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EX-32 - EXHIBIT 32 - HC2 HOLDINGS, INC.a3q17ex32.htm
EX-31.2 - EXHIBIT 31.2 - HC2 HOLDINGS, INC.a3q17ex312.htm
EX-31.1 - EXHIBIT 31.1 - HC2 HOLDINGS, INC.a3q17ex311.htm
EX-10.1 - EXHIBIT 10.1 - HC2 HOLDINGS, INC.a3q17ex101-jferraro.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 001-35210
 
hc2logo20178ka04.jpg
HC2 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
54-1708481
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
450 Park Avenue, 30th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 235-2690
(Registrant’s telephone number, including area code)
_____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
N/A
_____________________________________________________________________________________________________________________
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  x    No  

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

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. (Check one):
Large accelerated filer
 
Accelerated filer
x
Non-accelerated filer
 
Smaller reporting company
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging Growth Company
 
 
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  ý
As of October 31, 2017, 43,054,728 shares of common stock, par value $0.001, were outstanding.


HC2 HOLDINGS, INC.
INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION


1

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Services revenue
 
$
210,698

 
$
245,064

 
$
643,596

 
$
624,545

Sales revenue
 
157,974

 
133,474

 
420,001

 
379,729

Life, accident and health earned premiums, net
 
20,472

 
19,967

 
60,648

 
59,939

Net investment income
 
16,287

 
14,799

 
48,530

 
42,585

Net realized gains (losses) on investments
 
978

 
(220
)
 
2,854

 
(2,677
)
Net revenue
 
406,409

 
413,084

 
1,175,629

 
1,104,121

Operating expenses
 
 
 
 
 
 
 
 
Cost of revenue - services
 
196,488

 
225,876

 
606,079

 
583,942

Cost of revenue - sales
 
128,185

 
107,984

 
341,672

 
308,951

Policy benefits, changes in reserves, and commissions
 
17,393

 
29,689

 
79,323

 
92,784

Selling, general and administrative
 
45,356

 
36,902

 
126,919

 
107,493

Depreciation and amortization
 
7,896

 
5,961

 
22,588

 
18,163

Other operating (income) expenses
 
526

 
(182
)
 
(1,294
)
 
(794
)
Total operating expenses
 
395,844

 
406,230

 
1,175,287

 
1,110,539

Income (loss) from operations
 
10,565

 
6,854

 
342

 
(6,418
)
Interest expense
 
(13,222
)
 
(10,719
)
 
(39,410
)
 
(31,614
)
Gain on contingent consideration
 
6,320

 
1,381

 
6,001

 
1,573

Income from equity investees
 
971

 
335

 
12,667

 
3,153

Other expenses, net
 
(97
)
 
(4,584
)
 
(8,112
)
 
(5,793
)
Income (loss) from continuing operations before income taxes
 
4,537

 
(6,733
)
 
(28,512
)
 
(39,099
)
Income tax (expense) benefit
 
(12,861
)
 
1,334

 
(16,167
)
 
3,649

Net loss
 
(8,324
)
 
(5,399
)
 
(44,679
)
 
(35,450
)
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest
 
2,357

 
841

 
6,305

 
2,365

Net loss attributable to HC2 Holdings, Inc.
 
(5,967
)
 
(4,558
)
 
(38,374
)
 
(33,085
)
Less: Preferred stock and deemed dividends from conversions
 
703

 
2,948

 
2,079

 
5,061

Net loss attributable to common stock and participating preferred stockholders
 
$
(6,670
)
 
$
(7,506
)
 
$
(40,453
)
 
$
(38,146
)
 
 
 
 
 
 
 
 
 
Loss per Common Share
 
 
 
 
 

 

Basic
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.95
)
 
$
(1.07
)
Diluted
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.95
)
 
$
(1.07
)
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
43,013

 
36,627

 
42,555

 
35,808

Diluted
 
43,013

 
36,627

 
42,555

 
35,808












See notes to Condensed Consolidated Financial Statements

2

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(8,324
)
 
$
(5,399
)
 
$
(44,679
)
 
$
(35,450
)
Other comprehensive income
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
548

 
672

 
3,897

 
1,335

Unrealized gain on available-for-sale securities
 
16,158

 
8,972

 
47,134

 
71,261

Other comprehensive income
 
16,706

 
9,644

 
51,031

 
72,596

Comprehensive income
 
8,382

 
4,245

 
6,352

 
37,146

Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest
 
2,357

 
841

 
6,305

 
2,365

Comprehensive income attributable to HC2 Holdings, Inc.
 
$
10,739

 
$
5,086

 
$
12,657

 
$
39,511
























See notes to Condensed Consolidated Financial Statements

3

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share amounts)

 
 
September 30, 2017
 
December 31, 2016
Assets
 

 

Investments:
 

 

Fixed maturities, available-for-sale at fair value
 
$
1,336,637

 
$
1,278,958

Equity securities, available-for-sale at fair value
 
49,046

 
51,519

Mortgage loans
 
26,427

 
16,831

Policy loans
 
18,038

 
18,247

Other invested assets
 
91,461

 
62,363

Total investments
 
1,521,609

 
1,427,918

Cash and cash equivalents
 
130,791

 
115,371

Accounts receivable, net
 
265,082

 
267,598

Recoverable from reinsurers
 
530,679

 
524,201

Deferred tax asset
 
436

 
1,108

Property, plant and equipment, net
 
282,065

 
286,458

Goodwill
 
96,990

 
98,086

Intangibles, net
 
35,781

 
39,722

Other assets
 
107,911

 
74,814

Total assets
 
$
2,971,344

 
$
2,835,276

 
 
 
 
 
Liabilities, temporary equity and stockholders’ equity
 

 

Life, accident and health reserves
 
$
1,683,568

 
$
1,648,565

Annuity reserves
 
245,053

 
251,270

Value of business acquired
 
44,013

 
47,613

Accounts payable and other current liabilities
 
295,096

 
251,733

Deferred tax liability
 
14,042

 
15,304

Long-term obligations
 
496,592

 
428,496

Other liabilities
 
83,265

 
92,871

Total liabilities
 
2,861,629

 
2,735,852

Commitments and contingencies
 

 

Temporary equity
 

 

Preferred stock
 
26,281

 
29,459

Redeemable noncontrolling interest
 
1,526

 
2,526

Total temporary equity
 
27,807

 
31,985

Stockholders’ equity
 

 

Common stock, $.001 par value
 
43

 
42

Shares authorized: 80,000,000 at September 30, 2017 and December 31, 2016;
 
 
 
 
Shares issued: 43,382,926 and 42,070,675 at September 30, 2017 and December 31, 2016;
 
 
 
 
Shares outstanding: 43,016,440 and 41,811,288 at September 30, 2017 and December 31, 2016, respectively
 
 
 
 
Additional paid-in capital
 
248,235

 
241,485

Treasury stock, at cost; 366,486 and 259,387 shares at September 30, 2017 and December 31, 2016, respectively
 
(1,981
)
 
(1,387
)
Accumulated deficit
 
(212,652
)
 
(174,278
)
Accumulated other comprehensive income (loss)
 
29,384

 
(21,647
)
Total HC2 Holdings, Inc. stockholders’ equity
 
63,029

 
44,215

Noncontrolling interest
 
18,879

 
23,224

Total stockholders’ equity
 
81,908

 
67,439

Total liabilities, temporary equity and stockholders’ equity
 
$
2,971,344

 
$
2,835,276














See notes to Condensed Consolidated Financial Statements

4

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total HC2 Stockholders' Equity
 
Non-
controlling
Interest
Total Stockholders’ Equity
Temporary Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2016
 
41,811

 
$
42

 
$
241,485

 
$
(1,387
)
 
$
(174,278
)
 
$
(21,647
)
 
$
44,215

 
$
23,224

 
$
67,439

 
$
31,985

Share-based compensation
 

 

 
5,630

 

 

 

 
5,630

 

 
5,630

 

Dividend paid to noncontrolling interests
 

 

 

 

 

 

 

 
(378
)
 
(378
)
 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
(673
)
 

 

 

 
(673
)
 

 
(673
)
 
673

Exercise of stock options
 
135

 

 
486

 

 

 

 
486

 

 
486

 

Taxes paid in lieu of shares issued for share-based compensation
 
(107
)
 

 

 
(594
)
 

 

 
(594
)
 

 
(594
)
 

Preferred stock dividend and accretion
 

 

 
(1,562
)
 

 

 

 
(1,562
)
 

 
(1,562
)
 

Amortization of issuance costs and beneficial conversion feature
 

 

 
(50
)
 

 

 

 
(50
)
 

 
(50
)
 
50

Issuance of common stock
 
374

 

 
81

 

 

 

 
81

 

 
81

 

Conversion of preferred stock to common stock
 
803

 
1

 
2,838

 

 

 

 
2,839

 

 
2,839

 
(3,228
)
Transactions with noncontrolling interests
 

 

 

 

 

 

 

 

 

 
665

Net loss
 

 

 

 

 
(38,374
)
 

 
(38,374
)
 
(3,967
)
 
(42,341
)
 
(2,338
)
Other comprehensive income
 







 


51,031


51,031




51,031



Balance as of September 30, 2017
 
43,016


$
43


$
248,235


$
(1,981
)
 
$
(212,652
)

$
29,384


$
63,029


$
18,879


$
81,908


$
27,807

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total HC2 Stockholders' Equity
 
Non-
controlling
Interest
Total Stockholders’ Equity
Temporary Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2015
 
35,250

 
$
35

 
$
209,477

 
$
(378
)
 
$
(79,729
)
 
$
(35,375
)
 
$
94,030

 
$
23,494

 
$
117,524

 
$
55,741

Share-based compensation
 

 

 
6,667

 

 

 

 
6,667

 

 
6,667

 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
(99
)
 

 

 

 
(99
)
 

 
(99
)
 
99

Exercise of stock options
 
2

 

 

 

 

 

 

 

 

 

Taxes paid in lieu of shares issued for share-based compensation
 
(201
)
 

 

 
(884
)
 

 

 
(884
)
 

 
(884
)
 

Preferred stock dividend and accretion
 

 

 
(2,386
)
 

 

 

 
(2,386
)
 

 
(2,386
)
 

Amortization of issuance costs and beneficial conversion feature
 

 

 
(309
)
 

 

 

 
(309
)
 

 
(309
)
 
309

Issuance of common stock
 
264

 

 

 

 

 

 

 

 

 

Conversion of preferred stock to common stock
 
2,716

 
3

 
9,360

 

 

 

 
9,363

 

 
9,363

 
(11,170
)
Transactions with noncontrolling interests
 

 

 
6,132

 

 

 

 
6,132

 
4,029

 
10,161

 

Net loss
 

 

 

 

 
(33,085
)
 

 
(33,085
)
 
(1,137
)
 
(34,222
)
 
(1,228
)
Other comprehensive income
 

 

 

 

 


72,596

 
72,596

 


72,596



Balance as of September 30, 2016
 
38,031

 
$
38


$
228,842


$
(1,262
)
 
$
(112,814
)

$
37,221


$
152,025


$
26,386


$
178,411


$
43,751







See notes to Condensed Consolidated Financial Statements

5

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(44,679
)
 
$
(35,450
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
 
Provision for doubtful accounts receivable
 
108

 
827

Share-based compensation expense
 
4,006

 
6,667

Depreciation and amortization
 
26,423

 
19,602

Amortization of deferred financing costs and debt discount / premium
 
4,203

 
1,530

Amortization of discount / premium on investments
 
6,126

 
8,966

Gain (loss) on sale or disposal of assets
 
(3,368
)
 
251

Lease termination costs
 
264

 
179

Asset impairment expense
 
1,810

 

Income from equity investees
 
(12,667
)
 
(3,153
)
Impairment of investments
 
6,112

 
4,321

Net realized and unrealized (gains) losses on investments
 
(2,881
)
 
2,519

Gain on contingent consideration
 
(6,001
)
 
(1,573
)
Receipt of dividends from equity investees
 
917

 
7,214

Deferred income taxes
 
(669
)
 
(18,940
)
Annuity benefits
 
6,519

 
6,737

Other operating activities
 
3,131

 
(224
)
Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
2,725

 
(56,463
)
Recoverable from reinsurers
 
(6,478
)
 
(3,323
)
Other assets
 
(27,424
)
 
52,462

Life, accident and health and annuity reserves
 
34,841

 
45,265

Accounts payable and other current liabilities
 
45,650

 
(12,625
)
Other liabilities
 
(1,561
)
 
30,190

Cash provided by operating activities:
 
37,107

 
54,979

Cash flows from investing activities:
 
 
 
 
Purchase of property, plant and equipment
 
(25,324
)
 
(21,689
)
Disposal of property, plant and equipment
 
1,610

 
6,411

Purchase of investments
 
(231,881
)
 
(169,088
)
Sale of investments
 
101,080

 
72,188

Maturities and redemptions of investments
 
100,691

 
53,663

Purchase of equity method investments
 
(11,390
)
 
(10,203
)
Cash paid for business acquisitions, net of cash acquired
 

 
(10,871
)
Other investing activities
 
(1,745
)
 
(483
)
Cash used in investing activities:
 
(66,959
)
 
(80,072
)
Cash flows from financing activities:
 
 
 
 
Proceeds from long-term obligations

108,469

 
11,672

Principal payments on long-term obligations

(48,146
)
 
(11,441
)
Annuity receipts
 
2,190

 
2,522

Annuity surrenders
 
(14,764
)
 
(15,562
)
Transactions with noncontrolling interests
 
665

 
5,837

Payment of dividends
 
(2,763
)
 
(3,007
)
Other financing activities
 
(230
)
 
(884
)
Cash provided by (used in) financing activities:
 
45,421

 
(10,863
)
Effects of exchange rate changes on cash and cash equivalents
 
(149
)
 
(1,347
)
Net change in cash and cash equivalents
 
15,420

 
(37,303
)
Cash and cash equivalents, beginning of period
 
115,371

 
158,624

Cash and cash equivalents, end of period
 
$
130,791

 
$
121,321

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
24,601

 
$
21,491

Cash paid for taxes
 
$
11,113

 
$
13,469

Non-cash investing and financing activities:
 
 
 
 
Property, plant and equipment included in accounts payable
 
$
547

 
$
1,542

Investments included in accounts payable
 
$
4,785

 
$
5,876

Conversion of preferred stock to common stock
 
$
4,433

 
$
10,853

Dividends payable to shareholders
 
$
500

 
$
800

Fair value of contingent assets assumed in other acquisitions
 
$

 
$
2,992

Fair value of deferred liabilities assumed in other acquisitions
 
$

 
$
2,589

Debt assumed in acquisitions
 
$

 
$
20,813




See notes to Condensed Consolidated Financial Statements

6


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Organization and Business

HC2 Holdings, Inc. ("HC2" and, together with its subsidiaries, the "Company", "we" and "our") is a diversified holding company which seeks to acquire and grow attractive businesses that we believe can generate long-term sustainable free cash flow and attractive returns. While the Company generally intends to acquire controlling equity interests in its operating subsidiaries, the Company may invest to a limited extent in a variety of debt instruments or noncontrolling equity interest positions. The Company’s shares of common stock trade on the NYSE under the symbol "HCHC".

The Company currently has seven reportable segments based on management’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, and Other, which includes businesses that do not meet the separately reportable segment thresholds.

1.Our Construction segment is comprised of DBM Global Inc. ("DBMG") and its wholly-owned subsidiaries. DBMG is a fully integrated detailer, Building Information Modelling ("BIM") modeler, fabricator and erector of structural steel and heavy steel plate. DBMG details, models, fabricates and erects structural steel for commercial and industrial construction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges, mines and power plants. DBMG also fabricates trusses and girders and specializes in the fabrication and erection of large-diameter water pipe and water storage tanks. Through Aitken, DBMG manufactures pollution control scrubbers, tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. The Company maintains a 92% controlling interest in DBMG.

2.Our Marine Services segment is comprised of Global Marine Systems Limited ("GMSL"). GMSL is a leading provider of engineering and underwater services on submarine cables. The Company maintains a 95% equity interest in GMSL.

3.Our Energy segment is comprised of American Natural Gas ("ANG"). ANG is a premier distributor of natural gas motor fuel. ANG designs, builds, owns, acquires, operates and maintains compressed natural gas fueling stations for transportation vehicles. The Company maintains effective control of, and a 49.99% ownership interest in ANG.

4.Our Telecommunications segment is comprised of PTGi International Carrier Services, ("ICS"). ICS operates a telecommunications business including a network of direct routes and provides premium voice communication services for national telecommunications operators, mobile operators, wholesale carriers, prepaid operators, Voice over Internet Protocol ("VOIP") service operators and Internet service providers from our International Carrier Services business unit. ICS provides a quality service via direct routes and by forming strong relationships with carefully selected partners. The Company owns 100% of ICS.

5.Our Insurance segment is comprised of Continental General Insurance Company ("CGI" or the "Insurance Company"). CGI provides long-term care, life and annuity coverage that help protect policy and certificate holders from the financial hardships associated with illness, injury, loss of life, or income continuation. The Company owns 100% of the Insurance Company.

6.Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"). Pansend owns (i) an 80% interest in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee, (ii) a 74% interest in R2 Dermatology Inc. ("R2"), which develops skin lightening technology, and (iii) an 80% interest in BeneVir Biopharm, Inc. ("BeneVir"), which focuses on immunotherapy for the treatment of solid tumors. Pansend also invests in other early stage or developmental stage healthcare companies including a 50% interest in Medibeacon Inc., and an investment in Triple Ring Technologies, Inc.

7.In our Other segment, we invest in and grow developmental stage companies that we believe have significant growth potential. Among the businesses included in this segment is the Company's 56% ownership interest in 704Games Company ("704Games" f/k/a DMi, Inc.), which owns licenses to create and distribute NASCAR® video games, and the Company's 72% interest in NerVve Technologies, Inc. ("NerVve"), which provides analytics on broadcast TV, digital and social media online platforms.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 9, 2017, as amended by amendment no.1, filed on March 28, 2017 (collectively "Form 10-K"). The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2017.

7


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Use of Estimates and Assumptions

The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.

Adjustments

During the second quarter of 2016, the Company identified an immaterial error in its calculation of depreciation expense for the twelve months ended December 31, 2015 and 2014 and the three months ended March 31, 2016 related to purchase accounting associated with the acquisition of DBMG in May 2014. This resulted in an excess depreciation expense being recorded in each of the periods noted. In addition, certain gains and losses on assets that were disposed of by DBMG were incorrectly recorded during the same periods as a result of these adjustments.

The Company corrected the cumulative effect of these adjustments in the second quarter of 2016, resulting in an immaterial net adjustment to net income (loss) attributable to common and participating preferred stockholders for the nine months ended September 30, 2016 of $1.3 million.

New Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its Condensed Consolidated Financial Statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial condition, results of operations or liquidity.

Accounting Pronouncements Early Adopted During the Fiscal Year

Testing for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles - Goodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of the goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this ASU remove the second step of the test. An entity will now apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The Company elected to early adopt ASU 2017-04 effective March 31, 2017, resulting in no impact to the Condensed Consolidated Financial Statements.

New Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, 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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), which includes amendments of a similar nature to the items typically addressed in the technical corrections and improvements project. Lastly, in February 2017, the FASB issued ASU 2017-05, clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets to clarify the scope of ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and provide guidance on partial sales of nonfinancial assets. This ASU clarifies that the unit of account under ASU 610-20 is each distinct nonfinancial or in substance nonfinancial asset and that a financial asset that meets the definition of an "in substance nonfinancial asset" is within the scope of ASC 610-20. This ASU eliminates rules specifically addressing sales of real estate and removes exceptions to the financial asset derecognition model. The ASUs described above are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

The Company anticipates adopting the new standard effective January 1, 2018. Although the Company is still in the process of evaluating the full impact of the new standard on its financial statements, at this stage of the process, it expects to apply the modified retrospective transition method and does not believe the adoption of ASU 2014-09 will have a significant impact on the amount or timing of its revenues.


8


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Material revenue streams were identified and representative contract/transaction types were sampled. Performance obligations identified within each material revenue stream were evaluated to determine whether the obligations were satisfied at a point in time or over time.  The evaluation of miscellaneous revenue streams, updating internal controls and the related qualitative disclosures regarding the potential impact of the effects of the accounting policies and a comparison to the Company’s current revenue recognition policies will continue during the fourth quarter of 2017.

Instruments with down round feature

In July 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the implementation date and the impact of this amendment on its financial statements.

Subsequent Events

ASC 855, Subsequent Events ("ASC 855"), establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 requires HC2 to evaluate events that occur after the balance date as of which HC2's financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. HC2 has evaluated subsequent events through the date these financial statements were issued. See Note 22. Subsequent Events for the summary of the subsequent events.

3. Business Combinations

Construction Segment

On October 13, 2016, DBMG acquired the detailing and BIM management business of PDC Global Pty Ltd. ("PDC"). The new businesses provide steel detailing, BIM modelling and BIM management services for industrial and commercial construction projects in Australia and North America. On November 1, 2016, DBMG acquired BDS VirCon ("BDS"). BDS provides steel detailing, rebar detailing and BIM modelling services for industrial and commercial projects in Australia, New Zealand, North America and Europe. The aggregate fair value of the consideration paid in connection with the acquisition of PDC and BDS was $25.5 million, including $21.4 million in cash. Both transactions were accounted for as business acquisitions.

Fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (in thousands):
Purchase price allocation
 
 
Cash and cash equivalents
 
$
621

Accounts receivable, net
 
5,558

Costs and recognized earnings in excess of billings on uncompleted contracts
 
1,686

Property, plant and equipment, net
 
8,043

Goodwill
 
11,827

Intangibles
 
3,955

Other assets
 
1,209

Total assets acquired
 
32,899

Accounts payable and other current liabilities
 
(5,924
)
Billings in excess of costs and recognized earnings on uncompleted contracts
 
(617
)
Deferred tax liability
 
(169
)
Other liabilities
 
(685
)
Total liabilities assumed
 
(7,395
)
Total net assets acquired
 
$
25,504


Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Among the factors that contributed to goodwill was approximately $2.9 million assigned to the assembled and trained workforce. Goodwill is not amortized and is not deductible for tax purposes.


9


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Acquisition costs to date incurred by DMBG in connection with the acquisition of PDC and BDS were approximately $3.1 million which was included in selling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.
PDC's and BDS' results were included in our Condensed Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations for the acquisition of PDC and BDS have not been presented because they are not material to our consolidated results of operations.

Energy Segment

For the year ended December 31, 2016, ANG completed four acquisitions comprised of an aggregate of twenty-one fueling stations. The total fair value of the consideration transferred by ANG in connection with the acquisitions was $42.1 million, comprised of $39.2 million in cash and a $2.9 million 4.25% seller note, due in 2022. See Note 12. Long-term Obligations for further details. Two of the transactions were accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets related to acquired stations.

For the transactions accounted for as a business combination, the fair value of consideration transferred was allocated among the identified assets acquired, liabilities assumed, intangibles and residual goodwill. For the two transactions accounted for as asset acquisitions the preliminary fair value of consideration transferred was preliminarily allocated based on the relative fair value (in thousands):
Purchase price allocation
 
 
Accounts receivable
 
$
1,303

Property, plant and equipment, net
 
43,267

Goodwill
 
748

Intangibles
 
4,984

Other assets
 
79

Total assets acquired
 
50,381

Accounts payable and other current liabilities
 
(898
)
Deferred tax liability
 
(7,086
)
Total liabilities assumed
 
(7,984
)
Bargain purchase gain
 
(340
)
Total net assets acquired
 
$
42,057


The preliminary allocation of the fair value of the acquired businesses was based upon a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period. The primary areas of preliminary allocation of the fair values of consideration transferred that are not yet finalized relate to the fair values of certain property, plant and equipment, deferred tax liability, intangible assets acquired and the residual goodwill. We expect to complete the purchase price allocation for fiscal year 2016 acquisitions during fiscal year 2017.

Approximately $7.1 million of the fair value of consideration transferred has been provisionally assigned to customer contracts with an estimated useful life ranging between four and fifteen years. The multi-period excess earnings method was used to assign fair value to the acquired customer contracts.

Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Goodwill is not amortized and is not deductible for tax purposes.

Results of operations from the acquired stations since acquisition dates have been included in our Condensed Consolidated Statements of Operations. Pro forma results of operations for ANG's acquisitions have not been presented because they are not material to our consolidated results of operations.

Other Acquisitions

During the year ended December 31, 2016, we completed the acquisition of additional interests in and thereby control of NerVve and BeneVir, and acquired a 60% controlling interest in CWind Limited ("CWind") with an obligation to purchase the remaining 40% in equal amounts on September 30, 2016 and September 30, 2017 (based on agreed financial targets). The total consideration transferred for these acquisitions was $14.9 million, including $9.2 million in cash. On November 1, 2016, we completed the renegotiation of the deferred purchase obligation to purchase the outstanding 40% minority interest of CWind and purchased the remaining 40% on that date. All three transactions were accounted for as business acquisitions.
 
Results of operations from other acquisitions since the respective acquisition dates have been included in our Condensed Consolidated Statements of Operations. Pro forma results of operations for other acquisitions have not been presented because they are not material to our consolidated results of operations.


10


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired, liabilities assumed, intangibles and residual goodwill (in thousands):
Purchase price allocation
 
 
Cash and cash equivalents
 
$
2,963

Restricted cash
 
3

Accounts receivable
 
6,400

Inventory
 
528

Property, plant and equipment, net
 
29,896

Goodwill
 
5,541

Intangibles
 
7,082

Other assets
 
2,051

Total assets acquired
 
54,464

Accounts payable and other current liabilities
 
(11,180
)
Deferred tax liability
 
(2,819
)
Long-term obligations
 
(20,813
)
Other liabilities
 
(3
)
Noncontrolling interest
 
(815
)
Total liabilities assumed
 
(35,630
)
Enterprise value
 
18,834

Less fair value of noncontrolling interest
 
3,889

Total net assets acquired
 
$
14,945


4. Investments

Fixed Maturity and Equity Securities Available-for-Sale

The following tables provide information relating to investments in fixed maturity and equity securities (in thousands):
September 30, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
15,318

 
$
407

 
$
(12
)
 
$
15,713

States, municipalities and political subdivisions
 
378,057

 
16,170

 
(1,269
)
 
392,958

Foreign government
 
6,343

 

 
(431
)
 
5,912

Residential mortgage-backed securities
 
107,249

 
4,765

 
(1,173
)
 
110,841

Commercial mortgage-backed securities
 
30,668

 
434

 
(3
)
 
31,099

Asset-backed securities
 
125,777

 
2,559

 
(348
)
 
127,988

Corporate and other
 
609,137

 
44,592

 
(1,603
)
 
652,126

Total fixed maturity securities
 
$
1,272,549

 
$
68,927

 
$
(4,839
)
 
$
1,336,637

Equity securities
 
 
 
 
 
 
 
 
Common stocks
 
$
10,565

 
$

 
$
(3
)
 
$
10,562

Perpetual preferred stocks
 
37,002

 
1,510

 
(28
)
 
38,484

Total equity securities
 
$
47,567

 
$
1,510

 
$
(31
)
 
$
49,046

December 31, 2016
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
15,910

 
$
135

 
$
(95
)
 
$
15,950

States, municipalities and political subdivisions
 
374,527

 
4,408

 
(3,858
)
 
375,077

Foreign government
 
6,380

 

 
(402
)
 
5,978

Residential mortgage-backed securities
 
136,126

 
2,634

 
(564
)
 
138,196

Commercial mortgage-backed securities
 
48,715

 
427

 
(89
)
 
49,053

Asset-backed securities
 
76,303

 
1,934

 
(572
)
 
77,665

Corporate and other
 
600,458

 
23,635

 
(7,054
)
 
617,039

Total fixed maturity securities
 
$
1,258,419

 
$
33,173

 
$
(12,634
)
 
$
1,278,958

Equity securities
 
 
 
 
 
 
 
 
Common stocks
 
$
16,236

 
$

 
$
(1,371
)
 
$
14,865

Perpetual preferred stocks
 
37,041

 
191

 
(578
)
 
36,654

Total equity securities
 
$
53,277

 
$
191

 
$
(1,949
)
 
$
51,519



11


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company has investments in mortgage-backed securities ("MBS") that contain embedded derivatives (primarily interest-only MBS) that do not qualify for hedge accounting. The Company recorded the change in the fair value of these securities within Net realized gains (losses) on investments. These investments had a fair value of $12.1 million and $15.2 million as of September 30, 2017 and December 31, 2016, respectively. The change in fair value related to these securities resulted in a gain of $0.6 million and zero loss for the three and nine months ended September 30, 2017, respectively and a net loss of approximately $0.1 million and $2.4 million for the three and nine months ended September 30, 2016, respectively.

Maturities of Fixed Maturity Securities Available-for-Sale

The amortized cost and fair value of fixed maturity securities available-for-sale as of September 30, 2017 are shown by contractual maturity in the table below (in thousands). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date:
 
 
Amortized Cost
 
Fair
 Value
Corporate, Municipal, U.S. Government and Other securities
 
 
 
 
Due in one year or less
 
$
36,381

 
$
36,153

Due after one year through five years
 
95,783

 
98,739

Due after five years through ten years
 
166,415

 
171,875

Due after ten years
 
710,276

 
759,942

Subtotal
 
1,008,855

 
1,066,709

Mortgage-backed securities
 
137,917

 
141,940

Asset-backed securities
 
125,777

 
127,988

Total
 
$
1,272,549

 
$
1,336,637


Corporate and Other Fixed Maturity Securities

The tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Amortized Cost
 
Fair
Value
 
% of
Total
 
Amortized Cost
 
Fair
Value
 
% of
Total
Finance, insurance, and real estate
 
$
199,777

 
$
210,783

 
32.3
%
 
$
214,911

 
$
211,834

 
34.3
%
Transportation, communication and other services
 
181,389

 
193,954

 
29.7
%
 
180,647

 
189,163

 
30.7
%
Manufacturing
 
111,030

 
120,060

 
18.4
%
 
112,644

 
118,440

 
19.2
%
Other
 
116,941

 
127,329

 
19.6
%
 
92,256

 
97,602

 
15.8
%
Total
 
$
609,137

 
$
652,126

 
100.0
%
 
$
600,458

 
$
617,039

 
100.0
%

Other-Than-Temporary Impairments - Fixed Maturity and Equity Securities

A portion of certain other-than-temporary impairment ("OTTI") losses on fixed maturity securities is recognized in Accumulated Other Comprehensive Income ("AOCI"). For these securities the net amount, which is recognized in the Condensed Consolidated Statements of Operations in the below line items, represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The Company recorded the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net realized gains (losses) on investments
 
$

 
$

 
$

 
$
163

Other expenses, net
 

 
1,473

 
6,111

 
2,451

Total Other-Than-Temporary Impairments
 
$

 
$
1,473

 
$
6,111

 
$
2,614



12


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale

The following table presents the total unrealized losses for the 139 and 269 fixed maturity and equity securities held by the Company as of September 30, 2017 and December 31, 2016, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Unrealized Losses
 
% of
Total
 
Unrealized Losses
 
% of
Total
Fixed maturity and equity securities
 
 
 
 
 
 
 
 
Less than 20%
 
$
(4,710
)
 
96.7
%
 
$
(10,069
)
 
69.0
%
20% or more for less than six months
 

 
%
 
(482
)
 
3.3
%
20% or more for six months or greater
 
(160
)
 
3.3
%
 
(4,032
)
 
27.7
%
Total
 
$
(4,870
)
 
100.0
%
 
$
(14,583
)
 
100.0
%

The determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include (i) whether the unrealized loss is credit-driven or a result of changes in market interest rates, (ii) the extent to which fair value is less than cost basis, (iii) cash flow projections received from independent sources, (iv) historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases, (v) near-term prospects for improvement in the issuer and/or its industry, (vi) third party research and communications with industry specialists, (vii) financial models and forecasts, (viii) the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments, (ix) discussions with issuer management, and (x) ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.

The Company analyzes its MBS for OTTI each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan-to-collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.

The Company believes it will recover its cost basis in the non-impaired securities with unrealized losses and that the Company has the ability to hold the securities until they recover in value. The Company neither intends to sell nor does it expect to be required to sell the securities with unrealized losses as of September 30, 2017. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

The following tables present the estimated fair values and gross unrealized losses for the 139 and 269 fixed maturity and equity securities held by the Company that have estimated fair values below amortized cost as of each of September 30, 2017 and December 31, 2016, respectively. The Company does not have any OTTI losses reported in AOCI. These investments are presented by investment category and the length of time the related fair value has remained below amortized cost (in thousands):
September 30, 2017
 
Less than 12 months
 
12 months of greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
6,994

 
$
(12
)
 
$

 
$

 
$
6,994

 
$
(12
)
States, municipalities and political subdivisions
 
62,682

 
(1,269
)
 

 

 
62,682

 
(1,269
)
Foreign government
 

 

 
5,913

 
(431
)
 
5,913

 
(431
)
Residential mortgage-backed securities
 
18,524

 
(1,003
)
 
10,429

 
(170
)
 
28,953

 
(1,173
)
Commercial mortgage-backed securities
 
1,132

 
(3
)
 

 

 
1,132

 
(3
)
Asset-backed securities
 
13,932

 
(130
)
 
6,178

 
(218
)
 
20,110

 
(348
)
Corporate and other
 
56,178

 
(1,567
)
 
883

 
(36
)
 
57,061

 
(1,603
)
Total fixed maturity securities
 
$
159,442

 
$
(3,984
)
 
$
23,403

 
$
(855
)
 
$
182,845

 
$
(4,839
)
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
$
10,282

 
$
(3
)
 
$

 
$

 
$
10,282

 
$
(3
)
Perpetual preferred stocks
 

 

 
1,072

 
(28
)
 
1,072

 
(28
)
Total equity securities
 
$
10,282

 
$
(3
)
 
$
1,072

 
$
(28
)
 
$
11,354

 
$
(31
)

13


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

December 31, 2016
 
Less than 12 months
 
12 months of greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
4,392

 
$
(95
)
 
$

 
$

 
$
4,392

 
$
(95
)
States, municipalities and political subdivisions
 
207,740

 
(3,858
)
 

 

 
207,740

 
(3,858
)
Foreign government
 
5,978

 
(402
)
 

 

 
5,978

 
(402
)
Residential mortgage-backed securities
 
54,385

 
(564
)
 

 

 
54,385

 
(564
)
Commercial mortgage-backed securities
 
13,159

 
(89
)
 

 

 
13,159

 
(89
)
Asset-backed securities
 
12,443

 
(572
)
 

 

 
12,443

 
(572
)
Corporate and other
 
147,653

 
(3,022
)
 
3,579

 
(4,032
)
 
151,232

 
(7,054
)
Total fixed maturity securities
 
$
445,750

 
$
(8,602
)
 
$
3,579

 
$
(4,032
)
 
$
449,329

 
$
(12,634
)
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
 
$
14,585

 
$
(1,371
)
 
$

 
$

 
$
14,585

 
$
(1,371
)
Perpetual preferred stocks
 
20,464

 
(578
)
 

 

 
20,464

 
(578
)
Total equity securities
 
$
35,049

 
$
(1,949
)
 
$

 
$

 
$
35,049

 
$
(1,949
)

As of September 30, 2017, investment grade fixed maturity securities (as determined by nationally recognized rating agencies) represented approximately 44.5% of the gross unrealized loss and 69.4% of the fair value. As of December 31, 2016, investment grade fixed maturity securities represented approximately 54.5% of the gross unrealized loss and 83.0% of the fair value.

Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.

Other Invested Assets

Carrying values of other invested assets accounted for under cost and equity method are as follows (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Cost
Method
 
Equity Method
 
Fair Value
 
Cost
Method
 
Equity Method
 
Fair
Value
Common Equity
 
$

 
$
1,298

 
$
7,056

 
$
138

 
$
1,047

 
$

Preferred Equity
 
2,484

 
15,710

 

 
2,484

 
9,971

 

Derivatives
 
3,097

 

 
2,164

 
3,097

 

 
3,813

Limited Partnerships
 

 
733

 

 

 
1,116

 

Joint Ventures
 

 
58,919

 

 

 
40,697

 

Total
 
$
5,581

 
$
76,660

 
$
9,220

 
$
5,719

 
$
52,831

 
$
3,813


The Company recognized a gain of zero and a loss of $1.6 million on changes in the fair value of investments accounted for under ASC 815, Derivatives and Hedging ("ASC 815") during the three and nine months ended September 30, 2017, respectively and a gain of zero and $2.7 million in the fair value of an equity security accounted under ASC 825, Financial Instruments for the three and nine months ended September 30, 2017, respectively.

The Company recognized losses of $0.3 million and $1.9 million on changes in the fair value of investments accounted for under ASC 815 during the three and nine months ended September 30, 2016, respectively.

Summarized financial information for subsidiaries not consolidated for the nine months ended September 30, 2017 is as follows (information for two of the investees is reported on a one month lag, in thousands):