See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except per share and share amounts)
NOTE 1. BASIS OF PRESENTATION
Basis of Presentation
The condensed consolidated financial statements as of and for the three and six months ended June 30, 2016 and 2015 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 insurance subsidiary’s business; Contractors’ Alliance Network, LLC (“CAN”), our vendor network manager 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 provides a portion of the reinsurance protection purchased by our insurance subsidiary; 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.
Our primary products are personal and commercial residential insurance, which we currently offer in Florida, under authorization from the Florida Office of Insurance Regulation (“FLOIR”). We also began offering personal residential insurance in the states of North Carolina, South Carolina and through the Zephyr acquisition, Hawaii. We are also licensed to do business in Georgia, Alabama and Mississippi. We conduct our operations under one business segment.
The condensed consolidated financial information included herein as of and for the three and six months ended June 30, 2016 and 2015 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, 2016 and 2015 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, 2015 consolidated balance sheet was derived from the Company’s audited consolidated financial statements as of and for the year ended December 31, 2015.
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, 2015. 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 temporary 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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
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, 2015.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. Such classifications include reclassifying goodwill and intangibles from other assets in the accompanying condensed consolidated balance sheets.
7
Recent
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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), ASU 2016-13,
Financial Instruments – Credit Losses
(Topic 326) (ASU 2016-13),
Measurement of Credit Losses on Financial Instruments
. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). ASU 2016-13
is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018.
The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09
, Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09), which requires an entity to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. ASU 2016-09 will also require an entity to elect an accounting policy to either estimate the number of forfeitures or account for forfeitures when they occur. ASU 2016-09 becomes effective for the Company during the first quarter of 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(ASU 2016-02), which provides guidance on the recognition, measurement, presentation, and disclosure of leases. The new standard supersedes present U.S. GAAP guidance on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease liabilities, as well as additional disclosures. The new standard is effective as of January 1, 2019, and early adoption is permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01
, Recognition and Measurement of Financial Assets and Financial Liabilities
(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. ASU 2016-01 becomes effective for the Company during the first quarter 2018. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU Topic 2014-09,
Revenue from Contracts with Customers
(Topic 606). The ASU 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 core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements.
There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition or cash flows.
NOTE 3. ACQUISITION
On March 21, 2016, the Company acquired 100% of the outstanding stock of ZAC and its wholly-owned subsidiary, Zephyr, in exchange for approximately $111,907, net of cash acquired. Zephyr is a specialty property insurance provider, which offers windstorm-hurricane insurance policies for residential customers in Hawaii. This acquisition will further the Company’s strategic push to diversify business operations and achieve potential reinsurance synergies while expanding growth opportunities outside of Florida.
The transaction was accounted for using the acquisition method of accounting. The valuation of assets acquired and liabilities assumed are based on preliminary estimates of fair value and are subject to revision as the Company finalizes its analysis. The results of operations of ZAC have been included in the Company’s condensed consolidated financial statements since the date of acquisition. The acquisition method requires significant use of estimates and is based on the information available to management at the time these condensed consolidated financial statements were prepared. As the acquisition was recently completed, the Company has not yet completed its assessment of the fair value of the intangible assets acquired, nor the related amortization expense applicable to definite-lived intangible assets during the period between the acquisition date and period end. As such, the total estimated purchase price in excess of net assets acquired and liabilities assumed has initially been recorded as goodwill and identified intangible assets. Goodwill
8
is not deductible for tax purposes and will not be amortized, but is subject to annual impairment tests using a fair-value based approach. The Company is entitled to a holdback provision, for purposes
of securing the indemnification obligation of the sellers for any damages arising out of or relating to a previous dispute should one arise. The following table summarizes the preliminary unaudited, estimated fair value of the assets acquired and liabilit
ies assumed. The Company is in the process of finalizing the purchase price allocation and, accordingly, the following allocation of the purchase price, before income taxes, is subject to adjustments during the measurement period:
Purchase Consideration
|
|
|
|
Cash, net of cash acquired
|
$
|
111,907
|
|
|
|
|
|
Assets acquired
|
|
|
|
Investments
|
$
|
76,440
|
|
Premiums and agent's receivable
|
|
1,680
|
|
Other assets
|
|
550
|
|
Prepaid reinsurance premiums
|
|
4,792
|
|
Intangible assets – value of business acquired
|
|
5,004
|
|
Intangible assets
|
|
24,203
|
|
Total assets acquired
|
$
|
112,669
|
|
Total liabilities assumed
|
$
|
(41,579
|
)
|
|
|
|
|
Net assets acquired
|
$
|
71,090
|
|
Goodwill
|
|
40,817
|
|
Total purchase price
|
$
|
111,907
|
|
Pro Forma Information
The following table presents selected unaudited pro forma information, assuming the acquisition of ZAC had occurred on January 1, 2015. 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, 2015, and the unaudited pro forma information does not purport to be indicative of future financial results.
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
$
|
115,281
|
|
|
$
|
107,638
|
|
|
$
|
235,668
|
|
|
$
|
220,196
|
|
Net income
|
$
|
18,368
|
|
|
$
|
27,669
|
|
|
$
|
28,743
|
|
|
$
|
59,904
|
|
Basic, earnings per share
|
$
|
0.62
|
|
|
$
|
0.93
|
|
|
$
|
0.96
|
|
|
$
|
2.01
|
|
Diluted, earnings per share
|
$
|
0.62
|
|
|
$
|
0.91
|
|
|
$
|
0.95
|
|
|
$
|
1.98
|
|
As a result of acquiring ZAC, our consolidated results of operations include the results of ZAC since the acquisition date. ZAC’s revenues and pre-tax net income included in our results of operations since the acquisition for the three months ended June 30, 2016 were $9,343 and $5,910, respectively and for the six months ended June 30, 2016, $10,362 and $6,507 respectively. For the three and six months ended June 30, 2016, income before taxes included $2,698 and $2,764, respectively, of amortization expense related to the identified intangible assets recorded as a result of the acquisition.
9
NOTE 4. INVESTMENTS
The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at June 30, 2016 and December 31, 2015:
|
|
Cost or Adjusted /
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
25,168
|
|
|
$
|
441
|
|
|
$
|
3
|
|
|
$
|
25,606
|
|
States, municipalities and political
subdivisions
|
|
|
266,871
|
|
|
|
7,236
|
|
|
|
15
|
|
|
|
274,092
|
|
Special revenue
|
|
|
66,967
|
|
|
|
424
|
|
|
|
165
|
|
|
|
67,226
|
|
Industrial and miscellaneous
|
|
|
144,440
|
|
|
|
3,208
|
|
|
|
95
|
|
|
|
147,553
|
|
Redeemable preferred stocks
|
|
|
3,645
|
|
|
|
116
|
|
|
|
27
|
|
|
|
3,734
|
|
Total fixed maturities
|
|
|
507,091
|
|
|
|
11,425
|
|
|
|
305
|
|
|
|
518,211
|
|
Nonredeemable preferred stocks
|
|
|
14,617
|
|
|
|
681
|
|
|
|
36
|
|
|
|
15,262
|
|
Equity securities
|
|
|
19,381
|
|
|
|
982
|
|
|
|
3,769
|
|
|
|
16,594
|
|
Total equity securities
|
|
|
33,998
|
|
|
|
1,663
|
|
|
|
3,805
|
|
|
|
31,856
|
|
Total investments
|
|
$
|
541,089
|
|
|
$
|
13,088
|
|
|
$
|
4,110
|
|
|
$
|
550,067
|
|
|
|
Cost or Adjusted /
Amortized Cost
|
|
|
Gross Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
25,474
|
|
|
$
|
16
|
|
|
$
|
387
|
|
|
$
|
25,103
|
|
States, municipalities and political
subdivisions
|
|
|
184,145
|
|
|
|
2,107
|
|
|
|
137
|
|
|
|
186,115
|
|
Special revenue
|
|
|
42,593
|
|
|
|
19
|
|
|
|
204
|
|
|
|
42,408
|
|
Industrial and miscellaneous
|
|
|
115,313
|
|
|
|
294
|
|
|
|
932
|
|
|
|
114,675
|
|
Redeemable preferred stocks
|
|
|
3,442
|
|
|
|
61
|
|
|
|
21
|
|
|
|
3,482
|
|
Total fixed maturities
|
|
|
370,967
|
|
|
|
2,497
|
|
|
|
1,681
|
|
|
|
371,783
|
|
Nonredeemable preferred stocks
|
|
|
12,443
|
|
|
|
338
|
|
|
|
43
|
|
|
|
12,738
|
|
Equity securities
|
|
|
19,996
|
|
|
|
398
|
|
|
|
4,819
|
|
|
|
15,575
|
|
Total equity securities
|
|
|
32,439
|
|
|
|
736
|
|
|
|
4,862
|
|
|
|
28,313
|
|
Total investments
|
|
$
|
403,406
|
|
|
$
|
3,233
|
|
|
$
|
6,543
|
|
|
$
|
400,096
|
|
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, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
|
|
Gains (Losses)
|
|
|
Fair Value at Sale
|
|
|
Gains (Losses)
|
|
|
Fair Value at Sale
|
|
|
|
(In thousands)
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
338
|
|
|
$
|
8,686
|
|
|
$
|
(39
|
)
|
|
$
|
5,795
|
|
Equity securities
|
|
|
20
|
|
|
|
600
|
|
|
|
59
|
|
|
|
2,141
|
|
Total realized gains
|
|
|
358
|
|
|
|
9,286
|
|
|
|
20
|
|
|
|
7,936
|
|
Fixed maturities
|
|
|
(30
|
)
|
|
|
2,903
|
|
|
|
(136
|
)
|
|
|
1,216
|
|
Equity securities
|
|
|
(65
|
)
|
|
|
2,503
|
|
|
|
—
|
|
|
|
—
|
|
Total realized losses
|
|
|
(95
|
)
|
|
|
5,406
|
|
|
|
(136
|
)
|
|
|
1,216
|
|
Net realized gain (losses)
|
|
$
|
263
|
|
|
$
|
14,692
|
|
|
$
|
(116
|
)
|
|
$
|
9,152
|
|
10
|
|
2016
|
|
|
2015
|
|
|
|
Gains (Losses)
|
|
|
Fair Value at Sale
|
|
|
Gains (Losses)
|
|
|
Fair Value at Sale
|
|
|
|
(In thousands)
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
1,467
|
|
|
$
|
46,978
|
|
|
$
|
(2
|
)
|
|
$
|
9,321
|
|
Equity securities
|
|
|
65
|
|
|
|
6,084
|
|
|
|
105
|
|
|
|
3,794
|
|
Total realized gains
|
|
|
1,532
|
|
|
|
53,062
|
|
|
|
103
|
|
|
|
13,115
|
|
Fixed maturities
|
|
|
(35
|
)
|
|
|
92,698
|
|
|
|
(222
|
)
|
|
|
2,706
|
|
Equity securities
|
|
|
(853
|
)
|
|
|
2,589
|
|
|
|
—
|
|
|
|
—
|
|
Total realized losses
|
|
|
(888
|
)
|
|
|
95,287
|
|
|
|
(222
|
)
|
|
|
2,706
|
|
Net realized gain (losses)
|
|
$
|
644
|
|
|
$
|
148,349
|
|
|
$
|
(119
|
)
|
|
$
|
15,821
|
|
The table below summarizes the Company’s fixed maturities at June 30, 2016 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.
|
|
June 30, 2016
|
|
|
|
Cost or Amortized Cost
|
|
|
Percent of Total
|
|
|
Fair Value
|
|
|
Percent of Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
40,925
|
|
|
|
8
|
%
|
|
$
|
40,975
|
|
|
|
8
|
%
|
Due after one year through five years
|
|
|
186,681
|
|
|
|
37
|
%
|
|
|
188,441
|
|
|
|
36
|
%
|
Due after five years through ten years
|
|
|
175,594
|
|
|
|
35
|
%
|
|
|
180,860
|
|
|
|
35
|
%
|
Due after ten years
|
|
|
103,891
|
|
|
|
20
|
%
|
|
|
107,935
|
|
|
|
21
|
%
|
Total
|
|
$
|
507,091
|
|
|
|
100
|
%
|
|
$
|
518,211
|
|
|
|
100
|
%
|
The following table summarizes the Company’s net investment income by major investment category for the three and six months ended June 30, 2016 and 2015, respectively:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Fixed maturities
|
|
$
|
5,609
|
|
|
$
|
1,840
|
|
|
$
|
4,030
|
|
|
$
|
3,319
|
|
Equity securities
|
|
|
(2,983
|
)
|
|
|
428
|
|
|
|
970
|
|
|
|
853
|
|
Cash, cash equivalents and short-term investments
|
|
|
136
|
|
|
|
88
|
|
|
|
137
|
|
|
|
211
|
|
Other investments
|
|
|
(138
|
)
|
|
|
43
|
|
|
|
(111
|
)
|
|
|
60
|
|
Net investment income
|
|
|
2,624
|
|
|
|
2,399
|
|
|
|
5,026
|
|
|
|
4,443
|
|
Investment expenses
|
|
|
(401
|
)
|
|
|
(309
|
)
|
|
|
(766
|
)
|
|
|
(720
|
)
|
Net investment income, less investment expenses
|
|
$
|
2,223
|
|
|
$
|
2,090
|
|
|
$
|
4,260
|
|
|
$
|
3,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016 or December 31, 2015. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the six months ended June 30, 2016 and 2015. In addition, there were no material gross realized gains or losses in the six months ended June 30, 2016 and 2015.
11
The following tables present an aging of our unrealized investment losses by investment class as of June 30, 2016 and December 31, 2015:
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
|
Number of
Securities
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Number of
Securities
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
9
|
|
|
$
|
3
|
|
|
$
|
1,144
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
States, municipalities and political
subdivisions
|
|
|
13
|
|
|
|
9
|
|
|
|
7,033
|
|
|
|
2
|
|
|
|
6
|
|
|
|
657
|
|
Special revenue
|
|
|
29
|
|
|
|
78
|
|
|
|
7,367
|
|
|
|
4
|
|
|
|
17
|
|
|
|
2,836
|
|
Industrial and miscellaneous
|
|
|
75
|
|
|
|
134
|
|
|
|
11,244
|
|
|
|
15
|
|
|
|
30
|
|
|
|
2,559
|
|
Redeemable preferred stocks
|
|
|
9
|
|
|
|
28
|
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
135
|
|
|
|
252
|
|
|
|
27,350
|
|
|
|
21
|
|
|
|
53
|
|
|
|
6,052
|
|
Nonredeemable preferred stocks
|
|
|
34
|
|
|
|
20
|
|
|
|
1,629
|
|
|
|
4
|
|
|
|
15
|
|
|
|
318
|
|
Equity securities
|
|
|
39
|
|
|
|
1,414
|
|
|
|
5,027
|
|
|
|
30
|
|
|
|
2,356
|
|
|
|
5,818
|
|
Total equity securities
|
|
|
73
|
|
|
|
1,434
|
|
|
|
6,656
|
|
|
|
34
|
|
|
|
2,371
|
|
|
|
6,136
|
|
Total investments
|
|
|
208
|
|
|
$
|
1,686
|
|
|
$
|
34,006
|
|
|
|
55
|
|
|
$
|
2,424
|
|
|
$
|
12,188
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
|
Number
of
Securities
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Number
of
Securities
|
|
|
Gros
s
Unrealized
Losses
|
|
|
Fai
r
Value
|
|
|
|
(In thousands)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
19
|
|
|
$
|
385
|
|
|
$
|
19,849
|
|
|
|
2
|
|
|
$
|
3
|
|
|
$
|
397
|
|
States, municipalities and political
subdivisions
|
|
|
14
|
|
|
|
50
|
|
|
|
10,979
|
|
|
|
1
|
|
|
|
3
|
|
|
|
164
|
|
Special revenue
|
|
|
141
|
|
|
|
870
|
|
|
|
73,312
|
|
|
|
5
|
|
|
|
61
|
|
|
|
1,318
|
|
Industrial and miscellaneous
|
|
|
134
|
|
|
|
279
|
|
|
|
60,203
|
|
|
|
10
|
|
|
|
9
|
|
|
|
1,646
|
|
Redeemable preferred stocks
|
|
|
9
|
|
|
|
21
|
|
|
|
950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities
|
|
|
317
|
|
|
|
1,605
|
|
|
|
165,293
|
|
|
|
18
|
|
|
|
76
|
|
|
|
3,525
|
|
Nonredeemable preferred stocks
|
|
|
19
|
|
|
|
29
|
|
|
|
1,560
|
|
|
|
5
|
|
|
|
14
|
|
|
|
250
|
|
Equity securities
|
|
|
48
|
|
|
|
2,975
|
|
|
|
8,416
|
|
|
|
20
|
|
|
|
1,844
|
|
|
|
2,680
|
|
Total equity securities
|
|
|
67
|
|
|
|
3,004
|
|
|
|
9,976
|
|
|
|
25
|
|
|
|
1,858
|
|
|
|
2,930
|
|
Total investments
|
|
|
384
|
|
|
$
|
4,609
|
|
|
$
|
175,269
|
|
|
|
43
|
|
|
$
|
1,934
|
|
|
$
|
6,455
|
|
NOTE 5. 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.
12
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, 2016 and the year ended
December 31, 2015, there were no transfers in or out of Levels 1, 2 and 3.
June 30, 2016
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Fixed maturities investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
25,606
|
|
|
$
|
1,433
|
|
|
$
|
24,173
|
|
|
$
|
—
|
|
States, municipalities and political
subdivisions
|
|
|
274,092
|
|
|
|
—
|
|
|
|
274,092
|
|
|
|
—
|
|
Special revenue
|
|
|
67,226
|
|
|
|
22,710
|
|
|
|
44,516
|
|
|
|
—
|
|
Industrial and miscellaneous
|
|
|
147,553
|
|
|
|
—
|
|
|
|
147,553
|
|
|
|
—
|
|
Redeemable preferred stocks
|
|
|
3,734
|
|
|
|
3,734
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities investments
|
|
|
518,211
|
|
|
|
27,877
|
|
|
|
490,334
|
|
|
|
—
|
|
Nonredeemable preferred stocks
|
|
|
15,263
|
|
|
|
15,263
|
|
|
|
—
|
|
|
|
—
|
|
Equity securities
|
|
|
16,593
|
|
|
|
16,593
|
|
|
|
—
|
|
|
|
—
|
|
Total equity securities
|
|
|
31,856
|
|
|
|
31,856
|
|
|
|
—
|
|
|
|
—
|
|
Total investments
|
|
$
|
550,067
|
|
|
$
|
59,733
|
|
|
$
|
490,334
|
|
|
$
|
—
|
|
December 31, 2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
(1)
|
|
$
|
3,300
|
|
|
$
|
3,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed maturities investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
25,103
|
|
|
|
22,361
|
|
|
|
2,742
|
|
|
|
—
|
|
States, municipalities and political
subdivisions
|
|
|
186,115
|
|
|
|
—
|
|
|
|
186,115
|
|
|
|
—
|
|
Special revenue
|
|
|
42,408
|
|
|
|
—
|
|
|
|
42,408
|
|
|
|
—
|
|
Industrial and miscellaneous
|
|
|
114,675
|
|
|
|
—
|
|
|
|
114,675
|
|
|
|
—
|
|
Redeemable preferred stocks
|
|
|
3,482
|
|
|
|
3,482
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities investments
|
|
|
375,083
|
|
|
|
29,143
|
|
|
|
345,940
|
|
|
|
—
|
|
Nonredeemable preferred stocks
|
|
|
12,738
|
|
|
|
12,738
|
|
|
|
—
|
|
|
|
—
|
|
Equity securities
|
|
|
15,575
|
|
|
|
15,575
|
|
|
|
—
|
|
|
|
—
|
|
Total equity securities
|
|
|
28,313
|
|
|
|
28,313
|
|
|
|
—
|
|
|
|
—
|
|
Total investments
|
|
$
|
403,396
|
|
|
$
|
57,456
|
|
|
$
|
345,940
|
|
|
$
|
—
|
|
(1)
|
Includes commercial paper with maturities of three months or less at time of purchase of $3,300 classified in cash and cash equivalents.
|
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at June 30, 2016 and December 31, 2015:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
2,582
|
|
|
$
|
2,582
|
|
Building
|
|
|
10,301
|
|
|
|
9,599
|
|
Computer hardware and software
|
|
|
3,128
|
|
|
|
2,502
|
|
Office furniture and equipment
|
|
|
669
|
|
|
|
634
|
|
Tenant and leasehold improvements
|
|
|
3,321
|
|
|
|
3,300
|
|
Vehicle fleet
|
|
|
822
|
|
|
|
693
|
|
Total, at cost
|
|
|
20,823
|
|
|
|
19,310
|
|
Less: accumulated depreciation and amortization
|
|
|
2,950
|
|
|
|
2,199
|
|
Property and equipment, net
|
|
$
|
17,873
|
|
|
$
|
17,111
|
|
13
Depreciation and amortization expense for property and equipment was $353 and $751 for the six months ended June 30, 2016, respectively. The Company’s real estate consists of 14 acres of land and four buildings with a gross area of approximately 191 square
feet.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Assets
As of June 30, 2016 and December 31, 2015 goodwill was $48,845 and $8,028, respectively, and intangible assets were $28,467 and $2,120, respectively. The increase in goodwill and intangible assets reflects the goodwill and intangible assets recorded in connection with the Zephyr acquisition. The preliminary purchase price allocation to goodwill and intangible assets has not been finalized and is subject to change. As of June 30, 2016, the amount of goodwill that we expect to be deductible for income tax purposes is $8,028. The Company has estimated the useful life of the value of business acquired (see Note 3) to be one year and is amortizing the balance based on the remaining percentage of acquired unearned premium from Zephyr. The Company has estimated the useful life of the other intangible assets to range between 10-15 years and is currently amortizing at an average of 12.5 years until the finalization of the purchase price allocation is completed and the useful lives have been finalized.
|
Goodwill
|
|
|
(in thousands)
|
|
Balance as of December 31, 2015
|
$
|
8,028
|
|
Goodwill acquired
|
|
40,817
|
|
Impairment
|
|
—
|
|
Balance as of June 30, 2016
|
$
|
48,845
|
|
Estimated annual pretax amortization of intangible assets for the remainder of 2016 and each of the next five years and thereafter (in thousands):
|
|
|
|
|
|
|
|
|
|
Remainder of 2016
|
|
$
|
2,996
|
|
2017
|
|
|
2,435
|
|
2018
|
|
|
2,128
|
|
2019
|
|
|
2,128
|
|
2020
|
|
|
2,116
|
|
2021
|
|
|
2,104
|
|
Thereafter
|
|
|
14,560
|
|
|
|
$
|
28,467
|
|
Amortization expense of intangible assets was $2,812 and $2,860 for the three and six months ended June 30, 2016. The Company recorded no amortization expense for the three and six months ended June 30, 2015.
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods indicated.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders (000's)
|
|
$
|
18,368
|
|
|
$
|
25,400
|
|
|
$
|
25,791
|
|
|
$
|
55,456
|
|
Weighted average shares outstanding
|
|
|
29,653,668
|
|
|
|
29,877,636
|
|
|
|
30,010,776
|
|
|
|
29,838,322
|
|
Basic earnings per share:
|
|
$
|
0.62
|
|
|
$
|
0.85
|
|
|
$
|
0.86
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders (000's)
|
|
$
|
18,368
|
|
|
$
|
25,400
|
|
|
$
|
25,791
|
|
|
$
|
55,456
|
|
Weighted average shares outstanding
|
|
|
29,653,668
|
|
|
|
29,877,636
|
|
|
|
30,010,776
|
|
|
|
29,838,322
|
|
Weighted average dilutive shares
|
|
|
-
|
|
|
|
390,860
|
|
|
|
61,848
|
|
|
|
353,894
|
|
Total weighted average dilutive shares
|
|
|
29,653,668
|
|
|
|
30,268,496
|
|
|
|
30,072,624
|
|
|
|
30,192,216
|
|
Diluted earnings per share:
|
|
$
|
0.62
|
|
|
$
|
0.84
|
|
|
$
|
0.86
|
|
|
$
|
1.84
|
|
14
As of June 30, 2016, the Company repurchased 1,140,289 shares of the Company’s stock in open market transactions for $16,562. As of June 30, 2016, the Company had $53,438 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.
NOTE 9. 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 months ended June 30, 2016 and 2015:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Beginning Balance
|
|
$
|
35,991
|
|
|
$
|
25,843
|
|
|
$
|
34,800
|
|
|
$
|
24,370
|
|
Policy acquisition costs deferred
|
|
|
27,330
|
|
|
|
18,358
|
|
|
|
46,649
|
|
|
|
32,924
|
|
Amortization
|
|
|
(20,753
|
)
|
|
|
(12,253
|
)
|
|
|
(38,881
|
)
|
|
|
(25,346
|
)
|
Ending Balance
|
|
$
|
42,568
|
|
|
$
|
31,948
|
|
|
$
|
42,568
|
|
|
$
|
31,948
|
|
NOTE 10. INCOME TAXES
During the six months ended June 30, 2016 and 2015, the Company recorded $16,006 and $33,826, respectively, of income tax expense which corresponds to an estimated annual effective tax rate of 38.3% and 37.9%, respectively.
The table below summarizes the significant components of our net deferred tax assets (liabilities):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
18,422
|
|
|
$
|
17,979
|
|
Tax-related discount on loss reserve
|
|
|
1,577
|
|
|
|
1,140
|
|
Unrealized loss
|
|
|
—
|
|
|
|
1,617
|
|
Stock-based compensation
|
|
|
2,450
|
|
|
|
1,277
|
|
Other
|
|
|
548
|
|
|
|
256
|
|
Total deferred tax assets
|
|
$
|
22,997
|
|
|
$
|
22,269
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
14,932
|
|
|
|
13,424
|
|
Unrealized gain
|
|
|
3,428
|
|
|
|
—
|
|
Investment basis difference on purchase
|
|
|
840
|
|
|
|
—
|
|
Intangibles
|
|
|
10,537
|
|
|
|
—
|
|
Property and equipment
|
|
|
471
|
|
|
|
473
|
|
Other
|
|
|
405
|
|
|
|
408
|
|
Total deferred tax liabilities
|
|
|
30,613
|
|
|
|
14,305
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(7,616
|
)
|
|
$
|
7,964
|
|
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.
As of June 30, 2016 and December 31, 2015, we had no significant uncertain tax positions.
15
NOTE 11. REINSURANCE
The Company’s reinsurance program is designed, utilizing the Company’s risk management methodology, to address its exposure to catastrophes. 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.
2016-2017 Reinsurance Program
The Company placed its reinsurance program for the period from June 1, 2016 through May 31, 2017 during the second quarter of 2016.This reinsurance program incorporates the catastrophe risk of our two insurance subsidiaries, Heritage Property & Casualty Insurance Company, a Florida based insurer, and Zephyr Insurance Company, 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 Ltd., a Bermuda special purpose insurer formed in 2014 (“Citrus Re”), and the Florida Hurricane Catastrophe Fund (“FHCF”).Coverage is shared by both insurers unless otherwise noted. The 2016-2017 reinsurance program provides, 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 $3.0 billion.
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 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 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.
|
·
|
The Company’s Retention
. If a first catastrophic event strikes Florida, the Company has a primary retention of the first $40 million of losses and loss adjustment expenses, of which Osprey is responsible for $20 million. If a first catastrophic event strikes Hawaii, the Company has a primary retention of the first $30 million of losses and loss adjustment expenses, of which Osprey is responsible for $15 million. If a second event strikes Florida, Heritage P&C’s primary retention decreases to $15 million and the remainder of the losses are ceded to third parties. If a second event strikes Hawaii, Zephyr’s primary retention decreases to $5 million. In the second event only for a loss exceeding $190 million, there is an additional Company co-participation of 5.4% subject to a maximum co-participation of $11.6 million. Heritage P&C and Zephyr each have a $5 million primary retention for events beyond the second catastrophic event. Osprey has no primary retention beyond the first catastrophic event in Florida or Hawaii. Additionally, Osprey is responsible for payment of up to $5.3 million of reinstatement premium, depending on the amount of losses incurred.
|
|
·
|
Shared Layers above retention and below FHCF
. Immediately above the retention, the Company has purchased $374 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company is able to reinstate the full amount of this reinsurance one time. To the extent that $374 million or a portion thereof is exhausted in a first catastrophic event, the Company has purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage.
|
|
·
|
FHCF Layer
. The Company’s FHCF program provides coverage for Florida events only and includes an estimated maximum provisional limit of 45% of $1.3 billion, in excess of its retention of $399 million. The limit and retention of the FHCF coverage is subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company has purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re. To the extent the FHCF coverage is adjusted, this private reinsurance with third party reinsurers and Citrus Re will adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events.
|
|
·
|
Layers alongside the FHCF.
The Florida reinsurance program includes third party layers alongside the FHCF. These include 2015 C and 2015 B series catastrophe bonds, which cover Florida only for the 2016 season, and 2016 D and 2016 E catastrophe bond series issued by Citrus Re, which total $377.5 million of coverage, as discussed below, as well as a traditional reinsurance layer providing $200 million of coverage. Through a reinstatement, the Company is able to reinstate the full amount of the $200 million of reinsurance one time. These 2016 catastrophe bonds and the traditional reinsurance layer provide coverage for both Florida and Hawaii catastrophe losses.
|
16
|
·
|
2016 Class D and E Notes:
During February 2016, Heritage P&C and Zephyr entered into two catastrophe reinsurance agreements with Citrus
Reuther agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2016. Heritage P&C and Zephyr pay a periodic premium to Citrus Re during this three-year risk period. Citrus
Re issued an aggregate of $250 million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to Heritage P&C and Zephyr under the reinsurance agreements. The Class D notes provide $150 million of c
overage and the Class E notes provide $100 million of coverage. The Class D and Class E notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized
by a reinsurance trust account for the benefit of Heritage P&C and Zephyr. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreemen
ts.
|
|
·
|
2015 Class B and C Notes
: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re.
The 2015 notes do not provide coverage for Zephyr for the 2016 hurricane season. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class B notes provide $97.5 million of coverage, and the Class C notes provide $30 million of coverage. The Class B and Class C notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.
|
Layers above the FHCF - Florida program
|
·
|
2015 Class A Notes:
During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The 2015 notes do not provide coverage for Zephyr for the 2016 hurricane season. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class A notes provide $150 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.
|
|
·
|
2014 Class A Notes:
Coverage immediately below and above the 2015 Class A notes is provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re, provides $150 million of coverage immediately below 2015 Class A and the second contract provides an additional $50 million of coverage which sits immediately above 2015 Class A. During April 2014, Heritage P&C entered into two catastrophe reinsurance agreements with Citrus Re. The 2014 notes do not provide coverage for Zephyr for the 2016 hurricane season. The agreements provide for three years of coverage from catastrophe losses caused by certain named storms, including hurricanes, beginning on June 1, 2014. The limit of coverage of $200 million is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued $200 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.
|
|
·
|
Multi-Zonal Layers
– The Company purchased additional layers which provide coverage for Florida for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii is a counterpart to the Florida-only catastrophe bond layers and FHCF layer. There is a total of $282 million of reinsurance coverage purchased on this basis, with $260 million having a prepaid reinstatement. The multi-zonal occurrence layer provides first and second event coverage of $260 million for Hawaii and second event coverage of $260 million for Florida. A top and drop multi-zonal layer provides first and subsequent event coverage of $22 million for Hawaii and second or subsequent event coverage of $22 million for Florida.
|
17
|
·
|
Aggregate Coverage
. In addition to what is described above, much of the reinsurance is structured in
a way to provide aggregate coverage. $682 million of limit is structured on this basis. To the extent that this coverage is not fully exhausted in the first catastrophic event, it provides coverage commencing at its reduced retention for second and subsequ
ent events where underlying coverage has been previously exhausted. $460 million has a reinstatement, which is prepaid.
|
For a first catastrophic event striking Florida, our reinsurance program provides coverage for $1.9 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 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. $860 million of limit purchased in 2016 includes a reinstatement, with $825 million being prepaid. In total, we have purchased $3.0 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.
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 is segmented into layers of coverage, protects 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 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.
|
•
|
The Company’s Retention
. For the first catastrophic event, the Company had a primary retention of the first $35 million of losses and loss adjustment expenses, of
which
Osprey is responsible for $20 million. For a second event, Heritage P&C’s primary retention decreased to $5 million and Osprey is responsible for $10 million. To the extent that there is reinsurance coverage remaining, Heritage P&C has a $5 million primary retention for events beyond the second catastrophic event. Osprey has no primary retention beyond the second catastrophic event.
|
|
•
|
Layers Below FHCF
. Immediately above the Company’s retention, the Company had purchased $440 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $440 million or a portion thereof was exhausted in a first catastrophic event, the Company had purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage. A portion of this coverage wraps around the FHCF and provided coverage alongside and above the FHCF.
|
|
•
|
FHCF Layer
. The Company’s FHCF coverage included an estimated maximum provisional limit of 75% of $920 million, or $690 million, in excess of its retention and private reinsurance of $336 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company had purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re To the extent the FHCF coverage was adjusted, this private reinsurance with third party reinsurers and Citrus Re would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage could not be reinstated once exhausted, but it did provide coverage for multiple events.
|
|
•
|
CAT Bond Layer alongside the FHCF
. During April 2015 Heritage P&C entered into three catastrophe reinsurance agreements with Citrus Re. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C paid periodic premiums to Citrus Re during the three-year risk period. Citrus Re issued an aggregate of $277.5 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. These notes were issued in three classes. The Class A notes provide $150 million of coverage for the layer immediately above the FHCF. The Class B notes provided $97.5 million of coverage, and the Class C notes provided $30 million of coverage. The Class B and Class C notes provided reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage was fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.
|
18
|
•
|
CAT Bond Layer above the FHCF
. Immediately above the FHCF layer was the coverage provided by the 2015 reinsurance agreement entered into with Citrus Re
. The Citrus Re. 2015 Class A notes provided up to $150 million of coverage immediately above the FHCF layer. Coverage immediately above the 2015 Class A notes was provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract
with Citrus Re provides $150 million of coverage and the second contract provided an additional $50 million of coverage.
|
|
•
|
Aggregate Coverage
. In addition to the layers described above, the Company had also purchased $125 million of aggregate reinsurance coverage for losses and loss adjustment expenses in excess of $1.648 billion for a first catastrophic event. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention for second and subsequent events and where underlying coverage had been previously exhausted. There was no reinstatement of the aggregate reinsurance coverage once exhausted, but it did provide coverage for multiple events.
|
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 have also 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 may experience significant losses and loss adjustment expenses in excess of our retention.
2014 – 2015 Reinsurance Program
During the second quarter of 2014, the Company placed its reinsurance program for the period from June 1, 2014 through May 31, 2015. The Company’s reinsurance program, which is segmented into layers of coverage, protects it for excess property catastrophe losses and loss adjustment expenses. The Company’s 2014-2015 reinsurance program incorporated the mandatory coverage required by law to be placed with FHCF. The Company 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, 2014 to May 31, 2015 reinsurance program.
|
•
|
The Company’s Retention
. For the first catastrophic event, the Company had a primary retention of the first $15 million of losses and loss adjustment expenses, of which Osprey was responsible for $6 million. For a second event, Heritage P&C’s primary retention decreased to $2 million and Osprey was responsible for $4 million. To the extent that there was reinsurance coverage remaining, Heritage P&C had a $2 million primary retention for events beyond the third catastrophic event. Osprey had no primary retention beyond the second catastrophic event.
|
|
•
|
Layers Below FHCF
. Immediately above the Company’s retention, the Company purchased $185 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $185 million or a portion thereof was exhausted in a first catastrophic event, the Company purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage. A portion of this coverage wrapped around the FHCF and provided coverage alongside the FHCF.
|
|
•
|
FHCF Layer
. The Company’s FHCF coverage included an estimated maximum provisional limit of 90% of $484 million, or $436 million, in excess of its retention and private reinsurance of $181 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company purchased coverage alongside from third party reinsurers. The layer alongside was in the amount of $48 million. To the extent the FHCF coverage was adjusted, this private reinsurance would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage could not be reinstated once exhausted, but it did provide coverage for multiple events.
|
|
•
|
CAT Bond Layer
. Immediately above the FHCF layer was the coverage provided by the reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re provided $150 million of coverage and the second contract provides an additional $50 million of coverage. Osprey provided $25 million of coverage alongside the second contract.
|
19
|
•
|
Aggregate Coverage
. In addition to the layers described above, the Company purchased $105 million of aggregate reinsurance coverage for losses and loss adju
stment expenses in excess of $825.0 million for a first catastrophic event. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention levels for second and subsequent
events and where underlying coverage had been previously exhausted. There was no reinstatement of the aggregate reinsurance coverage once exhausted, but it did provide coverage for multiple events. Osprey Re provided $20 million of protection in the layer
above $940 million.
|
For a first catastrophic event, the Company’s 2014-2015 reinsurance program provided coverage for $990 million of losses and loss adjustment expenses, including its retention, and the Company was responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, the Company’s total available coverage depended on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. The Company purchased reinstatement premium protection insurance to provide an additional $185 million of coverage. The Company’s aggregate reinsurance layer also provided coverage for second and subsequent events to the extent not exhausted in prior events.
Property Per Risk Coverage
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 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.
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:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Premium written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
177,955
|
|
|
$
|
134,785
|
|
|
$
|
316,087
|
|
|
$
|
236,286
|
|
Assumed
|
|
|
(660
|
)
|
|
|
812
|
|
|
|
8,474
|
|
|
|
33,279
|
|
Ceded
|
|
|
(242,927
|
)
|
|
|
(181,652
|
)
|
|
|
(243,659
|
)
|
|
|
(182,422
|
)
|
Net premium written
|
|
$
|
(65,632
|
)
|
|
$
|
(46,055
|
)
|
|
$
|
80,902
|
|
|
$
|
87,143
|
|
Change in unearned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
(30,294
|
)
|
|
$
|
(44,461
|
)
|
|
$
|
(40,681
|
)
|
|
$
|
(70,983
|
)
|
Assumed
|
|
|
16,636
|
|
|
|
35,966
|
|
|
|
31,700
|
|
|
|
54,520
|
|
Ceded
|
|
|
188,208
|
|
|
|
149,397
|
|
|
|
143,339
|
|
|
|
125,655
|
|
Net decrease (increase)
|
|
$
|
174,550
|
|
|
$
|
140,902
|
|
|
$
|
134,358
|
|
|
$
|
109,192
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
147,661
|
|
|
$
|
90,324
|
|
|
$
|
275,406
|
|
|
$
|
165,303
|
|
Assumed
|
|
|
15,976
|
|
|
|
36,777
|
|
|
|
40,174
|
|
|
|
87,799
|
|
Ceded
|
|
|
(54,719
|
)
|
|
|
(32,255
|
)
|
|
|
(100,320
|
)
|
|
|
(56,767
|
)
|
Net premiums earned
|
|
$
|
108,918
|
|
|
$
|
94,846
|
|
|
$
|
215,260
|
|
|
$
|
196,335
|
|
Losses and LAE incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
30,034
|
|
|
$
|
17,525
|
|
|
$
|
81,800
|
|
|
$
|
43,003
|
|
Assumed
|
|
|
18,758
|
|
|
|
16,384
|
|
|
|
33,961
|
|
|
|
23,445
|
|
Ceded
|
|
|
2
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
Net losses and LAE incurred
|
|
$
|
48,794
|
|
|
$
|
33,909
|
|
|
$
|
115,757
|
|
|
$
|
66,448
|
|
20
The following table highlights the effects that the Company’s assumption transactions have on unpaid losses and loss adjustment expenses and unearned premiums:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
(In thousands)
|
Unpaid losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
87,311
|
|
|
$
|
60,223
|
|
|
Assumed
|
|
|
30,200
|
|
|
|
23,499
|
|
|
Gross unpaid losses and LAE
|
|
|
117,511
|
|
|
|
83,722
|
|
|
Ceded
|
|
|
(26
|
)
|
|
|
—
|
|
|
Net unpaid losses and LAE
|
|
$
|
117,485
|
|
|
$
|
83,722
|
|
|
Unearned premiums:
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
328,779
|
|
|
$
|
258,754
|
|
|
Assumed
|
|
|
12,039
|
|
|
|
43,739
|
|
|
Gross unearned premiums
|
|
|
340,818
|
|
|
|
302,493
|
|
|
Ceded
|
|
|
(226,627
|
)
|
|
|
(78,517
|
)
|
|
Net unearned premiums
|
|
$
|
114,191
|
|
|
$
|
223,976
|
|
|
NOTE 12. RESERVE FOR UNPAID LOSSES
The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date.
The table below summarizes the activity related to the Company’s reserve for unpaid losses:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
108,443
|
|
|
$
|
61,846
|
|
|
$
|
83,722
|
|
|
$
|
51,469
|
|
Less: reinsurance recoverable on paid losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net balance, beginning of period
|
|
|
108,443
|
|
|
|
61,846
|
|
|
|
83,722
|
|
|
|
51,469
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
49,126
|
|
|
|
33,760
|
|
|
|
101,626
|
|
|
|
70,812
|
|
Prior years
|
|
|
(332
|
)
|
|
|
149
|
|
|
|
14,131
|
|
|
|
(4,364
|
)
|
Total incurred
|
|
|
48,794
|
|
|
|
33,909
|
|
|
|
115,757
|
|
|
|
66,448
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
25,421
|
|
|
|
18,580
|
|
|
|
38,053
|
|
|
|
28,395
|
|
Prior years
|
|
|
14,331
|
|
|
|
7,046
|
|
|
|
43,941
|
|
|
|
19,393
|
|
Total paid
|
|
|
39,752
|
|
|
|
25,626
|
|
|
|
81,994
|
|
|
|
47,788
|
|
Net balance, end of period
|
|
|
117,485
|
|
|
|
70,129
|
|
|
|
117,485
|
|
|
|
70,129
|
|
Plus: reinsurance recoverable on unpaid losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, end of period
|
|
$
|
117,485
|
|
|
$
|
70,129
|
|
|
$
|
117,485
|
|
|
$
|
70,129
|
|
The Company writes insurance in the states of Florida, North Carolina, South Carolina and Hawaii, 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 balance sheet date.
The Company’s losses incurred during the six months ended June 30, 2016 and 2015 reflect a prior year deficiency of $14,131 and a redundancy of $4,364, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. All of the unfavorable development was from personal lines. Also, most of the unfavorable emergence came from the second, third and fourth quarters of 2015 and are 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 2016 has been isolated to the tri-county region of Florida (the counties of Miami-Dade, Broward and Palm Beach).
21
NOTE 13. OTHER LIABILITIES
At June 30, 2016 and December 31, 2015, other liabilities included approximately $2,467 and $4,920, respectively, 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 periods ending June 30, 2016 and December 31, 2015 was $6,426 and $5,793, for commission payable, $3,440 and $3,919 for accounts payable and other payables, and $5,260 and $3,253, for taxes, suspense and unearned revenue, respectively.
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 subsidiary. 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. Combined results of the Company’s insurance subsidiaries reported a net loss of $600 for the six months ended June 30, 2016 and a net income of $45,000 for the year ended December 31, 2015.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 and Zephyr are required to maintain capital and surplus equal to the greater of $15,000 or 10% of their liabilities. The Company’s combined statutory surplus was $284,000 and $216,600 at June 30, 2016 and December 31, 2015, respectively. State law also requires the Company’s insurance subsidiary to adhere to prescribed premium-to-capital surplus ratios, with which the Company is in compliance.
In 2014, the Florida legislature passed Senate Bill 1308, which was signed into law by the Governor. Among other things, this bill incorporates the National Association of Insurance Commissioners (“NAIC”) recommendations with regard to expansion of the regulation of insurers to include non-insurance entity affiliates. Specifically, the new law permits the FLOIR to examine affiliated entities within an insurance holding company system in order to ascertain the financial condition of the insurer. The law also provides for certain disclosures with regard to enterprise risk, which are satisfied by the provision of related information filed with the SEC. This legislation was designed to bolster regulation for insurer solvency and governance and became effective January 1, 2015.
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.
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, 2016 and 2015.
|
·
|
The Company has entered into an agreement with a real estate management company controlled by one of its directors to manage its Clearwater office space. Management services are provided at a fixed fee, plus ordinary and necessary out of pocket expenses. Fees for additional services, such as the oversight of construction activity, are provided for on an as-needed basis. For the period ended June 30, 2016 and 2015, the Company paid the management service company approximately $60 and $62, respectively.
|
NOTE 17. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) plan for 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 months ended June 30, 2016 and 2015, the Company’s contributions to the plan on behalf of the participating employees were $248 and $160, respectively.
22
The Company provides for its employees a partially self-insured healthcare plan and benefits. For the six months ended June 30, 2016 and 2015, the Company incurred medical premium costs in the aggregate of $1,366 and $496, respec
tively. The Company also recorded approximately $472 as unpaid claims as of 2015. 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 f
or 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 cover
age 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, 2016, the Company had 29,301,121 shares of common stock outstanding, 1,140,289 treasury shares of common stock and 1,125,000 unvested restricted common stock [not included in the outstanding share count] issued reflecting total paid-in capital of $205,036 as of such date.
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.
Equity
As more fully disclosed in our audited consolidated financial statements for the year ended December 31, 2015, there were, as of December 31, 2015, 30,441,410 shares of common stock outstanding, 1,149,923 stock options outstanding, and 1,125,000 unvested restricted stock grants, representing $202,628 of additional paid-in capital.
Stock Repurchase Program
On September 14, 2015, the Company announced that the Company’s Board of Directors, authorized a stock repurchase program authorizing the Company to repurchase up to $20,000 of the Company’s common stock. The stock repurchase program expires December 31, 2016. The Company purchased 612,300 shares at a total cost of $9,635 during the three months ended March 31, 2016, through open market or private transactions. From the existing repurchase program, the Company purchased an additional 527,989 shares at a cost of $6,927 during the three months ending months ended June 30, 2016, through open market or private transactions. On May 4, 2016, the Board of Directors authorized an additional stock repurchase of up to $50,000 of the Company’s common stock through on December 31, 2017.
Dividends
On March 2, 2016, the Company announced a first quarter dividend of $0.05 per share payable on April 5, 2016, to stockholders of record as of the close of business on March 15, 2016. On December 17, 2015, the Company announced a cash dividend of $0.05 per share on the Company’s common stock, payable on January 13, 2016 to stockholders of record as of the close of business on December 31, 2015.
On May 4, 2016, the Company announced a second quarter dividend of $0.06 per share payable on July 1, 2016, to stockholders of record as of the close of business on June 15, 2016. During the six months ended June 30, 2016 and the year ended December 31, 2015, dividends charged to retained earnings were $3,419 and $1,578, respectively.
NOTE 19. STOCK-BASED COMPENSATION
The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”), which became effective on May 22, 2014. The Plan has authorized 2,981,737 shares of common stock reserved for issuance under the Plan for future grants.
23
At June 30, 2016 and December 31, 2015, there were 170,814shares 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, 2016 is as follows:
|
|
Options
|
|
|
Weighted - Average Grant Date Fair
Value
|
|
Balance at December 31, 2015
|
|
|
1,149,923
|
|
|
$
|
2.99
|
|
Granted
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
1,149,923
|
|
|
$
|
2.99
|
|
Vested and exercisable as of June 30, 2016
|
|
|
1,149,923
|
|
|
$
|
2.99
|
|
The Company had approximately $0 and $50 of unrecognized stock compensation expense at June 30, 2016 and 2015, respectively, related to unvested stock-based compensation granted. The Company recognized approximately $0 and $1,800 of compensation expense during the six months ended June 30, 2016 and 2015, respectively.
Stock-based compensation costs for restricted grants is measured based on the closing fair market value of our common stock on the date of grant. The Company recognizes stock-based compensation costs over the award’s requisite service period on a straight-line basis for time-based restricted stock grants.
Restricted Stock
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant-Date Fair
|
|
|
|
Number of shares
|
|
|
Value per Share
|
|
Unvested, at December 31, 2015
|
|
|
1,125,000
|
|
|
$
|
21.40
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Canceled and forfeited
|
|
|
—
|
|
|
|
—
|
|
Unvested, at June 30, 2016
|
|
|
1,125,000
|
|
|
$
|
21.40
|
|
The Company recognized $2,408 of compensation expense during the six months ended June 30, 2016.
The Company had approximately $20,919 of unrecognized stock compensation expense at June 30, 2016 related to unvested compensation, which the Company expects to recognize ratably over the period of 4.4 years. The Company did not have any compensation expense for the comparable period for 2015 relating to restricted stock.
NOTE 20. SUBSEQUENT EVENTS
On August 1, 2016, 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 3, 2016 to stockholders of record on September 15, 2016.
24