Heritage Insurance (HRTG) - 2025 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited financial information, including statements, management's discussion, market risk disclosures, and controls and procedures Item 1. Unaudited Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with explanatory notes - Net income for Q1 2025 was $30.5 million, up 114.2% from $14.2 million in Q1 2024[16] - Diluted EPS for Q1 2025 was $0.99, up from $0.47 in Q1 2024[16] Key Financial Position Changes (March 31, 2025 vs. December 31, 2024) (in thousands) | Metric | March 31, 2025 | December 31, 2024 | | :-------------------- | :------------- | :---------------- | | Total Assets | $2,213,097 | $2,468,924 | | Total Liabilities | $1,884,094 | $2,178,124 | | Total Stockholders' Equity | $329,003 | $290,799 | Condensed Consolidated Balance Sheets This section presents the Company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | ASSETS | March 31, 2025 | December 31, 2024 | | :------------------------------------------ | :------------- | :---------------- | | Fixed maturities, available-for-sale, at fair value | $667,390 | $655,555 | | Equity securities, at fair value | $1,064 | $1,936 | | Other investments, net | $4,930 | $5,952 | | Total investments | $673,384 | $663,443 | | Cash and cash equivalents | $425,908 | $452,666 | | Restricted cash | $13,454 | $10,979 | | Accrued investment income | $5,230 | $5,592 | | Premiums receivable, net | $109,336 | $102,134 | | Reinsurance recoverable on paid and unpaid claims, net | $593,083 | $740,204 | | Prepaid reinsurance premiums | $196,228 | $309,802 | | Deferred income tax asset, net | $22,055 | $13,876 | | Deferred policy acquisition costs, net | $63,906 | $63,204 | | Property and equipment, net | $38,843 | $38,080 | | Right-of-use lease asset, finance | $14,459 | $15,082 | | Right-of-use lease asset, operating | $5,540 | $5,850 | | Intangibles, net | $34,826 | $36,372 | | Other assets | $16,845 | $11,640 | | Total Assets | $2,213,097 | $2,468,924 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Unpaid losses and loss adjustment expenses | $848,928 | $1,042,687 | | Unearned premiums | $704,857 | $702,707 | | Reinsurance payable | $123,065 | $227,060 | | Long-term debt, net | $94,808 | $116,319 | | Advance premiums | $21,635 | $15,186 | | Income taxes payable, net | $20,577 | $846 | | Accrued compensation | $10,436 | $8,926 | | Lease liability, finance | $17,481 | $18,071 | | Lease liability, operating | $6,595 | $6,945 | | Accounts payable and other liabilities | $35,712 | $39,378 | | Total Liabilities | $1,884,094 | $2,178,124 | | Stockholders' Equity: | | | | Common stock | $3 | $3 | | Additional paid-in capital | $363,909 | $362,644 | | Accumulated other comprehensive income, net of taxes | $(22,139) | $(28,604) | | Treasury stock, at cost | $(130,900) | $(130,900) | | Retained earnings | $118,130 | $87,656 | | Total Stockholders' Equity | $329,003 | $290,799 | | Total Liabilities and Stockholders' Equity | $2,213,097 | $2,468,924 | Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) This section details the Company's revenues, expenses, net income, and other comprehensive income for the reported periods Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (in thousands, except per share amounts) | REVENUES: | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, 2024 | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Gross premiums written | $355,997 | $356,684 | | Change in gross unearned premiums | $(2,169) | $(15,295) | | Gross premiums earned | $353,828 | $341,389 | | Ceded premiums | $(153,794) | $(161,963) | | Net premiums earned | $200,034 | $179,426 | | Net investment income | $8,575 | $8,551 | | Net realized losses | $(4) | $(1) | | Other revenue | $2,915 | $3,326 | | Total revenues | $211,520 | $191,302 | | EXPENSES: | | | | Losses and loss adjustment expenses | $99,407 | $102,035 | | Policy acquisition costs, net of ceding commission income | $45,815 | $46,929 | | General and administrative expenses, net of ceding commission income | $23,862 | $19,634 | | Total expenses | $169,084 | $168,598 | | Operating income | $42,436 | $22,704 | | Interest expense, net | $2,426 | $2,830 | | Income before income taxes | $40,010 | $19,874 | | Income tax expense | $9,536 | $5,649 | | Net income | $30,474 | $14,225 | | OTHER COMPREHENSIVE INCOME (LOSS) | | | | Change in net unrealized gains (losses) on investments | $8,477 | $(284) | | Reclassification adjustment for net realized investment losses | $4 | $1 | | Income tax (expense) benefit related to items of other comprehensive income | $(2,016) | $67 | | Total comprehensive income | $36,939 | $14,009 | | Weighted average shares outstanding - Basic | 30,697,826 | 30,376,682 | | Weighted average shares outstanding - Diluted | 30,757,089 | 30,435,945 | | Earnings per share - Basic | $0.99 | $0.47 | | Earnings per share - Diluted | $0.99 | $0.47 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the Company's equity, including common stock, retained earnings, and comprehensive income components Condensed Consolidated Statements of Stockholders' Equity (in thousands) | | Common Shares | Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Shares | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | | :------------------------------------------ | :------------ | :-------- | :------------------------- | :---------------- | :-------------- | :----------------------------------- | :------------------------- | | Balance at December 31, 2024 | 30,607,039 | $3 | $362,644 | $87,656 | $(130,900) | $(28,604) | $290,799 | | Net unrealized change in investments, net of tax | — | — | — | — | — | $6,465 | $6,465 | | Issuance of restricted stock | 386,231 | — | — | — | — | — | — | | Stock-based compensation on restricted stock | — | — | $1,265 | — | — | — | $1,265 | | Net Income | — | — | — | $30,474 | — | — | $30,474 | | Balance at March 31, 2025 | 30,993,270 | $3 | $363,909 | $118,130 | $(130,900) | $(22,139) | $329,003 | Condensed Consolidated Statements of Cash Flows This section reports cash inflows and outflows from operating, investing, and financing activities over the reporting periods Condensed Consolidated Statements of Cash Flows (in thousands) | OPERATING ACTIVITIES | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, 2024 | | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Net income | $30,474 | $14,225 | | Net cash provided by operating activities | $837 | $4,308 | | INVESTING ACTIVITIES | | | | Net cash used in investing activities | $(3,469) | $(83,295) | | FINANCING ACTIVITIES | | | | Net cash (used in) provided by financing activities | $(21,651) | $3,113 | | Decrease in cash, cash equivalents, and restricted cash | $(24,283) | $(75,874) | | Cash, cash equivalents and restricted cash, beginning of period | $463,645 | $473,339 | | Cash, cash equivalents and restricted cash, end of period | $439,362 | $397,465 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements - The Company's results are reported as a single operating and reportable segment: residential property insurance[31] - The Company's unrealized losses on debt securities are primarily due to rising interest rates, with no credit loss allowance recorded as of March 31, 2025, as the Company intends to hold these investments to recovery or maturity[40] - The Company purchases significant reinsurance from third-party reinsurers (rated 'A-' or higher by A.M. Best or S&P, or fully collateralized) and its wholly-owned subsidiary, Osprey Re Ltd., to limit exposure to individual risks and catastrophic events[73][74] - As of March 31, 2025, the Company's insurance subsidiaries met all financial and regulatory capital and surplus requirements in each of the states in which they conduct business[102] - On March 11, 2025, the Company awarded 99,246 shares of time-based restricted stock and 285,985 shares of performance-based restricted stock, with a fair value of $11.88 per share, to certain employees under the 2023 Omnibus Incentive Plan[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition and operational results, highlighting key performance indicators, strategic initiatives, and market impacts - The Company is a super-regional property and casualty insurance holding company providing personal and commercial residential insurance across multiple states, with a vertically integrated operational model[134] - Strategic initiatives for 2025 include re-opening profitable geographies, persistent underwriting discipline, continued data-driven analytics for exposure management, enhancing customer service and claims capabilities, and leveraging infrastructure for future growth[144] - The net combined ratio improved by 9.5 points to 84.5% in Q1 2025 from 94.0% in Q1 2024, driven by a lower net loss and LAE ratio and lower net expense ratio[165] Overview This section provides a high-level introduction to the Company's business model and operational structure - Heritage Insurance Holdings, Inc. is a super-regional property and casualty insurance holding company primarily offering personal and commercial residential insurance products across a multi-state footprint[134] - The Company operates as a vertically integrated insurer, managing risk management, underwriting, claims processing, actuarial rate making, customer service, and distribution[134] Recent Developments This section highlights recent market trends, legislative changes, and operational adjustments impacting the Company - The Company mitigates increased material and labor costs due to inflationary pressures through rate increases and the use of inflation guard[135] - Legislative changes since 2022 have positively impacted the Florida property insurance market by curtailing claims abuses, leading the Company to anticipate writing more organic personal lines business in Florida[136][142] Policies-in-force, Premiums-in-force, and Total Insured Value (TIV) Trends | Metric | Q1 2025 | Q1 2024 | % Change | | :----- | :------ | :------ | :------- | | Policies-in-force: | | | | | Florida | 130,003 | 147,954 | (12.1)% | | Other States | 247,818 | 289,001 | (14.3)% | | Total | 377,821 | 436,955 | (13.5)% | | Premiums-in-force (in thousands): | | | | | Florida | $695,091 | $716,868 | (3.0)% | | Other States | $737,561 | $670,195 | 10.1% | | Total | $1,432,653 | $1,387,063 | 3.3% | | Total Insured Value (in thousands): | | | | | Florida | $102,648,934 | $103,796,187 | (1.1)% | | Other States | $260,995,659 | $284,663,196 | (8.3)% | | Total | $363,644,593 | $388,459,383 | (6.4)% | - The average premium per policy increased by 19.5% for Q1 2025 compared to the prior year, driven by rate changes, inflation guard, and the mix of business written[140] - For the 2025 hurricane season, the Company is observing an increase in reinsurance supply at improved risk-adjusted costs, following moderating pricing in 2024[143] Overview of Financial Results This section summarizes the Company's financial performance, including net income, premiums earned, and key profitability ratios - Net income for Q1 2025 was $30.5 million ($0.99 diluted EPS), a significant increase from $14.2 million ($0.47 diluted EPS) in Q1 2024, primarily due to positive impacts from rate actions, underwriting, and exposure management[146] - Net premiums earned grew 11.5% to $200.0 million, while total expenses remained relatively flat, contributing to the improved net income[146] - The net combined ratio improved by 9.5 points to 84.5% in Q1 2025, driven by a lower net loss ratio (49.7%, down 7.2 points) and a lower net expense ratio (34.8%, down 2.3 points)[146] - Net weather and catastrophe losses increased to $43.5 million in Q1 2025 from $18.4 million in Q1 2024, but this was more than offset by significantly lower attritional losses and favorable reserve development[146] Results of Operations This section provides a detailed analysis of the Company's revenues, expenses, and profitability for the reported periods Revenue Comparison (Q1 2025 vs. Q1 2024) (in thousands) | REVENUE | 2025 | 2024 | $ Change | % Change | | :--------------------- | :--- | :--- | :------- | :------- | | Gross premiums written | $355,997 | $356,684 | $(687) | (0.2)% | | Gross premiums earned | $353,828 | $341,389 | $12,439 | 3.6% | | Ceded premiums | $(153,794) | $(161,963) | $8,169 | (5.0)% | | Net premiums earned | $200,034 | $179,426 | $20,608 | 11.5% | | Net investment income | $8,575 | $8,551 | $24 | 0.3% | | Total revenue | $211,520 | $191,302 | $20,218 | 10.6% | Expense Comparison (Q1 2025 vs. Q1 2024) (in thousands) | EXPENSES | 2025 | 2024 | $ Change | % Change | | :---------------------- | :--- | :--- | :------- | :------- | | Losses and loss adjustment expenses | $99,407 | $102,035 | $(2,628) | (2.6)% | | Policy acquisition costs | $45,815 | $46,929 | $(1,114) | (2.4)% | | General and administrative expenses | $23,862 | $19,634 | $4,228 | 21.5% | | Total expenses | $169,084 | $168,598 | $486 | 0.3% | Net Income and EPS Comparison (Q1 2025 vs. Q1 2024) (in thousands, except per share amounts) | Metric | 2025 | 2024 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Net income | $30,474 | $14,225 | $16,249 | 114.2% | | Basic earnings per share | $0.99 | $0.47 | $0.52 | 110.6% | | Diluted earnings per share | $0.99 | $0.47 | $0.52 | 110.6% | Key Ratios (Q1 2025 vs. Q1 2024) | Ratio | 2025 | 2024 | Change (points) | | :---- | :--- | :--- | :-------------- | | Ceded premium ratio | 43.5% | 47.4% | (3.9) | | Net loss and LAE ratio | 49.7% | 56.9% | (7.2) | | Net expense ratio | 34.8% | 37.1% | (2.3) | | Net combined ratio | 84.5% | 94.0% | (9.5) | Financial Condition – March 31, 2025 compared to December 31, 2024 This section analyzes changes in the Company's balance sheet items between the current and prior fiscal year-end - Cash and cash equivalents decreased by $26.8 million to $425.9 million, primarily due to the payoff of a $19.2 million FHLB-ATL loan and purchases of fixed income securities[169] - Reinsurance recoverable on paid and unpaid claims decreased by $147.1 million to $593.1 million, driven by reinsurance reimbursements for Hurricanes Ian and Milton and favorable development of ultimate losses[171] - Unpaid losses and loss adjustment expenses decreased by $193.8 million to $848.9 million, mainly due to claim payments for Hurricanes Milton and Ian and a reduction in ultimate losses[173] - Total shareholders' equity increased by $38.2 million to $329.0 million, primarily due to net income and an $8.5 million reduction in unrealized losses in accumulated other comprehensive loss[176] Liquidity and Capital Resources This section discusses the Company's sources and uses of cash, capital structure, and compliance with debt covenants - Principal liquidity sources include cash flows generated from operations, existing cash and cash equivalents, marketable securities balances, and borrowings available under Credit Facilities[177] - Net cash provided by operating activities decreased to $837,000 in Q1 2025 from $4.3 million in Q1 2024, primarily due to timing of cash flows associated with claim and reinsurance payments and reimbursements[181] - Net cash used in financing activities was $21.7 million in Q1 2025, compared to cash provided of $3.1 million in Q1 2024, mainly due to the repayment of a $19.2 million FHLB-ATL loan and $5.5 million in proceeds from a FHLB Des Moines loan in the prior year[183] - The Company maintains a $100 million Term Loan Facility and a $50 million Revolving Credit Facility, with $67.8 million and $10.0 million outstanding respectively as of March 31, 2025[186][187] - The Company was in compliance with all applicable terms of its covenants and other requirements under the Credit Agreement, Convertible Notes, cash borrowings, and other loans as of the report date[98] Critical Accounting Policies and Estimates This section outlines the significant accounting policies and estimates that require management's judgment and could impact financial results - The Company's financial statements rely on estimates and assumptions about future events, which could materially differ from actual results if underlying factors change[207] - No material changes or additions have been made to the critical accounting policies and estimates as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024[207] Recent Accounting Pronouncements This section addresses the impact of newly issued accounting pronouncements on the Company's financial reporting - No new accounting pronouncements issued but not yet adopted are expected to have a material impact on the Company's results of operations or financial position[32][208] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's exposure to market risks, primarily interest rate and credit risk, and their management - The duration of financial instruments subject to interest rate risk was 3.0 years at March 31, 2025 and 2024, and 3.1 years at December 31, 2024[209] - Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio, with an estimated weighted-average credit quality rating of A at March 31, 2025[209] - The Company has not experienced a material impact when compared to the tabular presentations of its interest rate and market risk sensitive instruments in its Annual Report on Form 10-K for the year ended December 31, 2024[210] Item 4. Controls and Procedures This section details the Company's evaluation of disclosure controls and procedures and reports on changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2025[212] - There have been no material changes in internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[213] PART II – OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity sales, other information, and exhibits Item 1. Legal Proceedings This section addresses the Company's involvement in legal actions arising in the ordinary course of business - The Company is subject to routine legal proceedings in the ordinary course of business[214] - Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's business, financial condition, or results of operations[214] Item 1A. Risk Factors This section refers to the Company's previously disclosed risk factors and notes any material changes - The Company's risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended December 31, 2024[215] - There have been no material changes to the Company's risk factors since the filing of the 2024 Form 10-K[215] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates no disclosures are required regarding unregistered sales of equity securities or use of proceeds - This item is not applicable for the reporting period[216] Item 5. Other Information This section provides details on executive officer equity awards and amendments to prior award agreements - On March 10, 2025, the Compensation Committee approved new time-based and performance-based restricted stock awards (Equity Awards) for named executive officers and other executive officers under the 2023 Omnibus Incentive Plan[216] - The new award agreements include a provision for accelerated vesting of certain Equity Awards upon a participant's Retirement, with pro-rated vesting for time-based stock and eligibility for performance-based stock from prior years, while current year performance-based stock is forfeited[217] - Amendments were also approved on March 10, 2025, to prior equity awards from 2023 and 2024, providing the same acceleration of vesting upon Retirement as in the new agreements, effective April 30, 2025[219] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - The report includes various exhibits such as the Certificate of Incorporation, By-laws, Form of Stock Certificate, Restricted Stock Award Agreements, and certifications from the Principal Executive and Financial Officers[223] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q - The report is signed by Ernesto Garateix, Chief Executive Officer, and Kirk Lusk, Chief Financial Officer, on May 9, 2025[227]