UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2022

OR

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

Commission File Number

001-36462

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

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

1401 N. Westshore Blvd

Tampa, FL 33607

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

(727) 362-7200

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate number of shares of the Registrant’s Common Stock outstanding on May 2, 2022 was 26,469,720.

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: March 31, 2022 (unaudited) and December 31, 2021	2
Condensed Consolidated Statements of Operations and Other Comprehensive Loss: Three Months Ended March 31, 2022 and 2021 (unaudited)	3
Condensed Consolidated Statements of Stockholders’ Equity: Three Months Ended March 31, 2022 and 2021(unaudited)	4
Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31, 2022 and 2021(unaudited)	5
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3 Quantitative and Qualitative Disclosures about Market Risk	29
Item 4 Controls and Procedures	30
PART II – OTHER INFORMATION
Item 1 Legal Proceedings	31
Item 1A Risk Factors	31
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 5 Other Information	31
Item 6 Exhibits	32
Signatures	33

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 about (i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (ii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) business and risk management strategies, including acquisitions, strategic investments and risk diversification; (iv) our estimates with respect to tax and accounting matters including the impact on our financial statements; (vi) future dividends, if any; (vi) our expectations related to our financing activities; (vii) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; (viii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements and the source of funds needed to fund our business and risk management strategies; (ix) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (x) our intentions with respect to our credit risk investments; (xi) the future impact of the COVID-19 pandemic; and (xii) the potential effects of our current legal proceedings.

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;

•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;

•inherent uncertainty of our models and our reliance on such models as a tool to evaluate risk;

•the fluctuation in our results of operations;

•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;

•increased competition, competitive pressures, and market conditions;

•our failure to accurately assess and price the risks we underwrite;

•our failure to identify suitable business acquisitions, 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;

•low renewal rates and failure of such 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;

•our ability to maintain effective internal controls over financial reporting;

•certain characteristics of our common stock;

•the continued and potentially prolonged impact of COVID-19 on the economy, demand for our products and our operations, including measures taken by the governmental authorities to address COVID-19, which may precipitate or exacerbate other risks and/or uncertainties;

•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;

•our failure to attract and retain qualified employees and independent agents or our loss of key personnel; and

•the impact of macroeconomic and geopolitical conditions, including the impact of supply chain constraints, inflationary pressures, labor availability and the conflict between Russia and Ukraine.

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.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

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

	March 31, 2022			December 31, 2021
ASSETS	(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $711,156 and $675,245)	$	673,511		$	669,354
Equity securities, at fair value, (cost $1,417 and $1,415)		1,417			1,415
Other investments, net		14,561			23,929
Total investments		689,489			694,698
Cash and cash equivalents		286,170			359,337
Restricted cash		7,416			5,415
Accrued investment income		3,290			3,167
Premiums receivable, net		74,512			71,925
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45		288,779			269,391
Prepaid reinsurance premiums		178,565			265,873
Income tax receivable		1,365			11,739
Deferred income tax asset, net		12,451			—
Deferred policy acquisition costs, net		90,641			93,881
Property and equipment, net		17,144			17,426
Right-of-use lease asset, net		26,963			27,753
Intangibles, net		54,338			55,926
Goodwill		91,959			91,959
Other assets		13,314			12,272
Total Assets	$	1,836,396		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	588,420		$	590,166
Unearned premiums		586,236			590,419
Reinsurance payable		116,218			191,728
Long-term debt, net		123,689			120,757
Deferred income tax liability, net		—			9,426
Advance premiums		39,167			24,504
Accrued compensation		5,770			8,014
Lease liability		30,475			31,172
Accounts payable and other liabilities		64,655			71,525
Total Liabilities	$	1,554,630		$	1,637,711
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,469,720 shares issued and 26,444,720 outstanding at March 31, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021		3			3
Additional paid-in capital		333,213			332,797
Accumulated other comprehensive loss, net of taxes		(28,894	)		(4,573	)
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at March 31, 2022 and December 31, 2021		(128,557	)		(123,557	)
Retained earnings		106,001			138,381
Total Stockholders' Equity		281,766			343,051
Total Liabilities and Stockholders' Equity	$	1,836,396		$	1,980,762

See accompanying notes to unaudited condensed consolidated financial statements.

2

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Loss

(Unaudited)

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

	For the Three Months Ended March 31,
	2022			2021
REVENUES:
Gross premiums written	$	283,196		$	274,181
Change in gross unearned premiums		4,172			(3,770	)
Gross premiums earned		287,368			270,411
Ceded premiums		(134,439	)		(128,212	)
Net premiums earned		152,929			142,199
Net investment income		2,000			1,293
Net realized (losses) gains		(16	)		80
Other revenue		3,695			3,671
Total revenues		158,608			147,243
EXPENSES:
Losses and loss adjustment expenses		140,038			97,909
Policy acquisition costs, net of ceding commission income (1)		38,257			35,366
General and administrative expenses, net of ceding commission income(2)		19,724			19,800
Total expenses		198,019			153,075
Operating Loss		(39,411	)		(5,832	)
Interest expense, net		1,972			1,878
Loss before income taxes		(41,383	)		(7,710	)
Benefit for income taxes		(10,624	)		(2,562	)
Net loss	$	(30,759	)	$	(5,148	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments		(31,770	)		(10,597	)
Reclassification adjustment for net realized investment losses (gains)		16			(80	)
Income tax benefit related to items of other comprehensive loss		7,433			2,475
Total comprehensive loss	$	(55,080	)	$	(13,350	)
Weighted average shares outstanding
Basic		26,787,379			27,827,804
Diluted		26,787,379			27,827,804
Loss per share
Basic	$	(1.15	)	$	(0.19	)
Diluted	$	(1.15	)	$	(0.19	)

(1)Policy acquisition costs includes $11.7 million and $11.3 million of ceding commission income for the three months ended March 31, 2022 and 2021, respectively.

(2)General and administration includes $3.9 million and $3.7 million of ceding commission income for the three months ended March 31, 2022 and 2021, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

3

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, 2021		26,753,511		$	3	$	332,797		$	138,381		$	(123,557	)	$	(4,573	)	$	343,051
Net unrealized change in investments, net of tax		—			—		—			—			—			(24,321	)		(24,321	)
Shares tendered for income taxes withholding		(9,849	)		—		(89	)		—			—			—			(89	)
Restricted stock vested		25,000			—		—			—			—			—			—
Issued restricted stock		397,176			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		505			—			—			—			505
Stock buy-back		(721,118	)		—		—			—			(5,000	)		—			(5,000	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,621	)		—			—			(1,621	)
Net loss		—			—		—			(30,759	)		—			—			(30,759	)
Balance at March 31, 2022		26,444,720		$	3	$	333,213		$	106,001		$	(128,557	)	$	(28,894	)	$	281,766

	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income (Losses)			Total Stockholders' Equity
Balance at December 31, 2020		27,748,606		$	3	$	331,867		$	219,782		$	(115,365	)	$	6,057		$	442,344
Net unrealized change in investments, net of tax		—			—		—			—			—			(8,202	)		(8,202	)
Shares tendered for income taxes withholding		(12,500	)		—		(127	)		—			—			—			(127	)
Restricted stock vested		25,000			—		—			—			—			—			—
Issued restricted stock		143,817			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		260			—			—			—			260
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,679	)		—			—			(1,679	)
Net loss		—			—		—			(5,148	)		—			—			(5,148	)
Balance at March 31, 2021		27,904,923		$	3	$	332,000		$	212,955		$	(115,365	)	$	(2,145	)	$	427,448

See accompanying notes to unaudited condensed consolidated financial statements.

4

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the Three Months Ended March 31,
	2022			2021
OPERATING ACTIVITIES
Net loss	$	(30,759	)	$	(5,148	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation		505			260
Bond amortization and accretion		910			917
Amortization of original issuance discount on debt		521			455
Depreciation and amortization		2,047			2,020
Allowance for bad debt		(14	)		76
Net realized investment gains		16			(80	)
Deferred income taxes		(14,444	)		(4,893	)
Changes in operating assets and liabilities:
Accrued investment income		(123	)		(135	)
Premiums receivable, net		(2,573	)		(6,941	)
Prepaid reinsurance premiums		87,308			73,595
Reinsurance recoverable on paid and unpaid claims		(19,388	)		28,761
Income taxes receivable		10,374			2,328
Deferred policy acquisition costs, net		3,240			389
Right of use leased asset		790			245
Other assets		(1,042	)		(1,790	)
Unpaid losses and loss adjustment expenses		(1,746	)		(21,459	)
Unearned premiums		(4,183	)		3,793
Reinsurance payable		(75,510	)		(17,712	)
Accrued interest		(342	)		(666	)
Accrued compensation		(2,244	)		(1,213	)
Advance premiums		14,663			3,229
Operating lease liabilities		(697	)		(271	)
Other liabilities		(6,515	)		(16,533	)
Net cash (used in) provided by operating activities		(39,206	)		39,227
INVESTING ACTIVITIES
Fixed maturity securities sales, maturities and paydowns		22,132			40,470
Fixed maturity securities purchases		(58,969	)		(113,890	)
Equity securities sales and return of capital		9,368			177
Equity securities reinvestments of dividends		(2	)		—
Cost of property and equipment acquired		(177	)		(421	)
Net cash used in investing activities		(27,648	)		(73,664	)
FINANCING ACTIVITIES
Repayment of term note		(875	)		(1,875	)
Mortgage loan payments		(81	)		(77	)
Draw from revolver		15,000			—
Repurchase of convertible notes		(11,633	)		—
Purchase of treasury stock		(5,000	)		—
Tax withholdings on share-based compensation awards		(89	)		(127	)
Dividends paid		(1,634	)		(1,670	)
Net cash used in financing activities		(4,312	)		(3,749	)
Decrease in cash, cash equivalents, and restricted cash		(71,166	)		(38,186	)
Cash, cash equivalents and restricted cash, beginning of period		364,752			446,383
Cash, cash equivalents and restricted cash, end of period	$	293,586		$	408,197
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid	$	—		$	—
Interest paid	$	1,578		$	1,808

5

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

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