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

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

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

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

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

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

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

The aggregate number of shares of the Registrant’s Common Stock outstanding on ~~November~~May 2, ~~2021~~2022 was ~~27,880,203~~26,469,720.

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about (i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments; (ii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) business and risk management strategies, including acquisitions, strategic investments and risk diversification; (iv) our estimates with respect to tax and accounting matters including the impact on our financial statements; ~~(iv)~~(vi) future dividends, if any; ~~(v)~~(vi) our expectations related to our financing activities; ~~(vi)~~(vii) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; ~~(vii)~~(viii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital ~~requirements; (viii)~~requirements and the source of funds needed to fund our business and risk management strategies; (ix) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; ~~(ix)~~(x) our intentions with respect to our credit risk investments; (xi) the future impact of the COVID-19 pandemic; and ~~(x)~~(xii) the potential effects of our current legal proceedings.

These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

See accompanying notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Operations and Other Comprehensive ~~Income~~Loss

See accompanying notes to unaudited condensed consolidated financial statements.

See accompanying notes to unaudited condensed consolidated financial ~~statements~~.statements.

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

Restricted cash primarily represents funds held to meet regulatory requirements in certain states in which the Company operates.

See accompanying notes to unaudited condensed consolidated financial statements.

NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. (together with its subsidiaries, the “Company”). These statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The accompanying interim condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed on March 14, 2022 (the ~~“2020~~“2021 Form 10-K”).

Significant accounting policies

The accounting policies of the Company are set forth in Note 1 to condensed consolidated financial statements contained in the Company’s ~~2020~~2021 Form 10-K.

Reclassification

Certain prior year amounts reported on the condensed consolidated balance sheet have been reclassified to conform to the current year presentation.

Accounting Pronouncements adopted

In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" . The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity. The if-converted method will be the only permissible method for computing the dilutive effect of the convertible debt instruments. Interest expense no longer includes amortization of debt discount. The Company adopted the guidance of ASU 2020-06 on January 1, 2022, reporting no material impact to the Company's consolidated condensed financial statements or disclosures for the quarter ended March 31, 2022.

Accounting Pronouncements not yet adopted

In March 2022, the FASB issued ASU 2022-02, “2022-02 Financial Instruments-Credit Losses” (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for annual periods beginning after December 15, 2022, including interim periods within those periods. Early adoption is permitted. The Company will adopt ASU 2022-02 during the first quarter of 2023 and will provide the required disclosures, if determined to be material.

The Company has documented the summary of its significant accounting policies in its Notes to the Audited Consolidated Financial Statements annual report on Form ~~10-K for the year ended December 31, 2020, filed on March 9, 2021.~~10-K. There have been no material changes to the Company’s accounting policies since the filing of that report.

No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on the Company’s results of operations or financial position.

NOTE 2. INVESTMENTS

Securities Available-for-Sale

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows for the ~~periods:~~periods presented:


September 30, 2021	Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2022									Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale	(In thousands)								(In thousands)
U.S. government and agency securities (1)	$	43,734	$	284	$	9	$	44,009	$	105,575	$	10	$	2,504	$	103,081
States, municipalities and political subdivisions		106,019		359		657		105,721		107,919		11		6,631		101,299
Special revenue		311,752		1,624		1,881		311,495		299,712		59		17,449		282,322
Hybrid securities		99		1		—		100
Industrial and miscellaneous		199,792		1,244		1,542		199,494		197,950		113		11,254		186,809
Total	$	661,396	$	3,512	$	4,089	$	660,819	$	711,156	$	193	$	37,838	$	673,511

(1)

Includes securities at ~~September 30, 2021~~March 31, 2022 with a carrying amount of $~~22.7~~20.4 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.


December 31, 2020		Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2021											Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale	(In thousands)									(In thousands)
U.S. government and agency securities (1)		$	29,985	$	609	$	1	$	30,593		$	73,923	$	184	$	282	$	73,825
States, municipalities and political subdivisions			84,597		1,077		4		85,670			106,727		242		1,270		105,699
Special revenue			271,194		3,154		27		274,321			291,005		1,084		3,520		288,569
Hybrid securities			100		—		—		100			99		—		—		99
Industrial and miscellaneous			167,296		3,070		39		170,327			203,491		636		2,965		201,162
Total		$	553,172	$	7,910	$	71	$	561,011		$	675,245	$	2,146	$	8,037	$	669,354

(1)

Includes securities at December 31, ~~2020~~2021 with a carrying amount of $~~21.6~~22.5 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

Net Realized (Losses) Gains

The proceeds from the sale of debt securities were $3.1 million and $11.6 million for the three months ended March 31, 2022 and 2021, respectively.

The following table presents net realized (losses) gains on the Company’s debt securities available-for-sale for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively:


	2021					2020				2022					2021
Three Months Ended September 30,	Gains (Losses)			Fair Value at Sale		Gains (Losses)		Fair Value at Sale
Three Months Ended March 31,										Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(In thousands)									(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	2		$	3,470	$	20,355	$	290,643	$	7		$	910	$	83		$	10,431
Total realized losses		(8	)		226		—		—		(23	)		1,685		(3	)		642
Net realized (losses) gains	$	(6	)	$	3,696	$	20,355	$	290,643
Net realized (losses) and gains										$	(16	)	$	2,595	$	80		$	11,073

2021

2020

Nine Months Ended September 30,

Gains
(Losses)

Fair Value at Sale

Gains
(Losses)

Fair Value at Sale

(In thousands)

Debt Securities Available-for-Sale

Total realized gains

$
106

$
24,265

$
20,492

$
305,791

Total realized losses

(10
)

1,043

(115
)

2,716

Net realized gains

$
96

$
25,308

$
20,377

$
308,507

The table below summarizes the Company’s debt securities at ~~September 30, 2021~~March 31, 2022 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.


	At September 30, 2021										At March 31, 2022
	Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total			Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total
Maturity dates:	(In thousands)					(In thousands)										(In thousands)
Due in one year or less	$	44,447		7	%	$	44,628		7	%	$	55,378		7.8	%	$	55,109		8.2	%
Due after one year through five years		253,398		38	%		254,377		38	%		339,179		47.7	%		324,660		48.2	%
Due after five years through ten years		220,450		33	%		218,373		33	%		233,249		32.8	%		214,130		31.8	%
Due after ten years		143,101		22	%		143,441		22	%		83,350		11.7	%		79,612		11.8	%
Total	$	661,396		100	%	$	660,819		100	%	$	711,156		100.0	%	$	673,511		100.0	%

Net Investment Income

The following table summarizes the Company’s net investment income by major investment category for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2021		2020		2022		2021
	(In thousands)				(In thousands)				(In thousands)
Debt securities	$	1,986	$	2,170	$	5,164	$	8,567	$	2,275	$	1,418
Equity securities		—		—		—		—		—		—
Cash and cash equivalents		17		651		72		1,610		16		28
Other investments		514		221		1,101		486		230		371
Net investment income		2,517		3,042		6,337		10,663		2,521		1,817
Less: Investment expenses		969		225		2,540		880		521		524
Net investment income, less investment expenses	$	1,548	$	2,817	$	3,797	$	9,783	$	2,000	$	1,293

The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged) and for which no0 credit loss allowance been established to date, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively:


	Less Than Twelve Months						Twelve Months or More						Less Than Twelve Months						Twelve Months or More
September 30, 2021	Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
March 31, 2022													Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale
U.S. government and agency securities		10	$	9	$	14,441		—	$	—	$	—		82	$	2,504	$	97,916		—	$	—	$	—
States, municipalities and political subdivisions		75		657		66,885		—		—		—		113		6,170		87,509		8		461		5,340
Special revenue		188		1,877		150,757		11		4		101		446		15,252		217,316		36		2,197		22,707
Industrial and miscellaneous		133		1,542		99,327		—		—		—		208		7,014		135,467		55		4,240		36,812
Total fixed maturity securities		406	$	4,085	$	331,410		11	$	4	$	101		849	$	30,940	$	538,208		99	$	6,898	$	64,859


	Less Than Twelve Months						Twelve Months or More						Less Than Twelve Months						Twelve Months or More
December 31, 2020	Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
December 31, 2021													Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale
U.S. government and agency securities		3	$	1	$	73		1	$	—	$	7		43	$	282	$	57,420		—	$	—	$	—
States, municipalities and political subdivisions		6		4		5,158		—		—		—		98		1,270		80,972		—		—		—
Special revenue		27		24		16,439		9		3		73		253		3,485		195,450		14		35		1,214
Industrial and miscellaneous		26		39		16,025		—		—		—		191		2,387		146,746		18		578		11,598
Total fixed maturity securities		62	$	68	$	37,695		10	$	3	$	80		585	$	7,424	$	480,588		32	$	613	$	12,812

The ~~Company’s~~Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is the result of a credit loss. All available-for-sale securities with unrealized losses ~~on corporate bonds have~~are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for credit-related impairment to determine whether a credit loss exists, including the extent to which fair value is below cost, the implied yield to maturity, rating downgrades of the security and whether or not ~~been recognized because~~ the ~~bonds are~~issuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of ~~high~~the issuer and industry factors that could negatively impact the capital markets.

If the decline in fair value of an available-for-sale security below its amortized cost is considered to be the result of a credit ~~quality with investment grade ratings of A- or higher,~~loss, the Company ~~does~~compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. For the three months ending March 31, 2022, management concluded that the decline in the fair value was not ~~intend~~a result from credit losses but rather as a direct result from the increase in the market interest rates. Therefore, the Company did 0t have an allowance for credit losses as of March 31, 2022 or December 31, 2021.

Quarterly, the Company considers whether it intends to sell ~~and~~an available-for-sale security or if it is ~~unlikely the Company~~more likely than not that it will be required to sell the ~~securities prior to their anticipated~~security before recovery ~~and the~~of its amortized costs. In these instances, a decline in fair value is ~~not deemed to relate to credit but to changes~~recognized in ~~interest rates and other market conditions. The bond issuers continue to make timely principal and interest payments~~net income based on the ~~bonds. Based on~~fair value of the ~~Company’s expected credit loss criteria and analysis results,~~security at the ~~Company did~~ time of assessment, resulting in a new cost basis for the security.0~~t record a credit allowance for securities that were in an unrealized loss position at September 30, 2021. There were neither any credit events nor credit allowances recorded at December 31, 2020.~~

Other Investments

Non-Consolidating Variable Interest Entities (“VIEs”)

The Company makes passive investments in limited partnerships (“LPs”), ~~limited liability companies (“LLCs”), and a Real Estate Investment Trust (“REIT”). These investments~~which are accounted for using the equity method, with income reported in ~~net realized~~earnings. The Company also makes passive investments in a Real Estate Investment Trust (“REIT”) and ~~unrealized gains and losses or~~an Insurtech company, which are accounted for using the measurement alternative method, which is reported at cost less impairment (if any), plus or minus changes from observable price changes.

These investments are generally of a passive nature and the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. Investments in these entities are by nature less liquid and may involve more risk than other investments.

~~In 2020, the Company entered into agreements for preferred units in the amounts of $7.5~~ ~~million and $9.9~~ ~~million. The preferred units are measured at amortized cost under the guidance of ASC 320 and are subject to a fixed principal and interest payment schedule with maturity dates of~~ ~~February 1, 2023~~ ~~and~~ ~~April 1, 2024, respectively. For the nine months ended September 30, 2021 and 2020, the Company received $937,000~~ ~~and $353,000~~ ~~in interest payments from the preferred units. As of September 30, 2021, the Company received in aggregate $1.2~~ ~~million in fixed principal payments in relation to the $7.5~~ ~~million preferred units agreement. There is no active market for these investments.~~

The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

At September 30, 2021

At December 31, 2020

Carrying Value

Maximum Loss Exposure

Carrying Value

Maximum Loss Exposure

(in thousands)

Investments in non-consolidated VIEs

$
23,887

$
24,909

$
26,409

$
26,409



	As of March 31, 2022				As of December 31, 2021
	Carrying Value		Maximum Loss Exposure		Carrying Value		Maximum Loss Exposure
	(in thousands)
Investments in non-consolidated VIEs	$	14,561	$	14,561	$	23,929	$	23,929

~~During the second quarter of 2021, the Company recorded on its condensed consolidated statement of operations in net realized and unrealized (losses) gains an impairment of approximately $1.0~~ ~~million on its REIT investment. As of September 30, 2021, the carrying value of the REIT less the impairment is approximately $3.0~~ ~~million.~~

No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment.

NOTE 3. FAIR VALUE OF FINANCIAL MEASUREMENTS

Fair value is determined based on the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

•

Level 1 – Unadjusted quoted prices are available in active markets for identical assets/liabilities as of the reporting date.

•

Level 2 – Valuations based on observable inputs, such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in the markets that are not active; or other inputs that are observable, either directly or indirectly.

•

Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs. The Company did not hold any Level 3 assets or liabilities as of ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

The following ~~tables present~~table presents information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy.

The tables below present the balances of the Company’s invested assets measured at fair value on a recurring basis:


September 30, 2021	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2022									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Invested Assets:	(in thousands)								(in thousands)
Debt Securities Available-for-sale
U.S. government and agency securities	$	44,009	$	366	$	43,643	$	0	$	103,081	$	361	$	102,720	$	0
States, municipalities and political subdivisions		105,721		0		105,721		0		101,299		0		101,299		0
Special revenue		311,495		0		311,495		0		282,322		0		282,322		0
Hybrid securities		100		0		100		0
Industrial and miscellaneous		199,494		0		199,494		0		186,809		0		186,809		0
Total investments	$	660,819	$	366	$	660,453	$	0	$	673,511	$	361	$	673,150	$	0

1210


December 31, 2020	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Invested Assets:	(in thousands)								(in thousands)
Debt Securities Available-for-sale
U.S. government and agency securities	$	30,593	$	371	$	30,222	$	0	$	73,825	$	364	$	73,461	$	0
States, municipalities and political subdivisions		85,670		0		85,670		0		105,699		0		105,699		0
Special revenue		274,321		0		274,321		0		288,569		0		288,569		0
Hybrid securities		100		0		100		0		99		0		99		0
Industrial and miscellaneous		170,327		0		170,327		0		201,162		0		201,162		0
Total investments	$	561,011	$	371	$	560,640	$	0	$	669,354	$	364	$	668,990	$	0

Financial Instruments excluded from the fair value hierarchy

The carrying value of premium receivables and accounts payable, accrued expense, revolving loans and borrowings under the Company’s senior secured credit facility approximate their fair value. The rate at which revolving loans and borrowings under the Company’s senior secured credit facility bear interest resets periodically at market interest rates.

Non-recurring fair value measurements

Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, were based on Level 3 unobservable inputs. For the quarters ended September 30, 2021 and 2020, these non-recurring fair values inputs consisted of brand, agent relationships, renewal rights, customer relations, trade names, non-compete and goodwill. To evaluate such assets for a potential impairment, the Company determines the fair value of the goodwill and intangible assets using a combination of a discounted cash flow approach and market approaches, which contain significant unobservable inputs and therefore are considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.

~~There~~Certain of our investments in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. For the year ended December 31, 2021, the Company recorded a goodwill impairment following its annual valuation review of approximately $61 million. In addition, in the second quarter of 2021, the Company recognized an impairment in other investments of approximately $1.0 million based on the estimated fair value of the Company's ownership interest. For the quarter-ended March 31, 2022, there were 0no non-recurring fair value adjustments to intangible assets and goodwill during the third quarters of 2021 and 2020. The Company records any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.adjustments.

NOTE 4. OTHER COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

The following table is a summary of other comprehensive ~~(loss) income~~loss and discloses the tax impact of each component of other comprehensive ~~(loss) income~~loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively:

For the Three Months Ended September 30,

2021

2020

Pre-tax

Tax

After-tax

Pre-tax

Tax

After-tax

(in thousands)

Other comprehensive (loss) income

Change in unrealized (losses) gains on investments, net

$
(1,344
)

$
311

$
(1,033
)

$
2,480

$
(574
)

$
1,906

Reclassification adjustment of realized losses (gains) included in net income

6

(1
)

5

(20,355
)

4,711

(15,644
)
Effect on other comprehensive (loss) income

$
(1,338
)

$
310

$
(1,028
)

$
(17,875
)

$
4,137

$
(13,738
)


	For the Three Months Ended March 31,
	2022									2021
	Pre-tax			Tax			After-tax			Pre-tax			Tax		After-tax
	(in thousands)
Other comprehensive loss
Change in unrealized losses on investments, net	$	(31,770	)	$	7,437		$	(24,333	)	$	(10,597	)	$	2,457	$	(8,140	)
Reclassification adjustment of realized losses (gains) included in net loss		16			(4	)		12			(80	)		18		(62	)
Effect on other comprehensive loss	$	(31,754	)	$	7,433		$	(24,321	)	$	(10,677	)	$	2,475	$	(8,202	)

For the Nine Months Ended September 30,

2021

2020

Pre-tax

Tax

After-tax

Pre-tax

Tax

After-tax

(in thousands)

Other comprehensive (loss) income

Change in unrealized (losses) gains on investments, net

$
(8,316
)

$
1,928

$
(6,388
)

$
19,330

$
(4,471
)

$
14,859

Reclassification adjustment of realized gains included in net income

(96
)

22

(74
)

(20,377
)

4,713

(15,664
)
Effect on other comprehensive (loss) income

$
(8,412
)

$
1,950

$
(6,462
)

$
(1,047
)

$
242

$
(805
)

NOTE 5. LEASES

The Company has entered into operating and financing leases primarily for real estate and vehicles. The Company will determine whether an arrangement is a lease at inception of the agreement. The operating leases have terms of one to ten years, and often include one or more options to renew. These renewal terms can extend the lease term from two to ten years, and are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company considers these options in determining the lease term used in establishing the Company’s right-of-use assets and lease obligations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine present value of the lease payments. The Company used the implicit rates within the finance leases.

Components of the Company’s lease costs for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ were as follows (in thousands):


	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Amortization of ROU assets - Finance leases	$	647	$	21	$	646	$	37
Interest on lease liabilities - Finance leases		263		5		249		9
Variable lease cost (cost excluded from lease payments)		112		128		186		121
Operating lease cost (cost resulting from lease payments)		339		340		353		340
Total lease cost	$	1,361	$	494	$	1,434	$	507

Nine Months Ended
September 30, 2021

Nine Months Ended
September 30, 2020

Amortization of ROU assets - Finance leases

$
1,321

$
64

Interest on lease liabilities - Finance leases

524

16

Variable lease cost (cost excluded from lease payments)

373

391

Operating lease cost (cost resulting from lease payments)

1,018

1,023

Total lease cost

$
3,236

$
1,494

Supplemental cash flow information and non-cash activity related to the Company’s operating and financing leases were as follows (in thousands):


	At September 30, 2021		At September 30, 2020		Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Finance lease - Operating cash flows	$	31	$	16	$	247	$	9
Finance lease - Financing cash flows	$	100	$	55	$	509	$	30

Operating lease - Operating cash flows (fixed payments)	$	1,123	$	1,080	$	393	$	367
Operating lease - Operating cash flows (liability reduction)	$	840	$	761	$	308	$	271

Supplemental balance sheet information related to the Company’s operating and financing leases as of ~~September 30, 2021~~March 31, 2022 were as follows (in thousands):


	Balance Sheet Classification	September 30, 2021			Balance Sheet Classification	March 31, 2022
Right-of-use lease assets - operating	Right-of-use lease asset, net	$	5,286
Right-of-use lease assets - finance	Right-of-use lease asset, net	$	23,366
Right-of-use assets - operating					Right-of-use lease asset, net	$	4,924
Right-of-use assets - finance					Right-of-use lease asset, net	$	22,039
Lease liability - operating(1)	Lease liability	$	6,844		Lease liability	$	6,400
Lease liability - finance	Lease liability	$	25,120		Lease liability	$	24,075

(1) Includes $1.3 million in lease incentives received in the first quarter of 2019.				(1) Includes $1.3 million in lease incentives received in the first quarter of 2019.

Weighted-average remaining lease term and discount rate for the Company’s operating and financing leases ~~as of September 30, 2021~~for the periods presented below were as follows:


	~~September 30, 2021~~
~~Weighted average lease term - Finance leases~~	~~9.34~~ ~~yrs.~~
~~Weighted average lease term - Operating leases~~	~~6.40~~ ~~yrs.~~
~~Weighted average discount rate - Finance leases~~		~~4.2~~	%
~~Weighted average discount rate - Operating leases~~		~~5.3~~	%


	March 31, 2022			March 31, 2021
Weighted average lease term - Finance leases	8.87 yrs.			3.54 yrs.
Weighted average lease term - Operating leases	6.00 yrs.			6.78 yrs.
Weighted average discount rate - Finance leases		4.2	%		6.9	%
Weighted average discount rate - Operating leases		5.3	%		5.3	%

Maturities of lease liabilities by fiscal year for the Company’s operating and financing leases were as follows (in thousands):


	March 31, 2022
2022 remaining	$	3,454
2023		4,545
2024		4,238
2025		3,970
2026		3,990
Thereafter		16,224
Total lease payments		36,421
Less: imputed interest		(5,946	)
Present value of lease liabilities	$	30,475

September 30, 2021

2021 remaining

$
1,142

2022

4,566

2023

4,500

2024

4,194

2025

3,970

Thereafter

20,213

Total lease payments

38,585

Less: imputed interest

(6,621
)
Present value of lease liabilities

$
31,964

NOTE 6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
	(In thousands)						(In thousands)
Land	$	2,582		$	2,582		$	2,582		$	2,582
Building		10,141			10,141			10,141			10,141
Computer hardware and software		7,147			6,358			7,315			7,204
Office furniture and equipment		2,038			2,027			1,366			1,355
Tenant and leasehold improvements		8,225			8,133			8,309			8,255
Vehicle fleet		720			850			720			720
Total, at cost		30,853			30,091			30,434			30,257
Less: accumulated depreciation and amortization		(12,903	)		(11,406	)		(13,290	)		(12,831	)
Property and equipment, net	$	17,950		$	18,685		$	17,144		$	17,426

Depreciation and amortization expense for property and equipment was approximately $~~736,000~~459,000 and $~~442,000~~432,300 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively and $1.6~~ ~~million and $1.3~~ ~~million for the nine months ended September 30, 2021 and 2020,~~ respectively. The Company’s real estate consists of 15 acres of land, ~~and~~ 52 buildings with a gross area of ~~191,200~~88,378 square feet and a parking garage. ~~Approximately~~ 75% of the building in Clearwater is leased to unaffiliated tenants. Following the Company’s planned relocation to its new Tampa headquarters, which is expected to occur in late 2021, the Company intends to sublease the remaining available space at the Clearwater location to unaffiliated tenants.

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Intangible Assets

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, goodwill was $~~152.5~~92.0 million and intangible assets were $~~57.5~~54.3 million and $~~62.3~~55.9 million, respectively. The Company has determined the useful life of the other intangible assets to range between 2.5-15 years. Intangible assets include $1.3 million relating to insurance licenses which is classified as an indefinite lived intangible and is subject to annual impairment testing concurrent with goodwill.


	Goodwill
	(in thousands)
Balance as of December 31, 2021	$	91,959
Goodwill acquired	0
Impairment	0
Balance as of March 31, 2022	$	91,959

Goodwill

(in thousands)

Balance as of December 31, 2020

$
152,459

Goodwill acquired

0

Impairment

0

Balance as of September 30, 2021

$
152,459

Management tests goodwill and other intangible assets for impairment annually during the fourth quarter, or more frequently should events or changes in circumstances indicate that goodwill or our other intangible assets might be impaired.

The Company’s intangible assets consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses.

Amortization expense of the Company’s intangible assets for each of the respective ~~three month~~three-month periods ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ was $1.6 ~~million and for the respective nine month periods ended September 30, 2021 and 2020 was $4.8~~ million. NaN impairment in the value of amortizing or non-amortizing intangible assets was recognized during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~

Estimated annual pretax amortization of intangible assets for each of the next five years and thereafter is as follows (in thousands):


Year	Amount(1)		Amount
2021 - remaining	$	1,588
2022	$	6,351
2022 - remaining			$	4,763
2023	$	6,351	$	6,351
2024	$	6,351	$	6,351
2025	$	6,315	$	6,315
2026			$	6,114
Thereafter	$	29,243	$	23,129
Total	$	56,199	$	53,023

NOTE 8. ~~EARNINGS~~LOSS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods indicated.

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Basic (loss) earnings per share:

Net (loss) income attributable to common stockholders (000's)

$
(16,410
)

$
(5,233
)

$
(25,509
)

$
6,519

Weighted average shares outstanding

27,938,028

27,739,839

27,902,814

28,053,959

Basic (loss) earnings per share:

$
(0.59
)

$
(0.19
)

$
(0.91
)

$
0.23

Diluted (loss) earnings per share:

Net (loss) income attributable to common stockholders (000's)

$
(16,410
)

$
(5,233
)

$
(25,509
)

$
6,519

Weighted average shares outstanding

27,938,028

27,739,839

27,902,814

28,053,959

Weighted average dilutive shares

—

—

—

19,611

Total weighted average dilutive shares

27,938,028

27,739,839

27,902,814

28,073,570

Diluted (loss) earnings per share:

$
(0.59
)

$
(0.19
)

$
(0.91
)

$
0.23


	Three Months Ended March 31,
	2022			2021
Basic loss per share:
Net loss attributable to common stockholders (000's)	$	(30,759	)	$	(5,148	)
Weighted average shares outstanding		26,787,379			27,827,804
Basic loss per share:	$	(1.15	)	$	(0.19	)

Diluted loss per share:
Net loss attributable to common stockholders (000's)	$	(30,759	)	$	(5,148	)
Weighted average shares outstanding		26,787,379			27,827,804
Weighted average dilutive shares		—			—
Total weighted average dilutive shares		26,787,379			27,827,804
Diluted loss per share:	$	(1.15	)	$	(0.19	)

The Company had ~~Due to the net loss~~1,903,039 and 1,629,503 antidilutive shares for the ~~three~~period ended March 31, 2022 and ~~nine months ended September 30,~~ 2021, ~~the number of dilutive shares is the same as the number of basic shares due to the antidilutive impact of the convertible debt and restricted stock under the if-converted method.~~respectively. The convertible notes were excluded from the computations because the conversion price on these notes was greater than the average market price of ~~the Company’s~~our common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the ~~treasury method. The~~"if converted" method under the guidance of ASU 2020-06, adopted by the Company ~~had~~ ~~2,677,355~~ ~~and~~ ~~1,819,503~~ ~~antidilutive shares as of September 30, 2021 and 2020, respectively.~~ on January 1, 2022.

NOTE 9. DEFERRED REINSURANCE CEDING COMMISSION

The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company allocated ceding commission income of $~~12.0~~11.7 million and $~~10.6~~11.3 million to policy acquisition costs and $~~4.0~~3.9 million and $~~3.5~~3.7 million to general and administrative expense, ~~respectively. For the nine months ended September 30, 2021 and 2020, the Company allocated ceding commission income of $35.2~~ ~~million and $32.3~~ ~~million to policy acquisition costs and $11.6~~ ~~million and $10.6~~ ~~million to general and administrative expenses,~~ respectively.

The table below depicts the activity regarding deferred reinsurance ceding commission during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2021			2020			2021			2020				2022			2021
	(In thousands)												(In thousands)
Beginning balance of deferred ceding commission income	$	39,940		$	34,562		$	39,995		$	37,464			$	40,405		$	39,995
Ceding commission deferred		17,659			17,294			48,447			43,213				12,454			13,029
Less: ceding commission earned		(15,978	)		(14,129	)		(46,821	)		(42,950	)			(15,614	)		(15,033	)
Ending balance of deferred ceding commission income ~~(1)~~	$	41,621		$	37,727		$	41,621		$	37,727			$	37,245		$	37,991

Deferred ceding commission income is classified in “Accounts payable and other liabilities” on the Company’s condensed consolidated balance sheet.

NOTE 10. DEFERRED POLICY ACQUISITION COSTS

The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“~~DPAC”~~DPAC��), which are amortized over the effective period of the related insurance policies.

The Company anticipates that its DPAC will be fully recoverable in the near term. The table below depicts the activity regarding DPAC for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2021			2020			2021			2020				2022			2021
	(In thousands)												(In thousands)
Beginning Balance	$	95,967		$	81,590		$	89,265		$	77,211			$	93,881		$	89,265
Policy acquisition costs deferred		47,976			42,096			144,380			128,400				49,992			46,675
Amortization		(48,518	)		(37,546	)		(138,220	)		(119,471	)			(53,232	)		(47,064	)
Ending Balance	$	95,425		$	86,140		$	95,425		$	86,140			$	90,641		$	88,876

NOTE 11. INCOME TAXES

For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recorded an income tax ~~benefits~~benefit of $($~~1.1~~10.6) million and $($~~1.5~~2.6) million, respectively, which corresponds to effective tax rates of ~~6.4~~25.7% and ~~22.3%, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded an income tax benefit of $(5.6) million and an income tax expense of $2.8~~ ~~million, respectively, which corresponds to effective rates of~~ ~~18.1% and~~ ~~29.9~~33.2%, respectively. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each period was affected by various permanent tax differences, ~~predominately~~including disallowed executive compensation deductions which ~~were~~was further limited in 2018 and future years upon the enactment of H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Additionally, the state effective income tax rate can also fluctuate as a result of changes in the geographic dispersion of the Company’s business. The effective tax rate can fluctuate throughout the year as estimates used in the tax provision for each quarter are updated as more information becomes available throughout the year.

The table below summarizes the significant components of the Company’s net deferred tax liability:



	September 30, 2021			December 31, 2020			March 31, 2022		December 31, 2021
Deferred tax assets:	(In thousands)						(In thousands)
Unearned premiums	$	13,101		$	15,303		$	20,639	$	15,805
Unearned commission		9,649			9,272			8,718		9,459
Net operating loss		1,880			1,885			857		1,222
Tax-related discount on loss reserve		3,809			3,322			4,130		3,872
Stock-based compensation		225			113			175		84
Accrued expenses		1,456			982			867		1,182
Leases		738			394			814		792
Unrealized losses		373			0			9,347		1,913
Consolidated loss limitation								7,949		0
Other		719			343			405		472
Total deferred tax asset		31,950			31,614			53,901		34,801
Deferred tax liabilities:
Deferred acquisition costs		22,122			20,694			21,218		21,977
Prepaid expenses		184			236			193		177
Unrealized gains		—			1,814
Property and equipment		1,398			1,669			1,410		1,504
Note discount		203			326			102		187
Basis in purchased investments		37			53			33		34
Basis in purchased intangibles		14,652			15,693			13,348		14,550
Internal revenue code 481(a)-Accounting method change		5,361			8,577			3,312		4,416
Other		1,658			1,029			1,834		1,382
Total deferred tax liabilities		45,615			50,091			41,450		44,227
Net deferred tax liability	$	(13,665	)	$	(18,477	)
Net deferred tax asset (liability)							$	12,451	$	(9,426	)

The statute of limitations related to the Company’s federal and state income tax returns remains open from the Company’s filings for 2018 through 2020. In April 2019, the Company was notified by the tax authority that the federal income tax returns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority for the examined tax years, reporting that the returns were accepted as final. No further action will be required, and no other tax years are under examination.

2021.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, we~~2021, the Company had 0 significant uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.

NOTE 12. REINSURANCE

Overview

In order to limit the Company’s potential exposure to individual risks and catastrophic events, the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of the Company’s risk strategy, and premiums ceded to reinsurers is one of the Company’s largest costs. The Company has strong relationships with reinsurers, which it attributes to its management’s industry experience, disciplined underwriting, and claims management capabilities. For each of the twelve months beginning June 1, 2020 and 2021, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate.

Purchasing a sufficient amount of reinsurance to cover catastrophic losses from single or multiple events or significant non-catastrophe losses is an important part of the Company’s risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies ~~we write~~the Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss.

The Company’s reinsurance agreements are prospective contracts. The Company ~~record~~records an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of the Company’s new reinsurance agreements. The Company generally amortizes its catastrophe reinsurance premiums ratably over the 12-month contract period, which is June 1 through May 31. Its quota share reinsurance is amortized over the 12-month contract period and may be purchased on a calendar or fiscal year basis.

In the event that the Company incurs losses and loss adjustment expenses recoverable under its reinsurance program, the Company records amounts recoverable from its reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of its liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to its estimate of unpaid losses. As a result, a reasonable possibility exists that an estimated recovery may change significantly in the near term from the amounts included in the Company’s condensed consolidated financial statements.

The Company’s insurance regulators require all insurance companies, like us, to have a certain amount of capital and reinsurance coverage in order to cover losses and loss adjustment expenses upon the occurrence of a catastrophic event. The Company’s reinsurance program provides reinsurance in excess of its state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event estimated to occur once in every 100 years based on its portfolio of insured risks. The nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a particular catastrophic event could be a one-in-100-year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company. The Company also purchases reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. The Company shares portions of its reinsurance program coverage among its insurance company affiliates.

~~2021-2022 Reinsurance Program~~

~~Catastrophe Excess of Loss Reinsurance~~

Effective June 1, 2021, the Company entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”). The catastrophe reinsurance programs are allocated among traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”) and Osprey Re Ltd (“Osprey”), the Company’s captive reinsurer. The FHCF covers Florida risks only and the Company elected to participate at 90%. For the 2021 hurricane season, Osprey Re will provide reinsurance only for a portion of the Heritage P&C program, covering the southeastern region. The Company’s third-party reinsurers are either rated “A-” or higher by A.M. Best or S&P or are fully collateralized, to reduce credit risk.

The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The 2021-2022 reinsurance program provides first event coverage up to $~~1.43~~ ~~billion for Heritage P&C, first event coverage up to $1.1~~ ~~billion for NBIC, and first event coverage up to $680.0~~ million for Zephyr. The Company’s first event retention in a 1 in 100 year event would include retention for the respective insurance company as well as any retention by Osprey. The first event maximum retention up to a 1 in 100 year event for each insurance company subsidiary is as follows: Heritage P&C – $~~32.0~~ ~~million, which would be~~ ~~100% ceded to Osprey; Zephyr – $~~32 ~~million; and NBIC – $20.7~~ ~~million.~~

The majority of the Company’s program was placed on a cascading basis which provides greater horizontal protection in a multiple small events scenario and features additional coverage enhancements. The Company is responsible for all losses and loss adjustment expenses in excess of our reinsurance program. For second or subsequent catastrophic events, the Company’s total available coverage depends on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $~~2.8~~ billion of limit purchased in 2021 includes reinstatement through the purchase of reinstatement premium protection. The amount of coverage, however, will be subject to the severity and frequency of such events.

~~The Company's estimated net cost for the 2021-2022 catastrophe reinsurance programs is approximately $312.0~~ ~~million.~~

~~Net Quota Share Reinsurance~~

The Company’s Net Quota Share coverage is proportional reinsurance, which applies to business underwritten by NBIC, for which certain of the Company’s other reinsurance (property catastrophe excess of loss and the second layer of the general excess of loss) inures to the quota share program. An occurrence limit of $~~20.0~~ million for catastrophe losses is in effect on the quota share program, subject to certain aggregate loss limits that vary by reinsurer. The amount and rate of ceding commissions slide, within a prescribed minimum and maximum, depending on loss performance. The Net Quota Share program was renewed on December 31, 2020 ceding ~~56.5% of the net premiums and losses and~~ 3~~% of the prior year quota share is in run off.~~

~~The Company placed~~ ~~100% of an occurrence contract for the Company’s business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2020, expiring~~ ~~December 31, 2021. The limit on the contract is $20.0~~ ~~million with a retention of $20.0~~ ~~million and has~~ 1 ~~reinstatement available.~~

~~Per Risk Coverage~~

For losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms, the Company purchased property per risk coverage for losses and loss adjustment expenses in excess of $~~1.0~~ ~~million per claim. The limit recovered for an individual loss is $9.0~~ ~~million and total limit for all losses is $27.0~~ ~~million. There are~~ 2 reinstatements available with additional premium due based on the amount of the layer exhausted. For losses arising from commercial residential business underwritten by NBIC, the Company purchased property per risk coverage for losses and loss adjustments expenses in excess of $~~750,000~~ ~~per claim. The limit recovered for an individual loss is $250,000~~ ~~and total limit for all losses is $750,000. There are~~ 2 ~~reinstatements available with additional premium due based on the amount of the layer exhausted.~~

~~In addition, the Company purchased facultative reinsurance for losses in excess of $10.0~~ ~~million for any properties it insured where the total insured value exceeded $10.0~~ ~~million. This coverage applies to losses arising from business underwritten by Heritage P&C and losses arising commercial residential business underwritten by NBIC, excluding losses from named storms.~~

~~General Excess of Loss~~

The Company’s general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. For the contract period of July 1, 2021 through June 30, 2022, the coverage is in 2 ~~layers in excess of the Company’s retention of the first $500,000~~ ~~of loss. The first layer is $250,000~~ ~~excess $500,000~~ ~~for property and casualty losses and the second layer for property losses is $2.75~~ ~~million excess $750,000. The second layer for casualty losses is $1.25~~ ~~million excess $750,000~~

~~In addition, the Company purchased facultative reinsurance for losses underwritten by NBIC in excess of $3.5~~ ~~million.~~

For a detailed discussion of the Company’s ~~2020-2021~~2021-2022 Reinsurance Program please Refer to Part II, Item 8, “Financial Statements and Supplementary Data” and “Note 12. Reinsurance” in the Company’s ~~Annual Report on~~2021 Form ~~10-K for the year ended December 31, 2020, which was filed with the SEC on March 9, 2021.~~10-K.

Effect of Reinsurance

The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated statement of income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2021			2020			2021				2020			2022			2021
	(In thousands)						(In thousands)							(In thousands)
Premium written:
Direct	$	274,178		$	278,242		$	886,059			$	797,776		$	283,196		$	274,181
Ceded		(53,505	)		(63,493	)		(491,677	)			(422,092	)		(47,131	)		(54,617	)
Net	$	220,673		$	214,749		$	394,382			$	375,684		$	236,066		$	219,564
Premiums earned:
Direct	$	294,409		$	254,982		$	850,466			$	731,489		$	287,368		$	270,411
Ceded		(131,964	)		(116,752	)		(399,323	)			(338,197	)		(134,439	)		(128,212	)
Net	$	162,445		$	138,230		$	451,143			$	393,292		$	152,929		$	142,199
Loss and Loss Adjustment Expenses
Direct	$	195,099		$	205,337		$	483,382			$	452,014		$	199,668		$	125,495
Ceded		(65,467	)		(85,619	)		(155,006	)	��		(185,245	)		(59,630	)		(27,585	)
Net	$	129,632		$	119,718		$	328,376			$	266,769		$	140,038		$	97,909

NOTE 13. RESERVE FOR UNPAID LOSSES

The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date. The Company estimates its IBNR reserves by projecting its ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses.

The table below summarizes the activity related to the Company’s reserve for unpaid losses:

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

(In thousands)

Balance, beginning of period

$
625,979

$
620,718

$
659,341

$
613,533

Less: reinsurance recoverable on unpaid losses

366,879

404,370

397,688

393,630

Net balance, beginning of period

259,100

216,348

261,653

219,903

Incurred related to:

Current year

130,425

125,544

331,374

281,698

Prior years

(793
)

(5,826
)

(2,998
)

(14,929
)
Total incurred

129,632

119,718

328,376

266,769

Paid related to:

Current year

75,508

71,955

171,128

148,563

Prior years

27,273

18,371

132,950

92,369

Total paid

102,781

90,326

304,078

240,932

Net balance, end of period

285,951

245,740

285,951

245,740

Plus: reinsurance recoverable on unpaid losses

350,195

417,257

350,195

417,257

Balance, end of period

$
636,146

$
662,997

$
636,146

$
662,997


	Three Months Ended March 31,
	2022		2021
	(In thousands)
Balance, beginning of period	$	590,166	$	659,341
Less: reinsurance recoverable on unpaid losses		301,757		397,688
Net balance, beginning of period		288,409		261,653
Incurred related to:
Current year		137,626		99,504
Prior years		2,412		(1,595	)
Total incurred		140,038		97,909
Paid related to:
Current year		39,628		25,826
Prior years		77,136		62,266
Total paid		116,764		88,092
Net balance, end of period		311,683		271,470
Plus: reinsurance recoverable on unpaid losses		276,737		366,412
Balance, end of period	$	588,420	$	637,882

As of ~~September 30, 2021,~~March 31, 2022, the Company reported $~~286.0~~311.7 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $~~213.5~~319.4 million attributable to IBNR net of reinsurance recoverable, or ~~74.7~~74.4% of net reserves for unpaid losses and loss adjustment expenses.

NOTE 14. LONG-TERM DEBT

Convertible Senior Notes

In August 2017 and September 2017, the Company issued in aggregate $136.8 million of 5.875% Convertible Senior Notes (“Convertible Notes”) maturing on August 1, 2037, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears, on February 1, and August 1 of each year.

As of ~~September 30, 2021,~~March 31, 2022, the Company had $~~22.7~~11.7 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately $~~716,900~~101,560. and net of $21.1 million of Convertible Notes held by an insurance company subsidiary. For each of the ~~respective nine month~~three-month periods ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company made interest payments, net of affiliated Convertible Notes of approximately $~~1.3~~630,650 ~~million~~and $687,750, on the Convertible Notes, respectively.

In January 2022, the Company reacquired and retired $11.7 million of its outstanding Convertible Senior Notes. Payment was made in cash and the Convertible Notes were retired at the time of repurchase. In addition, the Company expensed $242,700 which was the proportionate amount of the unamortized issuance and debt discount costs associated with this repurchase.

Senior Secured Credit Facility

~~In December 2018, the~~The Company ~~entered into~~is party to afive-year, $~~125.0~~150.0 million credit agreement ~~(the~~(as amended from time to time, the “Credit Agreement”) with a syndicate of ~~lenders consisting of $~~lenders.

The Credit Agreement, as amended, provides for (1) a ~~75.0~~five-year ~~million~~ senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a $~~50.0~~five-year ~~million~~ senior secured revolving credit facility in an aggregate principal amount of $75 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

On July 28, 2021, the Company entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”) with the guarantors and lenders party thereto. The Fifth Amendment amended the Credit Agreement to, among other things, (i) increase the Revolving Credit Facility from $50 ~~million to $~~75 ~~million and make related changes to the Credit Agreement, (ii) provide for a $13.75~~ ~~million advance under the existing $~~75 ~~million Term Loan Facility for an aggregate of $~~70 million principal amount outstanding as of the date of the Fifth Amendment, extend the maturity of the Term Loan Facility from December of 2023 to July 2026 and reduce the amortization of the Term Loan Facility, (iii) ~~reduce the applicable margin for loans under the Credit Agreement to~~ ~~2.5% to~~ ~~3.0% per annum for LIBOR loans (reduced from the prior range of~~ ~~3.25% to~~ ~~3.75%) and 1.5% to 2.0% per annum for base rate loans (reduced from the prior range of~~ ~~2.25% to~~ ~~2.75~~%), ~~in each case based on a consolidated leverage ratio ranging from less than or equal to~~ ~~1.25-to-1 to greater than~~ ~~2.25-to-1 (previously less than or equal to~~ ~~2.0-to-1 to greater than~~ ~~3.0-to-1), (iv) reduce the restriction on negative covenants~~ thereby allowing the Company greater flexibility and (iv) provide mechanics relating to a transition away from LIBOR as a benchmark interest rate. All other material terms of the Credit Agreement remain unchanged.

Term Loan Facility: The principal amount of the Term Loan Facility ~~as amended,~~ amortizes in quarterly installments, ~~beginning~~which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to ~~(i)~~ $1.9 million per quarter, ~~prior~~payable quarterly, decreasing to ~~July 29, 2021, (ii)~~ $875,000 per quarter commencing with the quarter ending December 31, 2021 and ~~(iii)~~increasing to $1.3 million ~~thereafter,~~per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. ~~As of~~The Term Loan Facility matures on July 27, 2026. On December 31, ~~2020,~~2021, there was $~~60.0~~69.1 million in aggregate principal outstanding on the Term Loan Facility. ~~On July 28, 2021, the~~As of March 31, 2022, there was $68.3 million in aggregate principal ~~amount of the term loan~~ outstanding ~~under~~on the Term Loan ~~Facility was increased by $13.75~~ ~~million to a total of $70.0~~ ~~million from $56.3~~ ~~million prior to the advance.~~Facility.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company made principal and interest payments of approximately $~~1.5~~1.4 million and $~~2.1~~2.6 million, respectively on the ~~term loan, respectively.~~Term Loan Facility.

Revolving Credit ~~Facility~~:Facility: The Revolving Credit Facility ~~as amended,~~ allows for borrowings of up to $~~75.0~~75 million inclusive of a $~~5.0~~5 million sublimit for the issuance of letters of credit and a $~~10.0~~10 million sublimit for swingline loans. As of ~~September 30, 2021, and~~ December 31, ~~2020,~~2021, the Company had $0 ~~and $~~10 ~~million of~~ borrowings and 0 letters of credit outstanding under the Revolving Credit ~~Facility, respectively. In connection with~~Facility. As of March 31, 2022, the ~~Fifth Amendment~~Company had $15.0 million of ~~the Credit Agreement,~~borrowings and a $7.5 million letter of credit outstanding under the Revolving Credit ~~Facility's outstanding balance of $~~10 ~~million was paid in full.~~Facility. For the ~~nine~~three months

ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and 2020,~~ the Company made interest payments of $~~196,500~~100,908 and $~~451,500~~116,805 under the Revolving Credit Facility, respectively.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin or (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00%, plus an applicable margin.

At ~~September 30, 2021,~~March 31 2022, the effective interest rate on for the Term Loan Facility and ~~for the~~ Revolving Credit Facility was ~~2.87~~3.0%. and 3.19

~~On March 31, 2021,~~%, respectively. The Company monitors the ~~Company closed the July 1, 2020 standby letter of credit in the amount of $31.5~~ ~~million that was issued by Regions Bank.~~

~~On June 1, 2020, the Company amended the Credit Agreement by entering into the Third Amendment to Credit Agreement (the “Third Amendment”) with the lenders from time to time party~~rates prior to the ~~Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Third Amendment modified~~reset date which allows it to establish if the ~~Credit Agreement~~payment is monthly or quarterly payment based on the most beneficial rate used to ~~increase~~calculate the ~~letter of credit sublimit from $~~5 ~~million to $~~40 ~~million and to make related modifications to certain of the negative covenants in the Credit Agreement.~~

On April 27, 2020, the Company amended the Credit Agreement by entering into the Second Amendment to Credit Agreement (the “Second Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Second Amendment modified the negative covenants in the Credit Agreement to permit the Company to make acquisitions and investments if, after giving effect to the acquisition or investment, either (1) the Company has an aggregate of $~~25.0~~ million in cash and availability under the revolving credit facility or (2) the consolidated leverage ratio under the Credit Agreement is at least a quarter turn less than the required ratio for the trailing four quarters. ~~The amendment gives the Company more flexibility to make acquisitions and investments in the future. All other material terms of the Credit Agreement remain unchanged.~~interest payment.

Mortgage Loan

In October 2017, the Company and its subsidiary, Skye Lane Properties LLC, jointly obtained a commercial real estate mortgage loan in the amount of $12.7 million, bearing interest of 4.95% per annum and maturing on October 30, 2027. On October 30, 2022, the interest rate shall adjust to an interest rate equal to the annualized interest rate of the United States 5-year Treasury Notes as reported by Federal Reserve on a weekly average basis plus 3.10%. The Company makes monthly principal and interest payments

towards the loan. For each of the respective ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company made principal and interest payments of approximately $~~670,000~~223,200 on the mortgage loan.

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 (“FHLB”) Atlanta. In connection with the loan agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of ~~September 30, 2021,~~March 31, 2022, the fair value of the collateralized securities was $~~22.7~~22.2 million and the equity investment in FHLB common stock was $1.2 million. AsFor each of ~~September 30,~~the three months ended March 31, 2022, and 2021, ~~and 2020,~~ the Company made quarterly interest payments as per the terms of the loan agreement of approximately $~~450,500~~150,160 ~~and $457,100, respectively.~~. As of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston valued at $~~215,900~~221,800 and $~~222,900~~215,900, respectively.

The following table summarizes the Company’s long-term debt and credit facilities as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	(in thousands)				(in thousands)
Convertible debt	$	23,413	$	23,413	$	11,779	$	23,413
Mortgage loan		11,599		11,827		11,440		11,521
Term loan facility		70,000		60,000
Credit loan facility						68,250		69,125
Revolving credit facility		0		10,000		15,000		0
FHLB loan agreement		19,200		19,200		19,200		19,200
Total principal amount	$	124,212	$	124,440	$	125,669	$	123,259
Less: unamortized discount and issuance costs	$	2,731	$	3,442
Deferred finance costs					$	1,980	$	2,502
Total long-term debt	$	121,481	$	120,998	$	123,689	$	120,757

As of the date of this report, the Company was in compliance with the applicable terms of all its covenants and other requirements under the Credit Agreement, Convertible Notes indenture, cash borrowings and other loans. The Company’s ability to secure future debt financing depends, in part, on its ability to remain in such compliance. Provided there is no default or an event of default, the Company is permitted to ~~payout~~pay out dividends in an aggregate amount not to exceed $10.0 million in any fiscal year.

The covenants and other requirements under the revolving agreement represent the most restrictive provisions that the Company is subject to with respect to its long-term debt.

The schedule of principal payments on long-term debt as of ~~September 30, 2021~~March 31, 2022 is as follows:


Year	Amount		Amount
	(In thousands)		(In thousands)
2021 remaining	$	953
2022		3,822
2022 remaining			$	2,867
2023		23,039		23,039
2024		4,292		4,292
2025		5,624		5,624
2026				68,331
Thereafter		86,482		21,516
Total	$	124,212	$	125,669

NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities consist of the following as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


Description	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	(In thousands)				(In thousands)
Deferred ceding commission	$	41,621	$	39,995	$	37,245	$	40,406
Outstanding claim checks		0		10,864
Outstanding claims checks						3,978		—
Accounts payable and other payables		6,951		9,248		7,498		10,086
Accrued interest and issuance costs		592		833		393		735
Accrued dividends		1,680		1,670		1,621		1,634
Premium tax						—		871
Other liabilities		257		80		548		195
Premium tax		1,531		0
Commission payables		14,404		18,245		13,372		17,598
Total other liabilities	$	67,036	$	80,935	$	64,655	$	71,525

NOTE 16. STATUTORY ACCOUNTING AND REGULATIONS

State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as the Company’s insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, restrict the allowable investment types and investment mixes, and subject the Company’s insurers to assessments.

The Company’s insurance subsidiaries Heritage Property & Casualty Insurance Company (“Heritage P&C)”, Narragansett Bay Insurance Company (“NBIC”), Zephyr Insurance Company (“Zephyr”), and Pawtucket Insurance Company (“PIC”) must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain capital and surplus equal to the greater of $15 million or 10% of their respective liabilities. Zephyr is required to maintain a deposit of $750,000 in a federally insured financial institution. NBIC is required to maintain capital and surplus of $3.0 million. The combined statutory surplus for Heritage P&C, Zephyr, NBIC and PIC was $~~290.0~~294.5 million at ~~September 30, 2021~~March 31, 2022 and $~~333.3~~302.1 million at December 31, ~~2020.~~2021. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, and risk-based capital requirements with which the Company is in compliance. At ~~September 30, 2021,~~March 31, 2022, the Company’s insurance subsidiaries met the financial and regulatory requirements of each of the states in which they conduct business.

NOTE 17. COMMITMENTS AND CONTINGENCIES

The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.

NOTE 18. RELATED PARTY TRANSACTIONS

From time to time the Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders, including as set forth below. The Company has entered into each of these arrangements without obligation to continue its effect in the future and the associated expense was immaterial to its results of operations or financial position as of ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

•

In July 2019, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency

that writes policies for Company. The Company pays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a director. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company paid agency commission to Comegys of approximately $~~53,900~~458,720 and $~~46,300~~ ~~and $595,700~~ ~~and $592,400~~309,800, respectively.

NOTE 19. EMPLOYEE BENEFIT PLANS

The Company provides a 401(k) plan for substantially all employees. The Company provides a matching contribution of 100% on the first 3% of employees’ contribution and 50% on the next 2% of the employees’ contribution to the plan. The maximum match is 4%. For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the contributions made to the plan on behalf of the participating employees were approximately $~~293,000~~396,600 and $~~265,000~~ ~~and for the nine months ended September 30, 2021 and 2020, contributions made to the plan were approximately $985,000~~ ~~and $897,000~~322,200, respectively.

Effective September 1, 2021, the Company terminated its self-insured healthcare plan and enrolled in a flex healthcare plan which allows employees the choice of three medical plans with a range of coverage levels and costs. For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company incurred medical premium costs including the new 2021-2022 healthcare premiums, of $~~1.6~~1.2 million and $~~941,000~~990,100, ~~respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred medical premium costs of $2.6~~ ~~million and $3.0~~ ~~million, respectively. An additional liability from the Company's self-insured healthcare plan was accrued for approximately $442,000~~ ~~and $1.4~~ ~~million for unpaid claims as of September 30, 2021 and December 31, 2020,~~ respectively.

NOTE 20. EQUITY

The total amount of authorized capital stock consists of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of ~~September 30, 2021,~~March 31, 2022, the Company had ~~27,802,626~~26,444,720 shares of common stock outstanding, ~~9,427,948~~11,257,855 treasury shares of common stock and ~~240,835~~655,268 unvested restricted common stock with accrued dividends reflecting total paid-in capital of $~~332.6~~333.2 million as of such date.

As more fully disclosed in the Company’s audited consolidated financial statements for the year ended December 31, ~~2020,~~2021, there were, ~~27,748,606~~26,753,511 shares of common stock outstanding, ~~9,279,839~~10,536,737 treasury shares of common stock and ~~100,267~~283,092 unvested shares of restricted common stock, representing $~~331.9~~332.8 million of additional paid-in capital.

Common Stock

Holders of common stock are entitled to one vote for each share held on all matters subject to a vote of stockholders, subject to the rights of holders of any outstanding preferred stock. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the rights of holders of any outstanding preferred stock. Holders of common stock will be entitled to receive ratably any dividends that the board of directors may declare out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to receive ratably its net assets available after the payment of all debts and other liabilities and subject to the prior rights of holders of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There is no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of the Company’s capital stock are fully paid and non-assessable.

Stock Repurchase Program

On ~~August 1, 2019,~~December 19, 2021, the ~~Company announced that its~~ Board of Directors ~~ratified~~established a ~~stock~~new share repurchase program ~~authorizing~~plan to commence upon December 31, 2021, for the ~~Company to repurchase~~purpose or repurchasing up to an aggregate of $~~50.0~~25.0 million of ~~its common stock which had expired~~Common Stock, through the open market or in such other manner as will comply with the terms of applicable federal and state securities laws and regulations, including without limitation, Rule 10b-18 under the Securities Act at any time or from time to time on or prior to December 31, ~~2020~~2022 (the "New Share Repurchase Plan"). As of ~~December~~March 31, ~~2020,~~2022, the Company repurchased in aggregate ~~2,065,042~~ ~~shares of its common stock since authorizing the stock repurchase program for $26.2~~ ~~million. On November 2, 2020, the Board of Directors extended the Company’s existing share repurchase program from~~ ~~December 31, 2020~~ to ~~December 31, 2021~~ ~~and increased the authorization under the program from the $23.8~~ ~~million remaining to $50.0~~ million, which repurchases may be made under the Company’s current Rule 10b5-1 trading plan, which allows the Company to purchase shares below a predetermined price per share, or otherwise. As of September 30, 2021, the Company repurchased in aggregate ~~148,109~~721,118 shares of its common stock under its repurchase program for $~~1.0~~5.0 million.

At ~~September 30, 2021,~~March 31, 2022, the Company has the capacity under ~~its stock repurchase program~~the New Share Repurchase Plan to repurchase $4920.0 million of its common shares until December 31, ~~2021.~~2022.

Dividends

On March ~~3, 2021, the Company’s Board of Directors declared a $0.06~~ ~~per share quarterly dividend payable on~~ ~~April 6, 2021, to stockholders of record as of~~ ~~March 15, 2021. On May 5, 2021, the Board of Directors declared a $0.06~~ ~~per share quarterly dividend payable on~~ ~~July 6, 2021~~ ~~to stockholders of record as of~~ ~~June 15, 2021. On August 5, 2021,~~4, 2022, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on ~~October~~April 6, ~~2021~~2022 to stockholders of record as of ~~September 15, 2021~~March 17, 2022.

The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors and will depend on a variety of factors including the Company’s financial condition and results of operations.

NOTE 21. STOCK-BASED COMPENSATION

Common, Restricted and Performance-based Stock

The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22, 2014. The Plan authorized 2,981,737 shares of common stock for issuance under the Plan for future grants. The ~~Company’s plan~~Plan allows for a variety of equity awards including stock options, restricted stock awards and performance-based awards.

At ~~September 30, 2021~~March 31, 2022 there were ~~939,691~~473,557 shares available for grant under the Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards.

~~During~~Effective January 1, 2022, the ~~quarter ended March 31, 2021,~~Board of Directors approved the recommendations made by the Compensation Committee to revise the non-employee director compensation policy to provide that: (i) each non‐ employee director of the Company ~~issued~~is entitled to ~~its Chief Executive Officer~~ an annual cash fee of $~~95,878~~125,000, payable quarterly; (ii) each member of a committee of the Board is entitled to an additional annual cash fee of $2,500; (iii) each chair of a committee of the Board is entitled to an additional $5,000 ~~performance-based~~annual cash fee; (iv) the chair of the Board, to the extent the chair is a non‐employee director, is entitled to an additional annual cash fee of $20,000; and (v) each non‐employee director of the Company is granted annually a number of shares of restricted ~~shares~~stock with a ~~market~~value equal to $40,000 at the date of issuance, a grant date of the date of the annual meeting of stockholders of the Company and which restricted stock will vest on the earlier of the one‐year anniversary of the date of issuance and the day immediately prior to the date of the following year’s annual meeting of stockholders of the Company.

In January 2022, the Company awarded to non-employee directors in aggregate 21,768 shares of restricted stock with a fair value at the time of grant of $~~10.43~~5.88 per share. The awards shall vest on the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date.

During the 2022 first quarter, the Company awarded 3,636 and 115,327 shares of time-based restricted stock with at the time of grant a fair value of $5.50 and $6.72 per share, respectively to certain employees. The time-based restricted stock will vest in two and three year equal installments on December 27, 2022, 2023 and 2024, respectively. In addition, the Company awarded 10,909 shares and 245,536 of performance-based restricted ~~shares have~~stock with at the time grant a fair value of $~~three-year~~5.50 and $6.72 per share, respectively. The performance-based restricted stock has a three-year performance period beginning on January 1, ~~2021~~2022 and ending on December 31, ~~2023~~2024 and will vest following the end of the performance period but no later than March 5, ~~2024. The number~~2025.

For the performance-based restricted stock the numbers of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. ~~In addition, the Company issued this executive~~ ~~47,939~~ ~~time-based restricted shares with a market value at the time of grant of $10.43~~ ~~per share. The time-based restricted shares will vest in three equal installments of~~ ~~15,979~~ ~~on December 31, 2021, and~~ ~~15,980~~ ~~on December 31, 2022 and 2023, respectively.~~

~~During the second quarter ended June 30, 2021, the Company issued to its Chief Financial Officer~~ ~~28,012~~ ~~performance-based restricted shares with a market value at the time of grant of~~ ~~10.71~~ ~~per share. The performance-based restricted shares have a~~ ~~three-year~~ performance period beginning on January 1, 2021 and ending December 31, 2023 and will vest following the end of the performance period but no later than March 5, 2024. The number of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In addition, the Company issued this executive ~~14,006~~ ~~time-based restricted shares with a market value at the time of grant of $10.71~~ ~~per share. The time-based restricted shares will vest in three equal installments~~ ~~4,668~~ ~~on December 31, 2021 and~~ ~~4,669~~ ~~on December 31, 2022 and 2023, respectively.~~

For awards with performance-based vesting conditions expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis until probability of achieving the performance-based conditions changes, if applicable. For awards with only a service condition, the Company expenses stock-based compensation using the straight-line method over the requisite service period for the entire award.

The Plan authorizes the Company to grant stock options at exercise prices equal to the fair market value of the Company’s stock on the dates the options are granted. ~~Any options granted would typically have a maximum term of~~ ~~ten years~~ ~~from the date of grant and vest primarily in equal annual installments over a range of~~ ~~one~~ to ~~five-year~~ ~~periods following the date of grant for employee options.~~ The Company has not granted any stock options since 2015 and all unexercised stock options have since been forfeited.

Restricted Stock

The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employee’s vest in equal installments generally over a ~~five-year~~two to five year period from the grant date subject to the recipient’s continued employment. The fair value of restricted stock awards is estimated by the market price at the date of grant and amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards granted prior to 2021 have the right to receive ~~dividends.~~dividends; dividends accrue but are not paid until vesting for recipients of restricted stock awards granted 2021 and thereafter.

Restricted stock activity for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 is as follows:


	Number of shares			Weighted-Average Grant-Date Fair Value per Share					Weighted-Average
Non-vested, at December 31, 2020		100,267		$	15.37
									Grant-Date Fair
						Number of shares			Value per Share
Non-vested, at December 31, 2021							283,092		$	9.32
Granted - Performance-based restricted stock		123,890			10.49		256,445			6.67
Granted - Time-based restricted stock		61,945			10.49		140,731			6.56
Vested		(26,294	)		12.07		(15,151	)		5.88
Canceled and surrendered		(18,973	)		13.04		(9,849	)		5.88
Non-vested, at September 30, 2021		240,835		$	12.15
Non-vested, at March 31, 2022							655,268		$	7.82

Awards are being amortized to expense over the ~~one~~two to five-year vesting period. The Company recognized $~~320,000~~505,730 and $~~1.4~~260,000 ~~million~~ of compensation expense for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. For the ~~nine~~three months ended ~~September 30, 2021 and 2020, the Company recognized compensation expense of $~~March 31, 2022, ~~867,000~~ ~~and $4.1~~ ~~million, respectively. For the nine months ended September 30, 2021,~~ ~~40,267~~25,000 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, ~~18,973~~9,849 shares were withheld by the Company to cover withholding taxes of $~~171,000~~89,000. For the comparable period of ~~2020,~~2021, ~~35,267~~25,000 shares were vested and released of which ~~22,223~~12,500 shares were withheld by the Company to cover withholding taxes of $~~297,000~~127,000.

At ~~September 30, 2021,~~March 31, 2022, there was approximately $~~1.0~~1.6 million unrecognized expense related to time-based non-vested restricted stock and an additional $~~1.1~~1.7 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in ~~2020,~~2021, there was $~~1.6~~2.0 million of unrecognized expense.

Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at ~~September 30, 2021~~March 31, 2022 is as follows:


Grant date	Restricted shares unvested		Share Value at Grant Date Per Share		Remaining Restriction Period (Years)		Restricted shares unvested		Share Value at Grant Date Per Share		Remaining Restriction Period (Years)
February 12, 2018		50,000	$	16.35		1.25		25,000		16.35		0.75
September 3, 2018								5,000		10.60		0.25
April 24, 2020		5,000	$	10.60		0.60		127,837		10.43		2.00
September 21, 2020								37,349		10.71		2.00
January 4, 2021		143,817	$	10.43		2.25		62,906		6.89		2.00
April 13, 2021		42,018	$	10.71		2.25
January 1, 2022								21,768		5.88		0.25
March 3, 2022								14,545		5.50		2.88
March 16, 2022								360,863		6.72		2.88
		240,835						655,268

NOTE 22. SUBSEQUENT EVENTS

The Company performed an evaluation of subsequent events through the date the condensed consolidated financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of ~~September 30, 2021.~~March 31, 2022.

On May 4, 2022, the Company and its subsidiary guarantors amended the Credit Agreement by entering into the Sixth Amendment to Credit Agreement (the “Sixth Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent.

Pursuant to the Sixth Amendment, the consolidated fixed charge coverage ratio included in the Credit Agreement will be calculated based on the Company’s consolidated tangible net worth, rather than the Company’s consolidated net worth as was required under the existing Credit Agreement. Specifically, the Sixth Amendment provides that, effective as of March 31, 2022 and for future fiscal quarters, the Company’s consolidated tangible net worth as of the end of a fiscal quarter may not be less than the sum of (1) $162,333,750, plus (2) 25% of the sum of the positive consolidated net income of the Company and its subsidiaries with respect to each full fiscal quarter, plus (3) 100% of the net cash proceeds of certain equity issuance transactions of the Company and its subsidiaries. All other material terms of the Credit Agreement remained unchanged.

On ~~November 4, 2021~~May 5, 2022, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on ~~January 6,~~July 5, 2022 to stockholders of record as of ~~December 15, 2021~~June 14, 2022.

2622

Item 2. 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 ~~and~~ elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“~~2020~~2021 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.

~~FINANCIAL HIGHLIGHTS~~

Overview

Heritage Insurance Holdings, Inc., is a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across its multi-state footprint. We provide personal residential insurance in sixteen states and commercial residential insurance in three of those states, while maintaining licenses in one additional state. As a vertically integrated insurer, we control or manage substantially all aspects of underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. Our financial strength ratings are important to the Company in establishing our competitive position and can impact our ability to write policies.

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 year to year, 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 that appear elsewhere in this document.

Recent Developments

COVID-19 and Other Matters

We continue to monitor the short- and long-term impacts of the COVID-19 virus and its variants. For the ~~year~~quarter ended ~~December~~March 31, ~~2020,~~2022, we saw negligible impact to our ~~business, and that trend has continued through the third quarter of 2021.~~business. As a residential property insurer, we view our business as somewhat insulated 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. ~~In a prolonged recessionary and social-distancing environment, we~~We could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition. ~~Increases~~Changes in the cost of materials and labor for home repairs can influence our ~~losses~~loss costs associated with claims. To the extent state and local requirements allow employees to return to the office, the Company has implemented return-to-office and hybrid programs, with the latter including a combination of in-office and remote work.

~~Climate Change~~

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 and 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. AlthoughWhile 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. Further, an increased incidence of catastrophic weather events could impact the cost and availability of our reinsurance program.

~~Coronavirus Aid, Relief, and Economic Security Act~~

The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments thatacknowledge uncertainties associated with future economic conditions, we ~~are deferring to future periods. We~~ do not ~~currently~~ expect ~~the CARES Act to have~~ a material impact onto our ~~liquidity or our financial results, except for the benefit associated with a 5-year carryback of our 2020 tax net operating loss.~~business going forward. We will continue to monitor economic conditions and, ~~assess~~in the ~~impact the CARES Act and similar legislation may have on~~case of a prolonged economic slowdown as a result of COVID-19, will take necessary actions to mitigate any negative impacts to our business, ~~and~~operations or financial results.

Financial Results ~~Highlights~~ for the ~~Third~~first quarter of ~~2021~~

2022

•

Net loss for the quarter was ~~$16.4~~$30.8 million, or ~~0.59 loss~~$1.15 per share, up from net loss of ~~$5.2~~$5.1 million or $0.19 ~~loss~~ per share in the prior year quarter.

•

Book value per share of ~~$14.57,~~$10.65, on March 31, 2022 was down ~~4.1%~~16.9% from ~~second~~December 31, 2021. The decrease is attributable to underwriting losses in the first quarter ~~2021 and 8.8% year-over-year.~~2022 coupled with unrealized losses on the Company’s available-for-sale fixed income securities portfolio. The unrealized losses were unrelated to credit risk but were primarily due to the sharp first-quarter decline in bond prices in a higher interest rate environment.

•

Gross premiums earned of $287.4 million, up 6.3% from $270.4 million in the prior year quarter, reflecting higher gross premiums written over the last twelve months.

•

Gross premiums written of ~~$274.2~~$283.2 million, ~~down 1.5% year-over-year, stemming~~up 3.3% from the prior year quarter, with intentional exposure-management and re-underwriting efforts resulting in a ~~12.4% exposure management driven~~4.0% reduction in Florida, ~~partly~~ offset by ~~8.0%~~ growth of 11.4% in other ~~states.~~regions.

•

Premiums in force of $1.2 billion, ~~relatively flat~~up 4.7% from ~~second~~first quarter ~~2021 and up 13.3% year-over-year.~~2021.



~~Policies-in-force of 581,286, a 2.1% reduction from second quarter 2021 and a 3.0% year-over-year increase.~~



~~Favorable prior year reserve development of $0.8 million.~~

•

Net current accident ~~quarter~~year weather losses of ~~$51.4~~$63.8 million, up substantially from ~~$47.3~~$31.4 million in the prior year quarter. Current accident ~~quarter~~year weather losses include ~~$16.0~~$45.0 million of net current accident quarter catastrophe losses, ~~down~~up from ~~$24.6~~$15.4 million in the prior year quarter, and ~~$35.5~~$18.8 million of other weather losses, up from ~~$22.8~~$16.1 million in the prior year quarter.

•

Total capital returned to shareholders of ~~$2.7~~$6.7 million, representing a $0.06 per share regular quarterly dividend and repurchase of ~~148,109~~721,118 shares of stock.

Results of Operations

Comparison of the Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

Revenue


	For the Three Months Ended September 30,												For the Three Months Ended March 31,
(Unaudited)	2021			2020			$ Change			% Change			2022			2021			$ Change			% Change
	(in thousands)												(in thousands)
REVENUE:
Gross premiums written	$	274,178		$	278,242		$	(4,064	)		(1.5	)%	$	283,196		$	274,181		$	9,015			3.3	%
Change in gross unearned premiums		20,231			(23,260	)		43,491			(187.0	)%		4,172			(3,770	)		7,942			(210.7	)%
Gross premiums earned		294,409			254,982			39,427			15.5	%		287,368			270,411			16,957			6.3	%
Ceded premiums		(131,964	)		(116,752	)		(15,212	)		13.0	%		(134,439	)		(128,212	)		(6,227	)		4.9	%
Net premiums earned		162,445			138,230			24,215			17.5	%		152,929			142,199			10,730			7.5	%
Net investment income		1,548			2,817			(1,269	)		(45.0	)%		2,000			1,293			707			54.7	%
Net realized and unrealized (losses) gains		(6	)		20,355			(20,361	)	NM
Net realized gains														(16	)		80			(96	)	NM
Other revenue		3,421			3,717			(296	)		(8.0	)%		3,695			3,671			24			0.7	%
Total revenue	$	167,408		$	165,119		$	2,290			1.4	%	$	158,608		$	147,243		$	11,365			7.7	%

NM= Not Meaningful

Gross premiums written

Gross premiums written were ~~$274.2~~$283.2 million, ~~in the third quarter of 2021, down 1.5% from $278.2 million in the prior year quarter. The decrease reflects 12.4%~~up 3.3% year-over-year, reflecting a 4.0% intentional exposure management related reduction in Florida ~~gross written premium, partially~~that was offset ~~by 8.0%~~by11.4% growth in other states. Rate increases meaningfully benefited written premiums throughout the book of business. The reduction in Florida gross written premium reflects our ~~plan~~strategy to manage our Florida total insurance value ("TIV") and attritional loss ratios by controlling renewals and new business written. ~~Rate increases materially benefited 2021 gross premiums written, particularly in Florida.~~

Premiums-in-force were $1.2 billion ~~as of third~~in first quarter 2022, up 4.7% from first quarter 2021, ~~relatively flat~~while policies-in-force were down 5.5%, with the delta largely stemming from ~~second quarter 2021 and up 13.3% year-over-year.~~rate increases. Policies-in-force were ~~581,286,~~559,496, a ~~2.1%~~5.5% reduction from ~~593,786~~591,924 policies at ~~second~~first quarter ~~2021 and a 3.0% increase year-over-year.~~2021. The reduction in policies in force from the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were ~~$294.4~~$287.4 million in ~~the third~~first quarter ~~of 2021,~~2022, up ~~15.5%~~6.3% from ~~$255.0~~$270.4 million in the prior year quarter. The increase reflects ~~the earning of~~ higher gross premiums written over the last twelve ~~months ended September 30, 2021 compared to premiums written over the twelve months ended September 30, 2020.~~months.

Ceded premiums

Ceded premiums were ~~$132.0~~$134.4 million in ~~third~~first quarter ~~2021,~~2022, up ~~13.0%~~4.9% from ~~$116.8~~$128.2 million in the prior year quarter. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program driven by an increase in ~~TIV.~~TIV for the respective reinsurance contract periods.

Net premiums earned

Net premiums earned were ~~$162.4~~$152.9 million in ~~third~~first quarter ~~2021,~~2022, up ~~17.5%~~7.5% from ~~$138.2~~$142.2 million in the prior year quarter. The increase primarily stems from ~~higher~~growth in gross premiums earned ~~partly offset by higher~~outpacing the increase in ceded premiums, as described above.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was ~~$1.5~~$2.0 million in ~~the third~~first quarter ~~2021,~~2022, compared to ~~$23.2~~$1.4 million in the prior year quarter. The ~~decrease~~increase is primarily due to ~~opportunistic sales of~~higher balances in our fixed income ~~securities which resulted in significant realized gains in third quarter 2020 and to a lesser extent, lower yields associated with~~portfolio than the ~~continued low interest rate environment.~~prior year quarter.

Other revenue

Other revenue was ~~$3.4~~$3.7 million in ~~the third~~first quarter ~~of 2021,~~2022, relatively flat when compared to the prior year quarter.

Total revenue

Total revenue was ~~$167.4~~$158.6 million in ~~third~~first quarter ~~2021,~~2022, up ~~1.4%~~7.7% from ~~$165.1~~$147.2 million in the prior year quarter. The increase primarily stems from higher net premiums earned, ~~partially offset by a reduction in net realized investment gains,~~ as described above.

For the Three Months Ended September 30,

(Unaudited)

2021

2020

$ Change

% Change

OPERATING EXPENSES:

(in thousands)

Losses and loss adjustment expenses

129,632

119,718

9,914

8.3
%
Policy acquisition costs

35,984

31,960

4,024

12.6
%
General and administrative expenses

17,169

17,923

(754
)

(4.2
)%
Total operating expenses

182,785

169,601

13,183

7.8
%


	For the Three Months Ended March 31,
(Unaudited)	2022		2021		$ Change			% Change
OPERATING EXPENSES:	(in thousands)
Losses and loss adjustment expenses		140,038		97,909		42,129			43.0	%
Policy acquisition costs		38,257		35,366		2,891			8.2	%
General and administrative expenses		19,724		19,800		(76	)		(0.4	)%
Total operating expenses		198,019		153,075		44,944			29.4	%

Losses and loss adjustment expenses

Losses and loss adjustment expenses (“LAE”) were ~~$129.6~~$140.0 million in ~~third~~first quarter ~~2021,~~2022, up ~~8.3%~~43.0% from ~~$119.7~~$97.9 million in the prior year quarter. The increase stems from higher net weather losses, ~~lower favorable reserve development and from a larger book of business.~~as described above.

Policy acquisition costs

Policy acquisition costs were ~~$36.0~~$38.3 million in ~~third~~first quarter ~~2021,~~2022, up ~~12.6%~~8.2% from ~~$32.0~~$35.4 million in the prior year quarter. The increase is primarily attributable to growth in gross premiums written ~~growth~~ and is partially offset by higher ceding commission income.

General and administrative expenses

General and administrative expenses were ~~$17.2~~$19.7 million in ~~third~~first quarter ~~2021, down 4.2% from $17.9 million in~~2022, relatively flat when compared to the prior year quarter. ~~The decrease is primarily attributable to higher ceding commission associated with gross premiums written growth and lower executive compensation.~~


	For the Three Months Ended September 30,												For the Three Months Ended March 31,
(Unaudited)	2021			2020			$ Change			% Change			2022			2021			$ Change			% Change
	(in thousands, except per share and share amounts)												(in thousands, except per share amounts)
Operating loss		(15,377	)		(4,482	)		(10,895	)		243.1	%		(39,411	)		(5,832	)		(33,579	)		575.8	%
Interest expense, net		2,150			2,251			(101	)		(4.5	)%		1,972			1,878			94			5.0	%
Loss before income taxes		(17,527	)		(6,733	)		(10,793	)		160.3	%		(41,383	)		(7,710	)		(33,672	)		436.8	%
Benefit for income taxes		(1,117	)		(1,500	)		383			(25.5	)%		(10,624	)		(2,562	)		(8,062	)		314.6	%
Net loss	$	(16,410	)	$	(5,233	)	$	(11,177	)		213.6	%	$	(30,759	)	$	(5,148	)	$	(25,611	)		497.5	%
Basic net loss per share	$	(0.59	)	$	(0.19	)	$	(0.40	)		209.1	%	$	(1.15	)	$	(0.19	)	$	(0.96	)	NM
Diluted net loss per share	$	(0.59	)	$	(0.19	)	$	(0.40	)		209.1	%	$	(1.15	)	$	(0.19	)	$	(0.96	)	NM

Interest expense, net

Net interest expense was ~~$2.1~~$2.0 million in the ~~third~~first quarter of ~~2021, effectively~~2022, relatively flat quarter-over-quarter.

Benefit for income taxes

Benefit for income taxes was ~~$1.1~~$10.6 million in ~~third~~first quarter ~~2021~~2022 compared to ~~$1.5~~$2.6 million in the prior year quarter. The effective tax rate was ~~6.4%~~25.7% in ~~third~~first quarter ~~2021, 15.9~~2022, 7.6 points below the prior year quarter’s ~~22.3%~~33.2% rate. The lower effective tax rate relates to the impact of permanent tax differences on projected results of operations for the calendar year. A change in the estimate from the prior quarter impacted the effect of permanent tax differences. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

~~Net loss~~

Third quarter 2021 net loss was $16.4 million ($0.59 per diluted share), up from net loss of $5.2 million ($0.19 per diluted share) in the prior year quarter. The year-over-year change primarily stems from lower realized capital gains, partly offset by a smaller underwriting loss. Higher losses and LAE contributed significantly to the net loss for the quarter, as described above.

~~Ratios~~

For the Three Months Ended September 30,

(Unaudited)

2021

2020

Ceded premium ratio

44.8
%

45.8
%

Net loss and LAE ratio

79.8
%

86.6
%
Net expense ratio

32.7
%

36.1
%
Net combined ratio

112.5
%

122.7
%

~~Ceded premium ratio~~

The ceded premium ratio was 44.8% in third quarter 2021, down 1.0 point from 45.8% in the prior year quarter. The decrease is primarily attributable to higher gross earned premium which exceeded the higher cost associated with our reinsurance program.

~~Net loss ratio~~

The net loss ratio was 79.8% in third quarter 2021, down 6.8 points from 86.6% in the prior year quarter. Although the dollar amount of losses is significantly higher than the prior year quarter, the loss ratio is lower than the prior year quarter due to higher net earned premium fueled by growth and rate changes as described above.

~~Net expense ratio~~

The net expense ratio was 32.7% in third quarter 2021, down 3.4 points from 36.1% in the prior year quarter. The decrease primarily stems from lower G&A and policy acquisition cost ("PAC") expense ratio associated with higher net earned premium over the prior year despite an increase in PAC and G&A expenses.

~~Net combined ratio~~

The net combined ratio was 112.5% in third quarter 2021, down 10.2 points from 122.7% in the prior year quarter. The decrease primarily stems from lower net loss and operating expense ratios. The net loss increased despite the lower net combined ratio due to the reduction in investment gains from the prior year quarter as described above.

~~Comparison of the Nine Months Ended September 30, 2021 and 2020~~

For the Nine Months Ended September 30,

2021

2020

$ Change

% Change

(Unaudited)

(in thousands)

REVENUE:

Gross premiums written

$
886,059

$
797,776

$
88,283

11.1
%
Change in gross unearned premiums

(35,593
)

(66,287
)

30,694

(46.3
)%
Gross premiums earned

850,466

731,489

118,977

16.3
%
Ceded premiums

(399,323
)

(338,197
)

(61,126
)

18.1
%
Net premiums earned

451,143

393,292

57,851

14.7
%
Net investment income

3,797

9,783

(5,986
)

(61.2
)%
Net realized and unrealized (losses) gains

(926
)

20,377

(21,303
)

NM

Other revenue

10,835

10,385

450

4.3
%
Total revenue

$
464,849

$
433,837

$
31,013

7.1
%

~~Gross premiums written~~

Gross premiums written were $886.1 million for the nine months ended September 30, 2021, up 11.1% from $797.8 million in the prior year period. The increase reflects 16.2% growth outside Florida and 3.6% growth in Florida. Rate increases materially benefited 2021 gross premiums written growth, particularly in Florida. Growth in all states was organic, including growth via independent agents and strategic partnerships with national carriers.

~~Gross premiums earned~~

Gross premiums earned were $850.5 million for the nine months ended September 30, 2021, up 16.3% from $731.5 million in the prior year period. The increase reflects the earning of higher gross premiums written over the twelve months ended September 30, 2021 compared to premiums written over the twelve months ended September 30, 2020.

~~Ceded premiums earned~~

Ceded premiums earned were $399.3 million for the nine months ended September 30, 2021, up 18.1% from $338.2 million in the prior year period. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program and an increase in TIV associated with premium growth as well as higher premium for our severe convective storm reinsurance coverage.

~~Net premiums earned~~

Net premiums earned were $451.1 million for the nine months ended September 30, 2021, up 14.7% from $393.3 million in the prior year period. The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums, as described above.

~~Net investment income~~

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities for the nine months ended September 30, 2021, was $2.9 million, down 90.3% from $30.2 million in the prior year period. The decrease is primarily due to opportunistic sales of fixed income securities which held significant unrealized gains in third quarter 2020 and to a lesser extent, lower yields associated with the continued low interest rate environment.

~~Other revenue~~

~~Other revenue was $10.8 million for the nine months ended September 30, 2021, relatively flat from $10.4 million in the prior year period.~~

~~Total revenue~~

Total revenue was $464.8 million for the nine months ended September 30, 2021, up 7.1% from $433.8 million in the prior year period. The increase primarily stems from higher net premiums earned, partially offset by a reduction in net investment income, as described above.

For the Nine Months Ended September 30,

(Unaudited)

2021

2020

$ Change

% Change

OPERATING EXPENSES:

(in thousands)

Losses and loss adjustment expenses

328,376

266,769

61,607

23.1
%
Policy acquisition costs

109,183

92,243

16,940

18.4
%
General and administrative expenses

52,490

59,583

(7,093
)

(11.9
)%
Total operating expenses

490,049

418,595

71,454

17.1
%

~~Losses and loss adjustment expenses~~

Losses and loss adjustment expenses (“LAE”) were $328.4 million for the nine months ended September 30, 2021, up 23.1% from $266.8 million in the prior year period. The increase primarily stems from higher net weather losses and from a larger book of business.

~~Policy acquisition costs~~

Policy acquisition costs were $109.2 million for the nine months ended September 30, 2021, up 18.4% from $92.2 million in the prior year period. The increase is primarily attributable to higher acquisition costs associated with growth in gross premiums written.

~~General and administrative expenses~~

General and administrative expenses were $52.5 million for the nine months ended September 30, 2021, down 11.9% from $59.6 million in the prior year period. The decrease is primarily attributable to a state tax credit recorded in second quarter 2021 and lower executive compensation expense.

For the Nine Months Ended September 30,

(Unaudited)

2021

2020

$ Change

% Change

(in thousands, except per share and share amounts)

Operating (loss) income

(25,200
)

15,242

(40,442
)

(265.3
)%
Interest expense, net

5,953

5,939

14

0.2
%
(Loss) income before income taxes

(31,153
)

9,303

(40,456
)

(434.9
)%
(Benefit) provision for income taxes

(5,644
)

2,784

(8,428
)

(302.7
)%
Net (loss) income

$
(25,509
)

$
6,519

$
(32,028
)

(491.3
)%
Basic net (loss) income per share

$
(0.91
)

$
0.23

$
(1.14
)

(497.5
)%
Diluted net (loss) income per share

$
(0.91
)

$
0.23

$
(1.14
)

(497.5
)%

~~Interest expense, net~~

~~Interest expense was $6.0 million for the nine months ended September 30, 2021, relatively flat from $5.9 million in the prior year period.~~

~~(Benefit) Provision for income taxes~~

(Benefit) provision for income taxes was $(5.6) million and $2.8 million for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rate for the current year period was 18.1%, 11.8 points lower than the prior year’s 29.9%. The lower effective tax rate relates to the impact of permanent tax differences on projected results of operations for the calendar year. A change in the estimate from the prior quarter impacted the effect of permanent tax differences. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

Net ~~(loss) income~~loss

~~Net~~First quarter 2022 net loss ~~for the nine months ended September 30, 2021~~ was ~~$25.5~~$30.8 million ($~~(0.91)~~1.15 loss per ~~diluted~~ share) ~~compared to~~, up from net ~~income~~loss of ~~$6.5~~$5.2 million ($~~0.23~~0.19 loss per ~~diluted~~ share) in the prior year ~~period.~~quarter. The ~~decrease~~year-over-year change primarily ~~reflects~~stems from a ~~higher net~~larger underwriting loss ~~ratio, largely~~ driven by ~~elevated~~significantly higher weather losses, ~~and lower investment income,~~which was partly offset by ~~higher total revenue and a lower~~growth in net ~~expense ratio.~~earned premium, as described above.

Ratios


	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(Unaudited)	2021			2020			2022			2021
Ceded premium ratio		47.0	%		46.2	%		46.8	%		47.4	%

Net loss and LAE ratio		72.8	%		67.8	%		91.6	%		68.9	%
Net expense ratio		35.8	%		38.6	%		37.9	%		38.8	%
Net combined ratio		108.6	%		106.4	%		129.5	%		107.7	%

Ceded premium ratio

The ceded premium ratio was ~~47.0% for the nine months ended September 30, 2021, up 0.8~~46.8% in first quarter 2022, down 0.6 points from ~~46.2%~~47.4% in the prior year ~~period. The increase resulted from a larger increase~~quarter, reflecting the growth in gross premiums earned ~~premium than~~outpacing the ~~increase~~growth in ceded ~~premium.~~premiums.

Net loss and LAE ratio

The net loss and LAE ratio was ~~72.8% for the nine months ended September 30, 2021,~~91.6% in first quarter 2022, up ~~5.0~~22.7 points from ~~67.8%~~68.9% in the prior year ~~period. The increase primarily stems from~~quarter, driven by higher ~~current accident~~weather losses compared to the prior year ~~weather and lower favorable reserve development,~~quarter, which was partly offset by the 7.5% increase in net ~~earned premium.~~premiums earned.

Net expense ratio

The net expense ratio was ~~35.8% for the nine months ended September 30, 2021, down 2.8 points from 38.6%~~37.9% in first quarter 2022, relatively flat compared to 38.8% in the prior year period. The decrease primarily stems from a lower net G&A expense ratio, driven by lower G&A expenses coupled with higher net premiums earned, partly offset by a slightly higher net PAC expense ratio, driven by higher gross premiums written.quarter.

Net combined ratio

The net combined ratio was ~~108.6% for nine months ended September 30, 2021,~~129.5% in first quarter 2022, up ~~2.2~~21.8 points from ~~106.4%~~107.7% in the prior year ~~period.~~quarter. The increase primarily stems from a higher net loss and LAE ratio ~~partly offset by~~with a ~~lower~~relatively flat net expense ~~ratio, as described above.~~

ratio.

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, 2021,~~March 31, 2022, we had ~~$393.4~~$286.2 million of cash and cash equivalents and ~~$686.1~~$689.5 million in investments, compared to ~~$441.0~~$359.3 million and ~~$589.0~~$694.7 million, respectively, as of December 31, ~~2020.~~2021. The decrease in cash and cash equivalents was primarily due to the ~~allocation~~timing of ~~cash used~~reinsurance payments for ~~investing activities.~~our catastrophe excess of loss ("XOL") program.

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, 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 ~~cash~~liquidity are adequate to meet our cash requirements for at least the next twelve months.

We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. 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,									For the Three Months Ended March 31,
	2021			2020			Change			2022			2021			Change
	(in thousands)									(in thousands)
Net cash provided by (used in):
Operating activities	$	70,150		$	118,561		$	(48,411	)	$	(39,206	)	$	39,227		$	(78,433	)
Investing activities		(110,305	)		136,642			(246,947	)		(27,648	)		(73,664	)		46,016
Financing activities		(7,402	)		(23,178	)		15,776			(4,312	)		(3,749	)		(563	)
Net (decrease) increase in cash and cash equivalents	$	(47,557	)	$	232,025		$	(279,582	)	$	(71,166	)	$	(38,186	)	$	(32,980	)

Operating Activities

Net cash ~~provided by~~used in operating activities was ~~$70.1~~$39.2 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to net cash provided by operating activities of ~~$118.6~~$39.2 million for the comparable period in ~~2020.~~2021. The decrease in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first ~~nine~~three months of ~~2021~~2022 compared to the first ~~nine~~three months of ~~2020.~~2021.

Investing Activities

Net cash used in investing activities for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was ~~$110.3~~$27.6 million as compared to net cash ~~provided by~~used in investing activities of ~~$136.6~~$73.7 million for the comparable period in ~~2020.~~2021. The change in cash used ~~for~~in investing activities relates primarily to allocations of funds for investment in ~~the current period compared to our strategic~~each period. Strategic sales of investments to yield realized gains in ~~the comparable period~~2020 produced proceeds which were invested in ~~2020.~~early 2021.

Financing Activities

Net cash used in financing activities for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was ~~$7.4~~$4.3 million, as compared to cash used in financing activities of ~~$23.2~~$3.7 million for the comparable period in ~~2020. The reduction in~~2021. While net cash used in financing activities ~~is due primarily to~~was relatively flat from the ~~decrease in the amount of stock repurchased under the stock repurchase program and use of proceeds~~prior year quarter, we drew $15 million from our ~~term loan facility which offset principal payments made.~~Revolving Credit Facility (defined below) to purchase and retire $11.7 million of Convertible Notes (defined below) during the first quarter of 2022, as described in Note 14.

3326

Credit Facilities

~~On December 14, 2018, the~~The Company ~~entered into~~is party to a ~~credit agreement (as amended from time to time, the “Credit Agreement”)~~Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint ~~Bookrunners.~~Bookrunners (as amended from time to time, the “Credit Agreement”).

~~On July 28, 2021, the Company entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”) with the guarantors and Lenders.~~ The Fifth Amendment amended the Credit Agreement to, among other things, (i) increase the revolving credit facility from $50 million to $75 million and make related changes to the Credit Agreement, (ii) provide for a $13.75 million advance under the existing $75 million term loan facility for an aggregate of $70 million principal amount outstanding as of the date of the Fifth Amendment, extend the maturity of the term loan facility from December of 2023 to July 2026 and reduce the amortization of the term loan facility, (iii) reduce the applicable margin for loans under the Credit Agreement to 2.5% to 3.0% per annum for LIBOR loans (reduced from the prior range of 3.25% to 3.75%) and 1.5% to 2.0% per annum for base rate loans (reduced from the prior range of 2.25% to 2.75%), in each case based on a consolidated leverage ratio ranging from less than or equal to 1.25-to-1 to greater than 2.25-to-1 (previously less than or equal to 2.0-to-1 to greater than 3.0-to-1), (iv) reduce the restriction on negative covenants thereby allowing the Company greater flexibility and (iv) provide mechanics relating to a transition away from LIBOR as a benchmark interest rate and replace LIBOR with an alternative benchmark rate.

~~Pursuant to the~~ Credit Agreement, as amended, ~~the participating Lenders agreed to provide~~provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $75 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). As

Term Loan Facility. The principal amount of ~~September 30, 2021, the Company had in aggregate $70 million principal outstanding under~~ the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and increasing to $1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27, 2026. As of March 31, 2022, there was ~~increased to $70~~$68.3 million in aggregate principal outstanding on the ~~date~~Term Loan Facility.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $75 million inclusive of a $5 million sublimit for the ~~Fifth Amendment,~~issuance of letters of credit and noa $10 million sublimit for swingline loans. As of March 31, 2022, we had $15 million in borrowings and a $7.5 million letters of credit outstanding under the Revolving Credit Facility.

The applicable margin for loans under the Credit Facilities ~~as amended,~~ varies from 2.5% per annum to 3.0% per annum (for LIBOR loans) and 1.5% to 2.0% per annum (for base rate loans) based on our consolidated leverage ~~ratio.~~ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of ~~June 30, 2021,~~March 31, 2022, the borrowing under our Credit Facilities were accruing interest at a rate of ~~3.38%~~3.0% per annum.

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.

Each of the Revolving Credit Facility and the Term Loan Facility mature on December 31, 2026. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ended March 31, 2019, in an amount equal to $1,875,000 per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and increasing to $1,375,000 per quarter commencing with the quarter ending December 31, 2024, with the balance payable at maturity.

~~The Company~~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 LIBOR loans. In addition, ~~the Company is~~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 ~~entered into~~are party to a Pledge and Security Agreement, ~~on December 14, 2018 (the~~(as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the 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 Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of ~~2.75 to 1.00 for each fiscal quarter in 2021, stepping down to~~ 2.50 to 1.00 ~~in 2022 and thereafter;~~ (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. 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.

Convertible Notes

On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 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 Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. 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, and Wilmington Trust, National Association, as trustee (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 second 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.

The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022.

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.

Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 but 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 Notes automatically become immediately due and payable.

~~As of September 30, 2021, there were Convertible Notes in~~In January 2022, the ~~aggregate~~Company repurchased $11.7 million principal amount of ~~$23.4~~outstanding Convertible Notes. As of March 31, 2022, there was $11.7 million ~~issued and outstanding.~~principal amount of outstanding Convertible Notes.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $31.0 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan was used to prepay the Company’s Senior Secured Notes due 2023 in 2018.

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. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we reassessed our critical accounting policies and estimates as disclosed within our ~~2020~~2021 Annual Report on Form 10-K.

Seasonality of our Business

Our insurance business is seasonal; hurricanes typically occur during the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters each year. With our catastrophe reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was ~~3.891~~3.758 years and 3.744 years at ~~September 30,~~March 31, 2022 and 2021, ~~2.971 years at September 30, 2020,~~ and ~~3.615~~3.903 years at December 31, ~~2020.~~2021. As interest rates continue to rise, the fair value of our fixed rate debt securities are subject to decline. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of ~~September 30, 2021,~~March 31, 2022, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, ~~2020.~~

2021.

On July 28, 2021, the Company amended its Credit Agreement to provide mechanics relating to a transition away from LIBOR as a benchmark interest rate for its indebtedness under the Credit Agreement and replace LIBOR with an alternative benchmark rate.

We have not experienced a material impact when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our ~~2020~~2021 Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2021.~~March 31, 2022.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant changes to our internal control over financial reporting for the period ending ~~September 30, 2021.~~March 31, 2022.

3730

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our condensed consolidated financial position results of operations or cash flow.

Item 1A. Risk Factors

The Company documented its risk factors in Item 1A of Part I of its annual report on Form 10-K for the year ended December 31, ~~2020~~2021 filed on March ~~9, 2021.~~14, 2022. There have been no material changes to the Company’s risk factors since the filing of that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~third quarter~~three months ended ~~September 30, 2021,~~March 31, 2022, we purchased ~~148,109~~721,118 shares of common stock for an aggregate of ~~$1.0~~$5.0 million under ~~our~~out stock repurchase program. In addition, ~~the Company~~we acquired ~~6,473~~9,849 shares of common stock for a total cost of ~~$44,500~~$89,000 during the quarter ended ~~September 30, 2021~~March 31, 2022 that were not part of the publicly announced stock repurchase program authorization. These shares were delivered to the Company by employees to satisfy tax withholding obligations with the vesting of restricted stock awards.

A summary of our common stock repurchases during the quarter ended ~~September 30, 2021,~~March 31, 2022, is set forth in the table below (in thousands, except shares and price per share):

Total Number of
Shares
Purchased

Average Price
Paid Per Share (1)

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)

Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs

July 1 - July 31, 2021

—

$
—

—

$
50,000

August 1 - August 29, 2021

—

$
—

—

$
50,000

September 1 - September 31, 2021

154,582

$
6.83

148,109

$
48,995

Total

154,582

148,109

Total Number of
Shares
Purchased

Average Price (1)
Paid Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs (2)

January 1 - January 31, 2022

9,849

$
5.88

—

$
25,000

February 1 - February 29, 2022

—

$
—

—

$
25,000

March 1 - March 31, 2022

721,118

$
6.93

721,118

$
20,000

Total

730,967

721,118

(1)

Represents the balance before commission and fees at the end of each period.

(2) ~~On November 2, 2020,~~

Effective December 31, 2021, the Board of Directors ~~extended the Company’s prior~~established a new share repurchase program. The new share repurchase program, ~~from December 31, 2020 to~~which commenced on December 31, 2021, ~~authorizing~~allows the Company to repurchase up to ~~$50.0~~an aggregate of $25.0 million of ~~its common stock~~Common Stock, through ~~such date. Repurchases may be made~~open market repurchases in compliance with Rule 10b-18 under the ~~Company’s current Rule 10b5-1 trading plan, which allows~~Exchange Act, and/or in privately negotiated transactions at management’s discretion based on market and business conditions, applicable legal requirements, and other factors, in such manner as will comply with the terms of applicable federal and state securities laws and regulations, at any time or from time to time on or prior to December 31, 2022.

Item 5. Other Information

Item 1.01 Entry into a Material Definitive Agreement.

On May 4, 2022, the Company and its subsidiary guarantors amended the Credit Agreement dated as of December 14, 2018 (as amended to ~~purchase shares below~~date, the “Credit Agreement”) by entering into the Sixth Amendment to Credit Agreement (the “Sixth Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent.

Pursuant to the Sixth Amendment, the consolidated fixed charge coverage ratio included in the Credit Agreement will be calculated based on the Company’s consolidated tangible net worth, rather than the Company’s consolidated net worth as was required under the existing Credit Agreement. Specifically, the Sixth Amendment provides that, effective as of March 31, 2022 and for future fiscal quarters, the Company’s consolidated tangible net worth as of the end of a ~~predetermined price per share, or otherwise. At September 30, 2021,~~fiscal quarter may not be less than the sum of (1) $162,333,750, plus (2) 25% of the sum of the positive consolidated net income of the Company ~~has~~and its subsidiaries with respect to each full fiscal quarter, plus (3) 100% of the ~~capacity~~net cash proceeds of certain equity issuance transactions of the Company and its subsidiaries. All other material terms of the Credit Agreement remained unchanged.

The above summary description of the Sixth Amendment is subject to, ~~repurchase $49.0 million~~and qualified in its entirety by reference to, the Sixth Amendment, a copy of ~~its common stock until December 31, 2021.~~which is filed herewith as Exhibit 10.1 and incorporated herein by reference herein.

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

The information contained in Item 1.01 is hereby incorporated into this Item 2.03 by reference thereto.

Item 6. Exhibits

The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q.

Index to Exhibits

~~Exhibit NumberDescription~~


3.1 ~~Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014~~ ~~3.2~~ ~~By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly~~ ~~Report on Form 10-Q filed on August 6, 2014~~ 4 ~~Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)~~ ~~4.1~~ 38 ~~Form of 5.875% Convertible Senior Notes due 2037 (included in Exhibit 4.1), (incorporated by reference to 1.1 to our Form 8-K filed on August 16, 2017)~~ ~~4.2~~ Indenture, dated as of August 16, 2017, by and among the Company. Heritage MGA, LLC as guarantor, and Wilmington Trust, National Association, as trustee, (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on August 16, 2017) 10.24* ~~Employment agreement dated September 1, 2021 between Heritage Insurance Holdings, Inc., and Sharon Binnun~~ 10.25* ~~Employment agreement dated September 1, 2021 between Heritage Insurance Holdings, Inc., and Tim Moura~~ 31.1* ~~Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the~~ ~~Sarbanes-Oxley Act of 2002~~ 31.2* ~~Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~ 32.1 ~~Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~ 32.2	Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014
3.2	By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014
4	Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)
4.1	Form of 5.875% Convertible Senior Notes due 2037 (included in Exhibit 4.1), (incorporated by reference to 1.1 to our Form 8-K filed on August 16, 2017)
4.2	Indenture, dated as of August 16, 2017, by and among the Company. Heritage MGA, LLC as guarantor, and Wilmington Trust, National Association, as trustee, (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on August 16, 2017)
10.1*	Sixth Amendment to Credit Agreement, dated May 4, 2022, among Heritage Insurance Holdings, Inc., certain subsidiaries of Heritage Insurance Holdings, Inc. from time to time party as guarantors, the lenders from time to time party and Regions Bank, as Administrative Agent and Collateral Agent
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.INS*		Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Data Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith

** Furnished herewith

3932

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HERITAGE INSURANCE HOLDINGS, INC.

Date: ~~November 8, 2021~~May 9, 2022	By:	/s/ ERNESTO GARATEIX
		Ernesto Garateix
		Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)

Date: ~~November 8, 2021~~May 9, 2022	By:	/s/ KIRK LUSK
		Kirk Lusk
		Chief Financial Officer (Principal Financial Officer)

4033


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


		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: ~~September 30, 2021~~March 31, 2022 (unaudited) and December 31, ~~2020~~2021		2
Condensed Consolidated Statements of Operations and Other Comprehensive ~~Income:~~Loss: Three Months Ended March 31, 2022 and ~~Nine Months ended September 30,~~ 2021 ~~and 2020~~ (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three Months Ended March 31, 2022 and ~~Nine Months ended September 30, 2021 and 2020 (unaudited)~~2021(unaudited)		4
Condensed Consolidated Statements of Cash Flows: ~~Nine~~Three Months ~~ended September 30, 2021~~Ended March 31, 2022 and ~~2020 (unaudited)~~2021(unaudited)		75
Notes to Unaudited Condensed Consolidated Financial Statements		97
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		2723
Item 3 Quantitative and Qualitative Disclosures about Market Risk		3629
Item 4 Controls and Procedures		3730
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		3831
Item 1A Risk Factors		3831
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		3831
Item 5 Other Information		31
Item 6 Exhibits		3832
Signatures		4033


	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
ASSETS	(unaudited)						(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $661,396 and $553,172)	$	660,819		$	561,011
Equity securities, at cost		1,415			1,599
Other investments		23,887			26,409
Fixed maturities, available-for-sale, at fair value (amortized cost of $711,156 and $675,245)							$	673,511		$	669,354
Equity securities, at fair value, (cost $1,417 and $1,415)								1,417			1,415
Other investments, net								14,561			23,929
Total investments		686,121			589,019			689,489			694,698
Cash and cash equivalents		393,411			440,956			286,170			359,337
Restricted cash		5,415			5,427			7,416			5,415
Accrued investment income		3,042			2,737			3,290			3,167
Premiums receivable, net		74,877			77,471			74,512			71,925
Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $45		346,374			355,037
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45								288,779			269,391
Prepaid reinsurance premiums		338,172			245,818			178,565			265,873
Income taxes receivable		35,490			32,224
Income tax receivable								1,365			11,739
Deferred income tax asset, net								12,451			0
Deferred policy acquisition costs, net		95,425			89,265			90,641			93,881
Property and equipment, net		17,950			18,685			17,144			17,426
Right-of-use lease asset, net		28,652			6,461			26,963			27,753
Intangibles, net		57,514			62,277			54,338			55,926
Goodwill		152,459			152,459			91,959			91,959
Other assets		13,220			11,544			13,314			12,272
Total Assets	$	2,248,122		$	2,089,379		$	1,836,396		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	636,146		$	659,341		$	588,420		$	590,166
Unearned premiums		605,304			569,618			586,236			590,419
Reinsurance payable		324,730			161,918			116,218			191,728
Long-term debt, net		121,481			120,998			123,689			120,757
Deferred income tax liability, net		13,665			18,477			0			9,426
Advance premiums		33,341			18,268			39,167			24,504
Accrued compensation		9,430			9,325			5,770			8,014
Lease liability		31,964			8,155			30,475			31,172
Accounts payable and other liabilities		67,036			80,935			64,655			71,525
Total Liabilities	$	1,843,097		$	1,647,035		$	1,554,630		$	1,637,711

Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 27,852,626 shares issued and 27,802,626 shares outstanding at September 30, 2021; 27,833,873 shares issued and 27,748,606 shares outstanding at December 31, 2020		3			3
Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,469,720 shares issued and 26,444,720 outstanding at March 31, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021								3			3
Additional paid-in capital		332,562			331,867			333,213			332,797
Accumulated other comprehensive income		(405	)		6,057
Treasury stock, at cost, 9,427,948 and 9,279,839 shares at September 30, 2021 and December 31, 2020		(116,370	)		(115,365	)
Accumulated other comprehensive loss, net of taxes								(28,894	)		(4,573	)
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at March 31, 2022 and December 31, 2021								(128,557	)		(123,557	)
Retained earnings		189,235			219,782			106,001			138,381
Total Stockholders' Equity		405,025			442,344			281,766			343,051
Total Liabilities and Stockholders' Equity	$	2,248,122		$	2,089,379		$	1,836,396		$	1,980,762


	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2021			2020			2022			2021
OPERATING ACTIVITIES
Net (loss) income	$	(25,509	)	$	6,519
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Net loss							$	(30,759	)	$	(5,148	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation		866			4,061			505			260
Bond amortization and accretion		3,018			4,247			910			917
Operating lease asset amortization		0			71
Amortization of original issuance discount on debt		1,454			1,056			521			455
Depreciation and amortization		6,345			6,078			2,047			2,020
Allowance for bad debt		106			0			(14	)		76
Net loss from sale of asset		0			155
Net realized gains		(96	)		(20,377	)
Net change for unrealized losses in other investments		1,022			0
Net realized investment gains								16			(80	)
Deferred income taxes		(2,862	)		67			(14,444	)		(4,893	)
Changes in operating assets and liabilities:
Accrued investment income		(305	)		1,740			(123	)		(135	)
Premiums receivable		2,488			(6,353	)
Premiums receivable, net								(2,573	)		(6,941	)
Prepaid reinsurance premiums		(92,354	)		(83,895	)		87,308			73,595
Reinsurance recoverable on paid and unpaid claims		8,663			4,703			(19,388	)		28,761
Income taxes receivable		(3,266	)		(13,079	)		10,374			2,328
Deferred policy acquisition costs, net		(6,160	)		(8,929	)		3,240			389
Right-of-use leased asset, net		(22,192	)		761
Right of use leased asset								790			245
Other assets		(1,676	)		451			(1,042	)		(1,790	)
Unpaid losses and loss adjustment expenses		(23,195	)		49,464			(1,746	)		(21,459	)
Unearned premiums		35,686			66,407			(4,183	)		3,793
Reinsurance payable		162,812			84,506			(75,510	)		(17,712	)
Accrued interest		(15	)		787			(342	)		(666	)
Accrued compensation		105			6,270			(2,244	)		(1,213	)
Advance premiums		15,073			15,114			14,663			3,229
Operating lease liabilities		23,809			—			(697	)		(271	)
Other liabilities		(13,667	)		(1,263	)		(6,515	)		(16,533	)
Net cash provided by operating activities		70,150			118,561
Net cash (used in) provided by operating activities								(39,206	)		39,227
INVESTING ACTIVITIES
Fixed maturity securities sales, maturities and paydowns		147,406			411,004			22,132			40,470
Fixed maturity securities purchases		(258,548	)		(254,145	)		(58,969	)		(113,890	)
Equity securities redemption		184			25
Paydowns on other investments		1,500			0
Limited partnership interest purchases		0			(20,400	)
Equity securities purchases		0			(6	)
Proceeds from sale of assets		45			792
Equity securities sales and return of capital								9,368			177
Equity securities reinvestments of dividends								(2	)		0
Cost of property and equipment acquired		(892	)		(628	)		(177	)		(421	)
Net cash (used in) provided by investing activities		(110,305	)		136,642
Net cash used in investing activities								(27,648	)		(73,664	)
FINANCING ACTIVITIES
Principal payments on term loan facility		(3,750	)		(7,500	)
Proceeds from term loan facility		2,781			0
Repayment of term note								(875	)		(1,875	)
Mortgage loan payments		(228	)		(215	)		(81	)		(77	)
Draw from revolver								15,000			0
Repurchase of convertible notes								(11,633	)		0
Purchase of treasury stock		(1,005	)		(9,997	)		(5,000	)		0
Tax withholdings on share-based compensation awards		(171	)		(297	)		(89	)		(127	)
Dividends paid		(5,029	)		(5,169	)		(1,634	)		(1,670	)
Net cash used in financing activities		(7,402	)		(23,178	)		(4,312	)		(3,749	)
(Decrease) increase in cash, cash equivalents, and restricted cash		(47,557	)		232,025
Decrease in cash, cash equivalents, and restricted cash								(71,166	)		(38,186	)
Cash, cash equivalents and restricted cash, beginning of period		446,383			283,008			364,752			446,383
Cash, cash equivalents and restricted cash, end of period	$	398,826		$	515,033		$	293,586		$	408,197
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid	$	489		$	16,252		$	0		$	0
Interest paid	$	4,214		$	4,794		$	1,578		$	1,808



	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	(In thousands)				(In thousands)
Cash and cash equivalents	$	393,411	$	440,956	$	286,170	$	359,337
Restricted cash		5,415		5,427		7,416		5,415
Total	$	398,826	$	446,383	$	293,586	$	364,752


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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2021			2020			2021			2020			2022			2021
REVENUES:
Gross premiums written	$	274,178		$	278,242		$	886,059		$	797,776		$	283,196		$	274,181
Change in gross unearned premiums		20,231			(23,260	)		(35,593	)		(66,287	)		4,172			(3,770	)
Gross premiums earned		294,409			254,982			850,466			731,489			287,368			270,411
Ceded premiums		(131,964	)		(116,752	)		(399,323	)		(338,197	)		(134,439	)		(128,212	)
Net premiums earned		162,445			138,230			451,143			393,292			152,929			142,199
Net investment income		1,548			2,817			3,797			9,783			2,000			1,293
Net realized and unrealized (losses) gains		(6	)		20,355			(926	)		20,377
Net realized (losses) gains														(16	)		80
Other revenue		3,421			3,717			10,835			10,385			3,695			3,671
Total revenues		167,408			165,119			464,849			433,837			158,608			147,243
EXPENSES:
Losses and loss adjustment expenses		129,632			119,718			328,376			266,769			140,038			97,909
Policy acquisition costs, net of ceding commission income (1)		35,984			31,960			109,183			92,243			38,257			35,366
General and administrative expenses, net of ceding commission income (2)		17,169			17,923			52,490			59,583			19,724			19,800
Total expenses		182,785			169,601			490,049			418,595			198,019			153,075
Operating (loss) income		(15,377	)		(4,482	)		(25,200	)		15,242
Operating Loss														(39,411	)		(5,832	)
Interest expense, net		2,150			2,251			5,953			5,939			1,972			1,878
(Loss) income before income taxes		(17,527	)		(6,733	)		(31,153	)		9,303
(Benefit) provision for income taxes		(1,117	)		(1,500	)		(5,644	)		2,784
Net (loss) income	$	(16,410	)	$	(5,233	)	$	(25,509	)	$	6,519
OTHER COMPREHENSIVE (LOSS) INCOME
Change in net unrealized (losses) gains on investments		(1,344	)		2,480			(8,316	)		19,330
Loss before income taxes														(41,383	)		(7,710	)
Benefit for income taxes														(10,624	)		(2,562	)
Net loss													$	(30,759	)	$	(5,148	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments														(31,770	)		(10,597	)
Reclassification adjustment for net realized investment losses (gains)		6			(20,355	)		(96	)		(20,377	)		16			(80	)
Income tax benefit related to items of other comprehensive income		310			4,137			1,950			242
Total comprehensive (loss) income	$	(17,438	)	$	(18,971	)	$	(31,971	)	$	5,714
Income tax benefit related to items of other comprehensive loss														7,433			2,475
Total comprehensive loss													$	(55,080	)	$	(13,350	)
Weighted average shares outstanding
Basic		27,938,028			27,739,839			27,902,814			28,053,959			26,787,379			27,827,804
Diluted		27,938,028			27,739,839			27,902,814			28,073,570			26,787,379			27,827,804
(Loss) earnings per share
Loss per share
Basic	$	(0.59	)	$	(0.19	)	$	(0.91	)	$	0.23		$	(1.15	)	$	(0.19	)
Diluted	$	(0.59	)	$	(0.19	)	$	(0.91	)	$	0.23		$	(1.15	)	$	(0.19	)


	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive (Loss) Income			Total Stockholders' Equity			Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2020		27,748,606		$	3	$	331,867		$	219,782		$	(115,365	)	$	6,057		$	442,344
Balance at December 31, 2021																						26,753,511		$	3	$	332,797		$	138,381		$	(123,557	)	$	(4,573	)	$	343,051
Net unrealized change in investments, net of tax		—			—		—			—			—			(8,202	)		(8,202	)		—			—		—			—			—			(24,321	)		(24,321	)
Shares tendered for income taxes withholding		(12,500	)		—		(127	)		—			—			—			(127	)		(9,849	)		—		(89	)		—			—			—			(89	)
Restricted stock vested		25,000			—		—			—			—			—			—			25,000			—		—			—			—			—			—
Issued restricted stock		143,817			—		—			—			—			—			—			397,176			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		260			—			—			—			260			—			—		505			—			—			—			505
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,679	)		—			—			(1,679	)
Net loss		—			—		—			(5,148	)		—			—			(5,148	)
Balance at March 31, 2021		27,904,923		$	3	$	332,000		$	212,955		$	(115,365	)	$	(2,145	)	$	427,448
Net unrealized change in investments, net of tax		—			—		—			—			—			2,768			2,768
Restricted stock vested		—			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		287			—			—			—			287
Issued restricted stock		42,018			—		—			—			—			—			—
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,680	)		—			—			(1,680	)
Net loss		—			—		—			(3,950	)		—			—			(3,950	)
Balance at June 30, 2021		27,946,941		$	3	$	332,287		$	207,325		$	(115,365	)	$	623		$	424,873
Net unrealized change in investments, net of tax		—			—		—			—			—			(1,028	)		(1,028	)
Shares tendered for income taxes withholding		(6,473	)		—		(45	)		—			—			—			(45	)
Restricted stock vested		10,267			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		320			—			—			—			320
Stock buy-back		(148,109	)		—		—			—			(1,005	)		—			(1,005	)		(721,118	)		—		—			—			(5,000	)		—			(5,000	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,680	)		—			—			(1,680	)		—			—		—			(1,621	)		—			—			(1,621	)
Net loss		—			—		—			(16,410	)		—			—			(16,410	)		—			—		—			(30,759	)		—			—			(30,759	)
Balance at September 30, 2021		27,802,626		$	3	$	332,562		$	189,235		$	(116,370	)	$	(405	)	$	405,025
Balance at March 31, 2022																						26,444,720		$	3	$	333,213		$	106,001		$	(128,557	)	$	(28,894	)	$	281,766



	At September 30, 2021				At December 31, 2020
	Carrying Value		Maximum Loss Exposure		Carrying Value		Maximum Loss Exposure
	(in thousands)
Investments in non-consolidated VIEs	$	23,887	$	24,909	$	26,409	$	26,409


	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Amortization of ROU assets - Finance leases	$	1,321	$	64
Interest on lease liabilities - Finance leases		524		16
Variable lease cost (cost excluded from lease payments)		373		391
Operating lease cost (cost resulting from lease payments)		1,018		1,023
Total lease cost	$	3,236	$	1,494


	September 30, 2021
2021 remaining	$	1,142
2022		4,566
2023		4,500
2024		4,194
2025		3,970
Thereafter		20,213
Total lease payments		38,585
Less: imputed interest		(6,621	)
Present value of lease liabilities	$	31,964


	Goodwill
	(in thousands)
Balance as of December 31, 2020	$	152,459
Goodwill acquired	0
Impairment	0
Balance as of September 30, 2021	$	152,459


	Total Number of Shares Purchased		Average Price Paid Per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
July 1 - July 31, 2021		—	$	—		—	$	50,000
August 1 - August 29, 2021		—	$	—		—	$	50,000
September 1 - September 31, 2021		154,582	$	6.83		148,109	$	48,995
Total		154,582				148,109


	Total Number of Shares Purchased		Average Price (1) Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2)
January 1 - January 31, 2022		9,849	$	5.88		—	$	25,000
February 1 - February 29, 2022		—	$	—		—	$	25,000
March 1 - March 31, 2022		721,118	$	6.93		721,118	$	20,000
Total		730,967				721,118