, 2017

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

60,481

 

 

$

 

 

$

(877

)

 

$

59,604

 

Corporate bonds

 

228,336

 

 

 

476

 

 

 

(1,308

)

 

 

227,504

 

Mortgage-backed and asset-backed securities

 

221,956

 

 

 

19

 

 

 

(2,523

)

 

 

219,452

 

Municipal bonds

 

120,883

 

 

 

599

 

 

 

(1,187

)

 

 

120,295

 

Redeemable preferred stock

 

12,059

 

 

 

485

 

 

 

(65

)

 

 

12,479

 

Short-term investments

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Total

$

653,715

 

 

$

1,579

 

 

$

(5,960

)

 

$

649,334

 

 

The following table provides the credit quality of available-for-sale debt securities with contractual maturities as of the dates presented (dollars in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017 (1)

 

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

Average Credit Ratings

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

AAA

 

$

344,801

 

 

 

45.3

%

 

$

317,313

 

 

 

48.9

%

AA

 

 

92,411

 

 

 

12.2

%

 

 

129,573

 

 

 

20.0

%

A

 

 

216,074

 

 

 

28.4

%

 

 

146,749

 

 

 

22.6

%

BBB

 

 

103,427

 

 

 

13.6

%

 

 

51,020

 

 

 

7.8

%

BB+ and Below

 

 

117

 

 

 

0.0

%

 

 

1,569

 

 

 

0.2

%

No Rating Available

 

 

3,578

 

 

 

0.5

%

 

 

3,110

 

 

 

0.5

%

Total

 

$

760,408

 

 

 

100.0

%

 

$

649,334

 

 

 

100.0

%

 

 

(1)

The credit ratings in the table above have been reclassified from the prior periods’ consolidated financial statements to conform to the current periods’ presentation.

 

The table above includes credit quality ratings by Standard and Poor’s Rating Services, Inc., Moody’s Investors Service,

Inc. and Fitch Ratings, Inc. The Company has presented the highest rating of the three rating agencies for each investment position.

 

9


 

The following table summarizes the amortized cost and fair value of mortgage-backed and asset-backed securities as of the dates presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Mortgage-backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

$

152,068

 

 

$

148,472

 

 

$

118,014

 

 

$

116,014

 

Non-agency

 

 

44,509

 

 

 

44,005

 

 

 

17,676

 

 

 

17,488

 

Asset-backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto loan receivables

 

 

28,983

 

 

 

28,649

 

 

 

35,105

 

 

 

34,962

 

Credit card receivables

 

 

23,836

 

 

 

23,665

 

 

 

38,844

 

 

 

38,719

 

Other receivables

 

 

25,732

 

 

 

24,437

 

 

 

12,317

 

 

 

12,269

 

Total

 

$

275,128

 

 

$

269,228

 

 

$

221,956

 

 

$

219,452

 

 

The following table summarizes the fair value and gross unrealized losses on available-for-sale debt securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates presented (dollars in thousands):

 

 

September 30, 2018

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

5

 

 

$

15,734

 

 

$

(313

)

 

 

11

 

 

$

40,389

 

 

$

(1,146

)

Corporate bonds

 

413

 

 

 

316,750

 

 

 

(4,599

)

 

 

66

 

 

 

51,245

 

 

 

(1,566

)

Mortgage-backed and asset-backed securities

 

86

 

 

 

135,530

 

 

 

(1,643

)

 

 

98

 

 

 

109,884

 

 

 

(4,280

)

Municipal bonds

 

6

 

 

 

3,278

 

 

 

(123

)

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

98

 

 

 

4,739

 

 

 

(154

)

 

 

1

 

 

 

408

 

 

 

(37

)

Total

 

608

 

 

$

476,031

 

 

$

(6,832

)

 

 

176

 

 

$

201,926

 

 

$

(7,029

)

 

 

 

December 31, 2017

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

7

 

 

$

35,464

 

 

$

(301

)

 

 

9

 

 

$

24,140

 

 

$

(576

)

Corporate bonds

 

159

 

 

 

142,208

 

 

 

(792

)

 

 

39

 

 

 

29,796

 

 

 

(516

)

Mortgage-backed and asset-backed securities

 

83

 

 

 

137,481

 

 

 

(955

)

 

 

37

 

 

 

70,218

 

 

 

(1,568

)

Municipal bonds

 

36

 

 

 

28,265

 

 

 

(246

)

 

 

30

 

 

 

48,370

 

 

 

(941

)

Redeemable preferred stock

 

21

 

 

 

2,464

 

 

 

(65

)

 

 

 

 

 

 

 

 

 

Total

 

306

 

 

$

345,882

 

 

$

(2,359

)

 

 

115

 

 

$

172,524

 

 

$

(3,601

)

 

Evaluating Investments for Other Than Temporary Impairment (“OTTI”)

 

As of September 30, 2018, the Company held available-for-sale debt securities that were in an unrealized loss position as presented in the table above. For available-for-sale debt securities with significant declines in value, the Company performs quarterly fundamental credit analysis on a security-by-security basis, which includes consideration of credit quality and credit ratings, review of relevant industry analyst reports and other available market data. For available-for-sale debt securities, the Company considers whether it has the intent and ability to hold the available-for-sale debt securities for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is considered other than temporary and is recorded in earnings. Based on our analysis, our fixed income portfolio is of high quality and we believe that we will recover the amortized cost basis of our available-for-sale debt securities. We continually monitor the credit quality of our investments in available-for-sale debt securities to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. Additionally, the Company considers management’s intent and ability to

10


 

hold the available-for-sale debt securities until recovery and its credit analysis of the individual issuers of the securities. Based on this process and analysis, management has no reason to believe the unrealized losses of the available-for-sale debt securities as of September 30, 2018 are other than temporary.