# Heritage Insurance Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Heritage Insurance Holdings, Inc.](/companies/hrtg.md) (CIK 1598665)
- Form: 10-Q
- Filed: 2023-08-09
- Accepted by EDGAR: Aug 9, 2023, 11:36 ET
- Period: 2023-06-30
- Accession: 0000950170-23-040144
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1598665/000095017023040144/hrtg-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1598665/000095017023040144/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $185.3m | us-gaap:Revenues |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $362.2m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $20.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $39.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $16.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $36.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $5.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $9.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $7.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $21.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.30 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.85 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.85 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 25,626,420 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 25,621,994 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $24.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $6.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $11.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $247.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $2.36bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $2.20bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $124.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $160.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 54,970 characters.

*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, 2022 (“2022 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 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. Additionally, we anticipate continued rising costs and constrained availability of catastrophe reinsurance. We mitigate these conditions by continued exposure management, implementation of increased rates and the use of inflation guard, which increases the insured value of a property to reflect the inflationary impact on costs to repair properties.

The table below provides policy count, premiums-in-force, and TIV for Florida and all other states as of June 30, 2023 and compares these metrics to the second quarter of 2022. One of our goals has been to reduce personal lines exposure in Florida, given historical abusive claims practices. Florida policies-in-force declined from the prior year quarter by 15.4% with a 17.8% increase in premiums-in-force, and a TIV increase of only 2.5%. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential business, rate increases across the book of business and use of inflation guard, partly offset by premium reductions associated with a nearly 16% reduction of our personal lines policies. The Florida TIV increase is similarly driven by strategic growth of our commercial residential portfolio as well as use of inflation guard across the book of business, partly offset by a Florida personal lines TIV decrease of 9.2%. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential business, rate increases across the book of business and use of inflation guard which ensures appropriate replacement cost values, partly offset by premium reductions associated with a nearly 16% reduction of our personal lines policies. Compared to the second quarter of 2022, premiums-in-force for markets outside of Florida increased 4.2%, while the policy count outside of Florida decreased 8.7% due to underwriting actions and intentional exposure management.

The Supplemental Information table demonstrates progress made compared to the second quarter 2022.

| Policies-in-force: | Q2 2023 | Q2 2022 | % Change |
| --- | ---: | ---: | ---: |
| Florida | 165,761 | 195,987 | (15.4)% |
| Other States | 323,629 | 354,534 | (8.7)% |
| **Total** | **489,390** | **550,521** | (11.1)% |
| **Premiums-in-force:** |  |  |  |
| Florida | $665,169,364 | $564,814,121 | 17.8% |
| Other States | 675,983,599 | 648,621,713 | 4.2% |
| **Total** | $1,341,152,963 | $1,213,435,834 | 10.5% |
| **Total Insured Value:** |  |  |  |
| Florida | $105,826,117,271 | $103,200,520,845 | 2.5% |
| Other States | 297,901,382,470 | 299,177,714,835 | (0.4)% |
| **Total** | $403,727,499,741 | **$402,378,235,680** | 0.3% |

### 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.

- **Generate underwriting profit through rate adequacy and more selective underwriting.**
- Continued significant rating actions throughout the book of business resulting in an increase in average premium per policy throughout the book of 24.3% compared to the second quarter of 2022 and 6.8% from the first quarter of 2023.
- Premiums-in-force were $1.3 billion up 10.5% from the prior year quarter, while policy count is down 11.1%, resulting from continued underwriting efforts to manage exposure for personal residential business while selectively growing the Company’s commercial residential business.
- Continued focus on tightening underwriting criteria while also restricting new business for policies written in over-concentrated markets or products.
- **Allocate capital to products and geographies that maximize long-term returns.**
- Strategically increased Florida commercial residential premiums-in-force by 75.5% over the prior year quarter while total insured value (“TIV”) for that product increased 35.3% and policies in force increased by only 12.7%.
- Reduction of policy count for the Florida personal lines product remains a key focus and will continue until the positive impact of recent legislation to reduce abusive claims practices is realized. Policies in force for Florida personal lines business intentionally declined by 15.8% as compared to the prior year period and 3.9% from the first quarter of 2023.
- This disciplined underwriting approach resulted in a policy count reduction from the prior year quarter of 11.1% while generating a 10.5% increase in premiums-in-force.
- **Maintain a balanced and diversified portfolio.**
- Even with the substantial increase in commercial business, no state represents over 26.2% of the Company's TIV.
- The top four states grew TIV by an average of 2.6% while the smallest five states grew TIV by 27.3%.
- As a result of diversification efforts, the top five personal lines states represented 71.6% of all TIV at second quarter 2023 compared to 72.5% of all TIV at second quarter 2022.
- Florida TIV increased 2.5% related to intentional growth of the Company’s commercial residential product and the use of inflation guard which ensures appropriate replacement cost values for all business, partly offset by the decrease in Florida personal lines policies over the prior year quarter.
- TIV outside of Florida represented 73.8% of the entire portfolio, compared to 74.4% as of the second quarter of 2022, driven by exposure management of personal lines business throughout the book and selective growth of Florida commercial lines business.
- **Provide coverage suitable to the market and return targets.**
- Continued expansion of Excess & Surplus lines (“E&S”) premium-in-force in California and Florida.
- Introduce E&S products in South Carolina during third quarter of 2023.
- Continue to evaluate other strategic states for E&S products.

### Reinsurance Commutation

As further described in Note 17, Commitments and Contingencies, to the condensed consolidated financial statements, our 2017 reinsurance agreement with the FHCF requires a commutation no later than 60 months after the end of the contract year, which commutation process began in June 2023. As part of this process, Heritage and FHCF will terminate the 2017 reinsurance agreement and agree on the amount that FHCF will be required to pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process will ultimately result in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma, with the potential for payment by the FHCF to Heritage of a larger or lesser amount than would otherwise have been the FHCF’s responsibility if the commutation were not required by Florida statutes and the contract terms. The commutation process began in June 2023 but has not yet been completed, and the Company cannot predict whether the loss estimates determined by Heritage and the loss estimates determined by the FHCF will differ. As such, there is no assurance that the reported reinsurance recoverable for Hurricane Irma losses from the FHCF will differ from the final amount that will be paid by the FHCF. Further, social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims could result in adverse development of these claims which, create uncertainty as to the ultimate cost to settle of all the remaining Hurricane Irma claims. Accordingly, the final amount that will be paid by the FHCF could vary from the

Company’s current or future estimation of losses to be recovered from the FHCF. The commutation process will be final and binding on both parties once complete.

### Overview of 2023 Financial Results

In the following section, we discuss our financial condition and results of operations for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, 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.

- Net income for the three months ended June 30, 2023 was $7.8 million or $0.30 per diluted share, compared to a net loss of $87.9 million or ($3.32) per diluted share in the prior year quarter. The variance from the prior year quarter is due to higher net earned premium and net investment income partly offset by higher operating expenses, primarily associated with the increase in gross premiums written from the prior year quarter as well as a net $90.8 million, non-cash goodwill impairment charge reported in the second quarter of 2022, which amounted to a $3.43 loss per share.
- Gross premiums written were $396.6 million, up 8.6% from $365.3 million in the prior year quarter, reflecting a strategic and substantial increase in Florida commercial lines business and higher average premium per policy throughout the book of business, partly offset by intentional exposure management related to premium reductions in business outside of Florida of 3.6%. Gross premium written for Florida personal lines business increased 3.0% due to rate increases, despite a 16.6% reduction in policy count from the prior year quarter.
- Gross premiums earned were $330.0 million, up 11.4% from $296.2 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy and organic growth of the commercial residential business.
- Net premiums earned were $176.8 million, up 11.7% from $158.3 million in the prior year quarter, reflecting higher gross premium earned outpacing the increase in ceded premiums for the quarter.
- Losses and loss adjustment expenses ("LAE") incurred were $106.6 million, up 5% from $101.5 million in the prior year quarter. The increase primarily stems from higher attritional losses, partly offset by lower weather losses compared to the prior year quarter. Net current accident year weather losses of $33.8 million, down from $38.1 million in the prior year quarter. There were no catastrophe losses in the quarter compared to catastrophe weather losses of $32.1 million in the prior year quarter. Other weather losses were $33.8 million, up from $6.0 million in the prior year quarter. The net loss ratio also benefited from favorable loss development of $2.7 million compared to unfavorable development in the second quarter of 2022 of $82,000.
- Ceded premium ratio was 46.4%, down 0.2 points from 46.6% in the prior year quarter driven by higher gross premiums earned, partly offset by the higher cost each year of the catastrophe excess of loss program, which incepts in June.
- Net loss and LAE ratio was 60.3%, 3.8 points lower than the prior year quarter of 64.1%, driven by higher net premiums earned, partly offset by higher net losses and LAE as described above.
- The net expense ratio was 34.8% in second quarter 2023, down 0.5 points from the prior year quarter amount of 35.3%, as the benefit of higher net premiums earned over the prior year quarter more than offset higher policy acquisition costs and general and administrative costs.
- Net combined ratio was 95.1%, down 4.3 points from 99.4% in the prior year quarter, driven by lower net loss and net expense ratios as described above.
- Effective tax rate was 43.0% compared to (0.6%) in the prior year quarter, driven by the impact of permanent differences in relation to the pre-tax income or loss each quarter. The effective tax rate in second quarter 2023 was impacted by a valuation allowance related to certain tax elections made by Osprey Re, the Company’s captive reinsurer domiciled in Bermuda. The Company increased its valuation allowance from first quarter 2023 by $2.5 million, adversely impacting the effective tax rate for the quarter. The effective tax rate in second quarter 2022 was impacted by the mostly non-deductible goodwill impairment charge.

### Results of Operations

### Comparison of the Three Months Ended June 30, 2023 and 2022

*(Unaudited)*

*(In thousands)*

| REVENUE: | For the Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Gross premiums written | $396,559 | $365,284 | $31,274 | 8.6% |
| Change in gross unearned premiums | (66,544) | (69,073) | 2,528 | (3.7)% |
| Gross premiums earned | 330,015 | 296,211 | 33,803 | 11.4% |
| Ceded premiums | (153,211) | (137,940) | (15,271) | 11.1% |
| Net premiums earned | 176,804 | 158,270 | 18,532 | 11.7% |
| Net investment income | 6,599 | 2,163 | 4,436 | 205.0% |
| Net realized gains | (1,568) | (102) | (1,466) | NM |
| Other revenue | 3,478 | 3,438 | 39 | 1.1% |
| **Total revenue** | $185,313 | $163,770 | $21,541 | 13.2% |

NM= Not Meaningful

#### Gross premiums written

Gross premiums written were $396.6 million in second quarter 2023, up 8.6% from $365.3 million in the prior year quarter, reflecting a strategic and substantial increase in Florida commercial lines business and higher average premium per policy throughout the book of business, partly offset by intentional exposure management related reductions of business outside of Florida by 3.6%. Gross premiums written for Florida personal lines business increased 3.0% due to rate increases, despite a 16.6% reduction in policy count from the prior year quarter.

Premiums-in-force was $1.3 billion as of June 30, 2023, representing a 10.5% increase from second quarter 2022, primarily due to continued proactive underwriting and rate actions, despite a policy count reduction of approximately 61,000 policies. In addition, our intentional growth of the Company’s commercial product, and use of inflation guard throughout the book of business, favorably impacted premiums-in-force. Concurrently, TIV was relatively flat with an increase of only 0.3%.

#### Gross premiums earned

Gross premiums earned were $330.00 million in second quarter 2023 up 11.4% from $296.2 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy, use of inflation guard, and organic growth in our commercial residential business.

#### Ceded premiums

Ceded premiums were $153.2 million in second quarter 2023, up 11.1% from $137.9 million in the prior year quarter. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program driven by a modest increase in TIV and significantly higher reinsurance costs for the respective reinsurance contract periods, as well as a larger ceded premium for our net quota share reinsurance associated with premium growth in the northeast.

#### Net premiums earned

Net premiums earned were $176.8 million in second quarter 2023, up 11.7% from $158.3 million in the prior year quarter. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums, as described above.

#### Net investment income

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $5.0 million in second quarter 2023, compared to $2.1 million in the prior year quarter. The increase is primarily due to higher yields on cash and invested assets associated with higher interest rates, partly offset by an impairment on other investments.

#### Other revenue

Other revenue was $3.5 million in second quarter 2023, relatively flat compared to the prior year quarter.

#### Total revenue

Total revenue was $185.3 million in second quarter 2023, up 13.2% from $163.8 million in the prior year quarter. The increase primarily stems from higher net premiums earned and net investment income as described above.

*(Unaudited)*

*(In thousands)*

| OPERATING EXPENSES: | For the Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Losses and loss adjustment expenses | 106,646 | 101,522 | 5,124 | 5.0% |
| Policy acquisition costs | 41,451 | 38,375 | 3,077 | 8.0% |
| General and administrative expenses | 20,058 | 17,466 | 2,593 | 14.8% |
| Goodwill and intangible asset impairment | 767 | 91,959 | (91,193) | (99.2)% |
| Total operating expenses | 168,922 | 249,322 | (80,399) | (32.2)% |

#### Losses and loss adjustment expenses

Losses and LAE were $106.7 million in second quarter 2023, up 5.0% from $101.5 million in the prior year quarter. The increase stems from higher attritional losses, partly offset by lower net weather losses, as described above. Additionally, we experienced $2.7 million of favorable prior year development compared to $82,000 of unfavorable prior year development in the prior year quarter. Refer to **Note 17,** *Commitments and Contingencies*, to the condensed consolidated financial statements for discussion related to the upcoming commutation of our 2017 reinsurance contract with the FHCF.

#### Policy acquisition costs

Policy acquisition costs were $41.5 million in second quarter 2023, up 8.0% from $38.4 million in the prior year quarter. The increase is primarily attributable to acquisition costs associated with growth in gross premiums written and is partly offset by higher ceding commission income.

#### General and administrative expenses

General and administrative expenses were $20.1 million in second quarter 2023, up 14.8% from the prior year quarter. The increase was driven primarily by increased human capital and software costs.

#### Impairment of Named Intangibles and Goodwill

During the three months ended June 30, 2023, certain brand and customer relations within the Company's restoration provider with a net value of $766,600 were impaired due to the discontinuation of providing restoration services to our policyholders. During the three months ended June 30, 2022, as a result of a goodwill impairment analysis, the entire amount of remaining goodwill was impaired, reducing our carrying value of goodwill from $92.0 million to $0.

*(Unaudited)*

*(In thousands, except per share amounts)*

|  | For the Three Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| **Operating income (loss)** | 16,391 | (85,552) | 101,943 | (119.2)% |
| Interest expense, net | 2,740 | 1,751 | 989 | 56.5% |
| Income (loss) before income taxes | 13,651 | (87,303) | 100,954 | (115.6)% |
| Provision for income taxes | 5,872 | 563 | 5,309 | NM |
| **Net income (loss)** | $7,779 | $(87,866) | $95,645 | (108.9)% |
| Basic earnings (loss) per share | $0.30 | $(3.32) | $3.63 | (109.2)% |
| Diluted earnings (loss) per share | $0.30 | $(3.32) | $3.63 | (109.1)% |

NM -Not meaningful

#### Net income (loss)

Second quarter 2023 net income was $7.8 million ($0.30 earnings per share), up from net loss of $87.9 million or ($3.32 loss per share) in the prior year quarter. The quarter-over-quarter change primarily stems from the goodwill impairment in the prior year quarter as described above as well as higher underwriting income in the current year quarter driven by higher rates and investment income and a lower loss ratio, as described below.

#### Interest expense, net

Interest expense, net was $2.7 million in the second quarter of 2023, up 56.5% from the prior year quarter and driven by higher variable interest rates on our debt.

#### Provision for income taxes

The provision for income taxes was $5.9 million in second quarter 2023 compared to $563,000 in the prior year quarter. The effective tax rate for second quarter 2023 was 43.0% compared to (0.6%) in the prior year quarter. The effective tax rate in second quarter 2023 was impacted by a valuation allowance related to certain tax elections made by Osprey Re, the Company’s captive reinsurer domiciled in Bermuda, which caused an increase in the effective tax rate. The Company increased its valuation allowance from first quarter 2023 by $2.5 million, adversely impacting the effective tax rate for the quarter. The effective tax rate in second quarter 2022 was impacted by the mostly non-deductible goodwill impairment charge described above. The impact of permanent tax differences on projected results of operations for the calendar year impacts the effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

### Ratios

*(Unaudited)*

|  | For the Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Ceded premium ratio | 46.4% | 46.6% |
| Net loss and LAE ratio | 60.3% | 64.1% |
| Net expense ratio | 34.8% | 35.3% |
| Net combined ratio | 95.1% | 99.4% |

#### Net combined ratio

The net combined ratio was 95.1% in second quarter 2023, down 4.3 points from 99.4% in the prior year quarter. The decrease primarily stems from lower net loss and LAE and net expense ratios as described below.

#### Ceded premium ratio

The ceded premium ratio was 46.4% in second quarter 2023, down 0.2 points from 46.6% in the prior year quarter driven by a higher cost of the 2023-2024 and 2022-2023 catastrophe excess of loss programs and net quota share program, as described above, partly offset by higher gross premiums earned.

#### Net loss and LAE ratio

The net loss and LAE ratio was 60.3%, 3.8 points lower than the prior year quarter of 64.1%, driven by higher net premiums earned, partly offset by higher net losses and LAE driven by higher attritional losses, net of lower weather losses.

#### Net expense ratio

The net expense ratio was 34.8%, down 0.5 points from the prior year quarter amount of 35.3%, as higher policy acquisition costs resulting from the increase in gross premiums written as well as higher general and administrative costs, driven by increased human capital and software costs, were more than offset by the benefit of higher net premiums earned over the prior year quarter.

### Comparison of the Six Months Ended June 30, 2023 and 2022

*(Unaudited)*

*(In thousands)*

| REVENUE: | For the Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Gross premiums written | $706,868 | $648,480 | $58,387 | 9.0% |
| Change in gross unearned premiums | (59,831) | (64,901) | 5,069 | (7.8)% |
| Gross premiums earned | 647,037 | 583,579 | 63,456 | 10.9% |
| Ceded premiums | (304,204) | (272,379) | (31,825) | 11.7% |
| Net premiums earned | 342,833 | 311,200 | 31,631 | 10.2% |
| Net investment income | 12,181 | 4,163 | 8,018 | 192.6% |
| Net realized gains | 330 | (118) | 448 | (379.9)% |
| Other revenue | 6,890 | 7,133 | (243) | (3.4)% |
| **Total revenue** | $362,234 | $322,378 | $39,854 | 12.4% |

#### Total revenue

Total revenue was $362.2 million for the six months ended June 30, 2023, up 12.4% from $322.4 million in the prior year period. The increase primarily stems from higher net premiums earned and net investment income, as described below.

#### Gross premiums written

Gross premiums written were $706.9 million for the six months ended June 30, 2023, up 9.0% from $648.5 million in the prior period, reflecting a strategic and substantial increase in Florida commercial lines business and higher average premium per policy throughout the book of business, partly offset by intentional exposure management related reductions on personal lines business throughout most states.

Premiums-in-force was $1.3 billion as of June 30, 2023, representing a 10.5% increase from second quarter 2022, primarily due to continued proactive underwriting and rate actions, despite a policy count reduction of approximately 61,000 policies. In addition, our intentional growth of the Company’s commercial product, and use of inflation guard throughout the book of business, favorably impacted premiums-in-force. Concurrently, TIV was relatively flat with an increase of only 0.3%.

#### Gross premiums earned

Gross premiums earned were $647.0 million for the six months ended June 30, 2023, up 10.9% from $583.6 million in the prior year period. The increase reflects higher gross premiums written over the preceding twelve months.

#### Ceded premiums earned

Ceded premiums earned were $304.2 million for the six months ended June 30, 2023, up 11.7% from $272.4 million in the prior year period. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program driven by a modest increase in TIV and significantly higher reinsurance costs for the respective reinsurance contract periods as well as a larger ceded premium for our net quota share reinsurance associated with premium growth in the northeast.

#### Net premiums earned

Net premiums earned were $342.8 million for the six months ended June 30, 2023, up 10.2% from $311.2 million in the prior year period. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums earned, as described above.

#### Net investment income

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $12.5 million for the six months ended June 30, 2023, compared to $4.0 million in the prior year period. The increase is primarily due to higher yields on cash and invested assets associated with higher interest rates.

#### Other revenue

Other revenue was $6.9 million for the six months ended June 30, 2023, down 3.4% from $7.1 million in the prior year period, driven primarily by a decline in policy fee income associated with the reduction of policies in force.

*(Unaudited)*

*(In thousands)*

| OPERATING EXPENSES: | For the Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Losses and loss adjustment expenses | 204,098 | 241,560 | (37,461) | (15.5)% |
| Policy acquisition costs | 81,776 | 76,632 | 5,144 | 6.7% |
| General and administrative expenses | 39,111 | 37,190 | 1,921 | 5.2% |
| Goodwill and intangible asset impairment | 767 | 91,959 | (91,193) | (99.2)% |
| Total operating expenses | 325,752 | 447,341 | (121,589) | (27.2)% |

#### Total operating expenses

Total operating expenses were $325.8 million for the six months ended June 30, 2023, down 27.2% from $447.3 million in the prior year period, primarily due to the previously mentioned $92.0 million goodwill impairment charge taken in the prior year period, and a $37.5 million decrease in losses and loss adjustment expenses detailed below.

#### Losses and loss adjustment expenses

Losses and LAE were $204.1 million for the six months ended June 30, 2023, down 15.5% from $241.6 million in the prior year period driven by significantly lower net weather losses. Net current accident year weather losses were $46.9 million, down 54.0% from $101.9 million in the prior year period. Current accident year weather losses include $5.0 million of net current accident year catastrophe losses, down from $77.2 million in the prior year period, and $41.6 million of other weather losses, up from $24.7 million in the prior year period. Additionally, we experienced $4.2 million of favorable prior year development compared to $2.5 million of unfavorable prior year development in the prior year period.

#### Policy acquisition costs

Policy acquisition costs were $81.8 million for the six months ended June 30, 2023, up 6.7% from $76.6 million in the prior year period. The increase is primarily attributable to acquisition costs associated with growth in gross premiums written.

#### General and administrative expenses

General and administrative expenses were $39.1 million for the six months ended June 30, 2023, up 5.2% from $37.2 million in the prior year period. The increase was driven primarily by increased human capital and software costs.

#### Impairment of Named Intangibles and Goodwill

During the six months ended June 30, 2023, certain brand and customer relations with a net value of $766,600 within the Company's restoration provider were impaired due to the discontinuation of providing restoration services to our policyholders. During the six months ended June 30, 2022, as a result of a goodwill impairment analysis, the entire amount of remaining goodwill was impaired, reducing our carrying value of goodwill from $92.0 million to $0.

*(Unaudited)*

*(In thousands, except per share amounts)*

|  | For the Six Months Ended June 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| **Operating income (loss)** | 36,482 | (124,963) | 161,445 | (129.2)% |
| Interest expense, net | 5,621 | 3,723 | 1,898 | 51.0% |
| Income (loss) before income taxes | 30,861 | (128,686) | 159,547 | (124.0)% |
| Provision (benefit) for income taxes | 9,074 | (10,061) | 19,135 | (190.2)% |
| **Net income (loss)** | $21,787 | $(118,625) | $140,412 | (118.4)% |
| Basic earnings (loss) per share | $0.85 | $(4.46) | $5.31 | (147.8)% |
| Diluted earnings (loss) per share | $0.85 | $(4.46) | $5.31 | (147.8)% |

#### Net income (loss)

Net income for the six months ended June 30, 2023 was $21.8 million ($0.85 earnings per share), compared to a net loss of $118.6 million ($4.46 loss per share) in the prior year period. The year-over-year change primarily stems from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge (contributing a $3.41 loss per share) and an underwriting loss driven by a higher net loss ratio in the prior year period, compared to underwriting income in the current year period driven by higher rates and investment income and lower weather losses, as described above.

#### Interest expense, net

Net interest expense was $5.6 million for the six months ended June 30, 2023, up from the prior year period, driven by higher variable interest rates on our debt.

#### Provision (benefit) for income taxes

The provision for income taxes was $9.1 million for the six months ended June 30, 2023 compared to a benefit for income taxes of $10.1 million in the prior year period. The effective tax rate was 29.4% for the six months ended June 30, 2023 compared to 7.8% for the prior year period. The effective tax rate for the six months ended June 30, 2023 was impacted by a valuation allowance related to certain tax elections made by Osprey Re, the Company’s captive reinsurer domiciled in Bermuda, which caused an increase in the effective tax rate. The effective tax rate for the six months ended June 30, 2022 was impacted by the mostly non-deductible goodwill impairment charge described above. The impact of permanent tax differences on projected results of operations for the calendar year impacts the effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

### Ratios

*(Unaudited)*

|  | For the Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Ceded premium ratio | 47.0% | 46.7% |
| Net loss and LAE ratio | 59.5% | 77.6% |
| Net expense ratio | 35.3% | 36.6% |
| Net combined ratio | 94.8% | 114.2% |

32

#### Net combined ratio

The net combined ratio was 94.8% for the six months ended June 30, 2023, down 19.4 points from 114.2% in the prior year period. The decrease primarily stems from lower net loss and LAE and net expense ratios as described below.

#### Ceded premium ratio

The ceded premium ratio was 47.0% for the six months ended June 30, 2023, up 0.3 points from 46.7% in the prior year period, reflecting the growth in gross premiums earned outpacing the growth in ceded premiums earned as described above.

#### Net loss and LAE ratio

The net loss and LAE ratio was 59.5% for the six months ended June 30, 2023, down 18.1 points from 77.6% in the prior year period, driven by higher net premiums earned and significantly lower weather losses compared to the prior year period.

#### Net expense ratio

The net expense ratio was 35.3% for the six months ended June 30, 2023, down 1.3 points from 36.6% in the prior year period, driven by the benefit of higher net earned premium.

### 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. At June 30, 2023, we had $256.8 million of cash and cash equivalents and $708.3 million in investments, compared to $287.6 million and $653.6 million, respectively, as of December 31, 2022. The decrease in cash and cash equivalents was primarily due to strategic investment of proceeds from investment maturities and operating cash into short term treasury bills to achieve a higher yield without increasing credit risk, and to increase liquidity.

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

*(In thousands)*

| Net cash provided by (used in): | For the Six Months Ended June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $24,119 | $(47,535) | $71,654 |
| Investing activities | (50,100) | (14,046) | (36,054) |
| Financing activities | (4,821) | (6,823) | 2,002 |
| Net increase (decrease) in cash and cash equivalents | $(30,802) | $(68,404) | $37,602 |

### Operating Activities

Net cash provided by operating activities was $24.1 million for the six months ended June 30, 2023 compared to net cash used in operating activities of $47.6 million for the comparable period in 2022. The increase in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first six months of 2023 compared to the first six months of 2022.

### Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 was $50.1 million as compared to net cash used in investing activities of $14.0 million for the comparable period in 2022. The change in cash used in investing activities relates primarily to the timing of investment maturities and related re-investment of proceeds and operating cash into short-term treasury bills.

### Financing Activities

Net cash used in financing activities for the six months ended June 30, 2023 was $4.8 million, as compared to cash used in financing activities of $6.8 million for the comparable period in 2022. The change in net cash used in financing activities relates primarily to the principal payments made on debt during the six months ended June 30, 2023, the repurchase of $5 million in treasury stock, and a $15 million draw from our Revolving Credit Facility (defined below) to purchase and retire $11.7 million of Convertible Notes (defined below), as described in Note 14 to the condensed consolidated financial statements, during the six months ended June 30, 2022 partly offset by higher interest.

### 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 June 30, 2023, there was $84.4 million 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. As of June 30, 2023, the Company had drawn $10.0 million under the Revolving Credit Facility and had unused letter of credit of $10.0 million.

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 June 30, 2023, the borrowings under the Term Loan Facility and Revolving Credit Facility are accruing interest at a rate of 7.905% and 7.948% 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).

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

The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022.

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

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.

In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of June 30, 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.

As discussed above, holders of the Convertible Notes issued by the Company had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase the aggregate principal amount of Convertible Notes that are validly tendered. The Company received notice from the Depository for the Convertible Notes that, on July 29, 2022, $10.9 million aggregate principal amount of the Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, and the Company has requested that the Trustee cancel the Convertible Notes tendered. The outstanding balance as of June 30, 2023 of non-affiliated Notes was $885,000. On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million from the Revolving Credit Facility to replenish the cash used to pay the $10.9 million for the purchase of the tendered Convertible Notes.

### FHLB Loan Agreements

In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $24.3 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of the FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. As of June 30, 2023, the common stock was valued at $1.2 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.

### 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, 2022.

### 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.

## Market risk

As filed, 892 characters.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 2.55 years and 3.758 years at June 30, 2023 and 2022, and 3.179 years at December 31, 2022. 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 June 30, 2023, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at June 30, 2022.

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, 2022.

## Controls and procedures

As filed, 1,434 characters.

### 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 June 30, 2023.

### 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 June 30, 2023.

## Risk factors

As filed, 255 characters.

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, 2022 filed on March 13, 2023. There have been no material changes to the Company’s risk factors since the filing of that report.

Filed Aug 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-040144. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.