Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.
Overview
Heritage Insurance Holdings, Inc., is a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across its multi-state footprint. We provide personal residential insurance in sixteen states and commercial residential insurance in three of those states, while maintaining licenses in one additional state. As a vertically integrated insurer, we control or manage substantially all aspects of underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. Our financial strength ratings are important to the Company in establishing our competitive position and can impact our ability to write policies.
The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document.
Recent Developments
COVID-19 and Other Matters
We continue to monitor the short- and long-term impacts of the COVID-19 virus and its variants. For the quarter ended March 31, 2022, we saw negligible impact to our business. As a residential property insurer, we view our business as somewhat insulated because property owners and renters generally view our products as a necessity. The majority of our gross and net premiums written are from renewals of expiring policies. New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio. We could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition. Changes in the cost of materials and labor for home repairs can influence our loss costs associated with claims.
While we acknowledge uncertainties associated with future economic conditions, we do not expect a material impact to our business going forward. We will continue to monitor economic conditions and, in the case of a prolonged economic slowdown as a result of COVID-19, will take necessary actions to mitigate any negative impacts to our business, operations or financial results.
Financial Results for the first quarter of 2022
•Net loss for the quarter was $30.8 million, or $1.15 per share, up from net loss of $5.1 million or $0.19 per share in the prior year quarter.
•Book value per share of $10.65, on March 31, 2022 was down 16.9% from December 31, 2021. The decrease is attributable to underwriting losses in the first quarter 2022 coupled with unrealized losses on the Company’s available-for-sale fixed income securities portfolio. The unrealized losses were unrelated to credit risk but were primarily due to the sharp first-quarter decline in bond prices in a higher interest rate environment.
•Gross premiums earned of $287.4 million, up 6.3% from $270.4 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months.
•Gross premiums written of $283.2 million, up 3.3% from the prior year quarter, with intentional exposure-management and re-underwriting efforts resulting in a 4.0% reduction in Florida, offset by growth of 11.4% in other regions.
•Premiums in force of $1.2 billion, up 4.7% from first quarter 2021.
•Net current accident year weather losses of $63.8 million, up substantially from $31.4 million in the prior year quarter. Current accident year weather losses include $45.0 million of net current accident quarter catastrophe losses, up from $15.4 million in the prior year quarter, and $18.8 million of other weather losses, up from $16.1 million in the prior year quarter.
•Total capital returned to shareholders of $6.7 million, representing a $0.06 per share regular quarterly dividend and repurchase of 721,118 shares of stock.
23
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(Unaudited) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in thousands) |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
283,196 |
|
|
$ |
274,181 |
|
|
$ |
9,015 |
|
|
|
3.3 |
% |
Change in gross unearned premiums |
|
|
4,172 |
|
|
|
(3,770 |
) |
|
|
7,942 |
|
|
|
(210.7 |
)% |
Gross premiums earned |
|
|
287,368 |
|
|
|
270,411 |
|
|
|
16,957 |
|
|
|
6.3 |
% |
Ceded premiums |
|
|
(134,439 |
) |
|
|
(128,212 |
) |
|
|
(6,227 |
) |
|
|
4.9 |
% |
Net premiums earned |
|
|
152,929 |
|
|
|
142,199 |
|
|
|
10,730 |
|
|
|
7.5 |
% |
Net investment income |
|
|
2,000 |
|
|
|
1,293 |
|
|
|
707 |
|
|
|
54.7 |
% |
Net realized gains |
|
|
(16 |
) |
|
|
80 |
|
|
|
(96 |
) |
|
NM |
|
Other revenue |
|
|
3,695 |
|
|
|
3,671 |
|
|
|
24 |
|
|
|
0.7 |
% |
Total revenue |
|
$ |
158,608 |
|
|
$ |
147,243 |
|
|
$ |
11,365 |
|
|
|
7.7 |
% |
NM= Not Meaningful
Gross premiums written
Gross premiums written were $283.2 million, up 3.3% year-over-year, reflecting a 4.0% intentional exposure management related reduction in Florida that was offset by11.4% growth in other states. Rate increases meaningfully benefited written premiums throughout the book of business. The reduction in Florida gross written premium reflects our strategy to manage our Florida total insurance value ("TIV") and attritional loss ratios by controlling renewals and new business written.
Premiums-in-force were $1.2 billion in first quarter 2022, up 4.7% from first quarter 2021, while policies-in-force were down 5.5%, with the delta largely stemming from rate increases. Policies-in-force were 559,496, a 5.5% reduction from 591,924 policies at first quarter 2021. The reduction in policies in force from the second quarter of 2021 reflects our exposure management initiatives.
Gross premiums earned
Gross premiums earned were $287.4 million in first quarter 2022, up 6.3% from $270.4 million in the prior year quarter. The increase reflects higher gross premiums written over the last twelve months.
Ceded premiums
Ceded premiums were $134.4 million in first quarter 2022, up 4.9% from $128.2 million in the prior year quarter. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program driven by an increase in TIV for the respective reinsurance contract periods.
Net premiums earned
Net premiums earned were $152.9 million in first quarter 2022, up 7.5% from $142.2 million in the prior year quarter. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums, as described above.
Net investment income
Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $2.0 million in first quarter 2022, compared to $1.4 million in the prior year quarter. The increase is primarily due to higher balances in our fixed income portfolio than the prior year quarter.
Other revenue
Other revenue was $3.7 million in first quarter 2022, relatively flat when compared to the prior year quarter.
Total revenue
Total revenue was $158.6 million in first quarter 2022, up 7.7% from $147.2 million in the prior year quarter. The increase primarily stems from higher net premiums earned, as described above.
24
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|
|
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|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(Unaudited) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
OPERATING EXPENSES: |
|
(in thousands) |
|
Losses and loss adjustment expenses |
|
|
140,038 |
|
|
|
97,909 |
|
|
|
42,129 |
|
|
|
43.0 |
% |
Policy acquisition costs |
|
|
38,257 |
|
|
|
35,366 |
|
|
|
2,891 |
|
|
|
8.2 |
% |
General and administrative expenses |
|
|
19,724 |
|
|
|
19,800 |
|
|
|
(76 |
) |
|
|
(0.4 |
)% |
Total operating expenses |
|
|
198,019 |
|
|
|
153,075 |
|
|
|
44,944 |
|
|
|
29.4 |
% |
Losses and loss adjustment expenses
Losses and loss adjustment expenses (“LAE”) were $140.0 million in first quarter 2022, up 43.0% from $97.9 million in the prior year quarter. The increase stems from higher net weather losses, as described above.
Policy acquisition costs
Policy acquisition costs were $38.3 million in first quarter 2022, up 8.2% from $35.4 million in the prior year quarter. The increase is primarily attributable to growth in gross premiums written and is partially offset by higher ceding commission income.
General and administrative expenses
General and administrative expenses were $19.7 million in first quarter 2022, relatively flat when compared to the prior year quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(Unaudited) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(in thousands, except per share amounts) |
|
Operating loss |
|
|
(39,411 |
) |
|
|
(5,832 |
) |
|
|
(33,579 |
) |
|
|
575.8 |
% |
Interest expense, net |
|
|
1,972 |
|
|
|
1,878 |
|
|
|
94 |
|
|
|
5.0 |
% |
Loss before income taxes |
|
|
(41,383 |
) |
|
|
(7,710 |
) |
|
|
(33,672 |
) |
|
|
436.8 |
% |
Benefit for income taxes |
|
|
(10,624 |
) |
|
|
(2,562 |
) |
|
|
(8,062 |
) |
|
|
314.6 |
% |
Net loss |
|
$ |
(30,759 |
) |
|
$ |
(5,148 |
) |
|
$ |
(25,611 |
) |
|
|
497.5 |
% |
Basic net loss per share |
|
$ |
(1.15 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.96 |
) |
|
NM |
|
Diluted net loss per share |
|
$ |
(1.15 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.96 |
) |
|
NM |
|
Interest expense, net
Net interest expense was $2.0 million in the first quarter of 2022, relatively flat quarter-over-quarter.
Benefit for income taxes
Benefit for income taxes was $10.6 million in first quarter 2022 compared to $2.6 million in the prior year quarter. The effective tax rate was 25.7% in first quarter 2022, 7.6 points below the prior year quarter’s 33.2% rate. The lower effective tax rate relates to the impact of permanent tax differences on projected results of operations for the calendar year. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.
Net loss
First quarter 2022 net loss was $30.8 million ($1.15 loss per share), up from net loss of $5.2 million ($0.19 loss per share) in the prior year quarter. The year-over-year change primarily stems from a larger underwriting loss driven by significantly higher weather losses, which was partly offset by growth in net earned premium, as described above.
Ratios
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|
|
|
|
For the Three Months Ended March 31, |
|
(Unaudited) |
|
2022 |
|
|
2021 |
|
Ceded premium ratio |
|
|
46.8 |
% |
|
|
47.4 |
% |
|
|
|
|
|
|
|
Net loss and LAE ratio |
|
|
91.6 |
% |
|
|
68.9 |
% |
Net expense ratio |
|
|
37.9 |
% |
|
|
38.8 |
% |
Net combined ratio |
|
|
129.5 |
% |
|
|
107.7 |
% |
Ceded premium ratio
The ceded premium ratio was 46.8% in first quarter 2022, down 0.6 points from 47.4% in the prior year quarter, reflecting the growth in gross premiums earned outpacing the growth in ceded premiums.
25
Net loss and LAE ratio
The net loss and LAE ratio was 91.6% in first quarter 2022, up 22.7 points from 68.9% in the prior year quarter, driven by higher weather losses compared to the prior year quarter, which was partly offset by the 7.5% increase in net premiums earned.
Net expense ratio
The net expense ratio was 37.9% in first quarter 2022, relatively flat compared to 38.8% in the prior year quarter.
Net combined ratio
The net combined ratio was 129.5% in first quarter 2022, up 21.8 points from 107.7% in the prior year quarter. The increase primarily stems from a higher net loss and LAE ratio with a relatively flat net expense ratio.
Liquidity and Capital Resources
Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of March 31, 2022, we had $286.2 million of cash and cash equivalents and $689.5 million in investments, compared to $359.3 million and $694.7 million, respectively, as of December 31, 2021. The decrease in cash and cash equivalents was primarily due to the timing of reinsurance payments for our catastrophe excess of loss ("XOL") program.
We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates.
We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months.
We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes.
Cash Flows
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|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(39,206 |
) |
|
$ |
39,227 |
|
|
$ |
(78,433 |
) |
Investing activities |
|
|
(27,648 |
) |
|
|
(73,664 |
) |
|
|
46,016 |
|
Financing activities |
|
|
(4,312 |
) |
|
|
(3,749 |
) |
|
|
(563 |
) |
Net (decrease) increase in cash and cash equivalents |
|
$ |
(71,166 |
) |
|
$ |
(38,186 |
) |
|
$ |
(32,980 |
) |
Operating Activities
Net cash used in operating activities was $39.2 million for the three months ended March 31, 2022 compared to net cash provided by operating activities of $39.2 million for the comparable period in 2021. The decrease in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first three months of 2022 compared to the first three months of 2021.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022 was $27.6 million as compared to net cash used in investing activities of $73.7 million for the comparable period in 2021. The change in cash used in investing activities relates primarily to allocations of funds for investment in each period. Strategic sales of investments to yield realized gains in 2020 produced proceeds which were invested in early 2021.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2022 was $4.3 million, as compared to cash used in financing activities of $3.7 million for the comparable period in 2021. While net cash used in financing activities was relatively flat from the prior year quarter, we drew $15 million from our Revolving Credit Facility (defined below) to purchase and retire $11.7 million of Convertible Notes (defined below) during the first quarter of 2022, as described in Note 14.
26
Credit Facilities
The Company is party to a Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners (as amended from time to time, the “Credit Agreement”).
The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $75 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).
Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and increasing to $1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27, 2026. As of March 31, 2022, there was $68.3 million in aggregate principal outstanding on the Term Loan Facility.
Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $75 million inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans. As of March 31, 2022, we had $15 million in borrowings and a $7.5 million letters of credit outstanding under the Revolving Credit Facility.
At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin or (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00%, plus an applicable margin. The Credit Agreement provides for mechanisms for the transition away from LIBOR as a benchmark interest rate and replacement of LIBOR with an alternative benchmark rate.
The applicable margin for loans under the Credit Facilities varies from 2.5% per annum to 3.0% per annum (for LIBOR loans) and 1.5% to 2.0% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of March 31, 2022, the borrowing under our Credit Facilities were accruing interest at a rate of 3.0 % per annum.
In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by our consolidated leverage ratio.
We may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of LIBOR loans. In addition, we are required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).
All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”).
The Company and the Guarantors are party to a Pledge and Security Agreement, (as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.
The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 2.50 to 1.00 (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.
27
Convertible Notes
On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017.
The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”).
The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.
The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.
Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.
During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.
The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022.
Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 but prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date.
28
The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Notes automatically become immediately due and payable.
In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of March 31, 2022, there was $11.7 million principal amount of outstanding Convertible Notes.
FHLB Loan Agreements
In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $31.0 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan was used to prepay the Company’s Senior Secured Notes due 2023 in 2018.
Critical Accounting Policies and Estimates
When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three months ended March 31, 2022, we reassessed our critical accounting policies and estimates as disclosed within our 2021 Annual Report on Form 10-K.
Seasonality of our Business
Our insurance business is seasonal; hurricanes typically occur during the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters each year. With our catastrophe reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments.
Recent Accounting Pronouncements
The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.