Heritage Insurance Holdings Inc

Previous wording

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. Additionally, we anticipate continued rising costs and constrained availability of catastrophe reinsurance. We mitigate these conditions by continued exposure management, implementation of increased rates and the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and TIV.

Current wording

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. Additionally, we anticipate continued rising costs and constrained availability of catastrophe reinsurance. We mitigate these conditions by continued exposure management, implementation of increased rates and the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and total insured value of properties.

Previous wording

The Supplemental Information table below demonstrates progress on our initiatives by providing policy count, premiums-in-force, and TIV for Florida and all other states as of December 31, 2023 and comparing those metrics to December 31, 2022. One of our strategies has been to reduce personal lines exposure in Florida, given historical abusive claims practices. While the Florida legislature made significant progress aimed at curtailing assignment of benefits and litigated claims abuse, we continue to carefully manage our Florida personal lines exposure.

Current wording

The Supplemental Information table below demonstrates progress on our initiatives by providing policy count, premiums-in-force, and total insured value for Florida and all other states as of December 31, 2024 and comparing those metrics to December 31, 2023. One of our strategies had been to reduce personal lines exposure in Florida, given historical abusive claims practices. Since 2022, several legislative changes have been implemented to positively impact the Florida property insurance market by curtailing assignment of benefits and litigated claims abuses. The positive impact of the legislative changes is reflected in our loss trends. As such, we anticipate writing more organic personal lines business in Florida. Coupled with more adequate rates, we are pursuing a strategy of controlled growth in Florida. We have selectively opened personal lines markets across our footprint for new business.

Previous wording

Florida policies-in-force declined from the prior year by 16.0% while premiums-in-force increased 15.9%, and TIV was down by 0.2%. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential business which generates higher average premium, rate increases across the book of business and use of inflation guard, partly offset by a premium reduction associated with fewer Florida personal lines policies. The Florida TIV remained relatively flat based on the reduction in personal lines policies offset by the strategic growth of our commercial residential portfolio, as well as use of inflation guard across the book of business. Compared to the year ended December 31, 2022, the policy count for markets outside of Florida decreased 14.4% due to underwriting actions and intentional exposure management, resulting in a TIV decrease of 6.3% while premiums-in-force decreased only 3.4% due to rating actions.

Current wording

Florida policies-in-force declined from the prior year by 12.8% while Florida premiums-in-force increased 1.8%, and Florida total insured value ("TIV") was slightly down. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential and surplus lines business as well as higher rates across our footprint which was partly offset by a premium reduction associated with fewer Florida personal lines policies. Use of inflation guard also bolstered premiums-in-force. The Florida TIV remained relatively flat as the reduction associated with personal lines policies was offset by the strategic growth of our commercial residential portfolio, as well as use of inflation guard across the book of business. Compared to the year ended December 31, 2023, the policy count for markets outside of Florida decreased 14.0% due to underwriting actions and intentional exposure management, resulting in a TIV decrease of 7.6% while premiums-in-force increased by 9.8% due to rating actions.

Previous wording

Generate underwriting profit though rate adequacy and more selective underwriting.

Current wording

•Generating underwriting profit through rate adequacy and more selective underwriting.

Previous wording

Allocate capital to products and geographies that maximize long-term returns.

Current wording

•Allocating capital to products and geographies that maximize long-term returns.

Previous wording

Maintain a balanced and diversified portfolio.

Current wording

•Maintaining a balanced and diversified portfolio.

Previous wording

As further described in Note 17, Commitments and Contingencies, to the condensed consolidated financial statements for the second quarter of 2023, our 2017 reinsurance agreement with the FHCF required a commutation no later than 60 months after the end of the contract year. As part of this process, Heritage and FHCF terminated the 2017 reinsurance agreement and agreed on the amount that the FHCF would pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process resulted in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma. Social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims, could result in adverse development of these claims, which creates uncertainty as to the ultimate cost to settle all of the remaining Hurricane Irma claims. Accordingly, the final amount paid by the FHCF could vary from the Company’s future estimation of losses to be recovered from the FHCF. As such, should further re-estimations to Hurricane Irma losses increase the Company's expected loss reserves, all the increase will be retained by the Company. The commutation process was finalized and binding for both parties upon completion which occurred during the quarter ended September 30, 2023 and the final payment by the FHCF was received by the Company in September 2023.

Current wording

As further described in Note 17, Commitments and Contingencies, and Note 13, Reserve for Unpaid Losses, to the condensed consolidated financial statements, our 2017 reinsurance agreement with the FHCF required a commutation no later than 60 months after the end of the contract year. As part of this process, Heritage and FHCF terminated the 2017 reinsurance agreement and agreed on the amount that the FHCF would pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process resulted in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma. Social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims, could result in adverse development of these claims, which creates uncertainty as to the ultimate cost to settle all of the remaining Hurricane Irma claims. Accordingly, the final amount paid by the FHCF could vary from the Company’s future estimation of losses to be recovered from the FHCF. As such, should further re-estimations to Hurricane Irma losses increase the Company's expected loss reserves, all the increase will be retained by the Company. The commutation process was finalized and binding for both parties upon completion which occurred during the quarter ended September 30, 2023 and the final payment by the FHCF was received by the Company in September 2023.

Previous wording

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates and inflation guard factors resulting in an increase in the average premium per policy of 24.2% for the year ended December 31, 2023 as compared to the prior year. The increase in average premium includes rate changes, inclusion of inflation in premiums as described below, and in the mix of business written. We experienced intentional growth of our commercial residential business during 2023 and this line of business generates significantly higher average premium per policy. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

Current wording

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates and inflation guard factors resulting in an increase in the average premium per policy of 22.3% at December 31, 2024 as compared to the prior year. The increase in average premium includes rate changes, inclusion of inflation in premiums as described below, and changes in the mix of business written. We experienced intentional growth of our commercial residential business during 2024 and this line of business generates significantly higher average premium per policy. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

Previous wording

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Our Florida personal lines market is also seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public. Our response to this phenomenon is a combination of raising rates and reducing exposure. Claims abuse has extended throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeds levels experienced in other states. Correspondingly, our exposure reduction plan expanded to personal lines business throughout the state of Florida. Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress toward reducing losses from abusive claim reporting practices. The special legislative session of December 2022 included a number of additional provisions aimed at driving down claims abuses and stabilizing the Florida property insurance market. The impact of this legislation continues to be evaluated by management before growing exposures in the Florida personal lines market.

Current wording

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Our Florida personal lines market was seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public. Our response to this phenomenon was a combination of raising rates and reducing exposure. In recent years, legislative changes have been made in Florida which we believe are making progress toward reducing losses from abusive claim reporting practices. The special legislative session of December 2022 included a number of additional provisions aimed at driving down claims abuses and stabilizing the Florida property insurance market. The positive impact of this legislation, coupled with rate adequacy and disciplined underwriting, has resulted in the selective re-opening of counties for new personal lines business in Florida.

Previous wording

Our industry experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in the Spring 2022 renewals. This trend continued but to a lesser extent during the Spring 2023 renewals. As described herein, we are carefully managing exposure by reducing new personal lines business written in many geographies, non-renewing unprofitable business in compliance with regulatory requirements, and narrowing our underwriting requirements. We have improved the geographic distribution of our business, which is becoming more rate adequate. Our Florida net incurred losses and LAE declined for the year ended December 31, 2023, mostly due to more favorable weather, our improved portfolio, and legislative changes aimed at curtailing claims abuse. Our Florida net incurred losses and LAE for the year ended December 31, 2022 were significantly higher from a combination of adverse weather and exacerbation of losses on weather and other claims resulting from the litigated claims environment.

Current wording

Our industry had experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in recent years. For the 2024 hurricane season, the supply of catastrophe excess of loss reinsurance for the Company was ample and pricing and terms have begun to moderate. We are managing exposure by writing new business only in geographies for which rates are adequate, non-renewing unprofitable business in compliance with regulatory requirements, and maintaining our strict underwriting requirements. We have improved the geographic distribution of our business, which is becoming more rate adequate.

Previous wording

Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost of our reinsurance program ratably over term of the arrangement, which is typically twelve months. Our catastrophe excess of loss reinsurance generally incepts June 1 and runs through May 31 of the following year. Our net quota share treaty incepts December 31. Our other reinsurance programs may be purchased on a calendar or fiscal year basis.

Current wording

Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost of our reinsurance program ratably over term of the arrangement, which is typically twelve months. Our catastrophe excess of loss reinsurance generally commences on June 1 and runs through May 31 of the following year. Our net quota share treaty commences on December 31. Our other reinsurance programs may be purchased on a calendar or fiscal year basis.

Previous wording

Provision for income taxes consists of federal and state corporate level income taxes. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year and updated with actual amounts in the fourth quarter. The effective tax rate can vary from the 26.5% statutory federal and state blended rate depending on the amount of pretax income in proportion to permanent tax differences as well as state tax apportionment. The 2023 effective tax rate was favorably impacted by the release of valuation allowance associated with the operations of our captive reinsurer, Osprey. The December 31, 2022 effective tax rate was adversely impacted by the non-deductible goodwill impairment and the establishment of a valuation allowance associated with the operations of our captive reinsurer, Osprey.

Current wording

Provision for income taxes consists of federal and state corporate level income taxes. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year and updated with actual amounts in the fourth quarter. The effective tax rate can vary from the 25.9% statutory federal and state blended rate depending on the amount of pretax income in proportion to permanent tax differences as well as state tax apportionment. The 2023 effective tax rate was favorably impacted by the release of valuation allowance associated with the operations of our captive reinsurer, Osprey.

Previous wording

Net income for the year ended December 31, 2023 was $45.3 million or $1.73 per diluted share, compared to a net loss of $154.4 million or $5.86 diluted loss per share in the prior year. The increase was driven mostly by the positive impact of rate actions, underwriting actions, and exposure management undertaken during 2022 and 2023, which favorably affected 2023 results. Additionally, net income benefitted from significantly lower losses as described below and a $6.4 million reduction in the valuation allowance associated with certain tax elections made by Osprey. Certain factors adversely affected 2022 results and impacted the year over year variance. The 2022 net loss stemmed from a $90.8 million, net of income tax, non-cash goodwill impairment charge contributing a $3.45 loss per share, combined with higher losses and loss adjustment expenses incurred for the year as described below. In addition, during 2022 the Company recorded a $6.4 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey, our captive reinsurer domiciled in Bermuda.

Current wording

•Net income for the year ended December 31, 2024 was $61.5 million or $2.01 per diluted share, compared to a net income of $45.3 million or $1.73 diluted loss per share in the prior year. The increase was driven mostly by the positive impact of rate actions, underwriting actions, and exposure management undertaken during 2022, 2023 and 2024, partly offset by higher operating expenses and income taxes, as described below.

Previous wording

Gross premiums written of $1.34 billion, up 5.3% from $1.28 billion in the prior year, driven primarily by rate actions taken in all states with a policy count reduction of 7.2% driven substantially by a reduction in the number of Florida personal lines policies. The decline in gross premiums written associated with the decline in personal lines policies was more than offset by growth in the commercial line gross premiums written. Additionally, rate increases continued to meaningfully benefit written premiums throughout the book of business and use of inflation guard results in higher premium.

Current wording

•Gross premiums written of $1.43 billion, an improvement of 6.7% from $1.34 billion in the prior year, driven primarily by rate actions taken in all states, which was partly offset by a personal lines policy count reduction driven by exposure management. Growth in the commercial lines business offset the decline in personal lines policies. Additionally, rate increases continued to meaningfully benefit written premiums throughout the book of business and use of inflation guard, which ensures appropriate property values, resulted in higher premium. While we expect underwriting discipline and exposure management to continue, the specific intentional targeted exposure management of the last several years is expected to level out going forward as we continue our controlled growth strategy, which includes strategically growing the personal lines policy count.

Previous wording

Gross premiums earned of $1.32 billion, up 9.5% from $1.28 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy.

Current wording

•Gross premiums earned of $1.4 billion, an improvement of 6.2% from $1.3 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy as described above.

Previous wording

Net premiums earned of $697.2 million, up 9.4% from $637.1 million in the prior year, reflecting the higher gross earned premium outpacing the increase in ceded premiums for the year.

Current wording

•Net premiums earned of $767.9 million, an improvement of 10.1% from $697.2 million in the prior year, reflecting the higher gross earned premium outpacing the increase in ceded premiums for the year.

Previous wording

Losses and loss adjustment expenses incurred of $426.1 million, down 15.0% from $501.2 million in the prior year. The decrease primarily stems from lower weather and attritional losses as described below. Additionally, we experienced $1.6 million of favorable prior year development compared to $3.7 million of adverse prior year development in 2022.

Current wording

•Losses and loss adjustment expenses incurred of $447.0 million, up 4.9% from $426.1 million in the prior year. The increase primarily stems from higher catastrophe losses, partly offset by lower weather and attritional losses as described below. Additionally, we experienced $25.4 million of adverse prior year development compared to $1.6 million of favorable prior year development in 2023. The adverse development was driven largely by development of Hurricane Irma claims. The net unfavorable loss development stemmed primarily from losses associated with Hurricane Irma, for which the losses were fully retained.

Previous wording

Net loss ratio of 60.4%, an 18.3 point improvement over the prior year of 78.7%, driven by lower weather and attritional losses incurred and benefiting from higher net premiums earned as described above.

Current wording

•Net loss ratio of 58.2%, a 2.9 point improvement over the prior year of 61.1%, driven by the benefit of higher net premiums earned as described above, which exceeded the impact of higher losses and loss adjustments expenses incurred, as described above.

Previous wording

Net combined ratio of 95.6%, an 18.7 point improvement from 114.3% in the prior year, primarily driven by lower net loss and net expense ratios as described above.

Current wording

•Net combined ratio of 94.2%, a 2.1 point improvement from 96.3% in the prior year, primarily driven by lower net loss ratio, partly offset by a higher net expense ratio as described above.

Previous wording

Effective tax rate was 12.9% compared to 7.1% in the prior year. The effective tax rate for 2023 benefitted from a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year, as operating income at Osprey for the year ended December 31, 2023 resulted in sufficient positive evidence to release the valuation allowance on the Osprey net deferred assets. In contrast, for the year ended December 31, 2022 a $6.4 million valuation allowance was established against our Osprey net deferred tax assets whose utilization may be limited under the Internal Revenue Code. The effective tax rate for 2022 was also significantly lower than the statutory rate due to a non-cash, mostly tax non-deductible goodwill impairment of $92.0 million recorded in the second quarter. The effective tax rate can also vary driven by the impact of permanent differences in relation to the pre-tax income or loss each year.

Current wording

•Effective tax rate was 25.6 % compared to 12.9% in the prior year. The effective tax rate for 2024 was slightly lower than the statutory rate. The effective tax rate for 2023 benefited from a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year, as operating income at Osprey for the year ended December 31, 2023 resulted in sufficient positive evidence to release the valuation allowance on the Osprey net deferred assets. The effective tax rate can also vary driven by the impact of permanent differences in relation to the pre-tax income or loss each year.

Previous wording

Total revenue was $735.5 million for the year ended December 31, 2023, up 11.0% compared to $662.5 million in the prior year. The increase primarily stems from higher net premiums earned and net investment income as described below.

Current wording

Total revenue was $817.0 million for the year ended December 31, 2024, up 11.1% compared to $735.5 million in the prior year. The increase primarily stems from higher net premiums earned and net investment income as described below.

Previous wording

Gross premiums written were $1.34 billion, up 5.3% year-over-year from $1.28 billion, reflecting a strategic and substantial increase in Florida commercial residential lines business and a higher average premium per policy throughout the book of business, partly offset by intentional targeted exposure management resulting in premium reductions of personal lines business in most states. We experienced premiums written growth of 15.3% in Florida driven by growth of the commercial residential portfolio and rate actions and a premium written reduction of 12.1% outside Florida driven by intentional exposure management which was partly offset by rate actions.

Current wording

Gross premiums written were $1.4 billion, up 6.7% year-over-year from $1.3 billion, reflecting a strategic and substantial increase in Florida commercial residential lines business and a higher average premium per policy throughout the book of business, partly offset by intentional targeted exposure management resulting in premium reductions of personal lines business in most states. We experienced premiums written growth of 7.4% in Florida driven by growth of the commercial residential portfolio, which offset a reduction of premium written for the Florida personal lines portfolio. Premiums written outside of Florida grew 5.0% driven by growth of the California E&S business and rate actions in other states, which was partly offset by a reduction related to exposure management.

Previous wording

Premiums-in-force were $1.4 billion as of December 31, 2023, representing a 5.6% increase from the prior year due to continued proactive underwriting action and rate increases across the entire portfolio and strategic growth in our commercial residential product, despite a policy count reduction of approximately 79,000, driven by an intentional reduction in our personal lines policy count. Concurrently, TIV decreased by 4.7%.

Current wording

Premiums-in-force were $1.4 billion as of December 31, 2024, representing a 5.7% increase from the prior year due to continued proactive underwriting action and rate increases across the entire portfolio and strategic growth in our commercial residential product, despite a policy count reduction of over 60,000, driven by an intentional reduction in our personal lines policy count. Concurrently, TIV decreased by 5.8%.

Previous wording

Gross premiums earned were $1.3 billion for the year ended December 31, 2023, up 9.5% compared to $1.2 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy, use of inflation guard, and organic growth of the commercial residential business.

Current wording

Gross premiums earned were $1.4 billion for the year ended December 31, 2024, up 6.2% compared to $1.3 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy, use of inflation guard, and organic growth of the commercial residential business.

Previous wording

Net premiums earned were $697.2 million for the year ended December 31, 2023, up 9.4% compared to $637.1 million in the prior year. The increase primarily stems from higher gross premiums earned outpacing higher ceded premiums as described above.

Current wording

Net premiums earned were $767.9 million for the year ended December 31, 2024, up 10.1% compared to $697.2 million in the prior year. The increase primarily stems from higher gross premiums earned outpacing higher ceded premiums as described above.

Previous wording

Net investment income, inclusive of realized investment gains (losses) and unrealized gains (losses) on equity securities, was $24.8 million for the year ended December 31, 2023, up 112.0% compared to $11.7 million in the prior year. The increase stems from a strategy to reinvest bond maturity proceeds into higher yielding short term instruments such as bank sweep accounts and treasury bills.

Current wording

Net investment income, inclusive of realized investment gains (losses) and unrealized gains (losses) on equity securities, was $35.9 million for the year ended December 31, 2024, up 45.0% compared to $24.8 million in the prior year. The increase is primarily due to higher yields on cash and invested assets associated with higher interest rates, coupled with higher balances of cash and invested assets.

Previous wording

Losses and LAE were $426.1 million for the year ended December 31, 2023, down 15.0% compared to $501.2 million in the prior year. The decrease was driven by lower weather losses and lower attritional losses compared to the prior year. Net current accident year weather losses were $109.2 million, down $84.0 million from $193.2 million in the prior year. Current year catastrophe losses were $48.3 million compared to catastrophe weather losses of $132.4 million in the prior year. Other weather losses were $60.9 million, relatively flat from $60.8 million in the prior year. Attritional losses were lower, primarily associated with the reduction in personal lines policy count and related underwriting criteria enhancements, which improved the book of business.

Current wording

Losses and LAE were $447.0 million for the year ended December 31, 2024, up 4.9% compared to $426.1 million in the prior year. The increase primarily stems from higher catastrophe losses and adverse development, which was partly offset by lower weather and attritional losses compared to the prior year. Net current accident year weather losses were $146.7 million, up $37.5 million from $109.2 million in the prior year. Current year catastrophe losses were $104.6 million compared to catastrophe weather losses of $48.3 million in the prior year. Other weather losses were $42.1 million compared to $60.9 million in the prior year. Attritional losses were lower, primarily associated with the reduction in personal lines policy count and related underwriting criteria enhancements, which improved the book of business.

Previous wording

General and administrative expenses were $77.8 million for the year ended December 31, 2023, up 10.5% compared to $70.4 million in the prior year. The increase is primarily attributable to amortization of software and other costs that can no longer be capitalized associated with the implementation of a new claims system. Additional costs were incurred in the current year associated with the installation of the new telephone system. The new claims and telephone systems are expected to drive future efficiencies. In addition, the company incurred higher human capital costs in the current year.

Current wording

General and administrative expenses were $85.1 million for the year ended December 31, 2024, up 9.5% compared to $77.8 million in the prior year. The increase was driven by a reduction in ceding commission income, as described above, for which a portion is allocated to general and administrative expenses, as well as amortization of software and other costs that can no longer be capitalized, associated with the implementation of a new claims system, higher insurance costs, and installation of the new telephone system.

Previous wording

We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed their implied fair value. Goodwill was evaluated at the reporting unit level, for which we have one reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. The Goodwill impairment evaluation includes a review of a variety of factors as described below, which require considerable management judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

Current wording

We evaluate other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of other intangible assets may exceed their implied fair value. We had no impairments for any other intangible assets for the year ended December 31, 2024. In December 2023, we impaired approximately $0.8 million of other intangibles associated with our construction division due to management changes to its operations. Note 3 "Intangible Assets, net"of the notes to our consolidated financial statements for more detail on impairment of our goodwill in 2022.

Previous wording

Interest expense was $11.2 million for the year ended December 31, 2023, above the prior year by 27.3% as a result of higher interest rates on our variable rate debt.

Current wording

Interest expense was $10.9 million for the year ended December 31, 2024, a reduction from the prior year by 2.5% as a result of a decrease in interest rates on our variable rate debt.

Previous wording

The provision for income taxes was $6.7 million for the year ended December 31, 2023 compared to a benefit for income taxes of $11.8 million for the year ended December 31, 2022. The effective tax rate for the year ended December 31, 2023 was 12.9% compared to 7.1% in the prior year. The effective tax rate for 2023 benefitted from a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year as operating income at Osprey for the year ended December 31, 2023 resulted in full use of Osprey operating losses. In contrast, for the year ended December 31, 2022 a $6.4 million valuation allowance was established against our Osprey net deferred tax assets whose utilization may be limited under the Internal Revenue Code. The effective tax rate for pre-tax loss experienced for the year ended December 31, 2022 was also significantly lower than the statutory rate due to a non-cash, mostly tax non-deductible goodwill impairment of $92.0 million recorded in the second quarter. The effective tax rate can also vary driven by the impact of permanent differences in relation to the pre-tax income or loss each year.

Current wording

The provision for income taxes was $21.1 million for the year ended December 31, 2024 compared to $6.7 million for the year ended December 31, 2023. The effective tax rate for the year ended December 31, 2024 was 25.6%, which is slightly lower than the statutory rate, compared to 12.9% in the prior year. The effective tax rate for 2023 was lower than the statutory rate driven by a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year, as operating income at Osprey for the year ended December 31, 2023 resulted in full use of Osprey operating losses. The effective tax rate can also vary driven by the impact of permanent differences in relation to the pre-tax income or loss each year.

Previous wording

The net combined ratio was 96.3% for the year ended December 31, 2023, an 18.7 point improvement from 114.3% in the prior year. The improvement stems primarily from a significantly lower net loss and LAE ratio, described below.

Current wording

The net combined ratio was 94.2% for the year ended December 31, 2024, a 2.1 point improvement from 96.3% in the prior year. The improvement stems primarily from a significantly lower net loss and LAE ratio, as described below.

Previous wording

At December 31, 2023, reinsurance recoverable on paid and unpaid claims decreased by $322.6 million to $482.4 million from $805.1 million at December 31, 2022. The decrease is primarily due to reinsurance reimbursements received during 2023 for claim payments related to Hurricanes Irma and Ian.

Current wording

At December 31, 2024, reinsurance recoverable on paid and unpaid claims increased by $257.8 million to $740.2 million from $482.4 million at December 31, 2023. The increase is primarily due to reinsurance recoverable for losses associated with Hurricanes Ian and Milton.

Previous wording

At December 31, 2023, total shareholders’ equity increased by $89.2 million to $220.3 million from $131.0 million at December 31, 2022. The increase is primarily due to net income for the year ended December 31, 2023, coupled with a reduction in unrealized losses on fixed maturity investments and proceeds from the public and private offering of shares of our common stock. Rising interest rates during 2022 resulted in significant unrealized losses at December 31, 2022. As interest rates tempered during 2023 and certain investments matured at face value, unrealized losses declined from the prior year.

Current wording

At December 31, 2024, total shareholders’ equity increased by $70.5 million to $290.8 million from $220.3 million at December 31, 2023. The increase is primarily due to net income of $61.5 million for the year ended December 31, 2024, coupled with a reduction in unrealized losses, from $35.3 million at December 31, 2023 to $28.6 million at December 31, 2024, as a result of lower interest rates during the period, which reduced the amount of unrealized losses on our fixed income securities.

Previous wording

Our principal sources of liquidity include cash flows generated from operations, our cash, cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of December 31, 2023, we held $463.6 million in cash and cash equivalents and $569.4 million in investments, compared to $280.9 million in cash and $653.6 million in investments as of December 31, 2022. The increase in cash and cash equivalents was primarily driven by proceeds from issuance of our common stock in the December 2023 underwritten public offering, higher cash levels at our captive reinsurer Osprey to provide collateral for affiliate reinsurance transactions, timing of receipt of reinsurance recoveries, a reinsurance commutation with the FHCF for which proceeds were received in advance of claim payments made by the Company, and reinvesting proceeds from investment maturities to short term instruments which provided a higher yield than fixed income securities, which was partly offset by costs associated with an enhanced policy, billing and claims system. The decrease in investments was driven by maturities which were not reinvested as described above which was partly offset by lower unrealized losses on our fixed income securities as interest rates stabilized.

Current wording

Our principal sources of liquidity include cash flows generated from operations, our cash, cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of December 31, 2024, we held $452.7 million in cash and cash equivalents and $663.4 million in investments, compared to $463.6 million in cash and $569.4 million in investments as of December 31, 2023. The decrease in cash and cash equivalents was primarily driven by cash used for payment of claims, inclusive of catastrophe claims from 2024 hurricanes, net of reinsurance recoveries, as well as timing of reinsurance premium payments. The increase in investments was driven by re-investment of proceeds from investment maturities and short term funds to secure a higher yield given expectations of interest rate declines. Additionally, unrealized losses on our fixed income securities declined as interest rates stabilized.

Previous wording

The Company is party to a Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners (as amended from time to time, the “Credit Agreement”).

Current wording

The Company is party to a Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”),and the administrative and collateral agents and other parties thereto (as amended from time to time, the “Credit Agreement”).

Previous wording

Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding under the Term Loan Facility. As of December 31, 2023, there was $79.6 million in aggregate principal outstanding under the Term Loan Facility.

Current wording

Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ended March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ended December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ended December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of December 31, 2024 and December 31, 2023, there was $70.1 million and $79.6 million, respectively, in aggregate principal outstanding under the Term Loan Facility.

Previous wording

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the amendment, the borrowings under the Revolving Credit Facility were repaid in full. On December 23, 2022, the Company borrowed $10.0 million under the Revolving Credit facility. At December 31, 2023, the outstanding balance under the Revolving Credit facility was $10.0 million. The Company secured additional letters of credit during 2023; however at December 31, 2023 all of the letters of credit were terminated and the Company had no outstanding letter of credits issued from the Revolving Credit Facility.

Current wording

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. At December 31, 2024 and 2023, the outstanding balance under the Revolving Credit facility was $10.0 million. During 2024, the Company secured letters of credit in aggregate of $24.4 million with a maturity date of March 16, 2025, which provided additional collateral for reinsurance contracts associated with Osprey Re and remained outstanding at December 31, 2024.

Previous wording

The applicable margin for loans under the Credit Facilities varies from 2.75% per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for SOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of December 31, 2023, the borrowings under the Term Loan Facility and Revolving Credit Facility accruing interest at a rate of 8.179% and 8.198% per annum, respectively.

Current wording

The applicable margin for loans under the Credit Facilities varies from 2.75% per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for SOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of December 31, 2024, the borrowings under the Term Loan Facility and Revolving Credit Facility accruing interest at a rate of 7.449% and 7.423% per annum, respectively.

Previous wording

The Company and the Guarantors are party to a Pledge and Security Agreement, (as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the

Current wording

The Company and the Guarantors are party to a Pledge and Security Agreement, (as amended from time to time the “Security Agreement”), in favor of a collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.