What changed in this filing

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Item 1. Business

2023-03-13 compared with 2022-03-14 · 235 added, 231 removed, 581 unchanged (45% of the section changed)

Heritage Insurance Holdings, Inc., (“we”, “our”, “us”, “Heritage”

Heritage Insurance Holdings, Inc.

(“we”, “our”, “us”, “Heritage”

and the “Company”) is a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance through our insurance company subsidiaries.

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Zephyr Insurance Company (“Zephyr”), which provides personal residential and wind-only property insurance in Hawaii.

Our financial strength ratings are important in establishing our competitive position and can impact our ability to write policies.

Our financial strength ratings are important in establishing our competitive position and can significantly impact our ability to write policies.

We are rated by both Demotech, Inc.

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Demotech and KBRA have assigned the following insurance financial strength ratings (“IFSR”) to our key operating subsidiaries.

Additionally, KBRA has assigned an investment grade issuer rating to the Company.

The outlook for all ratings is stable.

Heritage Insurance

Additionally, KBRA has assigned an investment grade issuer rating to Heritage Insurance Holdings, Inc.

The KBRA outlook for Heritage P&C and Zephyr is stable and the KBRA outlook for Heritage Insurance Holdings, Inc.

and NBIC is negative.

We also provide insurance and insurance-related services through the following operating subsidiaries:

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On an admitted basis, we provide personal residential insurance in fourteen eastern and gulf states and commercial residential insurance in three of those states.

We also write personal residential insurance on an admitted basis in Hawaii and on an excess and surplus lines basis in California.

We also write personal residential insurance on an admitted basis in Hawaii and on an excess and surplus lines basis in California and Florida.

We are licensed, but inactive, in Pennsylvania.

We conduct our operations under one business segment.

We conduct our operations under one business and reporting segment.

As of December 31, 2022, we had 514,924 personal residential policies in force, representing $1.1 billion of annualized premium, 2,756 commercial residential policies in force, representing $154.6 million of annualized premium, and 12,227 commercial general liability policies in force, representing $11.0 million of annualized premium, for a total of 529,907 policies and $1.3 billion of annualized premium.

For the years ended December 31, 2021, 2020 and 2019, we had gross premiums written of $1.2 billion, $1.1 billion and $937.9 million, respectively and operating (loss) income of ($68.1) million, $10.2 million and $49.6 million, respectively.

The operating loss for the year ended December 31, 2021 included a Goodwill impairment charge of $60.5 million.

At December 31,

2021 and 2020, we had total assets of $2.0 billion and $2.1 billion, respectively, and total stockholders’

equity of $343.1 million and $442.3 million, respectively.

Our overall strategy is to grow organically and geographically diversify our property insurance operations to achieve consistent positive results for our shareholders, while mitigating risk from a single or series of catastrophic weather events.

We believe this diversification also increases our supply of risk transfer partners and optimizes reinsurance pricing.

We intend to continue to grow profitably by undertaking the following:

For the year ended December 31, 2022, we had gross premiums written of $1.3 billion and an operating loss of $157.4 million.

The operating loss for the year ended December 31, 2022 included a non-cash, mostly non-deductible goodwill impairment charge of $92.0 million.

At December 31, 2022, we had total assets of $2.4 billion and total stockholders’

equity of $131.0 million.

Our overall short-term strategy has shifted from growing premiums to rebalancing our portfolio of over $1 billion in gross written premium to optimize our portfolio toward products and geographies that maximize long term returns to our shareholders, while mitigating risk from a single or series of catastrophic weather events.

We intend to improve underwriting results by undertaking the following:

Improve the Profitability of our Portfolio

We believe that our goal to improve the profitability of our business will be achieved through disciplined underwriting, diversification of our book of business, and rate adequacy, as well as a robust reinsurance program.

We continue our marketing efforts throughout the states in which we conduct business.

There are certain regions in Florida, such as the tri-county area and the central Florida area, where we are not seeking growth until the economics improve.

With our coastal exposure which includes exposure to hurricanes and other severe weather events, our reinsurance program provides meaningful balance sheet protection and reduces earnings volatility.

We have taken underwriting and rate actions to improve the profitability of our business and continuously monitor our portfolio to manage the risk of wind and other perils.

For example, we have significantly decreased our total insured value for personal lines business in Florida’s Miami-Dade and Broward counties since 2017 given higher claims and reinsurance costs.

As of December 31, 2021 and 2020, personal residential property insurance in Miami-Dade and Broward counties accounted for approximately 1.9% and 2.3%, respectively, of our total insured value down from 5.0% in 2017.

More selective underwriting has led to an intentional decline in policy count for our admitted personal lines product while achieving a higher average premium per policy through rate actions.

Given our coastal exposure, which includes exposure to hurricanes and other severe weather events, our reinsurance program provides meaningful balance sheet protection and reduces earnings volatility.

We continue to take underwriting and rate actions to improve the profitability of our business and continuously monitor our portfolio to manage the risk of wind and other perils.

Optimize Our Reinsurance Program

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We believe there is sufficient capital to support our reinsurance program and that we have an opportunity to obtain reasonable pricing and contract terms and conditions.

We continue to evaluate cost-efficient alternatives to traditional reinsurance.

Each year we evaluate whether to meet a portion of our reinsurance needs through the use of our reinsurance subsidiary, Osprey, which helps to manage our reinsurance expense and reduces our reliance on third-party reinsurance.

We continue to evaluate cost-efficient alternatives to traditional reinsurance, such as the issuance of catastrophe bonds by Citrus Re Ltd.

(“Citrus Re”), a Bermuda special purpose insurer.

In addition, each year we evaluate whether to meet a portion of our reinsurance needs through the use of our reinsurance subsidiary, Osprey, which helps to manage our reinsurance expense and reduces our reliance on third-party reinsurance.

Efficiently Manage Losses and Loss Adjustment Expenses

We are committed to proactively managing our loss costs through prudent underwriting and by in-sourcing critical aspects of claims adjusting and repair services.

We are committed to proactively managing our loss costs through prudent underwriting and in-sourcing critical aspects of claims adjusting and remediation services.

We have over 300 full-time employees dedicated to claims management.

This includes personnel who in take claim information an in-house insurance defense team, claims examiners, and claims vendor management and mediation personnel.

We have additional contracted claims adjusting and loss mitigation resources in all states in which we conduct business and deploy those additional resources as needed.

Our CAN subsidiary provides emergency claims and repair services to our policyholders.

While CAN’s initial operations were in Florida only, it has expanded to our northeastern and southeastern states and Hawaii.

Our CAN subsidiary provides emergency claims and mitigation services to our policyholders.

We believe our significant internal and external resources allow us to deliver timely service to our policyholders and effectively manage claims costs.

Expand and Cultivate Relationships with Large Independent Agencies

As described in our competitive strengths below, we believe that continuing to expand and cultivate our relationships with large independent agencies and other stakeholders will foster continued organic growth.

We have also established relationships with auto insurance carriers who package their auto product with our residential property insurance product to provide growth opportunities.

We have also established relationships with auto insurance carriers who package their auto product with our residential property insurance product to provide diversification opportunities.

Develop IT Solutions to More Effectively Service our Customers

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Our Competitive Strengths

We believe that our growth to date and our ability to capitalize on our future growth prospects are a result of the following competitive strengths of our business:

We believe that our business diversification to date and our ability to capitalize on our future business prospects are a result of the following competitive strengths of our business:

Experienced Management Team With a Long History in the Residential Property Insurance Market

We have an experienced executive management team led by Ernesto Garateix, Chief Executive Officer, Kirk Lusk, Chief Financial Officer and a highly experienced and diverse senior management team with significant expertise in the residential property insurance industry and deep industry relationships.

Our former President, Richard Widdicombe, serves as Chairman of the Board.

Our former President, Richard Widdicombe, who serves as Chairman of the Board also has extensive experience in and an in-depth knowledge of the insurance industry.

Strong, Conservative Capital Structure

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We believe that the vertical integration of our claims adjusting, water mitigation, and repair services provides us with a competitive advantage.

Through our management of both claims adjusting and repair services, we are less reliant on third parties and are generally able to begin the adjustment and mitigation process in a timely manner, benefitting loss costs.

We also believe our unique model provides a superior level of customer service for our policyholders, enhancing our reputation and increasing the likelihood that our policyholders will renew their policies with us.

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The Products and Distribution section below describes the breadth of our agency network.

COVID-19 Update

With regard to the COVID-19 pandemic, the health and safety of our employees and their families is a priority.

The Company has implemented return-to-office and hybrid programs, with the latter including a combination of in-office and remote work..

We continue to monitor the short-and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020.

During the year ended December 31, 2021, we saw negligible impact to our business.

As a residential property insurer, we view our business as somewhat insulated from the effects of the pandemic because property owners and renters generally view our products as a necessity.

The majority of our gross and net premiums written are from renewals of expiring policies.

New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio.

While we have not experienced disruptions to our independent agency channel, in a prolonged recessionary and social-distancing environment, we could experience disruptions that could have a negative impact on our revenues and financial condition.

Changes in the cost of materials and labor for home repairs can influence our loss costs associated with claims.

Although we have not experienced a significant amount of payment delays, or non-payment under prolonged recessionary economic conditions, we could experience more significant delays in premium payments and possibly non-payment of premiums.

The advancement of the environmental, social and governance (“ESG”) framework is intended to promote awareness, sustainable and inclusive development of insurance markets which has been an area of focus for standard setters and regulatory agencies at the state and federal level.

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Specifically:

Environment - we are currently focused on becoming more energy efficient, mitigating and adapting to climate change along with conserving water and reducing waste.

Environment - we are currently focused on becoming more energy efficient, mitigating and adapting to climate change, conserving water and reducing waste.

Social –

we have put emphasis on creating an inclusive equal opportunity workplace and inspiring others to support community relations.

we have put emphasis on creating an inclusive equal opportunity workplace and inspiring employees to support community relations.

Governance –

we are committed in its pursuit in creating an ethical and transparent organization.

we are committed in our pursuit to create an ethical and transparent organization.

We continue to enhance our ESG policies as we assess, analyze and identify critical topics.

We continue to monitor the expansion of these policies to ensure compliance with future regulations, and assess and seek to implement best practices in response to any emerging guidance.

We continue to monitor the expansion of these policies to ensure compliance with future regulations and seek to implement best practices in response to any emerging guidance.

Our Competition

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insurance entities.

We compete for business on the basis of price, financial strength, types of coverages offered, availability of coverage desired by customers, commission structure and quality of service.

We compete for business on the basis of price, financial strength, types of coverages

offered, availability of coverage desired by customers, commission structure and quality of service.

We believe Heritage differentiates itself from many competitors with our service levels, financial resources, including a robust reinsurance program, streamlined processes, and vertical integration of loss mitigation and repair services.

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Heritage P&C writes voluntary personal residential insurance policies through a network of more than 2,000 independent agents in the states in which it is licensed.

Approximately 25% of our new premium is written by agents that are affiliated with eight large agency networks with which we have entered into master agency agreements.

Approximately 28% of our voluntary personal lines policies are written by agents that are affiliated with eight large agency networks with which we have entered into master agency agreements.

We market and write commercial residential policies through a network of approximately 400 independent agents in Florida.

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We also distribute indirectly to over 1,500 retail locations through eight wholesale agency relationships.

Our three largest independent agency relationships represent approximately $77 million, or 16.8% annualized premiums.

Our three largest independent agency relationships represent 15.6% of annualized premiums.

Additionally, we have expanded our product offering to include commercial residential products in New Jersey and New York.

Zephyr writes personal and commercial insurance policies through a network of approximately 70 independent agencies in Hawaii.

Approximately 51.0% of our voluntary premium is written by agents that are affiliated with three large agency networks with which we have entered into master agency agreements.

Approximately 50.6% of our premium is written by agents that are affiliated with three large agency networks with which we have entered into master agency agreements.

The following charts depict the geographic distribution of our in-force premium as of December 31, 2022 and 2021, respectively.

* * Other includes AL,CA,DE, GA, MD, MS, and VA

Our Florida personal lines in-force premium has declined as part of our strategy to re-allocate capital to products and geographies that maximize long-term returns.

* * Other includes CA, DE, GA, MD, MS and VA

CGL = commercial general liability

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The underwriting team includes actuarial staff, underwriters, our risk management team, and product development personnel.

Our underwriting team leverages our proprietary data analytics, which include a number of automated processes, to analyze a number of risk evaluation factors, including the age, construction, location and value of the residence, premiums to be received from insuring the residence, geographic concentrations of policyholders and the cost of reinsurance.

The underwriting criteria that we consider will continue to evolve as our business grows.

Our underwriting team leverages our proprietary data analytics, which include

a number of automated processes, to analyze a number of risk evaluation factors, including the age, construction, location and value of the residence, premiums to be received from insuring the residence, geographic concentrations of policies and the cost of reinsurance.

The underwriting criteria that we consider continues to evolve with our business and strategy.

We also review our expiring policies to determine if those risks continue to meet our underwriting guidelines.

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We utilize web-based software solutions and insurance personnel to perform policy administration services, including processing, billing and policy maintenance.

The software is able to adapt to a variety of forms and rates, handle the administration of an increasing number of policies as we grow and expand, and provide detailed information about our book of business to our internal underwriters so that they can adjust our underwriting criteria, as necessary.

The software is able to adapt to a variety of forms and rates, handle the administration of our policy volume, and provides detailed information about our book of business to our internal underwriters so that they can adjust our underwriting criteria, as necessary.

The systems also allow us to provide renewal notices, late payment notices, cancellation notices, endorsements and policies to our customers on a timely basis.

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We closely manage all aspects of the claims process, from processing the initial claim submission to providing remediation services for claims through our wholly-owned subsidiary, CAN, or preferred vendors.

Claims from policyholders are reviewed by our

managers and staff adjusters, who assess the extent of the loss, which may include thorough on-site investigations, and determine the resources needed to adjust each claim.

Claims from policyholders are reviewed by our managers and staff adjusters, who assess the extent of the loss, which may include thorough on-site investigations, and determine the resources needed to adjust each claim.

Our claims are generally adjusted by our staff claims professionals, except in the case of a catastrophic event for which we have contracted with several large national claims adjusting firms and experienced independent contractors to assist our adjusters with the increased volume of claims to ensure timely responses to our policyholders.

Our CAN subsidiary performs both catastrophe and non-catastrophe related repair and remediation services.

We deployed our extensive resources at CAN to perform emergency claim services and repairs in the aftermath of Hurricanes Irma, Florence and Michael and use these resources for other severe weather events.

Our CAN network has been expanded to other states in which we conduct business.

We believe our approach to claims handling results in a higher level of customer service and reduces our losses and loss adjustment expense.

To encourage our Florida policyholders to allow us to manage their claims from beginning to end, we developed the Platinum Program, which provides participating customers with a 10% discount on their claim deductible, and gives us control over inspection, claims adjusting and repair services.

To encourage our Florida policyholders to allow us to manage their claims from beginning to end, we developed a program that provides participating customers with a 10% discount on their claim deductible, and gives us control over inspection, claims adjusting and repair services.

Loss and Loss Adjustment Expense Reserves

Our liability for losses and loss adjustment expenses represents our preliminary estimated ultimate liability of (i) claims that have been incurred and reported, but not yet paid (case reserves), (ii) claims that have been incurred but not yet reported to us (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which are intended to cover the cost of settling claims, including investigation and defense of lawsuits resulting from such claims.

Our liability for losses and loss adjustment expenses represents our estimated ultimate liability of (i) claims that have been incurred and reported, but not yet paid (case reserves), (ii) claims that have been incurred but not yet reported to us (“IBNR”), and (iii) loss adjustment expenses (“LAE”) which are intended to cover the cost of settling claims, including investigation and defense of lawsuits resulting from such claims.

Considerable time can pass between the occurrence of an insured loss, the reporting of the loss, and the payment of that loss.

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to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Our business depends upon the use, development and implementation of integrated technology systems.

These systems enable us to provide a high level of service to agents and policyholders by processing business efficiently, communicating and sharing data with agents, providing a variety of methods for the payment of premiums and allowing for the accumulation and analysis of information for our management.

We believe the availability and use of these technology systems has resulted in improved service to agents and customers, increased efficiencies in processing our multi-state insurance business and lower operating costs.

We license policy and claims administration and catastrophe modeling software from third parties.

Technology has become an integral part of our organization and makes us more efficient, cost-effective and customer-centric.

Our business depends upon the development, implementation and use of integrated technology systems to automate various processes such as underwriting, claims processing, billing and customer service.

This leads to improved efficiency, reduced errors and faster turnaround times.

These systems have enabled us to offer more personalized experience and better service to both our agents as well as our customers.

Our technology platform has streamlined our various business processes making them faster and more efficient across our multi-state insurance business.

The technology platform is supported by a robust enterprise data warehouse and analytics platform that provides key performance indicator measurements and actionable insights for our management, at the same time supporting all of our regulatory compliance reporting needs.

We license policy, billing and claims administration and catastrophe modeling software from third parties.

We also own or license other technology systems used by our insurance company affiliates.

These technology systems consist primarily of an integrated central processing computer, a series of server-based computer networks, a back-up server and various Internet-based communications systems.

Many of our technology platforms run on cloud-based solutions, and some run on servers hosted in a data center.

All of our platforms are resilient and have disaster recovery backups.

In order to limit our potential exposure to individual risks and catastrophic events, we purchase significant reinsurance from third party reinsurers.

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Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) our captive reinsurance subsidiary, Osprey.

We also sponsored catastrophe bonds in 2022 through Citrus Re.

In addition to purchasing excess of loss catastrophe reinsurance, we also purchased quota share, property per risk and facultative reinsurance.

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For second or subsequent catastrophic events, our total available coverage depends on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted.

In the fourth quarter of 2022 we re-estimated our ultimate losses for Hurricane Irma, which struck Florida in 2017.

As a result of that re-estimation, Heritage has exhausted the private layers of reinsurance specific to Hurricane Irma but has a 45% participation in the FHCF limit remaining.

Accordingly, should future re-estimations to Hurricane Irma losses increase the expected loss reserves, a portion of the increase will be retained and a portion will be ceded to the FHCF.

For the contract period ending May 31, 2023, our insurance company subsidiaries purchased catastrophe excess of loss reinsurance from the following sources:

(i) FHCF (i.e.

Florida residential admitted market risks only), and (ii) over 50 third-party private reinsurers, all of which were rated “A-”

(i) FHCF (i.e., Florida residential admitted market risks only), (ii) over 50 third-party private reinsurers, all of which were rated “A-”

or higher by A.M.

Best or S&P or which were fully collateralized and (iii) Osprey Re, our captive reinsurance subsidiary.

Best or S&P or which were fully collateralized, (iii) Osprey Re, our captive reinsurance subsidiary, and (iv) Citrus Re.

There is no single reinsurer representing more than 10% of the limit purchased for our program other than the FHCF.

The chart below lists our third-party reinsurers with A.M.

Best and S&P ratings for all Heritage insurance company subsidiaries as of December 31, 2021.

Best and S&P ratings as of December 31, 2022.

To the extent a reinsurer is not rated, the reinsurance program is fully collateralized.

Refer to Note 12 “Reinsurance”

to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

Aeolus Re Ltd./Keystone PF Segregated Account

Fully Collateralized

Allianz Risk Transfer (Bermuda) Limited (obo PIMCO), 'Allianz Risk Transfer AG (Bermuda Branch)

Allied World Assurance Company, Ltd, Allied World Reinsurance Management Company/Allied World Insurance Company

Manager / Reinsurers

Aeolus Re Ltd.

collateralized

Allianz Risk Transfer AG (Bermuda Branch)

Allianz Risk Transfer AG (Bermuda Branch) (obo PIMCO)

Allied World Assurance Company, Ltd

American Agricultural Insurance Company

Arch Reinsurance Company

Arch Reinsurance Limited, Arch Reinsurance Limited (obo Quantedge Capital USA Inc), Arch Reinsurance Limited (obo Securis ILS Management Ltd)

Ariel Re Bda Limited/Lloyd's Syndicate 1910, Ariel Re Bda Limited/Lloyd's Syndicate 1969

Arch Reinsurance Limited

Arch Reinsurance Limited (obo Quantedge Capital USA Inc)

Arch Reinsurance Limited (obo Securis ILS Management Ltd)

Ariel Re Bda Limited/Lloyd's Syndicate 1910

Ariel Re Bda Limited/Lloyd's Syndicate 1969

Ascot Bermuda Limited

Ascot Underwriting Inc./Lloyd's Syndicate 1414 (ASC)

Aspen Bermuda Limited, Aspen Re America/Aspen Insurance UK Limited

AXIS Reinsurance Company, AXIS Specialty Limited

Berkley Re America/Berkley Insurance Company

BGS Services (Bermuda) Limited/Lloyd's Syndicate 2987, Brit Insurance Services USA LLC/BRT Syndicate 2987 at Lloyd's

Aspen American Insurance Company

Aspen Bermuda Limited

AXIS Specialty Limited

Berkley Insurance Company

BGS Services (Bermuda) Limited/Lloyd's Syndicate 2987

Chaucer Insurance Company DAC (Bermuda)

China Property & Casualty Reinsurance Company Ltd.

Chord Re Consortium 9840

Chubb Tempest Re USA LLC/ACE Property and Casualty Insurance Company

Chubb Tempest Reinsurance Ltd.

DaVinci Reinsurance Ltd.

Conduit Reinsurance Limited

Shaw Re (Bermuda) Ltd., Bermuda

collateralized

DUAL Commercial LLC (Tamesis Americas)/Allianz Global Risks US Ins Co

Eclipse Re Ltd/Segregated Account EC0035

Fully Collateralized

Employers Mutual Casualty Company

Endurance Assurance Corporation

collateralized

Endurance Specialty Insurance Ltd.

Everest Reinsurance Company

Fidelis Insurance Bermuda Limited, Fidelis Underwriting Limited

Fidelis Insurance Bermuda Limited

Fidelis Underwriting Limited

Fubon Insurance Co., Ltd.

General Insurance Corporation of India

Group Ark Insurance Limited

Hannover Rueck SE, (obo Eskatos Capital Management), (obo Eskatos Capital Management), (obo Securis), (obo Pillar Capital Management)

Hannover Re (Bermuda), Ltd.

Hannover Rueck SE (obo Chard Re)

Hannover Rueck SE (obo Eskatos Capital Management)

Hannover Rueck SE (obo Pillar Capital Management)

Hannover Rueck SE (obo Securis)

Harco National Insurance Company

Hiscox Insurance Company (Bermuda) Limited

Houston Casualty Company (UK Branch)

Insurance Company of the West

Liberty Mutual Insurance Company

Lloyd's Syndicate(s)

Lloyd's Syndicate 0033 (HIS)

Lloyd's Syndicate 0626 (IRK)

Lloyd's Syndicate 0727 (SAM)

Lloyd's Syndicate 1084 (CSL)

Lloyd's Syndicate 1301 (IGO)

Lloyd's Syndicate 1414 (ASC)

Lloyd's Syndicate 1729 (DUW)

Lloyd's Syndicate 1856 (IQU)

Lloyd's Syndicate 1947 (GIC)

Lloyd's Syndicate 2623 (AFB)

Lloyd's Syndicate 2791 (MAP)

Lloyd's Syndicate 2987 (BRT)

Lloyd's Syndicate 4020 (ARK)

Lloyd's Syndicate 4444 (CNP)

Lloyd's Syndicate 5886 (WBC)

Munich Reinsurance America, Inc.

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Nautical Management Ltd./Markel Bermuda Limited

New India Assurance Company Limited (UK Branch)

Odyssey Reinsurance Company

Partner Reinsurance Company Limited (Marilla Distribution Platform)

Partner Reinsurance Company of the U.S.

Prospero Re Ltd.

Fully Collateralized

Qatar Reinsurance Company Limited

collateralized

Renaissance Reinsurance Ltd.

Renaissance Reinsurance U.S.

Satec Srl/New Reinsurance Company Ltd.

SCOR Reinsurance Company

SiriusPoint America Insurance Company

SiriusPoint America Insurance

SiriusPoint Bermuda Insurance Company Ltd.

Swiss Reinsurance America Corporation

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Taiping Reinsurance Company Limited

The Toa Reinsurance Company of America

Topsail Reinsurance SPC, Ltd.

Fully Collateralized

Transatlantic Reinsurance Company, (obo Integral Reinsurance Ltd)

TransRe/General Reinsurance Corporation

Validus Americas/Validus Reinsurance (Switzerland) Ltd, OmegaCat Reinsurance Ltd, (obo of AlphaCat Reinsurance Ltd)

The Cincinnati Insurance Company

collateralized

Transatlantic Reinsurance Company

Validus Reinsurance, Ltd.

(Marilla Distribution Platform)

Vantage Risk Ltd.

XL Bermuda Ltd

XL Reinsurance America Inc.

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requiring reserves.

Over the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing.

Various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing.

These regulations include (i) the creation of “market assistance plans”

under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term or to non-renew policies at their scheduled expirations, (iii) advance notice requirements or limitations imposed for certain policy non-renewals, (iv) limitations upon or decreases in rates permitted to be charged, (v) expansion of governmental involvement in the insurance market and (vi) increased regulation of insurers’

under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term or to non-renew policies at their scheduled expirations, (iii) advance notice requirements or limitations imposed for certain policy non-renewals, (iv) limitations upon increases or decreases in rates permitted to be charged, (v) expansion of governmental involvement in the insurance market and (vi) increased regulation of insurers’

policy administration and claims handling practices.

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We provide competitive compensation and benefits as well as a 401(k) plan with employee matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, telemedicine, paid time off, family leave, employee assistance programs and free education, training and development programs.

Our Company is committed to the wellness of its employees and its community and as part of that commitment we have volunteer programs to support our local community’s wellness which provides our employees paid time to volunteer to Heritage-sponsored volunteer opportunities.

We are committed to the wellness of our employees and our community and as part of that commitment we have volunteer programs to support our local community’s wellness which provides our employees paid time to volunteer to Heritage-sponsored volunteer opportunities.

Available Information

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We maintain reserves to cover our estimated ultimate liabilities for losses and loss adjustment expenses, also referred to as loss reserves.

Our current loss reserves are based primarily on our historical data and statistical projections of what we believe the resolution and administration of claims will cost based on facts and circumstances then known to us.

Our loss reserves are based primarily on our historical data and statistical projections of what we believe the resolution and administration of claims will cost based on facts and circumstances then known to us.

Our claims experience and our experience with the risks related to certain claims is inherently limited.

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Catastrophes can be caused by various events, including hurricanes, severe convective storms, tropical storms, snowstorms, tornadoes, earthquakes, hailstorms, explosions, power outages, fires and by man-made events, such as terrorist attacks.

Climate change, to the extent it produces extreme changes in temperatures and changes in weather patterns, could affect the frequency or severity of weather-related catastrophes The incidence and severity of catastrophes are inherently unpredictable.

Climate change, to the extent it produces extreme changes in temperatures and changes in weather patterns, could affect the frequency or severity of weather-related catastrophes.

The incidence and severity of catastrophes are inherently unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected and the severity of the event.

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Therefore, although we attempt to manage our exposure to catastrophes through our underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance protection and may have a material adverse impact on our results of operations and financial condition.

In total, for the period from June 1, 2021 through May 31, 2022, we have purchased up to approximately $2.8 billion of catastrophe reinsurance coverage for Heritage P&C, Zephyr, and NBIC, for multiple catastrophic events.

In the fourth quarter of 2022 we re-estimated our ultimate losses for Hurricane Irma, which struck Florida in 2017.

As a result of that re-estimation, Heritage has exhausted the private layers of reinsurance specific to Hurricane Irma but has a 45% participation in the FHCF limit remaining Accordingly, should future re-estimations to Hurricane Irma losses increase the expected loss reserves, a portion of the increase will be retained and a portion will be ceded to the FHCF.

In total, for the period from June 1, 2022 through May 31, 2023, we have purchased an aggregate limit of $3.2 billion of catastrophe reinsurance coverage for Heritage

P&C, Zephyr, and NBIC, for multiple catastrophic events.

Our ability to access this coverage, however, is subject to the severity and frequency of such events.

We may experience significant losses and loss adjustment expenses in excess of our retention or experience multiple retentions for a series of catastrophic events in a single season, which could materially and adversely affect our financial results.

The inherent uncertainty of models and our reliance on such models as a tool to evaluate risk may have an adverse effect on our financial results.

We license analytic and modeling software from third parties to facilitate our pricing, assess our risk exposure and determine our reinsurance needs.

Given the inherent uncertainty of modeling techniques and the application of such techniques, these models and databases may not accurately address the emergence of a variety of matters which might impact our exposure to losses.

If, these models may understate the exposures we are assuming, we may not properly assess the risk and make poor decisions relating to pricing and underwriting.

As a result, our financial results may be adversely impacted, perhaps significantly.

Our success depends on our ability to adequately assess risk and set premiums accordingly, and our failure to do so could affect the growth of our business and adversely impact our financial results.

Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks.

Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, reinsurance costs and underwriting expenses and to earn a profit.

In order to price our products accurately, we must collect and properly analyze a substantial amount of data;

develop, test and apply appropriate rating formulas;

closely monitor and timely recognize changes in trends;

and project both severity and frequency of losses with reasonable accuracy.

Our ability to successfully perform these tasks, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:

the availability of sufficient reliable data and our ability to properly analyze available data;

regulatory delays in approving filed rate changes;

the uncertainties that inherently characterize estimates and assumptions;

our selection and application of appropriate rating and pricing techniques;

changes in legal standards, claim resolution practices, and restoration costs;

legislatively imposed consumer initiatives.

In addition, we could underprice risks, which would negatively affect our profit margins.

We could also overprice risks, which could reduce the number of policies we write and our competitiveness.

In either event, our profitability could be materially and adversely affected.

Our results of operations may fluctuate significantly based on industry factors.

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We anticipate that claims arising from future events may require the establishment of substantial reserves from time to time.

Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.

The cost of reinsurance is subject to prevailing market conditions beyond our control such as the amount of capital in the reinsurance market, as well as the frequency and magnitude of natural and man-made catastrophes.

Our total cost of obtaining reinsurance over the last few years has increased, both on an absolute basis and as a percentage of premiums-in-force, and is expected to continue to increase in the future.

We cannot be assured that reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us.

As a result, we may determine to increase the amount of risk we retain or look for other alternatives to reinsurance, which could in turn have a material adverse effect on our financial position, results of operations and cash flows.

We may not be able to collect reinsurance amounts due to us from the reinsurers with which we have contracted.

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Our reinsurance coverage in any given year may be concentrated with one or a limited group of reinsurers.

No single private reinsurer represented more than 10% of the overall limit purchased from our total reinsurance coverage.

No single private market reinsurer represented more than 10% of the overall limit purchased from our total reinsurance coverage.

Any failure on the part of any one reinsurance company to meet its obligations to us could have a material adverse effect on our financial condition or results of operations.

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This could result in significant financial, legal and operational challenges to our Company.

In the event of a catastrophic loss, FHCF’s ability to pay may be dependent upon its ability to issue bonds in amounts that would be required to meet its reinsurance obligations.

In the event of a catastrophic loss, the FHCF’s ability to pay may be dependent upon its ability to issue bonds in amounts that would be required to meet its reinsurance obligations.

There can be no assurance that FHCF will be able to do this.

While we believe FHCF currently has adequate capital and financing capacity to meet its reinsurance obligations, there can be no assurance that it will be able to meet its obligations in the future, and any failure to do so could have a material adverse effect on our liquidity, financial condition and results of operations.

Reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all.

We cannot be assured that reinsurance will remain continuously available to us in the amounts we consider sufficient and at prices acceptable to us.

We carry a significant amount of intangible assets on our consolidated balance sheets.

Earnings for future periods may be impacted by impairment charges for intangible assets.

We have a significant amount of intangible assets that could be subject to impairment.

If we determine that a significant impairment has occurred in the value of our unamortized intangible assets, we could be required to write off a portion of our assets, which could adversely affect our consolidated financial condition or our reported results of operations.

The inherent uncertainty of models and our reliance on such models as a tool to evaluate risk may have an adverse effect on our financial results.

We license analytic and modeling software from third parties to facilitate our pricing, assess our risk exposure and determine our reinsurance needs.

If these models understate the exposures we are assuming, we may not properly assess the risk and we may make poor decisions relating to pricing, underwriting, and the related amount of reinsurance we purchase.

As a result, our financial results may be adversely impacted, perhaps significantly.

Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

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If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely affected.

Our success depends on our ability to adequately assess risk and set premiums accordingly, and our failure to do so could affect the growth of our business and adversely impact our financial results.

Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks.

Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses, reinsurance costs and underwriting expenses and to earn a profit.

In order to price our products accurately, we must collect and properly analyze a substantial amount of data;

develop, test and apply appropriate rating formulas;

closely monitor and timely recognize changes in trends;

and project both severity and frequency of losses with reasonable accuracy.

Our ability to successfully perform these tasks, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:

the availability of sufficient reliable data and our ability to properly analyze available data;

regulatory delays in approving filed rate changes;

the uncertainties that inherently characterize estimates and assumptions;

our selection and application of appropriate rating and pricing techniques;

changes in legal standards, claim resolution practices, and restoration costs;

legislatively imposed consumer initiatives.

In addition, we could underprice risks, which would negatively affect our profit margins.

We could also overprice risks, which could reduce the number of policies we write and our competitiveness.

In either event, our profitability could be materially and adversely affected.

We may not be able to identify suitable acquisition candidates, effectively integrate newly acquired businesses or achieve expected profitability from acquisitions.

Part of our growth strategy is to expand through the acquisition of complementary businesses.

We may not be able to effectively integrate newly acquired businesses or achieve expected profitability from acquisitions.

We have in the past and may in the future expand through the acquisition of complementary businesses.

This could occur through an acquisition of a company or a portion of a company’s business.

There can be no assurance that suitable candidates for business acquisitions can be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all.

Even if suitable candidates are identified, any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock, including the integration of the acquired operations and information systems, diversion of management's attention, risks of entering new market regions in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses, changes for impairment of long-terms assets or goodwill and risks associated with unanticipated liabilities.

Any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock, including the integration of the acquired operations and information systems, diversion of management's attention, risks of entering new market regions in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses, changes for impairment of long-terms assets or goodwill and risks associated with unanticipated liabilities

In connection with an acquisition, we could incur debt, recognize amortization expenses related to intangible assets, have to take large and immediate write-offs, including but not limited to goodwill impairment, and assume liabilities.

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Future acquisitions could also result in accounting charges, potentially dilutive issuances of equity securities and increased debt and contingent liabilities, including liabilities related to unknown or undisclosed circumstances, any of which could have a material adverse effect on our business and the market price of our common stock.

We carry a significant amount of goodwill and intangible assets on our consolidated balance sheets.

Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets.

Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses.

We evaluate goodwill for impairment at least annually, or more frequently if circumstances suggest an impairment may have occurred.

While we believe we have made reasonable estimates and assumptions to calculate the fair values of our reporting units which were based on facts and circumstances known at such time, it is possible that existing or new events may result in forecasted cash flows, revenue and earnings that differ from those that formed the basis of our estimates and assumptions, which could be materially different from our estimates and assumptions.

If so, we could be required to incur a non-cash goodwill impairment charge to operating income for impairment.

For example, as a result of a variety of factors, specifically (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events, (ii) elevated loss ratios for property insurers in our markets and (iii) trading of our stock below book value, we determined that a portion of our goodwill was impaired as the carrying values exceeded fair value and we recorded a non-cash goodwill impairment charge of $60.5 million.

Any impairment in the value of our goodwill would have an adverse non-cash impact on our results of operations and reduce our net worth.

As of December 31, 2021, after giving effect to the impairment charge, the carrying value of our goodwill was $92 million.

Additionally, we have a significant amount of intangible assets that could also be subject to impairment.

We may not be able to effectively execute our growth and diversification strategy.

We have and intend to continue to invest significant time and resources to develop and market geographic expansion, new lines of business and/or products and services and we may not achieve the return on our investment that we expect.

Initial timetables for the introduction and development of geographic expansion, new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible.

We may not be able to effectively execute our business diversification strategy.

We have and intend to continue to invest significant time and resources to employ our business strategies, including the rebalancing of our portfolio toward products and geographies that maximize long-term returns to our shareholders, and we may not achieve the return on our investment that we expect.

Initial timetables for optimizing and diversifying our portfolio of policies may not be achieved and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives, and shifting customer preferences may also impact the successful implementation of our business plan.

Such external factors and requirements may increase our costs and potentially affect the speed with which we will be able to pursue new market opportunities.

There can be no assurance that we will be successful in bringing new insurance products or geographic expansion to our marketplace.

Additionally, any geographic expansion, new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.

Such external factors and requirements may increase our costs and potentially affect the speed with which we will be able to re-allocate capital among our portfolio of policies.

There can be no assurance that we will be successful in deploying this strategy.

Additionally, to the extent our business strategies include any geographic expansion, new line of business and/or new product or service, such expansion or new products or services could have a significant impact on the effectiveness of our system of internal controls.

Failure to successfully manage these risks could have a material adverse effect on our business, results of operations and financial condition.

Our growth and diversification strategy involves expansion of our business to states outside of our existing markets.

Geographic diversification may be hindered by the fact that our operating history is less than the operating history of our competitors, and we may be unable to satisfy requirements imposed by state regulators and other third parties.

We rely on independent agents to write voluntary insurance policies for us, and if we are not able to attract and retain independent agents, our revenues would be negatively affected.

We rely on independent agents to write insurance policies for us, and if we are not able to attract and retain independent agents, our revenues would be negatively affected.

We write personal and commercial insurance policies through a network of independent agents.

Of our network of 2,700 southeast U.S.

independent agents, approximately 25.0% of new business is affiliated with eight large agency networks with which we have entered into master agency agreements, which are generally terminable with notice.

Of our network of approximately 600 retail independent agents for business in the northeastern U.S., our eight largest relationships represent approximately $71.0 million in annualized premiums.

Our southeastern personal residential insurance policies are written through a network of more than 2,000 independent agents.

Approximately 28% of our voluntary personal lines policies are written by agents that are affiliated with eight large agency networks with which we have entered into master agency agreements.

We market and write commercial residential policies through a network of approximately 400 independent agents in Florida.

Of our network of approximately 500 retail independent agents for business in the northeastern U.S., our three largest relationships represent approximately $79.0 million in annualized premiums.

Of our network of approximately 70 Hawaiian independent agencies, approximately 50.6% are affiliated with three large multi-producer agencies.

Our strategic focus is to grow the number of policies written, which meet our underwriting criteria, throughout the states in which we are licensed, which will further increase our reliance on our network of independent agents.

If any of our independent agents cease writing policies for us, or if any of our master agency agreements are terminated, we may suffer a reduction in the amount of products we are able to sell, which would negatively impact our results of operations.

Our strategic focus is to improve the underwriting performance of our policies throughout the states in which we are licensed, which will further increase our reliance on our network of independent agents.

If any of our independent agents cease writing policies for us, or if any of our master agency agreements are terminated, we may suffer a reduction in the number of products we are able to sell, which would negatively impact our results of operations.

Many of our competitors also rely on independent agents.

As a result, we must compete with other insurers for independent agents’

Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher commissions to their agents.

Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher

commissions to their agents.

If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract business from independent agents to sell our products.

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Further, we may require additional capital in the future which may not be available or may only be available on unfavorable terms.

Our future growth and future capital requirements will depend on our ability to expand the number of insurance policies we write, to expand the kinds of insurance products we offer and to expand the geographic markets in which we do business, all balanced by the business risks we choose to assume and cede.

These growth initiatives require capital.

Our future growth and future capital requirements will depend on the number of insurance policies we write, the kinds of insurance products we offer, the geographic markets in which we do business and, to the extent part of our business strategy in the

future, policy and/or geographic expansion, all balanced by the business risks we choose to assume and cede.

Growth initiatives require capital.

Our existing sources of funds include possible sales of common or preferred stock, incurring debt and our earnings from operations and investments.

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Based on our current operating plan, we believe that our current capital together with our anticipated retained income will support our operations.

However, we cannot provide any assurance in that regard, since many factors will affect the amount and timing of our capital needs, including our growth and profitability, the availability and cost of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.

However, we cannot provide any assurance in that regard, since many factors will affect the amount and timing of our capital needs, including profitability of our business, the availability and cost of reinsurance, market disruptions and other unforeseeable developments.

If we require additional capital, it is possible that equity or debt financing may not be available on acceptable terms or at all.

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We may, under certain circumstances, be required to liquidate our investments in securities at prices below book value, which may adversely affect our financial results.

We currently hold all of our cash in accounts with four financial institutions and, as a result of this concentration, a portion of the balances in such accounts exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

This risk could be amplified in periods of rising interest rates.

We currently hold all of our cash in accounts with eight financial institutions and, as a result of this concentration, a portion of the balances in such accounts exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

While we monitor and adjust the balances in our accounts as appropriate, these balances could be impacted if any of these financial institutions fail and could be subject to other adverse conditions in the financial markets.

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The effects of emerging claim and coverage issues on our business are uncertain.

Loss frequency and severity in the property and casualty insurance industry and multi-peril personal line business, in general, has continued to increase in recent years, principally driven by litigation and assignment of benefits (“AOB”) in the State of Florida.

Loss frequency and severity in the property and casualty insurance industry and multi-peril personal lines business has continued to increase in recent years, often driven by actual and social inflation.

Litigation and assignment of benefits (“AOB”) in the State of Florida is an example of these trends.

For example, in recent years, Florida homeowners have been assigning the benefit of their insurance recovery to third parties, which has resulted in increases in the size and number of claims and the amount of litigation, interference in the adjustment of claims, the assertion of bad faith actions and one-way rights to claim attorney fees.

However, in July 2019, the Florida legislature enacted an AOB reform bill that intends to limit AOB litigation by creating requirements for the execution of an AOB and allowing an insurance policy to prohibit any AOB.

There can be no assurance that this new legislation will reduce the future impact of AOB practices.

The Florida legislature enacted several reform bills in the last three years with the intention to limit AOB and frivolous litigation.

There can be no assurance that this new legislation will reduce the future impact of AOB or litigated claims practices.

Many legal actions and proceedings have been brought on behalf of classes of complainants, which can increase the size of judgments.

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If we are unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action, which could adversely affect our operations.

These regulatory

requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

In addition, regulatory authorities also may conduct periodic examinations into insurers’

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These practices may turn out to be different from the interpretations of regulatory authorities.

If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us.

If we do not have the requisite licenses and approvals or do not comply

with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us.

This could adversely affect our ability to operate our business.

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As of December 31, 2022, our insurance subsidiaries each maintained a risk-based capital ratio of over 300% and complied with the requirement of our state regulators.

Our Florida subsidiary, HPCI, has agreed to continue to maintain a risk-based capital ratio of at least 300%.

For NBIC, our regulator reduced our risk-based capital ratio requirement from 375% for the year ended December 31, 2020 to 350% for the year ended December 31, 2021.

Our subsidiary, HPCI, has agreed to continue to maintain a risk-based capital ratio of at least 300%.

Our subsidiary, NBIC, has agreed to maintain a risk-based capital ratio requirement of 350%.

In addition, our insurance subsidiaries are required to maintain certain minimum capital and surplus and to limit its written premiums to specified multiples of its capital and surplus.

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If the rates on which our borrowings are based were to increase from current levels, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available to service our other obligations would decrease.

Our financing costs may be adversely affected by the discontinuation of LIBOR.

LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and was historically widely used as a reference for setting the interest rate on loans globally, and has been the subject of recent

proposals for reform.

The ICE Benchmark Administration Limited (“IBA”) ceased the publication of USD LIBOR for the 1 week and 2 month tenors on December 31, 2021 and intends to cease all other tenors on June 30, 2023.

These reforms will cause the establishment of an alternative reference rate(s).

Federal Reserve of New York’s ARRC working group is proposing to replace U.S.

dollar LIBOR with Secured Overnight Financing Rate (SOFR), which is calculated based on repurchase agreements with the Federal Reserve which are fully secured by U.S.

treasury securities.

This alternative rate, if adopted, would be used to calculate our interest rates and/or payments on our variable rate indebtedness under our term loan facility and revolving credit facility.

Any new interest rate may result in interest rates and/or payments that are higher than, lower than, or that do not otherwise correlate over time with the interest rates and/or payments that would have been applicable to our obligations if LIBOR was available in its current form.

As such, the potential effect of any such event is uncertain, but were it to occur, our cost of capital, financial results, cash flows and results of operations may be adversely affected.

At the current time, it is uncertain which of the various alternative reference rates will attain industry-wide market acceptance as a replacement for LIBOR.

Our interest rate expense may materially increase as a result of the transition from LIBOR to an alternative reference rate.

While we have amended our credit facility to provide mechanics relating to a transition away from LIBOR as a benchmark interest rate and the replacement of LIBOR by an alternative benchmark rate, it is unclear the extent to which the alternative benchmark rates will be as predictable as LIBOR or if such rates will be more expensive or more volatile than LIBOR.

Unfortunately, there are various SOFR rates and none have gained widespread industry acceptance.

Consequently, post termination of LIBOR, our variable rate indebtedness may be at interest rates that are higher than the interest rates that would have been applicable to our obligations if LIBOR was available in its current form.

We depend on the ability of our subsidiaries to generate and transfer funds to meet debt obligations.

Due to inflationary pressures on the U.S.

economy and governmental action to combat inflation, interest rates increased during 2022 and it appears likely that interest rates will continue to increase during 2023, which may decrease our net income and cash flows.

Our credit agreement contains restrictions that can limit our flexibility in operating our business.

The agreement governing our credit facilities contains various covenants that limit our ability to engage in certain transactions.

These covenants limit our and our subsidiaries’

ability to, among other things:

incur additional indebtedness;

declare or make any restricted payments, including dividends;

make investments, including the contribution of capital to our insurance subsidiaries;

create liens on any of our current or future assets;

consolidate, merge, sell, or otherwise dispose of all or substantially all of our current or future assets;

enter into certain transactions with our affiliates.

These covenants could place us at a disadvantage compared to some of our competitors that may have fewer restrictive covenants and may not be required to operate under these restrictions.

Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing and business opportunities.

If we fail to comply with these covenants, it could result in an event of default under our credit facilities.

If any default occurs, all amounts outstanding under our credit facilities may become immediately due and payable.

Dividend payments on our common stock in the future are uncertain.

Although we have paid dividends on our common stock in the past, the declaration and payment of dividends will be at the discretion of our board of directors and will depend on our profits, financial requirements and other factors, such as restrictions under

our credit facilities, which limit our ability to pay dividends, and other legal and regulatory restrictions on the payment of dividends, our overall business condition and other elements our board of directors considers relevant.

Therefore, investors who purchase our common stock may only realize a return on their investment if the value of our common stock appreciates.

We depend on the ability of our subsidiaries to generate and transfer funds to meet debt obligations and to make dividend payments.

We do not have significant revenue generating operations of our own.

Our ability to make scheduled payments on our debt obligations and dividends depends on the financial condition and operating performance of our subsidiaries.

As such, our ability to make scheduled payments on our debt obligations and pay dividends depends on the financial condition and operating performance of our subsidiaries.

If the funds we receive from our subsidiaries, some of which are subject to regulatory restrictions on the payment of distributions, are insufficient to meet our debt obligations, we may be required to raise funds through the issuance of additional debt or equity securities, reduce or suspend dividend payments, or sell assets.

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These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.

Our stock price in recent years has been volatile and is likely to continue to be volatile, which may impact the value of stock held by investors.

The market price of our common stock has experienced, and may continue to experience, significant volatility from time to time.

Such volatility may be affected by various factors and events, such as:

o our operating results, including a shortfall in revenues or operating performance from that expected by securities analysts and investors;

o recognition of large unanticipated accounting charges, such as impairment charges;

o changes in securities analysts’

estimates of our financial performance or the financial performance of our competitors or companies in our industry generally;

o a downgrade of our Demotech or KBRA rating;

o the announcement of a material event or anticipated event involving us or our industry or the markets in which we operate;

o the other risk factors described in this Annual Report.

In recent years, the U.S.

stock market has experienced extreme price and volume fluctuations, which have sometimes affected the market price of the securities issued by a particular company in a manner unrelated to our operational performance.

This type of market effect could impact the price of our common stock as well.

This volatility means that the price of our common stock may have declined substantially at such time as our stockholders may look to sell shares of our common stock, which reduces the value of their investment.

General Risk Factors

The coronavirus (COVID-19) global pandemic may adversely affect our business, including revenues, profitability, results of operations, and/or cash flows, in a manner and to a degree that cannot be predicted but could be material.

Despite recent progress in the administration of vaccines, both the outbreak of recent variants, including Delta and Omicron, and the related containment and mitigation measures that have been put in place across the world, have had and are likely to continue to have adverse impacts on the global economy and could have adverse impacts on our business and results of operations.

The cumulative effects of COVID-19 on the Company, and the effect of any other epidemic, pandemic or public health outbreak, cannot be predicted at this time, but could include, without limitation:

We expect that the impact of COVID-19 on general economic activity could negatively impact our premium volumes.

While we did not experience this impact in 2021, we anticipate premium volumes, particularly in new sales volumes, could be adversely affected prospectively if economic conditions worsen and home purchases in our geographies decline materially.

If premium volumes were to decrease materially, our earned premium would also decline and we could experience an increase in our net operating expense ratio.

States and local governments may launch measures to combat the spread of COVID-19 and its new variants, including travel bans, quarantines and lock-downs of affected areas which could cause disruption to our distribution channel of independent agents which may have a negative impact on our revenues and financial condition.

In an effort to support insurance consumers during the pandemic, some states where we market our products have issued mandates or requests such as moratoriums on policy cancellations or non-renewals for non-payments of premiums, forbearance on premium collections, waivers of late payment fees and extended periods in which policyholders may make their missed payments.

These actions may result in delayed premium receipts, disrupting cash flows and increasing credit risk from policyholders unable to make timely premium payments.

We may experience increased claims, losses, litigation, and related expenses, as well as higher costs related to delays in adjusting claims, as a result of stay-at-home orders, quarantines, an increased proportion of individuals working from home, and an uptick in renovation work as a result.

As a result of potential supply chain constraints and increased labor costs, whether caused by the COVID-19 pandemic or macroeconomic factors generally, our loss costs associated with claims and claims amounts may increase due to the increased cost of materials and labor needed for repairs and to otherwise remediate claims.

There has been and there may continue to be increased volatility and declines in financial markets which, could negatively impact liquidity and credit availability and could continue to reduce the fair market value of, or result in the impairment of, invested assets held by the Company.

The decline in interest rates could reduce future investment results.

The situation surrounding COVID-19 remains fluid.

The rapid spread of the COVID-19 virus and its variants, the persistence of the resulting pandemic and measures implemented to combat it may have an adverse effect on our business.

Moreover, the longer the pandemic persists, the more material the ultimate effects are likely to be.

It is possible that there will be future negative effects that we cannot presently predict, including near term effects.

Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future, and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally.

For this reason, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 and its variants may have on the Company’s results of operations, financial position, and liquidity.

The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the pandemic, the pervasiveness of new variants of the virus, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease, including the effectiveness and availability of vaccines.

Our information technology systems, or those of our key service providers, may fail or suffer a loss of security which could adversely affect our business.

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The development and expansion of our insurance business is dependent upon the successful development and implementation of advanced technology, including modeling, underwriting and information technology systems.

Because we intend to expand our business by writing additional policies, expanding to new geographic areas and entering into new lines of business, we are enhancing our information technology systems to handle and process an increased volume of policies.

Additionally, we have engaged service providers to provide us with policy and other administration services for certain policies and we intend to continue to utilize third party systems as our policy count grows.

The failure of any of these systems to function as planned could slow our growth and adversely affect our future business volume service levels and results of operations.

We have engaged service providers to provide us with policy and other administration services for certain policies and we intend to continue to utilize third party systems.

The failure of any of these systems to function as planned could adversely affect our future business volume service levels and results of operations.

In addition, we have licensed certain systems and data from third parties.

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We conduct our business primarily from offices located in Florida, Hawaii, and Rhode Island where catastrophic weather events could damage our facilities or interrupt our power supply.

The loss or significant impairment of functionality in these facilities for any

reason could have a material adverse effect on our business, as we do not have significant redundancies to replace our facilities if functionality is impaired.

The loss or significant impairment of functionality in these facilities for any reason could have a material adverse effect on our business, as we do not have significant redundancies to replace our facilities if functionality is impaired.

We contract with a third-party vendor to maintain complete daily backups of our systems;

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Additionally, our future success is also based on our ability to develop the talent and skills of our human resources and attract and retain experienced and qualified employees.

For example, if the quality of our underwriters, claims or other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations, which could adversely affect our results.

There is strong competition within the insurance industry and from businesses outside the insurance industry for qualified employees.

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Corporate Headquarters

Safety Harbor, Florida

Restoration Center

Company owned

Honolulu, Hawaii

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Insurance Company NE, Operations

Following our planned relocation to our new Tampa headquarters, which began in late 2021, we have subleased a portion of the remaining available space at the Clearwater location to unaffiliated tenants.

Approximately 96% of the building in Clearwater is leased to unaffiliated tenants.

We believe that these properties are suitable and adequate to meet the needs of our business.

Legal Proceedings

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business