☒ 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~~August 2, ~~2021~~2022 was ~~27,880,203~~26,569,096.

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

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

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.


	September 30, 2021			December 31, 2020			June 30, 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 $689,163 and $675,245)							$	635,458		$	669,354
Equity securities, at fair value, (cost $1,514 and $1,415)								1,514			1,415
Other investments, net								17,352			23,929
Total investments		686,121			589,019			654,324			694,698
Cash and cash equivalents		393,411			440,956			290,932			359,337
Restricted cash		5,415			5,427			5,416			5,415
Accrued investment income		3,042			2,737			3,215			3,167
Premiums receivable, net		74,877			77,471			81,277			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								289,106			269,391
Prepaid reinsurance premiums		338,172			245,818			468,748			265,873
Income taxes receivable		35,490			32,224
Income tax receivable								13,281			11,739
Deferred income tax asset, net								9,762			0
Deferred policy acquisition costs, net		95,425			89,265			99,468			93,881
Property and equipment, net		17,950			18,685			19,622			17,426
Right-of-use lease asset, net		28,652			6,461			26,047			27,753
Intangibles, net		57,514			62,277			52,751			55,926
Goodwill		152,459			152,459			0			91,959
Other assets		13,220			11,544			15,956			12,272
Total Assets	$	2,248,122		$	2,089,379		$	2,029,905		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	636,146		$	659,341		$	553,909		$	590,166
Unearned premiums		605,304			569,618			655,351			590,419
Reinsurance payable		324,730			161,918			375,284			191,728
Long-term debt, net		121,481			120,998			122,990			120,757
Deferred income tax liability, net		13,665			18,477			0			9,426
Advance premiums		33,341			18,268			37,827			24,504
Accrued compensation		9,430			9,325			7,730			8,014
Lease liability		31,964			8,155			29,647			31,172
Accounts payable and other liabilities		67,036			80,935			66,621			71,525
Total Liabilities	$	1,843,097		$	1,647,035		$	1,849,359		$	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, 26,569,096 shares issued and 26,544,096 outstanding at June 30, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021								3			3
Additional paid-in capital		332,562			331,867			333,747			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								(41,194	)		(4,573	)
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at June 30, 2022 and December 31, 2021								(128,557	)		(123,557	)
Retained earnings		189,235			219,782			16,547			138,381
Total Stockholders' Equity		405,025			442,344			180,546			343,051
Total Liabilities and Stockholders' Equity	$	2,248,122		$	2,089,379		$	2,029,905		$	1,980,762

See accompanying notes to unaudited condensed consolidated financial statements.

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
REVENUES:
Gross premiums written	$	274,178		$	278,242		$	886,059		$	797,776		$	365,284		$	337,700		$	648,480		$	611,881
Change in gross unearned premiums		20,231			(23,260	)		(35,593	)		(66,287	)		(69,073	)		(52,054	)		(64,901	)		(55,824	)
Gross premiums earned		294,409			254,982			850,466			731,489			296,211			285,646			583,579			556,057
Ceded premiums		(131,964	)		(116,752	)		(399,323	)		(338,197	)
Ceded premiums earned														(137,940	)		(139,147	)		(272,379	)		(267,359	)
Net premiums earned		162,445			138,230			451,143			393,292			158,271			146,499			311,200			288,698
Net investment income		1,548			2,817			3,797			9,783			2,163			956			4,163			2,249
Net realized and unrealized (losses) gains		(6	)		20,355			(926	)		20,377
Net realized losses														(102	)		(1,000	)		(118	)		(920	)
Other revenue		3,421			3,717			10,835			10,385			3,438			3,742			7,133			7,414
Total revenues		167,408			165,119			464,849			433,837			163,770			150,197			322,378			297,441
EXPENSES:
Losses and loss adjustment expenses		129,632			119,718			328,376			266,769			101,522			100,834			241,560			198,743
Policy acquisition costs, net of ceding commission income (1)		35,984			31,960			109,183			92,243			38,375			37,833			76,632			73,199
General and administrative expenses, net of ceding commission income (2)		17,169			17,923			52,490			59,583			17,466			15,520			37,190			35,320
Goodwill impairment														91,959			0			91,959			0
Total expenses		182,785			169,601			490,049			418,595			249,322			154,187			447,341			307,262
Operating (loss) income		(15,377	)		(4,482	)		(25,200	)		15,242
Operating Loss														(85,552	)		(3,990	)		(124,963	)		(9,821	)
Interest expense, net		2,150			2,251			5,953			5,939			1,751			1,925			3,723			3,803
(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														(87,303	)		(5,915	)		(128,686	)		(13,624	)
Provision (benefit) for income taxes														563			(1,965	)		(10,061	)		(4,527	)
Net loss													$	(87,866	)	$	(3,950	)	$	(118,625	)	$	(9,097	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments														(16,161	)		3,625			(47,932	)		(6,972	)
Reclassification adjustment for net realized investment losses (gains)		6			(20,355	)		(96	)		(20,377	)		102			(22	)		118			(102	)
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 (expense) related to items of other comprehensive losses (gains)														3,759			(835	)		11,193			1,640
Total comprehensive loss													$	(100,166	)	$	(1,182	)	$	(155,246	)	$	(14,531	)
Weighted average shares outstanding
Basic		27,938,028			27,739,839			27,902,814			28,053,959			26,453,456			27,904,923			26,620,418			27,866,364
Diluted		27,938,028			27,739,839			27,902,814			28,073,570			26,453,456			27,904,923			26,620,418			27,866,364
(Loss) earnings per share
Loss per share
Basic	$	(0.59	)	$	(0.19	)	$	(0.91	)	$	0.23		$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)
Diluted	$	(0.59	)	$	(0.19	)	$	(0.91	)	$	0.23		$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)

See accompanying notes to unaudited condensed consolidated financial statements.


	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) Income			Total Stockholders' Equity
Balance at December 31, 2020		27,748,606		$	3	$	331,867		$	219,782		$	(115,365	)	$	6,057		$	442,344			27,748,606		$	3	$	331,867		$	219,782		$	(115,365	)	$	6,057		$	442,344
Net unrealized change in investments, net of tax		—			—		—			—			—			(8,202	)		(8,202	)		—			—		—			—			—			(8,202	)		(8,202	)
Shares tendered for income taxes withholding		(12,500	)		—		(127	)		—			—			—			(127	)		(12,500	)		—		(127	)		—			—			—			(127	)
Restricted stock vested		25,000			—		—			—			—			—			—			25,000			—		—			—			—			—			—
Issued restricted stock		143,817			—		—			—			—			—			—			143,817			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		260			—			—			—			260			—			—		260			—			—			—			260
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,679	)		—			—			(1,679	)		—			—		—			(1,679	)		—			—			(1,679	)
Net loss		—			—		—			(5,148	)		—			—			(5,148	)		—			—		—			(5,148	)		—			—			(5,148	)
Balance at March 31, 2021		27,904,923		$	3	$	332,000		$	212,955		$	(115,365	)	$	(2,145	)	$	427,448			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			—			—		—			—			—			2,768			2,768
Restricted stock vested		—			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		287			—			—			—			287			—			—		287			—			—			—			287
Issued restricted stock		42,018			—		—			—			—			—			—			42,018			—		—			—			—			—			—
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,680	)		—			—			(1,680	)		—			—		—			(1,680	)		—			—			(1,680	)
Net loss		—			—		—			(3,950	)		—			—			(3,950	)		—			—		—			(3,950	)		—			—			(3,950	)
Balance at June 30, 2021		27,946,941		$	3	$	332,287		$	207,325		$	(115,365	)	$	623		$	424,873			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	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,680	)		—			—			(1,680	)
Net loss		—			—		—			(16,410	)		—			—			(16,410	)
Balance at September 30, 2021		27,802,626		$	3	$	332,562		$	189,235		$	(116,370	)	$	(405	)	$	405,025

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


	For the Nine Months Ended September 30,						For the Six Months Ended June 30,
	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							$	(118,625	)	$	(9,097	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation		866			4,061			1,008			547
Bond amortization and accretion		3,018			4,247			1,745			1,960
Operating lease asset amortization		0			71
Amortization of original issuance discount on debt		1,454			1,056			776			830
Goodwill impairment								91,959			0
Depreciation and amortization		6,345			6,078			4,100			4,042
Allowance for bad debt		106			0			4			111
Net loss from sale of asset		0			155
Net realized gains		(96	)		(20,377	)
Net realized investment gains								118			(102	)
Net change for unrealized losses in other investments		1,022			0			0			1,022
Deferred income taxes		(2,862	)		67			(7,995	)		2,780
Changes in operating assets and liabilities:
Accrued investment income		(305	)		1,740			(48	)		(265	)
Premiums receivable		2,488			(6,353	)
Premiums receivable, net								(9,356	)		(6,288	)
Prepaid reinsurance premiums		(92,354	)		(83,895	)		(202,875	)		(170,812	)
Reinsurance recoverable on paid and unpaid claims		8,663			4,703			(19,715	)		40,119
Income taxes receivable		(3,266	)		(13,079	)		(1,542	)		(7,776	)
Deferred policy acquisition costs, net		(6,160	)		(8,929	)		(5,587	)		(6,702	)
Right-of-use leased asset, net		(22,192	)		761
Right of use leased asset								1,706			(22,889	)
Other assets		(1,676	)		451			(3,684	)		(4,313	)
Lease incentives								1,622			1,470
Unpaid losses and loss adjustment expenses		(23,195	)		49,464			(36,257	)		(33,362	)
Unearned premiums		35,686			66,407			64,932			55,894
Reinsurance payable		162,812			84,506			183,556			230,865
Accrued interest		(15	)		787			95			(210	)
Accrued compensation		105			6,270			(284	)		(585	)
Advance premiums		15,073			15,114			13,323			18,357
Operating lease liabilities		23,809			—			(1,525	)		23,685
Other liabilities		(13,667	)		(1,263	)		(4,986	)		(14,879	)
Net cash provided by operating activities		70,150			118,561
Net cash (used in) provided by operating activities								(47,535	)		104,402
INVESTING ACTIVITIES
Fixed maturity securities sales, maturities and paydowns		147,406			411,004			43,188			84,902
Purchases in other investments								(7,500	)		0
Fixed maturity securities purchases		(258,548	)		(254,145	)		(58,969	)		(176,381	)
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
Return of capital in other investments								14,077			784
Equity securities reinvestments of dividends								(99	)		0
Leasehold improvements								(3,358	)		(1,470	)
Cost of property and equipment acquired		(892	)		(628	)		(1,385	)		(747	)
Net cash (used in) provided by investing activities		(110,305	)		136,642
Net cash used in investing activities								(14,046	)		(92,912	)
FINANCING ACTIVITIES
Principal payments on term loan facility		(3,750	)		(7,500	)
Proceeds from term loan facility		2,781			0
Repayment of term note								(1,750	)		(1,875	)
Mortgage loan payments		(228	)		(215	)		(160	)		(152	)
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	)		(58	)		(127	)
Dividends paid		(5,029	)		(5,169	)		(3,222	)		(3,349	)
Net cash used in financing activities		(7,402	)		(23,178	)		(6,823	)		(5,503	)
(Decrease) increase in cash, cash equivalents, and restricted cash		(47,557	)		232,025			(68,404	)		5,987
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		$	296,348		$	452,370
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid	$	489		$	16,252		$	5,885		$	489
Interest paid	$	4,214		$	4,794		$	2,273		$	2,721

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.

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
June 30, 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	$	102,663	$	0	$	3,203	$	99,460
States, municipalities and political subdivisions		106,019		359		657		105,721		105,378		4		9,561		95,821
Special revenue		311,752		1,624		1,881		311,495		296,842		22		25,172		271,692
Hybrid securities		99		1		—		100
Industrial and miscellaneous		199,792		1,244		1,542		199,494		184,280		28		15,823		168,485
Total	$	661,396	$	3,512	$	4,089	$	660,819	$	689,163	$	54	$	53,759	$	635,458

(1)

Includes securities at ~~September~~June 30, ~~2021~~2022 with a carrying amount of $~~22.7~~28.3 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, 2021		Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale	(In thousands)
U.S. government and agency securities (1)		$	73,923	$	184	$	282	$	73,825
States, municipalities and political subdivisions			106,727		242		1,270		105,699
Special revenue			291,005		1,084		3,520		288,569
Hybrid securities			99		—		—		99
Industrial and miscellaneous			203,491		636		2,965		201,162
Total		$	675,245	$	2,146	$	8,037	$	669,354

December 31, 2020

Cost or Adjusted /
Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

Debt Securities Available-for-sale
(In thousands)

U.S. government and agency securities (1)

$
29,985

$
609

$
1

$
30,593

States, municipalities and political subdivisions

84,597

1,077

4

85,670

Special revenue

271,194

3,154

27

274,321

Hybrid securities

100

—

—

100

Industrial and miscellaneous

167,296

3,070

39

170,327

Total

$
553,172

$
7,910

$
71

$
561,011

(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 for the three and six months ended June 30, 2022 and 2021 were $5.9 million and $9.0 million and $15.1 million and $29.5 million, respectively.

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

2021

2020

Three 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

$
2

$
3,470

$
20,355

$
290,643

Total realized losses

(8
)

226

—

—

Net realized (losses) gains

$
(6
)

$
3,696

$
20,355

$
290,643


	2022					2021
Three Months Ended June 30,	Gains (Losses)			Fair Value at Sale		Gains (Losses)		Fair Value at Sale
	(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	28		$	1,291	$	22	$	12,464
Total realized losses		(130	)		4,546		0		175
Net realized (losses) and gains	$	(102	)	$	5,837	$	22	$	12,639


	2022					2021
Six Months Ended June 30,	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	32		$	2,336	$	105		$	22,895
Total realized losses		(150	)		6,096		(3	)		817
Net realized (losses) and gains	$	(118	)	$	8,432	$	102		$	23,712

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~~June 30, ~~2021~~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 June 30, 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	%	$	53,698		8	%	$	53,190		8	%
Due after one year through five years		253,398		38	%		254,377		38	%		336,935		49	%		316,690		50	%
Due after five years through ten years		220,450		33	%		218,373		33	%		222,938		32	%		195,700		31	%
Due after ten years		143,101		22	%		143,441		22	%		75,592		11	%		69,878		11	%
Total	$	661,396		100	%	$	660,819		100	%	$	689,163		100	%	$	635,458		100	%

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
	(In thousands)				(In thousands)				(In thousands)				(In thousands)
Debt securities	$	1,986	$	2,170	$	5,164	$	8,567	$	2,428	$	1,760	$	4,703	$	3,178
Equity securities		—		—		—		—		—		—		—		—
Cash and cash equivalents		17		651		72		1,610		144		27		160		54
Other investments		514		221		1,101		486		82		216		312		588
Net investment income		2,517		3,042		6,337		10,663		2,654		2,003		5,175		3,820
Less: Investment expenses		969		225		2,540		880		491		1,047		1,012		1,571
Net investment income, less investment expenses	$	1,548	$	2,817	$	3,797	$	9,783	$	2,163	$	956	$	4,163	$	2,249

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~~June 30, ~~2021~~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
June 30, 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		—	$	—	$	—		93	$	3,203	$	99,221		—	$	—	$	—
States, municipalities and political subdivisions		75		657		66,885		—		—		—		114		8,972		84,638		8		589		5,202
Special revenue		188		1,877		150,757		11		4		101		468		21,921		209,925		42		3,251		24,998
Industrial and miscellaneous		133		1,542		99,327		—		—		—		231		9,684		128,596		59		6,139		37,668
Total fixed maturity securities		406	$	4,085	$	331,410		11	$	4	$	101		906	$	43,779	$	522,380		109	$	9,980	$	67,868


	Less Than Twelve Months						Twelve Months or More
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		43	$	282	$	57,420		—	$	—	$	—
States, municipalities and political subdivisions		98		1,270		80,972		—		—		—
Special revenue		253		3,485		195,450		14		35		1,214
Industrial and miscellaneous		191		2,387		146,746		18		578		11,598
Total fixed maturity securities		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 and six months ending June 30, 2022, management concluded that the decline in the fair value was not ~~intend~~a result of 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 June 30, 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.~~

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~~June 30, ~~2021~~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 June 30, 2022				As of December 31, 2021
	Carrying Value		Maximum Loss Exposure		Carrying Value		Maximum Loss Exposure
	(in thousands)
Investments in non-consolidated VIEs - Equity Method	$	3,785	$	3,785	$	3,852	$	3,852
Investments in non-consolidated VIEs - Amortized Cost	$	8,490	$	8,490	$	15,000	$	15,000
Investments in non-consolidated VIEs - Measure Alternative	$	5,077	$	5,077	$	5,077	$	5,077
Total non-consolidated VIEs	$	17,352	$	17,352	$	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~~June 30, ~~2021~~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)
June 30, 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	$	99,460	$	0	$	99,460	$	0
States, municipalities and political subdivisions		105,721		0		105,721		0		95,821		0		95,821		0
Special revenue		311,495		0		311,495		0		271,692		0		271,692		0
Hybrid securities		100		0		100		0
Industrial and miscellaneous		199,494		0		199,494		0		168,485		0		168,485		0
Total investments	$	660,819	$	366	$	660,453	$	0	$	635,458	$	0	$	635,458	$	0


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		—		288,569		0
Hybrid securities		100		0		100		0		99		—		99		0
Industrial and miscellaneous		170,327		0		170,327		0		201,162		—		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 were~~ 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 $061 ~~non-recurring fair value adjustments to intangible assets and goodwill during~~million. In addition, in the ~~third quarters~~second quarter of 2021, ~~and 2020. The~~the Company ~~records any measurement period adjustments to~~recognized an impairment in other investments of approximately $1.0 million based on the estimated fair value of ~~assets acquired~~the Company's ownership interest. During the second quarter of 2022, Management concluded that it had a full impairment of its goodwill and ~~liabilities assumed, with~~that its carrying value of $92.0 million should be written off based on the ~~corresponding offset~~following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to ~~goodwill.~~recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) our market cap was below book value.

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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, 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 June 30,
	2022									2021
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
	(in thousands)
Other comprehensive loss
Change in unrealized losses on investments, net	$	(16,161	)	$	3,783		$	(12,378	)	$	3,625		$	(840	)	$	2,785
Reclassification adjustment of realized losses (gains) included in net loss		102			(24	)		78			(22	)		5			(17	)
Effect on other comprehensive loss	$	(16,059	)	$	3,759		$	(12,300	)	$	3,603		$	(835	)	$	2,768

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
)


	For the Six Months Ended June 30,
	2022									2021
	Pre-tax			Tax			After-tax			Pre-tax			Tax		After-tax
	(in thousands)
Other comprehensive loss
Change in unrealized losses on investments, net	$	(47,932	)	$	11,220		$	(36,712	)	$	(6,972	)	$	1,616	$	(5,356	)
Reclassification adjustment of realized losses (gains) included in net loss		118			(27	)		91			(102	)		24		(78	)
Effect on other comprehensive loss	$	(47,814	)	$	11,193		$	(36,621	)	$	(7,074	)	$	1,640	$	(5,434	)

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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 were as follows (in thousands):


	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020		Three Months Ended June 30, 2022		Three Months Ended June 30, 2021
Amortization of ROU assets - Finance leases	$	647	$	21	$	646	$	637
Interest on lease liabilities - Finance leases		263		5		246		252
Variable lease cost (cost excluded from lease payments)		112		128		185		140
Operating lease cost (cost resulting from lease payments)		339		340		352		339
Total lease cost	$	1,361	$	494	$	1,429	$	1,368

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


	Six Months Ended June 30, 2022		Six Months Ended June 30, 2021
Amortization of ROU assets - Finance leases	$	1,292	$	674
Interest on lease liabilities - Finance leases		495		261
Variable lease cost (cost excluded from lease payments)		426		261
Operating lease cost (cost resulting from lease payments)		705		679
Total lease cost	$	2,919	$	1,875

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

Finance lease - Operating cash flows

$
31

$
16

Finance lease - Financing cash flows

$
100

$
55

Operating lease - Operating cash flows (fixed payments)

$
1,123

$
1,080

Operating lease - Operating cash flows (liability reduction)

$
840

$
761


	At June 30, 2022		At June 30, 2021
Finance lease - Operating cash flows	$	493	$	18
Finance lease - Financing cash flows	$	1,022	$	61

Operating lease - Operating cash flows (fixed payments)	$	792	$	746
Operating lease - Operating cash flows (liability reduction)	$	625	$	554

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

Balance Sheet
Classification

September 30, 2021

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

Lease liability - operating

Lease liability

$
6,844

Lease liability - finance

Lease liability

$
25,120


	Balance Sheet Classification	June 30, 2022		December 31, 2021
Right-of-use assets - operating	Right-of-use lease asset, net	$	4,654	$	5,035
Right-of-use assets - finance	Right-of-use lease asset, net	$	21,393	$	22,718
Lease liability - operating	Lease liability	$	6,084	$	6,551
Lease liability - finance	Lease liability	$	23,563	$	24,621

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~~	%


	June 30, 2022			June 30, 2021
Weighted average lease term - Finance leases	8.63 yrs.			9.62 yrs.
Weighted average lease term - Operating leases	5.86 yrs.			6.60 yrs.
Weighted average discount rate - Finance leases		4.2	%		4.2	%
Weighted average discount rate - Operating leases		5.4	%		5.3	%

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


	September 30, 2021			June 30, 2022
2021 remaining	$	1,142
2022		4,566
2022 remaining				$	2,298
2023		4,500			4,545
2024		4,194			4,238
2025		3,970			3,970
2026					3,990
Thereafter		20,213			16,224
Total lease payments		38,585			35,265
Less: imputed interest		(6,621	)		(5,618	)
Present value of lease liabilities	$	31,964		$	29,647

NOTE 6. PROPERTY AND EQUIPMENT, NET

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


	September 30, 2021			December 31, 2020			June 30, 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			8,578			7,204
Office furniture and equipment		2,038			2,027			1,366			1,355
Tenant and leasehold improvements		8,225			8,133			9,990			8,255
Vehicle fleet		720			850			720			720
Total, at cost		30,853			30,091			33,377			30,257
Less: accumulated depreciation and amortization		(12,903	)		(11,406	)		(13,755	)		(12,831	)
Property and equipment, net	$	17,950		$	18,685		$	19,622		$	17,426

Depreciation and amortization expense for property and equipment was approximately $~~736,000~~466,000 and $~~442,000~~432,000 for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively and $~~1.6~~925,000 ~~million~~ and $~~1.3~~864,000 ~~million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, 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~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, goodwill was $~~152.5~~0 and $92.0 million and intangible assets were $~~57.5~~52.8 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		Goodwill
	(in thousands)		(in thousands)
Balance as of December 31, 2020	$	152,459
Balance as of December 31, 2021			$	91,959
Goodwill acquired	0		0
Impairment	0			(91,959	)
Balance as of September 30, 2021	$	152,459
Balance as of June 30, 2022			$	0

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. Management has concluded a triggering event has occurred for which it deemed an interim evaluation of goodwill is appropriate. During the second quarter of 2022, Management concluded the remaining balance of its goodwill is fully impaired and that its carrying value of $92.0 million be written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) our market cap was below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $92.0 million goodwill impairment charge, most of which is not tax deductible.

Other Intangible Assets

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 ~~the respective~~ three ~~month periods~~months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was $1.6 million and for the ~~respective nine month periods~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was $~~4.8~~3.2 million. NaN impairment in the value of amortizing or non-amortizing intangible assets was recognized during the ~~nine~~three and six months ended ~~September~~June 30, ~~2021~~2022 or ~~2020.~~

2021.

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			$	3,176
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	$	51,436

NOTE 8. ~~EARNINGS~~LOSS PER SHARE

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Basic loss per share:
Net loss attributable to common stockholders (000's)	$	(87,866	)	$	(3,950	)	$	(118,625	)	$	(9,097	)
Weighted average shares outstanding		26,453,456			27,904,923			26,620,418			27,866,364
Basic loss per share:	$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)

Diluted loss per share:
Net loss attributable to common stockholders (000's)	$	(87,866	)	$	(3,950	)	$	(118,625	)	$	(9,097	)
Weighted average shares outstanding		26,453,456			27,904,923			26,620,418			27,866,364
Total weighted average dilutive shares		26,453,456			27,904,923			26,620,418			27,866,364
Diluted loss per share:	$	(3.32	)	$	(0.14	)	$	(4.46	)	$	(0.33	)

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

The Company had ~~Due to the net loss~~2,370,531 and 2,452,412 antidilutive shares for the ~~three~~six-month period ended June 30, 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~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company allocated ceding commission income of $~~12.0~~11.5 million and $~~10.6~~11.9 million to policy acquisition costs and $~~4.0~~3.9 million and $~~3.5~~3.9 million to general and administrative expense, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company allocated ceding commission income of $~~35.2~~23.2 million and $~~32.3~~23.2 million to policy acquisition costs and $~~11.6~~7.7 million and $~~10.6~~7.6 million to general and administrative ~~expenses,~~expense, respectively.

The table below depicts the activity regarding deferred reinsurance ceding commission, included in accounts payable and other liabilities during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

(In thousands)

Beginning balance of deferred ceding commission income

$
39,940

$
34,562

$
39,995

$
37,464

Ceding commission deferred

17,659

17,294

48,447

43,213

Less: ceding commission earned

(15,978
)

(14,129
)

(46,821
)

(42,950
)
Ending balance of deferred ceding commission income (1)

$
41,621

$
37,727

$
41,621

$
37,727

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	(In thousands)
Beginning balance of deferred reinsurance ceding commission income	$	37,245		$	37,991		$	40,405		$	39,995
Ceding commission deferred		16,610			17,759			29,064			30,788
Less: ceding commission earned		(15,326	)		(15,810	)		(30,940	)		(30,843	)
Ending balance of deferred reinsurance ceding commission income	$	38,529		$	39,940		$	38,529		$	39,940

NOTE 10. DEFERRED POLICY ACQUISITION COSTS

The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
	(In thousands)												(In thousands)
Beginning Balance	$	95,967		$	81,590		$	89,265		$	77,211		$	90,641		$	88,876		$	93,881		$	89,265
Policy acquisition costs deferred		47,976			42,096			144,380			128,400			49,842			49,729			99,834			96,404
Amortization		(48,518	)		(37,546	)		(138,220	)		(119,471	)		(41,015	)		(42,638	)		(94,247	)		(89,702	)
Ending Balance	$	95,425		$	86,140		$	95,425		$	86,140		$	99,468		$	95,967		$	99,468		$	95,967

NOTE 11. INCOME TAXES

For the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded a tax provision of $563,000 and an income tax ~~benefits of $(~~benefit ($~~1.1) million and $(1.5~~2.0) million, respectively, which corresponds to effective tax rates of (~~6.4~~0.6)% and ~~22.3~~33.2%, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded an income tax benefit of $($~~5.6~~10.1) million and ~~an income tax expense of~~ $~~2.8~~4.5 million, respectively, which corresponds to effective tax rates of ~~18.1~~7.8% and ~~29.9~~33.2%, respectively. The effective tax rate for the three and six months ended June 30, 2022 was impacted by the mostly non-deductible goodwill impairment charge described in Note 7. Goodwill and Other Intangible Assets. 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:~~asset (liability):



	September 30, 2021			December 31, 2020			June 30, 2022		December 31, 2021
Deferred tax assets:	(In thousands)						(In thousands)
Unearned premiums	$	13,101		$	15,303		$	9,184	$	15,805
Unearned commission		9,649			9,272			9,019		9,459
Net operating loss		1,880			1,885			1,486		1,222
Tax-related discount on loss reserve		3,809			3,322			4,216		3,872
Stock-based compensation		225			113			224		84
Accrued expenses		1,456			982			1,251		1,182
Leases		738			394			822		792
Unrealized losses		373			0			13,106		1,913
Federal net operating loss carryforward								10,661		0
Other		719			343			450		472
Total deferred tax asset		31,950			31,614			50,419		34,801
Deferred tax liabilities:
Deferred acquisition costs		22,122			20,694			23,284		21,977
Prepaid expenses		184			236			144		177
Unrealized gains		—			1,814
Property and equipment		1,398			1,669			1,313		1,504
Note discount		203			326			85		187
Basis in purchased investments		37			53			32		34
Basis in purchased intangibles		14,652			15,693			11,811		14,550
Internal revenue code 481(a)-Accounting method change		5,361			8,577			2,208		4,416
Other		1,658			1,029			1,780		1,382
Total deferred tax liabilities		45,615			50,091			40,657		44,227
Net deferred tax liability	$	(13,665	)	$	(18,477	)
Net deferred tax asset (liability)							$	9,762	$	(9,426	)

As of June 30, 2022, the Company has a gross operating loss carryforward for federal and state income tax purposes of $45.5 million, which will expire after 2042. 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,~~2021.

Osprey Re, our reinsurance affiliate, based in Bermuda, made an irrevocable election under section 953(d) of the ~~Company was notified by the tax authority that the federal~~U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax ~~returns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received~~purposes. As a ~~notice from the~~result of this election, our reinsurance subsidiary is subject to United States income tax ~~authority for the examined tax years, reporting that the returns~~as if it were ~~accepted as final. No further action will be required, and no other tax years are under examination.~~

a U.S. corporation.

At ~~September~~June 30, ~~2021~~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~~2021 and ~~2021,~~2022, 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”). Additionally, for the 2022 hurricane season, the Company purchased a portion of our catastrophe excess of loss reinsurance program from Citrus Re Ltd. (“Citrus Re), a Bermuda special purpose insurer formed in 2014, through the 2022-1 notes, which cover catastrophe losses incurred for specific states. 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 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~~

2022-2023 Reinsurance Program

Catastrophe Excess of Loss Reinsurance

Effective June 1, ~~2021,~~2022, 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”), Citrus Re Ltd., 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~~ for the ~~2021~~2022 hurricane ~~season,~~season. Osprey Re will provide reinsurance ~~only~~ for a portion of the Heritage P&C, ~~program, covering the southeastern region.~~NBIC and Zephyr programs. 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.

Osprey Re is fully collateralized.

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~~2022-2023 reinsurance program provides first event coverage up to $~~1.43~~1.3 billion for Heritage P&C, first event coverage up to $~~1.1~~1.2 billion for NBIC, and first event coverage up to $~~680.0~~780.0 million for Zephyr. The Company’s first event retention in a 1 in ~~100 year~~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~~100-year event for each insurance company subsidiary is as follows: Heritage P&C – $~~32.0~~40.0 million, of which $35.0 million would be~~100~~% ceded to Osprey; NBIC – $30.0 million of which $30 million would be ceded to Osprey in a shared contract with Zephyr; and Zephyr – $3240 ~~million; and NBIC –~~million, of which $~~20.7~~30 ~~million.~~million would be ceded to Osprey in a shared contract with NBIC.

~~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~~3.2 billion of limit purchased in ~~2021~~2022 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~~2022-2023 catastrophe excess of loss reinsurance programs is approximately $~~312.0~~359.5 million. This cost estimate is based on projected exposures for which there is a true up as of August 31, 2022.

Additionally, the Company placed an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2021, expiring December 31, 2022. The limit on the contract is $20.0 million with a retention of $20.0 million and has 1 reinstatement available.

The Company placed an aggregate contract for the Company’s business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 1, 2021, expiring March 31, 2022. The limit on the contract is $20.0 million with an aggregate retention of $21.0 million, with a $21.0 million per occurrence cap, and a $1.0 million franchise deductible.

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~~2021 ceding ~~56.5~~50.0% of the net premiums and losses and 35% 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 also 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 Programplease 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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021:


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021				2020			2022			2021			2022			2021
	(In thousands)						(In thousands)							(In thousands)						(In thousands)
Premium written:
Direct	$	274,178		$	278,242		$	886,059			$	797,776		$	365,284		$	337,700		$	648,480		$	611,881
Ceded		(53,505	)		(63,493	)		(491,677	)			(422,092	)		(428,124	)		(383,555	)		(475,254	)		(438,172	)
Net	$	220,673		$	214,749		$	394,382			$	375,684		$	(62,839	)	$	(45,855	)	$	173,226		$	173,709
Premiums earned:
Direct	$	294,409		$	254,982		$	850,466			$	731,489		$	296,211		$	285,646		$	583,579		$	556,057
Ceded		(131,964	)		(116,752	)		(399,323	)			(338,197	)		(137,940	)		(139,147	)		(272,379	)		(267,359	)
Net	$	162,445		$	138,230		$	451,143			$	393,292		$	158,271		$	146,499		$	311,200		$	288,698
Loss and Loss Adjustment Expenses
Direct	$	195,099		$	205,337		$	483,382			$	452,014		$	137,582		$	162,788		$	337,250		$	288,282
Ceded		(65,467	)		(85,619	)		(155,006	)	��		(185,245	)		(36,060	)		(61,954	)		(95,689	)		(89,539	)
Net	$	129,632		$	119,718		$	328,376			$	266,769		$	101,522		$	100,834		$	241,560		$	198,743

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,						Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020			2021			2020			2022		2021			2022		2021
	(In thousands)												(In thousands)
Balance, beginning of period	$	625,979		$	620,718		$	659,341		$	613,533		$	588,420	$	637,882		$	590,166	$	659,341
Less: reinsurance recoverable on unpaid losses		366,879			404,370			397,688			393,630			276,737		366,412			301,757		397,688
Net balance, beginning of period		259,100			216,348			261,653			219,903			311,683		271,470			288,409		261,653
Incurred related to:
Current year		130,425			125,544			331,374			281,698			101,441		101,445			239,065		200,949
Prior years		(793	)		(5,826	)		(2,998	)		(14,929	)		81		(611	)		2,495		(2,206	)
Total incurred		129,632			119,718			328,376			266,769			101,522		100,834			241,560		198,743
Paid related to:
Current year		75,508			71,955			171,128			148,563			59,713		69,795			99,341		95,621
Prior years		27,273			18,371			132,950			92,369			34,822		43,409			111,958		105,675
Total paid		102,781			90,326			304,078			240,932			94,535		113,204			211,299		201,296
Net balance, end of period		285,951			245,740			285,951			245,740			318,670		259,100			318,670		259,100
Plus: reinsurance recoverable on unpaid losses		350,195			417,257			350,195			417,257			235,239		366,879			235,239		366,879
Balance, end of period	$	636,146		$	662,997		$	636,146		$	662,997		$	553,909	$	625,979		$	553,909	$	625,979

As of ~~September~~June 30, ~~2021,~~2022, the Company reported $~~286.0~~318.7 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $~~213.5~~236.3 million attributable to IBNR net of reinsurance recoverable, or ~~74.7~~74.1% 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~~June 30, ~~2021,~~2022, the Company had $~~22.7~~11.8 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately $~~716,900~~25,700. 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~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company made interest payments, net of affiliated Convertible Notes of approximately $~~1.3~~680,150 ~~million~~and $687,500, 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 represents 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 June 30, 2022, there was $67.4 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~~six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, the Company made principal and interest payments of approximately $~~1.5~~1.8 million and $~~2.1~~783,400, respectively and for the comparable period of 2021, the Company made principal and interest payments of $1.9 million $1.0 million, respectively on the ~~term loan, respectively.~~Term Loan Facility.

On May 4, 2022, the Company and its subsidiary guarantors amended the Credit Agreement dated as of December 14, 2018 (as amended to 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, which is gross of accumulated other comprehensive income, 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.

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 June 30, 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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company made interest payments of $~~196,500~~100,406, and $~~451,500~~168,369 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~~June 30 ~~2021,~~2022, the effective interest rate on for the Term Loan Facility and ~~for the~~ Revolving Credit Facility was ~~2.87~~3.526%. and 4.0625

~~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~~ toward the loan. For each of the respective ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company made principal and interest payments of approximately $~~670,000~~446,425 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~~June 30, ~~2021,~~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~~the six-month periods ended June 30, ~~2021,~~2022, and ~~2020,~~2021, the Company made quarterly interest payments as per the terms of the loan agreement of approximately $~~450,500~~300,320 ~~and $457,100, respectively.~~. As of ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston valued at $~~215,900~~319,100 and $~~222,900~~215,900, respectively.

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


	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
	(in thousands)				(in thousands)
Convertible debt	$	23,413	$	23,413	$	11,779	$	23,413
Mortgage loan		11,599		11,827		11,361		11,521
Term loan facility		70,000		60,000
Credit loan facility						67,375		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	$	124,715	$	123,259
Less: unamortized discount and issuance costs	$	2,731	$	3,442
Deferred finance costs					$	1,725	$	2,502
Total long-term debt	$	121,481	$	120,998	$	122,990	$	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~~June 30, ~~2021~~2022 is as follows:


Year	Amount		Amount
	(In thousands)		(In thousands)
2021 remaining	$	953
2022		3,822
2022 remaining			$	1,912
2023		23,039		23,039
2024		4,292		4,292
2025		5,624		5,624
2026				68,331
Thereafter		86,482		21,517
Total	$	124,212	$	124,715

NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

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


Description	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
	(In thousands)				(In thousands)
Deferred ceding commission	$	41,621	$	39,995
Outstanding claim checks		0		10,864
Deferred reinsurance ceding commission					$	38,529	$	40,406
Accounts payable and other payables		6,951		9,248		8,616		10,086
Accrued interest and issuance costs		592		833		831		735
Accrued dividends		1,680		1,670		1,626		1,634
Premium tax						—		871
Other liabilities		257		80		110		195
Premium tax		1,531		0
Commission payables		14,404		18,245		16,909		17,598
Total other liabilities	$	67,036	$	80,935	$	66,621	$	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”),~~&C, 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~~296.8 million at ~~September~~June 30, ~~2021~~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~~June 30, ~~2021,~~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~~June 30, ~~2021~~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~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company paid agency commission to Comegys of approximately $~~53,900~~18,206 and $~~46,300~~249,250, respectively. For the six months ended June 30, 2022 and 2021, the Company paid agency commission to Comegys of approximately $476,924 and $~~595,700~~ ~~and $592,400~~559,050, 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 and six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, the contributions made to the plan on behalf of the participating employees were approximately $~~293,000~~334,800 and $~~265,000~~731,400, respectively. For the three and ~~for the nine~~six months ended ~~September~~June 30, 2021, ~~and 2020,~~the contributions made to the plan on behalf of the participating employees were approximately $~~985,000~~365,100 and $~~897,000~~687,300, 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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company incurred medical premium costs including the new 2021-2022 healthcare premiums, of $~~1.6~~2.4 million and $~~941,000, respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred medical premium costs of $2.6~~ ~~million and $3.0~~1.0 million, respectively. ~~An additional liability from~~As of June 30, 2022 and 2021, the ~~Company's self-insured healthcare plan was accrued for approximately~~Company had $~~442,000~~122,000 and $~~1.4~~679,200 ~~million~~of unapplied insurance premiums and additional liability recorded 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~~June 30, ~~2021,~~2022, the Company had ~~27,802,626~~26,544,096 shares of common stock outstanding, ~~9,427,948~~11,257,855 treasury shares of common stock and ~~240,835~~727,876 unvested restricted common stock with accrued dividends reflecting total paid-in capital of $~~332.6~~333.7 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 31, 2020,~~For the six months ended June 30, 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~~June 30, ~~2021,~~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.

On May 5, 2022, the Company announced that its Board of Directors declared a $0.06 per share quarterly dividend payable on July 5, 2022 to stockholders of record as of June 14, 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~~June 30, ~~2021~~2022 there were ~~939,691~~374,181 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.

Effective January 1, 2022, the 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 is entitled to an annual cash fee of $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 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 stock with a 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.

During the 2022 first quarter, ~~ended March 31, 2021,~~ the Company ~~issued to its Chief Executive Officer~~awarded ~~95,878~~3,636 ~~performance-based~~and 115,327 shares of time-based restricted ~~shares~~stock with ~~a market value~~ at the time of grant a fair value of $~~10.43~~5.50 and $6.72 per ~~share.~~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 stock with at the time grant a fair value of $5.50 and $6.72 per share, respectively. The performance-based restricted ~~shares have~~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.~~2025.

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 $5.88 per share. The ~~number~~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. The Company's annual shareholders meeting was held on June 23, 2022, at which time the restricted stock was effectively vested.

In June 2022, the Company awarded to non-employee directors in aggregate 99,376 shares of restricted stock with a fair value at the time of grant of $3.22 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.

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~~six months ended ~~September~~June 30, ~~2021~~2022 is as follows:

Number of shares

Weighted-Average Grant-Date Fair Value per Share

Non-vested, at December 31, 2020

100,267

$
15.37

Granted - Performance-based restricted stock

123,890

10.49

Granted - Time-based restricted stock

61,945

10.49

Vested

(26,294
)

12.07

Canceled and surrendered

(18,973
)

13.04

Non-vested, at September 30, 2021

240,835

$
12.15


				Weighted-Average
				Grant-Date Fair
	Number of shares			Value per Share
Non-vested, at December 31, 2021		283,092		$	9.32
Granted - Performance-based restricted stock		256,445			6.67
Granted - Time-based restricted stock		240,107			5.18
Vested		(41,919	)		4.81
Canceled and surrendered		(9,849	)		5.88
Non-vested, at June 30, 2022		727,876		$	7.33

Awards are being amortized to expense over the ~~one~~two to five-year vesting period. For the three months ended June 30, 2022 and 2021, the Company recognized $505,000 and $260,000 of compensation expense, respectively. The Company recognized $~~320,000~~1.0 million and $1.4 million of compensation expense for the ~~three~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020, the Company recognized compensation expense of $~~2022, ~~867,000~~ ~~and $4.1~~ ~~million, respectively. For the nine months ended September 30, 2021,~~ ~~40,267~~51,768 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~~58,000. For the comparable period of ~~2020,~~2021, ~~35,267~~30,000 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~~June 30, ~~2021,~~2022, there was approximately $~~1.0~~1.6 million unrecognized expense related to time-based non-vested restricted stock and an additional $~~1.1~~1.5 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~~2.1 million of unrecognized expense.

Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at ~~September~~June 30, ~~2021~~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
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
March 3, 2022								14,545		5.50		2.88
March 16, 2022								360,863		6.72		2.88
June 23, 2022								99,376		3.22		1.00
		240,835						727,876

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~~June 30, ~~2021.~~2022.

Holders of the 5.875% Convertible Senior Notes due 2037 (the “Notes”) issued by the Company had an optional put right, pursuant to the indenture governing the Notes, to require the Company to repurchase the aggregate principal amount of Notes that are validly tendered. The Company has received notice from the Depositary for the Notes that, on July 29, 2022, $10,895,000 aggregate principal amount of the Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Notes, and the Company has requested that the trustee cancel the Notes tendered. The outstanding balance as of June 30, 2022 of non-affiliated Notes was $11.8 million. On August 1, 2022, the Company made payments for the principal amount of the Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million from its revolver to replenish the cash used to pay the $10.9 million for the purchase of the tendered Notes.

The Company expects to use its revolving credit facility to issue a standby letter of credit in the amount of $31.8 million to serve as collateral for a reinsurance agreement Osprey Re will enter into with our insurance company affiliates.

On ~~November 4, 2021~~,August 3, 2022, the ~~Company announced that its~~ Board of Directors ~~declared a~~decided for the second quarter of 2022 to allocate the $0.06 per share typically used to pay a quarterly dividend ~~payable~~to shareholders to repurchase common stock. The Board of Directors will re-evaluate dividend distribution on ~~January 6, 2022~~a quarterly basis and will make a determination, in part, based on the current stock trading price as compared to ~~stockholders of record as of~~ ~~December 15, 2021~~.book value.

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.

~~Heritage Insurance Holdings, Inc., is~~We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across ~~its~~our multi-state footprint. We provide personal residential insurance in ~~sixteen states~~Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, North Carolina, Rhode Island, South Carolina, New Jersey, New York, North Carolina, and Virginia and commercial residential insurance in ~~three of those states, while maintaining licenses in one additional state.~~Florida, New Jersey, and New York. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, ~~customer service, actuarial analysis, distribution and~~ claims processing and ~~adjusting.~~adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to ~~the Company~~us in establishing our competitive position and can impact our ability to write policies.

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates, resulting in an increase in the average premium per policy of 11.5% for the quarter ended June 30, 2022 as compared to the prior year quarter. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it takes an average of eighteen months for the impact of a rate change to be fully recognized in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our retention has remained steadily in the range of 90% despite the rate increases we have implemented, in large part due to a challenging property insurance market in most of the regions in which we operate. Weather losses and a higher cost of reinsurance have impacted these markets. While we believe our rates are generally competitive with private market insurers operating in our space, we are committed to achieving rate adequacy to address a higher cost of doing business in our markets.

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Some of our ~~financial condition~~markets are also seeing claim costs impacted by litigated claims, which substantially increases loss costs. Our response to this phenomenon is a combination of raising rates and reducing exposure, particularly in the geographic regions which generate the highest number of litigated claims. We initiated an exposure reduction plan for the tri-county area of Florida in 2016 due to claims abuse from water damage claims. We have since experienced a claims surge throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeded levels experienced in other states. Our exposure reduction plan then expanded to the entire state of Florida. Our policy count and total insured value (“TIV”) in Florida declined by 22.2% and 13.5%%, respectively, since December 31, 2020. While we see improvement in the geographic distribution of our business, which is becoming more rate adequate, our Florida loss costs have continued to increase from a combination of adverse weather and exacerbation of losses on weather and other claims from the litigated claims environment. Recent legislative changes have been made in Florida which we believe have helped to make some progress toward reducing losses from abusive claim reporting practices.

The following table, which provides policy count, in-force premium, and TIV, demonstrates the results of ~~operations that follows provides information that will assist~~our exposure management as relates to Florida. Florida premiums-in-force declined 5.7% as of June 30, 2022 as compared to the ~~reader~~prior year quarter despite much larger reductions of our policies-in-force and TIV, primarily due to rate increases. For states outside of Florida, the premiums-in-force increased at a much larger rate than the increases in ~~understanding our consolidated financial statements, the changes~~policies in ~~certain key items in those financial statements from year~~force and TIV, primarily due 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.rate increases.

We continue to monitor the short- and long-term impacts of the COVID-19 virus and its variants. For the ~~year~~six months ended ~~December 31, 2020,~~June 30, 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~~Most 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 resultant from COVID-19 related supply shortages can influence our ~~losses~~loss costs associated with claims. ~~To the extent state and local requirements allow employees~~

While we acknowledge uncertainties associated with future economic conditions, we do not expect a material impact to ~~return~~our business going forward relating to COVID-19 other than supply chain related issues which may cause inflation to the ~~office,~~cost of building material. We will continue to monitor economic conditions and, in the ~~Company has implemented return-to-office and hybrid programs, with the latter including~~case of a ~~combination~~prolonged economic slowdown as a result of ~~in-office and remote work.~~COVID-19, will take necessary actions to mitigate any negative impacts to our business, operations or financial results.

~~Climate change, to the extent it produces extreme~~We evaluate goodwill and other intangible assets for impairment annually, or whenever events or changes in ~~temperatures and changes in weather patterns, could affect~~circumstances indicate that it is likely that 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 totalcarrying amount of ~~insured exposure~~goodwill and other intangible assets may exceed the implied fair value. Any impairment is charged to operations in the ~~area affected~~period that the impairment is identified. The evaluation of goodwill impairment requires considerable management judgment and ~~the severity~~includes a review of ~~the event. Although we attempt to manage our exposure to catastrophes through our underwriting process and the purchase~~a variety of ~~reinsurance protection, an especially severe catastrophe or series of catastrophes~~factors as described below. Any adverse change in these factors could ~~exceed our reinsurance protection and may~~ have a ~~material adverse~~significant impact on ~~our results~~the recoverability of ~~operations~~goodwill and ~~financial condition. Further, an increased incidence of catastrophic weather events~~ could ~~impact the cost and availability of our reinsurance program.~~

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 that we are deferring to future periods. We do not currently expect the CARES Act to have a material impact on our ~~liquidity or~~financial results. During the second quarter of 2022, we concluded it was appropriate to perform an interim evaluation of goodwill for potential impairment given a variety of market factors as described below. As a result of the analysis, we impaired the entire amount of remaining goodwill, which reduced our carrying value of goodwill from $92.0 million to $0 based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) trading of our stock below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $92.0 million non-cash goodwill impairment charge, most of which is not tax deductible.

The discussion of our financial condition and results ~~except~~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, including certain key performance indicators such as net combined ratio, net expense ratio and net loss ratio, and the primary factors that accounted for ~~the benefit associated with a 5-year carryback of~~those changes, as well as how certain accounting principles, policies and estimates affect our ~~2020 tax net operating loss. We will continue to monitor and assess the impact the CARES Act and similar legislation may have on our business and~~consolidated financial ~~results.~~

statements. This discussion should be read in conjunction with our consolidated financial statements and the ~~Third quarter of 2021~~

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

~~Gross premiums written were $274.2~~Total revenue was $163.8 million in the third quarter of 2021, down 1.5% from $278.2 million in the prior year quarter. The decrease reflects 12.4% reduction in Florida gross written premium, partially offset by 8.0% growth in other states. The reduction in Florida gross written premium reflects our plan 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 quarter 2021, relatively flat from~~ second quarter ~~2021 and~~2022, up ~~13.3% year-over-year. Policies-in-force were 581,286, a 2.1% reduction~~9.0% from ~~593,786 policies at second quarter 2021 and a 3.0% increase year-over-year. The reduction in policies in force from the second quarter of 2021 reflects our exposure initiatives.~~

Gross premiums earned were $294.4 million in the third quarter of 2021, up 15.5% from $255.0 million in the prior year quarter. 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 were $132.0 million in third quarter 2021, up 13.0% from $116.8 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.

~~Net premiums earned were $162.4 million in third quarter 2021, up 17.5% from $138.2~~$150.2 million in the prior year quarter. The increase primarily stems from higher net premiums earned and an increase in investment income, as described in detail below.

Gross premiums written were $365.3 million, up 8.2% from $337.7 million the prior year quarter, reflecting a 4.6% growth in Florida and 12.1% growth in other states, primarily from increased rates as well as a small increase in policy count in states outside of Florida. Rate increases continued to meaningfully benefit written premiums throughout the book of business.

Premiums-in-force were $1.2 billion in second quarter 2022, up 3.4% from second quarter 2021, while policies-in-force were down 7.3%, with the difference largely stemming from rate increases. The reduction in policies-in-force from the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned were $296.2 million in second quarter 2022, up 3.7% from $285.6 million in the prior year quarter. The increase reflects higher gross premiums written over the last twelve months, which is primarily related to higher rates on a smaller book of business based on policy count.

Ceded premiums earned were $137.9 million in second quarter 2022, down 0.9% from $139.1 million in the prior year quarter. The decrease is driven by higher ceded premium for the second quarter of 2021 associated with our severe convective storm reinsurance contract, partly offset by higher ceded premium on our net quota share reinsurance program, which is driven by growth in our northeast business, and higher ceded premium on our June 1, 2022 catastrophe excess of loss program driven by higher TIV and higher reinsurance rates due to current market conditions.

Net premiums earned were $158.3 million in second quarter 2022, up 8.0% from $146.5 million in the prior year quarter. The increase primarily stems from growth in gross premiums earned outpacing the increase in ceded premiums earned, as described above.

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was ~~$1.5~~$2.1 million in ~~the third~~second quarter ~~2021,~~2022, compared to ~~$23.2 million~~a net investment loss of $44,000 in the prior year quarter. The ~~decrease~~increase is ~~primarily due to opportunistic sales of~~driven by a realized loss recognized on an investment held outside our managed portfolio in the prior year quarter as well as 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 was $3.4 million in ~~the third~~second quarter ~~of 2021, relatively flat when compared to the prior year quarter.~~

~~Total revenue was $167.4 million in third quarter 2021, up 1.4%~~2022, down by 8.1% from ~~$165.1~~$3.7 million in the prior year ~~quarter. The increase~~quarter, driven primarily ~~stems from higher net premiums earned, partially offset~~ by a decline in policy fee income associated with the reduction of policies in ~~net realized investment gains, as described above.~~force.

Total operating expenses were up $95.1 million, or 61.7% in the second quarter 2022, primarily due to the previously mentioned $92.0 million goodwill impairment charge taken in the quarter.

Losses and loss adjustment expenses (“LAE”) were ~~$129.6~~$101.5 million in ~~third~~second quarter ~~2021,~~2022, slightly up ~~8.3%~~ from ~~$119.7~~$100.8 million in the prior year quarter. ~~The increase stems from higher net~~Net current accident year weather losses ~~lower favorable reserve development~~include $38.1 million, up 7.3% from $35.5 million in the prior year quarter. Current accident year weather losses include $32.1 million of net current accident quarter catastrophe losses, up from $24.5 million in the prior year quarter, and $6.0 million of other weather losses, down from $11.0 million in the prior year quarter. We experienced a ~~larger book of business.~~4.0% decline in attritional losses from the prior year quarter, despite the increase in gross earned premiums.

Policy acquisition costs were ~~$36.0~~$38.4 million in ~~third~~second quarter ~~2021,~~2022, up ~~12.6%~~1.4% from ~~$32.0~~$37.8 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.~~written.

General and administrative expenses were ~~$17.2~~$17.5 million in ~~third~~second quarter ~~2021, down 4.2%~~2022, up 12.5% from ~~$17.9~~$15.5 million in the prior year quarter. The ~~decrease~~increase is primarily attributable to ~~higher ceding commission associated with gross premiums written growth and lower executive compensation.~~a state tax credit of $1.5 million recorded in the prior year quarter.

As a result of our analysis, at June 30, 2022 we impaired the entire amount of remaining goodwill, reducing our carrying value of goodwill from $92.0 million to $0. See the section titled “Goodwill Impairment Charge” above for more detail on our goodwill impairment charge.

Second quarter 2022 net loss was $87.9 million ($3.32 loss per share), down from net loss of $4.0 million ($0.14 loss per share) in the prior year quarter, with the reduction stemming primarily from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge (contributing a $3.43 loss per share), partly offset by underwriting income for the quarter.

Net interest expense was ~~$2.1~~$1.8 million in the ~~third~~second quarter of ~~2021, effectively flat quarter-over-quarter.~~2022, down due to a reduction in debt discount associated with the repurchase of convertible notes in the first quarter of 2022.

~~Benefit~~Provision for income taxes was ~~$1.1 million~~$563,000 in ~~third~~second quarter ~~2021~~2022 compared to ~~$1.5~~a benefit for income taxes of $2.0 million in the prior year quarter. The effective tax rate in second quarter 2022 was ~~6.4% in third quarter 2021, 15.9 points below~~impacted by the ~~prior year quarter’s 22.3% rate.~~mostly non-deductible goodwill impairment charge described above. 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~~year impacts the ~~estimate from the prior quarter impacted the effect of permanent tax differences. The~~ effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

~~Third~~The net combined ratio was 99.4% in second quarter ~~2021 net loss was $16.4 million ($0.59 per diluted share), up~~2022, down 5.8 points from ~~net loss of $5.2 million ($0.19 per diluted share)~~105.2% in the prior year quarter. The ~~year-over-year change primarily~~decrease stems from ~~lower realized capital gains, partly offset by~~improvements in all three of our key operating ratios, resultant from a ~~smaller underwriting loss. Higher losses~~focus on rate adequacy and ~~LAE contributed significantly to the net loss for the quarter,~~effective exposure management, as described above.

The ceded premium ratio was ~~44.8%~~46.6% in ~~third~~second quarter ~~2021,~~2022, down ~~1.0 point~~2.1 points from ~~45.8%~~48.7% in the prior year ~~quarter. The decrease is primarily attributable to higher~~quarter, reflecting the growth in gross premiums earned ~~premium which exceeded~~outpacing the ~~higher cost associated with our reinsurance program.~~growth in ceded premiums earned described above.

The net loss and LAE ratio was ~~79.8%~~64.1% in ~~third~~second quarter ~~2021,~~2022, down ~~6.8~~4.7 points from ~~86.6%~~68.8% in the prior year ~~quarter. Although the dollar amount of~~quarter, driven by relatively flat losses ~~is significantly higher than the prior year quarter, the loss ratio is lower than the prior year quarter due to higher~~and an increase in net premiums earned ~~premium fueled by growth and rate changes~~ as described above.

The net expense ratio was ~~32.7%~~35.3% in ~~third~~second quarter ~~2021,~~2022, down ~~3.4 points~~1.1 point from ~~36.1%~~36.4% in the prior year ~~quarter. The decrease primarily stems from~~quarter, driven by a 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.~~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.Results of Operations

Comparison of the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

Total revenue was $322.4 million for the six months ended June 30, 2022, up 8.4% from $297.4 million in the prior year period. The increase primarily stems from higher net premiums earned and investment income, as described below.

Gross premiums written were ~~$886.1~~$648.5 million for the ~~nine~~six months ended ~~September 30,~~June 30. 2022, up 6.0% from $611.9 million in the prior year period. We experienced growth of 11.8% outside of Florida and 0.7% growth in Florida. Growth throughout our book of business was largely driven by rate increases resulting in a higher average premium per policy as described above.

Premiums-in-force were $1.2 billion at second quarter 2022, up 3.4% from second quarter 2021, while policies-in-force were down 7.3%, with the difference largely stemming from rate increases. The reduction in policies in force from the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned were $583.6 million for the six months ended June 30. 2022, up ~~11.1%~~4.9% from ~~$797.8~~$556.1 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 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 preceding twelve ~~months ended September 30, 2021 compared to premiums written over the twelve months ended September 30, 2020.~~months.

Ceded premiums earned were ~~$399.3~~$272.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, up ~~18.1%~~1.9% from ~~$338.2~~$267.4 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~~driven by an increase in TIV ~~associated with premium growth~~for the respective reinsurance contract periods and higher rate-on-line, as well as higher premium ceded under our net quota share program driven by growth in our northeast business, partly offset by higher premium for the six months ended June 30, 2021 for our severe convective storm reinsurance ~~coverage.~~program.

Net premiums earned were ~~$451.1~~$311.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, up ~~14.7%~~7.8% from ~~$393.3~~$288.7 million in the prior year period. The increase primarily stems from ~~higher~~growth in gross premiums earned ~~partly offset by higher~~outpacing the increase in ceded premiums earned, as described above.

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $4.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, was $2.9 million, down 90.3% from $30.2~~2022, compared to $1.3 million in the prior year period. The ~~decrease~~increase is primarily due to ~~opportunistic sales of~~higher balances in our fixed income ~~securities which~~portfolio than the prior six-month period, coupled with a realized loss recognized on an investment held ~~significant unrealized gains~~outside our managed portfolio in ~~third quarter 2020 and to a lesser extent, lower yields associated with~~ the ~~continued low interest rate environment.~~prior year quarter.

Other revenue was ~~$10.8~~$7.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, relatively flat~~2022, down 3.8% from ~~$10.4~~$7.4 million in the prior year ~~period.~~period, driven primarily by a decline in policy fee income associated with the reduction of policies in force.

Total ~~revenue was $464.8~~operating expenses were $447.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, up ~~7.1%~~45.6% from ~~$433.8~~$307.3 million in the prior year ~~period. The~~period, primarily due to the previously mentioned $92.0 million goodwill impairment charge taken in the quarter, and a $42.8 million increase ~~primarily stems from higher net premiums earned, partially offset by a reduction~~ in ~~net investment income, as described above.~~losses and loss adjustment expenses detailed below.

Losses and ~~loss adjustment expenses (“LAE”)~~LAE were ~~$328.4~~$241.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, up ~~23.1%~~21.5% from ~~$266.8~~$198.7 million in the prior year period. ~~The increase primarily stems from higher net~~Net current accident year weather losses include $101.9 million, up 52.3% from $66.9 million in the prior year period. Current accident year weather losses include $77.2 million of net current accident year catastrophe losses, up from $39.8 million in the prior year period, and $24.7 million of other weather losses, down from $27.1 million in the prior year period. We experienced a ~~larger book of business.~~2.3% increase in attritional losses from the prior year period.

Policy acquisition costs were ~~$109.2~~$76.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, up ~~18.4%~~4.7% from ~~$92.2~~$73.2 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 were ~~$52.5~~$37.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, down 11.9%~~2022, up 5.3% from ~~$59.6~~$35.3 million in the prior year period. The ~~decrease~~increase is primarily attributable to a $1.5 million state tax credit recorded in ~~second quarter 2021 and lower executive compensation expense.~~the prior year period.

As a result of our analysis on June 30, 2022, we impaired the entire amount of remaining goodwill, reducing our carrying value of goodwill from $92.0 million to $0. See the section titled “Goodwill Impairment Charge” above for more detail on our goodwill impairment charge.

Net loss for the six months ended June 30, 2022 was $118.6 million ($4.46 loss per share), compared to a net loss of $9.1 million ($0.33 loss per share) in the prior year period. The year-over-year change primarily stems from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge (contributing a $3.41 loss per share), coupled with an underwriting loss generated for the six-month period driven by higher weather losses over the prior period, as described above.

~~Interest~~Net interest expense was ~~$6.0~~$3.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, relatively flat~~2022, slightly down from ~~$5.9~~the prior year period.

Benefit for income taxes was $10.1 million for the six months ended June 30, 2022 compared to $4.5 million in the prior year period.

~~(Benefit) provision for income taxes~~ The effective tax rate was ~~$(5.6) million and $2.8 million~~7.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020, respectively.~~2022 compared to 33.2% for the prior year period. The effective tax rate for the ~~current year period~~six months ended June 30, 2022 was ~~18.1%, 11.8 points lower than~~impacted by the ~~prior year’s 29.9%.~~mostly non-deductible goodwill impairment charge as described above. 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~~year impacts the ~~estimate from the prior quarter impacted the effect of permanent tax differences. The~~ effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.

Net loss for the nine months ended September 30, 2021 was $25.5 million ($(0.91) per diluted share) compared to net income of $6.5 million ($0.23 per diluted share) in the prior year period. The decrease primarily reflects a higher net loss ratio, largely driven by elevated weather losses, and lower investment income, partly offset by higher total revenue and a lower net expense ratio.

The ceded premium ratio was 47.0% for the nine months ended September 30, 2021, up 0.8 points from 46.2% in the prior year period. The increase resulted from a larger increase in gross earned premium than the increase in ceded premium.

The net loss and LAE ratio was 72.8% for the nine months ended September 30, 2021, up 5.0 points from 67.8% in the prior year period. The increase primarily stems from higher current accident year weather and lower favorable reserve development, partly offset by the increase in net earned premium.

The net expense ratio was 35.8% for the nine months ended September 30, 2021, down 2.8 points from 38.6% 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.

The net combined ratio was ~~108.6%~~114.2% for ~~nine months~~the six-month period ended ~~September~~June 30, ~~2021,~~2022, up ~~2.2~~7.8 points from 106.4% in the prior year period. The increase primarily stems from a higher net loss and LAE ratio, partly offset by a ~~lower~~decrease in the net expense ratio.

The ceded premium ratio was 46.7% for the six-month period ended June 30, 2022, down 1.4 points from 48.1% in the prior year period, reflecting the growth in gross premiums earned outpacing the growth in ceded premiums earned as described above.

The net loss and LAE ratio was 77.6% for the six-month period ended June 30, 2022, up 8.8 points from 68.8% in the prior year period, driven by higher weather losses compared to the prior year period, which was partly offset by the 7.8% increase in net premiums earned.

The net expense ratio was 36.6% for the six-month period ended June 30, 2022, down 1.0 point from 37.6% in the prior year period, driven by a lower PAC ratio.

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~~June 30, ~~2021,~~2022, we had ~~$393.4~~$290.9 million of cash and cash equivalents and ~~$686.1~~$654.3 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 as well as timing of reinsurance recoveries. The decrease in investments is due to the unrealized losses on the Company’s available-for-sale fixed income securities portfolio. The unrealized losses resulted from the sharp decline in bond prices during 2022 as a result of the higher interest rate environment. The Company’s fixed income portfolio average credit rating is A+ with a duration of 3.6 years at June 30, 2022.

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.

Net cash ~~provided by~~used in operating activities was ~~$70.1~~$47.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to net cash provided by operating activities of ~~$118.6~~$104.4 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~~six months of ~~2021~~2022 compared to the first ~~nine~~six months of ~~2020.~~2021.

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$110.3~~$14.0 million as compared to net cash ~~provided by~~used in investing activities of ~~$136.6~~$92.9 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 2020 produced proceeds which were re-invested in 2021, driving up the ~~comparable period in 2020.~~cash used for investing activities.

Net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$7.4~~$6.8 million, as compared to cash used in financing activities of ~~$23.2~~$5.5 million for the comparable period in ~~2020.~~2021. The ~~reduction~~increase in cash used infor financing activities ~~is due primarily to the decrease in the amount of stock repurchased under the stock repurchase program and use of proceeds~~was driven by our $15 million draw 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, and our purchase of $5 million of treasury stock during the first half of 2022.

~~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 June 30, 2022, there was ~~increased to $70~~$67.4 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 June 30, 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,~~2022, the borrowing under our Credit Facilities were accruing interest at a rate of ~~3.38%~~3.5625% 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.

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.

In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of ~~September~~June 30, ~~2021,~~2022, there ~~were~~was $11.7 million principal amount of outstanding Convertible Notes.

As discussed above, holders of the Convertible Notes inissued by the Company had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase the aggregate principal amount of ~~$23.4~~Convertible Notes that are validly tendered. The Company has received notice from the Depositary for the Convertible Notes that, on July 29, 2022, $10,895,000 aggregate principal amount of the Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, and the Company has requested that the trustee cancel the Convertible Notes tendered. The outstanding balance as of June 30, 2022 of non-affiliated Notes was $11.8 million. On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $10.9 million ~~issued~~ and ~~outstanding.~~$320,041, respectively. The Company has drawn $10.0 million from its revolver to replenish the cash used to pay the $10.9 million for the purchase of the tendered Convertible Notes.

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.

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~~six months ended ~~September~~June 30, ~~2021,~~2022, we reassessed our critical accounting policies and estimates as disclosed within our ~~2020~~2021 Annual Report on Form 10-K.

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.

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.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was ~~3.891~~3.629 years and 3.801 years at ~~September~~June 30, 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~~June 30, ~~2021,~~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.~~

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.

WeThe The Federal Reserve has tightened monetary policy, including multiple interest rate increases in the first half of 2022; however, the outlook is less certain for longer-term rates during the second half of 2022 and beyond. At June 30, 2022, 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.

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~~June 30, ~~2021.~~2022.

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~~June 30, ~~2021.~~2022.

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.

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.

During the third quarter ended September 30, 2021, we purchased 148,109 shares of common stock for an aggregate of $1.0 million under our stock repurchase program. In addition, the Company acquired 6,473 shares of common stock for a total cost of $44,500 during the quarter ended September 30, 2021 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.None

~~A summary of our common stock repurchases during the quarter ended September 30, 2021, is set forth in the table below (in thousands, except shares and price per share):~~Item 5. Other Information

~~(1) Represents the balance before commission and fees at the end of each period.~~

(2) On November 2, 2020, the Board of Directors extended the Company’s prior share repurchase program from December 31, 2020 to December 31, 2021, authorizing the Company to repurchase up to $50.0 million of its common stock through such date. 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. At September 30, 2021, the Company has the capacity to repurchase $49.0 million of its common stock until December 31, 2021.

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

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.


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~~June 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021		2
Condensed Consolidated Statements of Operations and Other Comprehensive ~~Income:~~Loss: Three and ~~Nine~~Six Months ~~ended September~~Ended June 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three and ~~Nine~~Six Months ~~ended September~~Ended June 30, ~~2021~~2022 and ~~2020 (unaudited)~~2021(unaudited)		4
Condensed Consolidated Statements of Cash Flows: ~~Nine~~Six Months ~~ended September~~Ended June 30, ~~2021~~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		2725
Item 3 Quantitative and Qualitative Disclosures about Market Risk		3637
Item 4 Controls and Procedures		37
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		38
Item 1A Risk Factors		38
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 5 Other Information		38
Item 6 Exhibits		38
Signatures		40


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



	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


	At September 30, 2021		At September 30, 2020
Finance lease - Operating cash flows	$	31	$	16
Finance lease - Financing cash flows	$	100	$	55

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


	Balance Sheet Classification	September 30, 2021
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
Lease liability - operating	Lease liability	$	6,844
Lease liability - finance	Lease liability	$	25,120


	Number of shares			Weighted-Average Grant-Date Fair Value per Share
Non-vested, at December 31, 2020		100,267		$	15.37
Granted - Performance-based restricted stock		123,890			10.49
Granted - Time-based restricted stock		61,945			10.49
Vested		(26,294	)		12.07
Canceled and surrendered		(18,973	)		13.04
Non-vested, at September 30, 2021		240,835		$	12.15


		At June 30,					YOY % Change
		2022			2021
Policies in force:
Florida			195,987			241,581		-18.9	%
Other States			354,534			352,205		0.7	%
Total			550,521			593,786		-7.3	%

Premiums in force:
Florida	$		564,814,121	$		598,869,936		-5.7	%
Other States			648,621,713			574,888,835		12.8	%
Total	$		1,213,435,834	$		1,173,758,771		3.4	%

Total Insured Value:
Florida	$		103,200,520,845	$		121,256,973,834		-14.9	%
Other States			299,177,714,835			280,332,366,098		6.7	%
Total	$		402,378,235,680	$		401,589,339,932		0.2	%


	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


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 ~~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~~
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 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed on May 9, 2022)
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)


	HERITAGE INSURANCE HOLDINGS, INC.

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

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