SEC Form 10-Q filed by Heritage Insurance Holdings Inc.

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

Form 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

001-36462

 

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		45-5338504
(State of Incorporation)		(IRS Employer Identification No.)

1401 N. Westshore Blvd

Tampa, FL 33607

(Address, including zip code, of principal executive offices)

(727) 362-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	HRTG	New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☒	Emerging growth company	☐
Non-accelerated filer	☐	Smaller reporting company	☒

If an emerging growth company, 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 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate number of shares of the Registrant’s Common Stock outstanding on May 2, 2024 was 30,636,496.

 

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HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

 

		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: March 31, 2024 (unaudited) and December 31, 2023		2
Condensed Consolidated Statements of Operations and Other Comprehensive Income: Three Months Ended March 31, 2024 and 2023 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three Months Ended March 31, 2024 and 2023 (unaudited)		4
Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31, 2024 and 2023 (unaudited)		5
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3 Quantitative and Qualitative Disclosures about Market Risk		33
Item 4 Controls and Procedures		33
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		34
Item 1A Risk Factors		34
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 5 Other Information		34
Item 6 Exhibits		34
Signatures		35

 

 

 

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FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements, expectations or beliefs regarding: (i) our core strategy and ability to fully execute our business plan; (ii) our growth, including by geographic expansion, new lines of business, additional policies and new products and services, competitive strengths, proprietary capabilities, processes and new technology, results of operations and liquidity; (iii) strategic initiatives and their impact on shareholder value; (iv) projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; (v) management’s goals and objectives, including intentions to pursue certain business and the handling of certain claims; (vi) projections of revenue, earnings, capital structure, reserves, liquidity and other financial items; (vii) rising costs of materials and labor; (viii) the supply of catastrophe reinsurance and its costs; (ix) assumptions underlying our critical accounting policies and estimates; (x) assumptions underlying statements regarding us and our business; (xi) the impact of legislation; (xii) claims and related expenses, and our reinsurers’ obligations; (xiii) pending legal proceedings and their effect on our financial position; (xiv) future policy count reduction rates in select geographies; and (xv) other similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included throughout this filing and particularly in Item 1A: "Risk Factors" set forth in our 2023 Annual Report on Form 10-K and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in this quarterly report on Form 10-Q. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to revise or publicly release any revision to any such forward-looking statement, except as may otherwise be required by law.

These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

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Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrences of anticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in the forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.

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PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share and share amounts)

 

		March 31, 2024				December 31, 2023
ASSETS		(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $690,345 and $606,646)		$	644,113			$	560,682
Equity securities, at fair value, (cost $1,936 and $1,666)			1,936				1,666
Other investments, net			6,886				7,067
Total investments			652,935				569,415
Cash and cash equivalents			386,100				463,640
Restricted cash			11,365				9,699
Accrued investment income			4,583				4,068
Premiums receivable, net			94,326				89,490
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $197			565,694				482,429
Prepaid reinsurance premiums			176,726				294,222
Income tax receivable			3,375				13,354
Deferred income tax asset, net			15,509				11,111
Deferred policy acquisition costs, net			104,217				102,884
Property and equipment, net			32,767				33,218
Right-of-use lease asset, finance			16,971				17,606
Right-of-use lease asset, operating			6,662				6,835
Intangibles, net			41,009				42,555
Other assets			17,895				12,674
Total Assets		$	2,130,134			$	2,153,200
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses		$	843,687			$	845,955
Unearned premiums			691,174				675,921
Reinsurance payable			102,538				159,823
Long-term debt, net			123,007				119,732
Advance premiums			37,019				23,900
Accrued compensation			3,876				9,461
Lease liability, finance			19,830				20,386
Lease liability, operating			7,868				8,076
Accounts payable and other liabilities			66,200				69,666
Total Liabilities		$	1,895,199			$	1,932,920
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 42,868,170 shares issued and 30,636,496 outstanding at March 31, 2024 and 42,450,612 shares issued and 30,218,938 outstanding at December 31, 2023			3				3
Additional paid-in capital			360,956				360,310
Accumulated other comprehensive loss, net of taxes			(35,466	)			(35,250	)
Treasury stock, at cost, 12,231,674 shares at each March 31, 2024 and December 31, 2023			(130,900	)			(130,900	)
Retained earnings			40,342				26,117
Total Stockholders' Equity			234,935				220,280
Total Liabilities and Stockholders' Equity		$	2,130,134			$	2,153,200

 

See accompanying notes to unaudited condensed consolidated financial statements.

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

(Amounts in thousands, except per share and share amounts)

 

		For the Three Months Ended March 31,
		2024				2023
REVENUES:
Gross premiums written		$	356,684			$	310,309
Change in gross unearned premiums			(15,295	)			6,713
Gross premiums earned			341,389				317,022
Ceded premiums			(161,963	)			(150,993	)
Net premiums earned			179,426				166,029
Net investment income			8,551				5,582
Net realized (losses) gains			(1	)			1,898
Other revenue			3,326				3,412
Total revenues			191,302				176,921
EXPENSES:
Losses and loss adjustment expenses			102,035				97,452
Policy acquisition costs, net of ceding commission income (1)			46,929				40,324
General and administrative expenses, net of ceding commission income(2)			19,634				19,054
Total expenses			168,598				156,830
Operating income			22,704				20,091
Interest expense, net			2,830				2,881
Income before income taxes			19,874				17,210
Provision for income taxes			5,649				3,202
Net income		$	14,225			$	14,008
OTHER COMPREHENSIVE INCOME
Change in net unrealized (losses) gains on investments			(284	)			12,143
Reclassification adjustment for net realized investment losses			1				2
Income tax benefit (expense) related to items of other comprehensive income (loss)			67				(2,855	)
Total comprehensive income		$	14,009			$	23,298
Weighted average shares outstanding
Basic			30,376,682				25,558,305
Diluted			30,435,945				25,617,568
Earnings per share
Basic		$	0.47			$	0.55
Diluted		$	0.47			$	0.55

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

		Common Shares				Par Value				Additional Paid-In Capital				Retained Earnings				Treasury Shares				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Balance at December 31, 2023			30,218,938			$	3			$	360,310			$	26,117			$	(130,900	)		$	(35,250	)		$	220,280
Net unrealized change in investments, net of tax			—				—				—				—				—				(216	)			(216	)
Issuance of restricted stock			417,558				—				—				—				—				—				—
Stock-based compensation on restricted stock			—				—				595				—				—				—				595
Additional costs associated to public offering			—				—				(3	)			—				—				—				(3	)
Unallocated dividends on restricted stock forfeitures			—				—				54				—				—				—				54
Net Income			—				—				—				14,225				—				—				14,225
Balance at March 31, 2024			30,636,496			$	3			$	360,956			$	40,342			$	(130,900	)		$	(35,466	)		$	234,935

 

 

 

 

		Common Shares				Par Value				Additional Paid-In Capital				Retained Deficit				Treasury Shares				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Balance at December 31, 2022			25,539,433			$	3			$	334,711			$	(19,190	)		$	(130,900	)		$	(53,585	)		$	131,039
Net unrealized change in investments, net of tax			—				—				—				—				—				9,290				9,290
Shares tendered for income taxes withholding			(4,200	)			—				(8	)			—				—				—				(8	)
Restricted stock vested			25,000				—				—				—				—				—				—
Forfeiture on restricted stock			(1,482	)			—				—				—				—				—				—
Stock-based compensation on restricted stock			—				—				395				—				—				—				395
Net Income			—				—				—				14,008				—				—				14,008
Balance at March 31, 2023			25,558,751			$	3			$	335,098			$	(5,182	)		$	(130,900	)		$	(44,295	)		$	154,724

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

		For the Three Months Ended March 31,
		2024				2023
OPERATING ACTIVITIES
Net income		$	14,225			$	14,008
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation			595				395
Bond amortization and accretion			(739	)			(279	)
Amortization of original issuance discount on debt			213				117
Depreciation and amortization			2,226				2,127
Allowance for bad debt (recovery)			(798	)			27
Expected credit allowance on reinsurance			—				152
Net realized losses (gains)			1				(1,898	)
Deferred income taxes			(4,330	)			(3,976	)
Changes in operating assets and liabilities:
Accrued investment income			(515	)			281
Premiums receivable, net			(4,038	)			11,947
Prepaid reinsurance premiums			117,496				118,217
Reinsurance recoverable on paid and unpaid claims			(83,265	)			123,063
Income taxes receivable			9,979				7,854
Deferred policy acquisition costs, net			(1,333	)			1,582
Right of use leased asset, net			808				414
Other assets			(5,221	)			(3,835	)
Unpaid losses and loss adjustment expenses			(2,268	)			(150,815	)
Unearned premiums			15,253				(6,777	)
Reinsurance payable			(57,285	)			(103,903	)
Accrued interest			(479	)			(87	)
Accrued compensation			(5,585	)			(1,245	)
Advance premiums			13,119				13,126
Leased liabilities, net			(764	)			(345	)
Other liabilities			(2,987	)			(5,204	)
Net cash provided by operating activities			4,308				14,946
INVESTING ACTIVITIES
Fixed maturity securities sales, maturities and paydowns			29,770				145,070
Fixed maturity securities purchases			(112,746	)			(110,251	)
Sale on other investments			—				4,000
Return on other investments			180				119
Equity securities reinvestments of dividends			(270	)			—
Cost of property and equipment acquired			(229	)			(2,413	)
Net cash (used in) provided by investing activities			(83,295	)			36,525
FINANCING ACTIVITIES
Repayment of term note			(2,375	)			(2,375	)
Mortgage loan (payments) adjustments			(63	)			15
Proceeds from loan agreement			5,500				—
Tax withholdings on share-based compensation awards			—				(8	)
Additional costs associated with public offering			(3	)			—
Dividends forfeited (paid)			54				(11	)
Net cash provided by (used in) financing activities			3,113				(2,379	)
(Decrease) increase in cash, cash equivalents, and restricted cash			(75,874	)			49,092
Cash, cash equivalents and restricted cash, beginning of period			473,339				287,572
Cash, cash equivalents and restricted cash, end of period		$	397,465			$	336,664
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid (refund)		$	—			$	(676	)
Interest paid		$	2,400			$	2,376

 

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Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.

		March 31, 2024				December 31, 2023
		(In thousands)
Cash and cash equivalents		$	386,100			$	463,640
Restricted cash			11,365				9,699
Total		$	397,465			$	473,339

 

Restricted cash represents funds held to meet regulatory requirements in certain states in which the Company operates as well as deposits related to reinsurance transactions using catastrophe bonds.

 

See accompanying notes to unaudited condensed consolidated financial statements.

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HERITAGE INSURANCE HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

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Reinsurance recoverable on unpaid losses includes expected reinsurance recoveries associated with reinsurance contracts the Company has in place. The amount may include recoveries from catastrophe excess of loss reinsurance, net quota share reinsurance, per risk reinsurance, and facultative reinsurance contracts.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

Overview

We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York. We provide personal residential insurance in Florida and South Carolina on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.

 

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. We mitigate the impact of inflation by implementation of rate increases and the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and TIV. Rising reinsurance costs may be mitigated through exposure management as well as recouping the cost of reinsurance in future rate filings.

Supplemental Information

The Supplemental Information table below demonstrates progress on our initiatives by providing policy count, premiums-in-force, and TIV for Florida and all other states as of March 31, 2024 and comparing those metrics to March 31, 2023. One of our strategies had been to reduce personal lines exposure in Florida, given historical abusive claims practices. The actions of the Florida legislature aimed at curtailing assignment of benefits and litigated claims abuse appears to have had a positive impact. While we continue to closely monitor our Florida personal lines exposure, we do not anticipate continuing to reduce the policy count at the same levels as recent years.

 

Policies-in-force:		Q1 2024				Q1 2023				% Change
Florida			147,954				172,425				(14.2	)	%
Other States			289,001				336,647				(14.2	)	%
Total			436,955				509,072				(14.2	)	%

Premiums-in-force:
Florida	$		716,867,957		$		624,931,522				14.7		%
Other States			670,195,000				681,407,015				(1.6	)	%
Total	$		1,387,062,957		$		1,306,338,537				6.2		%

Total Insured Value:
Florida	$		103,796,187,233		$		104,735,498,939				(0.9	)	%
Other States			284,663,195,759				302,701,975,889				(6.0	)	%
Total	$		388,459,382,992		$		407,437,474,828				(4.7	)	%

 

Florida policies-in-force declined from the prior year quarter by 14.2% while premiums-in-force increased 14.7%, and TIV was down by 0.9%. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential business which generates higher average premium, rate increases across the book of business and use of inflation guard, partly offset by a premium reduction associated with fewer Florida personal lines policies. The Florida TIV declined modestly as the reduction in personal lines policies was offset by the strategic growth of our commercial residential portfolio, as well as use of inflation guard across the book of business. Compared to the quarter ended March 31, 2023, the policy count for markets outside of Florida decreased 14.2% due to underwriting actions and intentional exposure management, resulting in a TIV decrease of 6.0% while premiums-in-force decreased only 1.6% due to rating actions.

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Strategic Profitability Initiatives

The following provides an update to our strategic initiatives that are expected to enable us to achieve consistent long-term quarterly earnings and drive shareholder value.

Trends

Inflation, Underwriting and Pricing

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates and inflation guard factors resulting in an increase in the average premium per policy of 23.7% for the quarter ended March 31, 2024 as compared to the prior year quarter. The higher average premium is driven by rate changes, inclusion of inflation in premiums as described below, and by the mix of business written. We experienced intentional growth of our commercial residential business during 2023 and in the first quarter of 2024. This line of business generates significantly higher average premium per policy. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our retention has remained steadily in the range of 90% despite the rate increases we have implemented, in large part due to a challenging property insurance market in many of the regions in which we operate. While we

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believe our rates are generally competitive with private market insurers operating in our space, we are focused on managing exposure and achieving rate adequacy throughout our book of business.

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Our Florida personal lines market is also seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public. Our response to this phenomenon is a combination of raising rates and reducing exposure. Claims abuse has extended throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeds levels experienced in other states. Correspondingly, our exposure reduction plan expanded to personal lines business throughout the state of Florida. Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress toward reducing losses from abusive claim reporting practices. The special legislative session of December 2022 included a number of additional provisions aimed at driving down claims abuses and stabilizing the Florida property insurance market. The legislation appears to be having the intended impact but continues to be evaluated by management and exposure in Florida continues to be closely monitored.

Our industry experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in recent years. For the 2024 hurricane season, the supply of catastrophe excess of loss reinsurance for the Company was ample and pricing began to moderate. We are managing exposure by writing new business only in geographies for which rates are adequate, non-renewing unprofitable business in compliance with regulatory requirements, and maintaining our narrow underwriting requirements. We have improved the geographic distribution of our business, which is becoming more rate adequate.

Overview of 2024 Financial Results

In the following section, we discuss our financial condition and results of operations for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, including certain key performance indicators such as net combined ratio, ceded premium ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q.

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Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

Revenue

		For the Three Months Ended March 31,
(Unaudited)		2024				2023				$ Change				% Change
		(in thousands)
REVENUE:
Gross premiums written		$	356,684			$	310,309			$	46,375				14.9	%
Change in gross unearned premiums			(15,295	)			6,713				(22,008	)			(327.8	)%
Gross premiums earned			341,389				317,022				24,367				7.7	%
Ceded premiums			(161,963	)			(150,993	)			(10,970	)			7.3	%
Net premiums earned			179,426				166,029				13,397				8.1	%
Net investment income			8,551				5,582				2,969				53.2	%
Net realized gains			(1	)			1,898				(1,899	)			(100.0	)%
Other revenue			3,326				3,412				(86	)			(2.5	)%
Total revenue		$	191,302			$	176,921			$	14,381				8.1	%

 

Total revenue

Total revenue was $191.3 million, up 8.1% compared to $176.9 million in the prior year quarter. The increase primarily stems from higher net premiums earned and net investment income as described below.

 

Gross premiums written

Gross premiums written were $356.7 million, up 14.9% from $310.3 million in the prior year quarter, reflecting a strategic and substantial increase in Florida commercial residential lines business and a higher average premium per policy throughout all lines of business, partly offset by intentional targeted exposure management described above.

Premiums-in-force were $1.4 billion as of first quarter 2024, an increase of 6.2% compared to $1.3 billion as of first quarter 2023 due to continued proactive underwriting and rate actions as well as growth in commercial lines business, despite an intentional reduction of approximately 71,000 personal lines policies. Concurrently, TIV decreased by 4.7%.

Gross premiums earned

Gross premiums earned of $341.4 million were up 7.7% from $317.0 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy throughout most of the book of business, use of inflation guard, and organic growth of our commercial residential business.

Ceded premiums

Ceded premiums were $162.0 million in first quarter 2024, up 7.3% from $151.0 million in the prior year quarter. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program, which incepts June 1 each year, driven

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by an increase in TIV and higher reinsurance costs partly offset by a lower cost for our net quota share reinsurance associated with cession and associated premium volume changes.

Net premiums earned

Net premiums earned were $179.4 million in first quarter 2024, up 8.1% from $166.0 million in the prior year quarter. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums, as described above.

Net investment income

Net investment income was $8.6 million in first quarter 2024, compared to $5.6 million in the prior year quarter. The increase is primarily due to higher balances and higher yields from actions taken to align investments with the yield curve.

 

		For the Three Months Ended March 31,
(Unaudited)		2024				2023				$ Change				% Change
OPERATING EXPENSES:		(in thousands)
Losses and loss adjustment expenses			102,035				97,452				4,583				4.7	%
Policy acquisition costs			46,929				40,324				6,605				16.4	%
General and administrative expenses			19,634				19,054				580				3.0	%
Total operating expenses			168,598				156,830				11,768				7.5	%

 

Total operating expenses

Total operating expenses were $168.6 million in first quarter 2024, up 7.5% from $156.8 million in the prior year quarter. As described below, we experienced higher losses and LAE primarily related to weather, higher policy acquisition costs mostly driven by business volume, and higher general and administrative expenses related to software and systems related costs.

 

Losses and loss adjustment expenses (LAE)

Losses and loss adjustment expenses incurred were $102.0 million in first quarter 2024, up 4.7% from $97.5 million in the prior year quarter. The increase primarily stems from higher weather losses and adverse loss development, partly offset by lower attritional losses. Net weather losses for the current accident quarter were $18.4 million, an increase from $12.8 million in the prior year quarter. Catastrophe losses were $15.9 million compared to $5.0 million in the prior year quarter. Other weather losses totaled $2.5 million, a reduction from the prior year quarter amount of $7.8 million. Additionally, the net loss ratio experienced an impact from net unfavorable loss development of $6.7 million during the first quarter of 2024, compared to net favorable development of $1.5 million in the prior year quarter.

Policy acquisition costs

Policy acquisition costs were $46.9 million in first quarter 2024, up 16.4% from $40.3 million in the prior year quarter. The increase is primarily attributable to growth in gross premiums written and lower ceding commission earned on the net quota share reinsurance contract, the income of which offsets, or reduces, other policy acquisition costs. The reduction in ceding commission income is due to less written premium associated with the net quota share reinsurance program coupled with lower ceding commission associated with contracts in runoff in the prior year period which earned ceding commission.

General and administrative expenses

General and administrative expenses were $19.6 million in first quarter 2024, up 3.0% from $19.1 million in the prior year quarter. The increase was driven largely by higher general and administrative costs related to software and associated costs with the implementation of a new claims system aimed at driving future efficiencies, which was partly offset by the reversal of an over accrual from the prior year end. The Company’s implementation of enhanced and updated claims, policy, and billing systems is expected to achieve efficiencies and improve the timeliness and quality of data analytics used to drive underwriting income.

 

		For the Three Months Ended March 31,
(Unaudited)		2024				2023				$ Change				% Change
		(in thousands, except per share amounts)
Operating income			22,704				20,091				2,613				13.0	%
Interest expense, net			2,830				2,881				(51	)			(1.8	)%
Income before income taxes			19,874				17,210				2,664				15.4	%
Provision for income taxes			5,649				3,202				2,447				76.4	%
Net income		$	14,225			$	14,008			$	217				1.5	%
Basic earnings per share		$	0.47			$	0.55			$	(0.08	)			(14.6	)%
Diluted earnings per share		$	0.47			$	0.55			$	(0.08	)			(14.5	)%

 

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Net income

First quarter 2024 net income was $14.2 million or $0.47 per diluted share, compared to net income of $14.0 million or $0.55 per diluted share in the prior year quarter, primarily driven by an increase in net premiums earned, and higher net investment income, which is partly offset by higher operating expenses. Additionally, the decrease in earnings per share was influenced by a higher weighted average number of shares outstanding than the prior year quarter due to equity issuance and stock grants, net of forfeitures. The improvement in net income is attributable to the positive impact of rate actions, underwriting actions, and exposure management taken during 2023 and 2022, which favorably impacted results during first quarter 2024. These actions resulted in growth of 8.1% in net premiums earned; however we experienced a 4.7% increase in net losses and LAE, as described below. A 53.2% increase in net investment income resulted from taking advantage of higher short-term interest rates. Policy acquisition costs increased 16.4%, which is attributable to costs that vary with gross premiums written as well as a reduction in ceding commission income on the net quota share reinsurance contract. General and administrative costs increased 3.0% driven primarily by costs associated with software, including a new claims system as described below.

Interest expense, net

Interest expense, net was $2.9 million in the first quarter of 2024, flat from the prior year quarter.

Provision for income taxes

The provision for income taxes was $5.6 million in first quarter 2024 compared to $3.2 million in the prior year quarter. The reduction is driven primarily by a change in the effective tax rate. The effective tax rate was 28.4% compared to 18.6% in the prior year quarter. The effective tax rate for the prior year quarter includes the benefit from a downward adjustment of $1.7 million to the valuation allowance related to Osprey Re, which lowered the effective tax rate for that period. There was no benefit nor detriment associated with a valuation allowance in the current year quarter. The valuation allowance relates to certain tax elections made by Osprey Re, the Company’s captive reinsurer domiciled in Bermuda. We calculate the provision for income taxes during interim reporting periods by applying an estimate of the effective tax rate for the full year. Additionally, the effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

Ratios

		For the Three Months Ended March 31,
(Unaudited)		2024				2023
Ceded premium ratio			47.4	%			47.6	%
Net loss and LAE ratio			56.9	%			58.7	%
Net expense ratio			37.1	%			35.8	%
Net combined ratio			94.0	%			94.5	%

Net combined ratio

The net combined ratio was 94.0% in first quarter 2024, down 0.5 points from 94.5% in the prior year quarter. The decrease primarily stems from lower net loss and LAE and net expense ratios as described above.

Ceded premium ratio

The ceded premium ratio was 47.4% in first quarter 2024, down 0.2 points from 47.6% in the prior year quarter driven by growth in gross premiums earned which offset higher catastrophe excess of loss reinsurance costs.

Net loss and LAE ratio

The net loss and LAE ratio was 56.9% in first quarter 2024, down 1.8 points from 58.7% in the prior year quarter, reflecting higher net premiums earned which outpaced the increase in net losses and LAE as described above.

Net expense ratio

The net expense ratio was 37.1%, a 1.3 point increase from the prior year quarter amount of 35.8%, primarily due to a reduction in ceding commission income, as described above, which drove up policy acquisition costs.

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Financial Condition – March 31, 2024 compared to December 31, 2023

Cash and Cash Equivalents

At March 31, 2024, cash and cash equivalents decreased by $77.5 million to $386.1 million from $463.6 million at December 31, 2023. The decrease was a result of replacing shorter term investments with longer duration fixed income securities to lock in interest rates.

Fixed Maturity Securities

At March 31, 2024, fixed income securities increased by $83.5 million to $652.9 million from $569.4 million at December 31, 2023. As discussed above, the increase was a result of investing in longer duration fixed income securities to lock in interest rates.

Reinsurance Recoverable on Paid and Unpaid Claims

At March 31, 2024, reinsurance recoverable on paid and unpaid claims increased by $83.3 million to $565.7 million from $482.4 million at December 31, 2023. The increase is primarily due to increasing our ultimate losses related to Hurricane Ian claims during the quarter which generated additional reinsurance recoverable on unpaid claims.

Unpaid Losses and Loss Adjustment Expenses

At March 31, 2024, unpaid losses and loss adjustment expenses decreased by $2.3 million to $843.7 million from $846.0 million at December 31, 2023. The decrease is primarily due to payment of Hurricane Irma and Ian claims during first quarter 2024 which was partly offset by higher weather losses incurred during the first quarter.

Unearned Premiums

At March 31, 2024, unearned premiums increased by $15.3 million to $691.2 million from $675.9 million at December 31, 2023, driven by higher gross premiums written during first quarter 2024 than during fourth quarter 2023.

Total Shareholders’ Equity

At March 31, 2024, total shareholders’ equity increased by $14.7 million to $234.9 million from $220.3 million at December 31, 2023. The increase is primarily due to net income for the quarter ended March 31, 2024.

Liquidity and Capital Resources

Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our Credit Facilities. As of March 31, 2024, we had $386.1 million of cash and cash equivalents and $652.9 million in investments, compared to $463.6 million and $569.4 million, respectively, as of December 31, 2023. As described above, the decrease in cash and cash equivalents was primarily due to strategic investment of funds into longer duration fixed income securities to lock in current interest rates.

We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey Re, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates.

We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months.

We may increase capital expenditures consistent with our investment plans and anticipated business strategies. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes.

Cash Flows

		For the Three Months Ended March 31,
		2024				2023				Change
		(in thousands)
Net cash (used in) provided by:
Operating activities		$	4,308			$	14,946			$	(10,639	)
Investing activities			(83,295	)			36,525				(119,821	)
Financing activities			3,113				(2,379	)			5,492
Net (decrease) increase in cash and cash equivalents		$	(75,875	)		$	49,092			$	(124,967	)

 

Operating Activities

Net cash provided by operating activities was $4.3 million for the three months ended March 31, 2024 compared to net cash provided by operating activities of $14.9 million for the comparable period in 2023. The increase in cash from operating activities

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relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first three months of 2024 compared to the first three months of 2023.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 was $83.3 million as compared to net cash provided by investing activities of $36.5 million for the comparable period in 2023. The change in cash provided by investing activities relates primarily to the timing of investment maturities and use of proceeds and existing cash to invest in longer duration fixed income securities during the first quarter of 2024 to lock in current interest rates.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2024 was $3.1 million, as compared to cash used in financing activities of $2.4 million for the comparable period in 2023. The change in net cash from financing activities relates primarily to the proceeds from a January 2024 loan in the amount of $5.5 million to an insurance company subsidiary from the FHLB-DM.

Credit Facilities

The Company is party to a Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners (as amended from time to time, the “Credit Agreement”).

The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $50 million (inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of March 31, 2024 and December 31, 2023, there was $77.3 million and $79.6 million, respectively, in aggregate principal outstanding under the Term Loan Facility.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. At March 31, 2024 and December 31, 2023, the outstanding balance under the Revolving Credit facility was $10.0 million. At March 31, 2024, the Company had no outstanding letter of credits issued from the Revolving Credit Facility.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin (described below) and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin (described below).

The applicable margin for loans under the Credit Facilities varies from 2.75% per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for SOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of March 31, 2024, the borrowings under the Term Loan Facility and Revolving Credit Facility accruing interest at a rate of 8.171% and 8.176% per annum, respectively.

In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by our consolidated leverage ratio.

We may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of SOFR loans. In addition, we are required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).

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All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”).

The Company and the Guarantors are party to a Pledge and Security Agreement, (as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.

The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.

Convertible Notes

On August 10, 2017 and September 6, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $136.8 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017.

The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”).

The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.

Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.

During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately

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preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.

Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

At any time prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date.

The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Convertible Notes automatically become immediately due and payable.

As of March 31, 2024 and December 31, 2023, there was $885,000 principal amount of outstanding Convertible Notes, net of $21.1 million of Convertible Notes held by an insurance company subsidiary.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. On September 29, 2023, the Company restructured the December 2018 agreement to extend the maturity date to March 28, 2025, with a 5.109% fixed interest rate payable quarterly commencing on December 28, 2023. The subsidiary continues to be a member in the FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. As of March 31, 2024, the common stock was valued at $1.5 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan were used to prepay the Company’s Senior Secured Notes due 2023 in 2018.

In December 2018, our insurance subsidiary became a member of the FHLB-DM. Membership in the FHLB-DM required an investment in FHLB-DM’s common stock which was purchased in December 2018 and valued at $133,200. In January 2024, the insurance subsidiary of the Company received a 4.23% fixed interest rate cash loan of $5.5 million from the Federal Home Loan Bank (“FHLB-DM”) Des Moines. Additionally, the transaction required the acquired FHLB-DM common stock and certain other investments to be pledged as collateral. As of March 31, 2024, the fair value of the collateralized securities was $19.8 million and the equity investment in FHLB common stock was $295,500.

Critical Accounting Policies and Estimates

When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. We have made no material changes or additions with regard to those policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Recent Accounting Pronouncements

The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.032 years and 3.168 years at March 31, 2024 and 2023, and 2.67 years at December 31, 2023. As interest rates rise, the fair value of our fixed rate debt securities are subject to decline. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of March 31, 2024, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A, at fair value, consistent with the average rating at March 31, 2024.

We have not experienced a material impact when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our Annual Report on Form 10-K for the year ended December 31, 2023.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant changes to our internal control over financial reporting for the period ending March 31, 2024.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to routine legal proceedings in the ordinary course of business. We believe that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

The Company documented its risk factors in Item 1A of Part I of its Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024. There have been no material changes to the Company’s risk factors since the filing of that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 5. Other Information

Trading Arrangements

During the three months ended April 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits

The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q.

Index to Exhibits

 

3.1	Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014
3.2	By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014
4	Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL (included in Exhibit 101)

 

 

 

* Filed herewith

** Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	HERITAGE INSURANCE HOLDINGS, INC.
Date: May 8, 2024	By:		/s/ ERNESTO GARATEIX
			Ernesto Garateix
			Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)
Date: May 8, 2024	By:		/s/ KIRK LUSK
			Kirk Lusk
			Chief Financial Officer (Principal Financial Officer)

 

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