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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
________________________________________________________
Form 10-Q
________________________________________________________
| | | | | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
| | | | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
001-36462
________________________________________________________
Heritage Insurance Holdings, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________________
| | | | | | | | |
| Delaware | | 45-5338504 |
| (State of Incorporation) | | (IRS Employer Identification No.) |
1401 N. Westshore Blvd
Tampa, FL 33607
(Address, including zip code, of principal executive offices)
(727) 362-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.0001 per share | HRTG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
| Large accelerated filer | o | Accelerated filer | x | Emerging growth company | o |
| Non-accelerated filer | o | Smaller reporting company | x | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate number of shares of the Registrant’s Common Stock outstanding on November 1, 2024 was 30,684,198.
HERITAGE INSURANCE HOLDINGS, INC.
Table of Contents
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements, expectations or beliefs regarding: (i) our core strategy and ability to fully execute our business plan; (ii) our strategic initiatives, including our controlled growth strategy and focus on rate adequacy and selective underwriting, and their impact on shareholder value; (iii) projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; (iv) management’s goals and objectives, including intentions to pursue certain business, including business in Florida, and the handling of certain claims; (v) our intention to leverage our existing sales and marketing teams; (vi) projections of financial items; (vii) the supply of catastrophe reinsurance and its costs; (viii) assumptions underlying statements regarding us and our business; (ix) claims and related expenses, and our reinsurers’ obligations; (x) pending legal proceedings and their effect on our financial position; (xi) future impact of prior strategic policy count reductions; (xii) the impact of legislative changes on our business; and (xiii) other similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included throughout this filing and particularly in Item 1A: "Risk Factors" set forth in our 2023 Annual Report on Form 10-K and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in this quarterly report on Form 10-Q. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to revise or publicly release any revision to any such forward-looking statement, except as may otherwise be required by law.
These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:
•the possibility that actual losses may exceed reserves, which are based on estimates;
•the concentration of our business in coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms;
•our exposure to catastrophic weather events;
•our failure to adequately assess and price the risks we underwrite;
•the fluctuation in our results of operations, including as a result of factors outside of our control;
•increased costs of reinsurance, non-availability of reinsurance, non-collectability of reinsurance and our ability to obtain reinsurance on terms and at a cost acceptable to us;
•inherent uncertainty of our models and our reliance on such models as a tool to evaluate risk;
•increased competition, competitive pressures, industry developments and market conditions;
•continued and increased impact of abusive and unwarranted claims;
•our inability to effectively manage our growth and integrate acquired companies;
•our failure to execute our diversification strategy;
•our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents;
•the failure of our claims department to effectively manage or remediate claims;
•the failure of policy renewals to meet our expectations;
•our inability to maintain our financial stability rating;
•our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business;
•our inability to generate investment income;
•effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;
•the failure of our risk mitigation strategies or loss limitation methods;
•lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write;
•the regulation of our insurance operations;
•changes in regulations and our failure to meet increased regulatory requirements, including minimum capital and surplus requirements;
•climate change, health crisis, severe weather conditions and other catastrophe events;
•litigation or regulatory actions;
•regulation limiting rate increases or that require us to participate in loss sharing or assessments;
•the terms of our indebtedness, including restrictions that limit our flexibility in operating our business, and our inability to comply with the financial and other covenants of our debt facilities;
•our ability to maintain effective internal controls over financial reporting;
•certain characteristics of our common stock;
•failure of our information technology systems or those of our key service providers and unsuccessful development and implementation of new technologies;
•a lack of redundancy in our operations; and
•our failure to attract and retain qualified employees and independent agents or our loss of key personnel.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrences of anticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in the forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share and share amounts)
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| ASSETS | (unaudited) | | |
Fixed maturities, available-for-sale, at fair value (amortized cost of $697,367 and $606,646) | $ | 671,761 | | | $ | 560,682 | |
Equity securities, at fair value, (cost $1,936 and $1,666) | 1,936 | | | 1,666 | |
| Other investments, net | 6,747 | | | 7,067 | |
| Total investments | 680,444 | | | 569,415 | |
| Cash and cash equivalents | 509,918 | | | 463,640 | |
| Restricted cash | 10,980 | | | 9,699 | |
| Accrued investment income | 5,230 | | | 4,068 | |
| Premiums receivable, net | 86,570 | | | 89,490 | |
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $197 | 441,579 | | | 482,429 | |
| Prepaid reinsurance premiums | 401,022 | | | 294,222 | |
| Income tax receivable | 8,743 | | | 13,354 | |
| Deferred income tax assets, net | 11,028 | | | 11,111 | |
| Deferred policy acquisition costs, net | 109,441 | | | 102,884 | |
| Property and equipment, net | 36,789 | | | 33,218 | |
| Right-of-use lease asset, finance | 15,708 | | | 17,606 | |
| Right-of-use lease asset, operating | 6,057 | | | 6,835 | |
| Intangibles, net | 37,918 | | | 42,555 | |
| Other assets | 12,961 | | | 12,674 | |
| Total Assets | $ | 2,374,388 | | | $ | 2,153,200 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Unpaid losses and loss adjustment expenses | $ | 775,468 | | | $ | 845,955 | |
| Unearned premiums | 724,426 | | | 675,921 | |
| Reinsurance payable | 344,486 | | | 159,823 | |
| Long-term debt, net | 118,551 | | | 119,732 | |
| Advance premiums | 27,936 | | | 23,900 | |
| Accrued compensation | 7,312 | | | 9,461 | |
| Lease liability, finance | 18,669 | | | 20,386 | |
| Lease liability, operating | 7,192 | | | 8,076 | |
| Accounts payable and other liabilities | 71,004 | | | 69,666 | |
| Total Liabilities | $ | 2,095,044 | | | $ | 1,932,920 | |
| | | |
| Commitments and contingencies (Note 17) | | | |
| Stockholders’ Equity: | | | |
Common stock, $0.0001 par value, 50,000,000 shares authorized, 42,915,872 shares issued and 30,684,198 outstanding at September 30, 2024 and 42,450,612 shares issued and 30,218,938 outstanding at December 31, 2023 | 3 | | | 3 | |
| Additional paid-in capital | 362,609 | | | 360,310 | |
| Accumulated other comprehensive loss, net of taxes | (19,731) | | | (35,250) | |
Treasury stock, at cost, 12,231,674 shares at each September 30, 2024 and December 31, 2023 | (130,900) | | | (130,900) | |
| Retained earnings | 67,363 | | | 26,117 | |
| Total Stockholders' Equity | 279,344 | | | 220,280 | |
| Total Liabilities and Stockholders' Equity | $ | 2,374,388 | | | $ | 2,153,200 | |
See accompanying notes to unaudited condensed consolidated financial statements.
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands, except per share and share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
September 30, | | For the Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| REVENUES: | | | | | | | |
| Gross premiums written | $ | 312,986 | | | $ | 309,510 | | | $ | 1,094,200 | | | $ | 1,016,378 | |
| Change in gross unearned premiums | 41,211 | | | 27,466 | | | (48,542) | | | (32,366) | |
| Gross premiums earned | 354,197 | | | 336,976 | | | 1,045,658 | | | 984,012 | |
| Ceded premiums | (155,356) | | | (160,335) | | | (477,076) | | | (464,539) | |
| Net premiums earned | 198,841 | | | 176,641 | | | 568,582 | | | 519,473 | |
| Net investment income | 9,801 | | | 6,867 | | | 28,121 | | | 19,048 | |
| Net realized gains (losses) and impairment | 6 | | | (379) | | | 17 | | | (49) | |
| Other revenue | 3,201 | | | 3,171 | | | 10,001 | | | 10,060 | |
| Total revenues | 211,849 | | | 186,300 | | | 606,721 | | | 548,532 | |
| EXPENSES: | | | | | | | |
| Losses and loss adjustment expenses | 130,020 | | | 131,397 | | | 337,983 | | | 335,495 | |
Policy acquisition costs, net of ceding commission income(1) | 48,508 | | | 42,427 | | | 142,661 | | | 124,202 | |
General and administrative expenses, net of ceding commission income(2) | 21,572 | | | 21,911 | | | 63,985 | | | 61,022 | |
| Intangible asset impairment | — | | | — | | | — | | | 767 | |
| Total expenses | 200,100 | | | 195,735 | | | 544,629 | | | 521,486 | |
| Operating income (loss) | 11,749 | | | (9,435) | | | 62,092 | | | 27,046 | |
| Interest expense, net | 2,755 | | | 2,591 | | | 8,365 | | | 8,211 | |
| Income (loss) before income taxes | 8,994 | | | (12,026) | | | 53,727 | | | 18,835 | |
| Provision (benefit) for income taxes | 842 | | | (4,602) | | | 12,481 | | | 4,472 | |
| Net income (loss) | $ | 8,152 | | | $ | (7,424) | | | $ | 41,246 | | | $ | 14,363 | |
| OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
| Change in net unrealized gains (losses) on investments | 19,711 | | | (4,494) | | | 20,353 | | | 4,664 | |
| Reclassification adjustment for net realized investment (gains) losses | (6) | | | 379 | | | (17) | | | 390 | |
| Income tax (expense) benefit related to items of other comprehensive income | (4,666) | | | 970 | | | (4,816) | | | (1,188) | |
| Total comprehensive income (loss) | $ | 23,191 | | | $ | (10,569) | | | $ | 56,766 | | | $ | 18,229 | |
| Weighted average shares outstanding | | | | | | | |
| Basic | 30,684,198 | | 26,698,806 | | 30,570,204 | | 25,941,422 |
| Diluted | 30,743,461 | | 26,698,806 | | 30,629,467 | | 25,980,931 |
| Earnings (loss) per share | | | | | | | |
| Basic | $ | 0.27 | | | $ | (0.28) | | | $ | 1.35 | | | $ | 0.55 | |
| Diluted | $ | 0.27 | | | $ | (0.28) | | | $ | 1.35 | | | $ | 0.55 | |
(1)Policy acquisition costs includes $8.9 million and $27.6 million of ceding commission income for the three and nine months ended September 30, 2024 and $11.9 million and $37.3 million of ceding commission income for the three and nine months ended September 30, 2023, respectively.
(2)General and administration includes $3.2 million and $9.3 million of ceding commission income for the three and nine months ended September 30, 2024 and $4.0 million and $12.3 million of ceding commission income for the three and nine months ended September 30, 2023, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Par Value | | Additional Paid-In Capital | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Balance at December 31, 2023 | 30,218,938 | | $ | 3 | | | $ | 360,310 | | | $ | 26,117 | | | $ | (130,900) | | | $ | (35,250) | | | $ | 220,280 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | (216) | | | (216) | |
| Issuance of restricted stock | 417,558 | | — | | | — | | | — | | | — | | | — | | | — | |
| Additional costs associated to public offering | — | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
| Unallocated dividends on restricted stock forfeitures | — | | — | | | 54 | | | — | | | — | | | — | | | 54 | |
| Stock-based compensation on restricted stock | — | | — | | | 595 | | | — | | | — | | | — | | | 595 | |
| Net income | — | | — | | | — | | | 14,225 | | | — | | | — | | | 14,225 | |
| Balance at March 31, 2024 | 30,636,496 | | $ | 3 | | | $ | 360,956 | | | $ | 40,342 | | | $ | (130,900) | | | $ | (35,466) | | | $ | 234,935 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | 696 | | | 696 | |
| Issuance of restricted stock | 47,702 | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation on restricted stock | — | | — | | | 833 | | | — | | | — | | | — | | | 833 | |
| Net income | — | | — | | | — | | | 18,869 | | | — | | | — | | | 18,869 | |
| Balance at June 30, 2024 | 30,684,198 | | $ | 3 | | | $ | 361,789 | | | $ | 59,211 | | | $ | (130,900) | | | $ | (34,770) | | | $ | 255,333 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | 15,039 | | | 15,039 | |
| Stock-based compensation on restricted stock | — | | — | | | 820 | | | — | | | — | | | — | | | 820 | |
| Net income | — | | — | | | — | | | 8,152 | | | — | | | — | | | 8,152 | |
| Balance at September 30, 2024 | 30,684,198 | | $ | 3 | | | $ | 362,609 | | | $ | 67,363 | | | $ | (130,900) | | | $ | (19,731) | | | $ | 279,344 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Par Value | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Treasury Shares | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Balance at December 31, 2022 | 25,539,433 | | $ | 3 | | | $ | 334,711 | | | $ | (19,190) | | | $ | (130,900) | | | $ | (53,585) | | | $ | 131,039 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | 9,290 | | | 9,290 | |
| Shares tendered for income taxes withholding | (4,200) | | — | | | (8) | | | — | | | — | | | — | | | (8) | |
| Restricted stock vested | 25,000 | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeiture on restricted stock | (1,482) | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation on restricted stock | — | | — | | | 395 | | | — | | | — | | | — | | | 395 | |
| Net income | — | | — | | | — | | | 14,008 | | | — | | | — | | | 14,008 | |
| Balance at March 31, 2023 | 25,558,751 | | $ | 3 | | | $ | 335,098 | | | $ | (5,182) | | | $ | (130,900) | | | $ | (44,295) | | | $ | 154,724 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | (2,279) | | | (2,279) | |
| Issuance of restricted stock | 63,744 | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation on restricted stock | — | | — | | | 403 | | | — | | | — | | | — | | | 403 | |
| Net income | — | | — | | | — | | | 7,779 | | | — | | | — | | | 7,779 | |
| Balance at June 30, 2023 | 25,622,495 | | $ | 3 | | | $ | 335,501 | | | $ | 2,597 | | | $ | (130,900) | | | $ | (46,574) | | | $ | 160,627 | |
| Net unrealized change in investments, net of tax | — | | — | | | — | | | — | | | — | | | (3,145) | | | (3,145) | |
| Issuance of restricted stock | 1,223,111 | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeiture on restricted stock | (49,020) | | — | | | (13) | | | — | | | — | | | — | | | (13) | |
| Stock-based compensation on restricted stock | — | | — | | | 1,341 | | | — | | | — | | | — | | | 1,341 | |
| Net loss | — | | — | | | — | | | (7,424) | | | — | | | — | | | (7,424) | |
| Balance at September 30, 2023 | 26,796,586 | | 3 | | | 336,829 | | | (4,827) | | | (130,900) | | | (49,719) | | | 151,386 | |
See accompanying notes to unaudited condensed consolidated financial statements.
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | |
| 2024 | | 2023 | |
| OPERATING ACTIVITIES | | | | |
| Net income | $ | 41,246 | | | $ | 14,363 | | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
| Stock-based compensation | 2,248 | | | 2,126 | | |
| Bond amortization and accretion | (2,500) | | | (2,484) | | |
| Amortization of original issuance discount on debt | 642 | | | 362 | | |
| Named intangible asset impairment | — | | | 767 | | |
| Depreciation and amortization | 6,733 | | | 6,463 | | |
| Allowance for (recovery) bad debt | (687) | | | 52 | | |
| Expected credit allowance on reinsurance | — | | | 152 | | |
| Net realized (gains) losses | (17) | | | 49 | | |
| Deferred income taxes, net | (4,734) | | | (439) | | |
| Changes in operating assets and liabilities: | | | | |
| Accrued investment income | (1,162) | | | 92 | | |
| Premiums receivable, net | 3,607 | | | 12,441 | | |
| Prepaid reinsurance premiums | (106,800) | | | (96,707) | | |
| Reinsurance recoverable on paid and unpaid claims | 40,850 | | | 77,472 | | |
| Income taxes receivable | 4,611 | | | (2,754) | | |
| Deferred policy acquisition costs, net | (6,557) | | | (4,481) | | |
| Right of use leased asset | 2,676 | | | 2,087 | | |
| Other assets | (287) | | | (1,551) | | |
| Unpaid losses and loss adjustment expenses | (70,487) | | | (160,486) | | |
| Unearned premiums | 48,505 | | | 32,231 | | |
| Reinsurance payable | 184,663 | | | 82,860 | | |
| Accrued interest | (529) | | | (441) | | |
| Accrued compensation | (2,149) | | | 2,017 | | |
| Advance premiums | 4,036 | | | 7,190 | | |
| Operating lease liabilities | (2,601) | | | (1,905) | | |
| Other liabilities | 1,866 | | | 1,182 | | |
| Net cash provided by (used in) operating activities | 143,173 | | | (29,342) | | |
| INVESTING ACTIVITIES | | | | |
| Fixed maturity securities sales, maturities and pay downs | 99,881 | | | 241,983 | | |
| Fixed maturity securities purchases | (188,105) | | | (250,783) | | |
| Equity securities reinvestment of dividends | (270) | | | (226) | | |
| Sale on other investment and return on capital | 319 | | | 5,080 | | |
| Cost of property and equipment acquired | (5,667) | | | (8,445) | | |
| Net cash used in investing activities | (93,842) | | | (12,391) | | |
| FINANCING ACTIVITIES | | | | |
| Repayment of term note | (7,125) | | | (7,125) | | |
| Mortgage loan payments | (198) | | | (114) | | |
| Proceeds from loan agreement | 5,500 | | | — | | |
| Additional costs associated with public offering | (3) | | | — | | |
| Tax withholding on share-based compensation awards | — | | | (8) | | |
| Dividends forfeited (paid) | 54 | | | (11) | | |
| Net cash used in financing activities | (1,772) | | | (7,258) | | |
| Increase (decrease) in cash, cash equivalents, and restricted cash | 47,559 | | | (48,991) | | |
| Cash, cash equivalents and restricted cash, beginning of period | 473,339 | | | 287,572 | | |
| Cash, cash equivalents and restricted cash, end of period | $ | 520,898 | | | $ | 238,581 | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | |
| Income taxes paid | $ | 12,696 | | | $ | 7,664 | | |
| Interest paid | $ | 7,224 | | | $ | 6,803 | | |
Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.
| | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 | |
| (In thousands) | |
| Cash and cash equivalents | $ | 509,918 | | | $ | 463,640 | | |
| Restricted cash | 10,980 | | | 9,699 | | |
| Total | $ | 520,898 | | | $ | 473,339 | | |
Restricted cash primarily represents funds held to meet regulatory requirements in certain states in which the Company operates.
See accompanying notes to unaudited condensed consolidated financial statements.
HERITAGE INSURANCE HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. (together with its subsidiaries, the “Company”). These statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The accompanying interim condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024 (the “2023 Form 10-K”).
Significant accounting policies
The accounting policies of the Company are set forth in Note 1 to the consolidated financial statements contained in the Company’s 2023 Form 10-K.
Accounting Pronouncements not yet adopted
The Company has documented the summary of its significant accounting policies in its Notes to the Audited Consolidated Financial Statements contained in the Company’s 2023 Form 10-K. There have been no material changes to the Company’s accounting policies since the filing of that report.
On March 6, 2024, the SEC adopted new rules designed to enhance public company disclosures related to the risks and impacts of climate-related matters. The rules amend the provisions of both Regulation S-K and Regulation S-X to require disclosure of climate-related risks, transition plans, targets and goals, risk management and governance as well as require disclosure of the financial effects of severe weather events and other natural conditions as well as the use of carbon offsets or renewable energy credits. Disclosure requirements will begin phasing in for fiscal years beginning on or after January 1, 2025, subject to legal challenges and the SEC's voluntary stay of the disclosure requirements. The Company will continue to assess the impact of these new rules on its financial statements while the stay is in place.
NOTE 2. INVESTMENTS
Securities Available-for-Sale
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | Cost or Adjusted / Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | | | | | | | |
| Debt Securities Available-for-sale | | (In thousands) | |
U.S. government and agency securities (1) | | $ | 87,973 | | | $ | 1,559 | | | $ | 574 | | | $ | 88,958 | | |
| States, municipalities and political subdivisions | | 333,004 | | | 915 | | | 21,221 | | | 312,698 | | |
| Corporate bonds | | 249,627 | | | 3,567 | | | 7,636 | | | 245,558 | | |
Mortgage-backed securities (1) | | 17,986 | | | — | | | 2,136 | | | 15,850 | | |
| Asset-backed securities | | 2,772 | | | — | | | 90 | | | 2,682 | | |
| Other | | 6,005 | | | 10 | | | — | | | 6,015 | | |
| Total | | $ | 697,367 | | | $ | 6,051 | | | $ | 31,657 | | | $ | 671,761 | | |
(1)Includes securities at September 30, 2024 with a carrying amount of $24.4 million and $7.1 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018 and 2024. The
Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | Cost or Adjusted / Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | | | | | | | |
| Debt Securities Available-for-sale | | (In thousands) | |
U.S. government and agency securities (1) | | $ | 81,540 | | | $ | 417 | | | $ | 1,295 | | | $ | 80,662 | | |
| States, municipalities and political subdivisions | | 319,896 | | | 104 | | | 31,018 | | | 288,982 | | |
| Corporate bonds | | 178,213 | | | 475 | | | 11,858 | | | 166,830 | | |
| Mortgage-backed securities | | 22,695 | | | — | | | 2,769 | | | 19,926 | | |
| Asset-backed securities | | 247 | | | — | | | 20 | | | 227 | | |
| Other | | 4,055 | | | — | | | — | | | 4,055 | | |
| Total | | $ | 606,646 | | | $ | 996 | | | $ | 46,960 | | | $ | 560,682 | | |
(1)Includes securities at December 31, 2023 with a carrying amount of $24.3 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.
Net Realized Gains (Losses) and Impairment
The following tables present net realized gains (losses) on the Company’s debt securities available-for-sale for the three and nine months ended September 30, 2024 and 2023, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2024 | | 2023 | |
| Three Months Ended September 30, | | Gains (Losses) | | Fair Value at Sale | | Gains (Losses) | | Fair Value at Sale | |
| | | | | | | | | |
| | (In thousands) | |
| Debt Securities Available-for-Sale | | | | | | | | | |
| Total realized gains | | $ | — | | | $ | — | | | $ | 2 | | | $ | 1,498 | | |
| Total realized losses | | (3) | | | 153 | | | (381) | | | 40,705 | | |
| Net realized losses | | $ | (3) | | | $ | 153 | | | $ | (379) | | | $ | 42,203 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2024 | | 2023 | |
| Nine Months Ended September 30, | | Gains (Losses) | | Fair Value at Sale | | Gains (Losses) | | Fair Value at Sale | |
| | | | | | | | | |
| | (In thousands) | |
| Debt Securities Available-for-Sale | | | | | | | | | |
| Total realized gains | | $ | 7 | | | $ | 2,744 | | | $ | 1 | | | $ | 1,900 | | |
| Total realized losses | | (5) | | | 343 | | | (391) | | | 41,137 | | |
| Net realized gains (losses) | | $ | 2 | | | $ | 3,087 | | | $ | (390) | | | $ | 43,037 | | |
The following table presents the reconciliation of net realized (losses) gains and impairment of the Company’s investments reported for the three and nine months ended September 30, 2024 and 2023, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2024 | | 2023 | | 2024 | | 2023 | |
| | | | | | | | |
| (In thousands) | |
| Gross realized gains on sales of available-for-sale securities | $ | — | | | $ | 2 | | | $ | 7 | | | $ | 1 | | |
| Recovery (impairment) on other investments | 4 | | | — | | | 4 | | | (1,559) | | |
| Realized losses on sales of available-for-sale securities | (3) | | | (381) | | | (5) | | | (391) | | |
| Gross realized gains on sale of other investments | 5 | | | — | | | 11 | | | 1,900 | | |
| Net realized gains (losses) and impairments | $ | 6 | | | $ | (379) | | | $ | 17 | | | $ | (49) | | |
The table below summarizes the Company’s debt securities at September 30, 2024 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2024 | |
| Cost or Amortized Cost | | Percent of Total | | Fair Value | | Percent of Total | |
| | | | | | | | |
| Maturity dates: | (In thousands) | | | | (In thousands) | | | |
| Due in one year or less | $ | 83,803 | | | 12.0 | % | | $ | 82,878 | | | 12.3 | % | |
| Due after one year through five years | 386,655 | | | 55.4 | % | | 375,797 | | | 56.0 | % | |
| Due after five years through ten years | 190,756 | | | 27.4 | % | | 179,300 | | | 26.7 | % | |
| Due after ten years | 36,153 | | | 5.2 | % | | 33,786 | | | 5.0 | % | |
| Total | $ | 697,367 | | | 100.0 | % | | $ | 671,761 | | | 100.0 | % | |
Net Investment Income
The following table summarizes the Company’s net investment income by major investment category for the three and nine months ended September 30, 2024 and 2023, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2024 | | 2023 | | 2024 | | 2023 | |
| | | | | | | | |
| (In thousands) | |
| Debt securities | $ | 4,935 | | | $ | 4,685 | | | $ | 15,992 | | | $ | 12,723 | | |
| Equity securities | 778 | | | 79 | | | 1,435 | | | 170 | | |
| Cash and cash equivalents | 4,677 | | | 1,746 | | | 12,490 | | | 6,195 | | |
| Other investments | 182 | | | 687 | | | 506 | | | 1,525 | | |
| Net investment income | 10,572 | | | 7,197 | | | 30,423 | | | 20,613 | | |
| Less: Investment expenses | 771 | | | 330 | | | 2,302 | | | 1,565 | | |
| Net investment income, less investment expenses | $ | 9,801 | | | $ | 6,867 | | | $ | 28,121 | | | $ | 19,048 | | |
The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged) and for which no credit loss allowance has been established to date, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position at September 30, 2024 and December 31, 2023, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or More | |
| September 30, 2024 | | Number of
Securities | | Gross Unrealized Losses | | Fair Value | | Number of
Securities | | Gross Unrealized Losses | | Fair Value | |
| Debt Securities Available-for-sale | | | | | | | | | | | | | |
| U.S. government and agency securities | | 1 | | $ | — | | | $ | 996 | | | 20 | | $ | 574 | | | $ | 20,063 | | |
| States, municipalities and political subdivisions | | 10 | | 101 | | | 12,522 | | | 357 | | 21,120 | | | 266,014 | | |
| Corporate bonds | | 1 | | — | | | 747 | | | 170 | | 7,636 | | | 115,504 | | |
| Mortgage-backed securities | | 4 | | — | | | 1 | | | 120 | | 2,136 | | | 15,849 | | |
| Asset-backed securities | | — | | | — | | | — | | | 34 | | 90 | | | 2,682 | | |
| Other | | — | | | — | | | — | | | — | | | — | | | — | | |
| Total fixed maturity securities | | 16 | | $ | 101 | | | $ | 14,266 | | | 701 | | $ | 31,556 | | | $ | 420,112 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or More | |
| December 31, 2023 | | Number of Securities | | Gross Unrealized Losses | | Fair Value | | Number of Securities | | Gross Unrealized Losses | | Fair Value | |
| Debt Securities Available-for-sale | | | | | | | | | | | | | |
| U.S. government and agency securities | | 3 | | $ | 14 | | | $ | 2,962 | | | 32 | | $ | 1,281 | | | $ | 42,305 | | |
| States, municipalities and political subdivisions | | 5 | | $ | 21 | | | $ | 3,875 | | | 382 | | $ | 30,997 | | | $ | 274,876 | | |
| Corporate bonds | | 10 | | $ | 24 | | | $ | 6,398 | | | 188 | | $ | 11,834 | | | $ | 128,771 | | |
| Mortgage-backed securities | | 10 | | $ | — | | | $ | 7 | | | 138 | | $ | 2,769 | | | $ | 19,810 | | |
| Asset-backed securities | | — | | | $ | — | | | $ | — | | | 24 | | $ | 20 | | | $ | 373 | | |
| Other | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | |
| Total fixed maturity securities | | 28 | | $ | 59 | | | $ | 13,242 | | | 764 | | $ | 46,901 | | | $ | 466,135 | | |
The Company’s unrealized losses on debt securities have not been recognized because the securities are of a high credit quality with investment grade ratings. After reviewing the Company's portfolio, if (i) the Company does not have the intent to sell, or (ii) it is more likely than not it will not be required to sell the security before its anticipated recovery, then the Company's intent is to hold the investment securities to recovery, or maturity if necessary to recover the decline in valuation as prices accrete to par. However, the Company's intent may change prior to maturity due to certain types of events, which include, but are not limited to, changes in the financial markets, the Company's analysis of an issuer’s credit metrics and prospects, changes in tax laws or the regulatory environment, or as a result of significant unforeseen changes in liquidity needs. As such, the Company may, from time to time, sell invested assets subsequent to the balance sheet date that it did not intend to sell at the balance sheet date. Conversely, the Company may not sell invested assets that the Company asserted it intended to sell at the balance sheet date. Such changes in intent are due to unforeseen events occurring subsequent to the balance sheet date.
No credit loss allowance was recorded as of September 30, 2024 or for the year ended December 31, 2023.
Other Investments
Non-Consolidating Variable Interest Entities (“VIEs”)
The Company makes passive investments in limited partnerships (“LPs”), which are accounted for using the equity method, with income reported in earnings through net realized and unrealized gains and losses. The Company also holds a passive investment in a Real Estate Investment Trust (“REIT”), which is accounted for using the measurement alternative method, and reported at cost less impairment (if any), plus or minus changes from observable price changes.
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at September 30, 2024 and December 31, 2023, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2024 | | As of December 31, 2023 | |
| | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure | |
| Investments in non-consolidated VIEs - Equity method | | $ | 1,679 | | | $ | 1,679 | | | $ | 1,819 | | | $ | 1,819 | | |
| Investments in non-consolidated VIEs - Measurement alternative | | 5,068 | | | 5,068 | | | 5,248 | | | 5,248 | | |
| Total non-consolidated VIEs | | $ | 6,747 | | | $ | 6,747 | | | $ | 7,067 | | | $ | 7,067 | | |
No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment.
NOTE 3. FAIR VALUE OF FINANCIAL MEASUREMENTS
Fair value is determined based on the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
•Level 1 – Unadjusted quoted prices are available in active markets for identical assets/liabilities as of the reporting date.
•Level 2 – Valuations based on observable inputs, such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in the markets that are not active; or other inputs that are observable, either directly or indirectly.
•Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs. At September 30, 2024 and December 31, 2023, there were no transfers in or out of Level 1, 2, and 3.
The following table presents information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy.
The tables below present the balances of the Company’s invested assets measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | Total | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| Financial assets | | (In thousands) | |
| Cash and cash equivalents | | $ | 509,918 | | | $ | 509,918 | | | $ | — | | | $ | — | | |
| Restricted cash | | $ | 10,980 | | | $ | 10,980 | | | $ | — | | | $ | — | | |
| Debt Securities Available-for-sale | | | | | | | | | |
| U.S. government and agency securities | | $ | 88,958 | | | $ | — | | | $ | 88,958 | | | $ | — | | |
| States, municipalities and political subdivisions | | 312,698 | | | — | | | 312,698 | | | — | | |
| Corporate bonds | | 245,558 | | | — | | | 245,558 | | | — | | |
| Mortgage-backed securities | | 15,850 | | | — | | | 15,850 | | | — | | |
| Asset-backed securities | | 2,682 | | | — | | | 2,682 | | | — | | |
| Other | | 6,015 | | | — | | | 6,015 | | | — | | |
| Total debt securities | | $ | 671,761 | | | $ | — | | | $ | 671,761 | | | $ | — | | |
| Equity Securities | | | | | | | | | |
| Common stock | | $ | 1,936 | | | $ | 1,936 | | | $ | — | | | $ | — | | |
| Total debt securities and equity securities | | $ | 673,697 | | | $ | 1,936 | | | $ | 671,761 | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | Total | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | |
| Financial assets | | (In thousands) | |
| Cash and cash equivalents | | $ | 463,640 | | | $ | 463,640 | | | $ | — | | | $ | — | | |
| Restricted cash | | $ | 9,699 | | | $ | 9,699 | | | $ | — | | | $ | — | | |
| Debt Securities Available-for-sale | | | | | | | | | |
| U.S. government and agency securities | | $ | 80,662 | | | $ | — | | | $ | 80,662 | | | $ | — | | |
| States, municipalities and political subdivisions | | 288,982 | | | — | | | 288,982 | | | — | | |
| Corporate bonds | | 166,830 | | | — | | | 166,830 | | | — | | |
| Mortgage-backed securities | | 19,926 | | | — | | | 19,926 | | | — | | |
| Asset-backed securities | | 227 | | | — | | | 227 | | | — | | |
| Other | | 4,055 | | | — | | | 4,055 | | | — | | |
| Total debt securities | | $ | 560,682 | | | $ | — | | | $ | 560,682 | | | $ | — | | |
| Equity Securities | | | | | | | | | |
| Common stock | | $ | 1,666 | | | $ | 1,666 | | | $ | — | | | $ | — | | |
| Total debt securities and equity securities | | $ | 562,348 | | | $ | 1,666 | | | $ | 560,682 | | | $ | — | | |
Financial Instruments excluded from the fair value hierarchy
The carrying value of premium receivables, accounts payable, accrued expense, revolving loans and borrowings under the Company’s senior secured credit facility approximate their fair value. The rate at which revolving loans and borrowings under the Company’s senior secured credit facility bear interest resets periodically at market interest rates.
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions
during the measurement period, or when they are considered to be impaired. For the nine months ended September 30, 2024, there were no assets or liabilities that were measured at fair value on a non-recurring basis.
Certain of the Company’s investments are measured in accordance with GAAP for the type of investment, using methodologies other than fair value.
NOTE 4. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize other comprehensive income (loss) and disclose the tax impact of each component of other comprehensive income for the three and nine months ended September 30, 2024 and 2023, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | |
| 2024 | | 2023 | |
| Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | |
| | | | | | | | | | | | |
| (In thousands) | |
| Other comprehensive income (loss) | | | | | | | | | | | | |
| Change in unrealized gains (losses) on investments, net | $ | 19,711 | | | $ | (4,667) | | | $ | 15,044 | | | $ | (4,494) | | | $ | 1,059 | | | $ | (3,435) | | |
| Reclassification adjustment of realized (gains) losses included in net income | (6) | | | 1 | | | (5) | | | 379 | | | (89) | | | 290 | | |
| Effect on other comprehensive income (loss) | $ | 19,705 | | | $ | (4,666) | | | $ | 15,039 | | | $ | (4,115) | | | $ | 970 | | | $ | (3,145) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | |
| 2024 | | 2023 | |
| Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | |
| | | | | | | | | | | | |
| (In thousands) | |
| Other comprehensive income | | | | | | | | | | | | |
| Change in unrealized gains (losses) on investments, net | $ | 20,353 | | | $ | (4,820) | | | $ | 15,533 | | | $ | 4,664 | | | $ | (1,097) | | | $ | 3,567 | | |
| Reclassification adjustment of realized losses included in net income | (17) | | | 4 | | | (13) | | | 390 | | | (92) | | | 298 | | |
| Effect on other comprehensive income | $ | 20,336 | | | $ | (4,816) | | | $ | 15,520 | | | $ | 5,054 | | | $ | (1,188) | | | $ | 3,866 | | |
NOTE 5. LEASES
The Company has entered into operating and financing leases primarily for real estate and vehicles. The Company will determine whether an arrangement is a lease at inception of the agreement. The operating leases have terms of one to ten years, and often include one or more options to renew. These renewal terms can extend the lease term from two to ten years and are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company considers these options in determining the lease term used in establishing the Company’s right-of-use assets and lease obligations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine present value of the lease payments. The Company used the implicit rates within the finance leases.
Components of the Company’s lease costs were as follows (in thousands):
| | | | | | | | | | | | | | |
| For The Nine Months Ended September 30, | |
| 2024 | | 2023 | |
| Operating lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations | $ | 1,210 | | | $ | 1,183 | | |
| Finance lease cost: | | | | |
| Amortization of assets, included in General & Administrative expenses on the Consolidated Statements of Operations | 1,898 | | | 1,921 |