# Heritage Insurance Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Heritage Insurance Holdings, Inc.](/companies/hrtg.md) (CIK 1598665)
- Form: 10-Q
- Filed: 2024-05-08
- Accepted by EDGAR: May 8, 2024, 20:06 ET
- Period: 2024-03-31
- Accession: 0000950170-24-055619
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1598665/000095017024055619/hrtg-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1598665/000095017024055619/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $191.3m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $19.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $22.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $5.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $14.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 30,435,945 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $4.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $229.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $386.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-03-31 | $2.13bn | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $1.90bn | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $123.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-03-31 | $234.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,113 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, 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.

### 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.**
- Significant rating actions across the book of business have had a favorable impact, resulting in an increase in average premium per policy.
- Gross premiums earned increased 7.7% over the prior year quarter, driven by rate actions taken in 2022 and 2023 across the book of business, as well as growth in commercial residential business, which helps drive the higher average premium.
- Premiums-in-force of $1.4 billion are up 6.2% from the prior year quarter, driven primarily by growth in commercial residential business and rate increases throughout the book of business.
- Continued focus on timely rate actions, maintaining underwriting criteria, and managing new business written in over-concentrated markets or products.
- **Allocate capital to products and geographies that maximize long-term returns.**
- We selectively increased the commercial residential premium in force by 44.4% compared to the first quarter of 2023, while the TIV only increased by 11.8%. The commercial residential business, which tends to have a significantly lower attritional loss ratio, generates materially higher premiums. Commercial residential business accounts for 19.9% of the in-force premium, compared to 14.7% in the prior year period.
- As part of our exposure management strategy, we continue to grow our policy count in products and geographies which are profitable and reduce our policy count in unprofitable and over concentrated areas
- This disciplined underwriting approach resulted in a policy count reduction of just over 72,000 or 14.2% from first quarter 2023, while premium in force increased by $80.7 million or 6.2%.
- **Maintain a balanced and diversified portfolio.**
- Selective diversification of the portfolio by product and state, which can change based on market conditions, serves to reduce performance volatility.
- No state represents over 26.7% of the Company’s TIV.
- **Provide coverage suitable to the market and return targets.**
- Continuing to offer Excess & Surplus lines ("E&S") policies in California, Florida, and South Carolina. This product allows greater flexibility in product terms as well as speed to market. In-force premium for E&S business increased 182.5% quarter over quarter.
- Continuing to evaluate other states for E&S and other products.

### 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 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.

- 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.
- Gross premiums written of $356.7 million were up 14.9% from $310.3 million in the prior year quarter, reflecting a strategic and substantial organic increase in Florida commercial residential lines business and a higher average premium per policy throughout the book of business from rating actions and use of inflation guard, which ensures appropriate property values, mostly offset by targeted exposure management.
- Gross premiums earned was $341.4 million, up 7.7% from $317.0 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months as described above.
- Net premiums earned was $179.4 million, up 8.1% from $166.0 million in the prior year quarter, reflecting higher gross premium earned outpacing the increase in ceded premiums for the current year quarter.
- Losses and loss adjustment expenses ("LAE") incurred was $102.0 million, 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 first quarter of 2023.

- Ceded premium ratio was 47.4%, 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 was 56.9%, 1.8 points lower than the prior year quarter of 58.7%, driven by growth in net earned premium outpacing the increase in net losses and LAE incurred as described above.
- 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 which drove up policy acquisition costs.
- Net combined ratio was 94.0% improved 0.5 points from 94.5% in the prior year quarter, driven by a lower net loss ratio which was partly offset by a higher net expense ratio as described above.
- 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. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

### Results of Operations

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

### Revenue

*(Unaudited)*

*(in thousands)*

| REVENUE: | For the Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| 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 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.

*(Unaudited)*

*(in thousands)*

| OPERATING EXPENSES: | For the Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| 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.

*(Unaudited)*

*(in thousands, except per share amounts)*

|  | For the Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| **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)% |

27

#### 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

*(Unaudited)*

|  | For the Three Months Ended March 31, 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.

### 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

*(in thousands)*

| Net cash (used in) provided by: | For the Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| 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 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).

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 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.

## Market risk

As filed, 894 characters.

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.

## Controls and procedures

As filed, 1,436 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 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.

## 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, 2023 filed on March 13, 2024. There have been no material changes to the Company’s risk factors since the filing of that report.

Filed May 8, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-055619. Last ingested by Listed: Oct 24, 2026, 15:14 ET. No prices; not investment advice.