Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) with the overall strategy of AMERCO, followed by a description of, and strategy related to, our operating segments to give the reader an overview of the goals of our businesses and the direction in which our businesses and products are moving. We then discuss our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Next, we discuss our results of operations for the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019, which is followed by an analysis of liquidity changes in our balance sheets and cash flows, and a discussion of our financial commitments in the sections entitled Liquidity and Capital Resources - Summary and Disclosures about Contractual Obligations and Commercial Commitments and a discussion of off-balance sheet arrangements. We conclude this MD&A by discussing our current outlook for the remainder of fiscal 2020.
This MD&A should be read in conjunction with the other sections of this Quarterly Report, including the Notes to Condensed Consolidated Financial Statements. The various sections of this MD&A contain a number of forward-looking statements, as discussed under the caption, Cautionary Statements Regarding Forward-Looking Statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing or in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2019. Many of these risks and uncertainties are beyond our control and our actual results may differ materially from these forward-looking statements.
AMERCO, a Nevada corporation, has a first fiscal quarter that ends on the 30
th
of June for each year that is referenced. Our insurance company subsidiaries have a first quarter that ends on the 31
st
of March for each year that is referenced. They have been consolidated on that basis. Our insurance companies’ financial reporting processes conform to calendar year reporting as required by state insurance departments. Management believes that consolidating their calendar year into our fiscal year financial statements does not materially affect the presentation of financial position or results of operations. We disclose material events, if any, occurring during the intervening period. Consequently, all references to our insurance subsidiaries’ years 2019 and 2018 correspond to fiscal 2020 and 2019 for AMERCO.
Overall Strategy
Our overall strategy is to maintain our leadership position in the United States and Canada “do-it-yourself” moving and storage industry. We accomplish this by providing a seamless and integrated supply chain to the “do-it-yourself” moving and storage market. As part of executing this strategy, we leverage the brand recognition of U-Haul
with our full line of moving and self-storage related products and services and the convenience of our broad geographic presence.
Our primary focus is to provide our customers with a wide selection of moving rental equipment, convenient self-storage rental facilities, portable moving and storage units and related moving and self-storage products and services. We are able to expand our distribution and improve customer service by increasing the amount of moving equipment and storage units and portable moving and storage units available for rent, expanding the number of independent dealers in our network and expanding and taking advantage of our eMove
®
capabilities.
Property and Casualty Insurance is focused on providing and administering property and casualty insurance to U-Haul and its customers, its independent dealers and affiliates.
Life Insurance is focused on long term capital growth through direct writing and reinsuring of life insurance, Medicare supplement and annuity products in the senior marketplace.
Description of Operating Segments
AMERCO’s three reportable segments are:
-
Moving and Storage, comprised of AMERCO, U-Haul, and Real Estate and the wholly owned subsidiaries of U-Haul and Real Estate;
-
Property and Casualty Insurance, comprised of Repwest and its wholly owned subsidiaries and ARCOA; and
-
Life Insurance, comprised of Oxford and its wholly owned subsidiaries.
Moving and Storage
Moving and Storage consists of the rental of trucks, trailers, portable moving and storage units, specialty rental items and self-storage spaces primarily to the household mover as well as sales of moving supplies, towing accessories and propane. Operations are conducted under the registered trade name U-Haul
®
throughout the United States and Canada.
With respect to our truck, trailer, specialty rental items and self-storage rental business, we are focused on expanding our dealer network, which provides added convenience for our customers, and expanding the selection and availability of rental equipment to satisfy the needs of our customers.
U-Haul brand self-moving related products and services, such as boxes, pads and tape, allow our customers to, among other things, protect their belongings from potential damage during the moving process. We are committed to providing a complete line of products selected with the “do-it-yourself” moving and storage customer in mind.
uhaul.com
®
is an online marketplace that connects consumers to our operations as well as independent Moving Help
®
service providers and thousands of independent Self-Storage Affiliates. Our network of customer rated affiliates and service providers furnish pack and load help, cleaning help, self-storage and similar services throughout the United States and Canada. Our goal is to further utilize our web-based technology platform to increase service to consumers and businesses in the moving and storage market.
Since 1945, U-Haul has incorporated sustainable practices into its everyday operations. We believe that our basic business premise of equipment sharing helps reduce greenhouse gas emissions and reduces the inventory of total large capacity vehicles. We continue to look for ways to reduce waste within our business and are dedicated to manufacturing reusable components and recyclable products. We believe that our commitment to sustainability, through our products and services and everyday operations, has helped us to reduce our impact on the environment.
Property and Casualty Insurance
Property and Casualty Insurance provides loss adjusting and claims handling for U-Haul through regional offices across the United States and Canada. Property and Casualty Insurance also underwrites components of the Safemove
®
, Safetow
®
, Safemove Plus
®
, Safestor
®
and
Safestor Mobile
®
protection packages to U-Haul customers. We continue to focus on increasing the penetration of these products into the moving and storage market. The business plan for Property and Casualty Insurance includes offering property and casualty insurance products in other U-Haul
related programs.
Life Insurance
Life Insurance provides life and health insurance products primarily to the senior market through the direct writing and reinsuring of life insurance, Medicare supplement and annuity policies.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP in the United States. The methods, estimates and judgments we use in applying our accounting policies can have a significant impact on the results we report in our financial statements. Certain accounting policies require us to make difficult and subjective judgments and assumptions, often as a result of the need to estimate matters that are inherently uncertain.
Following is a detailed description of the accounting policies that we deem most critical to us and that require management’s most difficult and subjective judgments. These estimates are based on historical experience, observance of trends in particular areas, information and valuations available from outside sources and on various other assumptions that are believed to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions and conditions and such differences may be material.
We also have other policies that we consider key accounting policies such as revenue recognition; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective. The accounting policies that we deem most critical to us, and involve the most difficult, subjective or complex judgments include the following:
Principles of Consolidation
We apply Accounting Standards Codification (“ASC”) 810 -
Consolidation
(“ASC 810”) in our principles of consolidation. ASC 810 addresses arrangements where a company does not hold a majority of the voting or similar interests of a variable interest entity (“VIE”). A company is required to consolidate a VIE if it has determined it is the primary beneficiary. ASC 810 also addresses the policy when a company owns a majority of the voting or similar rights and exercises effective control.
As promulgated by ASC 810, a VIE is not self-supportive due to having one or both of the following conditions: (i) it has an insufficient amount of equity for it to finance its activities without receiving additional subordinated financial support or (ii) its owners do not hold the typical risks and rights of equity owners. This determination is made upon the creation of a variable interest and is re-assessed on an on-going basis should certain changes in the operations of a VIE, or its relationship with the primary beneficiary, trigger a reconsideration under the provisions of ASC 810. After a reconsideration event occurs, the facts and circumstances are utilized in determining whether or not a company is a VIE, which other company(ies) have a variable interest in the entity, and whether or not the company’s interest is such that it is the primary beneficiary.
We will continue to monitor our relationships with the other entities regarding who is the primary beneficiary, which could change based on facts and circumstances of any reconsideration events.
Recoverability of Property, Plant and Equipment
Our property, plant and equipment is stated at cost. Interest expense incurred during the initial construction of buildings and rental equipment is considered part of cost. Depreciation is computed for financial reporting purposes using the straight-line or an accelerated method based on a declining balance formula over the following estimated useful lives: rental equipment 2-20 years and buildings and non-rental equipment 3-55 years. Routine maintenance costs are charged to operating expense as they are incurred. Gains and losses on dispositions of property, plant and equipment other than real estate (“personal property”) are netted against depreciation expense when realized. Equipment depreciation is recognized in amounts expected to result in the recovery of estimated residual values upon disposal, i.e., minimize gains or losses. In determining the depreciation rate, historical disposal experience, holding periods and trends in the market for vehicles are reviewed. As a result of the changes in IRS regulations regarding the capitalization of assets, beginning in the first quarter of fiscal 2017, the Company changed its depreciation policy to raise the value threshold before certain assets are capitalized. This change in procedure results in the immediate recognition of reported operating costs with a lagging decrease in depreciation expense over the term that these assets would have been depreciated. Due to this change, we had additional operating expenses of $7.6 million and $5.1 million in the first quarter of fiscal 2020 and 2019, respectively. This change in procedure is benefiting the Company through the immediate recognition of tax deductible costs.
We regularly perform reviews to determine whether facts and circumstances exist which indicate that the carrying amount of assets, including estimates of residual value, may not be recoverable or that the useful life of assets are shorter or longer than originally estimated. Reductions in residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. Reviews are performed based on vehicle class, generally subcategories of trucks and trailers. We assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining lives against their respective carrying amounts. We consider factors such as current and expected future market price trends on used vehicles and the expected life of vehicles included in the fleet. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If asset residual values are determined to be recoverable, but the useful lives are shorter or longer than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.
For our box truck fleet, we utilize an accelerated method of depreciation based upon a declining formula. Under the declining balances method (2.4 times declining balance), the book value of a rental truck is reduced approximately 16%, 13%, 11%, 9%, 8%, 7%, and 6% during years one through seven, respectively, and then reduced on a straight-line basis to a salvage value of 15% by the end of year fifteen.
Comparatively, a standard straight-line approach would reduce the book value by approximately 5.7% per year over the life of the truck.
Although we intend to sell our used vehicles for prices approximating book value, the extent to which we realize a gain or loss on the sale of used vehicles is dependent upon various factors, including, but not limited to, the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and the depreciation rates with respect to the vehicle
.
We typically sell our used vehicles at our sales centers throughout the United States and Canada, on our website at uhaul.com/trucksales or by phone at 1-866-404-0355. Additionally, we sell a large portion of our pickup and cargo van fleet at automobile dealer auctions.
Insurance Reserves
Liabilities for life insurance and certain annuity and health policies are established to meet the estimated future obligations of policies in force, and are based on mortality, morbidity and withdrawal assumptions from recognized actuarial tables, which contain margins for adverse deviation. In addition, liabilities for health, disability and other policies include estimates of payments to be made on insurance claims for reported losses and estimates of losses incurred, but not yet reported (“IBNR”). Liabilities for annuity contracts consist of contract account balances that accrue to the benefit of the policyholders.
Insurance reserves for Property and Casualty Insurance and U-Haul take into account losses incurred based upon actuarial estimates and are management’s best approximation of future payments.
These estimates are based upon past claims experience and current claim trends as well as social and economic conditions such as changes in legal theories and inflation.
These reserves consist of case reserves for reported losses and a provision for IBNR losses, both reduced by applicable reinsurance recoverables, resulting in a net liability.
Due to the nature of the underlying risks and high degree of uncertainty associated with the determination of the liability for future policy benefits and claims, the amounts to be ultimately paid to settle these liabilities cannot be precisely determined and may vary significantly from the estimated liability, especially for long-tailed casualty lines of business such as excess workers’ compensation.
As a result of the long-tailed nature of the excess workers’ compensation policies written by Repwest from 1983 through 2001, it may take a number of years for claims to be fully reported and finally settled.
On a regular basis management reviews insurance reserve adequacy to determine if existing assumptions need to be updated. In determining the assumptions for calculating workers’ compensation reserves, management considers multiple factors including the following:
-
Claimant longevity;
-
Cost trends associated with claimant treatments;
-
Changes in ceding entity and third party administrator reporting practices;
-
Changes in environmental factors including legal and regulatory;
-
Current conditions affecting claim settlements, and
-
Future economic conditions including inflation.
We reserve each claim based upon the accumulation of claim costs projected through each claimant’s life expectancy, and then adjust for applicable reinsurance arrangements.
Management reviews each claim at least bi-annually and when facts and circumstances change to determine if the estimated life-time claim costs have increased and then adjusts the reserve estimate accordingly at that time.
We factor in an estimate of potential cost increases in our IBNR liability.
We do not assume settlement of existing claims in calculating the reserve amount, unless it is in the final stages of completion.
Continued increases in claim costs, including medical inflation and new treatments and medications, could lead to future adverse development resulting in additional reserve strengthening.
Conversely, settlement of existing claims or injured workers returning to work or expiring prematurely could lead to future positive development.
Impairment of Investments
Investments are evaluated pursuant to guidance contained in ASC 320 -
Investments - Debt and Equity Securities
to determine if and when a decline in market value below amortized cost is other-than-temporary. Management makes certain assumptions or judgments in its assessment, including, but not limited to, our ability and intent to hold the security, quoted market prices, dealer quotes or discounted cash flows, industry factors, financial factors, and issuer specific information such as credit strength. Other-than-temporary impairment in value is recognized in the current period operating results. There were no write downs in the first quarter of fiscal 2020 or 2019.
Income Taxes
We file a consolidated tax return with all of our legal subsidiaries.
Our tax returns are periodically reviewed by various taxing authorities. The final outcome of these audits may cause changes that could materially impact our financial results.
Fair Values
Fair values of cash equivalents approximate carrying value due to the short period of time to maturity. Fair values of short term investments, investments available-for-sale, long term investments, mortgage loans and notes on real estate, and interest rate swap contracts are based on quoted market prices, dealer quotes or discounted cash flows. Fair values of trade receivables approximate their recorded value.
Our financial instruments that are exposed to concentrations of credit risk consist primarily of temporary cash investments, trade receivables, reinsurance recoverables and notes receivable. Limited credit risk exists on trade receivables due to the diversity of our customer base and their dispersion across broad geographic markets. We place our temporary cash investments with financial institutions and limit the amount of credit exposure to any one financial institution.
We have mortgage receivables, which potentially expose us to credit risk. The portfolio of notes is principally collateralized by self-storage facilities and commercial properties. We have not experienced any material losses related to the notes from individual or groups of notes in any particular industry or geographic area. The estimated fair values were determined using the discounted cash flow method and using interest rates currently offered for similar loans to borrowers with similar credit ratings.
The carrying amount of long term debt and short term borrowings are estimated to approximate fair value as the actual interest rate is consistent with the rate estimated to be currently available for debt of similar term and remaining maturity.
Other investments, including short term investments, are substantially current or bear reasonable interest rates. As a result, the carrying values of these financial instruments approximate fair value.
Accounting Pronouncements
Please see Note 16, Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for Adoption of New Accounting Pronouncements and Recent Accounting Pronouncements.
Results of Operations
AMERCO and Consolidated Entities
Quarter Ended June 30, 2019 compared with the Quarter Ended June 30, 2018
Listed below, on a consolidated basis, are revenues for our major product lines for the first quarter of fiscal 2020 and the first quarter of fiscal 2019:
|
|
Quarter Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Self-moving equipment rentals
|
$
|
748,596
|
$
|
716,602
|
Self-storage revenues
|
|
98,274
|
|
86,212
|
Self-moving and self-storage products and service sales
|
|
80,026
|
|
79,241
|
Property management fees
|
|
7,156
|
|
7,416
|
Life insurance premiums
|
|
32,710
|
|
36,888
|
Property and casualty insurance premiums
|
|
13,424
|
|
12,781
|
Net investment and interest income
|
|
35,749
|
|
24,605
|
Other revenue
|
|
63,314
|
|
55,832
|
Consolidated revenue
|
$
|
1,079,249
|
$
|
1,019,577
|
Self-moving equipment rental revenues increased $32.0 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019. The improvements came from both truck and trailer rentals. Compared to the same period last year, we increased the number of retail locations, independent dealers, box trucks, trailers and towing devices in the rental fleet.
Self-storage revenues increased $12.1 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
The average monthly amount of occupied square feet increased by 15.9% during the first quarter of fiscal 2020 compared with the same period last year.
The growth in revenues and square feet rented comes from a combination of improved rates per square foot, occupancy gains at existing locations and from the addition of new facilities to the portfolio. Over the last twelve months, we added approximately 5.8 million net rentable square feet, or a 17.8% increase, with approximately 1.9 million of that coming on during the first quarter of fiscal 2020.
Sales of self-moving and self-storage products and services increased $0.8 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
Life insurance premiums decreased $4.2 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019 due primarily to decreased life and Medicare supplement premiums.
Property and casualty insurance premiums increased $0.6 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019 due to an increase in Safetow
®
and Safestor
®
sales, which is a reflection of the increased equipment and storage rental transactions.
Net investment and interest income increased $11.1 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019. Changes in the market value of unaffiliated common stocks held in our insurance subsidiary accounted for $2.2 million of the increase during the quarter. Investment income increased due to a larger invested asset base and we had a $3.4 million gain on derivatives at our life insurance subsidiary.
Other revenue increased $7.5 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019, primarily coming from our U-Box
®
program.
Listed below are revenues and earnings from operations at each of our operating segments for the first quarter of fiscal 2020 and the first quarter of fiscal 2019. The insurance companies’ first quarters ended March 31, 2019 and 2018.
|
|
Quarter Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Moving and storage
|
|
|
|
|
Revenues
|
$
|
1,000,398
|
$
|
947,885
|
Earnings from operations before equity in earnings of subsidiaries
|
|
201,896
|
|
200,395
|
Property and casualty insurance
|
|
|
|
|
Revenues
|
|
20,305
|
|
15,889
|
Earnings from operations
|
|
8,466
|
|
2,713
|
Life insurance
|
|
|
|
|
Revenues
|
|
60,321
|
|
57,863
|
Earnings from operations
|
|
3,781
|
|
1,881
|
Eliminations
|
|
|
|
|
Revenues
|
|
(1,775)
|
|
(2,060)
|
Earnings from operations before equity in earnings of subsidiaries
|
|
(278)
|
|
(285)
|
Consolidated results
|
|
|
|
|
Revenues
|
|
1,079,249
|
|
1,019,577
|
Earnings from operations
|
|
213,865
|
|
204,704
|
Total costs and expenses increased $50.5 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019. Operating expenses for Moving and Storage increased $38.9 million, largely from personnel, liability costs, shipping costs associated with U-Box and property taxes. Repair costs associated with the rental fleet experienced a $2.5 million decrease during the quarter. Net gains from the disposal of rental equipment increased $0.4 million.
Depreciation expense associated with our rental fleet increased $8.4 million to $122.4 million due to a larger fleet.
Depreciation expense on all other assets, largely from buildings and improvements, increased $6.2 million to $34.9 million. Gains on the disposal of real estate increased $1.6 million from the condemnation of a property in the first quarter of fiscal 2020.
As a result of the above-mentioned changes in revenues and expenses, earnings from operations increased to $213.9 million for the first quarter of fiscal 2020, compared with $204.7 million for the first quarter of fiscal 2019.
Interest expense for the first quarter of fiscal 2020 was $38.9 million, compared with $35.3 million for the first quarter of fiscal 2019, due to increased borrowings.
Income tax expense was $42.3 million for the first quarter of fiscal 2020, compared with $41.3 million for the first quarter of fiscal 2019.
As a result of the above-mentioned items, earnings available to common stockholders were $132.4 million for the first quarter of fiscal 2020, compared with $127.8 million for the first quarter of fiscal 2019.
Basic and diluted earnings per share for the first quarter of fiscal 2020 were $6.76, compared with $6.53 for the first quarter of fiscal 2019.
The weighted average common shares outstanding basic and diluted were 19,597,697 for the first quarter of fiscal 2020, compared with 19,590,585 for the first quarter of fiscal 2019.
Moving and Storage
Quarter Ended June 30, 2019 compared with the Quarter Ended June 30, 2018
Listed below are revenues for our major product lines at Moving and Storage for the first quarter of fiscal 2020 and the first quarter of fiscal 2019:
|
|
Quarter Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Self-moving equipment rentals
|
$
|
749,136
|
$
|
717,542
|
Self-storage revenues
|
|
98,274
|
|
86,212
|
Self-moving and self-storage products and service sales
|
|
80,026
|
|
79,241
|
Property management fees
|
|
7,156
|
|
7,416
|
Net investment and interest income
|
|
3,267
|
|
2,563
|
Other revenue
|
|
62,539
|
|
54,911
|
Moving and Storage revenue
|
$
|
1,000,398
|
$
|
947,885
|
Self-moving equipment rental revenues increased $31.6 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
The improvements came from both truck and trailer rentals. Compared to the same period last year, we increased the number of retail locations, independent dealers, box trucks, trailers and towing devices in the rental fleet.
Self-storage revenues increased $12.1 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
The average monthly amount of occupied square feet increased by 15.9% during the first quarter of fiscal 2020 compared with the same period last year.
The growth in revenues and square feet rented comes from a combination of improved rates per square foot, occupancy gains at existing locations and from the addition of new facilities to the portfolio. Over the last twelve months, we added approximately 5.8 million net rentable square feet, or a 17.8% increase, with approximately 1.9 million of that coming on during the first quarter of fiscal 2020.
Sales of self-moving and self-storage products and services increased $0.8 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
Net investment and interest income increased $0.7 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019.
Other revenue increased $7.6 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019 caused primarily by the U-Box
®
program.
We own and manage self-storage facilities. Self-storage revenues reported in the consolidated financial statements represent Company-owned locations only. Self-storage data for our owned storage locations follows:
|
|
Quarter Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
(In thousands, except occupancy rate)
|
Unit count as of June 30
|
|
452
|
|
383
|
Square footage as of June 30
|
|
38,175
|
|
32,394
|
Average monthly number of units occupied
|
|
302
|
|
262
|
Average monthly occupancy rate based on unit count
|
|
68.4%
|
|
69.6%
|
Average monthly square footage occupied
|
|
27,421
|
|
23,666
|
Over the last twelve months we added approximately 5.8 million net rentable square feet of new storage to the system. This was a mix of existing storage locations we acquired and new development. On average, the occupancy rate of this new capacity on the date it was added was 8.5%.
Total costs and expenses increased $51.0 million during the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019. Operating expenses increased $38.9 million largely from increased personnel, liability costs, shipping costs associated with U-Box and property taxes. Repair costs associated with the rental fleet experienced a $2.5 million decrease during the quarter. Net gains from the disposal of rental equipment increased $0.4 million.
Depreciation expense associated with our rental fleet increased $8.4 million to $122.4 million due to a larger fleet.
Depreciation expense on all other assets, largely from buildings and improvements, increased $6.2 million to $34.9 million. Gains on the disposal of real estate increased $1.6 million from the condemnation of a property in the first quarter of fiscal 2020.
As a result of the above-mentioned changes in revenues and expenses, earnings from operations for Moving and Storage before consolidation of the equity in the earnings of the insurance subsidiaries, increased to $201.9 million for the first quarter of fiscal 2020, compared with $200.4 million for the first quarter of fiscal 2019.
Equity in the earnings of AMERCO’s insurance subsidiaries was $9.8 million for the first quarter of fiscal 2020, compared with $3.7 million for the first quarter of fiscal 2019.
As a result of the above-mentioned changes in revenues and expenses, earnings from operations increased to $211.7 million for the first quarter of fiscal 2020, compared with $204.1 million for the first quarter of fiscal 2019.
Property and Casualty Insurance
Quarter Ended March 31, 2019 compared with the Quarter Ended March 31, 2018
Net premiums were $14.1 million and $13.3 million for the quarters ended March 31, 2019 and 2018, respectively. A significant portion of Repwest’s premiums are from policies sold in conjunction with U-Haul rental transactions. The premium increase corresponded with the increased moving and storage transactions at U-Haul during the same period.
Net investment and interest income was $6.2 million and $2.5 million for the three months ended March 31, 2019 and 2018, respectively. The main driver of the change in net investment income was the increase in the valuation of unaffiliated common stock of $2.2 million for the three months ended March 31, 2019.
Net operating expenses were $8.1 million and $8.7 million for the three months ended March 31, 2019 and 2018, respectively. The change was due to an increase in commissions, decreased loss adjusting fees and subrogation income.
Benefits and losses incurred were $3.8 million and $4.5 million for the three months March 31, 2019 and 2018, respectively. The decrease was due to favorable loss experience.
As a result of the above-mentioned changes in revenues and expenses, pretax earnings from operations were $8.5 million and $2.7 million for the three months ended March 31, 2019 and 2018, respectively.
Life Insurance
Quarter Ended March 31, 2019 compared with the Quarter Ended March 31, 2018
Net premiums were $32.7 million and $36.9 million for the quarters ended March 31, 2019 and 2018, respectively. Medicare Supplement premiums decreased by $3.0 million due to the reduction in new sales and policy decrements on the existing business offset by premium rate increases. Life premiums decreased by $0.8 million, primarily due to the termination of a reinsurance contract with one of our reinsurers in the fourth quarter of fiscal 2019. Premiums on other lines of business decreased $0.4 million. Deferred annuity deposits were $61.5 million or $0.2 million above prior year and are accounted for on the balance sheet as deposits rather than premiums
Net investment and interest income was $26.7 million and $19.9 million for the quarters ended March 31, 2019 and 2018, respectively. Investment income from fixed maturities increased $4.0 million from a larger invested asset base. The increase in realized capital gains was $1.0 million coupled with a $3.4 million gain on derivatives used as hedges for our fixed indexed annuities. This was partially offset by a $1.6 million decrease in the investment income from other invested assets.
Net operating expenses were $5.2 million and $5.9 million for the quarters ended March 31, 2019 and 2018, respectively. The decrease was primarily due to decreased commissions and general expenses.
Benefits and losses incurred were $45.2 million and $44.1 million for the quarters ended March 31, 2019 and 2018, respectively. Interest credited to policyholders increased $6.2 million from the increase in the deposit base. This was partially offset by the decrease in incurred benefits on Medicare supplement, life and other lines of business. Medicare supplement benefits decreased $3.5 million from the declining policies in force. Life benefits decreased $1.0 million due to the termination of a reinsurance contract. Benefits on the remaining lines of business decreased $0.5 million.
Amortization of deferred acquisition costs (“DAC”), sales inducement asset (“SIA”) and the value of business acquired (“VOBA”) was $6.1 million and $6.0 million for the quarters ended March 31, 2019 and 2018, respectively.
As a result of the above mentioned changes in revenues and expenses, pretax earnings from operations were $3.8 million and $1.9 million for the quarters ended March 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
We believe our current capital structure is a positive factor that will enable us to pursue our operational plans and goals and provide us with sufficient liquidity for the foreseeable future. There are many factors that could affect our liquidity, including some which are beyond our control, and there is no assurance that future cash flows and liquidity resources will be sufficient to meet our outstanding debt obligations and our other future capital needs.
As of June 30, 2019, cash and cash equivalents totaled $519.8 million, compared with $673.7 million at March 31, 2019. The assets of our insurance subsidiaries are generally unavailable to fulfill the obligations of non-insurance operations (Moving and Storage). As of June 30, 2019 (or as otherwise indicated), cash and cash equivalents, other financial assets (receivables, short-term investments, other investments, fixed maturities, and related party assets) and debt obligations of each operating segment were:
|
|
Moving & Storage
|
|
Property & Casualty Insurance (a)
|
|
Life Insurance (a)
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
500,497
|
$
|
6,061
|
$
|
13,273
|
Other financial assets
|
|
173,795
|
|
472,122
|
|
2,308,138
|
Debt obligations
|
|
4,343,935
|
|
–
|
|
–
|
|
|
|
|
|
|
|
(a) As of March 31, 2019
|
|
|
|
|
|
|
As of June 30, 2019, Moving and Storage had additional cash available under existing credit facilities of $75.0 million.
The majority of invested cash at the Moving and Storage segment is held in government money market funds.
Net cash provided by operating activities increased $11.3 million in the first quarter of fiscal 2020 compared with the first quarter of fiscal 2019.
Net cash used in investing activities increased $286.1 million in the first quarter of fiscal 2020, compared with the first quarter of fiscal 2019. Purchases of property, plant and equipment, which are reported net of cash from sales and lease-back transactions, increased $299.1 million. Cash from the sales of property, plant and equipment decreased $26.8 million largely due to reduced fleet sales. For our insurance subsidiaries, net cash used in investing activities decreased $33.0 million due to reduced investment purchases.
Net cash provided by financing activities increased $220.9 million in the first quarter of fiscal 2020, as compared with the first quarter of fiscal 2019. This was due to a combination of decreased debt payments of $12.7 million, increased finance/capital lease repayments of $10.1 million, an increase in cash from borrowings of $230.1 million, and a decrease in net annuity deposits from Life Insurance of $13.1 million.
Liquidity and Capital Resources and Requirements of Our Operating Segments
Moving and Storage
To meet the needs of our customers, U-Haul maintains a large fleet of rental equipment. Capital expenditures have primarily consisted of new rental equipment acquisitions and the buyouts of existing fleet from leases. The capital to fund these expenditures has historically been obtained internally from operations and the sale of used equipment and externally from debt and lease financing. In the future, we anticipate that our internally generated funds will be used to service the existing debt and fund operations. U-Haul estimates that during fiscal 2020, we will reinvest in our truck and trailer rental fleet approximately $700 million, net of equipment sales excluding any lease buyouts. Through the first quarter of fiscal 2020, we have invested, net of equipment sales, $403 million before any lease buyouts in our truck and trailer fleet of this projected amount. Fleet investments in fiscal 2020 and beyond will be dependent upon several factors, including availability of capital, the truck rental environment and the used-truck sales market. We anticipate that the fiscal 2020 investments will be funded largely through debt financing, external lease financing and cash from operations. Management considers several factors, including cost and tax consequences, when selecting a method to fund capital expenditures. Our allocation between debt and lease financing can change from year to year based upon financial market conditions, which may alter the cost or availability of financing options.
Real Estate has traditionally financed the acquisition of self-storage properties to support U-Haul's growth through debt financing and funds from operations and sales. Our plan for the expansion of owned storage properties includes the acquisition of existing self-storage locations from third parties, the acquisition and development of bare land, and the acquisition and redevelopment of existing buildings not currently used for self-storage. We are funding these development projects through loans and internally generated funds. For the first quarter of fiscal 2020, we invested $218 million in real estate acquisitions, new construction and renovation and major repairs. For fiscal 2020, the timing of new projects will be dependent upon several factors, including the entitlement process, availability of capital, weather, and the identification and successful acquisition of target properties. U-Haul's growth plan in self-storage also includes the expansion of the U-Haul Storage Affiliate program, which does not require significant capital.
Net capital expenditures (purchases of property, plant and equipment less proceeds from the sale of property, plant and equipment and lease proceeds) were $686.5 million and $360.6 million for the first quarter of fiscal 2020 and 2019, respectively. The components of our net capital expenditures are provided in the following table:
|
|
Quarter Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Purchases of rental equipment
|
$
|
560,693
|
$
|
440,350
|
Equipment lease buyouts
|
|
34,030
|
|
2,633
|
Purchases of real estate, construction and renovations
|
|
217,911
|
|
219,196
|
Other capital expenditures
|
|
34,614
|
|
12,871
|
Gross capital expenditures
|
|
847,248
|
|
675,050
|
Less: Lease proceeds
|
|
–
|
|
(126,903)
|
Less: Sales of property, plant and equipment
|
|
(160,754)
|
|
(187,546)
|
Net capital expenditures
|
$
|
686,494
|
$
|
360,601
|
Moving and Storage continues to hold significant cash and has access to additional liquidity. Management may invest these funds in our existing operations, expand our product lines or pursue external opportunities in the self-moving and storage marketplace or reduce existing indebtedness where possible.
Property and Casualty Insurance
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, Property and Casualty Insurance’s assets are generally not available to satisfy the claims of AMERCO or its legal subsidiaries.
We believe that stockholders’ equity at Property and Casualty Insurance remains sufficient, and we do not believe that its ability to pay ordinary dividends to AMERCO will be restricted per state regulations.
Property and Casualty Insurance’s stockholder’s equity was $236.4 million and $222.4 million at March 31, 2019 and December 31, 2018, respectively. The increase resulted from net earnings of $6.7 million and an increase in other comprehensive income of $7.2 million.
Property and Casualty Insurance does not use debt or equity issues to increase capital and therefore has no direct exposure to capital market conditions other than through its investment portfolio.
Life Insurance
Life Insurance manages its financial assets to meet policyholder and other obligations, including investment contract withdrawals and deposits. Life Insurance’s net deposits for the quarter ended March 31, 2019 were $24.5 million. State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, Life Insurance’s assets are generally not available to satisfy the claims of AMERCO or its legal subsidiaries.
Life Insurance’s stockholder’s equity was $349.1 million and $311.7 million as of March 31, 2019 and December 31, 2018, respectively. The increase resulted from net earnings of $3.1 million and an increase in other comprehensive income of $34.3 million primarily due to the effect of interest rate changes on the fixed maturity portion of the investment portfolio. Life Insurance has not historically used debt or equity issues to increase capital and therefore has not had any significant direct exposure to capital market conditions other than through its investment portfolio. However, as of March 31, 2019, Oxford had outstanding deposits of $60.0 million through its membership in the FHLB system.
For a more detailed discussion of this deposit, please see Note 4, Borrowings, of the Notes to Condensed Consolidated Financial Statements.
Cash Provided from Operating Activities by Operating Segments
Moving and Storage
Net cash provided from operating activities were $367.8 million and $351.5 million for the first quarter of fiscal 2020 and 2019, respectively.
Property and Casualty Insurance
Net cash provided by operating activities were $3.1 million and $4.0 million for the first quarters ended March 31, 2019 and 2018, respectively.
The decrease was the result of changes in intercompany balances and the timing of payables activity.
Property and Casualty Insurance’s cash and cash equivalents and short-term investment portfolios amounted to $13.3 million and $11.2 million at March 31, 2019 and December 31, 2018, respectively. These balances reflect funds in transition from maturity proceeds to long term investments. Management believes this level of liquid assets, combined with budgeted cash flow, is adequate to meet foreseeable cash needs. Capital and operating budgets allow Property and Casualty Insurance to schedule cash needs in accordance with investment and underwriting proceeds.
Life Insurance
Net cash provided by operating activities were $10.0 million and $14.2 million for the first quarter ended March 31, 2019 and 2018, respectively. The decrease was primarily due to the timing of settlement of payables, offset by an increase resulting from a reduction in paid commissions and federal income tax.
In addition to cash flows from operating activities and financing activities, a substantial amount of liquid funds are available through Life Insurance’s short-term portfolio and its membership in the FHLB. As of March 31, 2019 and December 31, 2018, cash and cash equivalents and short-term investments amounted to $13.3 million and $24.1 million, respectively. Management believes that the overall sources of liquidity are adequate to meet foreseeable cash needs.
Liquidity and Capital Resources - Summary
We believe we have the financial resources needed to meet our business plans, including our working capital needs. We continue to hold significant cash and have access to existing credit facilities and additional liquidity to meet our anticipated capital expenditure requirements for investment in our rental fleet, rental equipment and storage acquisitions and build outs.
Our borrowing strategy is primarily focused on asset-backed financing and rental equipment leases. As part of this strategy, we seek to ladder maturities and fix interest rates. While each of these loans typically contains provisions governing the amount that can be borrowed in relation to specific assets, the overall structure is flexible with no limits on overall Company borrowings. Management believes it has adequate liquidity between cash and cash equivalents and unused borrowing capacity in existing credit facilities to meet the current and expected needs of the Company over the next several years. As of June 30, 2019, we had available borrowing capacity under existing credit facilities of $75.0 million. It is possible that circumstances beyond our control could alter the ability of the financial institutions to lend us the unused lines of credit. We believe that there are additional opportunities for leverage in our existing capital structure.
For a more detailed discussion of our long term debt and borrowing capacity, please see Note 4, Borrowings, of the Notes to Condensed Consolidated Financial Statements.
Fair Value of Financial Instruments
Certain assets and liabilities are recorded at fair value on the condensed consolidated balance sheets and are measured and classified based upon a three tiered approach to valuation. ASC 820 requires that financial assets and liabilities recorded at fair value be classified and disclosed in a Level 1, Level 2 or Level 3 category. For more information, please see Note 14, Fair Value Measurements, of the Notes to Condensed Consolidated Financial Statements.
The available-for-sale securities held by us are recorded at fair value. These values are determined primarily from actively traded markets where prices are based either on direct market quotes or observed transactions. Liquidity is a factor considered during the determination of the fair value of these securities. Market price quotes may not be readily available for certain securities or the market for them has slowed or ceased. In situations where the market is determined to be illiquid, fair value is determined based upon limited available information and other factors, including expected cash flows. As of June 30, 2019, we had $0.2 million of available-for-sale assets classified in Level 3.
The interest rate swaps held by us as hedges against interest rate risk for our variable rate debt are recorded at fair value. These values are determined using pricing valuation models, which include broker quotes for which significant inputs are observable. They include adjustments for counterparty credit quality and other deal-specific factors, where appropriate, and are classified as Level 2.
Disclosures about Contractual Obligations and Commercial Commitments
Our estimates as to future contractual obligations have not materially changed from the disclosure included under the subheading Disclosures about Contractual Obligations and Commercial Commitments in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements in situations where management believes that the economics and sound business principles warrant their use.
Historically, we have used off-balance sheet arrangements in connection with the expansion of our self-storage business. For more information please see Note 10, Related Party Transactions, of the Notes to Condensed Consolidated Financial Statements. These arrangements were primarily used when our overall borrowing structure was more limited. We do not face similar limitations currently and off-balance sheet arrangements have not been utilized in our self-storage expansion in recent years. In the future, we will continue to identify and consider off-balance sheet opportunities to the extent such arrangements would be economically advantageous to us and our stockholders
Fiscal 2020 Outlook
We will continue to focus our attention on increasing transaction volume and improving pricing, product and utilization for self-moving equipment rentals. Maintaining an adequate level of new investment in our truck fleet is an important component of our plan to meet our operational goals. Revenue in the U-Move
®
program could be adversely impacted should we fail to execute in any of these areas. Even if we execute our plans, we could see declines in revenues primarily due to unforeseen events including adverse economic conditions or heightened competition that is beyond our control.
With respect to our storage business, we have added new locations and expanded at existing locations. In fiscal 2020, we are actively looking to acquire new locations, complete current projects and increase occupancy in our existing portfolio of locations. New projects and acquisitions will be considered and pursued if they fit our long term plans and meet our financial objectives. We will continue to invest capital and resources in the U-Box
®
program throughout fiscal 2020.
Property and Casualty Insurance will continue to provide loss adjusting and claims handling for U-Haul and underwrite components of the Safemove
®
, Safetow
®
, Safemove Plus
®
, Safestor
®
and Safestor Mobile
®
protection packages to U-Haul customers.
Life Insurance is pursuing its goal of expanding its presence in the senior market through the sales of its Medicare supplement, life and annuity policies. This strategy includes growing its agency force, expanding its new product offerings, and pursuing business acquisition opportunities.