Heritage Insurance Holdings Inc.

11/07/2025 | Press release | Distributed by Public on 11/07/2025 12:29

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2024 (as amended, the "2024 Form 10-K"). Unless the context requires otherwise, as used in this Form 10-Q, the terms "we", "us", "our", "the Company", "our Company", and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.
Overview
We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York. We provide personal residential insurance in Florida and South Carolina on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.
Recent Developments
Economic and Market Factors
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. We mitigate the impact of inflation by implementation of rate increases 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 ("TIV"). To the extent that reinsurance costs rise, we may seek to recoup the cost of reinsurance in future rate filings as well as mitigate the cost through exposure management.
Supplemental Information
The Supplemental Information table below demonstrates the distribution of our portfolio by providing policy count, premiums-in-force, and TIV for Florida and all other states as of September 30, 2025 and comparing those metrics to September 30, 2024.
Policies-in-force: Q3 2025 Q3 2024 % Change
Florida 125,476 135,867 (7.6) %
Other States 237,833 265,224 (10.3) %
Total 363,309 401,091 (9.4) %
Premiums-in-force:
(in thousands)
Florida $ 692,114 $ 722,202 (4.2) %
Other States 748,448 704,779 6.2 %
Total $ 1,440,562 $ 1,426,981 1.0 %
Total Insured Value:
(in thousands)
Florida $ 106,682,106 $ 103,248,922 3.3 %
Other States 258,581,715 270,322,492 (4.3) %
Total $ 365,263,822 $ 373,571,415 (2.2) %
The policy count reduction from the prior year quarter of 9.4% was driven by exposure management goals associated with the profitability initiatives described below. The underwriting and rate adequacy objectives were met and given the Company's achievement of rate adequacy in a majority of our territories, the Company is expanding and open for new business in nearly all territories.
Strategic Profitability Initiatives
The Company has focused on three main strategic initiatives over the past few years aimed at achieving consistent, long-term quarterly earnings and driving shareholder value, which include:
•Generating underwriting profit through rate adequacy and more selective underwriting.
•Allocating capital to products and geographies that maximize long-term returns.
•Maintaining a balanced and diversified portfolio.
These three initiatives will remain in place while we also expand our strategy to include our 2025 initiatives.
Strategic Initiatives for 2025
•Re-opening profitable geographies and allocating capital to sustain profits and margins on a measured basis.
•Persistent underwriting discipline and focus on rate adequacy.
•Continued data driven analytics.
•Enhancing customer service and claims capabilities.
•Leveraging infrastructure and capabilities to foster future growth.
Trends
Inflation, Underwriting and Pricing
We address reinsurance and loss costs trends in the property insurance sector through rates and inflation guard factors which resulted in an increase in the average premium per policy of 11.5% for the quarter ended September 30, 2025 as compared to the prior year quarter. The higher average premium is driven by rate changes, inclusion of inflation guard, and by the mix of business written. We experienced intentional growth of our commercial residential business during 2024, with in-force premium in that line of business decreasing during 2025, driven primarily by competitive market conditions. 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.
We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our retention has remained steady in the range of near 90%,which we believe is driven in large part due to our strong agency relationships and focus on policyholder service level. While we believe our rates are generally competitive with private market insurers operating in our space, we are focused on maintaining rate adequacy throughout our book of business as we continue to prudently grow our business.
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. However, inflation is increasing at a lower rate than what we have experienced in the last several years. We will make adjustment for increasing or decreasing inflation as we see fluctuations. Florida personal lines claim costs associated with litigated claims have decreased over the last several years due to favorable legislation aimed to curtail claims abuse. 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 legislation appears to have achieved its intended impact and has improved our outlook on conducting business in Florida.
Our industry had experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in 2022 and 2023. For the 2024 hurricane season, the supply of catastrophe excess of loss reinsurance for the Company was ample and pricing began to moderate. For the 2025 hurricane season, we observed increased reinsurance supply at competitive pricing as the reinsurance market continues to stabilize and improve.
Overview of Financial Results
In the following section, we discuss our financial condition and results of operations for the three months ended September 30, 2025 compared to the three months ended September 30, 2024.
The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, including certain key performance indicators such as net combined ratio, ceded premium ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q.
•Third quarter 2025 net income was $50.4 million or $1.63 per diluted share, compared to net income of $8.2 million or $0.27 per diluted share in the prior year quarter, primarily driven by a significant reduction in losses and loss adjustment expenses and a reduction in operating expenses. Rate changes and organic growth in select geographies resulted in growth of 6.4% in gross written premiums and 2.2% of gross premiums earned. Investment income was relatively flat despite a larger investment portfolio due to the interest rate environment. Losses and LAE decreased by 42.5% primarily from lower weather losses. Policy acquisition costs decreased 6.9%, driven by higher ceding commission which was partially offset by an increase in agent commissions driven by higher written premiums. General and administrative costs increased 3.6% driven primarily due to system related costs.
•Gross premiums written of $333.2 million were up 6.4% from $313.0 million in the prior year quarter, reflecting both rate actions and growth of new business as rate adequate territories were opened for new business. This was partly offset by a reduction in commercial residential business, driven by competitive market conditions.
•Gross premiums earned were $362.0 million, up 2.2% from $354.2 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months primarily from rating actions.
•Net premiums earned were $195.1 million, down 1.9% from $198.8 million in the prior year quarter, driven by higher ceded premium in the quarter which offset higher gross premiums earned. The increase in ceded premiums is driven primarily by a $4.0 million reinstatement premium for Hurricane Ian and an increase in the northeast quota share program as premium subject to that program grew from the prior year quarter. This led to an increase in the ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the prior year quarter.
•Net loss ratio decreased to 38.3%, a 27.1 point improvement from 65.4% in the same quarter last year, reflecting significantly lower net losses and LAE. Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63.0 million in the prior year quarter. There were no catastrophe losses in the current quarter compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development compared to the prior year quarter. Favorable net loss development was $5.0 million in the current year quarter compared to adverse development of $6.3 million in the prior year quarter.
•The net expense ratio was 34.6%, a 0.6 point improvement from the prior year quarter amount of 35.2%, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceding commission income associated with both a larger amount of premium ceded under the net quota share program and a higher ceding commission rate driven by favorable loss experience for that program. This resulted in a 1.2% reduction in policy acquisition costs which was partly offset by a 0.6 point increase in the net general and administrative expense ratio.
•Net combined ratio of 72.9% improved 27.7 points from 100.6% in the prior year quarter, driven by primarily by a lower net loss ratio as well as a lower net expense ratio as described above.
•Net investment income was $9.7 million, relatively flat from the prior year quarter, due to a lower interest rate environment for our sweep accounts and money market funds, despite higher invested assets. We continue to manage our investment portfolio, while maintaining a conservative portfolio with high quality investments and duration liability matched.
•The effective tax rate was 26.2% compared to 9.4% in the prior year quarter. We calculate the provision for income taxes during interim reporting periods by applying an estimate of the effective tax rate for the full year. The effective tax rate for the prior year quarter was favorably impacted by updated estimates used in the quarterly tax provision as well as the benefit of interest income on a previous year's income tax refund, which lowered income tax expense for the prior year quarter. The effective tax rate can fluctuate throughout the year as estimates used in each quarterly tax provision are updated with additional information.
Results of Operations
Comparison of the Three Months Ended September 30, 2025 and 2024
Revenue
For the Three Months Ended September 30,
2025 2024 $ Change % Change
(Unaudited) (in thousands)
REVENUE:
Gross premiums written $ 333,160 $ 312,986 $ 20,174 6.4 %
Change in gross unearned premiums 28,801 41,211 (12,410) (30.1) %
Gross premiums earned 361,961 354,197 7,764 2.2 %
Ceded premiums (166,829) (155,356) (11,473) 7.4 %
Net premiums earned 195,132 198,841 (3,709) (1.9) %
Net investment income 9,686 9,801 (115) (1.2) %
Net realized gains on debt securities and other investments 2,746 6 2,740 NM
Other revenue 4,895 3,201 1,694 52.9 %
Total revenue $ 212,459 $ 211,849 $ 610 0.3 %
*NM - Not Meaningful
Total revenue
Total revenue was $212.5 million, a 0.3% improvement compared to $211.9 million in the prior year quarter. The increase primarily stems from an increase in net realized gains on debt securities and other investments, which included a gain on the sale of investment property, net of costs and commission expenses as well as an increase in other revenue primarily related to fee income from our surplus lines business, which was offset by a slight decrease in net premiums earned.
Gross premiums written
Gross premiums written of $333.2 million grew 6.4% from $313.0 million in the prior year quarter, reflecting both rate actions and growth of new business as rate adequate territories were opened for new business. This was partly offset by a reduction in commercial residential business, driven by competitive market conditions.
Premiums-in-force were $1.44 billion as of third quarter 2025, an increase of 1.0% compared to $1.43 billion as of third quarter 2024, driven by rate actions taken while concurrently, TIV decreased by 2.2%.
Gross premiums earned
Gross premiums earned were $362.0 million, a 2.2% improvement from $354.2 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months.
Ceded premiums
Ceded premiums were $167.0 million in third quarter 2025, up by 7.4% from $155.4 million in the prior year quarter. The increase in ceded premiums is driven primarily by a $4.0 million reinstatement premium for Hurricane Ian during the third quarter of 2025 and an increase in the northeast quota share program as premium subject to that program grew from the prior year quarter. The result was an increase in the ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the prior year quarter. To the extent the ultimate losses for Hurricanes Ian or Milton change, reinstatement premiums will correspondingly change.
Net premiums earned
Net premiums earned were $195.1 million in third quarter 2025, down 1.9% from $198.8 million in the prior year quarter, driven by higher ceded premium in the quarter which offset higher gross premiums earned as described above.
Net investment income
Net investment income was $9.7 million in third quarter 2025, relatively flat from $9.8 million in the prior year quarter, primarily due to lower yields on money market accounts in the current interest rate environment, despite higher invested asset balances. We continue to manage our investment portfolio, while maintaining a conservative portfolio with high quality investments and duration liability matched.
Expenses
For the Three Months Ended September 30,
(Unaudited) 2025 2024 $ Change % Change
EXPENSES: (in thousands)
Losses and loss adjustment expenses 74,766 130,020 (55,254) (42.5) %
Policy acquisition costs 45,182 48,508 (3,326) (6.9) %
General and administrative expenses 22,345 21,572 773 3.6 %
Total expenses 142,293 200,100 (57,807) (28.9) %
Total expenses
Total expenses were $142.3 million in third quarter 2025, a 28.9% improvement compared to $200.1 million in the prior year quarter. As described below, losses and LAE declined, policy acquisition costs declined, and general and administrative expenses increased.
Losses and loss adjustment expenses ("LAE")
Losses and LAE incurred were $74.8 million in third quarter 2025, a 42.5% improvement from $130.0 million in the prior year quarter. The decrease primarily stems from lower weather losses and favorable net loss development. We experienced no catastrophe losses during the third quarter of 2025 as compared to $48.7 million in the prior year quarter. Other weather losses were down to $13.8 million for the third quarter of 2025 compared to the prior year quarter amount of $14.3 million. Net favorable prior year loss development was $5.0 million for the third quarter of 2025 compared to net unfavorable loss development of $6.3 million for the prior year quarter.
Policy acquisition costs
Policy acquisition costs were $45.2 million in third quarter 2025, a 6.9% improvement from $48.5 million in the prior year quarter. The decrease is primarily attributable to higher ceding commission earned on the net quota share reinsurance contract, the income of which offsets other policy acquisition costs. Higher ceding commission income was associated with both a larger amount of premium ceded under the net quota share program and a higher ceding commission rate driven by favorable loss experience for that program.
General and administrative expenses
General and administrative expenses were $22.3 million in third quarter 2025, up 3.6% from $21.6 million in the prior year quarter. The increase was driven largely by higher systems related costs.
Income
For the Three Months Ended September 30,
2025 2024 $ Change % Change
(Unaudited) (in thousands, except per share amounts)
Operating income 70,166 11,749 58,417 497.2 %
Interest expense, net 1,850 2,755 (905) (32.8) %
Income before income taxes 68,316 8,994 59,322 659.6 %
Income tax expense 17,895 842 17,053 NM
Net income $ 50,421 $ 8,152 $ 42,269 518.5 %
Basic earnings per share $ 1.63 $ 0.27 $ 1.36 NM
Diluted earnings per share $ 1.63 $ 0.27 $ 1.36 NM
*NM - Not Meaningful
Net income
Third quarter 2025 net income was $50.4 million or $1.63 per diluted share, compared to net income of $8.2 million or $0.27 per diluted share in the prior year quarter, primarily driven by a significant reduction in losses and LAE and a reduction in operating expenses. Losses and LAE decreased by 42.5%, driven primarily from lower weather losses and favorable net loss development. Policy acquisition costs decreased 6.9%, driven by an increase in ceding commission on the net quota share reinsurance contract, which offsets higher costs that vary with gross premiums written. General and administrative costs increased 3.6% driven primarily by systems costs, with the net general and administrative expense ratio 0.6 points higher than the prior year quarter.
Interest expense, net
Interest expense, net was $1.9 million in the third quarter of 2025, a $0.9 million decrease from $2.8 million for the prior year quarter, driven by the reduction in debt obligations and a lower interest rate environment.
Income tax expense
Income tax expense was $17.9 million in third quarter 2025 compared to $0.8 million in the prior year quarter. The effective tax rate for the current year quarter was 26.2% compared to 9.4% in the prior year quarter. We calculate the provision for income taxes during interim reporting periods by applying an estimate of the effective tax rate for the full year. The effective tax rate for the prior year quarter was favorably impacted by updated estimates used in the quarterly tax provision as well as the benefit of interest income on a previous year's income tax refund, which lowered income tax expense for the prior year quarter. The effective tax rate can fluctuate throughout the year as estimates used in each quarterly tax provision are updated with additional information.
Ratios
For the Three Months Ended September 30,
(Unaudited) 2025 2024
Ceded premium ratio 46.1 % 43.9 %
Net loss and LAE ratio 38.3 % 65.4 %
Net expense ratio 34.6 % 35.2 %
Net combined ratio 72.9 % 100.6 %
Net combined ratio
The net combined ratio was 72.9% in third quarter 2025, a 27.7 point improvement from 100.6% in the prior year quarter. The decrease primarily stems from a lower net loss and LAE ratio and lower net expense ratio as described below.
Ceded premium ratio
The ceded premium ratio was 46.1% in third quarter 2025, up 2.2 point from 43.9% in the prior year quarter, primarily driven by a $4.0 million reinstatement premium related to Hurricane Ian and higher ceded premium on the net quota share contract driven by growth in premiums associated with that contract.
Net loss and LAE ratio
The net loss and LAE ratio was 38.3% in third quarter 2025, a 27.1 point improvement from 65.4% in the prior year quarter, reflecting a significant decrease in net losses and LAE as described above.
Net expense ratio
The net expense ratio was 34.6%, a 0.6 point improvement from the prior year quarter amount of 35.2%, primarily driven by higher ceding commission income which lowered the net policy acquisition costs ratio. This was partly offset by a higher net general and administrative expense ratio.
Results of Operations
Comparison of the nine months Ended September 30, 2025 and 2024
Revenue
For the Nine Months Ended September 30,
2025 2024 $ Change % Change
(Unaudited) (in thousands)
REVENUE:
Gross premiums written $ 1,100,125 $ 1,094,200 $ 5,925 0.5 %
Change in gross unearned premiums (30,742) (48,542) 17,800 (36.7) %
Gross premiums earned 1,069,383 1,045,658 23,725 2.3 %
Ceded premiums (477,901) (477,076) (825) 0.2 %
Net premiums earned 591,482 568,582 22,900 4.0 %
Net investment income 27,295 28,121 (826) (2.9) %
Net realized gains on debt securities and other investments 2,746 17 2,729 NM
Other revenue 10,490 10,001 489 4.9 %
Total revenue $ 632,013 $ 606,721 $ 25,292 4.2 %
*NM - Not Meaningful
Total revenue
Total revenue was $632.0 million for the nine months ended September 30, 2025, a 4.2% improvement compared to $606.7 million in the prior year period. The increase primarily stems from higher net premiums earned as described below.
Gross premiums written
Gross premiums written were $1.1 billion for the nine months ended September 30, 2025, a 0.5% improvement from $1.09 billion in the prior year period primarily reflecting rating actions and deployment of our managed growth initiative. Exposure management initiatives from prior years were completed. We experienced a reduction of written premium for commercial residential business, primarily driven by competitive market conditions.
Premiums-in-force were $1.44 billion as of third quarter 2025, a 1.0% improvement compared to $1.43 billion as of third quarter 2024, driven by rate actions taken, use of inflation guard, and growth in new business written, while concurrently, TIV decreased by 2.2%.
Gross premiums earned
Gross premiums earned were $1.07 billion for the nine month period ended September 30, 2025, a 2.3% improvement from $1.05 billion in the prior year period. Rating actions and use of inflation guard contributed to this increase, which was partly offset by reductions in the southeast associated with previous exposure management actions and a reduction for the commercial residential business driven by competitive market condition.
Ceded premiums
Ceded premiums were $477.9 million for the nine month period ended September 30, 2025, up 0.2% from $477.1 million in the prior year period. The increase relates primarily to the net quota share program where subject premium for 2025 was higher than subject premium for 2024, thereby driving up ceded premium in 2025. The increase associated with the net quota share program was partly offset by lower reinstatement premium for Hurricane Ian. For the nine months ended September 30, 2025, total reinstatement premium was $2.6 million compared to $18.7 million for the nine months ended September 30, 2024. To the extent the ultimate losses for Hurricanes Ian or Milton change, reinstatement premiums may correspondingly fluctuate.
Net premiums earned
Net premiums earned were $591.5 million for the nine month period ended September 30, 2025, a 4.0% improvement from $568.6 million in the prior year period. The increase primarily stems from growth in gross premiums earned as described above.
Net investment income
Net investment income was $27.3 million for the nine month period ended September 30, 2025, down 2.9% from $28.1 million in the prior year period, driven primarily by lower yields on money market and our bank sweep accounts in the current interest rate environment.
Expenses
For the Nine Months Ended September 30,
(Unaudited) 2025 2024 $ Change % Change
EXPENSES: (in thousands)
Losses and loss adjustment expenses 249,793 337,983 (88,190) (26.1) %
Policy acquisition costs 134,143 142,661 (8,518) (6.0) %
General and administrative expenses 70,604 63,985 6,619 10.3 %
Total expenses 454,540 544,629 (90,089) (16.5) %
Total expenses
Total expenses were $454.5 million for the nine month period ended September 30, 2025, a 16.5% improvement compared to $544.6 million in the prior year period. As described below, losses and LAE declined, policy acquisition costs declined, and general and administrative expenses increased.
Losses and loss adjustment expenses ("LAE")
Losses and LAE incurred were $249.8 million for the nine month period ended September 30, 2025, a 26.1% improvement from $338.0 million in the prior year period. The decrease primarily stems from lower weather and attritional losses and favorable net loss development. Net weather and catastrophe losses for the accident period ended September 30, 2025 were $69.8 million, a decrease from $101.1 million in the prior year period. There were no catastrophe losses in the current year period compared to $48.7 million in the prior year period. Other weather losses totaled $69.8 million, an increase from the prior year period amount of $52.4 million. Net favorable prior year loss development was $15.1 million for the nine months of 2025 compared to net unfavorable loss development of $21.6 million for the prior year period.
Policy acquisition costs
Policy acquisition costs were $134.1 million for the nine month period ended September 30, 2025, a 6.0% improvement from $142.7 million in the prior year period. The decrease is primarily attributable to higher ceding commission earned on the net quota share reinsurance contract, the income of which offsets other policy acquisition costs. The increase in ceding commission income is due to changes in the program which incepted December 31, 2024 and included a higher ceded rate as well as more written premium applicable to the program as well as a higher ceding commission rate driven by favorable loss experience for that program.
General and administrative expenses
General and administrative expenses were $70.6 million for the nine month period ended September 30, 2025, up 10.3% from $64.0 million in the prior year period. The increase was driven largely by human capital costs, and higher costs related to software and associated costs with the implementation of a new claims, billing and policy system, and higher regulatory costs, which were partly offset by higher ceding commission and certain lower costs associated with non-recurring 2024 expenses such as insurance and systems consulting costs. The policy, billing and claims system was placed in service on a pilot basis late in the third quarter of 2024. Certain costs associated with the system are currently being capitalized as development is still in progress and the previously capitalized costs are now being amortized, which drives up general and administrative expenses. The Company's implementation of enhanced and updated claims, policy, and billing systems is expected to achieve efficiencies, enhance customer service, and improve the timeliness and quality of data analytics used to drive underwriting income.
Income
For the Nine Months Ended September 30,
2025 2024 $ Change % Change
(Unaudited) (in thousands, except per share amounts)
Operating income 177,473 62,092 115,381 185.8 %
Interest expense, net 6,157 8,365 (2,208) (26.4) %
Income before income taxes 171,316 53,727 117,589 218.9 %
Income tax expense 42,397 12,481 29,916 239.7 %
Net income $ 128,919 $ 41,246 $ 87,673 212.6 %
Basic earnings per share $ 4.17 $ 1.35 $ 2.82 209.3 %
Diluted earnings per share $ 4.17 $ 1.35 $ 2.82 209.3 %
Net income
For the nine months ended September 30, 2025 net income was $128.9 million or $4.17 per diluted share, compared to net income of $41.2 million or $1.35 per diluted share in the prior year period, primarily driven by higher net premiums earned, a gain on the sale of investment property, a significant decrease in losses and LAE, and lower operating expenses. The improvement in net income is attributable to the positive impact of rate actions, underwriting actions, and exposure management taken during the last several years, which favorably impacted results for the period ended September 30, 2025. These actions resulted in growth of 4.0% in net premiums earned, with a 26.1% decrease in net losses and LAE, as described above. Policy acquisition costs decreased 6.0%, primarily related to an increase in ceding commission income on the net quota share reinsurance contracts. General and administrative costs increased 10.3% driven primarily by costs associated with software, including a new claims, billing and policy system as well as an increase in certain human capital costs as described above.
Interest expense, net
Interest expense, net was $6.2 million for the nine month period ended September 30, 2025, a decrease of 26.4% compared to $8.4 million for the prior year period, The decrease was attributed to the impact from the reduction of debt obligations accompanied with a lower interest rate environment.
Income tax expense
Income tax expense was $42.4 million for the nine month period ended September 30, 2025 compared to $12.5 million in the prior year period, with the higher income tax provision in the current period driven by higher pre-tax earnings compared to the prior year period, coupled with a lower effective tax rate. The effective tax rate for the current year period was 24.7% compared to 23.2% in the prior year period. We calculate the provision for income taxes during interim reporting periods by applying an estimate of the effective tax rate for the full year. The effective tax rate for the prior year period was favorably impacted by updated estimates used in the quarterly tax provision as well as the benefit of interest income on a previous year's income tax refund, which lowered income tax expense for the period. The effective tax rate can fluctuate throughout the year as estimates used in each quarterly tax provision are updated with additional information.
Ratios
For the Nine Months Ended September 30,
(Unaudited) 2025 2024
Ceded premium ratio 44.7 % 45.6 %
Net loss and LAE ratio 42.2 % 59.4 %
Net expense ratio 34.6 % 36.3 %
Net combined ratio 76.8 % 95.7 %
Net combined ratio
The net combined ratio was 76.8% for the nine month period ended September 30, 2025, an 18.9 point improvement from 95.7% in the prior year period. The decrease primarily stems from a lower net loss and LAE ratio and lower net expense ratio as described below.
Ceded premium ratio
The ceded premium ratio was 44.7% for the nine month period ended September 30, 2025, a 0.9 point improvement from 45.6% in the prior year period, primarily driven by growth in gross premiums earned as well as slightly lower reinsurance costs, as described above.
Net loss and LAE ratio
The net loss and LAE ratio was 42.2% for the nine month period ended September 30, 2025, a 17.2 point improvement from 59.4% in the prior year period, reflecting higher net premiums earned, coupled with a decrease in net losses and LAE as described above.
Net expense ratio
The net expense ratio was 34.6% for the nine month period ended September 30, 2025, a 1.7 point improvement from the prior year period amount of 36.3%, primarily driven by growth in net premiums earned which, coupled with higher ceding commission income, lowered the net policy acquisition costs ratio and was partly offset by a higher net general and administrative expense ratio.
Financial Condition - September 30, 2025 compared to December 31, 2024
Cash and Cash Equivalents
At September 30, 2025, cash and cash equivalents increased by $107.8 million to $560.4 million from $452.7 million at December 31, 2024. The increase was primarily a result of net cash provided by operations, which was held in money market funds for liquidity.
Fixed Maturity Securities
At September 30, 2025, fixed income securities increased by $45.3 million to $700.8 million from $655.6 million at December 31, 2024. The increase primarily relates to purchases of fixed income securities in longer duration to lock in interest rates.
Reinsurance Recoverable on Paid and Unpaid Claims
At September 30, 2025, reinsurance recoverable on paid and unpaid claims decreased by $360.7 million to $379.5 million from $740.2 million at December 31, 2024. The decrease was primarily driven by reinsurance reimbursements collected during the nine months ended September 30, 2025, primarily associated with claims payments for Hurricanes Ian and Milton as well as a reduction in ultimate losses for certain catastrophic events which reduced reinsurance recoverable on unpaid claims as claims developed favorably during 2025.
Prepaid Reinsurance Premiums
At September 30, 2025, prepaid reinsurance premium increased by $116.3 million to $426.1 million from $309.8 million at December 31, 2024. The increase is driven by the June 1, 2025 inception of our catastrophe excess of loss reinsurance program which represents prospective contracts. We record an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of these reinsurance agreements, which drove up prepaid reinsurance premiums at September 30, 2025.
Unpaid Losses and Loss Adjustment Expenses
At September 30, 2025, unpaid losses and loss adjustment expenses decreased by $393.3 million to $649.6 million from $1.04 billion at December 31, 2024. This amount represents unpaid loss and loss adjustment expenses excluding any reinsurance recoveries. The decrease was primarily due to payment of claims for Hurricanes Milton and Ian during the nine months ended 2025, as well as a reduction in ultimate losses for certain catastrophic events as claims developed favorably during 2025.
Reinsurance Payable
At September 30, 2025, reinsurance payable increased by $151.9 million to $378.9 million from $227.0 million at December 31, 2024. The increase is driven by the June 1, 2025 inception of our catastrophe excess of loss reinsurance program as described above.
Long-term Debt
At September 30, 2025, long-term debt decreased by $37.1 million to $79.3 million from $116.3 million at December 31, 2024, driven by the payoff of a loan from the FHLB-ATL in March 2025 and the mortgage loan in July 2025 as well as quarterly principal payments on other long-term debt.
Total Shareholders' Equity
At September 30, 2025, total shareholders' equity increased by $146.5 million to $437.3 million from $290.8 million at December 31, 2024. The increase was primarily due to net income for the nine month period ended September 30, 2025 as well as a benefit in accumulated other comprehensive loss driven by a reduction of unrealized losses during that period of 2025 in the amount of $15.7 million.
Liquidity and Capital Resources
Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our Credit Facilities. As of September 30, 2025, we had $560.4 million of cash and cash equivalents and $703.4 million in investments, compared to $452.7 million and $663.4 million, respectively, as of December 31, 2024. As described above, the increase in cash and cash equivalents was primarily a result of net cash provided by operations, which was held in money market funds for liquidity.
We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey Re, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates.
We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months.
We may increase capital expenditures consistent with our investment plans and anticipated business strategies. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes.
Cash Flows
For the Nine Months Ended September 30,
2025 2024 Change
(in thousands)
Net cash provided by (used in):
Operating activities $ 168,432 $ 143,173 $ 25,259
Investing activities (21,105) (93,842) 72,737
Financing activities (37,247) (1,772) (35,475)
Net increase in cash and cash equivalents $ 110,081 $ 47,559 $ 62,522
Operating Activities
Net cash provided by operating activities was $168.4 million for the nine months ended September 30, 2025 compared to net cash provided by operating activities of $143.2 million for the comparable period in 2024. The increase in cash provided by operating activities relates primarily to timing of cash flows associated with premium collection, claim and reinsurance payments as well as reinsurance reimbursements during the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2025 was $21.1 million as compared to net cash used in investing activities of $93.8 million for the comparable period in 2024. The change in cash used in investing activities relates primarily to timing of investment maturities and use of proceeds as well as availability of existing cash to invest in longer duration fixed income securities to lock in current interest rates, as well as proceeds from the sale of investment property, net of costs and commission expenses.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2025 was $37.2 million, as compared to cash used in financing activities of $1.8 million for the comparable period in 2024. The change in net cash from financing activities relates primarily to the repayments of the FHLB-ATL loan and the mortgage loan agreements for $19.2 million and $10.6 million during the first and third quarters of 2025, respectively, as well as purchases of treasury stock. In comparison, we reported $5.5 million of proceeds in the first quarter of 2024 from a FHLB Des Moines loan.
Credit Facilities
On July 22, 2025, the Company and its subsidiary guarantors entered into the Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") with lenders from time to time party thereto and Regions Bank, as administrative agent and collateral agent. The Amended and Restated Credit Agreement amended and restated in its entirety the Credit Agreement dated as of December 14, 2018 (as amended to date, the "Prior Credit Agreement").
The Amended and Restated Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of up to $200.0 million, consisting of (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million with a maturity of July 2030 (the "Term Loan Facility"), (2) a $75 million committed delayed draw term loan that may be advanced to finance specified permitted acquisitions and investments with a maturity of July 2030 (the "Delayed Draw Term Loan Facility") and (3) a five-year senior secured revolving credit facility in an aggregate principal amount of $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) (the "Revolving Credit Facility" and together with the Term Loan Facility and the Delayed Draw Term Loan Facility, the "Credit Facilities").
Term Loan Facility. The principal amount of the term loan facility under the Prior Credit Agreement amortized 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, which was July 28, 2026, but was refinanced in full in connection with the Amended and Restated Credit Agreement. The principal amount of the Term Loan Facility under the Amended and Restated Credit Facility amortizes in quarterly installments beginning with the close of the fiscal quarter ending December 31, 2025, in an amount equal to $937,500 per quarter, payable quarterly, and increasing to approximately $1.4 million per quarter commencing with the quarter ending September 30, 2028, with the remaining balance payable at maturity. As amended, the Term Loan Facility matures on July 22, 2030. As of September 30, 2025, there was $75.0 million in aggregate principal amount outstanding under the Term Loan Facility and as of December 31, 2024, there was $70.1 million in aggregate principal outstanding under the term loan facility under the Prior Credit Agreement.
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 $25.0 million and the unused amount of the Revolving Credit Facility. At December 31, 2024, the outstanding balance under the revolving credit facility under the Prior Credit Agreement was $10.0 million, which amount was repaid in connection with the Amended and Restated Credit Agreement. During 2024, the Company secured letters of credit in aggregate of $24.4 million with a maturity date of March 16, 2025. As of December 31, 2024, the letters of credit remained outstanding and there were no draws as of such date. There were no draws on the letters of credit during 2025, which were cancelled effective on their maturity date of March 16, 2025. At July 22, 2025, the outstanding balance under the revolving credit facility under the Prior Credit Agreement was $10.0 million, which was repaid in connection with the Amendment and Restated Credit Agreement. At September 30, 2025, the Company had no outstanding letters of credit issued from the Revolving Credit Facility.
At our option, borrowings under the Credit Facilities, as amended bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin (described below) or (2) a base rate determined by reference to the highest of (a) the "prime rate" of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin (described below).
The applicable margin for loans under the Credit Facilities, as amended, varies from 2.50% per annum to 3.00% per annum (for SOFR loans) and 1.50% to 2.00% per annum (for base rate loans) based on our consolidated leverage ratio ranging from less than or equal to 1-to-1 to greater than 1.5-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 September 30, 2025, the borrowings under the Term Loan Facility were accruing interest at a rate of 6.816% per annum, respectively.
In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by our consolidated leverage ratio.
We may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of SOFR loans. In addition, we are required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).
All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company's current and future regulated insurance subsidiaries (collectively, the "Guarantors").
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.
The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Amended and Restated Credit Agreement requires the Company to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 2.00 to 1.00, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated tangible net worth for the Company and its subsidiaries, which is required to be not less than the sum of 75% of consolidated tangible net worth measured as of the fiscal quarter ended September 30, 2025 plus 25% of positive consolidated net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company's regulated insurance subsidiaries or observe specified reinsurer concentration limits.
Convertible Notes
On August 10, 2017, the Company and Heritage MGA, LLC (the "Notes Guarantor") entered into a purchase agreement (the "Purchase Agreement") with the initial purchaser party thereto (the "Initial Purchaser"), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $136.8 million aggregate principal amount of the Company's 5.875% Convertible Senior Notes due 2037 (the "Convertible Notes") in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the "Securities Act"). The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017.
The Company issued the Convertible Notes under an Indenture (the "Convertible Note Indenture"), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, the trustee party thereto (the "Trustee").
The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company's future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company's unsecured indebtedness that is not so subordinated; effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company's subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.
The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.
Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company's common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company's common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the third business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.
During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.
Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company's election, a public acquirer change of control (as defined in the Convertible Note Indenture)), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal
to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
At any time prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company's option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date.
The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Convertible Notes automatically become immediately due and payable.
As of September 30, 2025 and December 31, 2024, there was $885,000 principal amount of outstanding Convertible Notes, net of $21.1 million of Convertible Notes held by an insurance company subsidiary.
FHLB Loan Agreements
In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank Atlanta ("FHLB-ATL"). On September 29, 2023, the Company restructured the December 2018 agreement to extend the maturity date to March 28, 2025, with a 5.109% fixed interest rate payable quarterly commencing on December 28, 2023. Membership in the FHLB-ATL required an investment in FHLB-ATL's common stock which was purchased in December 2018 and valued at $1.4 million. In March 2025, the FHLB-ATL agreement was repaid and the securities were released from pledged collateral. As of September 30, 2025, the subsidiary continues to be a member in FHLB-ATL with its common stock valued at $570,000.
In December 2018, our insurance subsidiary became a member of the Federal Home Loan Bank Des Moines ("FHLB-DM"). Membership in the FHLB-DM required an investment in FHLB-DM's common stock which was purchased in December 2018 and valued at $133,200. In January 2024, the insurance subsidiary of the Company received a 4.23% fixed interest rate cash loan of $5.5 million from the FHLB-DM. Additionally, the transaction required the acquired FHLB-DM common stock and certain other investments to be pledged as collateral. As of September 30, 2025, the fair value of the collateralized securities was $4.2 million and the equity investment in FHLB-DM common stock was $316,300.
Critical Accounting Policies and Estimates
When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. We have made no material changes or additions with regard to those policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024.
Recent Accounting Pronouncements
The information set forth under Note 1 to the condensed consolidated financial statements under the caption "Basis of Presentation and Significant Accounting Policies" is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.
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