Annual Report 2015
Dear Fellow Shareholders
I am pleased to report another year of record results in 2015 as we
build a track record of growth and above average market returns
for shareholders.
For 2015, Heritage posted significant growth on both the top and
bottom line as compared to 2014:
• Net premiums earned improved 68% to $376 million
• Net income increased 96% to $93 million
• Earnings per share grew 67% to $3.05
• Policies in force increased 23% to 257,000 policies
• Stockholders’ equity increased by 40% to $357 million
“We are just scratching
the surface on the many
coastal state opportunities
where we feel Heritage
can bring a value-added
solution to agents
and policyholders.”
Growing our direct book of business is a focal point for Heritage,
and our voluntary business continued to gain traction in 2015.
Importantly, we saw significant growth in our voluntary commercial
residential business with an acceleration in the second half of the
year. Our voluntary personal inforce written premium increased
64% for the full year while our commercial lines voluntary production
increased nine-fold. The Company’s underwriting capabilities were
a strong point as reflected in an impressive 74.9% gross combined
ratio. This substantial growth provided us with the financial flexibility
to put plans in place during 2015 to return capital to shareholders.
Our board approved a share buyback authorization and we
announced the Company’s first ever quarterly dividend.
Balancing Business Development with Capital Return
We commenced a dividend to return capital to shareholders while
simultaneously laying the groundwork for future growth initiatives.
During 2015, we began our multi-state expansion initiatives outside
of Florida, filing applications to write property and casualty
insurance in North Carolina, South Carolina, Massachusetts,
Georgia, Alabama and Mississippi. We are now approved in
both Carolinas, Alabama, Mississippi and Georgia and are actively
issuing new policies in North Carolina. Our team is focused on
appointing agents and streamlining our systems to achieve maximum
performance and efficiencies as we expand in new states. Our
relationship with National General in North Carolina made this state
a natural starting point as we leverage their automobile portfolio
with our homeowners’ products.
Beyond our organic growth initiatives, we remain active in M&A
where opportunities for profitable growth are present. We identified
an attractive asset in Zephyr Insurance Company (Zephyr) and
announced our acquisition of its parent company in September
2015. The transaction closed in March 2016 and it has provided
us an immediate presence in Hawaii as Zephyr accounts for
approximately 30% of the wind-only share of the market. The
Gross Premiums Written
(In millions)
$586
$436
$219
2013
2014
2015
Net income
(in millions)
$93
$47
$34
2013
2014
2015
Dear Fellow Shareholders
business is highly complementary, the deal is immediately accretive,
and we expect reinsurance synergies to be achieved within the
first year of closing. We look forward to a seamless integration
with the Zephyr team and working alongside such a strong group
of insurance professionals.
Differentiated Approach
Heritage’s outlook and approach to the marketplace is different
from its peer group and 2015 was once again marked by
innovation in how we look at the business: innovation in the
handling and resolution of claims; innovation in new business
production; innovation in our ability to secure alternative channels
of reinsurance coverage; and innovation in how we assume policies
from Citizens Insurance. First and foremost, our business success
stems from the treatment of policyholders and how quickly they
are helped in their time of need. We had the idea for in-house claim
mitigation early in our history and acquired water mitigation assets
from SVM in 2014. Our thinking was that we could provide quicker,
better and more satisfactory claims resolution by doing it ourselves
instead of outsourcing to third parties.
Our water mitigation program was instantly successful and we
decided to add to our capabilities with the acquisition of BRC
Restoration Specialists (BRC) in August 2015. The addition of
BRC’s professionals, trucks and materials further expanded our
internal water mitigation services and provided new reconstruction
capabilities. All of this was executed in an effort to better serve
our policyholders. We pride ourselves as a company on our rapid
response times and getting to the policyholder within hours
of a call.
Our solutions-oriented approach to claims mitigation contributes
to customer satisfaction, and ultimately policyholder retention,
but also mitigates run-away costs. Heritage will continue to
emphasize and evolve our claims-resolution initiatives, as we
believe this will serve as a competitive differentiator for years to
come. For example, we are currently training and certifying our
repair technicians to become licensed claims adjustors. We believe
the continued development of our technicians will allow Heritage to
capture additional efficiencies.
As it relates to our largest expense, reinsurance, we once again
secured multi-year reinsurance coverage through a catastrophe
bond issuance. This practice helps to insulate Heritage from yearly
reinsurance price swings and, with the attractive pricing in the
reinsurance marketplace over the last few years, positions Heritage
well in the coming years. The multi-year insurance cover allows
Heritage to achieve greater stability with reinsurance costs, which
allows the Company to keep prices more stable for policyholders.
Because of this market-leading business practice, Insurance
Insider recognized Heritage as the 2015 Insurer of the Year.
Book Value per Share
$11.71
$8.56
$7.20
2013
2014
2015
Policies-In-Force
(in thousands)
257
209
128
2013
2014
2015
Amid market speculation about state-run Citizens’ take-out pool
as a long-term viable growth channel, Heritage continued to
identify attractive policies in 2015 that met our underwriting
requirements. For the year, we assumed approximately 68,200
personal residential policies and approximately 860 commercial
residential policies representing roughly $139 million and $21
million of annualized premium, respectively. We will continue to
assess whether additional Citizens policies meet our underwriting
requirements. At the same time, we are focused on new channels
of growth. This was evidenced over the past year as we experienced
growth in voluntary policies, with notable success within our
commercial residential business. We are also exploring new product
introductions, including general liability insurance, which launched
in March 2016. We will continue to explore strategic expansion
initiatives, including M&A and strategic partnerships.
Solid Risk Management and Sustainability
We were founded on an entrepreneurial mindset coupled with
sound risk management principles. Our strict underwriting
guidelines continue to drive our success in capturing the right
new business. Heritage conducts its underwriting with the support
of an in-house actuarial team, and the Company strives to offer
the most competitively priced products commensurate with the
risk undertaken. In addition, our in-house claims and customer
services teams support all policyholders.
Heritage’s focus is identifying attractive policies that are additive
to the book of business. Our underwriting expertise will be a key
variable to our success in new regions.
Financial Strength Translates into Outperformance
Heritage continues to stand out not only amongst peers but also
amongst the broader market. With a return on average equity of
30.2% in 2015, the Company ranked in the top 20% of companies
in the S&P 500. Our share price performance also surpassed the
broader market with a 12% return in 2015 over the previous year.
We closed 2015 with $216 million in statutory surplus, no debt and
no quota share reinsurance putting us in a unique position within
our industry. We are focused on long-term shareholder returns by
concentrating on highly profitable and disciplined growth initiatives.
Dear Fellow Shareholders
The Zephyr transaction is the most recent example
of the synergistic initiatives designed to enhance
shareholder value.
As we progress through 2016, I remain very excited
about our prospects and the team here at Heritage
that will lead the company forward. We are just
scratching the surface on the many coastal state
opportunities where we feel Heritage can bring a
value-added solution to agents and policyholders.
Our hands-on approach and our vertically integrated
claims resolution model resonates with the market-
place. And we will continue to strive to develop
attractive coverage solutions that meet the demands
of these regions. With our proven track record in
Florida, a dynamic market with unique demands, we
are optimistic about our growth opportunities in these
new markets.
The commercial residential business has performed
above our expectations and we believe this market
will continue to be a growth avenue for the Company.
Relationships built on mutual trust and experience
are key to success in this space, and we have an
outstanding and experienced commercial team. We
have 22 dedicated professionals focused exclusively
on our commercial customers.
Serving Policyholders
Heritage is in the business of providing property
insurance protection to our policyholders. This
includes coverage if a hurricane should strike.
While we have been fortunate to have hurricane
free seasons since inception, we are prepared.
Our people have catastrophe experience, our
reinsurance program is robust, we have significant
surplus and are ready to fulfill our commitment to
policyholders in their time of need.
2015 was a year of growth as we gained share
in the Florida marketplace while identifying new
regions that would benefit from our customer
focused and claim solutions approach to serving
policyholders. As we move through 2016, it will be
a year of expansion and the continued strategic
positioning of our infrastructure and assets.
We are advancing our people and integrating
systems to ensure we understand the dynamics
of our new markets.
We are focused on building a company that will
thrive for the long-term and see ample opportunity
to penetrate new markets with competitive
products. Thank you for your continued support.
Bruce Lucas
Chairman & Chief Executive Officer,
Heritage Insurance Holdings, Inc.
April 18, 2016
Heritage Board of Directors
About Heritage Insurance
Bruce Lucas
Chairman and Chief Executive Officer
James Masiello
Director
Richard Widdicombe
President
Panagiotis Apostolou
Director
Irini Barlas
Director
Trifon Houvardas
Director
Nicholas Pappas
Director
Joseph Vattamattam
Director
Vijay Walvekar
Director
Heritage Insurance Holdings, Inc. is a property and casualty
insurance holding company headquartered in Clearwater,
Florida. Its subsidiaries, Heritage Property & Casualty Insurance
Company and Zephyr Insurance Company, write over $590 million
and $60 million, respectively, of personal and commercial
residential premium through a large network of experienced
agents. The Company is currently writing property and casualty
insurance policies in Florida, Hawaii and North Carolina.
Heritage Insurance Holdings, Inc. is led by a seasoned senior
management team with an average of 31 years of insurance
industry experience.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 2015
OR
For the Transition Period From to
Commission File Number 001-36462
Heritage Insurance Holdings, Inc.
Delaware
(STATE OF INCORPORATION)
45-5338504
(I.R.S. ID)
2600 McCormick Drive, Suite 300, Clearwater, Florida 33759
(727) 362-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.0001 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:3)(cid:133)
Non-accelerated filer (cid:3)(cid:133) (Do not check if a smaller reporting company)
Accelerated filer
(cid:3)(cid:95)
Smaller reporting company(cid:3)(cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of the Registrant’s common stock held by non-affiliates was $593,101,859 on June 30, 2015, computed on the basis on
the closing sale price of the Registrant’s common stock on the New York Stock Exchange on that date.
As of March 1, 2016, the number of shares outstanding of the Registrant’s common stock was 30,441,410.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K, provided that if such Proxy Statement is not filed with the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed no later than the end of such 120-day period.
(cid:3)
HERITAGE INSURANCE HOLDINGS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business ..................................................................................................................................................................
Risk Factors .............................................................................................................................................................
Unresolved Staff Comments ...................................................................................................................................
Properties .................................................................................................................................................................
Legal Proceedings ...................................................................................................................................................
Mine Safety Disclosure ...........................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ............................................................................................................................................................
Selected Financial Data ...........................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................................
Quantitative and Qualitative Disclosures about Market Risk ..................................................................................
Financial Statements and Supplementary Data .......................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................
Controls and Procedures ..........................................................................................................................................
Other Information ....................................................................................................................................................
Directors, Executive Officers and Corporate Governance ......................................................................................
Executive Compensation .........................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................
Certain Relationships and Related Transactions, and Director Independence ........................................................
Principal Accountant Fees and Services ..................................................................................................................
Exhibits, Financial Statements Schedules ...............................................................................................................
Signatures ....................................................................................................................................................................................
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws.
These forward-looking statements include, but are not limited to, statements regarding: our core strategy; our growth, results of
operations or liquidity; statements concerning projections, predictions, expectations, estimates or forecasts as to our business,
financial and operational results and future economic performance; statements of management’s goals and objectives; projections of
revenue, earnings, capital structure and other financial items; assumptions underlying statements regarding us and our business; and
other similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks and
uncertainties that could cause actual results and events to differ. A detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from such forward-looking statements is included throughout this filing and
particularly in Item 1A: "Risk Factors" and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” set forth in this Annual Report on Form 10-K. All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to revise or publicly release any revision to any such
forward-looking statement, except as may otherwise be required by law.
These statements are based on current expectations, estimates and projections about the industry and market in which we
operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or
comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future
performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from
those expressed or implied by such statements. The risks and uncertainties include, without limitation:
our limited operating history;
the possibility that actual losses may exceed reserves;
the concentration of our business in Florida;
our exposure to catastrophic events;
the fluctuation in our results of operations;
the discontinuation of the Citizens depopulation program and our inability to select favorable Citizens policies to assume;
increased costs of reinsurance, non-availability of reinsurance, and non-collectability of reinsurance;
increased competition, competitive pressures, and market conditions;
our failure to accurately price the risks we underwrite;
inherent uncertainty of our models and our reliance on such model as a tool to evaluate risk;
the failure of our claims department to effectively manage or remediate claims;
low renewal rates and failure of such renewals to meet our expectations;
our failure to execute our growth strategy;
failure of our information technology systems and unsuccessful development and implementation of new technologies;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) we do not have significant redundancy in our operations;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our failure to attract and retain qualified employees and independent agents or our loss of key personnel;
our inability to generate investment income;
our inability to maintain our financial stability rating;
effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;
the failure of our risk mitigation strategies or loss limitation methods; and
changes in regulations and our failure to meet increased regulatory requirements.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition or operating results.
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no
obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or
to reflect the occurrences of anticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from those contained in the forward-looking
statements. Consequently, you should not place undue reliance on forward-looking statements.
Item 1.
Business
Our Business
PART I
Heritage Insurance Holdings, Inc., (“we”, “our”, “us” and “Heritage Insurance”) is a property and casualty insurance holding
company that provides personal and commercial residential insurance. We are headquartered in Clearwater, Florida and, through our
subsidiary, Heritage Property & Casualty Insurance Company (“Heritage P&C”), we provide personal residential insurance for single-
family homeowners and condominium owners, rental property insurance and commercial residential insurance in the state of Florida
and North Carolina. We are vertically integrated and control or manage substantially all aspects of insurance underwriting, customer
service, actuarial analysis, distribution and claims processing and adjusting. We are led by an experienced senior management team
with an average of 31 years of insurance industry experience. We began operations in August 2012, and in December 2012 we began
selectively assuming policies from Citizens Property Insurance Corporation (“Citizens”), a Florida state-supported insurer, through
participation in a legislatively established “depopulation program” designed to reduce the state’s risk exposure by encouraging private
companies to assume insurance policies from Citizens. We also write policies outside the Citizens depopulation program, which we
refer to as voluntary policies. Heritage P&C is currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), a rating agency
specializing in evaluating the financial stability of insurers.
In addition to Heritage P&C, our other subsidiaries include: 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 that also houses with BRC Restoration Specialists Inc. (“BRC”), our provider of restoration, emergency and recovery
services; 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.
Heritage Insurance
Holdings, Inc.
Heritage Property &
Casualty Insurance Co.
Heritage MGA, LLC
Contractors' Alliance
Network, LLC
First Access Insurance
Group, LLC
Osprey Re Ltd (Bermuda)
Heritage Insurance
Claims, LLC
Skye Lane
Properties, LLC
Our Company
Our company was initially formed as a Florida limited liability company in 2012. On January 1, 2014, we formed a Delaware
limited liability company, also named Heritage Insurance Holdings, LLC, and merged with it in order to domicile the Company in
Delaware. Effective May 22, 2014, Heritage Insurance Holdings, LLC converted into a Delaware corporation named Heritage
Insurance Holdings, Inc.
Our primary products are personal and commercial residential insurance, which at December 31, 2015 were offered only in
Florida under authorization from the Florida Office of Insurance Regulation (“FLOIR”). We conduct our operations under one
business segment.
As of December 31, 2015, we had 253,726 personal residential policies in force, representing $478.0 million of annualized
premium and 3,405 commercial residential policies in force, representing $113.5 million of annualized premium. Approximately 75%
of our personal policies and 72% of our commercial policies as of December 31, 2015 were assumed from Citizens. For the years
ended December 31, 2015 and 2014, we had gross premiums written of $586.1 million and $436.4 million, respectively, and net
income of $92.5 million and $47.1 million, respectively. At December 31, 2015, we had total assets of $837.4 million and total
stockholders’ equity of $356.6 million.
1
As of December 31, 2015, Citizens had approximately 504,000 insurance policies, of which approximately 480,000 were
personal residential policies and approximately 8,300 were commercial residential policies. We have selectively assumed personal
residential policies from Citizens in 22 separate assumption transactions between December 2012 and December 2015, including 10 in
2015. In October 2014 we completed our first commercial residential assumption transaction. A substantial portion of our revenue
since our inception has come from these assumed policies. We intend to continue assuming policies from Citizens that meet our
assumption strategy and underwriting criteria. However, given the reduced policy count at Citizens resulting from the depopulation
program, we do not anticipate future assumptions to yield as many policies as historical assumption transactions.
In order to assume a policy from Citizens, we must obtain the prior approval of the insurance agent that wrote the policy. With
respect to policies written by agents that are affiliated with an insurance company or agency, we must also obtain the approval of the
insurance company or agency. Currently, four large national insurance companies or agencies permit us to assume policies from
Citizens that have been written by their agents—State Farm, Allstate, Brown & Brown and AAA (formerly the American Automobile
Association). In an effort to increase the pool of Citizens policies that we may assume, we are seeking similar advance approvals from
other insurance companies and agencies. We currently have advance approvals covering more than 5,200 agents. These agents were
responsible for writing more than 85% of the eligible personal residential insurance policies held by Citizens as of December 31,
2015.
Recent Developments
On September 29, 2015, the Company entered into a definitive agreement to acquire Zephyr Acquisition Company (“ZAC”) and
its wholly-owned subsidiaries, HI Holdings, Inc. and Zephyr Insurance Company, Inc. (“Zephyr”), a specialty insurance provider
in Hawaii that writes residential property insurance policies that covers the peril of wind. The acquisition will provide Heritage with
an immediate presence in Hawaii with Zephyr holding approximately 30% of the wind-only market share in the state. The purchase
price for the acquisition is approximately $120.0 million.
On September 14, 2015, the Company announced that the Board of Directors authorized a $20 million share repurchase program
under which purchases may be made from time to time in the open market, or through privately negotiated transactions, block
transactions or other techniques, as determined by the Company’s management. This program is available through December 31,
2016. To date, no shares have been repurchased.
In August 2015, the Company announced it received its certificate of Authority (“COA”) to write property and casualty
insurance in the state of North Carolina. North Carolina marks the beginning of the Company’s multi-state expansion. The Company
wrote its first policy in North Carolina in January 2016. The Company also was received its COA in South Carolina. The Company
has been approved in Alabama and Mississippi. The Company has also submitted applications Massachusetts and Georgia.
In July 2015, the Company acquired substantially all of the assets of BRC, a Florida based provider of restoration services and
emergency and recovery assistance. At closing, Company paid $6.0 million in cash and 79,850 shares of the Company’s common
stock valued at $2.0 million.
Our Strategy
Since our inception, a substantial portion of our revenue has come from policies we assumed from Citizens and Sunshine State
Insurance Company (“SSIC”), with the balance of our revenue generated from renewal of these assumed policies and from voluntary
policies. Building on these successful transactions, we intend to continue to grow profitably by undertaking the following:
Increase Our Policies in Force in Florida Through Strategic Policy Assumptions and Expansion of Our Voluntary Market Share
We intend to continue assuming policies from Citizens that meet our assumption strategy and underwriting criteria. We also
expect continue to pursue opportunities to acquire policies from private insurers. We will also pursue opportunities to increase the
number of our voluntary policies by expanding our independent agent distribution network, as well as obtaining approval from
national insurance companies to allow their agents to offer our personal residential policies in Florida. We entered into a marketing
agreement with National General Insurance Company and began writing homeowners insurance through their distribution network in
early 2016 in the state of North Carolina. We also intend to increase our marketing efforts, which we believe will allow us to more
effectively penetrate areas of the state where we are not currently writing significant new business.
Opportunistically Diversify Product Offerings
We will continue to grow our commercial residential business, which we launched in the fourth quarter of 2014 with assumption
transactions from Citizens, as well as through voluntary sales. As of December 31, 2015, our commercial residential policies
represented approximately $113.4 million of in-force premium, which included $66.0 million from Citizens assumptions. We
anticipate most of our future growth in commercial residential will come from voluntary sales, as we have already selected most of the
2
commercial policies that meet our underwriting criteria from Citizens. In the fourth quarter of 2014, we also entered into the
manufactured housing line of business by assuming approximately 10,100 policies from Citizens. Additional new product lines may
include non-residential coverage, such as general liability insurance. We have had no growth in manufacturing housing during 2015,
nor do we anticipate any future growth.
Optimize Our Reinsurance Program
We will continue to obtain what we believe to be the most appropriate levels and sources of reinsurance. We believe that the
significant additional capital entering portions of the reinsurance market provides us with the opportunity to obtain favorable pricing
and contract terms and conditions, including multi-year commitments, which comprise a significant portion of our 2015-2016
reinsurance program. In April 2014 and 2015, we entered into fully collateralized catastrophe reinsurance agreements funded through
the issuance of a total of $478.0 million principal amount of catastrophe bonds, and we will continue evaluating such cost-efficient
alternatives to traditional reinsurance. Additionally, we will continue to meet certain of our reinsurance needs through the use of our
reinsurance subsidiary, Osprey, which mitigates our reinsurance expense and reduces our reliance on third-party reinsurance.
Efficiently Manage Losses and Loss Adjustment Expenses
We are committed to proactively managing our losses and loss adjustment expenses through prudent underwriting and the use of
internal claims adjustment and repair services. In March 2014, we acquired the largest vendor in the CAN network, which we believe
has allowed us to expand our in-house mitigation and restoration services. We are licensing our CAN employees as adjusters, which
we believe will reduce our loss adjustment expenses and shorten the length of time required to resolve claims. Additionally, the
acquisition of assets of BRC provides us with additional resources and capabilities to perform restoration services in-house, as well as
provide construction resources after a catastrophic event.
Expand to New Geographic Markets
We intend to explore opportunities to enter other coastal states where we believe the market opportunity is most similar to
Florida and where we can utilize our underwriting and claims expertise to attract and manage profitable business. We believe further
increasing our geographic diversification is an important factor in reducing our potential risk of loss from any catastrophic event,
reducing our per policy reinsurance costs and providing an additional area for future growth beyond our expansion in Florida. In 2015,
we received COA to write property and casualty insurance in the states of North Carolina and South Carolina. We received approvals
to write property and casualty insurance in the states of Alabama and Mississippi in 2016. We also have submitted applications in
Massachusetts and Georgia.
Our Competitive Strengths
We believe that our rapid growth to date and our ability to capitalize on our future growth prospects are a result of the following
competitive strengths of our business:
Experienced Management Team With a Long History in the Florida Personal Residential Insurance Market
We have a deep and experienced management team led by Bruce Lucas, Chairman and Chief Executive Officer, Richard
Widdicombe, President, Stephen Rohde, Chief Financial Officer, Melvin Russell, Chief Underwriting Officer, Ernesto Garateix, Chief
Operating Officer, Sharon Binnun, Executive Vice President Finance, Paul Nielsen, Vice President of Claims, Joseph Peiso, Vice
President of Compliance, Randy Jones, President Commercial Division and Arlene Luis, Executive Vice President Commercial. Our
management team, which averages 31 years of insurance industry experience, has extensive experience in the Florida personal and
commercial residential insurance market, has built longstanding relationships with key participants in the insurance industry and is
supported by a group of highly qualified individuals with industry expertise, including a Chief Actuary with more than 36 years of
industry experience.
Strong, Conservative Capital Structure
As of December 31, 2015, we had stockholders’ equity of $356.6 million. As of December 31, 2015, Heritage P&C had
policyholder surplus, as defined by statutory accounting principles, of $216.6 million. We believe that this level of surplus places us
among the best capitalized insurance companies focusing primarily on the Florida personal residential insurance market and is
significantly in excess of the minimum capital levels required by FLOIR and Demotech for similarly rated in-state insurance
companies. In addition, unlike many of our in-state competitors, we have relied exclusively upon common equity to provide our
capital.
3
Selective Underwriting and Policy Acquisition Criteria
We believe our proprietary data analytics capabilities and underwriting processes allow us to better select the insurance policies
we are willing to assume from the Citizens depopulation program, leading to strong profitability and reduced risk. In addition, we
choose to minimize our exposure to or avoid certain types of coverage if we believe there is significant risk of loss, including coverage
for sink-hole related losses in high-risk areas. As a result of our efforts, our gross loss ratio was 26.9% and 28.7% for the years ended
December 31, 2015 and 2014, respectively.
Unique Claims Servicing Model and Superior Customer Service
We believe that the vertical integration of our claims adjustment and repair services provides us with a competitive
advantage. Because we manage both claims adjusting and repair services, we are generally able to begin the adjustment and mitigation
process much earlier than our competitors, thus reducing our loss adjustment expenses and ultimate loss payouts. A significant number
of our repair technicians are participating in training and certification programs to become licensed claims adjusters (eight out of the
nineteen are now licensed), allowing us to capture additional efficiencies. We also believe our unique model provides a superior level
of customer service for our policyholders, enhancing our reputation and increasing the likelihood that our policyholders will renew
their policies with us.
Relationships with Highly Rated Reinsurers
We manage our exposure to catastrophic events through, among other things, the purchase of reinsurance. Our relationships
with highly rated reinsurers have been developed as a result of our management team’s industry experience and reputation for
selective underwriting. Our financial strength, underwriting results and the long-term relationships between our management team and
our reinsurance partners help improve the cost-effectiveness of our reinsurance program.
Relationships with Independent Agents and National Underwriters
We have developed relationships with a network of approximately 3,500 independent insurance agents. We believe we have
been able to build this network due to our reputation for financial stability, commitment to the Florida market and integrity in the
underwriting and claims process. We are also exploring relationships with additional large national insurers and agencies that no
longer write substantial personal residential insurance in Florida, which would give us access to their network of Florida agents.
Our Competition
The market for residential property insurance is highly competitive. In Florida, our primary market there are over 164 licensed
insurance companies that are actively writing homeowners’ policies. The table below shows year-to-date in-force premium volume
and market share for the top 20 companies in Florida as of September 30, 2015, which is the most recent date for which this
information is publicly available. We compete to varying degrees with all of these companies and others, including large national
carriers, the state-sponsored homeowners’ insurance entity, and single state or regional carriers.
Florida Property Insurance Market - Personal Residential and Commercial Residential - Ranked by Total Premiums Written.*
Company Name (1)
Policies In Force
Total Premiums Written
% of
Distribution
CITIZENS PROPERTY INSURANCE CORPORATION
UNIVERSAL PROPERTY & CASUALTY INSURANCE COMPANY
HERITAGE PROPERTY & CASUALTY INSURANCE COMPANY
FEDERATED NATIONAL INSURANCE COMPANY
HOMEOWNERS CHOICE PROPERTY & CASUALTY INSURANCE COMPANY, INC.
UNITED PROPERTY & CASUALTY INSURANCE COMPANY
AMERICAN COASTAL INSURANCE COMPANY
SECURITY FIRST INSURANCE COMPANY
UNITED SERVICES AUTOMOBILE ASSOCIATION
PEOPLE'S TRUST INSURANCE COMPANY
FLORIDA PENINSULA INSURANCE COMPANY
ST. JOHNS INSURANCE COMPANY, INC.
AMERICAN INTEGRITY INSURANCE COMPANY OF FLORIDA
TOWER HILL PRIME INSURANCE COMPANY
FIRST PROTECTIVE INSURANCE COMPANY
FEDERAL INSURANCE COMPANY
TOWER HILL SIGNATURE INSURANCE COMPANY
AIG PROPERTY CASUALTY COMPANY
OLYMPUS INSURANCE COMPANY
USAA CASUALTY INSURANCE COMPANY
Total - Top 20 Insurers
Total - All Insurers
4
557,378
544,681
247,221
231,828
163,808
172,422
4,653
265,132
123,922
146,128
119,370
169,266
209,581
144,845
76,973
32,456
93,696
14,177
85,406
57,770
3,460,713
5,965,572
$ 1,131,976,454
817,920,814
525,973,280
416,422,753
404,728,434
320,886,191
320,682,697
288,617,942
281,568,543
272,211,596
267,975,059
263,099,788
242,634,183
236,987,264
208,861,567
183,529,011
159,136,687
151,703,381
150,839,928
138,740,749
$ 6,784,496,321
$ 10,187,690,519
11.11%
8.03%
5.16%
4.09%
3.97%
3.15%
3.15%
2.83%
2.76%
2.67%
2.63%
2.58%
2.38%
2.33%
2.05%
1.80%
1.56%
1.49%
1.48%
1.36%
66.60%
100%
(1)
This exhibit excludes State Farm Florida Insurance Company, whose data was not publicly available on September 30, 2015.
*
The information displayed in the table above is compiled and published by the Florida Office of Insurance Regulation based on
information filings submitted quarterly by all Florida licensed insurance companies. The information above is presented for each
individual company and is not consolidated or aggregated.
Products and Distribution
We market and write personal lines voluntary policies through a network of approximately 1,400 independent agents. Of these
agents, approximately 56% are affiliated with eight large agency networks with which we have entered into master agency
agreements. We intend to pursue additional voluntary business from agents in our existing independent agent network, expand our
independent agent network and seek additional opportunities to use insurer-affiliated agents to offer our personal residential policies in
Florida. We had 40,131 voluntary policies (15.6% of our total policies in force) as of December 31, 2015, and for the year ended
December 31, 2015, we wrote an average of 1,920 new voluntary policies per month. We entered into a marketing agreement with
National General Insurance Company and began writing homeowners insurance through their distribution network in early 2016 in the
state of North Carolina. The voluntary market is a significant component of our growth strategy.
We market and write commercial residential voluntary policies through a network of approximately 60 independent agents. We
intend to pursue additional voluntary business from these agents in our existing independent agent network, expand our independent
agent network and seek additional opportunities to increase our commercial residential policies in Florida. We started writing
voluntary policies in October 2014. For the year ended December 31, 2015, we wrote 898 policies with an average premium of
$50,704, totaling $45.5 million in new voluntary policies. The commercial voluntary market is a major component of our commercial
growth strategy.
We seek to underwrite a diverse mix of geographic risks within Florida to manage the potential impact of a catastrophic event
and reduce our per policy reinsurance costs. As of December 31, 2015, the geographic distribution of our policies in force and total
insured values were as follows (figures may not sum to totals due to rounding):
South Florida Counties
Miami-Dade
Broward
Palm Beach
South Florida Exposure
Other Significant Counties(1)
Pinellas
Hillsborough
Pasco
Lee
Sarasota
Collier
Manatee
Total Other Significant Counties
Summary for all of Florida
South Florida Exposure
Total Other Significant Counties
Other Florida Counties
TOTAL
As of December 31, 2015
(Total Insured Value in Millions)
Total All Lines
Policy Count
Total Insured Value
(TIV) $
% TIV
37,641
31,804
22,244
91,689
29,012
20,605
13,503
13,143
9,686
7,144
6,481
99,574
91,689
99,574
65,868
257,131
$ 15,365
15,875
9,457
$ 40,697
$ 9,661
6,283
3,619
4,744
3,142
3,019
2,530
$ 32,998
$ 40,697
32,998
21,171
$ 94,866
16.2%
16.7%
10.0%
42.9%
10.2%
6.6%
3.8%
5.0%
3.3%
3.2%
2.7%
34.8%
42.9%
34.8%
22.3%
100.0%
(1)
Other significant counties are defined as those counties with a total insured value greater than 2.0% of the $94.9 billion of total insured value as of December 31,
2015. This amount includes policies that do not cover the peril of wind.
In order to limit our potential exposure to individual risks and catastrophic events, we purchase significant reinsurance from
third party reinsurers. Purchasing reinsurance is an important part of our risk strategy, and premiums paid (or ceded) to reinsurers is
our single largest cost. We have strong relationships with reinsurers which we believe are a result of our management’s industry
5
experience and reputation for selective underwriting and effective claim management. For the twelve months beginning June 1, 2014
and 2015, we purchased catastrophe reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-
mandated catastrophe fund (“FHCF”), (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc.
(“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”), (iii) sponsorship of multiple catastrophe bonds that provide
$478 million of principal limit that can be drawn upon over a three year period, and (iv) our wholly-owned reinsurance subsidiary,
Osprey. In addition to purchasing catastrophe reinsurance, we also purchased property risk reinsurance which limits our net exposure
in the event of a severe non-catastrophe loss impacting a single location or risk to $1.0 million. We also utilize facultative reinsurance
to supplement our per risk reinsurance program where our capacity needs dictate. See “-Reinsurance – 2015 – 2016 Catastrophe
Reinsurance Program”.
The FLOIR requires all insurance companies, like us, to have a certain amount of capital reserves and reinsurance coverage in
order to cover losses upon the occurrence of a catastrophic event. Our reinsurance program for the twelve months beginning June 1,
2014 and 2015 provides reinsurance in excess of FLOIR’s requirements, which are based on the probable maximum loss that we
would incur from an individual catastrophic event estimated to occur once every 100 years based on our portfolio of insured risks. We
also purchase reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year.
We test the sufficiency of our reinsurance program by subjecting our personal and commercial residential exposures to
statistical testing using the AIR U.S. Hurricane Model, which replicates the most severe hurricanes to have occurred historically in
Florida, individual storms of severity in excess of such historical levels, and the historical calendar years in which the most severe
multiple catastrophic events occurred in Florida. In this regard, the 2004 calendar year, in which four large catastrophic hurricanes
made landfall in Florida, is considered to be the worst catastrophic year in Florida’s recorded history. Assuming the reoccurrence of
the 2004 calendar year events, the probable maximum net loss to us in 2015, based on the coverage for our 2015-2016 reinsurance
program, would be $36.9 million (after tax, net of all reinsurance recoveries and including our retention through Osprey). This loss
would have represented 10.4% of our stockholders’ equity at December 31, 2015.
We closely manage all aspects of our claims adjustment process. Claims are initially reviewed by our managers and staff
adjusters, who determine the extent of the loss and the resources needed to adjust each claim. In the case of a catastrophic event, we
have contracted with four large national claims adjusting firms to assist our adjusters with the increased volume of claims and ensure
timely responses to our policyholders. We utilize our wholly-owned subsidiary, CAN, to manage mitigation and restoration services
for our customers. CAN primarily handles water damage-related claims, which comprised approximately 73% of our losses and loss
adjustment expenses through December 31, 2015. In March 2014, we completed the acquisition of the assets and personnel of our
main water mitigation services vendor. This acquisition has allowed us to better service our customers and expand our mitigation and
restoration services. In addition, all of our voluntary policies and renewed Citizens policies are enrolled in our Platinum Preferred
Savings Program (the “Platinum Program”). Under the Platinum Program, customers receive a 10% discount on their claim
deductible, and we obtain control over inspection, claims adjusting and repair services. We believe our approach to claims handling
results in a higher level of customer service and reduces our losses and loss adjustment expenses. As a result of our efforts, our gross
loss ratio, which expresses our losses and loss adjustment expenses as a percentage of gross earned premiums, was 26.9% and 28.7%
for the years ended December 31, 2015 and 2014, respectively. In addition, we utilize our recent acquisition, BRC, to manage and
provide restoration services to CAN customers for all types of claims. BRC currently provides services for non-insurance related
projects which we expect to decrease in future periods.
Our Market
According to the U.S. Census Bureau, at December 23, 2014, Florida was the third largest U.S. state with an estimated
population of approximately 20 million people. The University of Florida Bureau of Economic and Business Research estimates that
Florida is expected to reach a population of approximately 26 million people by 2040, an increase of 36% from 2010. Property
ownership and development represent key drivers of the Florida economy.
Because of its geography, Florida is exposed to an increased risk of hurricanes during the entire six months of the Atlantic
hurricane season, which spans from June 1 through November 30. While a significant hurricane has not made landfall in Florida since
2005, eight hurricanes in 2004 and 2005, including Hurricanes Charley, Katrina, Rita and Wilma, caused a combined estimated
property damage of over $110 billion, a significant portion of which occurred in Florida. As a result, personal residential insurance
and claims servicing are vitally important to Florida residents.
The Florida residential insurance market is highly fragmented and dominated by in-state insurance companies, including
Citizens. Significant dislocation in the Florida property insurance market began following Hurricane Andrew in 1992 and accelerated
following the 2004 and 2005 hurricane seasons. In total, national and regional insurers reduced their share of the market in Florida
from 84% in 1999 to 26% in 2012. As national and regional insurance companies reduced their exposure in Florida, Citizens increased
efforts to provide affordable residential insurance to those residents unable to obtain coverage in the private market. As a result,
Citizens’ policy count grew from roughly 726,000 policies in 2005 to a peak level of approximately 1.5 million policies in late 2011.
6
To reduce Citizens’ risk exposure, beginning in 2010, Florida elected officials encouraged Citizens to focus on reducing the size of its
portfolio by returning policies to the private market. In response, Citizens instituted a number of measures to incentivize the private
sector to participate in the depopulation program. Some of these initiatives include increased inspections, improved underwriting,
reductions in coverage and annual rate increases. Depopulation efforts have been successful, as Citizens’ policy count at
December 31, 2015 was approximately 504,000. As of December 31, 2015, approximately 192,000 of Heritage’s in force policies
were assumed through the depopulation program.
According to data compiled by FLOIR, which excludes State Farm Florida Insurance Company, Citizens was the largest
residential insurance carrier in Florida as of September 30, 2015, with a market share of approximately 11.1% based on total in force
direct premiums written for personal and commercial residential insurance. As of the same date, we ranked third in Florida within this
market, with a market share of approximately 5.2%, and through our depopulation efforts, we have grown substantially since inception
in 2012. Assuming further access to capital and reinsurance support, we believe we have the opportunity to significantly expand the
size of our personal and commercial residential insurance business in Florida and of our business into other complementary business
lines and states. In 2015, we received our COA to write property and casualty insurance in the state of North and South Carolina. We
received approval to write property and casualty insurance in Alabama and Mississippi. We have also submitted applications in
Massachusetts and Georgia.
In recent years, the property and casualty insurance market has experienced a substantial increase in the availability of property
catastrophe reinsurance resulting from the increased supply of capital from non-traditional insurance providers, including private
capital and hedge funds. This increased capital supply, coupled with a lack of recent significant catastrophic storm activity in Florida,
has reduced the cost of property catastrophe reinsurance, directly benefitting purchasers of this reinsurance, including us.
Underwriting
Our underwriters evaluate and select only those risks that they believe will enable us to achieve an underwriting profit. In order
to achieve underwriting profitability on a consistent basis, we focus on (1) the suitability of the risk to be assumed or written, (2) the
adequacy of the premium with regard to the risk to be assumed or written and (3) the geographic distribution of existing policies
within Florida.
All of our personal lines underwriting is done internally under the supervision of our Chief Underwriting Officer with input
from our Chief Actuary and our Director of Risk Management. Our commercial lines underwriting is done internally under the
supervision of our Executive Vice President Commercial Division. Our underwriters use our proprietary data analytics capabilities,
which include a number of automated processes, to analyze a number of risk evaluation factors, including the age, construction,
location and value of the residence and the premiums to be received from insuring the residence. New technological advances in
computer generated geographical mapping afford us an enhanced perspective as to geographic concentrations of policyholders. When
considering the geographic distribution of existing policies, our underwriters may consider the number of other residences we insure
within the same region, county, city and zip code. We also consider the cost of reinsurance when assessing the adequacy of the
premium with regard to the risk to be assumed or written. In particular, because we assume policies from Citizens in large quantities,
we must evaluate the aggregate impact of the assumed policies on our reinsurance program. The underwriting criteria that we consider
will continue to evolve as our business grows and expands.
We also review our expiring policies to determine whether those risks continue to meet our underwriting guidelines. If a given
policy no longer meets our underwriting guidelines, we will take appropriate action regarding that policy, including raising premium
rates or, to the extent permitted by applicable law and our assumption agreements with Citizens, not offering to renew the policy.
Policy Administration
We have engaged West Point Underwriters, Inc. and Majesco Mastec, providers of web-based software solutions and insurance
personnel, to provide us with policy administration services for our business, including processing, billing and policy maintenance.
The software is able to adapt to a variety of forms and rates, handle the administration of an increasing number of policies as our
Company grows and expands, and provide detailed information about our book of business to our internal underwriters so that they
can adjust our underwriting criteria as necessary. The software provides us with daily updates regarding the insurance policies that we
have issued. The systems also allow us to provide renewal notices, late payment notices, cancellation notices, endorsements and
policies to our policyholders in a timely fashion.
Claims Administration
We closely manage all aspects of the claims process, from processing the initial filing to providing remediation services through
our wholly-owned subsidiary, CAN. When a policyholder contacts us to report a claim, members of our claims department create a
claim file and aggregate the appropriate supporting documentation. Claims are then reviewed by our managers and staff adjusters, who
7
assess the extent of the loss, including through on-site investigations, and determine the resources needed to adjust each claim. Our
claims are generally adjusted by our staff claims professionals, except in the case of a catastrophic event for which we have contracted
with four large national claims adjusting firms to assist our adjusters with the increased volume of claims and ensure timely responses
to our policyholders. In the final stage of the claims process, we leverage CAN vendor network to provide repair and remediation
services to the policyholder.
We perform or supervise the services rendered to our policyholders at all stages of the claims process, which we believe allows
us to reduce cost and provide a high level of customer service to our policyholders. To encourage our policyholders to allow us to
manage their claims from beginning to end, we developed our Platinum Program. Under the Platinum Program, participating
customers receive a 10% discount on their claim deductible, and we obtain control over inspection, claims adjusting and repair
services, with the repair services being managed by either CAN or one of our contracted vendors. In March 2014, we acquired the
largest vendor in the CAN network, which has allowed us to expand our in-house mitigation and restoration services. In August 2015,
we acquired BRC to allow us to further expand our restoration services.
Citizens Assumption Transactions
As of December 31, 2015, we have assumed, net of cancellations, an aggregate of approximately 192,000 policies through
participation in the Citizens depopulation program. Citizens generally offers depopulations on a monthly basis. From December 2012
through December 2015, we participated in 22 depopulations. We have also been approved for depopulation during the first quarter of
2016 and continue to seek monthly approvals.
In order to be eligible to participate in an assumption transaction, we first apply to FLOIR for approval to assume a specified
number of policies. We prepare and submit a report showing the cumulative pro forma financial impact of assuming all policies for
which we have applied and all policies we have been previously approved to assume. Once we have received FLOIR approval
indicating the maximum number of policies we may assume, Citizens provides us with a list of policies eligible for assumption and the
relevant policy data. We evaluate these policies using our proprietary data analytics capabilities and submit to Citizens a list of
policies we would like to assume. Citizens then compares our list of preferred policies with those of other private insurance companies
participating in the depopulation and informs us which policies will be assigned to us.
Once Citizens informs us which policies we may assume, we notify each policyholder of our offer to assume their policy, the
amount of their estimated premium upon renewal and their right to opt-out of the assumption transaction. On the effective date of such
transaction, Citizens transfers to us the unearned premiums for the policies that have not opted out of the assumption transaction. A
policyholder may also opt-out during the 30-day period following the effective date of the assumption transaction. If a policyholder
opts-out during such period, we return the applicable unearned premiums to Citizens.
Under the terms of our typical assumption agreement with Citizens, we assume all liability and obligation for losses under the
assumed policies arising on or after the effective date of the assumption transaction, and we directly service all policyholder claims
related to such losses. All terms and conditions of the assumed policies, including coverage and rates, remain unchanged for the
remainder of the policy term. Citizens remains liable for all losses under the assumed policies arising prior to the effective date of the
assumption transaction and is solely responsible for servicing all policyholder claims related to such losses.
We strive to retain these policies by offering competitive rates and efficient claims handling to our policyholders. Through
December 31, 2015, we renewed approximately 85% of the policies we assumed from Citizens upon their initial expiration.
8
Loss Development
Our losses and loss adjustment expenses (“LAE”) represent estimated costs ultimately required to settle all claims for a given
period. The following table illustrates development of the estimated liability for losses and loss adjustment expenses as of:
Original liability for losses and LAE1
Re-estimated losses and LAE2 as of:
1 year later
2 years later
3 years later
Cumulative redundancy (deficiency) 3
Cumulative amount of liability paid as of:
1 year later
2 years later
3 years later
2015
December 31,
2014
(In thousands)
2013
$
83,722 $
51,469 $
19,344
—
—
—
—
—
—
—
46,184
—
—
5,293
19,121
16,846
—
2,498
27,265
—
—
311,514 $
12,052
13,472
—
139,959
Gross premiums earned
$
524,740 $
(1) Represents management’s original best estimated liability of (i) unpaid claims, (ii) incurred but not reported (“IBNR”) and
(iii) loss adjustment expenses (“LAE”).
(2) Represents the re-estimated liabilities in later years of unpaid claims, IBNR and loss adjustment expenses in the respective
years.
(3) Represents the difference between the latest re-estimate and the original estimate. A redundancy means the original estimate is
higher than the current estimate whereas a deficiency means that the original estimate is lower than the current estimate.
Technology
Our business depends upon the use, development and implementation of integrated technology systems. These systems enable
us to provide a high level of service to agents and policyholders by processing business efficiently, communicating and sharing data
with agents, providing a variety of methods for the payment of premiums and allowing for the accumulation and analysis of
information for our management. We believe the availability and use of these technology systems has resulted in improved service to
agents and customers, increased efficiencies in processing Heritage P&C’s business and lower operating costs.
We also license software from third parties, including West Point Underwriters, Majesco Mastec and AIR Worldwide, Inc.
(“AIR”). AIR’s catastrophe modeling software enables us to optimize our insurance portfolio to manage our reinsurance costs. We
also own or license other technology systems used by Heritage P&C. These technology systems consist primarily of an integrated
central processing computer, a series of server-based computer networks, a back-up server and various Internet-based communications
systems.
Reinsurance
In order to limit our potential exposure to catastrophic events, we purchase significant reinsurance from third party reinsurers
and sponsor catastrophe bonds (Citrus Re). We also purchase property per risk reinsurance and facultative coverage for non-
catastrophe related to losses in excess of $1.0 million. Purchasing reinsurance is an important part of our risk strategy, and premiums
paid (or ceded) to reinsurers is our single largest cost. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on
policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they
assume under our reinsurance agreements, we remain liable for the entire insured loss. See in Part I, Item 1A “Risk Factors”. We may
not be able to collect reinsurance amounts due to us from the reinsurers with which we have contracted.
Our reinsurance agreements are short-term, prospective contracts. We record an asset, prepaid reinsurance premiums, and a
liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize
our reinsurance premiums over the 12-month contract period, which is June 1 through May 31.
In the event that we incur losses and loss adjustment expenses recoverable under our reinsurance program, we record amounts
recoverable from our reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts
recoverable on unpaid losses is a function of our liability for unpaid losses associated with the reinsured policies; therefore, the
amount changes in conjunction with any changes to our estimate of unpaid losses. As a result, a reasonable possibility exists that an
estimated recovery may change significantly in the near term from the amounts included in our consolidated financial statements.
9
FLOIR requires all insurance companies, like us, to have a certain amount of capital and reinsurance coverage in order to cover
losses and loss adjustment expenses upon the occurrence of a catastrophic event. Our 2015-2016 reinsurance program provides
reinsurance in excess of FLOIR’s requirements, which are based on the probable maximum loss that we would incur from an
individual catastrophic event estimated to occur once in every 100 years based on our portfolio of insured risks. The nature, severity
and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of
insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a
particular catastrophic event could be a one-in-100 year loss event for one insurance company while having a greater or lesser
probability of occurrence for another insurance company. We also purchase reinsurance coverage to protect against the potential for
multiple catastrophic events occurring in the same year.
2015 – 2016 Reinsurance Program
During the second quarter of 2015, we placed our reinsurance program for the period from June 1, 2015 through May 31, 2016.
Our reinsurance program, which is segmented into layers of coverage, protects us for excess property catastrophe losses and loss
adjustment expenses. Our 2015-2016 reinsurance program incorporates the mandatory coverage required by law to be placed with
FHCF. For the 2015 hurricane season, we selected 75% participation in the FHCF. We 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
June 1, 2015 to May 31, 2016 reinsurance program.
•
•
•
•
•
•
The Company’s Retention. For the first catastrophic event, we have 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 decreases 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 our retention, we have purchased $440 million of reinsurance from third party
reinsurers. Through the payment of a reinstatement premium, we are able to reinstate the full amount of this reinsurance
one time. To the extent that $440 million or a portion thereof is exhausted in a first catastrophic event, we have 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 provides coverage alongside and above the FHCF.
FHCF Layer. Our FHCF coverage includes 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 is
subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all
participants. We purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus
Re Ltd To the extent the FHCF coverage is adjusted, this private reinsurance with third party reinsurers and Citrus Re Ltd
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.
CAT Bond Layer alongside the FHCF. During April 2015 Heritage P&C entered into three catastrophe reinsurance
agreements with Citrus Re Ltd. 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 Ltd
during this three-year risk period. Citrus Re Ltd issued in 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 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.
CAT Bond Layer above the FHCF. Immediately above the FHCF layer is the coverage provided by the 2015 reinsurance
agreement entered into with Citrus Re as described above in this footnote. The Citrus Re 2015 Class A notes provide up to
$150 million of coverage immediately above the FHCF layer. Coverage immediately above the 2015 Class A notes is
provided by the 2014 reinsurance agreements entered into with Citrus Re Ltd. The first contract with Citrus Re Ltd
provides $150 million of coverage and the second contract provides an additional $50 million of coverage.
Aggregate Coverage. In addition to the layers described above, we have 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 is not fully exhausted in the first catastrophic event, it provides coverage commencing at its
reduced retention for second and subsequent events and where underlying coverage has been previously exhausted. There
is no reinstatement of the aggregate reinsurance coverage once exhausted, but it does provide coverage for multiple
events.
10
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. The chart below provides a
graphic illustration of the structure and operations of our 2015-2016 catastrophe reinsurance program.
$1.8B
Top & Drop II
$75M xs $475M
NIL
Top & Drop I
$50M xs $5M
NIL
$200M xs $475M
NIL
$150M xs $475M
NIL
s
r
e
y
a
L
t
n
e
m
e
c
a
p
e
R
F
C
H
F
l
$650M xs
$360M*
$35M xs
$360M*
$200M xs
$360M*
Mandatory FHCF
75% of
$920M xs $336M
Layer 2
$321M xs $154M
1 @ 100%
Layer 1
$119M xs $35M
1 @ 100%
$20M xs $15M
NIL
$15M Retention
In placing our 2015-2016 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate
uncertainty surrounding the future cost of our reinsurance by negotiating multi-year arrangements. The $477.5 million of aggregate
coverage we have purchased from Citrus Re Ltd, which includes both the 2014 Class A & B notes and 2015 Class A, B, and C notes,
extends $200.0 million for another two-year period and $277.5 million for a three-year period. To the extent it is all or partially
exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage accounts for approximately 45%
of our purchases of private reinsurance for the 2015 hurricane season. The terms of each of the multi-year coverage arrangements
described above are subject to adjustment depending on, among other things, the size and composition of our portfolio of insured risks
in future periods.
Assuming the reoccurrence of Hurricane Andrew, which is considered to be the most catastrophic single event in Florida’s
recorded history, the probable maximum net loss to us in 2015, assuming the reinsurance coverage described above, would be
11
$30.8 million (after tax, net of all reinsurance recoveries and including our retention through Osprey Re). This loss would have
represented 8.7% of our stockholders’ equity at December 31, 2015. We estimate that, based on our portfolio of insured risks as of
August 31, 2015, Hurricane Andrew would have represented a catastrophic event likely to occur approximately once every 31 years
and would have exhausted approximately 39.5% of our total expected reinsurance coverage.
For the twelve months ending May 31, 2016, we purchased reinsurance from the following sources: (i) FHCF, (ii) Citrus Re Ltd,
(iii) 23 third-party private reinsurers, all of which were rated “A-” or higher by A.M. Best or S&P and (iv) our wholly-owned
reinsurance subsidiary, Osprey. Allianz Global Corporate & Specialty SE provides approximately 38% of our third-party reinsurance
program, including Citrus Re catastrophe bonds. The chart below lists our third-party reinsurers with A.M. Best and S&P ratings:
Reinsurer
Allianz Global & Corporate SE
Amlin AG
Axis Specialty Limited
ACE Tempest Reinsurance Ltd
Everest Reinsurance Company
Fidelis Insurance Bermuda Limited
General Insurance Corporation of India
Hamilton Re, Ltd
Hannover Re (Bermuda) Ltd
Horseshoe Re Ltd
Markel Bermuda Limited
Odyssey Reinsurance Company
Partner Reinsurance Co Ltd
Poseidon Re
Qatar Reinsurance Company Limited
Rubik Re
Lloyd’s Underwriter Syndicate No. 0382
Lloyd’s Underwriter Syndicate No. 1955
Lloyd’s Underwriter Syndicate No. 2001
Lloyd’s Underwriter Syndicate No. 2003
Taiping Reinsurance Co., Ltd
Tokio Millennium Re Ag
XL Catlin
A.M. Best Rating
S&P Rating
A+
A
A+
A++
A+
A-
A-
A-
A+
Fully Collateralized
A
A
A
Fully Collateralized
A
Fully Collateralized
A
A
A+
A
A
A++
A
AA
A
A+
AA
A+
NA
NA
NA
AA-
A
A-
A+
A
A+
A+
A+
A+
A
A+
A+
Investments
Our investments are managed by seven third-party asset managers. We have designed our investment policy to provide a
balance between current yield, conservation of capital and the liquidity requirements of our operations. As such, our investable assets
are primarily held in cash and bonds with relatively short durations. Our investment policy sets guidelines that provide for a well-
diversified investment portfolio that is compliant with Florida statutes that emphasizes quality and preservation of capital. The policy
limits investments in common and preferred stocks to 15% of Heritage P&C’s admitted assets, with no more than 10% in either
class. Our bond portfolio must have a minimum weighted average portfolio quality of A, with only $1 million invested in below
investment grade bonds. No more than 2% of admitted assets can be invested in any one issuer, excluding government-related
securities. Investments in commercial mortgages cannot exceed 10% of admitted assets. Prohibited investments include short sales and
margin purchases, oil, gas, mineral or other types of leases, speculative uses of futures and options, unrated corporate securities, non-
US denominated securities, convertible securities high risk CMO instruments, repurchase agreements, securities lending transactions
and speculative foreign currency valuation transactions. Our investment policy, which may change from time to time, is approved by
our Investment Committee and is reviewed on a regular basis in order to ensure that our investment policy evolves in response to
changes in the financial market. See Note 3 to our consolidated financial statements for the year ended December 31, 2015 included
elsewhere in this Annual Report.
As of December 31, 2015, we held $236.3 million in cash and cash equivalents and $400.1 million in securities, which were
comprised of $371.8 million in bonds, $12.7 million in preferred stocks and $15.6 million in common stock.
Government Regulation
The insurance industry is extensively regulated. Heritage P&C is subject to the laws and regulations of Florida and any other
state where we may seek to do business. Florida’s insurance regulatory regime provides for regulation of virtually all aspects of
Heritage P&C’s business. Florida, like many states, has adopted several model laws and regulations as promulgated by the NAIC.
12
State statutes and administrative rules generally require each insurance company that is part of a holding company group to register
with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies within
the holding company system which may materially affect the operations, management or financial condition of the insurers within the
group. As part of its registration, each insurance company must identify material agreements, relationships and transactions with
affiliates, including without limitation loans, investments, asset transfers, transactions outside of the ordinary course of business,
certain management, service, and cost sharing agreements, reinsurance transactions, dividends and consolidated tax allocation
agreements. In many instances, Florida’s insurance laws and regulations are even more stringent that those promulgated by the NAIC
or other states.
As an initial matter, Florida routinely places additional restrictions on new insurers as a condition of receiving a certificate of
authority. These restrictions are typically memorialized in a consent order entered into between FLOIR and the insurer applying for a
certificate of authority. We are subject to such a consent order in which we have agreed to higher or more stringent restrictions than
are otherwise required under Florida law. The material restrictions we have agreed to include:
•
•
•
•
Florida law requires a residential property writer to maintain surplus of the greater of $15.0 million or 10% of its
liabilities. Pursuant to the consent order, we agreed to establish a minimum capital and surplus of $18.0 million. As of
December 31, 2015, our insurance subsidiary held surplus of $216.6 million, in full compliance with Florida law and the
consent order.
Florida law restricts the ratio of premiums written to policyholder surplus to 10 to 1 on a gross basis and 4 to 1 on a net of
reinsurance basis. As of December 31, 2015, Heritage P&C’s gross and net writing ratios were 2.7 to 1 and 1.8 to 1,
respectively. Pursuant to the consent order, we also agreed to not exceed the projected premiums in the plan of operation
submitted with our original application for licensure without the prior written approval of FLOIR during 2013, 2014 and
2015. As part of the FLOIR approval process for the various Citizens assumption transactions in which we have
participated, we have received approval to exceed these projected premiums. We are in full compliance with these
provisions of the consent order.
Florida law places no restrictions on the parent of an insurer, or other upstream entities, with regard to the payment of
dividends. Pursuant to the consent order, we agreed to not make any distributions to stockholders prior to July 31, 2015,
except such distributions as are required to offset stockholders’ tax obligations resulting from the ownership of our equity
or such distributions as may be approved by FLOIR in advance and in writing. We are in full compliance with this
provision of the consent order.
Florida law allows an insurer to pay certain dividends to stockholders without approval of FLOIR. Pursuant to the consent
order, we agreed that, until July 31, 2017, Heritage P&C would pay only those dividends that have been approved in
advance and in writing by FLOIR. Our insurance subsidiary has paid no stockholder dividends since its inception and is in
full compliance with this provision of the consent order.
We are also subject to consent orders setting conditions for FLOIR’s approval of the Citizens assumption transactions in which
we have participated. We are required by consent order to comply with the assumption agreements entered into with Citizens at the
time of each assumption transaction, which requires that for the assumed policies, we must offer to renew each policy for a minimum
of three years. In addition, three of our assumptions in 2013 limited rate increases to the higher of those approved by FLOIR for
Citizens for comparable risks or 10%. We are in full compliance with all consent orders issued with regard to Citizens’ depopulation
program.
Additionally, we are subject to regulations administered by a department of insurance in each state in which we do business.
These regulations relate to, among other things:
•
•
•
•
•
•
•
•
•
•
the content and timing of required notices and other policyholder information;
the amount of premiums the insurer may assume or write in relation to its surplus;
the amount and nature of reinsurance a company is required to purchase;
participation in guaranty funds and other statutorily created markets or organizations;
business operations and claims practices;
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers and their products;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of insurance company subsidiaries to pay dividends to insurance holding companies;
13
•
•
•
•
•
•
•
restrictions on transactions between insurance companies and their affiliates;
restrictions on the size of risks insurable under a single policy;
requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
the form and content of records of financial condition required to be filed; and
requiring reserves.
FLOIR and regulators in other jurisdictions where we may become licensed and offer insurance products conduct periodic
examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition,
holding company issues and other matters. These regulatory authorities also conduct periodic examinations into insurers’ business
practices. Additionally, as an insurance company operating in Florida, Heritage P&C is subject to assessments levied by Citizens, the
Florida Insurance Guaranty Association and the FHCF.
Employees
As of December 31, 2015, we had 247 employees, all of whom are full time employees. We are not a party to any collective
bargaining agreement and have not experienced any work stoppages or strikes as a result of labor disputes. We consider relations with
our employees to be satisfactory.
Available Information
Heritage Insurance Holdings Inc.’s, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) are made available, free of charge, on or through the “Investor Relations” portion of our Internet
website https://heritagepci.com. Reports filed with or furnished to the SEC will also be available as soon as reasonably practicable
after they are filed with or furnished to the SEC and are available over the internet at the SEC’s website at http://www.sec.gov.
Item 1A.
Risk Factors
Set forth below are certain risk factors that could harm our business, results of operations and financial condition. You should
carefully read the following risk factors, together with the financial statements, related notes and other information contained in this
Annual Report on Form 10-K. Our business, financial condition and operating results may suffer if any of the following risks are
realized. If any of these risks or uncertainties occur, the trading price of our common stock could decline and you might lose all or
part of your investment. This Annual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties.
Please refer to the discussion of “Forward-Looking Statements” of this Annual Report in connection with your consideration of the
risk factors and other important factors that may affect future results described herein.
Risks Related to Our Business
We have a limited operating history, and our business and future prospects are difficult to evaluate.
We began operations in August 2012 and wrote our first policy in November 2012. Due to our limited operating history, our
ability to execute our business strategy is materially uncertain and our operations and prospects are subject to all risks inherent in a
developing business enterprise. Our limited operating history also makes it difficult to evaluate our long term commercial viability. As
a new business, we must work to establish and develop successful operating procedures, hire staff, tailor and fine-tune our information
management and other systems, maintain adequate control of our expenses, develop business relationships, implement our marketing
strategies (and adapt and modify them as needed), establish a positive image and reputation in the community, and take any other
steps necessary to conduct our business. As a result of these challenges, it is possible that we may not be successful in implementing
our business strategy or completing the development of the infrastructure necessary to expand our business.
Our loss reserves are estimates and may be inadequate to cover our actual liability for losses, causing our results of operations
to be adversely affected.
We maintain reserves to cover our estimated ultimate liabilities for losses and loss adjustment expenses, also referred to as loss
reserves. We have a limited operating history and a limited loss history which may negatively impact our ability to accurately
establish loss reserves. Our current loss reserves are based primarily on industry historical data and statistical projections of what we
14
believe the resolution and administration of claims will cost based on facts and circumstances then known to us. As a company with
limited operating history, our claims experience and our experience with the risks related to certain claims is inherently limited. We
use company historical data to the extent it is available and rely heavily on industry historical data, which may not be indicative of
future periods. As a result, our projections and our estimates may be inaccurate, which in turn may cause our actual losses to exceed
our loss reserves. If our actual losses exceed our loss reserves, our financial results, our ability to expand our business and to compete
in the property and casualty insurance industry may be negatively affected.
Factors that affect unpaid losses and loss adjustment expenses include the estimates made on a claim-by-claim basis known as
“case reserves” coupled with bulk estimates known as “incurred but not yet reported” (or “IBNR”). Periodic estimates by management
of the ultimate costs required to resolve all claims are based on our analysis of historical data and estimations of the impact of
numerous factors such as (i) per claim information, (ii) industry and company historical loss experience and development patterns,
(iii) legislative enactments, judicial decisions, legal developments in the awarding of damages and changes in political attitudes, and
(iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of
its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for estimating the ultimate resolution of all claims. There is no precise method for subsequently evaluating the
impact of any specific factor on the adequacy of the reserves because the eventual redundancy or deficiency is affected by multiple
factors.
Because of the inherent uncertainties in the reserving process, we cannot be certain that our reserves will be adequate to cover
our actual losses and loss adjustment expenses. If our reserves for unpaid losses and loss adjustment expenses are less than actual
losses and loss adjustment expenses, we will be required to increase our reserves with a corresponding reduction in our net income in
the period in which the deficiency is identified. Future loss experience substantially in excess of our reserves for unpaid losses and
loss adjustment expenses could substantially harm our results of operations and financial condition.
Because all of our insurance business was conducted in Florida as of December 31, 2015, any single catastrophic event, or a
series of such events, or other condition affecting losses in Florida could adversely affect our financial condition and results of
operations.
As of December 31, 2015, all our insurance business was conducted in Florida. The distribution of our policies is generally
consistent with that of Florida’s population and is therefore more concentrated in densely-populated coastal areas. A single
catastrophic event, or a series of such events, destructive weather pattern, general economic trend, regulatory development or other
condition specifically affecting Florida, particularly the more densely populated areas of the state, could have a disproportionately
adverse impact on our business, financial condition and results of operations. While we actively manage our exposure to catastrophic
events through our underwriting process and the purchase of reinsurance, the fact that our business is concentrated in Florida subjects
us to increased exposure to certain catastrophic events and destructive weather patterns such as hurricanes, tropical storms and
tornadoes. Changes in the prevailing regulatory, legal, economic, political, demographic and competitive environment, and other
conditions in Florida could also make it less attractive for us to do business in Florida and would have a more pronounced effect on
our business than it would on other insurance companies that are more geographically diversified than we are. Since our business is
concentrated in this manner, the occurrence of one or more catastrophic events or other conditions affecting losses in Florida could
have an adverse effect on our business, financial condition and results of operations.
We have exposure to unpredictable catastrophes, which can materially and adversely affect our financial results.
We write insurance policies that cover homeowners, condominium owners and commercial residential buildings for losses that
result from, among other things, catastrophes. We are therefore subject to losses, including claims under policies we have assumed or
written, arising out of catastrophes that may have a significant effect on our business, results of operations and financial condition. A
significant catastrophe, or a series of catastrophes, could also have an adverse effect on our reinsurers. Catastrophes can be caused by
various events, including hurricanes, tropical storms, tornadoes, earthquakes, hailstorms, explosions, power outages, fires and by man-
made events, such as terrorist attacks. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses
from a catastrophe is a function of both the total amount of insured exposure in the area affected and the severity of the event. Our
policyholders are currently concentrated in Florida, which is especially subject to adverse weather conditions such as hurricanes and
tropical storms. Therefore, although we attempt to manage our exposure to catastrophes through our underwriting process and the
purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance protection
and may have a material adverse impact on our results of operations and financial condition. In total, for the period from June 1, 2015
through May 31, 2016, we have purchased $2.3 billion of reinsurance coverage, including our retention, for multiple catastrophic
events. Our ability to access this coverage, however, is subject to the severity and frequency of such events. We may experience
significant losses and loss adjustment expenses in excess of our retention.
15
Our results of operations may fluctuate significantly based on industry factors as well as our participation in the Citizens
depopulation program.
The insurance business historically has been a cyclical industry characterized by periods of intense price competition due to
excess underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing. As premium levels
increase, there may be new entrants to the market, which could then lead to increased competition, a significant reduction in premium
rates, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material adverse effect on
our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered
by insureds and insurers, including changes resulting from multiple and/or catastrophic hurricanes, may affect the cycles of the
insurance business significantly. We cannot predict whether market conditions will improve, remain constant or deteriorate. Negative
market conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If we
cannot write insurance at appropriate rates, our business would be materially and adversely affected.
In addition, the uncertainties inherent in the reserving process, together with the potential for unforeseen developments,
including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss adjustment expenses
materially different from the reserves initially established. Changes to prior year reserves will affect current underwriting results by
increasing net income if the prior year reserves prove to be redundant or by decreasing net income if the prior year reserves prove to
be insufficient. We are not allowed to record contingency reserves to account for expected future losses. As a result, we expect
volatility in operating results in periods in which significant loss events occur because generally accepted accounting principles do not
permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. We anticipate
that claims arising from future events may require the establishment of substantial reserves from time to time.
Our results of operations may also vary based on our continued participation in the Citizens depopulation program. As part of a
typical assumption transaction with Citizens, we acquire the unearned premium associated with the assumed policies, which,
depending on the size of the transaction, may cause significant variability in our financial results from period to period. In June 2013,
we entered into a retroactive quota share reinsurance agreement with Citizens that resulted in our recognition of $26.0 million of
retroactive insurance income for the year ended December 31, 2013, as we realized income equal to the earned premiums, net of
associated losses and loss adjustment expenses, from such policies for the period from January 1, 2013 through May 31, 2013 with no
corresponding reinsurance cost. We do not expect to enter into similar retroactive arrangements in connection with future policy
assumptions from Citizens. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Key Components of Our Results of Operations—Retroactive reinsurance income.”
Our successful participation in the Citizens depopulation program depends on the continuation of such program and our ability
to select favorable policies to assume.
An element of our growth strategy involves continued participation in the Citizens depopulation program to the extent that such
policies meet our underwriting criteria. As of December 31, 2015, approximately 75% of our 257,131 policies in force were assumed
from Citizens. Our ability to participate in this program is subject to a variety of factors, including continuation of the program. There
can be no assurance that Citizens will decide to continue the depopulation program for a significant period of time, or at all. At our
formation, there were approximately 1.6 million policies in force at Citizens. At the end of 2015, Citizens policies in force had
dropped to approximately 500,000 primarily due to depopulation activity from 2012 through 2015. Any efforts by the Florida
legislature or Citizens to curtail the depopulation program, materially modify the terms of the program as it relates to personal
residential policies, or restrict our participation in the program would hurt our growth prospects and will adversely impair our financial
condition and results of operations. When we enter into an assumption transaction with Citizens, we have the opportunity to review
information about the policies available for assumption. We undertake a robust selection process in which we analyze various aspects
of each policy’s risk profile and, based on the results, select the policies we would like to assume. Our successful participation in the
depopulation program depends on our ability to select policies that will be accretive to our financial results. However, our selection
process involves many different considerations, and there can be no assurances that we will appropriately assess the risks associated
with each policy. As a result, we may select unfavorable policies that could result in substantial losses, which may in turn adversely
impact our financial condition and results of operations.
We may not be able to collect reinsurance amounts due to us from the reinsurers with which we have contracted.
Reinsurance is a method of transferring part of an insurance company’s risk under an insurance policy to another insurance
company. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we
remain liable for the entire insured loss. We use reinsurance arrangements to limit and manage the amount of risk we retain, to
stabilize our underwriting results and to increase our underwriting capacity. Our ability to recover amounts due from reinsurers under
the reinsurance treaties we currently have in effect is subject to the reinsurance company’s ability and willingness to pay and to meet
its obligations to us. We attempt to select financially strong reinsurers with an A.M. Best or S&P rating of “A-” or better or we require
16
the reinsurer to fully collateralize its exposure. While we monitor from time to time their financial condition, we also rely on our
reinsurance broker and rating agencies in evaluating our reinsurers’ ability to meet their obligations to us.
Our reinsurance coverage in any given year may be concentrated with one or a limited group of reinsurers. For the twelve
months ending May 31, 2016, Allianz Global Corporate & Specialty SE provides approximately 38% of our third-party reinsurance
coverage, including Citrus Re Catastrophe Bonds which are fully collateralized. Any failure on the part of any one reinsurance
company to meet its obligations to us could have a material adverse effect on our financial condition or results of operations.
All residential insurance companies that write business in Florida, including us, are required to obtain reinsurance through
FHCF, and this coverage comprises a substantial portion of our reinsurance program. 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. We have
purchased private reinsurance alongside our FHCF layer to fill in gaps in coverage that may result from the adjustment of the limit or
retention of our FHCF coverage; however, such reinsurance would not cover any losses we may incur as a result of FHCF’s inability
to pay the full amount of our claims. If a catastrophic event occurs in Florida, FHCF may not have sufficient funds to pay all of its
claims from insurance companies in full or in a timely manner. This could result in significant financial, legal and operational
challenges to our Company. In the event of a catastrophic loss, FHCF’s ability to pay may be dependent upon its ability to issue bonds
in amounts that would be required to meet its reinsurance obligations. There can be no assurance that FHCF will be able to do this.
While we believe FHCF currently has adequate capital and financing capacity to meet its reinsurance obligations, there can be no
assurance that it will be able to meet its obligations in the future, and any failure to do so could have a material adverse effect on our
liquidity, financial condition and results of operations.
Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.
The cost of reinsurance is subject to prevailing market conditions beyond our control such as the amount of capital in the
reinsurance market, as well as the frequency and magnitude of natural and man-made catastrophes. We cannot be assured that
reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us. As a result,
we may determine to increase the amount of risk we retain or look for other alternatives to reinsurance, which could in turn have a
material adverse effect on our financial position, results of operations and cash flows.
Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our
business and adversely impact our financial results.
The property and casualty insurance industry in Florida is cyclical and, during times of increased capacity, highly competitive.
We compete not only with other stock companies, but also with Citizens, mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Our principal lines of business are written by numerous other insurance companies. Competition
for any one account may come from very large, well-established national companies, smaller regional companies, other specialty
insurers in our field and other companies that write insurance only in Florida. Some of these competitors have greater financial
resources, larger agency networks and greater name recognition than we do. We compete for business not only on the basis of price,
but also on the basis of financial strength, types of coverages offered, and availability of coverage desired by customers, commission
structure and quality of service. We may have difficulty continuing to compete successfully on any of these bases in the future.
Competitive pressures coupled with market conditions may affect our rate of premium growth and financial results.
In addition, industry developments could further increase competition in our industry. These developments could include:
•
•
•
•
an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies
attempt to enter the insurance business as a result of better premium pricing and/or policy terms;
an increase in programs in which state-sponsored entities provide property insurance in catastrophe-prone areas;
changes in Florida’s regulatory climate; and
the passage of federal proposals for an optional federal charter that would allow some competing insurers to operate under
regulations different or less stringent than those applicable to Heritage P&C.
These developments and others could make the property and casualty insurance marketplace more competitive by increasing the
supply of insurance available. If competition limits our ability to write new business at adequate rates, our future results of operations
would be adversely affected.
Our success depends on our ability to accurately price the risks we underwrite.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide
variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, reinsurance costs
17
and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a
substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in
trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to successfully perform these tasks, and
as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control,
including:
•
•
•
•
•
•
the availability of sufficient reliable data and our ability to properly analyze available data;
regulatory delays in approving filed rate changes;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate rating and pricing techniques;
changes in legal standards, claim resolution practices, and restoration costs; and
legislatively imposed consumer initiatives.
In addition, we could underprice risks, which would negatively affect our profit margins. We could also overprice risks, which
could reduce the number of policies we write and our competitiveness. In either event, our profitability could be materially and
adversely affected.
The inherent uncertainty of models and our reliance on such models as a tool to evaluate risk may have an adverse effect on
our financial results.
We license analytic and modeling software from third parties to facilitate our pricing, assess our risk exposure and determine
our reinsurance needs. Given the inherent uncertainty of modeling techniques and the application of such techniques, these models and
databases may not accurately address the emergence of a variety of matters which might impact our exposure to losses. Accordingly,
these models may understate the exposures we are assuming and our financial results may be adversely impacted, perhaps
significantly.
The failure of our claims department to effectively manage or remediate claims could adversely affect our insurance business,
financial results and capital requirements.
We rely on our claims department to facilitate and oversee the claims adjustment process for our policyholders. Many factors
could affect the ability of our claims department to effectively manage claims by our policyholders, including:
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•
•
•
•
the accuracy of our adjusters as they make their assessments and submit their estimates of damages;
the training, background and experience of our claims representatives;
the ability of our claims department to ensure consistent claims handling;
the ability of our claims department to translate the information provided by adjusters into acceptable claims resolutions;
and
the ability of our claims department to maintain and update its claims handling procedures and systems as they evolve
over time based on claims and geographical trends in claims reporting.
Any failure to effectively manage the claims adjustment process, including failure to pay claims accurately, could lead to
material litigation, undermine our reputation in the marketplace, impair our corporate image and negatively affect our financial results.
Additionally, in the final stage of the claims process, we leverage CAN’s vendor network to provide repair and remediation
services to the policyholder. If such services are not performed properly, we may face liability. Although we maintain professional
liability insurance to cover losses arising from our repair and remediation services, there can be no assurances that such coverage is
adequate. In addition, our failure to timely and properly remediate claims, or the perception of such failure, may damage our
reputation and adversely affect our ability to renew existing policies or write new policies.
If actual renewals of our existing contracts do not meet expectations, our premiums written in future years and our future
results of operations could be materially adversely affected.
Our insurance policies are written for a one-year term. We make assumptions about the renewal of our prior year’s contracts,
including for purposes of determining the amount of reinsurance we purchase. If actual renewals do not meet expectations or if we
choose not to write on a renewal basis because of pricing conditions, our premiums written in future years and our future operations
would be materially adversely affected, and we may purchase reinsurance beyond what we believe is the most appropriate level.
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We may not be able to effectively execute our growth strategy.
We may invest significant time and resources to develop and market new lines of business and/or products and services and we
may not achieve the return on our investment that we expect. Initial timetables for the introduction and development of new lines of
business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External
factors, such as compliance with regulations, competitive alternatives, and shifting customer preferences may also impact the
successful implementation of a new line of business or a new product or service. Such external factors and requirements may increase
our costs and potentially affect the speed with which we will be able to pursue new market opportunities. There can be no assurance
that we will be successful in bringing new insurance products to our marketplace. Additionally, any new line of business and/or new
product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully
manage these risks could have a material adverse effect on our business, results of operations and financial condition.
Our growth strategy involves expansion of our business to states outside of Florida. Geographic diversification may be hindered
by the fact that we have a limited operating history, and we may be unable to satisfy requirements imposed by state regulators and
other third parties.
If we are unable to expand our business because our capital must be used to pay greater than anticipated claims, our financial
results may suffer. Further, we may require additional capital in the future which may not be available or may only be available
on unfavorable terms.
Our future growth and future capital requirements will depend on our ability to expand the number of insurance policies we
assume or write in Florida, to expand the kinds of insurance products we offer and to expand the geographic markets in which we do
business, all balanced by the business risks we choose to assume and cede. All of these growth initiatives require capital. Our existing
sources of funds include possible sales of common or preferred stock, incurring debt and our earnings from operations and
investments. Unexpected catastrophic events in our coverage areas, such as the hurricanes experienced in Florida in the past decade,
may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to
pay these unanticipated claims unless we are able to raise additional capital.
To the extent that our present capital is insufficient to meet future operating requirements or to cover losses, we may need to
raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe that our current capital
together with our anticipated retained income will support our operations. However, we cannot provide any assurance in that regard,
since many factors will affect the amount and timing of our capital needs, including our growth and profitability, the availability and
cost of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we
require additional capital, it is possible that equity or debt financing may not be available on acceptable terms or at all. In the case of
equity financings, dilution to our stockholders could result, and in any case such securities may have rights, preferences and privileges
that are senior to those of existing stockholders. If we cannot obtain adequate capital on favorable terms or at all, our business,
financial condition or results of operations could be materially adversely affected.
Our information technology systems, or those of our key service providers, may fail or suffer a loss of security which could
adversely affect our business.
Our insurance business is highly dependent upon the successful and uninterrupted functioning of our computer and data
processing systems. We rely on these systems to perform actuarial and other modeling functions necessary for writing business, as
well as to handle our policy administration process (i.e., handling and adjusting claims, the printing and mailing of our policies,
endorsements, renewal notices, etc.). The successful operation of our systems depends on a continuous supply of electricity. The
failure of these systems or disruption in the supply of electricity could interrupt our operations and result in a material adverse effect
on our business.
The development and expansion of our insurance business is dependent upon the successful development and implementation of
advanced technology, including modeling, underwriting and information technology systems. Because we intend to expand our
business by writing additional voluntary policies and entering into new lines of business, we are enhancing our information
technology systems to handle and process an increased volume of policies. Additionally, we have engaged service providers to
provide us with policy and other administration services for certain of our policies and we intend to continue to utilize third party
systems as our policy count grows. The failure of any of these systems to function as planned could slow our growth and adversely
affect our future business volume and results of operations. In addition, we have licensed certain systems and data from third parties.
We cannot be certain that we will have access to these, or comparable systems, or that our technology or applications will continue to
operate as intended. Moreover, we cannot be certain that we would be able to replace these systems without slowing our underwriting
response time. A major defect or failure in our internal controls or information technology systems could result in management
distraction, harm to our reputation, a loss or delay of revenues or increased expense.
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In addition, a security breach of our computer systems could damage our reputation or result in liability. We retain confidential
business and policyholder information in our computer systems. We may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by such breaches. It is critical that our facilities and infrastructure
remain secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer
viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if
hackers were able to penetrate our network security or otherwise misappropriate confidential information.
The development and implementation of new technologies will require an additional investment of our capital resources in the
future.
Frequent technological changes, new products and services and evolving industry standards are all influencing the insurance
business. We believe that the development and implementation of new technologies will require additional investment of our capital
resources in the future. We have not determined, however, the amount of resources and the time that this development and
implementation may require, which may result in short-term, unexpected interruptions to our business, or may result in a competitive
disadvantage in price and/or efficiency, as we endeavor to develop or implement new technologies.
We do not have significant redundancy in our operations.
We conduct our business primarily from offices located on the west coast of Florida where hurricanes could damage our
facilities or interrupt our power supply. The loss or significant impairment of functionality in these facilities for any reason could have
a material adverse effect on our business, as we do not have significant redundancies to replace our facilities if functionality is
impaired. We contract with a third party vendor to maintain complete daily backups of our systems, however, we have not fully tested
our plan to recover data in the event of a disaster.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are
knowledgeable about our business. If the quality of our underwriters and other personnel decreases, we may be unable to maintain our
current competitive position in the specialized markets in which we operate and be unable to expand our operations, which could
adversely affect our results.
The loss of, or failure to attract, key personnel could have a more significant impact on our business as compared to some of our
competitors that are larger or have longer operating histories. We believe that our ability to grow and fully execute our business plan
will depend in large part on our ability to attract and retain additional skilled and qualified personnel and to expand, train and manage
our employees. We may not be successful in doing so, because the competition for experienced personnel in the insurance industry is
intense.
We are dependent on key executives, the loss of whom could adversely affect our business.
Our future success depends to a significant extent on the efforts of our senior management. We believe there are only a limited
number of available and qualified executives with substantial experience in our industry. Accordingly, the loss of the services of one
or more of the members of our senior management could delay or prevent us from fully implementing our business strategy and,
consequently, significantly and negatively affect our business.
Currently, we only maintain key man life insurance with respect to Bruce Lucas, our Chairman and Chief Executive Officer. If
any other member of senior management dies or becomes incapacitated, or leaves the company to pursue employment opportunities
elsewhere, we would be solely responsible for locating an adequate replacement for such senior management and for bearing any
related cost. To the extent that we are unable to locate an adequate replacement or are unable to do so within a reasonable period of
time, our business may be significantly and negatively affected.
Our financial results may be negatively affected by the fact that a portion of our income is generated by the investment of our
company’s capital, premiums and loss reserves.
A portion of our income is, and likely will continue to be, generated by the investment of our capital, premiums and loss
reserves. The amount of income so generated is a function of our investment policy, available investment opportunities and the
amount of available cash invested. We are also constrained by investment limitations contained in the Florida Insurance Code. At
December 31, 2015, approximately 63% of our total investments, cash and cash equivalents was invested in fixed-maturity and equity
securities with the balance in cash and cash equivalents. We may, under certain circumstances, be required to liquidate our
investments in securities at prices below book value, which may adversely affect our financial results. We currently hold all of our
cash in accounts with four financial institutions and, as a result of this concentration, a portion of the balances in such accounts
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exceeds the FDIC insurance limits. While we monitor and adjust the balances in our accounts as appropriate, these balances could be
impacted if any of these financial institutions fail and could be subject to other adverse conditions in the financial markets.
We may alter our investment policy to accept higher levels of risk with the expectation of higher returns. Fluctuating interest
rates and other economic factors make it impossible to estimate accurately the amount of investment income that will be realized. In
fact, we may realize losses on our investments.
Our inability to maintain our financial stability rating may have a material adverse effect on our competitive position, the
marketability of our product offerings, and our liquidity, operating results and financial condition.
Financial stability ratings are important factors in establishing the competitive position of insurance companies and can have a
significant effect on an insurance company’s business. Many insurance buyers, agents, brokers and secured lenders use the ratings
assigned by rating agencies to assist them in assessing the financial stability and overall quality of the companies from which they are
considering purchasing insurance or in determining the financial stability of the company that provides insurance. We currently have a
Demotech rating of “A” (“Exceptional”). This is the third highest financial stability rating of the six financial stability ratings utilized
by Demotech. These financial stability ratings provide an objective baseline for assessing solvency and should not be interpreted as
(and are not intended to serve as) an assessment of, a recommendation to buy, sell, or hold, any securities of an insurance company or
its parent holding company, including shares of our common stock.
On an ongoing basis, rating agencies review the financial performance and condition of insurers and can downgrade or change
the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital, a reduced confidence in management
or a host of other considerations that may or may not be under the insurer’s control. All ratings are subject to continuous review;
therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on
our competitive position, the marketability of our product offerings and our ability to grow in the marketplace.
The effects of emerging claim and coverage issues on our business are uncertain.
Loss frequency and severity in the property and casualty insurance industry in general and for our company specifically has
continued to increase in recent years, principally driven by litigation and assignment of benefits. In addition, many legal actions and
proceedings have been brought on behalf of classes of complainants, which can increase the size of judgments. The propensity of
policyholders and third party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards may
render the loss reserves of our insurance subsidiary inadequate for current and future losses. In addition, as industry practices and
social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge.
These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the
number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance
policies that are affected by the changes. As a result, the full extent of liability under our insurance policies may not be known at the
time such policies are issued or renewed, and our financial position and results of operations may be adversely affected.
The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results
of operations.
We utilize a number of strategies to mitigate our risk exposure including:
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•
•
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employing proper underwriting procedures;
carefully evaluating the terms and conditions of our policies;
geographic diversification; and
ceding insurance risk to reinsurance companies.
However, there are inherent limitations in all of these tactics. No assurance can be given that an event or series of unanticipated
events will not result in loss levels which could have a material adverse effect on our financial condition or results of operations.
Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we assume or write could have a
material adverse effect on our financial condition or our results of operations.
Various provisions of our policies, such as limitations or exclusions from coverage which are designed to limit our risks, may
not be enforceable in the manner we intend. In addition, the policies we issue contain conditions requiring the prompt reporting of
claims to us and our right to decline coverage in the event of a violation of that condition. While our insurance product exclusions and
limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory
authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of such
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endorsements and limitations in a way that would adversely affect our loss experience, which could have a material adverse effect on
our financial condition or results of operations.
We rely on independent agents to write voluntary insurance policies for us, and if we are not able to attract and retain
independent agents, our revenues would be negatively affected.
We write voluntary personal and commercial insurance policies through a network of independent agents. Of our network of
approximately 3,533 independent agents, approximately 56% are affiliated with eight large agency networks with which we have
entered into master agency agreements. As of December 31, 2015, voluntary policies written through independent agents, including
the policies we acquired from SSIC, constituted approximately 25.3% of our total policies in force and represented approximately
$146.6 million in annualized premiums. We expect to increase the number of voluntary policies we write as our business expands,
which will further increase our reliance on our network of independent agents. In fact, in the future, we may rely on independent
agents to be the primary source for our property insurance policies. If any of our independent agents cease writing policies for us, or if
any of our master agency agreements are terminated, we may suffer a reduction in the amount of products we are able to sell, which
would negatively impact our results.
Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent
agents’ business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher
commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to
attract business from independent agents to sell our products.
Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
Climate change, to the extent it produces extreme changes in temperatures and changes in weather patterns, could affect the
frequency or severity of weather events. Further, it could reduce the affordability and availability of personal residential insurance,
which could have an effect on pricing. Changes in weather patterns could also affect the frequency and severity of other natural
catastrophe events to which we may be exposed.
If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively
affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material
weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”) requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with
this Annual Report on Form 10-K, provide a management report on the internal controls over financial reporting.
We are in the process of designing and implementing the internal controls over financial reporting required to comply with the
Sarbanes-Oxley Act requirements, which may take a significant amount of time and may require specific compliance training of our
personnel. In the future, we may discover areas of our internal controls that need improvement. If we or our independent registered
public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remediated, could reduce the market’s
confidence in our financial statements and harm our stock price. We may not be able to effectively and timely implement necessary
control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and
reporting requirements. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and
investors could lose confidence in the accuracy and completeness of our financial reports.
The requirements of being a public company have increased certain of our costs and require significant management focus.
As a public company, our legal, accounting and other expenses associated with compliance related and other activities have
increased. For example, in connection with our initial public offering, we created new board committees and appointed independent
directors to comply with the corporate governance requirements of the NYSE. In addition, our management team and board of
directors have limited experience implementing public company compliance requirements, and therefore, since our initial public
offering, our management and other personnel have diverted attention from operational and other business matters to devote
substantial time to such efforts. In particular, we have incurred significant expenses and devoted substantial management effort toward
ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an
emerging growth company, as defined in The Jumpstart Our Business Act of 2012 (the “JOBS Act”). We have hired additional
accounting and financial staff with appropriate public company experience and technical accounting knowledge and have established
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an internal audit function. Costs to obtain director and officer liability insurance also contribute to our increased costs. As a result of
the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as
executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and
reporting requirements, which could further increase our compliance costs.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements applicable
to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we currently and may in the future take advantage of
certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth
companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act with respect to our internal control over financial reporting, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take
advantage of these provisions for up to five years from our initial public offering or such earlier time that we are no longer an
“emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of
the year in which we have more than $1.0 billion in annual revenues; (ii) the date we qualify as a “large accelerated filer,” with at least
$700 million of equity securities; (iii) the issuance, in any three-year period, by our company of more than $1.0 billion in non-
convertible debt securities held by non-affiliates; and (iv) the last day of the year ending after the fifth anniversary of our initial public
offering. We may choose to take advantage of some but not all of these reduced reporting and other burdens. To the extent we take
advantage of any of the reduced reporting burdens in this annual report or in future filings, the information that we provide our
security holders may be different than you might get from other public companies in which you hold equity interests. We cannot
predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be
more volatile.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other
words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have chosen to “opt-out” of such extended transition period, however, and, as a result, we 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. Section 107 of the JOBS Act provides that our decision to opt-out of the extended transition period for complying
with new or revised accounting standards is irrevocable.
Risks Related to Regulation of our Insurance Operations
We are subject to extensive regulation which may reduce our profitability or limit our growth. Moreover, if we fail to comply
with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our
financial condition and results of operations.
We are subject to extensive state regulation. Heritage P&C is subject to supervision and regulation that is primarily designed to
protect our policyholders rather than our stockholders, and such regulation is imposed by both the state in which it is domiciled
(Florida) and the states in which it does business. These regulations relate to, among other things, the approval of policy forms and
premium rates, our conduct in the marketplace, our compliance with solvency and financial reporting requirements, transactions with
our affiliates, and limitations on the amount of business we can write, the amount of dividends we can pay to stockholders, and the
types of investments we can make. Insurance holding company regulations generally provide that transactions between an insurance
company and its affiliates must be fair and reasonable, and must be clearly and accurately disclosed in the records of the respective
parties, with expenses and payments allocated between the parties in accordance with customary accounting practices. Many types of
transactions between an insurance company and its affiliates, such as transfers of assets, loans, reinsurance agreements, service
agreements, certain dividend payments by the insurance company and certain other material transactions, may be subject to prior
approval by, or prior notice to, state regulatory authorities. If we are unable to obtain the requisite prior approval for a specific
transaction, we would be precluded from taking the action, which could adversely affect our operations. These regulatory
requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. In addition, regulatory
authorities also may conduct periodic examinations into insurers’ business practices. These reviews may reveal deficiencies in our
insurance operations or differences between our interpretations of regulatory requirements and those of the regulators.
State insurance regulations also frequently impose notice or approval requirements for the acquisition of specified levels of
ownership in the insurance company or insurance holding company. For example, Florida law requires that a person may not,
individually or in conjunction with any affiliated person of such person, acquire directly or indirectly, conclude a tender offer or
exchange offer for, enter into any agreement to exchange securities for, or otherwise finally acquire 5% or more of the outstanding
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voting securities of a Florida domiciled stock insurer or of a controlling company, unless it is in compliance with certain notice and
approval requirements. Such restriction may inhibit our ability to grow our business or achieve our business objectives.
Further, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the
violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe
may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory
authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance
regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us.
This could adversely affect our ability to operate our business.
Heritage P&C is subject to additional regulation imposed by consent orders entered into with FLOIR in connection with our
formation.
In addition to compliance with statutes and regulations, Florida routinely places additional restrictions on new insurers as a
condition of receiving their certificate of authority. These restrictions are typically memorialized in a consent order entered into
between FLOIR and the insurer applying for a certificate of authority. We are subject to such a consent order. We have, in certain
cases, agreed to higher or more stringent restrictions than are otherwise required under Florida law. The material restrictions we have
agreed to include:
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•
•
Florida law requires a residential property writer to maintain surplus of the greater of $15.0 million or 10% of its
liabilities. Pursuant the consent order, we agreed to establish a minimum capital and surplus of $18.0 million.
Florida law restricts the ratio of premiums written to policyholder surplus to 10 to 1 on a gross basis and 4 to 1 on a net of
reinsurance basis. Pursuant to the consent order, we agreed to not exceed the projected premiums in the plan of operation
submitted with our original application for licensure without the prior written approval of FLOIR during 2012, 2013 and
2014. As part of the FLOIR approval process for the various Citizens assumption transactions in which we have
participated, we have received approval to exceed these projected premiums.
Florida law places no restrictions on the parent of an insurer, or other upstream entities, with regard to the payment of
dividends. Pursuant to the consent order, we agreed to not make any distributions to stockholders prior to July 31, 2015,
except such distributions as are required to offset stockholders’ tax obligations resulting from the ownership of our equity
or such distributions as may be approved by FLOIR in advance and in writing.
Florida law allows an insurer to pay certain dividends to stockholders without approval of FLOIR. Pursuant to the consent
order, we agreed that, until July 31, 2017, Heritage P&C would pay only those dividends that have been approved in
advance and in writing by FLOIR.
In addition, we are subject to several consent orders setting conditions upon FLOIR’s approval of the various Citizens
assumption transactions in which we have participated. For example, beginning with our June 2013 assumption transaction, we are
required to offer to renew each assumed policy for a minimum of three years and limit rate increases to the higher of those offered by
Citizens for comparable risks or 10%.
In the event we are unable to comply with the additional regulation imposed by these consent orders, it may adversely affect our
ability to operate our business.
Changes in regulation may reduce our profitability and limit our growth.
We are subject to extensive regulation in Florida, the only state in which we currently conduct business through December 31,
2015. The National Association of Insurance Commissioners (“NAIC”) and state insurance regulators are constantly reexamining
existing laws and regulations, generally focusing on modifications to holding company regulations, interpretations of existing laws
and the development of new laws. For example, in 2013 FLOIR asked the Florida legislature to amend the Florida Insurance Code in
conformity with the latest amendments to the NAIC Model Holding Company System Regulatory Act. Among other things, such
amendment requires the ultimate controlling person of any Florida insurance company to file an Annual Report identifying the
material risks within the insurance holding company system that could pose enterprise risk to the insurance company.
From time to time, states consider and/or enact laws that may alter or increase state authority to regulate insurance companies
and insurance holding companies. States also consider and/or enact laws that impact the competitive environment and marketplace for
property and casualty insurance. Our insurance company subsidiary currently transacts insurance only in Florida, where the political
environment has sometimes led to aggressive regulation of property and casualty insurance companies. For example, in 2007, Florida
enacted legislation that led to rate levels in the private insurance market that we believe, in many instances in the past, were
inadequate to cover the related underwriting risk. This same legislation required Citizens to reduce its premium rates and begin
competing against private insurers in the Florida residential property insurance market. Florida lawmakers may continue to enact or
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retain legislation that suppresses the rates of Citizens, further adversely impacting the private insurance market and increasing the
likelihood that it must levy assessments on private insurance companies and ultimately on Florida consumers. These and other aspects
of the political environment in jurisdictions where we operate may reduce our profitability, limit our growth, or otherwise adversely
affect our operations.
During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to
address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include
(i) the creation of “market assistance plans” under which insurers are induced to provide certain coverages, (ii) restrictions on the
ability of insurers to rescind or otherwise cancel certain policies in mid-term or to nonrenew policies at their scheduled expirations,
(iii) advance notice requirements or limitations imposed for certain policy non-renewals, (iv) limitations upon or decreases in rates
permitted to be charged, (v) expansion of governmental involvement in the insurance market and (vi) increased regulation of insurers’
policy administration and claims handling practices.
Currently, the federal government does not directly regulate the insurance business. However, in recent years the state insurance
regulatory framework has come under increased federal scrutiny. Congress and some federal agencies from time to time investigate
the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an
optional federal charter, similar to banks. In addition, changes in federal legislation and administrative policies in several areas,
including changes in the Gramm-Leach-Bliley Act, financial services regulation and federal taxation, can significantly impact the
insurance industry and us.
We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may
have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our
business will not become more stringent in the future or result in materially higher costs than current requirements, or that creation of
a federal insurance regulatory system will not adversely affect our business or disproportionately benefit our competitors. Changes in
the regulation of our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.
Our insurance subsidiary is subject to minimum capital and surplus requirements, and our failure to meet these requirements
could subject us to regulatory action.
Our insurance subsidiary is subject to risk-based capital standards and other minimum capital and surplus requirements imposed
under applicable state laws, currently the laws of Florida. The risk-based capital standards, based upon the Risk-Based Capital Model
Act adopted by the NAIC, require our insurance subsidiary to report its results of risk-based capital calculations to FLOIR and the
NAIC. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance
company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital.
Authorized control level risk-based capital is determined using the NAIC’s risk-based capital formula, which measures the minimum
amount of capital that an insurance company needs to support its overall business operations.
An insurance company with total adjusted capital that is less than 200% of its authorized control level risk-based capital is at a
company action level, which would require the insurance company to file a risk-based capital plan that, among other things, contains
proposals of corrective actions the company intends to take that are reasonably expected to result in the elimination of the company
action level event. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100%, and 70% of
its authorized control level risk-based capital. The lower the percentage, the more severe the regulatory response, including, in the
event of a mandatory control level event (total adjusted capital falls below 70% of the insurer’s authorized control level risk-based
capital), placing the insurance company into receivership. As of December 31, 2015, Heritage P&C’s risk-based capital ratio was
368%.
In addition, our insurance subsidiary is required to maintain certain minimum capital and surplus and to limit its written
premiums to specified multiples of its capital and surplus. The insurance subsidiary could exceed these ratios if its volume increases
faster than anticipated or if its surplus declines due to catastrophe or non-catastrophe losses or excessive underwriting and operational
expenses.
Florida law requires a residential property writer to maintain surplus of the greater of $15.0 million or 10% of its liabilities.
Pursuant to the consent order we entered into in connection with receiving our certificate of authority, we agreed to establish a
minimum capital and surplus of $18.0 million. As of December 31, 2015, our insurance subsidiary held surplus of $216.6 million.
Florida law also restricts the ratio of premiums written to policyholder surplus to 10 to 1 on a gross basis and 4 to 1 on a net of
reinsurance basis. As of December 31, 2015, our insurance subsidiary’s gross and net writing ratios were 2.7 to 1 and 1.8 to 1,
respectively. Pursuant to the consent order, we agreed to not exceed the projected premiums in the plan of operation submitted with
our original application for licensure without the prior written approval of FLOIR during 2012, 2013, and 2014. As part of the FLOIR
approval process for the various Citizens assumption transactions in which we have participated, we have received approval to exceed
these projected premiums.
25
Any failure by our insurance subsidiary to meet the applicable risk-based capital or minimum statutory capital requirements or
the writings ratio limitations imposed by the laws of Florida (or other states where we may eventually conduct business) could subject
it to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business,
state supervision or liquidation.
Any changes in existing risk-based capital requirements, minimum statutory capital requirements, or applicable writings ratios
may require us to increase our statutory capital levels, which we may be unable to do.
Regulation limiting rate increases and requiring us to participate in loss sharing may decrease our profitability.
From time to time, political dispositions affect the insurance market, including efforts to effectively suppress rates at a level that
may not allow us to reach targeted levels of profitability. Despite efforts to remove politics from insurance regulation, facts and
history demonstrate that public policymakers, when faced with untoward events and adverse public sentiment, can act in ways that
impede a satisfactory correlation between rates and risk. Such acts may affect our ability to obtain approval for rate changes that may
be required to attain rate adequacy along with targeted levels of profitability and returns on equity. Our ability to afford reinsurance
required to reduce our catastrophe risk may be dependent upon the ability to adjust rates for our cost.
Additionally, we are required to participate in guaranty funds for insolvent insurance companies. The funds periodically assess
losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely
affected by any of these factors.
Risks Relating to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price
you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock
or the stock of other companies in our industry;
the failure of research analysts to cover our common stock;
general economic, industry and market conditions;
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
material litigation or government investigations;
changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war,
incidents of terrorism or responses to such events;
changes in key personnel;
sales of common stock by us, our principal stockholders or members of our management team;
the granting or exercise of employee stock options;
volume of trading in our common stock; and
impact of the facts described elsewhere in “Risk Factors.”
In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility
has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The
changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our
common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially
reduce our share price.
26
We may not continue to pay dividends on our common stock.
In the fourth quarter of 2015 and in the first quarter of 2016, our Board of Directors initiated a quarterly cash dividends on our
common stock; however, we can provide no assurance or guarantee that we will continue to pay dividends in the future. Therefore,
investors who purchase our common stock may only realize a return on their investment if the value of our common stock appreciates.
The declaration and payment of any future dividends will be at the discretion of our Board of Directors and will be dependent upon
our profits, financial requirements and other factors including regulatory restrictions on the payment of dividends from our
subsidiaries, general business conditions and such other factors as our Board of Directors considers relevant.
Certain provisions of our certificate of incorporation and our bylaws may make it difficult for stockholders to change the
composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider
to be beneficial.
Certain provisions of our certificate of incorporation and bylaws may have the effect of delaying or preventing changes in
control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The
provisions in such certificate of incorporation and bylaws include, among other things, the following:
•
•
•
•
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including
preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent;
advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder
meetings; and
allowing only our board of directors to fill vacancies on our board of directors.
We have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with
a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person
became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects
of Section 203.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our
board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the
stockholders might believe to be in their best interests, including an acquisition that would result in a price per share at a premium
over the market price, and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the
members of our management.
Applicable insurance laws may make it difficult to effect a change of control of our company.
State insurance holding company laws require prior approval by the state insurance department of any change of control of an
insurer that is domiciled in that respective state. “Control” is generally defined as the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a company, whether through the ownership of voting securities, by
contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting
securities of a domestic insurance company or any entity that controls a domestic insurance company. Because Heritage P&C is
domiciled in Florida, we are subject to Florida law, which prohibits any person from acquiring 5% or more of our outstanding voting
securities without the prior approval of FLOIR. However, a party acquiring more than 5% but less than 10% of our voting securities
that does not otherwise exercise control may make such acquisition without prior approval by filing a disclaimer of affiliation and
control with FLOIR. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of
us, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be
desirable.
Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect
holders of our common stock, which could depress the price of our common stock.
Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights
of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any
27
further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights
superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us,
discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and
other rights of the holders of our common stock.
Our business and stock price may suffer as a result of our limited public company operating experience. In addition, if
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our
stock price and trading volume could decline.
We completed our initial public offering in May 2014. Our limited public company operating experience may make it difficult
to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to
effectively manage our business in a public company environment or for any other reason, our business, prospects, financial condition
and results of operations may be harmed. In addition, if no or very few securities or industry analysts cover of our company, the
trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or
publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts
ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock
price and trading volume to decline.
Item 1B.
Unresolved Staff Comments
None
Item 2.
Properties
We, through Skye Lane, our wholly-owned subsidiary, own a two-building 13-acre campus located in Clearwater, Florida.
Approximately 80% of the property is occupied by unaffiliated tenants.
Item 3.
Legal Proceedings
We are subject to routine legal proceedings in the ordinary course of business. We believe that the ultimate resolution of these
matters will not have a material adverse effect on our business, financial condition or results of operations.
Item 4.
Mine Safety Disclosures
Not applicable
28
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “HRTG”. The following table sets
forth the high and low sale prices as reported on the NYSE, and the amount of our dividends declarations, for 2015 and 2014,
respectively. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.
Year
2015
Quarter
High
Low
First
Second
Third
Fourth
$
$
$
$
22.80 $
23.23 $
27.28 $
24.98 $
Dividends paid per share
—
—
—
0.05
18.58 $
19.88 $
16.81 $
18.73 $
Year
2014
Quarter
High
Low
First
Second
Third
Fourth
$
$
$
$
— $
15.38 $
15.70 $
19.84 $
Dividends paid per share
—
—
—
—
— $
11.29 $
13.60 $
14.03 $
The closing sale price of our common stock as reported on the NYSE on March 1, 2016 was $19.76 per share. As of such date
there were 39 holders of record of our common stock based on information provided by our transfer agent.
Dividends
On December 17, 2015, the Company’s Board of Directors declared dividends of $0.05 per share. Total dividends paid to date
are approximately $1.6 million. No dividends were declared for 2014. Any future dividend payments will be at the discretion of our
Board of Directors and will depend on profits, financial requirements and other factors, such as legal and regulatory restrictions on the
payment of dividends, overall business condition and other elements the Board of Directors considers relevant.
Securities Authorized for Issuance under Equity Compensation Plan
For information regarding the securities authorized for issuance under our equity compensation plans, refer to “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters” included in Part III, Item 12 of this
Annual Report.
29
Item 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7 – Management’s Discussion and
Analysis of Financial Condition Results of Operations and our consolidated financial statements and the related notes appearing in
Item 8 – Financial Statements and Supplementary Data of this Annual Report. The consolidated statements of operations data for the
years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data at December 31, 2015 and 2014 are derived
from our consolidated financial statements appearing in Item 8 of this Annual Report. The historical results shown below are not
necessarily indicative of the results to be expected in any future period.
Statements of Operations Data:
Revenue:
Gross premiums written
Gross premiums earned
Net premiums earned
Net investment income and realized gains
Other revenue
Total revenue
Expenses:
Loss and loss adjustment expenses
Other operating expenses
Total expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Ratios to net premiums earned:
Net loss ratio
Net expense ratio
Combined ratio
Balance Sheet Data
2015
Year Ended December 31,
2014
(In thousands, except per share data)
2013
$ 586,098 $ 436,407 $ 218,537
$ 524,740 $ 311,514 $ 139,959
95,159
$ 376,268 $ 223,612 $
726
4,153 $
$
28,947
6,055 $
$
$ 394,792 $ 233,820 $ 124,832
8,929 $
9,595 $
$ 141,191 $
$ 103,311 $
89,560 $
70,008 $
$ 244,502 $ 159,568 $
74,252 $
27,155 $
47,097 $
$ 150,290 $
57,778 $
$
92,512 $
$
$
$
3.08 $
3.05 $
1.92 $
1.82 $
37.5%
27.5%
65.0%
40.1 %
31.3 %
71.4 %
38,501
30,870
69,371
55,461
21,248
34,213
2.39
2.36
40.5%
32.4%
72.9%
Cash and invested assets
Prepaid reinsurance premiums
Deferred policy acquisition costs
Total Assets
Unpaid loss and loss adjustment expense
Unearned premiums
Reinsurance payable
Total Liabilities
Total Stockholders' Equity
As of December 31,
2015
2014
(In thousands)
636,373 $
78,517 $
34,800 $
837,398 $
83,722 $
302,493 $
60,210 $
480,845 $
356,553 $
491,640
43,148
24,370
615,031
51,469
241,136
17,113
359,942
255,089
$
$
$
$
$
$
$
$
$
30
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within
our control.
Overview: We are a property and casualty insurance holding company headquartered in Clearwater, Florida and, through our
insurance subsidiary, we provide personal residential insurance for single-family homeowners and condominium owners, rental
property insurance and commercial residential insurance in the state of Florida and North Carolina. We are vertically integrated and
control or manage substantially all aspects of insurance underwriting, customer service, actuarial analysis, distribution and claims
processing and adjusting. We are led by an experienced senior management team with an average of 31 years of insurance industry
experience. Heritage P&C is currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), a rating agency specializing in
evaluating the financial stability of insurers.
In addition to Heritage P&C, our other subsidiaries include: 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 that also houses with BRC Restoration Specialists (“BRC”) our provider of restoration, emergency and recovery services;
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.
We intend the discussion of our financial condition and results of operations that follows to provide 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.
Discussion of our business and overall financial results, and other highlights related to our results of operations for the periods
presented.
Financial Results Highlights for the Year Ended December 31, 2015
•
•
•
•
•
•
There were 257,131 policies in-force at December 31, 2015, of which approximately 74.6% were assumed from Citizens,
9.8% were assumed from SSIC and 15.6% were from voluntary sales
Gross premiums written of $586.1 million and total revenue of $394.8 million
Net premiums earned of $376.3 million
Net income of $92.5 million
Combined ratio of 74.9% on a gross basis and 65.0% on a net basis
Cash, cash equivalents and investments of $636.4 million, with total assets of $837.4 million
31
Consolidated Results of Operations
The following table summarizes our results of operations for the periods indicated (in thousands, except per share amounts):
REVENUE:
Gross premiums written
Increase in gross unearned premiums
Gross premiums earned
Ceded premiums
Net premiums earned
Retroactive reinsurance (1)
Net investment income
Net realized gains (losses)
Other revenue
Total revenue
EXPENSES:
Losses and loss adjustment expenses
Policy acquisition costs
General and administrative expenses
Total expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share
Basic
Diluted
Selected Other Data
Book value per share
Growth in book value per share
Return on average equity
Ratios to Gross Premiums Earned:
Ceded premium ratio
Loss ratio
Expense ratio
Combined ratio
Ratios to Net Premiums Earned:
Loss ratio
Expense ratio
Combined ratio
2015
Year Ended December 31,
2014
(in thousands)
2013
586,098 $
(61,358)
524,740
(148,472)
376,268
—
7,421
1,508
9,595
394,792 $
436,407
(124,893 )
311,514
(87,902 )
223,612
—
3,849
304
6,055
233,820
$ 218,537
(78,578)
139,959
(44,800)
95,159
26,046
1,049
(323)
2,901
$ 124,832
141,191
57,186
46,125
244,502
150,290
57,778
92,512 $
89,560
36,510
33,498
159,568
74,252
27,155
47,097
$
38,501
6,150
24,720
69,371
55,461
21,248
34,213
3.08 $
3.05 $
1.92
1.82
$
$
2.39
2.36
11.71 $
36.8%
30.2%
8.56 $
18.9 %
26.5 %
7.20
113.0%
45.0%
$
$
$
$
$
$
2015
Year Ended December 31,
2014
(unaudited)
2013
28.3%
26.9%
19.7%
74.9%
37.5%
27.5%
65.0%
28.2 %
28.7 %
22.5 %
79.4 %
40.1 %
31.3 %
71.4 %
32.0%
27.5%
22.1%
81.6%
40.5%
32.4%
72.9%
32
1.
Retroactive reinsurance income of $26.0 million during the year ended December 31, 2013 represents premiums earned, net of losses, for the period from
January 1, 2013 through May 31, 2013 from a retroactive reinsurance quota share agreement entered into in connection with our assumption of approximately
39,000 policies from Citizens in June 2013. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Key Components of our Results of Operations
Revenue
Gross premiums written. Gross premiums written represent, with respect to a period, the sum of assumed premiums written (premiums
from policies that we assumed from Citizens, net of opt-outs, as well as policies acquired from SSIC) plus direct premiums written
(premiums from subsequent renewals of Citizens’ policies and voluntary policies written during the period, net of any midterm
cancellations), in each case prior to ceding premiums to reinsurers.
Gross premiums earned. Gross premiums earned represent the total premiums earned during a period from policies assumed from
Citizens, net of opt-outs, as well as policies acquired from SSIC, subsequent renewals of such policies and voluntary policies.
Premiums associated with assumed policies are earned ratably over the remaining term of the policy and premiums associated with
voluntary and renewed policies are earned ratably over the twelve-month term of the policy.
Ceded premiums. Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost, excluding premiums
ceded to Osprey, of our reinsurance program ratably over the twelve month term of the arrangement. In most cases, our reinsurance
contracts are effective June 1 and run through May 31 of the following year.
Net premiums earned. Net premiums earned reflect gross premiums earned less ceded premiums during the period.
Retroactive reinsurance income. Retroactive reinsurance income represents the income, net of associated losses and loss adjustment
expenses, arising from the retroactive reinsurance agreement we entered in connection with our assumption of approximately 39,000
policies from Citizens in June 2013. Under this retroactive reinsurance agreement, we realized income equal to the earned premiums,
net of associated losses and loss adjustment expenses, from such polices for the period from January 1, 2013 through May 31, 2013
with no corresponding reinsurance costs. The earned premiums for the period from June 1, 2013 through June 27, 2013 (the date the
assumption agreement) are effective) are included in gross premiums written for the year ended December 31, 2013. The retroactive
reinsurance agreement, which was a key element of our decision to enter into an assumption transaction at the outset of hurricane
season, is not typical of our assumption transactions with Citizens. The typical assumption transaction with Citizens provides for the
assumption of unearned premiums as of the effective date of the transaction, and does not result in the transfer of earned premiums
and losses and loss adjustment expenses for prior periods. We do not expect to enter into similar retroactive arrangements with
Citizens in connection with future policy assumptions.
Net investment income. Net investment income represents interest earned from fixed maturity securities, short term securities and
other investments, dividends on equity securities, and the gains or losses from the sale of investments.
Other revenue. Other revenue represents rental income due under non-cancelable leases for space at the Company’s commercial
property in Clearwater, Florida that we acquired in April 2013, and all policy and pay-plan fees. Florida law allows insurers to charge
policyholders a $25 policy fee on each policy written; these fees are not subject to refund, and the Company recognizes the income
immediately when collected. The Company also charges pay-plan fees to policyholders that pay its premiums in more than one
installment and record the fees as income when collected. In addition, the Company records revenue earned from its restoration
subsidiary for non-insurance construction as services performed using the percentage of completion method. We do not expect the
revenue generated from non-insurance contracts to be material in nature.
Expenses
Losses and loss adjustment expenses. Losses and loss adjustment expenses reflect losses paid, expenses paid to resolve claims, such as
fees paid to adjusters, attorneys and investigators, and changes in our reserves for unpaid losses and loss adjustment expenses during
the period, in each case net of losses ceded to reinsurers. Our reserves for unpaid losses and loss adjustment expenses represent the
estimated ultimate cost of resolving all reported claims plus all losses we incurred related to insured events that we assume have
occurred as of the reporting date, but that policyholders have not yet reported to us (which are commonly referred to as incurred but
not reported, or “IBNR”). We estimate our reserves for unpaid losses using individual case-based estimates for reported claims and
actuarial estimates for IBNR losses. We continually review and adjust our estimated losses as necessary based on industry
development trends, our evolving claims experience and new information obtained. If our unpaid losses and loss adjustment expenses
are considered deficient or redundant, we increase or decrease the liability in the period in which we identify the difference and reflect
the change in our current period results of operations.
33
Policy acquisition costs. Policy acquisition costs consist of the following items: (i) commissions paid to outside agents at the time of
policy issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes
and (iv) inspection fees. We recognize policy acquisition costs ratably over the term of the underlying policy. Until renewed, policies
assumed from Citizens have no associated policy acquisition costs. Policy acquisition costs also include the costs to acquire the SSIC
policies. We recognize these costs ratably over the term of the unearned premium acquired in the transaction.
General and administrative expenses. General and administrative expenses include compensation and related benefits, professional
fees, office lease and related expenses, information system expenses, corporate insurance, and other general and administrative costs.
Provision for income taxes. Provision for income taxes historically consisted of income taxes associated with our subsidiaries that are
taxed as corporations. On May 22, 2014, we converted from a limited liability company to a corporation. As a corporation, we are
subject to typical corporate U.S. federal and state income tax rates which we expect to result in a statutory tax rate of approximately
38.575% under current tax law.
Ratios
Ceded premium ratio. Our ceded premium ratio represents ceded premiums as a percentage of gross premiums earned.
Gross loss ratio. Our gross loss ratio represents losses and loss adjustment expenses as a percentage of gross premiums earned.
Net loss ratio. Our net loss ratio represents losses and loss adjustment expenses as a percentage of net premiums earned.
Gross expense ratio. Our gross expense ratio represents policy acquisition costs and general and administrative expenses as a
percentage of gross premiums earned.
Net expense ratio. Our net expense ratio represents policy acquisition costs and general and administrative expenses as a percentage of
net premiums earned.
Combined ratios. Our combined ratio on a gross basis represents the sum of ceded premiums, losses and loss adjustment expenses,
policy acquisition costs and general and administrative expenses as a percentage of gross premiums earned. Our combined ratio on a
net basis represents the sum of losses and loss adjustment expenses, policy acquisition costs and general and administrative expenses
as a percentage of net premiums earned.
The combined ratio is the key measure of underwriting performance traditionally used in the property and casualty industry. A
combined ratio under 100% generally reflects profitable underwriting results.
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the
combined ratio on a gross basis is more relevant in assessing overall performance.
Results of Operations – Year Ended December 31, 2014 Compared to Year Ended December 31, 2015
Revenue
Gross premiums written
Gross premiums written increased from $436.4 million for the year ended December 31, 2014 to $586.1 million for the year
ended December 31, 2015. The increase in gross premiums written was due to the renewal of a significant number of policies
previously assumed from Citizens and SSIC, the growing number of new voluntary policies written and the assumption of
approximately 68,200 personal residential policies from Citizens, as well as approximately 100 commercial residential policies from
Citizens in 2015. Of our gross premiums written for the year ended December 31, 2015, $487.6 million represents direct premiums
written and $98.5 million represents assumed premiums written. Of the $487.6 million of direct premiums written, renewals of
policies previously assumed from Citizens accounted for $393.5 million and renewals of policies previously assumed from SSIC
accounted for $41.4 million, while voluntary business accounted for $92.7 million. The assumed premiums written of $98.5 million
was comprised of policies assumed from Citizens.
Gross premiums earned
Gross premiums earned increased from $311.5 million for the year ended December 31, 2014 to $524.7 million for the year
ended December 31, 2015. Our policies in force as of December 31, 2014 and 2015 were approximately 209,400, and 257,100,
respectively, and this increase had a favorable impact on our gross premiums earned. Additionally, we experienced significant growth
34
during the second half of 2014, including the acquisition of SSIC policies in June 2014 and the introduction of commercial residential
business during the fourth quarter of 2014. This business generated earned premiums for the full year for 2015, while only generating
earned premiums for partial year of 2014. Gross earned premiums from commercial residential was $97.2 million for 2015, as
compared to $18.9 million for 2014.
Ceded premiums
Ceded premiums increased from $87.9 million for the year ended December 31, 2014 to $148.5 million for the year ended
December 31, 2015. The increase in ceded premiums is primarily a result of the significant increase in the policies in force noted
above, in particular the introduction of commercial residential business which has higher reinsurance costs as measured against gross
earned premium than personal residential. The increase in ceded premiums was partially offset by lower reinsurance costs due to
favorable reinsurance market conditions and the availability of lower cost reinsurance related to $477.5 million of catastrophe bonds
issued by Citrus Re, and improved geographic spread of risk.
Net premiums earned
Net premiums earned increased from $223.6 million for the year ended December 31, 2014 to $376.3 million for the year ended
December 31, 2015. The increase in net premiums earned in the comparable periods is primarily attributable to the increase in the
number of policies in force during the year ended December 31, 2015 as compared to the year ended December 31, 2014, the growth
in policy count experienced in the second half of 2014, partially offset by increased ceded earned premiums.
Net investment income
Net investment income, inclusive of net realized investment gains and losses, increased from $4.2 million for the year ended
December 31, 2014 to $8.9 million for the year ended December 31, 2015. The increase in net investment income is due to the
increase in invested assets from $331.2 million at December 31, 2014 to $400.1 million at December 31, 2015. The increase resulted
primarily from policy growth and an increase in net realized gains from $0.3 million in 2014 to $1.5 million in 2015, resulting from
the Company being reactive to market conditions.
Other revenue
Other revenue increased from $6.1 million for the year ended December 31, 2014 to $9.6 million for the year ended
December 31, 2015. The increase in other revenue between the comparable periods is primarily attributable to the policy fees
generated by our growing portfolio of new and renewed policies. Also, the rental income received pursuant to non-cancelable leases
for our commercial property in Clearwater, Florida, and revenue earned from non-insurance claims generated by our restoration
subsidiary contributed to the increase.
Total revenue
Total revenue increased from $233.8 million for the year ended December 31, 2014 to $394.8 million for the year ended
December 31, 2015. The increase in total revenue was due primarily to the growth in net premiums earned resulting from the
significant increase in the number of policies in force throughout the year ended December 31, 2015 as compared to the prior year.
Expenses
Losses and loss adjustment expenses
Losses and loss adjustment expenses increased from $89.6 million for the year ended December 31, 2014 to $141.2 million for
the year ended December 31, 2015. The increase in losses and loss adjustment expenses resulted primarily from an increase in the
number of policies in force between the respective periods, partially offset by a 1.8 percentage point decrease in the gross loss ratio.
Losses and loss adjustment expenses for the year ended December 31, 2015 include losses paid of $57.5 million and a $32.3 million
increase in unpaid losses and loss adjustment expenses, including the addition of $16.8 million of IBNR reserves. As of December 31,
2015, we reported $83.7 million in unpaid losses and loss adjustment expenses which included $46.9 million attributable to IBNR, or
56% of total reserves for unpaid losses and loss adjustment expenses.
Policy acquisition costs
Policy acquisition costs increased from $36.5 million for the year ended December 31, 2014 to $57.2 million for the year ended
December 31, 2015. The increase is primarily attributable to the significant increase in new and renewed policies, which have
associated commissions and administration fees paid to outside agents and administrators at the time of policy issuance, premium
35
taxes and inspection fees, none of which are associated with policies assumed from Citizens prior to their renewal. This was partially
offset by the fact that, $7.6 million of the $10 million SSIC policy acquisition fee was amortized during the year ended December 31,
2014, compared to only $2.4 million during the year ended December 31, 2015.
General and administrative expenses
General and administrative expenses increased from $33.5 million for the year ended December 31, 2014 to $46.1 million for
the year ended December 31, 2015. The increase in 2015 was due primarily to the growth in our infrastructure resulting in greater
costs associated with our personnel, facilities and overall business activity.
Provision for income taxes
Provision for income taxes was $27.2 million and $57.8 million for the years ended December 31, 2014 and 2015, respectively.
Our effective tax rates for the years ended December 31, 2014 and 2015 were 36.6% and 38.6%, respectively. The increase in the
effective tax rate is a result of prior period adjustments and more favorable permanent differences in 2014.
Net Income
For the year ended December 31, 2014 we generated net income of $47.1 million, or $1.82 earnings per diluted common share,
compared to net income of $92.5 million, or $3.05 earnings per diluted common share, for the year ended December 31, 2015. The
weighted average shares outstanding on a diluted basis increased from 25.8 million shares to 30.3 million shares as of December 31,
2015, primarily due to the issuance of IPO shares mid-year 2014 causing 2014 diluted shares to be lower.
Ratios – Year Ended December 31, 2014 Compared to Year Ended December 31, 2015
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the ratios
discussed below are more meaningful when viewed on a gross basis.
Ceded premium ratio
Our ceded premium ratio was relatively unchanged at 28.2% for the year ended December 31, 2014 compared to 28.3% for the
year ended December 31, 2015.
Gross loss ratio
Our gross loss ratio decreased from 28.7% for the year ended December 31, 2014 to 26.9% for the year ended December 31,
2015, primarily due to the introduction of commercial residential business during the quarter ended December 31, 2014, which has a
significantly lower loss ratio then personal residential. Commercial residential represented 18.5% of total gross earned premiums in
2015 compared to 6.1% in 2014.
Net loss ratio
Our net loss ratio decreased from 40.1% for the year ended December 31, 2014 to 37.5% for the year ended December 31, 2015,
primarily as a result of the increase in commercial residential business in 2015.
Gross expense ratio
Our gross expense ratio decreased from 22.5% for the year ended December 31, 2014 to 19.7% for the year ended December 31,
2015, primarily as a result of general and administrative expenses increasing at significantly slower pace than gross premiums earned.
Net expense ratio
Our net expense ratio decreased from 31.3% for the year ended December 31, 2014 to 27.5% for the year ended December 31,
2015, primarily as a result of general and administration expenses increasing at significantly slower pace than gross premiums earned.
Combined ratio
Our combined ratio on a gross basis decreased from 79.4% for the year ended December 31, 2014 to 74.9% for the year ended
December 31, 2015. Our combined ratio on a net basis decreased from 71.4% for the year ended December 31, 2014 to 65.0% for the
36
year ended December 31, 2015. The changes in our combined ratio, on both a gross and net basis, are primarily as a result of the
improvement of the loss and expense ratios to earned premiums, as discussed above.
Results of Operations – Year Ended December 31, 2013 Compared to Year Ended December 31, 2014
Revenue
Gross premiums written
Gross premiums written increased from $218.5 million for the year ended December 31, 2013 to $436.4 million for the year
December 31, 2014. The increase in gross premiums written was due to the renewal of a significant number of policies previously
assumed from Citizens and SSIC, the growing number of new voluntary policies written and the assumption of approximately 55,000
personal residential policies from Citizens and 32,000 from SSIC, as well as approximately 2,200 commercial residential policies from
Citizens in 2014. Of our gross premiums written for the year December 31, 2014, $283.3 million represents direct premiums written
and $153.1 million represents assumed premiums written. Of the $283.3 million of direct premiums written, renewals of policies
previously assumed from Citizens accounted for $217.1 million and renewals of policies previously assumed from SSIC accounted for
$23.9 million, while voluntary business accounted for $42.2 million. The assumed premiums written of $153.1 million were
comprised of $124.5 million from policies assumed from Citizens and $28.6 million from policies assumed from SSIC.
Gross premiums earned
Gross premiums earned increased from $140.0 million for the year ended December 31, 2013 to $311.5 million for the year
ended December 31, 2014. Our policies in force as of December 31, 2013 and 2014 were approximately 85,100, and 209,400,
respectively, and this increase had a favorable impact on our gross premiums earned. Approximately $28.5 million of gross premiums
earned during the year ended December 31, 2014 was attributable to the SSIC policies acquired on June 27, 2014, and $17.0 million
was attributable to our entrance into the commercial residential line of business during the fourth quarter of 2014 via assumptions
from Citizens and new voluntary writings.
Ceded premiums
Ceded premiums increased from $44.8 million for the year ended December 31, 2013 to $87.9 million for the year ended
December 31, 2014. The increase in ceded premiums is primarily a result of the significant increase in the policies in force noted
above, partially offset by lower reinsurance costs due to favorable reinsurance market conditions and the availability of lower cost
reinsurance related to $200 million of catastrophe bonds issued by a Citrus Re, and improved geographic spread of risk. Additionally,
prior to June 1, 2013, our reinsurance costs were significantly lower because we purchased reinsurance limited to non-hurricane losses
through May 31, 2013.
Net premiums earned
Net premiums earned increased from $95.2 million for the year ended December 31, 2013 to $223.6 million for the year ended
December 31, 2014. The increase in net premiums earned in the comparable periods is primarily attributable to the increase in the
number of policies in force during the year ended December 31, 2014 as compared to the year ended December 31, 2013, partially
offset by increased ceded earned premiums.
Net investment income
Net investment income, inclusive of net realized investment gains and losses, increased from $0.7 million for the year ended
December 31, 2013 to $4.2 million for the year ended December 31, 2014. The increase in net investment income is due to the
significant increase in invested assets from $136.2 million at December 31, 2013 to $331.2 million at December 31, 2014. The
increase resulted primarily from policy growth.
Retroactive reinsurance income
Retroactive reinsurance income of $26.0 million for the year ended December 31, 2013 was a non-recurring event. In
connection with our assumption of 39,000 policies in June 2013, we entered into a retroactive quota share reinsurance agreement with
Citizens that resulted in our recognition of $26.0 million of retroactive reinsurance income, representing the earned premium, net of
associated losses and loss adjustment expenses, from such policies for the period from January 1, 2013 through May 31, 2013.
37
Other revenue
Other revenue increased from $2.9 million for the year ended December 31, 2013 to $6.1 million for the year ended
December 31, 2014. The increase in other revenue between the comparable periods is primarily attributable to the policy fees
generated by our growing portfolio of new and renewed policies. Also, the rental income received pursuant to non-cancelable leases
for our commercial property in Clearwater, Florida that we purchased in April 2013, contributed to the increase in other revenue.
Total revenue
Total revenue increased from $124.8 million for the year ended December 31, 2013 to $233.8 million for the year ended
December 31, 2014. The increase in total revenue was due primarily to the growth in net premiums earned resulting from the
significant increase in the number of policies in force throughout the year ended December 31, 2014 as compared to the prior year.
Expenses
Losses and loss adjustment expenses
Losses and loss adjustment expenses increased from $38.5 million for the year ended December 31, 2013 to $89.6 million for
the year ended December 31, 2014. The increase in losses and loss adjustment expenses resulted primarily from an increase in the
number of policies in force between the respective periods as well as a modest increase in the loss ratio. Losses and loss adjustment
expenses for the year ended December 31, 2014 include losses paid of $57.4 million and a $32.1 million increase in unpaid losses and
loss adjustment expenses, including the addition of $19.1 million of IBNR reserves. As of December 31, 2014, we reported $51.5
million in unpaid losses and loss adjustment expenses which included $30.1 million attributable to IBNR, or 58.4% of total reserves
for unpaid losses and loss adjustment expenses.
Policy acquisition costs
Policy acquisition costs increased from $6.2 million for the year ended December 31, 2013 to $36.5 million for the year ended
December 31, 2014. The increase is primarily attributable to the significant increase in new and renewed policies, which have
associated commissions and administration fees paid to outside agents and administrators at the time of policy issuance, premium
taxes and inspection fees, none of which are associated with policies assumed from Citizens prior to their renewal. In addition, $7.6
million of the $10 million SSIC policy acquisition fee was amortized during the year ended December 31, 2014.
General and administrative expenses
General and administrative expenses increased from $24.7 million for the year ended December 31, 2013 to $33.5 million for
the year ended December 31, 2014. The increase in 2014 was due primarily to the growth in our infrastructure resulting in greater
costs associated with our personnel, facilities and overall business activity.
Provision for income taxes
Provision for income taxes was $21.2 million and $27.2 million for the years ended December 31, 2013 and 2014, respectively.
Our effective tax rates for the years ended December 31, 2013 and 2014 were 38.3% and 36.6%, respectively. The decrease in the
effective tax rate is a result of limited liability company status income in 2014, prior to the conversion of the Company to a
corporation in May 2014 compared to a loss recognized by the limited liability company status of the parent company in 2013.
Net Income
Our results of operations for the year ended December 31, 2014 reflect net income of $47.1 million, or $1.82 earnings per
diluted common share, compared to net income of $34.2 million, or $2.36 earnings per diluted common share, for the year ended
December 31, 2013. The weighted average shares outstanding on a diluted basis increased from 14.5 million shares as of December
31, 2013 to 25.8 million shares as of December 31, 2014, primarily due to the Company’s IPO on May 22, 2014 and related warrant
exercises. This caused the reduced earnings per diluted share in 2014, despite the increase in net income.
38
Ratios – Year Ended December 31, 2013 Compared to Year Ended December 31, 2014
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the ratios
discussed below are more meaningful when viewed on a gross basis.
Ceded premium ratio
Our ceded premium ratio decreased from 32.0% for the year ended December 31, 2013 to 28.2% for the year ended
December 31, 2014. This decrease is primarily due to lower reinsurance costs due to favorable reinsurance market conditions, the
availability of lower cost reinsurance related to $200 million of catastrophe bonds issued by a Citrus Re and improved geographic
spread of risk.
Gross loss ratio
Our gross loss ratio increased from 27.5% for the year ended December 31, 2013 to 28.7% for the year ended December 31,
2014, primarily due to an increase in IBNR.
Net loss ratio
Our net loss ratio decreased from 40.5% for the year ended December 31, 2013 to 40.1% for the year ended December 31, 2014,
primarily as a result of the improvement of the ceded premium ratio to gross earned premiums.
Gross expense ratio
Our gross expense ratio increased modestly from 22.1% for the year ended December 31, 2013 to 22.5% for the year ended
December 31, 2014, primarily as a result of the acquisition costs associated with the SSIC book of business that was acquired on
June 27, 2014.
Net expense ratio
Our net expense ratio decreased from 32.4% for the year ended December 31, 2013 to 31.3% for the year ended December 31,
2014, primarily as a result of the improvement of the ceded premium ratio to gross earned premiums.
Combined ratio
Our combined ratio on a gross basis decreased from 81.6% for the year ended December 31, 2013 to 79.4% for the year ended
December 31, 2014. Our combined ratio on a net basis decreased from 72.9% for the year ended December 31, 2013 to 71.4% for the
year ended December 31, 2014. The changes in our combined ratio, on both a gross and net basis, are primarily as a result of the
improvement of the ceded premium ratio to gross earned premiums.
Liquidity and Capital Resources
As of December 31, 2015, we had $236.3 million of cash and cash equivalents, which primarily consisted of cash and money
market accounts. We intend to hold substantial cash balances during hurricane season to meet seasonal liquidity needs and the
collateral requirements of Osprey Re Ltd, our captive reinsurance company described below. We also had $13.1 million in restricted
cash to meet our contractual obligations related to the Catastrophe bonds issued by Citrus Re. We will continue to hold the cash
balances in early 2016 to fund the $120 million Zephyr acquisition, which is expected to close during the first quarter of 2016 and pay
reinsurance payables of $60 million due in January and April of 2016.
Osprey Re Ltd is required to maintain a collateral trust account equal to the risk that it assumes from Heritage P&C, less
amounts collateralized through a letter of credit. As of December 31, 2015, $25 million was held in Osprey’s trust account and $10
million was collateralized with a letter of credit. At December 31, 2015, Osprey Re Ltd’s total reinsurance coverage provided to
Heritage P&C was $35 million.
Although we can provide no assurances, we believe that we maintain sufficient liquidity to pay Heritage P&C’s claims and
expenses, as well as to satisfy commitments in the event of unforeseen events such, inadequate premium rates, or reserve deficiencies.
We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our
financial position.
39
As of December 31, 2015, we had 30,441,410 shares of common stock outstanding, options to purchase 1,149,923 shares of
common stock, and 1,125,0000 shares of restricted common stock, reflecting total paid-in capital of $202.6 million as of such date.
We believe our current capital resources, together with cash provided from our operations, will be sufficient to meet currently
anticipated working capital requirements. We cannot provide assurance, however, that such will be the case in the future.
Statement of Cash Flows
The net increases (decreases) in cash and cash equivalents are summarized in the following table:
2015
For the year ended December 31,
2014
Change
Change
2013
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
$
Net increase (decrease) in cash and cash equivalents
$
153,860 $
(86,964)
8,900
75,796 $
(40,336) $
113,083
(92,373)
(19,626) $
194,196
$
(200,047 )
101,273
95,422
$
89,145 $
(63,553)
68,643
94,235 $
105,051
(136,494)
32,630
1,187
(in thousands)
Operating Activities
Net cash provided by operating activities for December 31, 2014 was $194.2 million as compared to $153.9 million cash
provided during the year ended December 31, 2015. The decrease resulted primarily from the timing of assumed premium payments
from Citizens and tax deposit payments.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2014 was $200.0 million as compared to $86.9 million for
the year ended December 31, 2015, reflecting the investment of funds provided by operating activities.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2014 was $101.3 million, as compared to $8.9
million for the year ended December 31, 2015. On May 29, 2014 we completed our IPO, which along with the concurrent private
placement, raised $78.6 million. In addition, and in connection with the IPO, $22.5 million was raised from the exercise of warrants
from existing stockholders.
Taxation
Deferred Tax Asset and Current Tax Liability
We report a deferred tax asset arising from the portion (20%) of unearned premiums that are otherwise recognized as taxable
income in advance of being earned for financial reporting purposes. Accordingly, our income taxes currently paid and payable also
reflect this temporary difference between taxable income and earned income reported in our financial statements. The increases in our
deferred tax asset from December 31, 2014 through December 31, 2015 reflect the significant unearned premiums arising from our
assumption transactions and the additional resulting temporary differences due to certain amounts being taxable in advance of being
recognized as earned for financial reporting purposes.
Conversion to a Corporation
On May 22, 2014, Heritage Insurance Holdings, Inc. was converted from a limited liability company to a corporation. As a
limited liability company, Heritage Insurance was treated as a partnership for tax purposes, and accordingly was not subject to entity-
level federal or state income taxation. Our income tax provision generally consists of income taxes payable by our separate
subsidiaries that are taxed as corporations and which have been taxed as such since our inception. As such, our effective tax rate as a
limited liability company has historically been driven primarily by the taxable income recognized by our subsidiaries. As a
corporation, we are subject to typical corporate U.S. federal and state income tax rates which we expect to result in a statutory tax rate
of approximately 38.575% under current tax law.
40
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make judgments and estimates that may have a
significant impact upon our financial results. Note 1, under Item 8, Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements, of this Annual Report contains a summary of our significant accounting policies, many of which
require the use of estimates and assumptions. We believe that the following areas are particularly subject to management’s judgments
and estimates and could materially affect our results of operations and financial position.
Premiums. We recognize direct and assumed premiums written as revenue, net of ceded amounts, on a daily pro rata basis over
the contract period of the related policies that are in force. For any portion of premiums not earned at the end of the reporting period,
we record an unearned premium liability.
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a
policy-level evaluation to determine the extent to which the balance of the premium receivable exceeds the balance of the unearned
premium. We then age any resulting exposure based on the last date the policy was billed to the policyholder, and we establish an
allowance account for credit losses for any amounts outstanding for more than 90 days. When we receive payments on amounts
previously charged off, we credit bad debt expense in the period we receive the payment. Balances in premiums receivable and the
associated allowance account are removed upon cancellation of the policy due to non-payment. We recorded an allowance of $0 and
$250,000 for uncollectible premiums at December 31, 2015 and 2014, respectively.
When we receive premium payments from policyholders prior to the effective date of the related policy, we record an advance
premium liability. On the policy effective date, we reduce the advance premium liability and record the premiums as described above.
Reserves for Unpaid Losses and Loss Adjustment Expenses. Reserves for unpaid losses and loss adjustment expenses, also
referred to as loss reserves, represent the most significant accounting estimate inherent in the preparation of our financial statements.
These reserves represent management’s best estimate of the amount we will ultimately pay for losses and loss adjustment expenses
and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material
facts and circumstances known at the balance sheet date.
We establish two categories of loss reserves as follows:
•
•
Case reserves—When a claim is reported, we establish an initial estimate of the losses that will ultimately be paid on the
reported claim. Our initial estimate for each claim is based upon the judgment of our claims professionals who are familiar
with property and liability losses associated with the coverage offered by our policies. Then, our claims personnel perform
an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating
to the loss and adjust the reserve as necessary. As claims mature, we increase or decrease the reserve estimates as deemed
necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site
reviews and any other information we gather while reviewing the claims.
IBNR reserves—Our IBNR reserves include true IBNR reserves plus “bulk” reserves. True IBNR reserves represent
amounts related to claims for which a loss occurred on or before the date of the financial statements but which have not
yet been reported to us. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which
are necessary to estimate ultimate losses on known claims. We estimate our IBNR reserves by projecting our ultimate
losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the
projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to
us at the balance sheet date.
When we establish our reserves, we analyze various factors such as the evolving historical loss experience of the insurance
industry as well as our experience, claims frequency and severity, our business mix, our claims processing procedures, legislative
enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation.
A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or
worse than indicated by our reserves, and the difference could be material. Due to the interaction of the foregoing factors, there is no
precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required.
Due to the uncertain nature of any future projections, the ultimate amount we will pay for losses will be different from the reserves we
record.
We determine our ultimate loss reserves by selecting a point estimate within a relevant range of indications that we calculate
using generally accepted actuarial techniques. Our selection of the point estimate is influenced by the analysis of our paid losses and
incurred losses since inception, as well as industry information relevant to the population of exposures drawn from Citizens. At our
current level of experience, industry information strongly influences the basis for estimates of claims related factors. We expect that
our loss experience will be of growing significance in future periods.
41
Our Chief actuary evaluated the adequacy of our reserves as of December 31, 2015 and concluded that total reserves ranging
from a low of $78.6 million to a high of $91.7 million would meet the requirements of the insurance laws of Florida, be consistent
with reserves computed in accordance with accepted loss reserving standards and principles, and make a reasonable provision for all
unpaid loss and loss adjustment expense obligations under the terms of our contracts and agreements. In addition to $36.9 million of
recorded case reserves, we recorded $46.8 million of IBNR reserves as of December 31, 2015 to achieve overall reserves of $83.7
million.
The process of establishing our reserves is complex and inherently imprecise, as it involves using judgment that is affected by
many variables. We believe a reasonably likely change in almost any of the factors we evaluate as part of our loss reserve analysis
could have an impact on our reported results, financial position and liquidity.
The following table quantifies the pro forma impact of hypothetical changes in our loss reserves on our net income,
stockholders’ equity and liquidity as of and for the year ended December 31, 2015 (in thousands).
Loss Reserves
$
83,722 $
78,556
$
91,697
Actual
Low Estimate
% Change
from
Actual
High Estimate
% Change
from
Actual
Impact on:
Net income
Stockholders’ equity
Cash, cash equivalents and investments
Adjusted cash, cash equivalents and investments
$
$
$
$
92,512 $
356,553 $
636,373 $
584,926 $
95,685
359,726
636,373
588,099
87,611
3.4 % $
0.9 % $ 351,652
— $ 636,373 —
0.5 % $ 580,025
(5)%
(1)%
(1)%
(1) Adjusted cash, cash equivalents and investments is intended to present a measure of future liquidity and consists of cash, cash
equivalents and investments, less loss reserves, net of taxes, assuming a 38.575% tax rate.
Policy Acquisition Costs. We incur policy acquisition costs that vary with, and are directly related to, the production of new
business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy
issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes and
(iv) inspection fees. We capitalize policy acquisition costs to the extent recoverable, then we amortize those costs over the contract
period of the related policy.
At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of
our expected losses, deferred policy acquisition costs and policy maintenance costs (such as costs to store records and costs incurred to
collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a
premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs.
Reinsurance. We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”,
all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are
unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss.
Our reinsurance agreements are short-term, prospective contracts. We record an asset, prepaid reinsurance premiums, and a
liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize
our prepaid reinsurance premiums over the 12-month contract period.
In the event that we incur losses recoverable under our reinsurance program, we record amounts recoverable from our reinsurers
on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a
function of our liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any
changes to our estimate of unpaid losses. In the event that we incur losses recoverable under the reinsurance program, the estimate of
amounts recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to our reserves for
unpaid losses.
We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness
of the reinsurers and the adequacy of collateral obtained, where applicable. We recorded no uncollectible amounts under our
reinsurance program or bad debt expense related to reinsurance for the years ended December 31, 2015 and December 31, 2014.
Investments. We currently classify all of our investments in fixed maturity securities and equity securities as available-for-sale,
and report them at fair value. We classified our investment in a mortgage loan as held to maturity and report it at amortized cost.
42
Subsequent to our acquisition of available-for-sale securities, we record changes in value through the date of disposition as unrealized
holding gains and losses, net of tax effects, and include them as a component of other comprehensive income. We include realized
gains and losses, which we calculate using the specific-identification method for determining the cost of securities sold, in net income.
We amortize any premium or discount on investments over the remaining maturity period of the related investments using the
effective interest method, and we report the amortization in net investment income. We recognize dividends and interest income when
earned.
Quarterly, we perform an assessment of our investments to determine if any are “other-than-temporarily” impaired. An
investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that
investment. As part of our assessment process, we determine whether the impairment is temporary or “other-than-temporary”. We
base our assessment on both quantitative criteria and qualitative information, considering a number of factors including, but not
limited to: how long the security has been impaired; the amount of the impairment; whether, in the case of equity securities, we intend
to hold, and have the ability to hold, the security for a period sufficient for us to recover our cost basis, or whether, in the case of debt
securities, we intend to sell the investment or it is more likely than not that we will have to sell the investment before we recover the
amortized cost; the financial condition and near-term prospects of the issuer; whether the issuer is current on contractually-obligated
interest and principal payments; key corporate events pertaining to the issuer and whether the market decline was affected by
macroeconomic conditions.
If we were to determine that an equity security has incurred an “other-than-temporary” impairment, we would permanently
reduce the cost of the security to fair value and recognize an impairment charge. If a debt security loan is impaired and we either
intend to sell the security loan or it is more likely than not that we will have to sell the security loan before we are able to recover the
amortized cost, then we would record the full amount of the impairment in our net income.
A large portion of our investment portfolio consists of fixed maturity securities, which may be adversely affected by changes in
interest rates as a result of governmental monetary policies, domestic and international economic and political conditions and other
factors beyond our control. A rise in interest rates would decrease the net unrealized holding gains of our investment portfolio, offset
by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would increase the net
unrealized holding gains of our investment portfolio, offset by lower rates of return on funds reinvested.
Fair Value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants (an exit price). When reporting the fair values of the Company’s financial instruments, the Company
prioritizes those fair value measurements into one of three levels based on the nature of the inputs, as follows:
•
•
•
Level 1—Assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active
market that the Company is able to access;
Level 2—Asset and liabilities with values based on quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets in markets that are not active; or valuation models with inputs that are observable, directly or
indirectly for substantially the term of the asset or liability.
Level 3—Assets and liabilities with values that are based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the
assumptions that market participants would use in valuing the assets and liabilities.
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained
from active markets. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted
prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other
relevant inputs. We do not have any investments in our portfolio which require us to use unobservable inputs. Our estimates of fair
value reflect the interest rate environment that existed as of the close of business on December 31, 2015 and December 31, 2014.
Changes in interest rates subsequent to December 31, 2015 may affect the fair value of our investments.
The carrying amounts for the following financial instruments approximate their fair values at December 31, 2015 and
December 31, 2014 because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable,
reinsurance payable, and accounts payable and accrued expenses.
Our non-financial assets, such as goodwill, purchased intangible assets, and property and equipment are carried at cost until
there are indicators of impairment, and are recorded at fair value only when an impairment charge is recognized.
Stock-Based Compensation. We recognize compensation expense under ASC 718 for 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
43
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. The application of this valuation model involves assumptions that
are judgmental and highly sensitive in the determination of compensation expense. We recorded $2.6 million, $3.3 million and $5.7
million of stock-based compensation in 2015, 2014 and 2013, respectively.
Income taxes. On May 22, 2014, the Company converted from a limited liability company to a corporation. As a limited liability
company, the Company was treated as a partnership for tax purposes, and accordingly was not subject to entity-level federal or state
income taxation. The Company’s income tax provision generally consisted of income taxes payable by its separate subsidiaries that
are taxed as corporations. As such, the Company’s effective tax rate as a limited liability company has historically been driven
primarily by the taxable income recognized with respect to gross premiums written. As a corporation, the Company is subject to
typical corporate U.S. federal and state income tax rates on a consolidated basis which it expects to result in a statutory tax rate of
approximately 38.575% under current tax law.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those
temporary differences. Should a change in tax rates occur, we recognize the effect on deferred tax assets and liabilities in operations in
the period that includes the enactment date. Realization of our deferred income tax assets depends upon our generation of sufficient
future taxable income.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount
recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the relevant taxing authority.
We record any income tax penalties and income tax-related interest as income tax expense in the period incurred. We did not
incur any material tax penalties or income tax-related interest during the years ended December 31, 2015, 2014 and 2013.
Recent Accounting Pronouncements
The Company describes below recent pronouncements that have had or may have a significant effect on its financial
statements or on its disclosures. The Company does not discuss recent pronouncements that a) are not anticipated to have an impact
on, or b) are unrelated to its financial condition, results of operations, or 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.
In June 2014, the FASB issued ASU Topic 2014-12, Compensation - Stock Compensation, which clarifies accounting for share-
based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period.
That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a
performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The
updated guidance clarifies that such a term should be treated as a performance condition that affects vesting. As such, the performance
target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target will be achieved and should represent the compensation cost
attributable to the periods for which the requisite service has already been rendered. The guidance will be effective for the Company
beginning with year 2016, and may be applied either prospectively or retrospectively. The Company does not anticipate that this
guidance will materially impact its consolidated financial statements and related disclosures.
44
In September 2015, the FASB issued ASU Topic 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments, which allows an entity to recognize adjustments to provisional amounts that in a business
combination in the reporting period in which the adjustment amounts are determined. ASU Topic No. 2015-16 is effective for our
fiscal year 2017. We do not expect the adoption of this standard to have a material impact on our financial statements.
In January 2016, the FASB issued ASU Topic 2016-1, Financial Statements - Overall (Topic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with
changes in fair value recognized in income; use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset on the balance sheet or the accompanying notes to the financial statements; present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk; and
eliminates the requirement disclose the method(s) and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for annual periods
beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain
requirements. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and
related disclosures.
Seasonality of our Business
Our insurance business is seasonal as hurricanes typically occur during the period from June 1 through November 30 each year.
With our reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to
reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning
June 1 of each year, subject to certain adjustments.
Off-Balance Sheet Arrangements
We obtained a $10 million irrevocable letter of credit from a financial institution to secure Osprey’s obligations arising from our
reinsurance program. We collateralized this letter of credit facility with otherwise unencumbered real estate. The letter of credit
terminates on May 31, 2016.
JOBS Act
We qualify as an “emerging growth company” under the JOBS Act. Section 107 of the JOBS Act provides that an emerging
growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for
complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain
accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail
ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on
which adoption of such standards is required for other public companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by
the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an emerging growth company we choose to rely on such
exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our systems of internal
controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation
disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation
between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median
employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth
company. We will remain an emerging growth company until the earlier of (1) the last day of the year (a) following the fifth
anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1 billion or
(c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-
affiliates exceeds $700 million as of the last business day of our prior second quarter, and (2) the date on which we have issued more
than $1 billion in non-convertible debt during the prior three-year period.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets are monetary in
45
nature. As a result, interest rates have a more significant impact on our performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect
such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to
charge adequate rates, we may be limited in raising our premium levels for competitive and regulatory reasons. Inflation also affects
the market value of our investment portfolio and the investment rate of return. Any future economic changes which result in prolonged
and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely
affect future liability requirements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Our investment portfolios at December 31, 2015 included fixed-maturity and equity securities, the purposes of which are not for
trading or speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet
policyholder obligations while minimizing market risk which is the potential economic loss from adverse fluctuations in securities’
prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation
of interest rates, durations and market conditions in developing investment strategies. Investment securities are managed by a group of
nationally recognized asset managers and are overseen by the investment committee appointed by our board of directors. Our
investment portfolios are primarily exposed to interest rate risk, credit risk and equity price risk. We classify our fixed-maturity and
equity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other
comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely
impact the carrying value of our stockholders’ equity.
Interest Rate Risk
Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage
the risk by analyzing anticipated movement in interest rates and considering our future capital needs.
The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity
securities at December 31, 2015 (in thousands):
Hypothetical Change in Interest rates
300 basis point increase
200 basis point increase
100 basis point increase
100 basis point decrease
200 basis point decrease
300 basis point decrease
Estimated Fair Value
After Change
Change In Estimated Fair
Value
Percentage Increase
(Decrease) in Estimated
Fair Value
$
$
$
$
$
$
325,715 $
341,073 $
356,429 $
386,990 $
399,841 $
406,808 $
(46,068)
(30,710)
(15,354)
15,207
28,058
35,025
(14)%
(9)%
(4)%
4%
7%
9%
Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of
our fixed maturities. We mitigate this risk by investing in fixed-maturities that are generally investment grade and by diversifying our
investment portfolio to avoid concentrations in any single issuer or market sector.
46
The following table presents the composition of our fixed-maturity portfolio by rating at December 31, 2015 (in thousands):
Comparable
Rating
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
B
Total
Amortized
Cost
% of Total
Amortized Cost
Fair Value
% of Total
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
$
99,557
33,225
50,651
36,120
30,903
40,903
30,131
37,024
6,030
5,701
323
399
370,967
27% $
9% $
14% $
10% $
8% $
11% $
8% $
10% $
2% $
1% $
0% $
0% $
100% $
99,275
33,618
51,204
36,431
31,111
41,047
30,085
36,768
5,959
5,567
329
389
371,783
27%
9%
14%
10%
8%
11%
8%
10%
2%
1%
0%
0%
100%
Our equity investment portfolio at December 31, 2015 consists of common stocks and redeemable and nonredeemable preferred
stocks. We may incur potential losses due to adverse changes in equity security prices. We manage this risk primarily through industry
and issuer diversification and asset allocation techniques.
The following table illustrates the composition of our equity portfolio at December 31, 2015 (in thousands):
Stocks by sector:
Financial
Energy
Other
Subtotal
Mutual Funds and ETF By type:
Equity
Subtotal
Total
Estimated
Fair Value
% of Total
Estimated
Fair value
$
$
$
$
4,197
11,467
12,445
28,109
204
204
28,313
15 %
41 %
43 %
99 %
1 %
1 %
100 %
Foreign Currency Exchange Risk
At December 31, 2015, we did not have any material exposure to foreign currency related risk.
47
Item 8.
Financial Statements and Supplementary Data
HERITAGE INSURANCE HOLDINGS, INC.
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .........................................................................................................
Page
49
Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014 ........................................................................
50
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2015, 2014 and
2013 ........................................................................................................................................................................................
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013 ............
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 .............................................
Notes to Consolidated Financial Statements .................................................................................................................................
51
52
53
54
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Heritage Insurance Holdings Inc.
We have audited the accompanying consolidated balance sheets of Heritage Insurance Holdings, Inc. (a Delaware Corporation) and
subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income and
comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Heritage Insurance Holdings, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally
accepted in the United States of America.
/s/ GRANT THORNTON LLP
Tampa, Florida
March 8, 2016
49
HERITAGE INSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Fixed maturity securities, available for sale, at fair value (amortized
cost of $370,967 and $290,951 in 2015 and 2014, respectively)
Equity securities, available for sale, at fair value (cost of $32,439 and $30,555
in 2015 and 2014, respectively)
Mortgage loan, held to maturity, at amortized cost
Total investments
Cash and cash equivalents
Restricted cash
Accrued investment income
Premiums receivable, net
Prepaid reinsurance premiums
Deferred income taxes
Deferred policy acquisition costs, net
Property and equipment, net
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses
Unearned premiums
Reinsurance payable
Income taxes payable
Advance premiums
Accrued compensation
Other liabilities
Total Liabilities
Commitments and contingencies (Note 13)(cid:3)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 30,441,410
and 29,794,960 shares issued and outstanding at December 31, 2015
and December 31, 2014, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
December 31,
2015
2014
$
371,783 $
293,085
28,313
—
400,096
236,277
13,085
3,409
30,565
78,517
7,964
34,800
17,111
15,574
837,398 $
83,722 $
302,493
60,210
2,092
12,138
2,305
17,885
480,845 $
3
202,628
(2,033 )
155,955
356,553
837,398 $
31,225
6,849
331,159
160,481
4,339
2,617
20,028
43,148
6,622
24,370
17,087
5,180
615,031
51,469
241,136
17,113
12,808
5,143
442
31,831
359,942
3
188,342
1,723
65,021
255,089
615,031
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
50
HERITAGE INSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
REVENUE:
Gross premiums written
Increase in gross unearned premiums
Gross premiums earned
Ceded premiums
Net premiums earned
Retroactive reinsurance
Net investment income
Net realized gains (losses)
Other revenue
Total revenue
EXPENSES:(cid:3)
Losses and loss adjustment expenses
Policy acquisition costs
General and administrative expenses
Total expenses
Income before income taxes
Provision for income taxes
Net income
OTHER COMPREHENSIVE INCOME:
Change in net unrealized (losses) gains on investments
Reclassification adjustment for net realized investment (losses) gains
Income tax (expense) benefit related to items of other comprehensive
income
Total comprehensive income
Weighted average shares outstanding(cid:3)
Basic
Diluted
Earnings per share
Basic
Diluted
2015
For the Year Ended December 31,
2014
2013
$
586,098 $
(61,358)
524,740
(148,472)
376,268
—
7,421
1,508
9,595
394,792
436,407 $
(124,893 )
311,514
(87,902 )
223,612
—
3,849
304
6,055
233,820
141,191
57,186
46,125
244,502
150,290
57,778
92,512
(4,606)
(1,508)
89,560
36,510
33,498
159,568
74,252
27,155
47,097
4,395
(304 )
$
2,358
88,756 $
(1,578 )
49,610 $
218,537
(78,578)
139,959
(44,800)
95,159
26,046
1,049
(323)
2,901
124,832
38,501
6,150
24,720
69,371
55,461
21,248
34,213
(1,610)
323
497
33,423
30,056,491
30,326,468
24,568,876
25,816,560
14,313,150
14,473,800
$
$
3.08
3.05
$
$
1.92
1.82
$
$
2.39
2.36
The accompanying notes are an integral part of these consolidated financial statements.
51
HERITAGE INSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
Common Stock
Balance at December 31, 2012
Equity reclassified to temporary equity
Issuance of 6,691,200 warrants and
313,650 redeemable shares
Equity based compensation
Executive stock grant
Issuance of equity for services
Net unrealized change in investments,
net of tax
Change in fair value of redeemable
shares
Net income
Balance at December 31, 2013
Temporary equity reclassified to equity
Issuance of equity
Net unrealized change in investments,
net of tax
Issuance of common stock equity in
initial public offering and private
placement, net of discount fee and
direct costs of issuance of $6,530
Issuance of common stock to
underwriters for over allotment, net of
discount fee and direct costs of
issuance of $700
Exercise of warrants
Stock-based compensation
Net income
Balance at December 31, 2014
Net unrealized change in investments,
net of tax
Issuance of 79,850 shares of stock
in connection with the
acquisition of BRC Restoration
Exercise of stock options and warrants
Stock-based compensation
Excess tax benefit on stock-based compensation
Dividends declared on common stock
Net income
Shares
Amount
8,310,450 $
(1,058,250)
6,459,150
247,350
38,250
10,200
—
—
—
14,007,150
2,338,350
17,850
—
Additional
Paid-In
Capital
1 $ 33,584 $
(4,150)
—
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
(5,466 ) $
—
— $
—
28,119
(4,150)
—
—
—
—
—
—
—
1
—
—
—
31,939
1,273
150
53
—
—
—
—
—
—
—
—
31,939
1,273
150
53
—
—
(790)
(790)
—
—
62,849
20,921
88
(10,823 )
34,213
17,924
—
—
—
—
(790)
—
—
(10,823)
34,213
79,984
20,921
88
—
—
2,513
2,513
6,909,091
1
69,469
—
—
69,470
900,000
5,622,519
—
—
29,794,960
—
79,850
566,600
—
—
—
—
—
1
—
—
3
—
9,200
22,514
3,301
—
188,342
—
—
—
47,097
65,021
—
—
—
—
1,723
9,200
22,515
3,301
47,097
255,089
—
—
(3,756)
(3,756)
—
—
—
—
—
—
2,000
8,900
2,647
739
—
—
—
—
—
—
(1,578 )
92,512
3 $ 202,628 $ 155,955 $
—
—
—
—
—
—
2,000
8,900
2,647
739
(1,578)
92,512
(2,033) $ 356,553
Balance at December 31, 2015
30,441,410 $
The accompanying notes are an integral part of these consolidated financial statements.
52
HERITAGE INSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
For the Year Ended December 31,
2014
2013
2015
$
92,512
$
47,097
$
34,213
Stock-based compensation
Amortization of bond discount
Depreciation and amortization
Bad debt expense
Net realized gains/losses
Deferred income taxes
Excess tax benefit on stock-based compensation
Changes in operating assets and liabilities:
Accrued investment income
Premiums receivable, net
Restricted cash
Prepaid reinsurance premiums
Reinsurance premiums receivable
Income taxes receivable
Deferred policy acquisition costs, net
Other assets
Unpaid losses and loss adjustment expenses
Unearned premiums
Reinsurance payable
Income taxes payable
Accrued compensation
Advance premiums
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Proceeds from sales and maturities of investments available for sale
Purchases of investments available for sale
Proceeds from sale of investment in mortgage loan
Acquisition of a business
Cost of property and equipment acquired
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from issuance of equity and redeemable shares
Proceeds from issuance of equity from initial public offering,
net of discount fee and expense
Proceeds from exercise of stock options and warrants
Repayment on note payable to bank
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flows Information:
Interest paid
Income taxes paid, net
Temporary equity reclassified to equity
Supplemental Disclosure of Non-Cash Investing Activities
Issuance of shares for consideration in the acquisition of a business
2,647
6,246
1,350
(250)
(1,508)
1,016
739
(792)
(10,287)
(8,746)
(35,369)
—
—
(10,430)
(2,594)
32,253
61,358
43,097
(10,716)
1,863
6,995
(15,524)
153,860
151,307
(237,946)
6,849
(6,000)
(1,174)
(86,964)
3,301
2,531
777
250
(304)
(3,764)
—
(1,646)
(9,931)
(4,339)
(11,896)
5,337
5,073
(14,605)
(2,554)
32,125
124,893
(12,478)
10,003
(63)
1,314
23,075
194,196
38,738
(231,070)
(786)
—
(6,929)
(200,047)
—
88
—
8,900
—
8,900
75,796
160,481
236,277
—
68,824
—
$
$
$
$
78,670
22,515
—
101,273
95,422
65,059
160,481
—
13,038
20,921
2,000
$
—
$
$
$
$
$
$
$
$
$
$
5,733
891
150
—
323
(893)
—
(856)
(10,227)
—
(30,658)
(5,337)
(5,073)
(9,733)
(1,810)
17,951
78,578
20,604
(1,100)
504
3,824
7,967
105,051
7,424
(126,971)
(6,063)
—
(10,884)
(136,494)
33,630
—
—
(1,000)
32,630
1,187
63,872
65,059
16
28,314
—
—
The accompanying notes are an integral part of these consolidated financial statements.
53
HERITAGE INSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Basis of Presentation and Nature of Business
Business Description
Heritage Insurance Holdings, Inc. (the “Company”, “we”, “our”, “us”) was initially formed as a Florida limited liability
company in 2012. On January 1, 2014, the Company formed a Delaware limited liability company, also named Heritage Insurance
Holdings, LLC and merged with it in order to domicile the Company in Delaware. Effective May 22, 2014, Heritage Insurance
Holdings, LLC converted into a Delaware corporation named Heritage Insurance Holdings, Inc. As used in these consolidated
financial statements, the terms “the Company”, “we”, “our” and “us” also refer to Heritage Insurance Holdings, LLC and its
consolidated subsidiaries prior to our conversion to a Delaware corporation.
Our insurance subsidiary is Heritage Property & Casualty Insurance Company (“Heritage P&C”). Our other subsidiaries
include: Heritage MGA, LLC (“MGA”), the managing general agent that manages substantially all aspects of our insurance
subsidiary’s business; Contractors’ Alliance Network, LLC, our vendor network manager, which includes BRC Restoration
Specialists, Inc., our restoration service; Skye Lane Properties, LLC, our property management subsidiary; First Access Insurance
Group, LLC, our retail agency; Osprey Re Ltd,; 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 Company’s primary products are personal and commercial residential insurance, which the Company currently offers only
in Florida under authorization from the Florida Office of Insurance Regulation (“FLOIR”). The Company conducts its operations
under one business segment.
On May 22, 2014, the Company’s registration statement on Form S-1 was declared effective, pursuant to which it sold
6,900,000 shares of common stock to the public at a price of $11.00 per share, including 900,000 shares sold pursuant to the
underwriters’ over-allotment option (the “IPO”). Concurrent with the IPO, the Company completed a private placement (the “Private
Placement”) with Ananke Ltd, an affiliate of Nephila Capital Ltd, to purchase $10 million of the Company’s common stock at a price
per share equal to the IPO price. The Company’s total net proceeds from the IPO and the Private Placement were $78.6 million, after
deducting underwriting discounts and other costs.
Basis of Presentation
The consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. and its wholly-owned
subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and all other entities in which
the Company has a controlling financial interest (none of which are variable interest entities). All intercompany accounts and
transactions have been eliminated in consolidation.
The Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by
the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, the Company is eligible for certain exemptions from
various reporting requirements applicable to other public companies that are not emerging growth companies. The Company intends
to continue to take advantage of some, but not all, of the exemptions available to emerging growth companies until such time that it is
no longer an emerging growth company. The Company has, however, irrevocably elected not to take advantage of the extended
transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. As a result, the Company
will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-
emerging growth companies.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States Generally Accepted Accounting
Principles (“U.S. GAAP”) requires us to make estimates and assumptions about future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information
related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time
these estimates are made. Actual results could differ materially from these estimates.
54
Note 2.
Significant Accounting Policies and Practices
Cash and Cash Equivalents
The Company’s cash and cash equivalents include demand deposits with financial institutions and short-term, highly-liquid
instruments with original maturities of three months or less when purchased. The carrying amounts reported in the consolidated
balance sheets for interest bearing deposits approximate their fair value because of the short maturity of these investments.
Restricted Cash
As of December 31, 2015 and 2014, restricted cash was $13.1 million and $4.3 million, respectively. Heritage P&C holds
approximately $13.1 million relating to a reinsurance agreement with an entity that issued catastrophe (“CAT”) bonds, as Heritage
P&C is contractually required to deposit two installments of reinsurance premiums into a trust account.
Investments
The Company classifies all of its investments in fixed maturity securities and equity securities as available-for-sale, and reports
them at fair value. The Company’s investment in a mortgage loan was classified as held to maturity and reported at amortized cost.
Subsequent to its acquisition of available-for-sale securities, the Company records changes in value through the date of disposition as
unrealized holding gains and losses, net of tax effects, and includes them as a component of other comprehensive income. The
Company includes realized gains and losses, which it calculates using the specific-identification method for determining the cost of
securities sold, in net income. The Company amortizes any premium or discount on fixed maturities over the remaining maturity
period of the related securities using the effective interest method, and reports the amortization in net investment income. The
Company recognizes dividends and interest income when earned.
Quarterly, the Company performs an assessment of its investments to determine if any are “other-than-temporarily” impaired.
An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that
investment. As part of the assessment process, the Company determines whether the impairment is temporary or “other-than-
temporary”. The Company bases its assessment on both quantitative criteria and qualitative information, considering a number of
factors including, but not limited to: how long the security has been impaired; the amount of the impairment; whether, in the case of
equity securities, the Company intends to hold, and have the ability to hold, the security for a period sufficient for us to recover our
cost basis, or whether, in the case of debt securities and participations in mortgage loans, the Company intends to sell the investment
or it is more likely than not that the Company will have to sell the investment before it recovers the amortized cost or cost; the
financial condition and near-term prospects of the issuer; whether the issuer is current on contractually-obligated interest and principal
payments; key corporate events pertaining to the issuer and whether the market decline was affected by macroeconomic conditions.
If the Company were to determine that an equity security has incurred an “other-than-temporary” impairment, the Company
would permanently reduce the cost of the security to fair value and recognize an impairment charge in its consolidated statements of
operations and comprehensive income. If a debt security or participation in a commercial mortgage loan was impaired and the
Company either intends to sell the investment or it is more likely than not that the Company will have to sell the investment before it
is able to recover the amortized cost or cost, then the Company would record the full amount of the impairment in its consolidated
statement of operations and other comprehensive income.
A large portion of the Company’s investment portfolio consists of fixed maturity securities, which may be adversely affected by
changes in interest rates as a result of governmental monetary policies, domestic and international economic and political conditions
and other factors beyond its control. A rise in interest rates would decrease the net unrealized holding gains of our investment
portfolio, offset by the Company’s ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates
would increase the net unrealized holding gains of our investment portfolio, offset by lower rates of return on funds reinvested.
55
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants (an exit price). When reporting the fair values of the Company’s financial instruments, the Company prioritizes
those fair value measurements into one of three levels based on the nature of the inputs, as follows:
•
•
•
Level 1—Assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active
market that the Company is able to access;
Level 2—Asset and liabilities with values based on quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets in markets that are not active; or valuation models with inputs that are observable, directly or
indirectly for substantially the term of the asset or liability.
Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value
measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to
determine a transaction price for the asset or liability at the reporting date based on the best information available in the
circumstances.
The Company estimates the fair value of its investments using the closing prices on the last business day of the reporting period,
obtained from active markets such as the NYSE, NASDAQ and NYSE MKT. For securities for which quoted prices in active markets
are unavailable, the Company uses observable inputs such as quoted prices in inactive markets, quoted prices in active markets for
similar instruments, benchmark interest rates, broker quotes and other relevant inputs. The Company does not have any investments in
its portfolio which require the use of unobservable inputs. The Company’s estimate of fair value reflects the interest rate environment
that existed as of the close of business on December 31, 2015. Changes in interest rates subsequent to December 31, 2015 may affect
the fair value of the Company’s investments.
The carrying amounts for the following financial instruments approximate their fair values at December 31, 2015 because of
their short-term nature: cash and cash equivalents, restricted cash, accrued investment income, premiums receivable, net, reinsurance
payable, and accrued compensation.
The Company’s non-financial assets, such as goodwill (reported in other assets), and property, plant and equipment are carried
at cost until there are indicators of impairment, and are recorded at fair value only when an impairment charge is recognized.
Premiums
The Company records assumed premiums written (premiums from policies that the Company assumed from Sunshine State
Insurance Company (“SSIC”) and from Citizens Property Insurance Corporation (“Citizens”), net of opt-outs) and direct premiums
written (premiums from subsequent renewals of Citizens’ and SSIC policies and voluntary policies written during the period) as
revenue, net of ceded amounts, on a daily pro rata basis over the contract period of the related policies that are in force. For any
portion of premiums not earned at the end of the reporting period, the Company records an unearned premium liability. As a one-time
only transaction on June 27, 2014, the Company assumed approximately $58.9 million of annualized premiums from SSIC. The
Company acquired 32,000 policies and as of December 31, 2015 have renewed approximately 24,100. At December 31, 2015, the
Company assumed approximately $53.3 million of annualized premium. The SSIC policies account for approximately 7% of the
Company’s total policies in force as of December 31, 2015.
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a
policy-level evaluation to determine the extent to which the balance of premiums receivable exceeds the balance of unearned
premiums. We then age any resulting exposure based on the last date the policy was billed to the policyholder, and we establish an
allowance for credit losses for any amounts outstanding for more than 90 days. When we receive payments on amounts previously
charged off, we reduce bad debt expense in the period we receive the payment. Balances in premiums receivable and the associated
allowance account are removed upon cancellation of the policy due to non-payment. We recorded an allowance of $0 and $250,000
for uncollectible premiums at December 31, 2015 and 2014, respectively. Bad debt expense recovery related to uncollectible
premiums was $(250,000), $250,000 and $0 for the years ended December 31, 2015, 2014 and 2013, respectively.
When the Company receives premium payments from policyholders prior to the effective date of the related policy, the
Company records an advance premiums liability. On the policy effective date, the Company reduces the advance premium liability
and records the premiums as described above.
Policy Acquisition Costs
The Company incurs policy acquisition costs that vary with, and are directly related to, the production of new business. Policy
acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance; (ii) policy
56
administration fees paid to a third-party administrator at the time of policy issuance; (iii) premium taxes; and (iv) inspection fees. The
Company capitalizes policy acquisition costs to the extent recoverable, then the Company amortizes those costs over the contract
period of the related policy.
At each reporting date, the Company determines whether it has a premium deficiency. A premium deficiency would result if the
sum of the Company’s expected losses, deferred policy acquisition costs, and policy maintenance costs (such as costs to store records
and costs incurred to collect premiums and pay commissions) exceeded the Company’s related unearned premiums plus investment
income. Should the Company determine that a premium deficiency exists, the Company would write off the unrecoverable portion of
deferred policy acquisition cost.
Long-Lived Assets—Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives as follows: building—40 years; computer hardware and software 3—years; office
and furniture equipment—3 to 7 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful
life. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not
improve or extend the life of the respective assets are expensed as incurred.
Business Combination
The application of the purchase method of accounting for business combinations requires the use of significant estimates and
assumptions in determining the fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price.
The estimates of the fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable
using established valuation techniques that consider a number of factors and when appropriate, valuations performed by independent
third party appraisers. Asset acquired and liabilities assumed in connection with business combinations are recorded based on their
respective fair values at the date of acquisition. The identifiable intangible assets that we have acquired are non-compete agreements,
customer relationships and trade names and associated trademarks. Goodwill is calculated as the excess of the cost of the acquired
entity over the net fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and
trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows.
Goodwill and Intangible Assets
Goodwill is subject to evaluation for impairment using a fair value based test. This evaluation is performed annually, during the
fourth quarter or more frequently if facts and circumstances warrant. The Company uses a qualitative approach to test goodwill for
impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is
less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The
Company applied this qualitative approach to its insurance operations reporting unit. If required following the qualitative assessment,
the first step in the goodwill impairment test involves comparing the fair value of each of its reporting units to the carrying value of
those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, the Company is required to
proceed to the second step. In the second step, the fair value of the reporting unit would be allocated to the assets (including
unrecognized intangibles) and liabilities of the reporting unit, with any residual representing the implied fair value of goodwill. An
impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value. The
Company reviews amortizable intangible assets for impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. If the Company concludes that impairment exists, the carrying amount is reduced to fair value.
Impairment of Long-Lived Assets Including Intangible Assets Subject to Amortization
The Company assesses the recoverability of long-lived assets when events or circumstances indicate that the assets might have
become impaired. The Company determines whether the assets can be recovered from undiscounted future cash flows and, if not
recoverable, the Company recognizes impairment to reduce the carrying value to fair value. Recoverability of long lived assets is
dependent upon, among other things, the Company’s ability to maintain profitability, so as to be able to meet its obligations when they
become due. No impairment was recognized in any period presented.
Unpaid Losses and Loss Adjustment Expenses
The Company’s reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of settling all
reported claims plus all claims we incurred related to insured events that have occurred as of the reporting date, but that policyholders
have not yet reported to the Company (incurred but not reported, or “IBNR”).
57
The Company estimates its reserves for unpaid losses and loss adjustment expenses using individual case-based estimates for
reported claims and actuarial estimates for IBNR losses. The Company continually reviews and adjusts its estimated losses as
necessary based on industry development trends, the Company’s evolving claims experience and new information obtained. If the
Company’s unpaid losses and loss adjustment expenses are considered to be deficient or redundant, the Company increases or
decreases the liability in the period in which it identifies the difference and reflects the change in its current period results of
operations. Though the Company’s estimate of the ultimate cost of settling all reported and unreported claims may change at any point
in the future, a reasonable possibility exists that its estimate may vary significantly in the near term from the estimated amounts
included in the Company’s consolidated financial statements.
The Company reports its reserves for unpaid losses and loss adjustment expenses gross of the amounts related to unpaid losses
recoverable from reinsurers and reports losses net of amounts ceded to reinsurers. The Company does not discount its loss reserves for
financial statement purposes.
Other Revenue
Other revenue represents rental income due under non-cancelable leases for space at the Company’s commercial property in
Clearwater, Florida that we acquired in April 2013, and all policy and pay-plan fees. Florida law allows insurers to charge
policyholders a $25 policy fee on each policy written; these fees are not subject to refund, and the Company recognizes the income
immediately when collected. The Company also charges pay-plan fees to policyholders that pay its premiums in more than one
installment and record the fees as income when collected. In addition, the Company records revenue earned from its restoration
subsidiary for non-insurance construction as services performed.
Reinsurance
The Company follows industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all
or a portion of the risk exposure on policies the Company writes to another insurer, known as a reinsurer. To the extent that the
Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company
remains liable for the entire insured loss.
The Company’s reinsurance agreements are short-term, prospective contracts. The Company records an asset, prepaid
reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of new reinsurance
agreements. The Company amortizes its prepaid reinsurance premiums over the 12-month contract period.
In the event that the Company incurs losses recoverable under its reinsurance program, the Company records amounts
recoverable from its reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts
recoverable on unpaid losses is a function of the Company’s liability for unpaid losses associated with the reinsured policies;
therefore, the amount changes in conjunction with any changes to the estimate of unpaid losses. Though an estimate of amounts
recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to the Company’s reserves
for unpaid losses, a reasonable possibility exists that an estimated recovery may change significantly from initial estimates.
The Company estimates uncollectible amounts receivable from reinsurers based on an assessment of factors including the
creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. The Company recorded no uncollectible
amounts under its reinsurance program or bad debt expense related to reinsurance for the years ended December 31, 2015, 2014 and
2013.
Assessments
Guaranty fund and other insurance-related assessments imposed upon the Company are recorded as policy acquisition costs in
the period the regulatory agency imposes the assessment. To recover Florida Insurance Guaranty Association (“FIGA”) assessments,
the Company in turn calculates and begins collecting a policy surcharge that will allow it to collect the entire assessment over a 12-
month period, based on an estimate of the number of policies the Company expects to write. The Company then submits an
information only filing, pursuant to Florida Statute 631.57(3)(h), to the insurance regulatory authority requesting formal approval of
the policy FIGA surcharge. The process may be repeated in successive 12-month periods until the Company collects the entire
assessment. The Company records the recoveries as revenue in the period that it collects the cash. While current regulations allow the
Company to recover from policyholders the amount of assessments imposed upon the Company, the Company’s payment of the
assessments and recoveries may not offset each other in the same year. There were no such assessments during the periods presented.
The Company collects other assessments imposed upon policyholders as a policy surcharge and records the amounts collected
as a liability until the Company remits the amounts to the regulatory agency that imposed the assessment.
58
Accrued Bonus Compensation
Our Board of Directors determined in 2013 that a bonus pool was appropriate based on an 8.5% of earnings before interest,
taxes, depreciation and amortization. For the year ended December 31, 2015 the Board of Directors approved approximately $14.1
million in bonuses to be paid to officers and employees and for the years ended December 31, 2014 and 2013, the Board of Directors
approved approximately $7.2 million and an aggregate of $11.5 million paid in cash and equity, respectively.
Income Taxes
On May 22, 2014, the Company converted from a limited liability company to a corporation. As a limited liability company, the
Company was treated as a partnership for tax purposes, and accordingly was not subject to entity-level federal or state income
taxation. The Company’s income tax provision generally consisted of income taxes payable by its separate subsidiaries that are taxed
as corporations. As such, the Company’s effective tax rate as a limited liability company was historically driven primarily by the
taxable income recognized by its taxable subsidiaries. As a corporation, the Company is subject to typical corporate U.S. federal and
state income tax rates on a consolidated basis which it expects to result in a combined federal and state statutory tax rate of
approximately 38.575% under current tax law.
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures
deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which it expects to recover
or settle those temporary differences. Should a change in tax rates occur, the Company recognizes the effect on deferred tax assets and
liabilities in operations in the period that includes the enactment date. Realization of the Company’s deferred income tax assets
depends upon our generation of sufficient future taxable income.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the
amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement with the relevant taxing authority.
The Company records any income tax penalties and income-tax-related interest as income tax expense in the period incurred.
The Company did not incur any material tax penalties or income-tax-related interest for the years ended December 31, 2015, 2014,
and 2013, respectively.
Advertising Costs
The Company expenses all advertising costs when it incurs those costs. For the years ended December 31, 2015, 2014 and 2013,
the Company incurred advertising costs of $27,000, $14,200, and $393,000, respectively.
Stock-Based Compensation
The Company measures stock-based compensation at the grant date based on the fair value of the award and recognizes stock-
based compensation expense over the requisite vesting period. Determining the fair value of stock option awards requires judgment,
including estimating stock price volatility, forfeiture rates and expected option life. Restricted stock awards are valued based on the
fair value of the stock on the grant date and the related compensation expense is recognized over the vesting period.
Earnings Per Share
The Company reports both basic earnings per share and diluted earnings per share. To calculate basic earnings per share, the
Company divides net income attributable to common shareholders by the weighted-average number of shares outstanding during the
period, including vested and unvested restricted shares. The Company calculates diluted earnings per share by dividing net income
attributable to common shareholders by the weighted-average number of shares, and the effect of share equivalents, and vested and
unvested restricted shares outstanding during the period using the treasury stock method to calculate common stock equivalents.
Concentrations of Risk
The Company’s current operations subject us to the following concentrations of risk:
•
•
Revenue—The Company writes residential property and liability policies exclusively
Geographic—The Company writes 100% of its premium in Florida
59
•
•
Group concentration of credit risk—all of the Company’s reinsurers engage in similar activities and have similar
economic characteristics that could cause their ability to repay us to be similarly affected by changes in economic or other
conditions
Credit risk—The Company chooses to deposit all its cash at four financial institutions
The Company mitigates its geographic and group concentrations of risk by entering into reinsurance contracts with highly rated,
financially-stable reinsurers, and by securing irrevocable letters of credit from reinsurers when necessary.
With regard to cash, the Company had $243.7 million and $154.4 million in excess of Federal Deposit Insurance Corporation
(“FDIC”) insurance limits at December 31, 2015 and December 31, 2014, respectively. Deposits held in non- interest-bearing
transaction accounts are combined with interest-bearing accounts and are insured up to $250,000.
Accounting Pronouncements
The Company describes below recent pronouncements that have had or may have a significant effect on its financial
statements or on its disclosures. The Company does not discuss recent pronouncements that a) are not anticipated to have an impact
on, or b) are unrelated to its financial condition, results of operations, or 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.
In June 2014, the FASB issued ASU Topic 2014-12, Compensation - Stock Compensation, which clarifies accounting for share-
based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period.
That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a
performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The
updated guidance clarifies that such a term should be treated as a performance condition that affects vesting. As such, the performance
target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target will be achieved and should represent the compensation cost
attributable to the periods for which the requisite service has already been rendered. The guidance will be effective for the Company
beginning with year 2016, and may be applied either prospectively or retrospectively. The Company does not anticipate that this
guidance will materially impact its consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU Topic 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments, which allows an entity to recognize adjustments to provisional amounts that in a business
combination in the reporting period in which the adjustment amounts are determined. ASU Topic No. 2015-16 is effective for our
fiscal year 2017. We do not expect the adoption of this standard to have a material impact on our financial statements.
In January 2016, the FASB issued ASU Topic 2016-1, Financial Statements - Overall (Topic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with
changes in fair value recognized in income; use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset on the balance sheet or the accompanying notes to the financial statements; present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk; and
eliminates the requirement disclose the method(s) and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for annual periods
beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain
requirements. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and
related disclosures.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact
on our consolidated financial statements or disclosures.
60
Note 3.
Investments
The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment
category, at December 31, 2015 and December 31, 2014:
Cost or Adjusted /
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized(cid:3)
Losses
(cid:3)(cid:3) Fair Value
(In thousands)
December 31, 2015
U.S. government and agency securities
$
States, municipalities and political subdivisions
Special revenue
Industrial and miscellaneous
Redeemable preferred stocks
Total fixed maturities
Nonredeemable preferred stocks
Equity securities
Total equity securities
Total investments
$
25,474 $
184,145
42,593
115,313
3,442
370,967
12,443
19,996
32,439
403,406 $
16 $
2,107
19
294
61
2,497
338
398
736
3,233 $
387 $
137
204
932
21
1,681
43
4,819
4,862
6,543 $
25,103
186,115
42,408
114,675
3,482
371,783
12,738
15,575
28,313
400,096
Cost or Adjusted /
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
(In thousands)
December 31, 2014
$
U.S. government and agency securities
States, municipalities and political subdivisions
Special revenue
Industrial and miscellaneous
Redeemable preferred stocks
Total fixed maturities
Nonredeemable preferred stocks
Equity securities
Total equity securities
Mortgage loan participation
Total investments
$
7,002 $
41,578
133,269
105,591
3,511
290,951
11,494
19,061
30,555
6,849
328,355 $
22 $
560
1,349
668
84
2,683
237
1,525
1,762
—
4,445 $
16 $
18
237
254
24
549
53
1,039
1,092
—
1,641 $
7,008
42,120
134,381
106,005
3,571
293,085
11,678
19,547
31,225
6,849
331,159
Special revenue instruments include U.S. government associated mortgage backed securities.
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 realized gains (losses) by major investment category as
of December 31, 2015 and 2014, respectively:
Year Ended December 31,
Fixed maturities
Equity securities
Total realized gains
Fixed maturities
Equity securities
Total realized losses
Net realized gains
2015
2014
Gains
(Losses)
Fair Value at Sale
Gains
(Losses)
Fair Value at Sale
(In thousands)
$
$
1,318 $
448
1,766
(133)
(125)
(258)
1,508 $
78,161 $
24,100
102,261
13,343
1,616
14,959
117,220 $
429 $
—
429
(114 )
(11 )
(125 )
304 $
8,632
—
8,632
4,164
19,680
23,844
32,476
61
The table below summarizes the Company’s fixed maturities at December 31, 2015 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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Cost or Amortized Cost Percent of Total
(In thousands)
Fair Value
(In thousands)
Percent of Total
December 31, 2015
$
$
34,162
146,616
79,380
110,809
370,967
9% $
40%
21%
30%
100% $
34,165
146,211
79,887
111,520
371,783
9%
40%
21%
30%
100%
Cost or Amortized Cost Percent of Total
(In thousands)
Fair Value
(In thousands)
Percent of Total
December 31, 2014
$
$
13,709
171,091
61,114
45,037
290,951
5% $
59%
21%
15%
100% $
13,712
171,382
62,091
45,900
293,085
5%
59%
21%
15%
100%
The following table summarizes the Company’s net investment income by major investment category for the years ended
December 31, 2015 and 2014, and 2013 respectively:
Fixed maturities
Equity securities
Cash, cash equivalents and short-term investments
Other investments
Net investment income
Investment expenses
Net investment income, less investment expenses
$
$
2015
For the Year Ended December 31,
2014
(In thousands)
2013
6,960 $
1,811
258
259
9,289
1,868
7,421 $
3,100 $
1,159
181
243
4,683
834
3,849 $
914
456
83
93
1,546
497
1,049
During the Company’s quarterly evaluations of its securities for impairment, the Company determined that none of its
investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers
of the debt securities in which the Company invests continue to make interest payments on a timely basis and have not suffered any
credit rating reductions. The Company does not intend to sell, nor is it likely that it would be required to sell, the debt securities before
the Company recovers its amortized cost basis. All the issuers of the equity securities it owns had near-term prospects that indicated
the Company could recover its cost basis, and the Company also has the ability and the intent to hold these securities until the value
equals or exceeds its cost.
62
The following table presents an aging of the Company’s unrealized investment losses by investment class as of December 31,
2015 and December 31, 2014:
Less Than Twelve Months
Gross
Unrealized
Losses
Number of
Securities
Fair Value
Twelve Months or More
Gross
Unrealized
Losses
Number of
Securities
Fair Value
December 31, 2015
U.S. government and agency securities
States, municipalities and political
subdivisions
Industrial and miscellaneous
Special revenue
Redeemable preferred stocks
Total fixed maturities
Nonredeemable preferred stocks
Equity securities
Total equity securities
Total
(In thousands)
19 $
385 $
19,849
2 $
3 $
397
14
141
134
9
317
19
48
67 $
384 $
50
870
279
21
1,605
29
2,975
3,004 $
4,609 $
10,979
73,312
60,203
950
165,293
1,560
8,416
9,976
175,269
1
5
10
—
18
5
20
25 $
43 $
3
61
9
—
76
14
1,844
1,858 $
1,934 $
164
1,318
1,646
—
3,525
250
2,680
2,930
6,455
Number of Securities
Less Than Twelve Months
Gross Unrealized
Losses
Fair Value Number of Securities(cid:3)(cid:3)(cid:3)
Twelve Months or More
Gross Unrealized
Losses
Fair Value
(In thousands)
December 31, 2014
U.S. government and agency securities
States, municipalities and political
subdivisions
Industrial and miscellaneous
Special revenue
Redeemable preferred stocks
Total fixed maturities
Nonredeemable preferred stocks
Equity securities
Total equity securities
Total
Note 4.
Earnings Per Share
11 $
14
98
71
18
212
1
1
2 $
214 $
15 $
2,451
7,661
15
51,156
204
36,643
213
854
9
98,765
457
2,552
31
1,039
9,792
1,070 $ 12,344
1,527 $ 111,109
1 $
1
10
6
8
26
1
—
1 $
27 $
1 $
109
177
3
1,975
50
1,592
23
355
15
4,208
92
490
22
—
—
22 $
490
114 $ 4,698
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
For the Year Ended December 31,
2014
2013
2015
92,512 $
$
30,056,491
$
3.08 $
47,097 $
34,213
24,568,876 14,313,150
2.39
1.92 $
92,512 $
$
30,056,491
269,977
30,326,468
$
3.05 $
47,097 $
34,213
24,568,876 14,313,150
1,247,684
160,650
25,816,560 14,473,800
2.36
1.82 $
Basic earnings per share:
Net income attributable to common stockholders (000's)
Weighted average shares outstanding
Basic earnings per share:
Diluted earnings per share:
Net income attributable to common stockholders (000's)
Weighted average shares outstanding
Weighted average dilutive shares
Total weighted average dilutive shares
Diluted earnings per share:
63
Note 5.
Fair Value 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 values 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 their calculations are not quoted prices in active markets, but are observable inputs, and therefore
represent Level 2 inputs.
The following table presents 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 years ended December 31, 2015 and 2014, there were no
transfers in or out of Level 1, 2, and 3.
December 31, 2015
Total
Level 1
Level 2
Level 3
(in thousands)
Assets:
Certificate of deposits (1)(cid:3)
Fixed maturities investments:
$
3,300 $
3,300 $
— $
U.S. government and agency securities
$
States, municipalities and political subdivisions
Special revenue
Industrial and miscellaneous
Redeemable preferred stocks
Total fixed maturities investments
Nonredeemable preferred stocks
Equity securities
Total equity securities
Total investments
$
$
$
25,103 $
186,115
42,408
114,675
3,482
375,083 $
12,738
15,575
28,313 $
403,396 $
22,361 $
—
—
—
3,482
29,143 $
12,738
15,575
28,313 $
57,456 $
2,742 $
186,115
42,408
114,675
—
345,940 $
—
—
— $
345,940 $
December 31, 2014
Total
Level 1
Level 2
Level 3
(in thousands)
Fixed maturities investments:
U.S. government and agency securities
$
States, municipalities and political subdivisions
Special revenue
Industrial and miscellaneous
Redeemable preferred stocks
Total fixed maturities investments
Nonredeemable preferred stocks
Equity securities
Total equity securities
Total investments
$
$
$
7,008 $
42,120
134,381
106,005
3,571
293,085 $
11,678
19,547
31,225 $
324,310 $
3,211 $
—
—
—
3,571
6,782 $
11,678
19,547
31,225 $
38,007 $
3,797 $
42,120
134,381
106,005
—
286,303 $
—
—
— $
286,303 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
Includes commercial paper with a maturity of three months or less at the time of purchase of $3.3 million classified in cash
and cash equivalents.
We believe the carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and
other current liabilities approximate their fair values at December 31, 2015 and December 31, 2014, due to the immediate or short
term maturity of these instruments.
64
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are
recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the
measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for
intangible assets acquired, were based on Level 3 unobservable inputs. During 2015 these non-recurring fair values inputs consisted of
customer relations, non-compete, brand name and goodwill. In the event of an impairment, we determine the fair value of the goodwill
and intangible assets using a combination of a discounted cash flow approach and market approaches, which contain significant
unobservable inputs and therefore is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally
include future cash flow projections and a discount rate.
There were no non-recurring fair value adjustments to intangible assets and goodwill during 2015, 2014 and 2013 except for certain
fair value measurements to reassign goodwill to the initial fair value estimates of the assets acquired assumed at the acquisition date
from updated estimates and assumptions completed during the measurement period. The measurement period may be up to one year
from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed,
with the corresponding offset to goodwill.
Note 6.
Property and Equipment
Property and equipment, net consists of the following at December 31, 2015 and 2014 (in thousands):
Land
Building
Computer hardware and software
Office furniture and equipment
Tenant and leasehold improvements
Vehicle fleet
Total, at cost
Less: accumulated depreciation and amortization
Property and equipment, net
$
December 31, 2015 December 31, 2014
(In thousands)
2,582 $
9,599
2,502
634
3,300
693
19,310
2,199
17,111 $
2,582
9,599
2,155
445
2,812
421
18,014
927
17,087
$
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $1.3 million, $0.8 million, $0.2 million,
respectively. The Company’s real estate consists of 13 acres of land, two buildings with a gross area of 148,000 square feet and a
parking garage. The Company relocated to these facilities during March 2014. These facilities and the related existing tenant lease
agreements were acquired in April 2013 for a total purchase price of $9.8 million paid in cash.
The Company currently leases space to non-affiliates and occupies space in one of the buildings.
Expected annual rental income due under non-cancellable operating leases for our real estate properties is as follows (in
thousands):
Year
January 1 to December 31, 2016
January 1 to December 31, 2017
January 1 to December 31, 2018
January 1 to December 31, 2019
January 1 to December 31, 2020
Thereafter
Amount
2,483
2,529
2,394
2,396
2,497
6,723
Note 7. Acquisition
On July 31, 2015, the Company acquired BRC Restoration Specialists, Inc., a Florida based provider of restoration services and
emergency and recovery assistance for a purchase price in aggregate of $8 million in cash and common stock. The Company issued
79,850 shares of its common stock to BRC at a fair value of $2.0 million as part of the purchase price and paid in cash $6.0 million.
For the purchase price allocation the Company utilized a third party to calculate the valuation. The excess of the cost of the BRC
acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as goodwill. Based on the fair
valuation, the purchase price is allocated as follows:
65
Purchase Price Allocation (in thousands):
Preliminary value assigned
Property, plant and equipment
Intangibles
Goodwill
Total purchase price
BRC Restoration Specialists,
Inc.
$
$
122
2,200
5,678
8,000
As of December 31, 2015, the Company recorded goodwill and intangibles in other assets.
Note 8.
Deferred Policy Acquisition Costs
The Company defers certain costs in connection with written policies, called Deferred Policy Acquisition Costs (“DPAC”), net
of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net
DPAC is amortized over the effective period of the related insurance policies.
The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity
with regard to DPAC for the years ended December 31, 2015 and 2014:
Beginning Balance
Policy acquisition costs deferred
Amortization
Ending Balance
For the Year Ended December 31,(cid:3)(cid:3)
2015
2014
(In thousands)
24,370 $
67,616
(57,186)
34,800 $
9,765
51,115
(36,510 )
24,370
$
$
Note 9.
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. These reinsurance agreements are part of the Company’s 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.
2013 – 2014 Reinsurance Program
During the second quarter of 2013, the Company placed its reinsurance program for the period from June 1, 2013 through
May 31, 2014. The Company’s reinsurance program, which was segmented into layers of coverage, protected it for excess property
catastrophe losses and loss adjustment expenses. The Company’s previous year’s reinsurance program incorporated the mandatory
coverage required by law to be placed with the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe reinsurance fund
(“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, 2013 to May 31, 2014 reinsurance
program.
•
•
The Company’s Retention. For the first catastrophic event, the Company had a primary retention of the first $9 million of
losses and loss adjustment expenses, of which the Company’s reinsurance subsidiary, Osprey Re Ltd (“Osprey”), was
responsible for $3 million. For a second and third catastrophic event, Heritage P&C’s primary retention decreased to $3
million per event. To the extent that there was reinsurance coverage remaining, Heritage P&C had no primary retention
for events beyond the third catastrophic event. Osprey had no primary retention beyond the first catastrophic event.
Layers Below FHCF. Immediately above the Company’s retention, the Company purchased $94 million of reinsurance
from third party reinsurers and Osprey. Through Osprey, the Company retained an aggregate participation in this coverage
of $3.5 million, comprised of a 3% participation of $31 million of losses and loss adjustment expenses in excess of $9
million, or $0.9 million, and a 4% participation of $63 million of losses and loss adjustment expenses in excess of $40
million, or $2.5 million. 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 $94.0 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.
66
•
•
FHCF Layer. The Company’s FHCF coverage included an estimated maximum provisional limit of 90% of $270 million,
or $243 million, in excess of the Company’s retention and private reinsurance of $103 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 and above the FHCF layer from third party
reinsurers. The layer alongside was in the amount of $27 million and the layer immediately above was in the amount of
$28.5 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. Through the payment of a reinstatement premium, the
Company was able to reinstate the full amount of this private reinsurance one time. To the extent that all or a portion of
either of these private layers 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. The FHCF coverage
could not be reinstated once exhausted, but it did provide coverage for multiple events.
Aggregate Coverage. In addition to the layers described above, the Company also purchased $170 million of aggregate
reinsurance coverage for losses and loss adjustment expenses in excess of $401.5 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 has been previously exhausted.
There is no reinstatement of the aggregate reinsurance coverage once exhausted, but it did provide coverage for multiple
events.
For a first catastrophic event, the Company’s 2013 reinsurance program provided coverage for $571.5 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 had coverage remaining from layers that were not previously fully exhausted. The Company also
purchased reinstatement premium protection insurance to provide an additional $149.5 million of coverage. The Company aggregate
reinsurance layer also provides coverage for second and subsequent events to the extent not exhausted in prior events.
During April 2014, Heritage P&C entered into two catastrophe reinsurance agreements with Citrus Re Ltd, a newly-formed
Bermuda special purpose insurer. 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 Ltd during this three-
year risk period. Citrus Re Ltd 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. The
Company has determined that, while Citrus Re Ltd is a variable interest entity, the Company does not have any variable interests in
Citrus Re Ltd Accordingly, consolidation of or disclosures associated with Citrus Re Ltd are not applicable.
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 current reinsurance program incorporates 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 decreases to $2 million and Osprey was responsible for $4 million. To the extent that there was
reinsurance coverage remaining, Heritage P&C has a $2 million primary retention for events beyond the third catastrophic
event. Osprey has 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 wraps around the FHCF and provides
coverage alongside the FHCF.
67
•
•
•
FHCF Layer. The Company’s FHCF coverage includes 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 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.
CAT Bond Layer. Immediately above the FHCF layer is the coverage provided by the reinsurance agreements entered into
with Citrus Re Ltd, as described above in this footnote. The first contract with Citrus Re Ltd provides $150 million of
coverage and the second contract provides an additional $50 million of coverage. Osprey provides $25 million of
coverage alongside the second contract.
Aggregate Coverage. In addition to the layers described above, the Company purchased $105 million of aggregate
reinsurance coverage for losses and loss adjustment 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 does provide coverage for
multiple events. Osprey Re Ltd provides $20 million of protection in the layer above $940 million.
For a first catastrophic event, the Company’s reinsurance program provides 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 depends 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 aggregate reinsurance
layer also provides coverage for second and subsequent events to the extent not exhausted in prior 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 incorporates 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 has 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 decreases 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 has purchased $440 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 $440 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. A portion of this coverage wraps around the FHCF and
provides coverage alongside and above the FHCF.
FHCF Layer. The Company’s FHCF coverage includes 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 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 Ltd To the extent the FHCF coverage is adjusted, this private reinsurance with third party
reinsurers and Citrus Re Ltd 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.
68
•
•
•
CAT Bond Layer alongside the FHCF. During April 2015 Heritage P&C entered into three catastrophe reinsurance
agreements with Citrus Re Ltd. 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 Ltd
during this three-year risk period. Citrus Re Ltd issued in 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 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.
CAT Bond Layer above the FHCF. Immediately above the FHCF layer is the coverage provided by the 2015 reinsurance
agreement entered into with Citrus Re as described above in this footnote. The Citrus Re 2015 Class A notes provide up to
$150 million of coverage immediately above the FHCF layer. Coverage immediately above the 2015 Class A notes is
provided by the 2014 reinsurance agreements entered into with Citrus Re Ltd, as described above in this footnote. The
first contract with Citrus Re Ltd provides $150 million of coverage and the second contract provides an additional $50
million of coverage.
Aggregate Coverage. In addition to the layers described above, the Company has 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 is not fully exhausted in the first catastrophic event, it provides coverage
commencing at its reduced retention for second and subsequent events and where underlying coverage has been
previously exhausted. There is no reinstatement of the aggregate reinsurance coverage once exhausted, but it does 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. The chart below provides a
graphic illustration of the structure and operations of our 2015-2016 catastrophe reinsurance program.
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 that the total insured value exceeded $10 million.
69
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 income and comprehensive income:
2015
For the Year Ended December 31,
2014
(In thousands)
2013
Premium written:(cid:3)
Direct
Assumed
Ceded
Net premium written
Change in unearned premiums:
Direct
Assumed
Ceded
Net decrease (increase)
Premiums earned:
Direct
Assumed
Ceded
Net premiums earned
Losses and LAE incurred:(cid:3)
Direct
Assumed
Ceded
Net losses and LAE incurred
$
$
$
$
$
$
$
$
487,583 $
98,515
(183,841)
402,257 $
283,295 $
153,112
(99,798 )
336,609 $
120,893
97,644
(75,459)
143,078
(103,138) $
41,780
35,369
(25,989) $
(80,617 ) $
(44,276 )
11,896
(112,997 ) $
384,445 $
140,295
(148,472)
376,268 $
202,678 $
108,836
(87,902 )
223,612 $
(74,797)
(3,781)
30,659
(47,919)
46,096
93,863
(44,800)
95,159
107,552 $
33,639
—
141,191 $
64,686 $
24,874
—
89,560 $
14,674
23,827
—
38,501
The following table highlights the effects that the Company’s assumption transactions have on unpaid losses and loss
adjustment expenses and unearned premiums:
2015
For the Year Ended December 31,
2014
(In thousands)
2013
Unpaid losses and loss adjustment expenses:
Direct
Assumed
Gross unpaid losses and LAE
Ceded
Net unpaid losses and LAE
Unearned premiums:
Direct
Assumed
Gross unearned premiums
Ceded
Net unearned premiums
$
$
$
$
60,223 $
23,499
83,722
—
83,722 $
34,420 $
17,049
51,469
—
51,469 $
10,037
9,307
19,344
—
19,344
258,754 $
43,739
302,493
(78,517)
223,976 $
155,617 $
85,519
241,136
(43,148 )
197,988 $
75,000
41,243
116,243
(31,252)
84,991
There were no amounts receivable with respect to reinsurers at December 31, 2015, 2014 or 2013. Thus, there were no
concentrations of credit risk associated with reinsurance receivables as of December 31, 2015, 2014 and 2013. The percentages of
assumed premiums earned to net premiums earned for the periods ended December 31, 2015, 2014 and 2013 were 37.3%, 48.7% and
98.6%, respectively.
70
Note 10. 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 for 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:
For the Year Ended December 31,
2014
2013
2015
Balance, beginning of period
Less: reinsurance recoverable on paid losses
Net balance, beginning of period
$
51,469 $
—
51,469
19,344 $
—
19,344
Incurred related to:(cid:3)
Current year
Prior years
Total incurred
Paid related to:(cid:3)
Current year
Prior years
Total paid
Net balance, end of period
Plus: reinsurance recoverable on unpaid losses
Balance, end of period
146,484
(5,293)
141,191
89,783
(223 )
89,560
81,673
27,265
108,938
83,722
—
83,722 $
45,618
11,817
57,435
51,469
—
51,469 $
$
1,393
—
1,393
38,968
(467)
38,501
20,010
540
20,550
19,344
—
19,344
The Company writes insurance in the state of Florida, which could be exposed to hurricanes or other natural catastrophes.
Although the occurrence of a major catastrophe could have a significant effect on its monthly or quarterly results, such an event is
unlikely to be so material as to disrupt its 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 year ended December 31, 2015 reflect a prior year redundancy of $5.3 million
associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to a longer history of
Company specific experience. Additionally, during the year ended December 31, 2015, the Company experienced favorable
development of losses and LAE reserves for its personal and commercial lines. The Company’s losses incurred related to prior years
reflect redundancies of $223,000 and $467,000 for the years ended December 31, 2014 and 2013, respectively.
Note 11.
Income Taxes
The following table summarizes the provision for income taxes:
Federal:
Current
Deferred
Provision for Federal income tax expense
State:
Current
Deferred
Provision for State income tax expense
Provision for income taxes
2015
For the Year Ended December 31,
2014(cid:3)
(In thousands)
2013
$
$
48,524 $
970
49,494
8,238
46
8,284
57,778 $
26,440 $
(3,219)
23,221
4,479
(545)
3,934
27,155 $
19,066
(769)
18,297
3,075
(124)
2,951
21,248
71
The following table sets forth the components of income before income taxes for the years ended December 31, 2015, 2014 and
2013 (in thousands):
Pass-through entities (Through May 22, 2014)
Non-pass through entities
Income before income taxes
2015
2014
2013
$
$
— $
150,290
150,290 $
2,668 $
71,584
74,252 $
1,888
53,573
55,461
The actual income tax expense differs from the expected income tax expense computed by applying the combined applicable
effective federal and state tax rates to income before the provision for income taxes as follows:
For the Year Ended December 31,
2014
2013
2015
Expected income tax expense at federal rate
State tax expense, net of federal tax benefits
Permanent items
Other
Reported income tax expense
35.0%
3.6%
-1.0%
0.9%
38.5%
35.0 %
3.6 %
0.0 %
-2.0 %
36.6 %
35.0%
3.6%
0.0%
-0.3%
38.3%
The effective income tax rate differs from the statutory income tax rate in 2015, 2014 and 2013 primarily due to state income
taxes and the fact that a portion of the Company’s consolidated pre-tax income through May 22, 2014 was earned at our limited
liability companies that had elected to be taxed under the Partnership provisions of the Internal Revenue Code. Accordingly, all
income or losses and applicable tax credits generated by these entities through that date are reported on the common shareholders’
individual tax returns, and no federal income taxes were recorded by the Company.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The table below summarizes the significant components of our net deferred tax assets:
Deferred tax assets:
Unearned premiums
Tax-related discount on loss reserve
Unrealized loss
Stock-based compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs
Unrealized gain
Property and equipment
Other
Total deferred tax liabilities
Less: valuation allowance
Net deferred tax assets
For the Year Ended December 31,(cid:3)
2015
2014
(In thousands)
17,979 $
1,140
1,277
1,617
257
22,269
13,424
—
473
408
14,305
—
7,964 $
15,567
1,022
—
1,258
545
18,392
9,401
1,081
633
655
11,770
—
6,622
$
$
In assessing the net carrying amount of deferred tax assets, we consider whether it is more likely than not that we 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. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The statute of limitations related to our federal and state income tax returns remains open from our first filings for 2012 through
2014. No taxing authorities are currently examining any of our federal or state income tax returns.
72
The reinsurance affiliate, which is based in Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal
Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result
of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S. corporation.
As of December 31, 2015, the Company had no uncertain tax positions or unrecognized tax benefits that, if recognized, would
impact the effective income tax rate.
Note 12.
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, specify allowable investment types and investment mixes, and subject insurers
to assessments.
The Company’s insurance subsidiary, Heritage P&C, files with the insurance regulatory authorities an “Annual Statement”. For
the years ended December 31, 2015 and 2014, the Company’s insurance subsidiary recorded statutory net income of $45.4 million and
$9.8 million, respectively. The Company’s insurance subsidiary is domiciled in Florida, and the laws of that state require that the
Company’s insurance subsidiary maintain capital and surplus equal to the greater of $15 million or 10% of its liabilities. The
Company’s statutory capital surplus was $216.6 million and $172.7 million at December 31, 2015 and 2014, respectively. State law
also requires the Company’s insurance subsidiary to adhere to prescribed premium-to-capital surplus ratios, with which the subsidiary
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 Office of Insurance Regulation 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.
The NAIC published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides for policy holders. Most states, including Florida, have enacted the NAIC
guidelines as statutory requirements, and insurers having less statutory surplus than required will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease
operations in the event the insurer fails to maintain the required statutory capital.
The level of required risk-based capital (“RBC”) is calculated and reported annually. There are five outcomes to the RBC
calculation set forth by the NAIC which are as follows:
1.
2.
3.
4.
No Action Level—If RBC is greater than 200%, no further action is required.
Company Action Level—If RBC is between 150%-200%, the insurer must prepare a report to the regulator outlining a
comprehensive financial plan that identifies conditions that contributed to the insurer’s financial condition and proposes
corrective actions.
Regulatory Action Level—If RBC is between 100%-150%, the state insurance commissioner is required to perform any
examinations or analyses to the insurer’s business and operations that he or she deems necessary as well as issuing appropriate
corrective orders.
Authorized Control Level—If RBC is between 70%-100%, this is the first point that the regulator may take control of the
insurer even if the insurer is still technically solvent and is in addition to all the remedies available at the higher action levels.
5. Mandatory Control Level—If RBC is less than 70%, the regulator is required to take steps to place the insurer under its control
regardless of the level of capital and surplus.
At December 31, 2014, the ratio of adjusted capital to authorized control level risk based capital was 368%.
Florida law permits an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net
operating profit and net realized capital gains. The law further provides calculations to determine the amount of dividends or
distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or
distributions that would require prior approval of the insurance regulatory authority. Statutory risk-based capital requirements may
further restrict our insurance subsidiary’s ability to pay dividends or make distributions if the amount of the intended dividend or
distribution would cause statutory surplus to fall below minimum risk-based capital requirements. However, the consent order
73
authorizing our commencement of operations precludes us from paying dividends without the prior approval of FLOIR until July 31,
2017.
Florida law limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt
instruments. The Company was in compliance with all investment restrictions at December 31, 2015 and 2014.
Governmental agencies or certain quasi-governmental entities can levy assessments upon the Company in the states in which the
Company writes policies. See Note 2 for a description of how the Company recovers assessments imposed upon it.
Governmental agencies or certain quasi-governmental entities can also levy assessments upon policyholders, and the Company
collects the amount of the assessments from policyholders as surcharges for the benefit of the assessing agency. We currently collect
assessments levied upon policyholders on behalf of Citizens in the amount of 1.0%, and on behalf of FHCF in the amount of 1.3%.
The Company multiplies the premium written on each policy by these assessment percentages to determine the additional amount that
it will collect from the policyholder and remit to the assessing agencies.
The Company reported its insurance subsidiary’s assets, liabilities and results of operations in accordance with GAAP, which
varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry
practices. The following items are principal differences between statutory accounting and GAAP:
•
•
•
•
•
•
•
•
•
•
Statutory accounting requires that the Company excluded certain assets, called non-admitted assets, from the balance sheet.
Statutory accounting requires the Company to expense policy acquisition costs when incurred, while GAAP allows the
Company to defer and amortize policy acquisition costs over the estimated life of the policies.
Statutory accounting dictates how much of a deferred income tax asset the Company can admit on a statutory balance sheet.
Statutory accounting requires that the Company record certain investments at cost or amortized cost, while the Company records
other investments at fair value; however, GAAP requires that we record all available for sale investments at fair value.
Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while
GAAP requires the Company to record surplus notes as a liability.
Statutory accounting allows bonds to be carried at amortized cost or fair value based on the rating received from the Securities
Valuation Office of the NAIC, while they are recorded at fair value for GAAP if designated as available for sale.
Statutory accounting allows ceding commission income to be recognized when written if the cost of acquiring and renewing the
associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the
coverage period.
Statutory accounting requires that unearned premiums and loss reserves be presented net of related reinsurance rather than on a
gross basis under GAAP.
Statutory accounting requires a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged
over ninety days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for
uncollateralized amounts ceded to a company not licensed in the insurance affiliate’s domiciliary state and a reserve for
uncollectable reinsurance is charged through earnings rather than surplus or equity.
Statutory accounting requires an additional admissibility test outlined in Statements on Statutory Accounting Principles, No. 101
and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of
income tax expense under GAAP.
74
The table below reconciles the Company’s consolidated GAAP net income (loss) to statutory net income (loss) of its insurance
subsidiary (in thousands):
Consolidated GAAP net income
Increase (decrease) due to:
Deferred income taxes
Deferred policy acquisition costs
Surplus note interest
Non-statutory subsidiaries
Equity compensation
Allowance for doubtful accounts
Other
For the Year Ended December 31,
2014
2013
2015
$
92,512 $
47,097 $
34,213
1,755
(10,430)
(347)
(36,569)
(1,074)
(250)
—
45,597 $
(3,764 )
(14,605 )
(1,445 )
(16,788 )
(1,106 )
250
199
9,838 $
(893)
(9,733)
(278)
(2,191)
—
—
(128)
20,990
Statutory net income of insurance subsidiary
$
The table below reconciles the Company’s consolidated GAAP stockholders’ equity to surplus with regards to policyholders of
the Company’s insurance subsidiary (in thousands):
$
Consolidated GAAP stockholders’ equity
Increase (decrease) due to:
Ownership shares issued
Dividends to shareholders
Excess tax benefit share-based compensation
Redeemable shares classified as temporary equity
Subsidiary capitalization
Surplus debentures and paid in surplus
Deferred policy acquisition costs
Deferred income taxes
Non-admitted assets
Surplus debenture interest
Non-statutory subsidiaries
Unrealized investment losses/gains
Equity compensation
Allowance for doubtful accounts
Other
For the Year Ended December 31,
2014
255,089 $
2015
356,553 $
2013
79,984
(201,892)
(1,578)
739
—
—
129,180
(34,800)
8,232
(400)
339
(38,527)
955
(2,180)
—
—
(176,464 )
—
—
—
—
128,106
(24,370 )
8,308
(320 )
(1,723 )
(10,825 )
(2,227 )
(3,106 )
250
(7 )
(72,948)
—
—
20,921
20,000
17,000
(9,765)
2,891
(511)
(278)
5,355
746
—
—
(341)
Statutory surplus as regards policyholders of insurance
subsidiary
$
216,621 $
172,711 $
63,054
The Company’s reinsurance subsidiary, Osprey Re Ltd (“Osprey”), which was incorporated on April 23, 2013, is licensed as a
Class 3a Insurer under The Bermuda Insurance Act 1978 and related regulations. Osprey is required to maintain statutory capital and
surplus of at least $1.0 million and maintain liquid resources or have access to liquid resources equal to its maximum obligation for
which it is responsible under the terms of any reinsurance arrangement to which it is a party. In May 2013, the Company contributed
$1.7 million in cash to Osprey. Osprey secures its reinsurance obligations to our insurance subsidiary with an irrevocable letter of
credit in the amount of $10 million. These resources, in addition to premiums ceded to it by our insurance subsidiary are sufficient to
comply with regulatory requirements as of December 31, 2015. Bermuda’s standard for financial statement reporting is U.S. GAAP.
Note 13. 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
75
(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 14. Other Liabilities
At December 31, 2015 and 2014, other liabilities included approximately $4.9 million and $21.1 million related to amounts
owed to Citizens for policies assumed by the Company, where the policyholder subsequently opted-out of the assumption program.
Note 15. Accrued Bonus Compensation
For the year ended December 31, 2015, the Company recognized employee bonus compensation expense of approximately
$14.1 million based on 8.5% of earnings before interest, taxes, depreciation and amortization, which the Company paid out in cash of
approximately $12.1 million as of December 31, 2015. For the year ended December 31, 2014, the Company accrued bonuses of
$7.7 million based on 8.5% of earnings before interest, taxes, depreciation and amortization, which was paid out in cash as of
December 31, 2014. For the year ended December 31, 2013, the Company awarded its directors, executive officers and select
employees’ bonus compensation of $11.5 million in the aggregate for 2013, comprised of $6.4 million in cash and $5.1 million in
ownership equity. The equity component was issued in the form of 389 ownership shares at a value of $13,125 per share. The per
share value was determined based on an independent valuation, and the Company evaluated the assumptions, methodologies and
conclusions associated with that valuation.
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 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 December 31, 2015 and
December 31, 2014.
•
•
•
The Company leased the space that it had occupied through March 2014 at 700 Central Avenue, Ste. 500 St. Petersburg, Florida
from a real estate management company controlled by a stockholder. The Company leased the space without obligation to
continue doing so in the future. For the years ended December 31, 2015, 2014 and 2013 the Company incurred rent expense of
approximately $0, $70,000 and $488,000 respectively.
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. As of December 31, 2015 and 2014, the Company has made payments of $113,400 and $93,000 under this agreement,
respectively. Fees for additional services, such as the oversight of construction activity, are provided for on an as needed basis.
The Company entered into an agreement for the construction of a parking facility for its Clearwater property with a relative of
one of its directors. As of December 31, 2014, the Company has made payments of approximately $2.6 million for engineering,
construction and architectural services. The project was completed during September 2014.
Note 17. Employee Benefit Plan
The Company provides a 401(k) plan for substantially all of its employees. The Company contributes 3% of employees’ salary,
up to the maximum allowable contribution, regardless of the employees’ level of participation in the plan. For the years ended
December 31, 2015 and 2014, the Company’s contributions to the plan on behalf of the participating employees were $276,300 and
$209,400, respectively.
The Company provides for its employees’ healthcare benefits. During the third quarter of 2015 the Company changed the
healthcare plan from a fully insured plan to a partially self-insured plan. For the years ended December 31, 2015 and 2014, the
Company incurred medical premium costs in aggregate of $1.4 million and $646,900, respectively. The Company also recorded
approximately $238,000 as unpaid claims as of December 31, 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 $60,000 for which any
excess cost would be covered by the reinsurer. There is an aggregate limit for losses in excess of $1.5 million which would provide up
to $1.0 million of coverage. Any excess of the $1.5 million retention and the $1 million of aggregate coverage would be borne by the
Company. The aggregate stop loss commences once our expenses exceeds 125% of the annual aggregate expected claims.
76
Note 18. Equity
The total amount of our authorized capital stock consists of 50,000,000 shares of common stock, $0.0001 par value, and
5,000,000 shares of preferred stock, $0.0001 par value. As of December 31, 2015, the Company had 30,441,410 shares of common
stock outstanding and no shares of preferred stock outstanding.
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 (excluding restricted stock) are fully paid and
nonassessable.
Equity Issuances
As of December 31, 2014, there were 29,794,960 shares of common stock outstanding and 30,600 warrants and 1,685,923 stock
options outstanding representing $188.3 million of additional paid-in capital. The following discloses the changes in the Company’s
stockholders’ equity during 2015.
First Quarter 2015
In March 2015, the Company issued 12,500 shares of common stock upon the exercise of 12,500 stock options granted at an
exercise price of $16.89 per share and received proceeds of $211,125.
Second Quarter 2015
In May 2015, the Company issued 30,600 shares of common stock upon the exercise of 30,600 warrants for gross proceeds of
$180,000 or an exercise price of $5.88 per share of common stock.
In May and June 2015, the Company issued an aggregate of 157,500 shares of common stock upon the exercise of 137,500 and
20,000 stock options which were granted at an exercise price of $16.89 and $14.02 per share and received proceeds of $2,322,375 and
$280,400, respectively.
Third Quarter 2015
In July and August 2015, the Company issued an aggregate of 210,000 shares of common stock upon the exercise of 60,000 and
150,000 stock options, which were granted at an exercise price of $14.02 and $16.89 per share and received proceeds of $841,195 and
$2,533,485, respectively.
In August 2015, in connection with the acquisition of BRC Restoration Specialists, Inc., (“BRC”) the Company issued 79,850
shares of common stock with a fair value of approximately $2,000,000.
Fourth Quarter 2015
In November and December 2015, the Company issued an aggregate of 156,000 shares of common stock upon the exercise of
120,000 and 36,000 stock options, which were granted at an exercise price of $16.89 and $14.02 per share and received proceeds of
$2,026,800 and $504,720, respectively.
77
Note 19.
Stock-Based Compensation
The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22,
2014. The Plan authorized 2,981,737 shares of common stock for issuance under the Plan for future grants.
At December 31, 2015 and 2014, there were 170,814 and 1,295,814 shares available for grant under the Plan, respectively.
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. The application of this valuation model involves assumptions that
are judgmental and highly sensitive in the determination of compensation expense.
Stock Options
On September 24, 2014, the Company granted options to purchase 359,000 shares to certain employees and directors. No stock
options were granted in 2013. These options were awarded with the strike price set at the fair market value at the grant date, and
vested on March 15, 2015 with an expiration date of September 24, 2017. The fair value of each option grant, which was $2.70 per
option granted in 2014, was estimated on the date of grant using the Black-Scholes option-pricing model.
On December 2, 2014, the Company granted options to purchase 1,326,923 shares to certain employees and directors. The
employee options were awarded with the strike price set at the fair market value at the grant date, and vest at 50 percent upon grant
and 50 percent on April 30, 2015 with an expiration date of December 2, 2017. The directors’ options were awarded with the strike
price set at the fair market value at the grant date, and vest quarterly commencing on January 1, 2015 with an expiration date of
December 2, 2017. The fair value of each option grant, which ranged from $3.07 to $3.54 per option granted in 2014, is estimated on
the date of grant using the Black-Scholes option-pricing model.
The following table provides the assumptions utilized in the Black-Scholes model for options granted during the year ended
December 31, 2014. No options were granted during the years ended December 31, 2015 and 2013.
Weighted-average risk-free interest rate
Expected term of option in years
Weighted-average volatility
Dividend yield
Weighted average grant date fair value per share
December 2,
2014
September
24,
2014
0.51
1.60
35.56%
0%
3.19 $
0.42
1.70
36.47 %
0 %
2.70
$
A summary of information related to stock options outstanding at December 31, 2015 is as follows:
Balance at December 31, 2013
Granted
Exercised
Forfeited
Balance at December 31, 2014
Granted
Exercised
Balance at December 31, 2015
Vested and exercisable as of December 31, 2015
78
Shares
Weighted-
Average Grant
Date Fair Value
—
1,685,923
—
—
1,685,923
—
$
$
(536,000 ) $
$
1,149,923
$
1,149,923
3.09
3.09
16.27
2.99
2.99
Range of
Exercise Price
Number
Outstanding
Options Outstanding
Average Remaining
Contractual
Life (in years)
Weighted Average
Exercise Price
Number
Exercisable
Options Exercisable
Average Remaining
Contractual
Life (in years)
Weighted Average
Exercise Price
$
$
14.02
16.89
15.46
243,000
906,923
1,149,923
1.75 $
2
1.875 $
14.02
16.89
15.46
243,000
906,923
1,149,923
1.75 $
2
1.875 $
14.02
16.89
15.46
The Company has recognized $1.9 million and $3.3 million of compensation expense during the years ended December 31,
2015 and 2014 relative to the stock options granted above.
Restricted Stock
The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards
granted to employees vest in equal installments generally over a five year period from the grant date subject to the recipient’s
continued employment. The fair value of restricted stock awards are estimated by the market price at the date of grant and amortized
on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards have the right to receive dividends.
No restricted stock was granted during the years ended December 31, 2014 and 2013. Restricted stock activity during the year ended
December 31, 2015 is as follows:
Non-vested, at December 31, 2014
Granted
Vested
Canceled and forfeited
Non-vested, at December 31, 2015
Number of shares
—
1,125,000
—
—
1,125,000
$
$
Weighted-Average
Grant-Date Fair
Value per Share
—
21.40
—
—
21.40
Awards are being amortized to expense over the five year vesting period.
The following table summarizes information about deferred tax benefits recognized and tax benefits realized to restricted stock
awards and related paid dividends, and the fair value of vested restricted stock for the year ended December 31, 2015 and 2014,
respectively.
For the Year Ended December 31,
Deferred tax benefit recognized
Tax benefit realized for restricted stock and paid dividends
Fair value of vested restricted stock
Note 20.
Stock Split
2015
$
76
357
—
In connection with the IPO in May 2014, the Company’s Board of Directors approved a 2,550 for 1 stock split of the
Company’s Shares. The stock split became effective on May 7, 2014. All share and per share amounts in the consolidated financial
statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this stock split and for changes
allocated with conversion from a limited liability company to a corporation.
79
Note 21. Condensed Financial Information of Registrant
Heritage Insurance Holdings, Inc. (the “parent company”) has no long term debt obligations, guarantees or material
contingencies as of December 31, 2015, 2014 and 2013. The following summarizes the major categories of the parent company’s
financial statements (in thousands, except share and per share data):
ASSETS
Cash and cash equivalents
Investment in and advances to subsidiaries
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities
Total Liabilities
Paid-in-capital
Accumulated other comprehensive income
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Revenue:
Other income
Total revenue
Expenses:
General and administrative
Interest
Total expenses
Loss before income taxes and equity in net income of
subsidiaries
Benefit from income taxes
Loss before equity in net income of subsidiaries
Equity in net income of subsidiaries
Net income
Weighted average shares outstanding
Basic
Diluted
Earnings per share
Basic
Diluted
As of December 31,
2015
2014
(In thousands)
36,762 $
166,597
7,355
210,714 $
349
349 $
201,892
—
8,473
210,365 $
210,714 $
30,927
218,600
6,473
256,000
911
911
188,345
1,723
65,021
255,089
256,000
$
$
$
$
$
For the Year Ended December 31,
2014
2013
2015
(In thousands)
1,129 $
1,129
9,036
—
9,036 $
(7,907)
(2,227)
(5,680)
98,192
92,512 $
$
1,896
1,896
6,649
—
6,649 $
(4,753)
(801)
(3,952)
51,049
47,097
$
1,075
1,075
4,119
16
4,135
(3,060)
—
(3,060)
37,273
34,213
30,056,491
30,326,468
24,568,876
25,816,590
14,313,150
14,473,800
3.08 $
3.05 $
1.92
1.82
$
$
2.39
2.36
$
$
$
$
$
80
Net cash provided by (used in) operating activities
Investing Activities
Dividends received from subsidiaries
Investments and advances to subsidiaries
Net cash used in investing activities
Financing Activities
Proceeds from issuance of equity from IPO and private
placement, net of discount fee and direct costs of
issuance
Proceeds from exercise of stock options and warrants
Proceeds from issuance of equity and redeemable shares
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of year
For the Year Ended December 31,
2014
2013
2015
(In thousands)
$
7,935 $
1,280 $
2,925
21,400
(32,400)
(11,000)
16,099
(98,469)
(82,370)
—
(26,895)
(26,895)
—
8,900
—
8,900
5,835
30,927
36,762 $
78,670
22,515
88
101,273
20,183
10,744
30,927 $
—
—
33,630
33,630
8,660
2,084
10,744
$
Note 22. Quarterly Results for 2015 and 2014 (unaudited)
The following table provides a summary of quarterly results for the periods presented (in thousands, except per share data):
For the year ended December 31, 2015
Net premiums earned
Investment income
Total revenues
Total expenses
Net income
Basic earnings per share
Diluted earnings per share
For the year ended December 31, 2014
Net premiums earned
Investment income
Total revenues
Total expenses
Net income
Basic earnings per share
Diluted earnings per share
Note 23.
Subsequent Events
First Quarter Second Quarter Third Quarter Fourth Quarter
97,572
$
1,725
$
101,332
$
68,039
$
20,243
$
0.67
$
0.66
$
101,489 $
1,633 $
105,128 $
56,836 $
30,056 $
1.01 $
1.00 $
94,846 $
2,090 $
99,088 $
58,098 $
25,400 $
0.85 $
0.84 $
82,361 $
1,973 $
89,244 $
61,529 $
16,813 $
0.56 $
0.55 $
$
$
$
$
$
$
$
43,878 $
618 $
43,878 $
32,057 $
7,888 $
0.48 $
0.42 $
44,295 $
719 $
46,529 $
31,429 $
9,566 $
0.43 $
0.39 $
55,527 $
1,126 $
58,013 $
41,904 $
9,965 $
0.33 $
0.33 $
79,912
1,386
85,400
54,178
19,678
0.67
0.67
During February 2016, the Company entered into two catastrophe reinsurance agreements with Citrus Re Ltd. The agreements
provide for three years of coverage from catastrophe losses caused by certain named storms, including hurricanes, beginning on
June 1, 2016. The Company pays a periodic premium to Citrus Re Ltd during this three-year risk period. Citrus Re Ltd issued $250
million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to the Company
under the reinsurance agreements. The Class D-50 notes provide up to $150 million of coverage and the Class E-50 notes provide
$100 million of coverage. Proceeds from the Class D-50 and Class E-50 notes provide reinsurance coverage for a portion of the sliver
of the catastrophe coverage that had previously been provided by the Florida Hurricane Catastrophe Fund. The limit of coverage is
fully collateralized by a reinsurance trust account for the benefit of the Company. 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.
The reinsurance agreements related to the 2016 notes provide coverage from catastrophe losses incurred by the Company in Florida
and other states and also provides coverage to future affiliates once named. Zephyr Insurance Company (“ZIC”) is specifically
covered with the expectation that the Company acquires Zephyr Acquisition Company (“ZAC”); if ZAC is not ultimately acquired,
ZIC will be not covered under these reinsurance agreements.
81
The Company received authorization to write business in South Carolina in January 2016 and began writing business in North
Carolina in January 2016. The Company has also submitted applications Massachusetts, Mississippi, Georgia and Alabama.
In February 2016, the Commissioner of the Hawaii Division of Insurance approved the filing for the indirect acquisition of ZIC.
The Company anticipates to complete the acquisition of ZAC and its wholly-owned subsidiaries, HI Holdings, Inc. and Zephyr
Insurance Company, Inc. (“Zephyr”), a specialty insurance provider in Hawaii in March 2016. The acquisition purchase price is for
approximately $120 million adjusted by any increase or decrease in stockholders equity of ZAC.
On March 1, 2016, the Company’s Board of Directors declared a $0.05 per share quarterly cash dividends payable on April 5,
2016, to stockholders of record on March 15, 2016.
82
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision
and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of December 31, 2015.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls
and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are
resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the
supervision and with the participation of our management, including our principal executive officer and principle financial officer, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2015, our management assessed the effectiveness of our internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2015, our internal
control over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal controls over financial reporting during our most recent quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
Not applicable.
83
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Information regarding directors of the Company standing for election at the 2016 annual stockholders meeting is incorporated in
this Item 10 by reference to the descriptions in the Proxy Statement under the captions “Corporate Governance – Proposal 1. Election
of Directors.”
Information regarding our audit committee and audit committee financial experts is incorporated in this Item 10 by reference to
the information under the caption “Corporate Governance – Board Meetings and Committees” in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated in this Item 10 by
reference to “Stock Ownership Information – Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Information regarding executive officers of the Company is incorporated in this Item 10 by reference to Part I, Item 1 of this
report under the caption “Executive Officers of the Registrant.”
Item 11.
Executive Compensation
The information regarding executive compensation is incorporated herein by reference to our definitive Proxy Statement for
the 2016 Annual Meeting of our Stockholders to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2015.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporate in this Item 12 by
reference to the sections of the Proxy Statement with the following captions:
(cid:120) Stock Ownership Information – Security Ownership of Directors and Executive Officers
(cid:120) Stock Ownership Information – Security Ownership of Certain Beneficial Owners
The following table includes information as of December 31, 2015, with respect to the Company’s equity compensation plans:
Plan Category
Equity Compensation Plan Approved by
Shareholders (1)
No. of Securities to be Issued
upon Exercise of Outstanding
Options and Rights
(a)
Weighted-Average Exercise
Price of Outstanding Options
and Rights
(b)
No. of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plan (Excluding Securities in
Column (a))
(c)
2,274,923 (2) $
15.46
170,814
1. Consists of the Omnibus Incentive Plan adopted on May 22, 2014.
2. As of December 31, 2015, 1,125,000 restricted stock and 1,149,923 stock options were outstanding. The weighted-average exercise price of
outstanding options and rights does not take into account the restricted stock, which have no exercise price.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information regarding certain relationship and related transactions, and director independence is incorporated herein by reference
to our definitive Proxy Statement for the 2016 Annual Meeting of our Stockholders to be filed with the SEC within 120 days after the
end of our fiscal year ended December 31, 2015.
Item 14.
Principal Accountant Fees and Services
Information regarding principal accountant fees and services is incorporated herein by reference to our definitive Proxy Statement for
the 2016 Annual Meeting of our Stockholders to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2015.
84
PART IV
Item 15.
Exhibits, Financial Statements Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
(a) The following documents are filed as part of this report.
(1) Financial Statements
The following consolidated financial statements of the Company and the reports of independent auditors thereon are filed with this
report:
Report of Independent Registered Public Accounting Firm (Grant Thornton LLP)
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All financial statement schedules have been omitted because the required information is not present or not present in amounts
sufficient to require the submission of schedules, or because the information required is included in our Consolidated Financial
Statements and Notes thereto.
(3) List of Exhibits
The Following is a list of exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K
Exhibit
Number
Description
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly
Report on Form 10-Q filed on August 6, 2014)
Form of Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-
1 (File No. 333-195409) filed on April 30, 2014)
Form of Warrant (Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File
No. 333-195409) filed on April 30, 2014)
Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2013, issued to Heritage Property &
Casualty Insurance Company by the Subscribing Reinsurers (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Catastrophe Excess of Loss and Aggregate Reinsurance Contract, effective June 1, 2013, issued to Heritage Property &
Casualty Insurance Company by the Subscribing Reinsurers (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Second Aggregate Catastrophic Excess of Loss Reinsurance Contract, effective June 1, 2013, issued to Heritage Property
& Casualty Insurance Company by the Subscribing Reinsurers (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Second Catastrophe Excess of Loss and Aggregate Reinsurance Contract, effective June 1, 2013, issued to Heritage
Property & Casualty Insurance Company by the Subscribing Reinsurers (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Underlying Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2013, issued to Heritage
Property & Casualty Insurance Company by Osprey Re Ltd (incorporated by reference to Exhibit 10.5 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
10.6
Property Catastrophe Excess of Loss Reinsurance Contract, effective December 4, 2012, issued to Heritage Property &
85
Exhibit
Number
10.7
10.8
10.9
10.10
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20
10.21
Description
Casualty Insurance Company by the Subscribing Reinsurers (incorporated by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Property Catastrophe Excess of Loss Reinsurance Contract, effective April 17, 2014, by and among Heritage Property &
Casualty Insurance Company and Citrus Re Ltd (incorporated by reference to Exhibit 10.30 to the Company’s
Registration Statement on Form S-1 (File No. 333-195409) filed on April 30, 2014)
Property Catastrophe Excess of Loss Reinsurance Contract, effective April 24, 2014, by and among Heritage Property &
Casualty Insurance Company and Citrus Re Ltd (incorporated by reference to Exhibit 10.31 to the Company’s
Registration Statement on Form S-1 (File No. 333-195409) filed on April 30, 2014)
Common Stock Purchase Agreement, dated May 9, 2014, by and between Heritage Insurance Holdings, LLC and
Ananke Ltd (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 (File No.
333-195409) filed on May 16, 2014)
Insurance Policy Acquisition and Transition Agreement, dated as of June 13, 2014, by and among Heritage Property &
Casualty Insurance Company, the Florida Department of Financial Services, as Receiver for Sunshine State Insurance
Company, and the Florida Insurance Guaranty Association (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on June 19, 2014)
$4,000,000 XS $2,000,000 XS $4,000,000 Underlying Property Catastrophe Excess of Loss Reinsurance Contract,
effective June 1, 2014, between Heritage Property & Casualty Insurance Company and the Subscribing Reinsurers
(incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 10-Q filed on August 06, 2014)
$6,000,000 XS $9,000,000 Underlying Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1,
2014, between Heritage Property & Casualty Insurance Company and the Subscribing Reinsurers (incorporated by
reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Multi-Year First & Second Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2014, between
Heritage Property & Casualty Insurance Company and the Subscribing Reinsurers (incorporated by reference to Exhibit
10.13 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
First & Second Property Catastrophe Reinstatement Premium Protection Reinsurance Contract, effective June 1, 2014,
between Heritage Property & Casualty Insurance Company and the Subscribing Reinsurers (incorporated by reference to
Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Fourth Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2014, between Heritage Property &
Casualty Insurance Company and the Subscribing Reinsurers (incorporated by reference to Exhibit 10.15 to the
Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Fifth Property Catastrophe Excess of Loss Reinsurance Contract, effective June 1, 2014, between Heritage Property &
Casualty Insurance Company and the Subscribing Reinsurers (incorporated by reference to Exhibit 10.16 to the
Company’s Quarterly Report on Form 10-Q filed on August 6, 2014)
Sixth Property Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2014, between Heritage Property &
Casualty Insurance Company and the Subscribing Reinsurers (incorporated by reference to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Reimbursement Contract, effective June 1, 2014, between Heritage Property & Casualty Insurance Company and the
State Board of Administration of the State of Florida (incorporated by reference to Exhibit 10.18 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Property Excess Per Risk Reinsurance Contract, effective June 27, 2014, between Heritage Property & Casualty
Insurance Company and the Subscribing Reinsurers (incorporated by reference to Exhibit 10.19 to the Company’s
Quarterly Report on Form 10-Q filed on August 6, 2014)
Separation Agreement and General Release, dated December 22, 2014, by and between Heritage Insurance Holdings,
Inc. and Kent Linder. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
December 22, 2014)
Amended and Restated Employment Agreement, dated November 04, 2015, by and between Heritage Insurance
Holdings, Inc. and Bruce Lucas. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-
K filed on November 6, 2015)
86
Exhibit
Number
10.22
10.23
23.1
31.1
31.2
32.1
Amended and Restated Employment Agreement, dated November 04, 2015, by and between Heritage Insurance
Holdings, Inc. and Richard Widdicombe. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on November 6, 2015)
Description
Amended and Restated Employment Agreement, dated November 04, 2015, by and between Heritage Insurance
Holdings, Inc. and Stephen Rohde. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form
8-K filed on November 6, 2015)
Consent of Grant Thornton LLP**
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 *
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema. *
101.CAL XBRL Taxonomy Extension Calculation Linkbase. *
101.DEF
XBRL Taxonomy Extension Definition Linkbase. *
101.LAB XBRL Taxonomy Extension Label Linkbase. *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.*
*
**
+
Filed herewith
Furnished herewith
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment, and this
exhibit has been filed separately with the SEC.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HERITAGE INSURANCE HOLDINGS, INC. (Registrant)
Date: March 8, 2016
By: /s/ BRUCE LUCAS
Chairman and Chief Executive Officer
(on behalf of the Registrant and as Principal Executive Officer)
POWERS OF ATTORNEY
KNOW ALL BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Bruce Lucas as
his true and lawful attorney-in-fact and agent, he with full power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents,
full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ BRUCE LUCAS
Bruce Lucas
/s/ STEPHEN ROHDE
Stephen Rohde
/s/ RICHARD WIDDICOMBE
Richard Widdicombe
/s/ PANAGIOTIS APOSTOLOU
Panagiotis Apostolou
/s/ TRIFON HOUVARDAS
Trifon Houvardas
/s/ NICHOLAS PAPPAS
Nicholas Pappas
/s/ JOSEPH VATTAMATTAM
Joseph Vattamattam
/s/ IRINI BARLAS
Irini Barlas
/s/ VIJAY WALVEKAR
Vijay Walvekar
/s/ JAMES MASIELLO
James Masiello
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 8, 2016
Chief Financial Officer
March 8, 2016
(Principal Financial Officer and Principal Accounting Officer)
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
March 8, 2016
President and Director
Director
Director
Director
Director
Director
Director
Director
88
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 8, 2016, with respect to the consolidated financial statements included in the Annual Report of
Heritage Insurance Holdings, Inc. on Form 10-K for the year ended December 31, 2015. We consent to the incorporation by reference
of said report in the Registration Statements of Heritage Insurance Holdings, Inc. on Form S-3 (File No. 333-206117) and Form S-8
(File No. 333-197906).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Tampa, Florida
March 8, 2016
Exhibit 31.1
I, Bruce Lucas, certify that:
1. I have reviewed this Annual Report on Form 10-K of Heritage Insurance Holdings, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading, with
respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 8, 2016
/s/ BRUCE LUCAS
Bruce Lucas
Chief Executive Officer (Principal
Executive Officer)
Exhibit 31.2
I, Stephen Rohde, certify that:
1. I have reviewed this Annual Report on Form 10-K of Heritage Insurance Holdings, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading, with
respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 8, 2016
/s/ STEPHEN ROHDE
Stephen Rohde
Chief Financial Officer (Principal
Financial Officer)
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Heritage Insurance Holdings, Inc. (the “Company”) on Form 10-K for the period
ending December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we Bruce Lucas,
Chief Executive Officer of the Company, and Stephen Rohde, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
By: /s/ BRUCE LUCAS
Bruce Lucas
Chief Executive Officer (Principal Executive Officer)
By: /s/ STEPHEN ROHDE
Stephen Rohde
Chief Financial Officer (Principal Financial Officer)
Date: March 8, 2016
Comparison of Cumulative Total Return*
Among Heritage Insurance Holdings, Inc., the NASDAQ Insurance Index and the Russell 2000 Index
Heritage Insurance Holdings, Inc. NASDAQ Insurance Index Russell 2000 Index
*Based on initial $100 investment on May 23, 2014 (the date of the HRTG initial public offering) with dividends reinvested. Fiscal year ending December 31
5/23/14
6/30/14
9/30/14
12/31/14
3/31/15
6/30/15
9/30/15
12/31/15
Heritage Insurance Holdings, Inc. $ 100.00 $
138.27 $
136.91 $
176.64 $
200.09 $
209.00 $ 179.36 $
198.36
NASDAQ Insurance Index
Russell 2000 Index
100.00
100.00
101.02
105.93
96.33
97.82
108.44
106.97
108.42
111.24
109.83
111.34
110.66
97.74
115.44
100.86
Transfer Agent
Computershare Investor Services, LLC is
the transfer agent and registrar for Heritage
Insurance Holdings, Inc. Inquiries about
shareholder accounts or address changes
should be directed to:
Telephone:
1 877-373-6374 (US & Canada)
1 781-575-2879 (Non US & Canada)
Mail:
Computershare Trust Company
P.O. Box 30170
College Station, TX 77842 - 3170
Overnight:
Computershare Trust Company
211 Quality Circle, Suite 210
College Station, TX 77845
Independent Registered Public
Accounting Firm
Grant Thornton LLP
101 E. Kennedy Blvd, Tampa, FL 33602
Financial Reports
Copies of Heritage Insurance Holdings’ 2015
Annual Report on Form 10-K are filed with the
SEC and are available online in the investors
section at heritagepci.com.
Annual Meeting
The 2016 Annual Meeting of Stockholders will
be held at 8:30am ET, on June 13, 2016 at:
Safety Harbor Resort & Spa
105 N. Bayshore Drive
Safety Harbor, FL 34695
Stock Listing and Certification
Heritage Insurance Holdings’ common
stock is listed on the New York Stock
Exchange (NYSE) under the ticker symbol
“HRTG”. Our CEO and CFO Certifications
required under the Sarbanes-Oxley Act of
2002 were filed as exhibits to our Annual
Report on Form 10-K.
Safe Harbor Statement
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995 —
Statements in this annual report regarding
our business that are not historical facts are
“forward-looking statements” that involve risks
and uncertainties. For a discussion of additional
risks and uncertainties, which could cause actual
results to differ from those contained in the
forward-looking statements, see our Securities
and Exchange Commission filings, including,
but not limited to, the risk factors in our
Annual Report on Form 10-K for the year
ended December 31, 2015, as filed with the
SEC on March 8, 2016.
Corporate Headquarters
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