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 June 30, 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 August 2, 2022 was 26,569,096.

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: June 30, 2022 (unaudited) and December 31, 2021	2
Condensed Consolidated Statements of Operations and Other Comprehensive Loss: Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	3
Condensed Consolidated Statements of Stockholders’ Equity: Three and Six Months Ended June 30, 2022 and 2021(unaudited)	4
Condensed Consolidated Statements of Cash Flows: Six Months Ended June 30, 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	25
Item 3 Quantitative and Qualitative Disclosures about Market Risk	37
Item 4 Controls and Procedures	37
PART II – OTHER INFORMATION
Item 1 Legal Proceedings	38
Item 1A Risk Factors	38
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 5 Other Information	38
Item 6 Exhibits	38
Signatures	40

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; (v) 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 ability to successfully mitigate the effects of inflation on our business; (xi) our intentions with respect to our credit risk investments; (xii) the future impact of the COVID-19 pandemic; and (xiii) 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;

•disruptions to our independent distribution agency channel;

•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)

	June 30, 2022			December 31, 2021
ASSETS	(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $689,163 and $675,245)	$	635,458		$	669,354
Equity securities, at fair value, (cost $1,514 and $1,415)		1,514			1,415
Other investments, net		17,352			23,929
Total investments		654,324			694,698
Cash and cash equivalents		290,932			359,337
Restricted cash		5,416			5,415
Accrued investment income		3,215			3,167
Premiums receivable, net		81,277			71,925
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45		289,106			269,391
Prepaid reinsurance premiums		468,748			265,873
Income tax receivable		13,281			11,739
Deferred income tax asset, net		9,762			—
Deferred policy acquisition costs, net		99,468			93,881
Property and equipment, net		19,622			17,426
Right-of-use lease asset, net		26,047			27,753
Intangibles, net		52,751			55,926
Goodwill		—			91,959
Other assets		15,956			12,272
Total Assets	$	2,029,905		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	553,909		$	590,166
Unearned premiums		655,351			590,419
Reinsurance payable		375,284			191,728
Long-term debt, net		122,990			120,757
Deferred income tax liability, net		—			9,426
Advance premiums		37,827			24,504
Accrued compensation		7,730			8,014
Lease liability		29,647			31,172
Accounts payable and other liabilities		66,621			71,525
Total Liabilities	$	1,849,359		$	1,637,711
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,569,096 shares issued and 26,544,096 outstanding at June 30, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021		3			3
Additional paid-in capital		333,747			332,797
Accumulated other comprehensive loss, net of taxes		(41,194	)		(4,573	)
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at June 30, 2022 and December 31, 2021		(128,557	)		(123,557	)
Retained earnings		16,547			138,381
Total Stockholders' Equity		180,546			343,051
Total Liabilities and Stockholders' Equity	$	2,029,905		$	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 June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
REVENUES:
Gross premiums written	$	365,284		$	337,700		$	648,480		$	611,881
Change in gross unearned premiums		(69,073	)		(52,054	)		(64,901	)		(55,824	)
Gross premiums earned		296,211			285,646			583,579			556,057
Ceded premiums earned		(137,940	)		(139,147	)		(272,379	)		(267,359	)
Net premiums earned		158,271			146,499			311,200			288,698
Net investment income		2,163			956			4,163			2,249
Net realized losses		(102	)		(1,000	)		(118	)		(920	)
Other revenue		3,438			3,742			7,133			7,414
Total revenues		163,770			150,197			322,378			297,441
EXPENSES:
Losses and loss adjustment expenses		101,522			100,834			241,560			198,743
Policy acquisition costs, net of ceding commission income (1)		38,375			37,833			76,632			73,199
General and administrative expenses, net of ceding commission income(2)		17,466			15,520			37,190			35,320
Goodwill impairment		91,959			—			91,959			—
Total expenses		249,322			154,187			447,341			307,262
Operating Loss		(85,552	)		(3,990	)		(124,963	)		(9,821	)
Interest expense, net		1,751			1,925			3,723			3,803
Loss before income taxes		(87,303	)		(5,915	)		(128,686	)		(13,624	)
Provision (benefit) for income taxes		563			(1,965	)		(10,061	)		(4,527	)
Net loss	$	(87,866	)	$	(3,950	)	$	(118,625	)	$	(9,097	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments		(16,161	)		3,625			(47,932	)		(6,972	)
Reclassification adjustment for net realized investment losses (gains)		102			(22	)		118			(102	)
Income tax benefit (expense) related to items of other comprehensive losses (gains)		3,759			(835	)		11,193			1,640
Total comprehensive loss	$	(100,166	)	$	(1,182	)	$	(155,246	)	$	(14,531	)
Weighted average shares outstanding
Basic		26,453,456			27,904,923			26,620,418			27,866,364
Diluted		26,453,456			27,904,923			26,620,418			27,866,364
Loss per share
Basic	$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)
Diluted	$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)

(1)Policy acquisition costs includes $11.5 million and $23.2 million of ceding commission income for the three and six months ended June 30, 2022 and $11.9 million and $23.2 million for the three and six months of June 30, 2021, respectively.

(2)General and administration includes $3.9 million and $7.7 million of ceding commission income for the three and six months ended June 30, 2022 and $3.9 million and $7.6 million for the three and six months ended June 30, 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
Net unrealized change in investments, net of tax		—			—		—			—			—			(12,300	)		(12,300	)
Adjustment to shares tendered for income taxes withholding		—			—		31			—			—			—			31
Issued restricted stock		99,376			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		503			—			—			—			503
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,588	)		—			—			(1,588	)
Net loss		—			—		—			(87,866	)		—			—			(87,866	)
Balance at June 30, 2022		26,544,096		$	3	$	333,747		$	16,547		$	(128,557	)	$	(41,194	)	$	180,546

	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings		Treasury Shares			Accumulated Other Comprehensive (Loss) Income			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			—		—			—		—			—			—