UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
001-36462
Heritage Insurance Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 45-5338504 | |
(State of Incorporation) |
| (IRS Employer Identification No.) |
2600 McCormick Drive1401 N. Westshore Blvd
Tampa, Suite 300
Clearwater, FloridaFL 3375933607
(Address, including zip code, of principal executive offices)
(727) 362-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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 |
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.
Large accelerated filer | ☐ | Accelerated filer | ☒ | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
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 2, 20217, 2022 was 27,880,20325,876,390.
HERITAGE INSURANCE HOLDINGS, INC.
Table of Contents
FORWARD-LOOKING STATEMENTS
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 expected positive impact of our strategic initiatives on our future financial results, including focus on profitability, exposure management, rate adequacy and our ability to create value for our shareholders; (iii) our ability to achieve consistent long-term quarterly earnings and drive shareholder value; (iv) expected continued changes in our portfolio to reduce exposure and generate long term returns; (v) the expected benefits of excess and surplus insurance products; (vi) expected losses from Hurricane Ian (vii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii)(viii) business and risk management strategies, including acquisitions, strategic investments and risk diversification; (ix) our estimates with respect to tax and accounting matters including the impact on our financial statements; (iv)(x) future dividends, if any; (v)(xi) our expectations related to our financing activities; (vi)(xii) 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)(xiii) 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; (xiv) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (ix)(xv) our ability to successfully mitigate the effects of inflation on our business; (xvi) our intentions with respect to our credit risk investments; (xvii) the future impact of the COVID-19 pandemic; and (x)(xviii) 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.
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share and share amounts)
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| September 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 $704,365 and $675,245) |
| $ | 633,192 |
|
| $ | 669,354 |
| ||||||||
Equity securities, at fair value, (cost $1,514 and $1,415) |
|
| 1,514 |
|
|
| 1,415 |
| ||||||||
Other investments, net |
|
| 17,084 |
|
|
| 23,929 |
| ||||||||
Total investments |
|
| 686,121 |
|
|
| 589,019 |
|
|
| 651,790 |
|
|
| 694,698 |
|
Cash and cash equivalents |
|
| 393,411 |
|
|
| 440,956 |
|
|
| 297,548 |
|
|
| 359,337 |
|
Restricted cash |
|
| 5,415 |
|
|
| 5,427 |
|
|
| 6,265 |
|
|
| 5,415 |
|
Accrued investment income |
|
| 3,042 |
|
|
| 2,737 |
|
|
| 3,517 |
|
|
| 3,167 |
|
Premiums receivable, net |
|
| 74,877 |
|
|
| 77,471 |
|
|
| 76,126 |
|
|
| 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 |
|
| 866,625 |
|
|
| 269,391 |
| ||||||||
Prepaid reinsurance premiums |
|
| 338,172 |
|
|
| 245,818 |
|
|
| 381,368 |
|
|
| 265,873 |
|
Income taxes receivable |
|
| 35,490 |
|
|
| 32,224 |
| ||||||||
Income tax receivable |
|
| 13,760 |
|
|
| 11,739 |
| ||||||||
Deferred income tax asset, net |
|
| 14,637 |
|
|
| — |
| ||||||||
Deferred policy acquisition costs, net |
|
| 95,425 |
|
|
| 89,265 |
|
|
| 100,649 |
|
|
| 93,881 |
|
Property and equipment, net |
|
| 17,950 |
|
|
| 18,685 |
|
|
| 22,784 |
|
|
| 17,426 |
|
Right-of-use lease asset, net |
|
| 28,652 |
|
|
| 6,461 |
|
|
| 25,218 |
|
|
| 27,753 |
|
Intangibles, net |
|
| 57,514 |
|
|
| 62,277 |
|
|
| 51,163 |
|
|
| 55,926 |
|
Goodwill |
|
| 152,459 |
|
|
| 152,459 |
|
|
| — |
|
|
| 91,959 |
|
Other assets |
|
| 13,220 |
|
|
| 11,544 |
|
|
| 11,133 |
|
|
| 12,272 |
|
Total Assets |
| $ | 2,248,122 |
|
| $ | 2,089,379 |
|
| $ | 2,522,583 |
|
| $ | 1,980,762 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
| ||||||
Unpaid losses and loss adjustment expenses |
| $ | 636,146 |
|
| $ | 659,341 |
|
| $ | 1,209,352 |
|
| $ | 590,166 |
|
Unearned premiums |
|
| 605,304 |
|
|
| 569,618 |
|
|
| 651,913 |
|
|
| 590,419 |
|
Reinsurance payable |
|
| 324,730 |
|
|
| 161,918 |
|
|
| 278,298 |
|
|
| 191,728 |
|
Long-term debt, net |
|
| 121,481 |
|
|
| 120,998 |
|
|
| 121,283 |
|
|
| 120,757 |
|
Deferred income tax liability, net |
|
| 13,665 |
|
|
| 18,477 |
|
|
| — |
|
|
| 9,426 |
|
Advance premiums |
|
| 33,341 |
|
|
| 18,268 |
|
|
| 37,855 |
|
|
| 24,504 |
|
Accrued compensation |
|
| 9,430 |
|
|
| 9,325 |
|
|
| 8,067 |
|
|
| 8,014 |
|
Lease liability |
|
| 31,964 |
|
|
| 8,155 |
|
|
| 28,901 |
|
|
| 31,172 |
|
Accounts payable and other liabilities |
|
| 67,036 |
|
|
| 80,935 |
|
|
| 69,217 |
|
|
| 71,525 |
|
Total Liabilities |
| $ | 1,843,097 |
|
| $ | 1,647,035 |
|
| $ | 2,404,886 |
|
| $ | 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, 25,923,930 shares issued and 25,898,930 outstanding at September 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 |
|
|
| 334,246 |
|
|
| 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 | ) | ||||||||
Retained earnings |
|
| 189,235 |
|
|
| 219,782 |
| ||||||||
Accumulated other comprehensive loss, net of taxes |
|
| (54,573 | ) |
|
| (4,573 | ) | ||||||||
Treasury stock, at cost, 11,890,599 and 10,536,737 shares at September 30, 2022 and December 31, 2021 |
|
| (130,286 | ) |
|
| (123,557 | ) | ||||||||
Retained (deficit) earnings |
|
| (31,693 | ) |
|
| 138,381 |
| ||||||||
Total Stockholders' Equity |
|
| 405,025 |
|
|
| 442,344 |
|
|
| 117,697 |
|
|
| 343,051 |
|
Total Liabilities and Stockholders' Equity |
| $ | 2,248,122 |
|
| $ | 2,089,379 |
|
| $ | 2,522,583 |
|
| $ | 1,980,762 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
2
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive IncomeLoss
(Unaudited)
(Amounts in thousands, except per share and share amounts)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gross premiums written |
| $ | 274,178 |
|
| $ | 278,242 |
|
| $ | 886,059 |
|
| $ | 797,776 |
|
| $ | 304,501 |
|
| $ | 274,178 |
|
| $ | 952,981 |
|
| $ | 886,059 |
|
Change in gross unearned premiums |
|
| 20,231 |
|
|
| (23,260 | ) |
|
| (35,593 | ) |
|
| (66,287 | ) |
|
| 3,458 |
|
|
| 20,231 |
|
|
| (61,442 | ) |
|
| (35,593 | ) |
Gross premiums earned |
|
| 294,409 |
|
|
| 254,982 |
|
|
| 850,466 |
|
|
| 731,489 |
|
|
| 307,959 |
|
|
| 294,409 |
|
|
| 891,539 |
|
|
| 850,466 |
|
Ceded premiums |
|
| (131,964 | ) |
|
| (116,752 | ) |
|
| (399,323 | ) |
|
| (338,197 | ) | ||||||||||||||||
Ceded premiums earned |
|
| (148,266 | ) |
|
| (131,964 | ) |
|
| (420,645 | ) |
|
| (399,323 | ) | ||||||||||||||||
Net premiums earned |
|
| 162,445 |
|
|
| 138,230 |
|
|
| 451,143 |
|
|
| 393,292 |
|
|
| 159,693 |
|
|
| 162,445 |
|
|
| 470,894 |
|
|
| 451,143 |
|
Net investment income |
|
| 1,548 |
|
|
| 2,817 |
|
|
| 3,797 |
|
|
| 9,783 |
|
|
| 2,887 |
|
|
| 1,548 |
|
|
| 7,050 |
|
|
| 3,797 |
|
Net realized and unrealized (losses) gains |
|
| (6 | ) |
|
| 20,355 |
|
|
| (926 | ) |
|
| 20,377 |
| ||||||||||||||||
Net realized losses |
|
| (3 | ) |
|
| (6 | ) |
|
| (121 | ) |
|
| (926 | ) | ||||||||||||||||
Other revenue |
|
| 3,421 |
|
|
| 3,717 |
|
|
| 10,835 |
|
|
| 10,385 |
|
|
| 2,916 |
|
|
| 3,421 |
|
|
| 10,049 |
|
|
| 10,835 |
|
Total revenues |
|
| 167,408 |
|
|
| 165,119 |
|
|
| 464,849 |
|
|
| 433,837 |
|
|
| 165,493 |
|
|
| 167,408 |
|
|
| 487,872 |
|
|
| 464,849 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Losses and loss adjustment expenses |
|
| 129,632 |
|
|
| 119,718 |
|
|
| 328,376 |
|
|
| 266,769 |
|
|
| 155,849 |
|
|
| 129,632 |
|
|
| 397,409 |
|
|
| 328,376 |
|
Policy acquisition costs, net of ceding commission income (1) |
|
| 35,984 |
|
|
| 31,960 |
|
|
| 109,183 |
|
|
| 92,243 |
|
|
| 39,194 |
|
|
| 35,984 |
|
|
| 115,826 |
|
|
| 109,183 |
|
General and administrative expenses, net of ceding commission income (2) |
|
| 17,169 |
|
|
| 17,923 |
|
|
| 52,490 |
|
|
| 59,583 |
|
|
| 17,758 |
|
|
| 17,169 |
|
|
| 54,947 |
|
|
| 52,490 |
|
Goodwill impairment |
|
| — |
|
|
| — |
|
|
| 91,959 |
|
|
| — |
| ||||||||||||||||
Total expenses |
|
| 182,785 |
|
|
| 169,601 |
|
|
| 490,049 |
|
|
| 418,595 |
|
|
| 212,801 |
|
|
| 182,785 |
|
|
| 660,141 |
|
|
| 490,049 |
|
Operating (loss) income |
|
| (15,377 | ) |
|
| (4,482 | ) |
|
| (25,200 | ) |
|
| 15,242 |
| ||||||||||||||||
Operating Loss |
|
| (47,308 | ) |
|
| (15,377 | ) |
|
| (172,269 | ) |
|
| (25,200 | ) | ||||||||||||||||
Interest expense, net |
|
| 2,150 |
|
|
| 2,251 |
|
|
| 5,953 |
|
|
| 5,939 |
|
|
| 2,027 |
|
|
| 2,150 |
|
|
| 5,750 |
|
|
| 5,953 |
|
(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 |
|
| (49,335 | ) |
|
| (17,527 | ) |
|
| (178,019 | ) |
|
| (31,153 | ) | ||||||||||||||||
Benefit for income taxes |
|
| (1,095 | ) |
|
| (1,117 | ) |
|
| (11,155 | ) |
|
| (5,644 | ) | ||||||||||||||||
Net loss |
| $ | (48,240 | ) |
| $ | (16,410 | ) |
| $ | (166,864 | ) |
| $ | (25,509 | ) | ||||||||||||||||
OTHER COMPREHENSIVE LOSS |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Change in net unrealized losses on investments |
|
| (17,471 | ) |
|
| (1,344 | ) |
|
| (65,403 | ) |
|
| (8,316 | ) | ||||||||||||||||
Reclassification adjustment for net realized investment losses (gains) |
|
| 6 |
|
|
| (20,355 | ) |
|
| (96 | ) |
|
| (20,377 | ) |
|
| 3 |
|
|
| 6 |
|
|
| 121 |
|
|
| (96 | ) |
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 expense related to items of other comprehensive losses |
|
| 4,089 |
|
|
| 310 |
|
|
| 15,282 |
|
|
| 1,950 |
| ||||||||||||||||
Total comprehensive loss |
| $ | (61,619 | ) |
| $ | (17,438 | ) |
| $ | (216,864 | ) |
| $ | (31,971 | ) | ||||||||||||||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Basic |
|
| 27,938,028 |
|
|
| 27,739,839 |
|
|
| 27,902,814 |
|
|
| 28,053,959 |
|
|
| 26,369,265 |
|
|
| 27,938,028 |
|
|
| 26,536,700 |
|
|
| 27,902,814 |
|
Diluted |
|
| 27,938,028 |
|
|
| 27,739,839 |
|
|
| 27,902,814 |
|
|
| 28,073,570 |
|
|
| 26,369,265 |
|
|
| 27,938,028 |
|
|
| 26,536,700 |
|
|
| 27,902,814 |
|
(Loss) earnings per share |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Loss per share |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Basic |
| $ | (0.59 | ) |
| $ | (0.19 | ) |
| $ | (0.91 | ) |
| $ | 0.23 |
|
| $ | (1.83 | ) |
| $ | (0.59 | ) |
| $ | (6.29 | ) |
| $ | (0.91 | ) |
Diluted |
| $ | (0.59 | ) |
| $ | (0.19 | ) |
| $ | (0.91 | ) |
| $ | 0.23 |
|
| $ | (1.83 | ) |
| $ | (0.59 | ) |
| $ | (6.29 | ) |
| $ | (0.91 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
3
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except share amounts)
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive Loss |
|
| Total |
| |||||||
Balance at December 31, 2021 |
|
| 26,753,511 |
|
| $ | 3 |
|
| $ | 332,797 |
|
| $ | 138,381 |
|
| $ | (123,557 | ) |
| $ | (4,573 | ) |
| $ | 343,051 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24,321 | ) |
|
| (24,321 | ) |
Shares tendered for income taxes withholding |
|
| (9,849 | ) |
|
| — |
|
|
| (89 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (89 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issued restricted stock |
|
| 397,176 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 505 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 505 |
|
Stock buy-back |
|
| (721,118 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,000 | ) |
|
| — |
|
|
| (5,000 | ) |
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
|
| — |
|
|
| — |
|
|
| (1,621 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
|
| — |
|
|
| — |
|
|
| (30,759 | ) |
Balance at March 31, 2022 |
|
| 26,444,720 |
|
| $ | 3 |
|
| $ | 333,213 |
|
| $ | 106,001 |
|
| $ | (128,557 | ) |
| $ | (28,894 | ) |
| $ | 281,766 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,300 | ) |
|
| (12,300 | ) |
Adjustment to shares tendered for income taxes withholding |
|
| — |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31 |
|
Issued restricted stock |
|
| 99,376 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 503 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 503 |
|
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,588 | ) |
|
| — |
|
|
| — |
|
|
| (1,588 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (87,866 | ) |
|
| — |
|
|
| — |
|
|
| (87,866 | ) |
Balance at June 30, 2022 |
|
| 26,544,096 |
|
| $ | 3 |
|
| $ | 333,747 |
|
| $ | 16,547 |
|
| $ | (128,557 | ) |
| $ | (41,194 | ) |
| $ | 180,546 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,379 | ) |
|
| (13,379 | ) |
Adjustment to shares tendered for income taxes withholding |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture on restricted stock |
|
| (12,422 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 499 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 499 |
|
Stock buy-back |
|
| (632,744 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,729 | ) |
|
| — |
|
|
| (1,729 | ) |
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (48,240 | ) |
|
| — |
|
|
| — |
|
|
| (48,240 | ) |
Balance at September 30, 2022 |
|
| 25,898,930 |
|
| $ | 3 |
|
| $ | 334,246 |
|
| $ | (31,693 | ) |
| $ | (130,286 | ) |
| $ | (54,573 | ) |
| $ | 117,697 |
|
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Total |
| |||||||
Balance at December 31, 2020 |
|
| 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 | ) |
Shares tendered for income taxes withholding |
|
| (12,500 | ) |
|
| — |
|
|
| (127 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (127 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issued restricted stock |
|
| 143,817 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 260 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 260 |
|
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,679 | ) |
|
| — |
|
|
| — |
|
|
| (1,679 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,148 | ) |
|
| — |
|
|
| — |
|
|
| (5,148 | ) |
Balance at March 31, 2021 |
|
| 27,904,923 |
|
| $ | 3 |
|
| $ | 332,000 |
|
| $ | 212,955 |
|
| $ | (115,365 | ) |
| $ | (2,145 | ) |
| $ | 427,448 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,768 |
|
|
| 2,768 |
|
Restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 287 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287 |
|
Issued restricted stock |
|
| 42,018 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,950 | ) |
|
| — |
|
|
| — |
|
|
| (3,950 | ) |
Balance at June 30, 2021 |
|
| 27,946,941 |
|
| $ | 3 |
|
| $ | 332,287 |
|
| $ | 207,325 |
|
| $ | (115,365 | ) |
| $ | 623 |
|
| $ | 424,873 |
|
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,028 | ) |
|
| (1,028 | ) |
Shares tendered for income taxes withholding |
|
| (6,473 | ) |
|
| — |
|
|
| (45 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45 | ) |
Restricted stock vested |
|
| 10,267 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 320 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 320 |
|
Stock buy-back |
|
| (148,109 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,005 | ) |
|
| — |
|
|
| (1,005 | ) |
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 |
|
4
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive Income |
|
| Total |
|
| Common Shares |
|
| Par Value |
|
| Additional Paid-In Capital |
|
| Retained |
|
| Treasury Shares |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Total |
| ||||||||||||||
Balance at January 1, 2020 |
|
| 28,650,918 |
|
| $ | 3 |
|
| $ | 329,568 |
|
| $ | 217,266 |
|
| $ | (105,368 | ) |
| $ | 7,330 |
|
| $ | 448,799 |
| ||||||||||||||||||||||||||||
Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| — |
|
|
| — |
|
|
| (34 | ) | ||||||||||||||||||||||||||||
Balance at January 1, 2020 (as adjusted for change in accounting principle) |
|
| 28,650,918 |
|
|
| 3 |
|
|
| 329,568 |
|
|
| 217,232 |
|
|
| (105,368 | ) |
|
| 7,330 |
|
|
| 448,765 |
| ||||||||||||||||||||||||||||
Balance at December 31, 2020 |
|
| 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 | ) | ||||||||||||||||||||||||||||
Shares tendered for income taxes withholding |
|
| (12,500 | ) |
|
| — |
|
|
| (127 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (127 | ) | ||||||||||||||||||||||||||||
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Issued restricted stock |
|
| 143,817 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 260 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 260 |
| ||||||||||||||||||||||||||||
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,679 | ) |
|
| — |
|
|
| — |
|
|
| (1,679 | ) | ||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,148 | ) |
|
| — |
|
|
| — |
|
|
| (5,148 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2021 |
|
| 27,904,923 |
|
| $ | 3 |
|
| $ | 332,000 |
|
| $ | 212,955 |
|
| $ | (115,365 | ) |
| $ | (2,145 | ) |
| $ | 427,448 |
| ||||||||||||||||||||||||||||
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,768 |
|
|
| 2,768 |
| ||||||||||||||||||||||||||||
Restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 287 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287 |
| ||||||||||||||||||||||||||||
Issued restricted stock |
|
| 42,018 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
|
| — |
|
|
| — |
|
|
| (1,680 | ) | ||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,950 | ) |
|
| — |
|
|
| — |
|
|
| (3,950 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2021 |
|
| 27,946,941 |
|
| $ | 3 |
|
| $ | 332,287 |
|
| $ | 207,325 |
|
| $ | (115,365 | ) |
| $ | 623 |
|
| $ | 424,873 |
| ||||||||||||||||||||||||||||
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,512 |
|
|
| 1,512 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,028 | ) |
|
| (1,028 | ) |
Shares tendered for income taxes withholding |
|
| (17,500 | ) |
|
| — |
|
|
| (233 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (233 | ) |
|
| (6,473 | ) |
|
| — |
|
|
| (45 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45 | ) |
Restricted stock vested |
|
| 25,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,267 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 320 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 320 |
|
Stock buy-back |
|
| (766,900 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,986 | ) |
|
| — |
|
|
| (7,986 | ) |
|
| (148,109 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,005 | ) |
|
| — |
|
|
| (1,005 | ) |
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,726 | ) |
|
| — |
|
|
| — |
|
|
| (1,726 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
|
| — |
|
|
| — |
|
|
| (1,680 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,620 |
|
|
| — |
|
|
| — |
|
|
| 7,620 |
| ||||||||||||||||||||||||||||
Balance at March 31, 2020 |
|
| 27,891,518 |
|
| $ | 3 |
|
| $ | 330,680 |
|
| $ | 223,126 |
|
| $ | (113,354 | ) |
| $ | 8,842 |
|
| $ | 449,297 |
| ||||||||||||||||||||||||||||
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,421 |
|
|
| 11,421 |
| ||||||||||||||||||||||||||||
Deferred tax adjustment for credit expected losses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| (4 | ) | ||||||||||||||||||||||||||||
Restricted stock vested |
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 1,357 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,357 |
| ||||||||||||||||||||||||||||
Stock buy-back |
|
| (163,456 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,011 | ) |
|
| — |
|
|
| (2,011 | ) | ||||||||||||||||||||||||||||
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,693 | ) |
|
| — |
|
|
| — |
|
|
| (1,693 | ) | ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,132 |
|
|
| — |
|
|
| — |
|
|
| 4,132 |
| ||||||||||||||||||||||||||||
Balance at June 30, 2020 |
|
| 27,738,062 |
|
| $ | 3 |
|
| $ | 332,037 |
|
| $ | 225,561 |
|
| $ | (115,365 | ) |
| $ | 20,263 |
|
| $ | 462,499 |
| ||||||||||||||||||||||||||||
Net unrealized change in investments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,738 | ) |
|
| (13,738 | ) | ||||||||||||||||||||||||||||
Shares tendered for income taxes withholding |
|
| (4,723 | ) |
|
| — |
|
|
| (64 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (64 | ) | ||||||||||||||||||||||||||||
Restricted stock vested |
|
| 10,267 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Issued restricted stock |
|
| 5,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation on restricted stock |
|
| — |
|
|
| — |
|
|
| 1,359 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,359 |
| ||||||||||||||||||||||||||||
Cash dividends declared ($0.06 per common stock) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,683 | ) |
|
| — |
|
|
| — |
|
|
| (1,683 | ) | ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,233 | ) |
|
| — |
|
|
| — |
|
|
| (5,233 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2020 |
|
| 27,748,606 |
|
| $ | 3 |
|
| $ | 333,332 |
|
| $ | 218,645 |
|
| $ | (115,365 | ) |
| $ | 6,525 |
|
| $ | 443,140 |
| ||||||||||||||||||||||||||||
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.
5
6
HERITAGE INSURANCE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
| For the Nine Months Ended September 30, |
|
| For the Nine Months Ended September 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 |
| $ | (166,864 | ) |
| $ | (25,509 | ) | ||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
| |||||||||||
Stock-based compensation |
|
| 866 |
|
|
| 4,061 |
|
|
| 1,507 |
|
|
| 866 |
|
Bond amortization and accretion |
|
| 3,018 |
|
|
| 4,247 |
|
|
| 2,561 |
|
|
| 3,018 |
|
Operating lease asset amortization |
|
| 0 |
|
|
| 71 |
| ||||||||
Amortization of original issuance discount on debt |
|
| 1,454 |
|
|
| 1,056 |
|
|
| 919 |
|
|
| 1,454 |
|
Goodwill impairment |
|
| 91,959 |
|
|
| — |
| ||||||||
Depreciation and amortization |
|
| 6,345 |
|
|
| 6,078 |
|
|
| 6,233 |
|
|
| 6,345 |
|
Allowance for bad debt |
|
| 106 |
|
|
| 0 |
|
|
| 10 |
|
|
| 106 |
|
Net loss from sale of asset |
|
| 0 |
|
|
| 155 |
| ||||||||
Net realized gains |
|
| (96 | ) |
|
| (20,377 | ) | ||||||||
Net realized investment losses (gains) |
|
| 121 |
|
|
| (96 | ) | ||||||||
Net change for unrealized losses in other investments |
|
| 1,022 |
|
|
| 0 |
|
|
| — |
|
|
| 1,022 |
|
Deferred income taxes |
|
| (2,862 | ) |
|
| 67 |
| ||||||||
Deferred income taxes, net |
|
| (8,781 | ) |
|
| (2,862 | ) | ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accrued investment income |
|
| (305 | ) |
|
| 1,740 |
|
|
| (350 | ) |
|
| (305 | ) |
Premiums receivable |
|
| 2,488 |
|
|
| (6,353 | ) | ||||||||
Premiums receivable, net |
|
| (4,211 | ) |
|
| 2,488 |
| ||||||||
Prepaid reinsurance premiums |
|
| (92,354 | ) |
|
| (83,895 | ) |
|
| (115,495 | ) |
|
| (92,354 | ) |
Reinsurance recoverable on paid and unpaid claims |
|
| 8,663 |
|
|
| 4,703 |
|
|
| (597,234 | ) |
|
| 8,663 |
|
Income taxes receivable |
|
| (3,266 | ) |
|
| (13,079 | ) | ||||||||
Income taxes receivable, net |
|
| (2,021 | ) |
|
| (3,266 | ) | ||||||||
Deferred policy acquisition costs, net |
|
| (6,160 | ) |
|
| (8,929 | ) |
|
| (6,768 | ) |
|
| (6,160 | ) |
Right-of-use leased asset, net |
|
| (22,192 | ) |
|
| 761 |
| ||||||||
Right of use leased asset |
|
| 2,535 |
|
|
| (22,192 | ) | ||||||||
Other assets |
|
| (1,676 | ) |
|
| 451 |
|
|
| 1,139 |
|
|
| (1,676 | ) |
Lease incentives |
|
| 1,622 |
|
|
| 2,622 |
| ||||||||
Unpaid losses and loss adjustment expenses |
|
| (23,195 | ) |
|
| 49,464 |
|
|
| 619,186 |
|
|
| (23,195 | ) |
Unearned premiums |
|
| 35,686 |
|
|
| 66,407 |
|
|
| 61,494 |
|
|
| 35,686 |
|
Reinsurance payable |
|
| 162,812 |
|
|
| 84,506 |
|
|
| 86,570 |
|
|
| 162,812 |
|
Accrued interest |
|
| (15 | ) |
|
| 787 |
|
|
| (160 | ) |
|
| (15 | ) |
Accrued compensation |
|
| 105 |
|
|
| 6,270 |
|
|
| 53 |
|
|
| 105 |
|
Advance premiums |
|
| 15,073 |
|
|
| 15,114 |
|
|
| 13,351 |
|
|
| 15,073 |
|
Operating lease liabilities |
|
| 23,809 |
|
|
| — |
|
|
| (2,271 | ) |
|
| 23,809 |
|
Other liabilities |
|
| (13,667 | ) |
|
| (1,263 | ) |
|
| (585 | ) |
|
| (13,667 | ) |
Net cash provided by operating activities |
|
| 70,150 |
|
|
| 118,561 |
| ||||||||
Net cash (used in) provided by operating activities |
|
| (15,480 | ) |
|
| 72,772 |
| ||||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturity securities sales, maturities and paydowns |
|
| 147,406 |
|
|
| 411,004 |
|
|
| 56,334 |
|
|
| 147,406 |
|
Purchases in other investments |
|
| (7,500 | ) |
|
| — |
| ||||||||
Fixed maturity securities purchases |
|
| (258,548 | ) |
|
| (254,145 | ) |
|
| (88,137 | ) |
|
| (258,548 | ) |
Equity securities redemption |
|
| 184 |
|
|
| 25 |
| ||||||||
Paydowns on other investments |
|
| 1,500 |
|
|
| 0 |
| ||||||||
Limited partnership interest purchases |
|
| 0 |
|
|
| (20,400 | ) | ||||||||
Equity securities purchases |
|
| 0 |
|
|
| (6 | ) | ||||||||
Return of capital in other investments |
|
| 14,345 |
|
|
| 1,684 |
| ||||||||
Equity securities reinvestments of dividends |
|
| (99 | ) |
|
| — |
| ||||||||
Leasehold improvements |
|
| (3,539 | ) |
|
| (2,622 | ) | ||||||||
Proceeds from sale of assets |
|
| 45 |
|
|
| 792 |
|
|
| — |
|
|
| 45 |
|
Cost of property and equipment acquired |
|
| (892 | ) |
|
| (628 | ) |
|
| (4,911 | ) |
|
| (892 | ) |
Net cash (used in) provided by investing activities |
|
| (110,305 | ) |
|
| 136,642 |
| ||||||||
Net cash used in investing activities |
|
| (33,507 | ) |
|
| (112,927 | ) | ||||||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Principal payments on term loan facility |
|
| (3,750 | ) |
|
| (7,500 | ) | ||||||||
Repayment of term note |
|
| (2,625 | ) |
|
| (3,750 | ) | ||||||||
Mortgage loan payments |
|
| (240 | ) |
|
| (228 | ) | ||||||||
Draw from credit facility |
|
| 25,000 |
|
|
| — |
| ||||||||
Proceeds from term loan facility |
|
| 2,781 |
|
|
| 0 |
|
|
| — |
|
|
| 2,781 |
|
Mortgage loan payments |
|
| (228 | ) |
|
| (215 | ) | ||||||||
Repurchase of convertible notes |
|
| (22,529 | ) |
|
| — |
| ||||||||
Purchase of treasury stock |
|
| (1,005 | ) |
|
| (9,997 | ) |
|
| (6,729 | ) |
|
| (1,005 | ) |
Tax withholdings on share-based compensation awards |
|
| (171 | ) |
|
| (297 | ) |
|
| (58 | ) |
|
| (171 | ) |
Dividends paid |
|
| (5,029 | ) |
|
| (5,169 | ) |
|
| (4,771 | ) |
|
| (5,029 | ) |
Net cash used in financing activities |
|
| (7,402 | ) |
|
| (23,178 | ) |
|
| (11,952 | ) |
|
| (7,402 | ) |
(Decrease) increase in cash, cash equivalents, and restricted cash |
|
| (47,557 | ) |
|
| 232,025 |
| ||||||||
Decrease in cash, cash equivalents, and restricted cash |
|
| (60,939 | ) |
|
| (47,557 | ) | ||||||||
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 |
|
| $ | 303,813 |
|
| $ | 398,826 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
| ||||||
Income taxes paid |
| $ | 489 |
|
| $ | 16,252 |
|
| $ | 6,222 |
|
| $ | 489 |
|
Interest paid |
| $ | 4,214 |
|
| $ | 4,794 |
|
| $ | 4,245 |
|
| $ | 4,214 |
|
76
Reconciliation of cash, cash equivalents, and restricted cash to condensed consolidated balance sheets.
|
|
|
|
|
|
| ||
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
|
| (In thousands) |
| |||||
Cash and cash equivalents |
| $ | 393,411 |
|
| $ | 440,956 |
|
Restricted cash |
|
| 5,415 |
|
|
| 5,427 |
|
Total |
| $ | 398,826 |
|
| $ | 446,383 |
|
|
|
|
|
|
|
| ||
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (In thousands) |
| |||||
Cash and cash equivalents |
| $ | 297,548 |
|
| $ | 359,337 |
|
Restricted cash |
|
| 6,265 |
|
|
| 5,415 |
|
Total |
| $ | 303,813 |
|
| $ | 364,752 |
|
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.
87
HERITAGE INSURANCE HOLDINGS, INC.
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, 20202021 filed on March 14, 2022 (the “2020“2021 Form 10-K”).
Significant accounting policies
During a third quarter assessment of the Company's deferred tax position, a valuation allowance of $10.7 million was recorded against the Company's deferred tax asset as of September 30, 2022. Based on the Internal Revenue Code (“IRC”) Section 953(d) election made for Osprey Re, the Company's captive reinsurer domiciled in Bermuda, the Company concluded a valuation allowance for its net deferred tax assets was necessary because those net deferred tax assets can only be applied to offset future taxable income of Osprey Re. Based on current available evidence, management does not believe there will be sufficient future Osprey Re taxable income over the next year in order to realize those net deferred tax assets. In the event Osprey Re recognizes future taxable income, the proportionate amount of the net operating loss carryforward will be used and an equivalent amount of the valuation allowance will reverse.
The accounting policies of the Company are set forth in Note 1 to condensed consolidated financial statements contained in the Company’s 20202021 Form 10-K.
Reclassification
Certain prior year amounts reported on the condensed consolidated balance sheetstatements of cashflows 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.
8
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 / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||||||||||||||||||
September 30, 2022 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| Fair Value |
| ||||||||||||||||||||
Debt Securities Available-for-sale |
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
U.S. government and agency securities (1) |
| $ | 43,734 |
| $ | 284 |
| $ | 9 |
| $ | 44,009 |
|
| $ | 118,629 |
|
| $ | 11 |
|
| $ | 4,354 |
|
| $ | 114,286 |
| |||
States, municipalities and political subdivisions |
| 106,019 |
| 359 |
| 657 |
| 105,721 |
|
|
| 105,221 |
|
|
| 1 |
|
|
| 13,037 |
|
|
| 92,185 |
| |||||||
Special revenue |
| 311,752 |
| 1,624 |
| 1,881 |
| 311,495 |
|
|
| 290,424 |
|
|
| 47 |
|
|
| 34,153 |
|
|
| 256,318 |
| |||||||
Hybrid securities |
| 99 |
| 1 |
| — |
| 100 |
| |||||||||||||||||||||||
Industrial and miscellaneous |
|
| 199,792 |
|
| 1,244 |
|
| 1,542 |
|
| 199,494 |
|
|
| 190,091 |
|
|
| 44 |
|
|
| 19,732 |
|
|
| 170,403 |
| |||
Total |
| $ | 661,396 |
| $ | 3,512 |
| $ | 4,089 |
| $ | 660,819 |
|
| $ | 704,365 |
|
| $ | 103 |
|
| $ | 71,276 |
|
| $ | 633,192 |
|
9
December 31, 2021 |
| Cost or Adjusted / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| 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 / |
|
| Gross Unrealized |
|
| Gross Unrealized |
|
| 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 |
|
Net Realized (Losses)Gains
The following table presents net realized (losses) gains on the Company’s debt securities available-for-sale for the three and nine months ended September 30, 2022 and 2021, and 2020, respectively:respectively:
|
| 2021 |
|
| 2020 |
| ||||||||||
Three Months Ended September 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| 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 September 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| Fair Value at Sale |
| ||||
|
| (In thousands) |
| |||||||||||||
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized gains |
| $ | — |
|
| $ | 50 |
|
| $ | 2 |
|
| $ | 3,470 |
|
Total realized losses |
|
| (3 | ) |
|
| 110 |
|
|
| (8 | ) |
|
| 226 |
|
Net realized (losses) and gains |
| $ | (3 | ) |
| $ | 160 |
|
| $ | (6 | ) |
| $ | 3,696 |
|
|
| 2022 |
|
| 2021 |
| ||||||||||
Nine Months Ended September 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| Fair Value at Sale |
| ||||
|
| (In thousands) |
| |||||||||||||
Debt Securities Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total realized gains |
| $ | 32 |
|
| $ | 2,451 |
|
| $ | 106 |
|
| $ | 24,265 |
|
Total realized losses |
|
| (153 | ) |
|
| 6,206 |
|
|
| (10 | ) |
|
| 1,043 |
|
Net realized (losses) and gains |
| $ | (121 | ) |
| $ | 8,657 |
|
| $ | 96 |
|
| $ | 25,308 |
|
As of September 30, 2021, the Company recorded on its condensed consolidated statement of operations in net realized (losses) gains an impairment of approximately $1.0 million on its REIT investment which is excluded from the table above.
|
| 2021 |
|
| 2020 |
| ||||||||||
Nine Months Ended September 30, |
| Gains |
|
| Fair Value at Sale |
|
| Gains |
|
| 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 |
|
9
The table below summarizes the Company’s debt securities at September 30, 20212022 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 September 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 | % |
| $ | 95,442 |
|
|
| 14 | % |
| $ | 93,586 |
|
|
| 15 | % | ||
Due after one year through five years |
|
| 253,398 |
|
| 38 | % |
|
| 254,377 |
|
| 38 | % |
|
| 342,738 |
|
|
| 49 | % |
|
| 313,712 |
|
|
| 50 | % | ||
Due after five years through ten years |
|
| 220,450 |
|
| 33 | % |
|
| 218,373 |
|
| 33 | % |
|
| 199,300 |
|
|
| 28 | % |
|
| 165,917 |
|
|
| 26 | % | ||
Due after ten years |
|
| 143,101 |
|
|
| 22 | % |
|
| 143,441 |
|
|
| 22 | % |
|
| 66,885 |
|
|
| 9 | % |
|
| 59,977 |
|
|
| 9 | % |
Total |
| $ | 661,396 |
|
|
| 100 | % |
| $ | 660,819 |
|
|
| 100 | % |
| $ | 704,365 |
|
|
| 100 | % |
| $ | 633,192 |
|
|
| 100 | % |
Net Investment Income
The following table summarizes the Company’s net investment income by major investment category for the three and nine months ended September 30, 20212022 and 2020,2021, respectively:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 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 |
|
| $ | 2,992 |
|
| $ | 1,986 |
|
| $ | 7,695 |
|
| $ | 5,164 |
|
Equity securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Cash and cash equivalents |
|
| 17 |
|
|
| 651 |
|
|
| 72 |
|
|
| 1,610 |
|
|
| 273 |
|
|
| 17 |
|
|
| 433 |
|
|
| 72 |
|
Other investments |
|
| 514 |
|
|
| 221 |
|
|
| 1,101 |
|
|
| 486 |
|
|
| 135 |
|
|
| 514 |
|
|
| 447 |
|
|
| 1,101 |
|
Net investment income |
|
| 2,517 |
|
|
| 3,042 |
|
|
| 6,337 |
|
|
| 10,663 |
|
|
| 3,400 |
|
|
| 2,517 |
|
|
| 8,575 |
|
|
| 6,337 |
|
Less: Investment expenses |
|
| 969 |
|
|
| 225 |
|
|
| 2,540 |
|
|
| 880 |
|
|
| 513 |
|
|
| 969 |
|
|
| 1,525 |
|
|
| 2,540 |
|
Net investment income, less investment expenses |
| $ | 1,548 |
| $ | 2,817 |
|
| $ | 3,797 |
| $ | 9,783 |
|
| $ | 2,887 |
|
| $ | 1,548 |
|
| $ | 7,050 |
|
| $ | 3,797 |
|
10
The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged) and for which no credit loss allowance been established to date, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position at September 30, 20212022 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 |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
September 30, 2022 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
U.S. government and agency securities |
|
| 10 |
| $ | 9 |
| $ | 14,441 |
| — |
|
| $ | — |
|
| $ | — |
|
|
| 93 |
|
| $ | 4,023 |
|
| $ | 98,801 |
|
|
| 5 |
|
| $ | 331 |
|
| $ | 8,911 |
| ||||
States, municipalities and political subdivisions |
|
| 75 |
| 657 |
| 66,885 |
| — |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
|
| 5,166 |
|
|
| 39,273 |
|
|
| 64 |
|
|
| 7,871 |
|
|
| 47,766 |
| ||||||
Special revenue |
|
| 188 |
| 1,877 |
| 150,757 |
| 11 |
|
|
| 4 |
|
|
| 101 |
|
|
| 378 |
|
|
| 15,277 |
|
|
| 121,001 |
|
|
| 153 |
|
|
| 18,876 |
|
|
| 103,038 |
| ||||||
Industrial and miscellaneous |
|
| 133 |
|
|
| 1,542 |
|
|
| 99,327 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 190 |
|
|
| 7,376 |
|
|
| 98,431 |
|
|
| 103 |
|
|
| 12,356 |
|
|
| 66,066 |
|
Total fixed maturity securities |
|
| 406 |
|
| $ | 4,085 |
|
| $ | 331,410 |
|
|
| 11 |
|
| $ | 4 |
|
| $ | 101 |
|
|
| 722 |
|
| $ | 31,842 |
|
| $ | 357,506 |
|
|
| 325 |
|
| $ | 39,434 |
|
| $ | 225,781 |
|
|
| Less Than Twelve Months |
|
| Twelve Months or More |
|
| Less Than Twelve Months |
|
| Twelve Months or More |
| ||||||||||||||||||||||||||||||||||||
December 31, 2020 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
December 31, 2021 |
| Number of |
|
| Gross |
|
| Fair Value |
|
| Number of |
|
| Gross |
|
| Fair Value |
| ||||||||||||||||||||||||||||||
Debt Securities Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
U.S. government and agency securities |
|
| 3 |
| $ | 1 |
| $ | 73 |
| 1 |
|
| $ | — |
|
| $ | 7 |
|
|
| 43 |
|
| $ | 282 |
|
| $ | 57,420 |
|
|
| — |
|
| $ | — |
|
| $ | — |
| ||||
States, municipalities and political subdivisions |
|
| 6 |
| 4 |
| 5,158 |
| — |
|
|
| — |
|
|
| — |
|
|
| 98 |
|
|
| 1,270 |
|
|
| 80,972 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||
Special revenue |
|
| 27 |
| 24 |
| 16,439 |
| 9 |
|
|
| 3 |
|
|
| 73 |
|
|
| 253 |
|
|
| 3,485 |
|
|
| 195,450 |
|
|
| 14 |
|
|
| 35 |
|
|
| 1,214 |
| ||||||
Industrial and miscellaneous |
|
| 26 |
|
|
| 39 |
|
|
| 16,025 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 191 |
|
|
| 2,387 |
|
|
| 146,746 |
|
|
| 18 |
|
|
| 578 |
|
|
| 11,598 |
|
Total fixed maturity securities |
|
| 62 |
|
| $ | 68 |
|
| $ | 37,695 |
|
|
| 10 |
|
| $ | 3 |
|
| $ | 80 |
|
|
| 585 |
|
| $ | 7,424 |
|
| $ | 480,588 |
|
|
| 32 |
|
| $ | 613 |
|
| $ | 12,812 |
|
The Company’sCompany 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 haveare reviewed. The Company considers
10
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 areissuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of highthe 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 doescompares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. For the three and nine months ending September 30, 2022, management concluded that the decline in the fair value was not intenda result of credit losses but rather as a direct result from the increase in the market interest rates. Therefore, the Company did not have an allowance for credit losses as of September 30, 2022 or December 31, 2021.
Quarterly, the Company considers whether it intends to sell andan available-for-sale security or if it is unlikely the Companymore likely than not that it will be required to sell the securities prior to their anticipatedsecurity before recovery and theof its amortized costs. In these instances, a decline in fair value is not deemed to relate to credit but to changesrecognized in interest rates and other market conditions. The bond issuers continue to make timely principal and interest paymentsnet income based on the bonds. Based onfair 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.0t record a credit allowance for securities that were in an unrealized loss position at September 30, 2021. There were neither any credit events nor credit allowances recorded at December 31, 2020.
Other Investments
Non-Consolidating Variable Interest Entities (“VIEs”)
The Company makes passive investments in limited partnerships (“LPs”), limited liability companies (“LLCs”), and a Real Estate Investment Trust (“REIT”). These investmentswhich are accounted for using the equity method, with income reported in net realizedearnings. The Company also makes passive investments in a Real Estate Investment Trust (“REIT”) and unrealized gains and losses oran 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.
11
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at September 30, 20212022 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 September 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 |
| $ | 3,517 |
|
| $ | 3,517 |
|
| $ | 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 |
| $ | 17,084 |
|
| $ | 17,084 |
|
| $ | 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:
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs. The Company did not hold any Level 3 assets or liabilities as of September 30, 20212022 or December 31, 2020.2021.
The following tables presenttable 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
11
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) |
| ||||||||||||||||||||||
September 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 |
|
| $ | 114,286 |
|
| $ | — |
|
| $ | 114,286 |
|
| $ | — |
| |||
States, municipalities and political subdivisions |
| 105,721 |
| 0 |
| 105,721 |
| 0 |
|
|
| 92,185 |
|
|
| — |
|
|
| 92,185 |
|
|
| — |
| |||||||
Special revenue |
| 311,495 |
| 0 |
| 311,495 |
| 0 |
|
|
| 256,318 |
|
|
| — |
|
|
| 256,318 |
|
|
| — |
| |||||||
Hybrid securities |
| 100 |
| 0 |
| 100 |
| 0 |
| |||||||||||||||||||||||
Industrial and miscellaneous |
|
| 199,494 |
|
| 0 |
|
| 199,494 |
|
| 0 |
|
|
| 170,403 |
|
|
| — |
|
|
| 170,403 |
|
|
| — |
| |||
Total investments |
| $ | 660,819 |
| $ | 366 |
| $ | 660,453 |
| $ | 0 |
|
| $ | 633,192 |
|
| $ | — |
|
| $ | 633,192 |
|
| $ | — |
|
12
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 |
|
| $ | — |
| |||
States, municipalities and political subdivisions |
| 85,670 |
| 0 |
| 85,670 |
| 0 |
|
|
| 105,699 |
|
|
| — |
|
|
| 105,699 |
|
|
| — |
| |||||||
Special revenue |
| 274,321 |
| 0 |
| 274,321 |
| 0 |
|
|
| 288,569 |
|
|
| — |
|
|
| 288,569 |
|
|
| — |
| |||||||
Hybrid securities |
| 100 |
| 0 |
| 100 |
| 0 |
|
|
| 99 |
|
|
| — |
|
|
| 99 |
|
|
| — |
| |||||||
Industrial and miscellaneous |
|
| 170,327 |
|
| 0 |
|
| 170,327 |
|
| 0 |
|
|
| 201,162 |
|
|
| — |
|
|
| 201,162 |
|
|
| — |
| |||
Total investments |
| $ | 561,011 |
| $ | 371 |
| $ | 560,640 |
| $ | 0 |
|
| $ | 669,354 |
|
| $ | 364 |
|
| $ | 668,990 |
|
| $ | — |
|
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, theThe 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 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 duringmillion. In the third quarterssecond quarter of 2021, and 2020. Thethe Company records any measurement period adjustments torecognized an impairment in other investments of approximately $1.0 million based on the estimated fair value of assets acquiredthe Company's ownership interest. During the second quarter of 2022, Management concluded that it had a full impairment of its remaining goodwill and liabilities assumed, withthat the corresponding offsetcarrying value of $92.0 million should be written off based on the 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 the Company's markets; and (iii) the Company's market cap was below book value.
12
NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOMELOSS
The following table is a summary of other comprehensive (loss) incomeloss and discloses the tax impact of each component of other comprehensive (loss) incomeloss for the three and nine months ended September 30, 20212022 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 September 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 |
| $ | (17,471 | ) |
| $ | 4,090 |
|
| $ | (13,381 | ) |
| $ | (1,344 | ) |
| $ | 311 |
|
| $ | (1,033 | ) |
Reclassification adjustment of realized losses (gains) included in net loss |
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
|
| 6 |
|
|
| (1 | ) |
|
| 5 |
|
Effect on other comprehensive loss |
| $ | (17,468 | ) |
| $ | 4,089 |
|
| $ | (13,379 | ) |
| $ | (1,338 | ) |
| $ | 310 |
|
| $ | (1,028 | ) |
|
| 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 Nine Months Ended September 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 |
| $ | (65,403 | ) |
| $ | 15,310 |
|
| $ | (50,093 | ) |
| $ | (8,316 | ) |
| $ | 1,928 |
|
| $ | (6,388 | ) |
Reclassification adjustment of realized losses (gains) included in net loss |
|
| 121 |
|
|
| (28 | ) |
|
| 93 |
|
|
| (96 | ) |
|
| 22 |
|
|
| (74 | ) |
Effect on other comprehensive loss |
| $ | (65,282 | ) |
| $ | 15,282 |
|
| $ | (50,000 | ) |
| $ | (8,412 | ) |
| $ | 1,950 |
|
| $ | (6,462 | ) |
13
NOTE 5. LEASES
The Company has entered into operating and financing leases primarily for real estate and vehicles. The Company will determine whether an arrangement is a lease at inception of the agreement. The operating leases have terms of one to ten years, and often include one or more options to renew. These renewal terms can extend the lease term from two to ten years, and are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company considers these options in determining the lease term used in establishing the Company’s right-of-use assets and lease obligations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine present value of the lease payments. The Company used the implicit rates within the finance leases.
Components of the Company’s lease costs for the three and nine months ended September 30, 20212022 and 20202021 were as follows (in thousands):
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||
Amortization of ROU assets - Finance leases |
| $ | 647 |
| $ | 21 |
|
| $ | 651 |
|
| $ | 647 |
| |
Interest on lease liabilities - Finance leases |
| 263 |
| 5 |
|
|
| 244 |
|
|
| 263 |
| |||
Variable lease cost (cost excluded from lease payments) |
| 112 |
| 128 |
|
|
| 287 |
|
|
| 112 |
| |||
Operating lease cost (cost resulting from lease payments) |
|
| 339 |
|
| 340 |
|
|
| 350 |
|
|
| 339 |
| |
Total lease cost |
| $ | 1,361 |
|
| $ | 494 |
|
| $ | 1,532 |
|
| $ | 1,361 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
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 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
Amortization of ROU assets - Finance leases |
| $ | 1,943 |
|
| $ | 1,321 |
|
Interest on lease liabilities - Finance leases |
|
| 739 |
|
|
| 524 |
|
Variable lease cost (cost excluded from lease payments) |
|
| 713 |
|
|
| 373 |
|
Operating lease cost (cost resulting from lease payments) |
|
| 1,055 |
|
|
| 1,018 |
|
Total lease cost |
| $ | 4,450 |
|
| $ | 3,236 |
|
13
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 September 30, 2022 |
|
| At September 30, 2021 |
| ||
Finance lease - Operating cash flows |
| $ | 737 |
|
| $ | 31 |
|
Finance lease - Financing cash flows |
| $ | 1,540 |
|
| $ | 100 |
|
|
|
|
|
|
|
| ||
Operating lease - Operating cash flows (fixed payments) |
| $ | 1,188 |
|
| $ | 1,123 |
|
Operating lease - Operating cash flows (liability reduction) |
| $ | 942 |
|
| $ | 840 |
|
Supplemental balance sheet information related to the Company’s operating and financing leases as of September 30, 20212022 were as follows (in thousands):
|
| Balance Sheet |
| 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 |
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Right-of-use assets - operating |
| Right-of-use lease asset, net |
| $ | 4,437 |
|
| $ | 5,035 |
|
Right-of-use assets - finance |
| Right-of-use lease asset, net |
| $ | 20,781 |
|
| $ | 22,718 |
|
Lease liability - operating |
| Lease liability |
| $ | 5,821 |
|
| $ | 6,551 |
|
Lease liability - finance |
| Lease liability |
| $ | 23,080 |
|
| $ | 24,621 |
|
Weighted-average remaining lease term and discount rate for the Company’s operating and financing leases as of September 30, 2021for the periods presented below were as follows:
| ||||
|
| |||
|
| |||
|
|
| ||
|
|
|
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
Weighted average lease term - Finance leases |
| 8.37 yrs. |
|
| 9.34 yrs. |
| ||
Weighted average lease term - Operating leases |
| 5.68 yrs. |
|
| 6.40 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):
14
|
| September 30, 2021 |
|
| September 30, 2022 |
| ||
2021 remaining |
| $ | 1,142 |
| ||||
2022 |
| 4,566 |
| |||||
2022 remaining |
| $ | 1,161 |
| ||||
2023 |
| 4,500 |
|
|
| 4,592 |
| |
2024 |
| 4,194 |
|
|
| 4,263 |
| |
2025 |
| 3,970 |
|
|
| 3,970 |
| |
2026 |
|
| 3,990 |
| ||||
Thereafter |
|
| 20,213 |
|
|
| 16,225 |
|
Total lease payments |
| 38,585 |
|
|
| 34,201 |
| |
Less: imputed interest |
|
| (6,621 | ) |
|
| (5,300 | ) |
Present value of lease liabilities |
| $ | 31,964 |
|
| $ | 28,901 |
|
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at September 30, 20212022 and December 31, 2020:2021:
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (In thousands) |
| |||||
Land |
| $ | 2,582 |
|
| $ | 2,582 |
|
Building |
|
| 10,141 |
|
|
| 10,141 |
|
Computer hardware and software |
|
| 12,089 |
|
|
| 7,204 |
|
Office furniture and equipment |
|
| 1,381 |
|
|
| 1,355 |
|
Tenant and leasehold improvements |
|
| 10,172 |
|
|
| 8,255 |
|
Vehicle fleet |
|
| 720 |
|
|
| 720 |
|
Total, at cost |
|
| 37,085 |
|
|
| 30,257 |
|
Less: accumulated depreciation and amortization |
|
| (14,301 | ) |
|
| (12,831 | ) |
Property and equipment, net |
| $ | 22,784 |
|
| $ | 17,426 |
|
14
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
|
| (In thousands) |
| |||||
Land |
| $ | 2,582 |
|
| $ | 2,582 |
|
Building |
|
| 10,141 |
|
|
| 10,141 |
|
Computer hardware and software |
|
| 7,147 |
|
|
| 6,358 |
|
Office furniture and equipment |
|
| 2,038 |
|
|
| 2,027 |
|
Tenant and leasehold improvements |
|
| 8,225 |
|
|
| 8,133 |
|
Vehicle fleet |
|
| 720 |
|
|
| 850 |
|
Total, at cost |
|
| 30,853 |
|
|
| 30,091 |
|
Less: accumulated depreciation and amortization |
|
| (12,903 | ) |
|
| (11,406 | ) |
Property and equipment, net |
| $ | 17,950 |
|
| $ | 18,685 |
|
Depreciation and amortization expense for property and equipment was approximately $736,000544,900 and $442,000736,000 for the three months ended September 30, 20212022 and 2020,2021, respectively and $1.61.5 million and $1.31.6 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. The Company’s real estate consists of 15 acres of land, and 5two buildings with a gross area of 191,20088,378 square feet and a parking garage. Approximately 75% of the building in Clearwater is leased to unaffiliated tenants. Following the Company’s planned relocation to its new Tampa headquarters, which is expected to occur in late 2021, the Company intends to sublease the remaining available space at the Clearwater location to unaffiliated tenants.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Assets
At September 30, 20212022 and December 31, 2020,2021, goodwill was $152.50 and $92.0 million and intangible assets were $57.551.2 million and $62.355.9 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 |
|
| — |
| ||
Impairment |
| 0 |
|
|
| (91,959 | ) | |
Balance as of September 30, 2021 |
| $ | 152,459 |
| ||||
Balance as of September 30, 2022 |
| $ | — |
|
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 the Company’s other intangible assets might be impaired. During the second quarter of 2022, management determined a triggering event occurred for which it deemed an interim evaluation of goodwill was appropriate and concluded the remaining balance of its goodwill was fully impaired. The carrying value of $92.0 million was 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 the Company’s markets; and (iii) the Company’s market cap was below book value. These factors reduced the Company’s previously modeled fair value of the Company and resulted in a $92.0 million goodwill impairment charge, as of the second quarter of 2022, most of which was 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 periodsmonths ended September 30, 20212022 and 20202021 was $1.6 million and for the respective nine month periodsmonths ended September 30, 20212022 and 20202021 was $4.8 million. NaNNo impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three and nine months ended September 30, 20212022 or 2020.
15
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 |
| $ | 1,588 |
| ||||
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 |
|
| $ | 49,848 |
|
NOTE 8. EARNINGSLOSS PER SHARE
The following table sets forth the computation of basic and diluted earningsloss per share (“EPS”) for the periods indicated.
15
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Basic (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders (000's) |
| $ | (16,410 | ) |
| $ | (5,233 | ) |
| $ | (25,509 | ) |
| $ | 6,519 |
|
Weighted average shares outstanding |
|
| 27,938,028 |
|
|
| 27,739,839 |
|
|
| 27,902,814 |
|
|
| 28,053,959 |
|
Basic (loss) earnings per share: |
| $ | (0.59 | ) |
| $ | (0.19 | ) |
| $ | (0.91 | ) |
| $ | 0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders (000's) |
| $ | (16,410 | ) |
| $ | (5,233 | ) |
| $ | (25,509 | ) |
| $ | 6,519 |
|
Weighted average shares outstanding |
|
| 27,938,028 |
|
|
| 27,739,839 |
|
|
| 27,902,814 |
|
|
| 28,053,959 |
|
Weighted average dilutive shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,611 |
|
Total weighted average dilutive shares |
|
| 27,938,028 |
|
|
| 27,739,839 |
|
|
| 27,902,814 |
|
|
| 28,073,570 |
|
Diluted (loss) earnings per share: |
| $ | (0.59 | ) |
| $ | (0.19 | ) |
| $ | (0.91 | ) |
| $ | 0.23 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Basic loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable to common stockholders (000's) |
| $ | (48,240 | ) |
| $ | (16,410 | ) |
| $ | (166,864 | ) |
| $ | (25,509 | ) |
Weighted average shares outstanding |
|
| 26,369,265 |
|
|
| 27,938,028 |
|
|
| 26,536,700 |
|
|
| 27,902,814 |
|
Basic loss per share: |
| $ | (1.83 | ) |
| $ | (0.59 | ) |
| $ | (6.29 | ) |
| $ | (0.91 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted loss per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable to common stockholders (000's) |
| $ | (48,240 | ) |
| $ | (16,410 | ) |
| $ | (166,864 | ) |
| $ | (25,509 | ) |
Weighted average shares outstanding |
|
| 26,369,265 |
|
|
| 27,938,028 |
|
|
| 26,536,700 |
|
|
| 27,902,814 |
|
Total weighted average dilutive shares |
|
| 26,369,265 |
|
|
| 27,938,028 |
|
|
| 26,536,700 |
|
|
| 27,902,814 |
|
Diluted loss per share: |
| $ | (1.83 | ) |
| $ | (0.59 | ) |
| $ | (6.29 | ) |
| $ | (0.91 | ) |
The Company had Due to the net loss for the three196,914 and nine months ended2,677,355 antidilutive shares as of September 30, 2022 and 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’sour common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the treasury method. The"if converted" method under the guidance of ASU 2020-06, adopted by the Company had 2,677,355 and 1,819,503 antidilutive shares as of September 30, 2021 and 2020, respectively. on January 1, 2022.
NOTE 9. DEFERRED REINSURANCE CEDING COMMISSION
The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the three months ended September 30, 20212022 and 2020,2021, the Company allocated ceding commission income of $12.011.7 million and $10.612.0 million to policy acquisition costs and $4.03.8 million and $3.54.0 million to general and administrative expense, respectively. For the nine months ended September 30, 20212022 and 2020,2021, the Company allocated ceding commission income of $35.234.9 million and $32.335.2 million to policy acquisition costs and $11.611.5 million and $10.611.6 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 months ended September 30, 20212022 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 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (In thousands) |
| |||||||||||||
Beginning balance of deferred reinsurance ceding commission income |
| $ | 38,529 |
|
| $ | 39,940 |
|
| $ | 40,405 |
|
| $ | 39,995 |
|
Ceding commission deferred |
|
| 17,046 |
|
|
| 17,659 |
|
|
| 46,110 |
|
|
| 48,447 |
|
Less: ceding commission earned |
|
| (15,486 | ) |
|
| (15,978 | ) |
|
| (46,426 | ) |
|
| (46,821 | ) |
Ending balance of deferred reinsurance ceding commission income |
| $ | 40,089 |
|
| $ | 41,621 |
|
| $ | 40,089 |
|
| $ | 41,621 |
|
16
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 months ended September 30, 20212022 and 2020.2021.
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
Beginning Balance |
| $ | 95,967 |
|
| $ | 81,590 |
|
| $ | 89,265 |
|
| $ | 77,211 |
|
| $ | 99,468 |
|
| $ | 95,967 |
|
| $ | 93,881 |
|
| $ | 89,265 |
|
Policy acquisition costs deferred |
|
| 47,976 |
|
|
| 42,096 |
|
|
| 144,380 |
|
|
| 128,400 |
|
|
| 39,194 |
|
|
| 47,976 |
|
|
| 139,028 |
|
|
| 144,380 |
|
Amortization |
|
| (48,518 | ) |
|
| (37,546 | ) |
|
| (138,220 | ) |
|
| (119,471 | ) |
|
| (38,013 | ) |
|
| (48,518 | ) |
|
| (132,260 | ) |
|
| (138,220 | ) |
Ending Balance |
| $ | 95,425 |
|
| $ | 86,140 |
|
| $ | 95,425 |
|
| $ | 86,140 |
|
| $ | 100,649 |
|
| $ | 95,425 |
|
| $ | 100,649 |
|
| $ | 95,425 |
|
NOTE 11. INCOME TAXES
The Company files a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred taxes for temporary differences between the financial statement and tax return basis of assets and liabilities.
16
Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which the Company has already recorded the tax benefit in its income statement. Deferred tax liabilities generally represent tax expense recognized in the Company's financial statements for which payment has been deferred or expenditures for which the Company has already taken a deduction in its tax return but have not yet been recognized in its financial statements. Under GAAP the Company is required to evaluate the recoverability of its deferred tax assets and establish a valuation allowance if necessary to reduce its deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances.
The Company establishes or adjusts valuation allowances for deferred tax assets when it estimates that it is more likely than not that future taxable income will be insufficient to realize the value of the deferred tax assets. The Company evaluates all significant available positive and negative evidence as part of its analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions its uses in forecasting future taxable income require significant judgment and take into account the Company's recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in its results of operations.
As of September 30, 2022. the Company recognized a valuation allowance of $10.7 million against the net deferred tax assets generated at its foreign domiciled captive reinsurer, Osprey Re. The Company can only realize those net deferred tax assets to the extent Osprey Re contributes future taxable income to the consolidated group. Management believes there is not sufficient evidence at the current time to realize the Osprey Re net deferred tax assets within the next calendar year. The valuation allowance is accounted for as an increase to income tax expense for the quarter. Osprey Re’s future taxable income can be used to apply against its net deferred tax assets to reduce taxable income and the valuation allowance will decrease proportionately resulting in a reduction of income tax expense. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and its effective tax rate in the future.
For the three months ended September 30, 20212022 and 2020,2021, the Company recorded an incomea tax benefitsbenefit of $($1.1) million and $($1.51.1) million, respectively, which corresponds to effective tax rates of 6.42.2% and 22.36.4%, respectively. For the nine months ended September 30, 20212022 and 2020,2021, the Company recorded an income tax benefit of $($5.611.2) million and an income tax expense of $2.85.6 million, respectively, which corresponds to effective tax rates of 18.16.3% and 29.918.1%, respectively. The effective tax rates for the three and nine months ended September 30, 2022 were impacted by the mostly non-deductible goodwill impairment charge taken in the second quarter of 2022 described in Note 7. Goodwill and Other Intangible Assets as well as the valuation allowance described above. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each period was also affected by various permanent tax differences, predominatelyincluding disallowed executive compensation deductions which werewas 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. TheFinally, 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.
17
The table below summarizes the significant components of the Company’s net deferred tax liability:asset (liability):
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||||
Deferred tax assets: |
| (In thousands) |
|
| (In thousands) |
| ||||||||||
Unearned premiums |
| $ | 13,101 |
| $ | 15,303 |
|
| $ | 13,454 |
|
| $ | 15,805 |
| |
Unearned commission |
| 9,649 |
| 9,272 |
|
|
| 9,384 |
|
|
| 9,459 |
| |||
Net operating loss |
| 1,880 |
| 1,885 |
| |||||||||||
State net operating loss |
|
| 1,490 |
|
|
| 1,222 |
| ||||||||
Tax-related discount on loss reserve |
| 3,809 |
| 3,322 |
|
|
| 4,799 |
|
|
| 3,872 |
| |||
Stock-based compensation |
| 225 |
| 113 |
|
|
| 455 |
|
|
| 84 |
| |||
Accrued expenses |
| 1,456 |
| 982 |
|
|
| 1,481 |
|
|
| 1,182 |
| |||
Leases |
| 738 |
| 394 |
|
|
| 841 |
|
|
| 792 |
| |||
Unrealized losses |
| 373 |
| 0 |
|
|
| 17,195 |
|
|
| 1,913 |
| |||
Federal net operating loss carryforward |
|
| 15,752 |
|
|
| — |
| ||||||||
Other |
|
| 719 |
|
| 343 |
|
|
| 416 |
|
|
| 472 |
| |
Valuation allowance |
|
| (10,650 | ) |
|
| — |
| ||||||||
Total deferred tax asset |
|
| 31,950 |
|
| 31,614 |
|
|
| 54,617 |
|
|
| 34,801 |
| |
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deferred acquisition costs |
| 22,122 |
| 20,694 |
|
|
| 23,561 |
|
|
| 21,977 |
| |||
Prepaid expenses |
| 184 |
| 236 |
|
|
| 118 |
|
|
| 177 |
| |||
Unrealized gains |
| — |
| 1,814 |
| |||||||||||
Property and equipment |
| 1,398 |
| 1,669 |
|
|
| 1,221 |
|
|
| 1,504 |
| |||
Note discount |
| 203 |
| 326 |
|
|
| 225 |
|
|
| 187 |
| |||
Basis in purchased investments |
| 37 |
| 53 |
|
|
| 666 |
|
|
| 34 |
| |||
Basis in purchased intangibles |
| 14,652 |
| 15,693 |
|
|
| — |
|
|
| 14,550 |
| |||
Internal revenue code 481(a)-Accounting method change |
| 5,361 |
| 8,577 |
|
|
| 1,104 |
|
|
| 4,416 |
| |||
Amortization of goodwill |
|
| 11,459 |
|
|
| — |
| ||||||||
Other |
|
| 1,658 |
|
| 1,029 |
|
|
| 1,626 |
|
|
| 1,382 |
| |
Total deferred tax liabilities |
|
| 45,615 |
|
| 50,091 |
|
|
| 39,980 |
|
|
| 44,227 |
| |
Net deferred tax liability |
| $ | (13,665 | ) |
| $ | (18,477 | ) | ||||||||
Net deferred tax asset (liability) |
| $ | 14,637 |
|
| $ | (9,426 | ) |
As of September 30, 2022, the Company has a gross operating loss carryforward for federal and state income tax purposes of $
20.7 million and $45.8 million, respectively, 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, the Company was notified by the tax authority that the federal2021.
Osprey Re, our reinsurance affiliate, based in Bermuda, made an irrevocable election under IRC Section 953(d) to be treated as a domestic insurance company for U.S. Federal income tax returns forpurposes. As a result of this election, the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority for the examined tax years, reporting that the returns were accepted as final. No further action will be required, and no other tax years are under examination.
17
At September 30, 2021 and December 31, 2020, we had 0 significant uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effectiveCompany's reinsurance subsidiary is subject to United States income tax rate.as if it were a U.S. corporation. Furthermore, limitations may be imposed on the ability to utilize Osprey Re’s deferred tax assets to the extent it has not contributed income to the consolidated group during its inclusion in the consolidated group.
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, 20202021 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 the Company's 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 writethe Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are
18
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 recordrecords 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 20212022 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.
18
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 2021-20222022-2023 reinsurance program provides first event coverage up to $1.431.3 billion for Heritage P&C, first event coverage up to $1.11.2 billion for NBIC, and first event coverage up to $680.0780.0 million for Zephyr. The Company’s first event retention in a 1 in 100 year100-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 year100-year event for each insurance company subsidiary is as follows: Heritage P&C – $32.040.0 million, of which $35.0 million would be100% ceded to Osprey; NBIC – $30.0 million of which $30.0 million would be ceded to Osprey in a shared contract with Zephyr; and Zephyr – $3240.0 million; and NBIC –million, of which $20.730.0 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 ourthe Company's 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 $2.83.2 billion of limit purchased in 20212022 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 2021-20222022-2023 catastrophe excess of loss reinsurance programs iswas approximately $312.0359.5 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 one 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.
19
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, 20202021 ceding 56.550.0% 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 2two 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 2two 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 2two 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. For the contract period of July 1, 2022 through June 30, 2023, the coverage for property losses is $2.75 million excess $750,000 and 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.
19
For a detailed discussion of the Company’s 2020-20212021-2022 Reinsurance Programplease Referrefer to Part II, Item 8, “Financial Statements and Supplementary Data” and “Note 12. Reinsurance” in the Company’s Annual Report on2021 Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 9, 2021.10-K.
Effect of Reinsurance
The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated statement of income for the three and nine months ended September 30, 20212022 and 2020:2021:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 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 |
|
| $ | 304,501 |
|
| $ | 274,178 |
|
| $ | 952,981 |
|
| $ | 886,059 |
|
Ceded |
|
| (53,505 | ) |
|
| (63,493 | ) |
|
| (491,677 | ) |
|
| (422,092 | ) |
|
| (60,885 | ) |
|
| (53,505 | ) |
|
| (536,139 | ) |
|
| (491,677 | ) |
Net |
| $ | 220,673 |
|
| $ | 214,749 |
|
| $ | 394,382 |
|
| $ | 375,684 |
|
| $ | 243,616 |
|
| $ | 220,673 |
|
| $ | 416,842 |
|
| $ | 394,382 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Direct |
| $ | 294,409 |
|
| $ | 254,982 |
|
| $ | 850,466 |
|
| $ | 731,489 |
|
| $ | 307,959 |
|
| $ | 294,409 |
|
| $ | 891,539 |
|
| $ | 850,466 |
|
Ceded |
|
| (131,964 | ) |
|
| (116,752 | ) |
|
| (399,323 | ) |
|
| (338,197 | ) |
|
| (148,266 | ) |
|
| (131,964 | ) |
|
| (420,645 | ) |
|
| (399,323 | ) |
Net |
| $ | 162,445 |
|
| $ | 138,230 |
|
| $ | 451,143 |
|
| $ | 393,292 |
|
| $ | 159,693 |
|
| $ | 162,445 |
|
| $ | 470,894 |
|
| $ | 451,143 |
|
Loss and Loss Adjustment Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Direct |
| $ | 195,099 |
|
| $ | 205,337 |
|
| $ | 483,382 |
|
| $ | 452,014 |
|
| $ | 809,993 |
|
| $ | 195,099 |
|
| $ | 1,147,243 |
|
| $ | 483,382 |
|
Ceded |
|
| (65,467 | ) |
|
| (85,619 | ) |
|
| (155,006 | ) | �� |
| (185,245 | ) |
|
| (654,144 | ) |
|
| (65,467 | ) |
|
| (749,834 | ) |
|
| (155,006 | ) |
Net |
| $ | 129,632 |
|
| $ | 119,718 |
|
| $ | 328,376 |
|
| $ | 266,769 |
|
| $ | 155,849 |
|
| $ | 129,632 |
|
| $ | 397,409 |
|
| $ | 328,376 |
|
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
20
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. Hurricane Ian struck Florida as a strong Category 4 hurricane on September 28, 2022. Gross catastrophe losses from Hurricane Ian are estimated to be of $655.4 million with net retained losses of $40.0 million. Gross losses from Hurricane Irma caused an increase in the ending balance as indicated below.
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 September 30, |
|
| Nine Months Ended September 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 |
|
| $ | 553,909 |
|
| $ | 625,979 |
|
| $ | 590,166 |
|
| $ | 659,341 |
| |||
Less: reinsurance recoverable on unpaid losses |
|
| 366,879 |
|
| 404,370 |
|
| 397,688 |
|
| 393,630 |
|
|
| 235,239 |
|
|
| 366,879 |
|
|
| 301,757 |
|
|
| 397,688 |
| |||
Net balance, beginning of period |
|
| 259,100 |
|
| 216,348 |
|
| 261,653 |
|
| 219,903 |
|
|
| 318,670 |
|
|
| 259,100 |
|
|
| 288,409 |
|
|
| 261,653 |
| |||
Incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Current year |
| 130,425 |
| 125,544 |
| 331,374 |
| 281,698 |
|
|
| 156,855 |
|
|
| 130,425 |
|
|
| 395,921 |
|
|
| 331,374 |
| |||||||
Prior years |
|
| (793 | ) |
|
| (5,826 | ) |
|
| (2,998 | ) |
|
| (14,929 | ) |
|
| (1,006 | ) |
|
| (793 | ) |
|
| 1,489 |
|
|
| (2,998 | ) |
Total incurred |
|
| 129,632 |
|
| 119,718 |
|
| 328,376 |
|
| 266,769 |
|
|
| 155,849 |
|
|
| 129,632 |
|
|
| 397,410 |
|
|
| 328,376 |
| |||
Paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Current year |
| 75,508 |
| 71,955 |
| 171,128 |
| 148,563 |
|
|
| 70,914 |
|
|
| 75,508 |
|
|
| 170,255 |
|
|
| 171,128 |
| |||||||
Prior years |
|
| 27,273 |
|
| 18,371 |
|
| 132,950 |
|
| 92,369 |
|
|
| 24,088 |
|
|
| 27,273 |
|
|
| 136,047 |
|
|
| 132,950 |
| |||
Total paid |
|
| 102,781 |
|
| 90,326 |
|
| 304,078 |
|
| 240,932 |
|
|
| 95,002 |
|
|
| 102,781 |
|
|
| 306,302 |
|
|
| 304,078 |
| |||
Net balance, end of period |
| 285,951 |
| 245,740 |
| 285,951 |
| 245,740 |
|
|
| 379,517 |
|
|
| 285,951 |
|
|
| 379,517 |
|
|
| 285,951 |
| |||||||
Plus: reinsurance recoverable on unpaid losses |
|
| 350,195 |
|
| 417,257 |
|
| 350,195 |
|
| 417,257 |
|
|
| 829,835 |
|
|
| 350,195 |
|
|
| 829,835 |
|
|
| 350,195 |
| |||
Balance, end of period |
| $ | 636,146 |
| $ | 662,997 |
| $ | 636,146 |
| $ | 662,997 |
|
| $ | 1,209,352 |
|
| $ | 636,146 |
|
| $ | 1,209,352 |
|
| $ | 636,146 |
|
As of September 30, 2021,2022, the Company reported $286.0379.5 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $213.5266.8 million attributable to IBNR net of reinsurance recoverable, or 74.770.34% 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.
20
As of September 30, 2021,2022, the Company had $22.7885,000 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate$21.1 million of approximately $716,900.Convertible Notes held by an insurance company subsidiary. For each of the respective nine monthnine-month periods ended September 30, 20212022 and 2020,2021, the Company made interest payments, net of affiliated Convertible Notes of approximately $1.0 million and $1.3 million, on the Convertible Notes, respectively.
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 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 directed the trustee to cancel the Notes tendered. Prior to this transaction, the outstanding balance as of September 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 used $10.0 million from its revolving credit facility to replenish the cash used to pay the $10.9 million for the purchase of the tendered Notes.
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, theThe Company entered intois party to afive-year, $125.0150.0 million credit agreement (the(as amended from time to time, the “Credit Agreement”) with a syndicate of lenders consisting oflenders.
On November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75.075 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related
21
thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the revolving credit facility commitments and/or term loan commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%). The Seventh Amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement. For additional information regarding the changes to the financial covenants in the Credit Agreement, refer to Part II, Item 5, “Other Information” in this Quarterly Report on Form 10-Q.
The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”) and (2) a $50.0five-year million senior secured revolving credit facility in an aggregate principal amount of $50 million (inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, 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: TheFacility. As amended by the Seventh Amendment, the principal amount of the Term Loan Facility as amended, amortizes in quarterly installments, beginningwhich began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to (i) $1.9 million per quarter, priorpayable quarterly, decreasing to July 29, 2021, (ii) $875,000 per quarter commencing with the quarter ending December 31, 2021, and (iii)increasing to $1.32.4 million thereafter,per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of December 31, 2020,September 30, 2022, there was $60.066.5 million in aggregate principal outstanding on the Term Loan Facility and as of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding on the Term Loan Facility. On July 28, 2021, the principal amount of the term loan outstanding under 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.
For the nine months ended September 30, 20212022, the Company made principal and 2020,interest payments of approximately $2.6 million and $1.7 million, respectively and for the comparable period of 2021, the Company made interest payments of approximately $1.5 million and $2.1 million on the term loan, respectively.
Revolving Credit Facility: The Revolving Credit Facility, as amended, allows for borrowings of up to $75.0 million inclusive of a $5.0 million sublimit for the issuance of letters of credit and a $10.0 million sublimit for swingline loans. As of September 30, 2021, and December 31, 2020, the Company had $0 and $10 million of borrowings and 0 letters of credit outstanding under the Revolving Credit Facility, respectively. In connection with the Fifth Amendment of the Credit Agreement, the Revolving Credit Facility's outstanding balance of $10 million was paid in full. For the nine months ended September 30, 2021 and 2020, the Company made interest payments of $196,500 and $451,500 under the Revolving Credit Facility, respectively.
At September 30, 2021, the effective interest rate for the Term Loan and for the Revolving Credit Facility was 2.87%.Facility.
On March 31, 2021,May 4, 2022, 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 Companyand its subsidiary guarantors amended the Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the ThirdSixth Amendment to Credit Agreement (the “Third“Sixth Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Third Amendment modified the Credit Agreement to increase 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 partyPursuant to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The SecondSixth Amendment, modified the negative covenantsconsolidated fixed charge coverage ratio included in the Credit Agreement to permitwill be calculated based on the Company to make acquisitions and investments if, after giving effect toCompany’s consolidated tangible net worth, rather than the acquisition or investment, either (1) the Company has an aggregate of $25.0 million in cash and availabilityCompany’s consolidated net worth as was required under the revolving credit facility or (2)existing Credit Agreement. Specifically, the Sixth Amendment provides that, effective as of March 31, 2022 and for future fiscal quarters, the Company’s consolidated leverage ratio undertangible net worth, which is gross of accumulated other comprehensive income, as of the Credit Agreement is at leastend of a fiscal quarter turnmay not be less than the required ratio forsum of (1) $162,333,750, plus (2) 25% of the trailing four quarters. The amendment givessum of the positive consolidated net income of the Company more flexibilityand its subsidiaries with respect to make acquisitionseach full fiscal quarter, plus (3) 100% of the net cash proceeds of certain equity issuance transactions of the Company and investments in the future.its subsidiaries. All other material terms of the Credit Agreement remainremained unchanged.
Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the Seventh Amendment, the borrowings under the Revolving Credit Facility were repaid in full.
At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin.
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 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (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, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a
22
change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.
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
At September 30, 2022, the effective interest rate on for the Term Loan Facility and Revolving Credit Facility was 5.88% and 5.69%, respectively. The Company monitors the rates prior to the reset date which allows it to establish if the payment is monthly or quarterly payment based on the most beneficial rate used to calculate the 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
21
towards toward the loan. For each of the respective nine-month periods ended September 30, 20212022 and 2020,2021, the Company made principal and interest payments of approximately $670,000 on the mortgage loan.
FHLB Loan Agreements
In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. In connection with the loan agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of September 30, 2021,2022, the fair value of the collateralized securities was $22.726.4 million and the equity investment in FHLB common stock was $1.2 million. AsFor each of the nine-month periods ended September 30, 2021,2022, and 2020,2021, the Company made quarterly interest payments as per the terms of the loan agreement of approximately $450,500450,500. and $457,100, respectively. As of September 30, 2021,2022, and December 31, 2020,2021, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston valued at $215,900319,100 and $222,900215,900, respectively.
The following table summarizes the Company’s long-term debt and credit facilities as of September 30, 20212022 and December 31, 2020:2021:
|
| September 30, 2021 |
| December 31, 2020 |
|
| September 30, 2022 |
|
| December 31, 2021 |
| |||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Convertible debt |
| $ | 23,413 |
|
| $ | 23,413 |
|
| $ | 885 |
|
| $ | 23,413 |
|
Mortgage loan |
| 11,599 |
|
|
| 11,827 |
|
| $ | 11,281 |
|
| $ | 11,521 |
| |
Term loan facility |
| 70,000 |
|
|
| 60,000 |
| |||||||||
Credit loan facility |
| $ | 66,500 |
|
| $ | 69,125 |
| ||||||||
Revolving credit facility |
| 0 |
|
|
| 10,000 |
|
| $ | 25,000 |
|
| $ | — |
| |
FHLB loan agreement |
|
| 19,200 |
|
|
| 19,200 |
|
| $ | 19,200 |
|
| $ | 19,200 |
|
Total principal amount |
| $ | 124,212 |
|
| $ | 124,440 |
|
| $ | 122,866 |
|
| $ | 123,259 |
|
Less: unamortized discount and issuance costs |
| $ | 2,731 |
|
| $ | 3,442 |
| ||||||||
Deferred finance costs |
| $ | 1,583 |
|
| $ | 2,502 |
| ||||||||
Total long-term debt |
| $ | 121,481 |
|
| $ | 120,998 |
|
| $ | 121,283 |
|
| $ | 120,757 |
|
AsAfter giving effect to Seventh Amendment, 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 dividends in an aggregate amount not to exceed $10.0 million in any fiscal year.
The covenants and other requirements under the revolving agreement represent the most restrictive provisions that the Company is subject to with respect to its long-term debt.
The schedule of principal payments on long-term debt as of September 30, 20212022 is as follows:
Year |
| Amount |
|
| Amount |
| ||
|
| (In thousands) |
|
| (In thousands) |
| ||
2021 remaining |
| $ | 953 |
| ||||
2022 |
| 3,822 |
| |||||
2022 remaining |
| $ | 957 |
| ||||
2023 |
| 23,039 |
|
|
| 23,039 |
| |
2024 |
| 4,292 |
|
|
| 4,292 |
| |
2025 |
| 5,624 |
|
|
| 5,624 |
| |
2026 |
|
| 78,331 |
| ||||
Thereafter |
|
| 86,482 |
|
|
| 10,623 |
|
Total |
| $ | 124,212 |
|
| $ | 122,866 |
|
23
NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following as of September 30, 20212022 and December 31, 2020:2021:
22
Description |
| September 30, 2021 |
|
| December 31, 2020 |
|
| September 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 |
| $ | 40,089 |
|
| $ | 40,406 |
| ||||||||
Accounts payable and other payables |
|
| 6,951 |
| 9,248 |
|
|
| 11,057 |
|
|
| 10,086 |
| ||
Accrued interest and issuance costs |
|
| 592 |
| 833 |
|
|
| 575 |
|
|
| 735 |
| ||
Accrued dividends |
|
| 1,680 |
| 1,670 |
|
|
| 72 |
|
|
| 1,634 |
| ||
Premium tax |
|
| 1,523 |
|
|
| 871 |
| ||||||||
Other liabilities |
|
| 257 |
| 80 |
|
|
| 30 |
|
|
| 195 |
| ||
Premium tax |
|
| 1,531 |
| 0 |
| ||||||||||
Commission payables |
|
| 14,404 |
|
| 18,245 |
|
|
| 15,871 |
|
|
| 17,598 |
| |
Total other liabilities |
| $ | 67,036 |
| $ | 80,935 |
|
| $ | 69,217 |
|
| $ | 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 $290.0261.4 million at September 30, 20212022 and $333.3302.1 million at December 31, 2020.2021. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, and risk-based capital requirements with which the Company is in compliance. At September 30, 2021,2022, the Company’s insurance subsidiaries met the financial and regulatory requirements of each of the states in which they conduct business.
NOTE 17. COMMITMENTS AND CONTINGENCIES
The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.
NOTE 18. RELATED PARTY TRANSACTIONS
From time to time the Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders, including as set forth below. The Company has entered into each of these arrangements without obligation to continue its effect in the future and the associated expense was immaterial to its results of operations or financial position as of September 30, 20212022 and 2020.2021.
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
24
is 4%. For the three and nine months ended September 30, 2022, the contributions made to the plan on behalf of the participating employees were approximately $276,090 and $1.0 million, respectively. For the three and nine months ended September 30, 2021, and 2020, the contributions made to the plan on behalf of the participating employees were approximately $293,000 and $265,000 and for the nine months ended September 30, 2021 and 2020, contributions made to the plan were approximately $985,000 and $897,000, respectively.
23
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 threenine months ended September 30, 20212022 and 2020,2021, the Company incurred medical premium costs including the new 2021-2022 healthcare premiums, of $1.63.4 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 million, respectively. An additional liability fromAs of September 30, 2022 and December 31, 2021, the Company's self-insured healthcare plan was accrued for approximatelyCompany had $442,0000 million and $1.4 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 30, 2021,2022, the Company had 27,802,62625,898,930 shares of common stock outstanding, 9,427,94811,890,599 treasury shares of common stock and 240,835715,454 unvested restricted common stock with accrued dividends reflecting total paid-in capital of $332.6334.2 million as of such date.
As more fully disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2020,2021, there were, 27,748,60626,753,511 shares of common stock outstanding, 9,279,83910,536,737 treasury shares of common stock and 100,267283,092 unvested shares of restricted common stock, representing $331.9332.8 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 ratifiedestablished a stocknew share repurchase program authorizingplan to commence upon December 31, 2021, for the Company to repurchasepurpose or repurchasing up to an aggregate of $50.025.0 million of its common stock which had expiredCommon 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, 20202022 (the "New Share Repurchase Plan"). As of December 31, 2020,For the nine months ended September 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 148,1091,353,862 shares of its common stock under its repurchase programprograms for $1.06.7 million.
At September 30, 2021,2022, the Company has the capacity under its stock repurchase programthe New Share Repurchase Plan to repurchase $4918.3 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 OctoberApril 6, 20212022 to stockholders of record as of September 15, 2021March 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.
On August 3, 2022, the Board of Directors elected to allocate the $0.06 per share typically used to pay a quarterly dividend to shareholders to repurchase common stock totaling $1.7 million. The Board of Directors re-evaluates dividend distribution on a quarterly basis and will make a determination, in part, based on the current stock trading price as compared to book value.
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.operations and the limitations under the Company’s debt facilities.
25
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 planPlan allows for a variety of equity awards including stock options, restricted stock awards and performance-based awards.
24
At September 30, 20212022 there were 939,691386,603 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 first quarter ended March 31, 2021,of 2022, the Company issued to its Chief Executive Officerawarded 95,8783,636 performance-basedshares and 115,327 shares of time-based restricted sharesstock with a market value at the time of grant a fair value of $10.435.50 and $6.72 per share.share, respectively to certain employees. The time-based restricted stock will vest in two andthree year equal installments on December 27, 2022, 2023 and 2024, respectively. In addition, during the first quarter of 2022, the Company awarded 10,909 shares and 245,536 shares 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 havestock has a three-year performance period beginning on January 1, 20212022 and ending on December 31, 20232024 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 numberawards will vest on the date of 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 will vest on the earlier of the one year anniversary of the grant date and the date immediately prior to the date of 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-yeartwo 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 months ended September 30, 20212022 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 |
|
| (22,271 | ) |
|
| 4.40 |
|
Non-vested, at September 30, 2022 |
|
| 715,454 |
|
| $ | 7.40 |
|
26
Awards are being amortized to expense over the onetwo to five-year vesting period. The Company recognized $320,000 and $1.4 million of compensation expense forFor the three months ended September 30, 2022 and 2021, the Company recognized $499,000and 2020,$320,000 of compensation expense, respectively. The Company recognized $1.5 million and $867,000 of compensation expense for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 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, 40,26751,768 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, 9,849 shares were withheld by the Company to cover withholding taxes of $58,000. For the comparable period of 2021, 40,267 shares were vested and released of which 18,973 shares were withheld by the Company to cover withholding taxes of $171,000. For the comparable period of 2020, 35,267 shares were vested and released of which 22,223 shares were withheld by the Company to cover withholding taxes of $297,000.
At September 30, 2021,2022, there was approximately $1.01.2 million unrecognized expense related to time-based non-vested restricted stock and an additional $1.11.4 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 $1.62.1 million of unrecognized expense.
Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at September 30, 20212022 is as follows:
25
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 |
|
| 86,954 |
|
|
| 3.22 |
|
|
| 1.00 |
| ||||||||||||
|
|
| 240,835 |
|
|
|
|
|
|
|
|
| 715,454 |
|
|
|
|
|
|
NOTE 22. SUBSEQUENT EVENTS
The Company performed an evaluation of subsequent events through the date the condensed consolidated financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of September 30, 2021.2022.
On November 7, 2022, Heritage Insurance Holdings, Inc. and its subsidiary guarantors (together, the “Company”) amended that certain Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent, collateral agent, swingline lender and issuing bank.
The Seventh Amendment amended the Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the revolving credit facility commitments and/or term loan commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) November 4, 2021increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%).
The Seventh Amendment also modifies certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future. Specifically, starting in the first quarter of 2023, the Seventh Amendment amends certain financial covenants as follows: (1) require additional leverage ratios under the Consolidated Leverage Ratio covenant (as defined in the Credit Agreement) after the initial step down to 2.50x in the second quarter of 2023 not to exceed 2.25x as of the second quarter of 2024 and 2.00x as of the second quarter of 2025, (2) apply all (A) Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement (“Non-credit Parties”) that exceed $38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20x. The Seventh Amendment also (A) eliminates the current $10 million basket available to the Company announcedto pay dividends to its shareholders or to repurchase its securities, (B) provides for a dividend of up to $2.0 million in the fourth quarter of 2024 under certain conditions and (C) restricts future dividends based on maintenance of certain financial ratios, including Consolidated Tangible
27
Net Worth. As a result, going forward, dividends and stock repurchases may be limited or restricted entirely and the Company’s ability to contribute capital to its insurance subsidiaries that its Board of Directors declared a $are not parties to the Credit Agreement may be limited.0.06 per share quarterly dividend payable on January 6, 2022 to stockholders of record as of December 15, 2021.
26
28
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, 20202021 (“20202021 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.
FINANCIAL HIGHLIGHTS
Overview
Heritage Insurance Holdings, Inc., isWe are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across itsour multi-state footprint. We provide personal residential insurance in sixteen statesAlabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in three of those states, while maintaining licensesFlorida, New Jersey, and New York. We provide personal residential insurance in one additional state.Florida on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, 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 Companyus in establishing our competitive position and can impact our ability to write policies.
Trends
Inflation, Underwriting and Pricing
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 13.6% for the quarter ended September 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 can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.
We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. our retention has remained steadily in the range of 90% despite the rate increases we have implemented, in large part due to a challenging property insurance market in many 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 focused on managing exposure and achieving rate adequacy throughout the book of business.
We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Our Florida personal lines market is also seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public. Our response to this phenomenon is a combination of raising rates and reducing exposure. Since that time the claims abuse has extended throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeds levels experienced in other states. Correspondingly, our exposure reduction plan expanded to personal lines business throughout the state of Florida.
Our industry experienced higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in the Spring 2022 renewals. We anticipate continued cost increases and availability constraints for the 2023 renewal season. As described herein, we are carefully managing exposure by reducing new business written in certain geographies, non-renewing unprofitable business in compliance with regulatory requirements, increasing rates, and narrowing our underwriting requirements.
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 resultant from the litigated claims environment. Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress toward reducing losses from abusive claim reporting practices.
The table below shows reductions in Florida policy count and total insured value (“TIV”) of 17.6% and 10.3%, respectively, from the prior year quarter. During this period, Florida premium in force declined by only 2.6% as rate increases dampened the impact of the reduction in policy count. For markets outside of Florida, the premiums-in-force increased at a much larger rate than the increases in policies in force and TIV, primarily due to rate increases.
29
|
| At September 30, |
|
|
|
| ||||||
|
| 2022 |
|
| 2021 |
|
| % Change |
| |||
Policies in force: |
|
|
|
|
|
|
|
|
| |||
Florida |
|
| 188,383 |
|
|
| 228,572 |
|
|
| -17.6 | % |
Other States |
|
| 352,989 |
|
|
| 352,714 |
|
|
| 0.1 | % |
Total |
|
| 541,372 |
|
|
| 581,286 |
|
|
| -6.9 | % |
|
|
|
|
|
|
|
|
|
| |||
Premiums in force: |
|
|
|
|
|
|
|
|
| |||
Florida | $ |
| 569,589,537 |
| $ |
| 584,994,491 |
|
|
| -2.6 | % |
Other States |
|
| 672,812,875 |
|
|
| 589,527,230 |
|
|
| 14.1 | % |
Total | $ |
| 1,242,402,412 |
| $ |
| 1,174,521,721 |
|
|
| 5.8 | % |
|
|
|
|
|
|
|
|
|
| |||
Total Insured Value: |
|
|
|
|
|
|
|
|
| |||
Florida | $ |
| 102,784,056,201 |
| $ |
| 114,537,338,974 |
|
|
| -10.3 | % |
Other States |
|
| 304,657,398,158 |
|
|
| 284,498,624,168 |
|
|
| 7.1 | % |
Total | $ |
| 407,441,454,359 |
| $ |
| 399,035,963,142 |
|
|
| 2.1 | % |
Strategic Profitability Initiatives
The following provides an update to the Company’s strategic initiatives that we expect will enable Heritage to achieve consistent long-term quarterly earnings and drive shareholder value. The Supplemental Information table included in this earnings release demonstrates progress made since third quarter 2021.
Recent Developments
Economic and Market Factors
We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general supply chain disruptions and inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims.
Goodwill Impairment Charge
We evaluate goodwill and other intangible assets for impairment annually, or whenever events or changes in circumstances indicate that it is likely that the carrying amount of goodwill and other intangible assets may exceed the implied fair value. Any impairment is charged to operations in the period that the impairment is identified. The evaluation of goodwill impairment requires considerable management judgment and includes a review of a variety of factors as described below. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our 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
30
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.
Third Quarter 2022 Financial Results
The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, including certain key performance indicators such as net combined ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document.
We continue to monitor the short- and long-term impacts of the COVID-19 virus and its variants. For the year ended December 31, 2020, we saw negligible impact to our business, and that trend has continued through the third quarter of 2021. As a residential property insurer, we view our business as somewhat insulated because property owners and renters generally view our products as a necessity. The majority of our gross and net premiums written are from renewals of expiring policies. New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio. In a prolonged recessionary and social-distancing environment, we could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition. Increases in the cost of materials and labor for home repairs can influence our losses associated with claims. To the extent state and local requirements allow employees to return to the office, the Company has implemented return-to-office and hybrid programs, with the latter including a combination of in-office and remote work.
Climate Change
Climate change, to the extent it produces extreme changes in temperatures and changes in weather patterns, could affect the frequency or severity of weather-related catastrophes. The incidence and severity of catastrophes are inherently unpredictable and the extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected and the severity of the event. Although we attempt to manage our exposure to catastrophes through our underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance protection and may have a material adverse impact on our results of operations and financial condition. Further, an increased incidence of catastrophic weather events could impact the cost and availability of our reinsurance program.
Coronavirus Aid, Relief, and Economic Security Act
The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that we are deferring to future periods. We do not currently expect the CARES Act to have a material impact on our liquidity or our financial results, except for the benefit associated with a 5-year carryback of 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 financial results.
31 Results of Operations Comparison of the Revenue For the Three Months Ended September 30, (Unaudited) 2021 2020 $ Change % Change (in thousands) REVENUE: Gross premiums written $ 274,178 $ 278,242 $ (4,064 ) (1.5 )% Change in gross unearned premiums 20,231 (23,260 ) 43,491 (187.0 )% Gross premiums earned 294,409 254,982 39,427 15.5 % Ceded premiums (131,964 ) (116,752 ) (15,212 ) 13.0 % Net premiums earned 162,445 138,230 24,215 17.5 % Net investment income 1,548 2,817 (1,269 ) (45.0 )% Net realized and unrealized (losses) gains (6 ) 20,355 (20,361 ) NM Other revenue 3,421 3,717 (296 ) (8.0 )% Total revenue $ 167,408 $ 165,119 $ 2,290 1.4 % For the Three Months Ended September 30, (Unaudited) 2022 2021 $ Change % Change (in thousands) REVENUE: Gross premiums written $ 304,501 $ 274,178 $ 30,323 11.1 % Change in gross unearned premiums 3,458 20,231 (16,773 ) (82.9 )% Gross premiums earned 307,959 294,409 13,550 4.6 % Ceded premiums earned (148,266 ) (131,964 ) (16,302 ) 12.4 % Net premiums earned 159,693 162,445 (2,752 ) (1.7 )% Net investment income 2,887 1,548 1,339 86.5 % Net realized losses (3 ) (6 ) 3 (50.0 )% Other revenue 2,916 3,421 (505 ) (14.8 )% Total revenue $ 165,493 $ 167,408 $ (1,916 ) (1.1 )% Total revenue Gross premiums written Gross premiums written were $304.5 million, up 11.1% from $274.2 million the prior year quarter, reflecting a 4.8% growth in Florida and 15.4% 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 $1.24 billion in the third quarter of 2022, up 5.8% from third quarter 2021, while policies-in-force were down Gross premiums earned Gross premiums earned were Ceded premiums earned Ceded premiums earned were Net premiums earned Net premiums earned were Net investment income Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was Other revenue Other revenue was 32 For the Three Months Ended September 30, (Unaudited) 2021 2020 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses 129,632 119,718 9,914 8.3 % Policy acquisition costs 35,984 31,960 4,024 12.6 % General and administrative expenses 17,169 17,923 (754 ) (4.2 )% Total operating expenses 182,785 169,601 13,183 7.8 % For the Three Months Ended September 30, (Unaudited) 2022 2021 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses $ 155,849 $ 129,632 $ 26,217 20.2 % Policy acquisition costs 39,194 35,984 3,210 8.9 % General and administrative expenses 17,758 17,169 589 3.4 % Total operating expenses 212,801 182,785 30,017 16.4 % Total operating expenses Total operating expenses were up $30.0 million, or 16.4% in the third quarter of 2022. As described below, the driver was primarily from the increase in losses and loss adjustment expenses as well as an increase in acquisition costs. Losses and loss adjustment expenses Losses and loss adjustment expenses (“LAE”) were $155.8 million in the third quarter of 2022, up from $129.6 million in Policy acquisition costs Policy acquisition costs were General and administrative expenses General and administrative expenses were For the Three Months Ended September 30, (Unaudited) 2022 2021 $ Change % Change (in thousands, except per share and share amounts) Operating loss $ (47,308 ) $ (15,377 ) $ (31,931 ) 207.7 % Interest expense, net 2,027 2,150 (123 ) (5.7 )% Loss before income taxes (49,335 ) (17,527 ) (31,809 ) 181.5 % Benefit for income taxes (1,095 ) (1,117 ) 23 (2.0 )% Net loss $ (48,240 ) $ (16,410 ) $ (31,831 ) 194.0 % Basic net loss per share $ (1.83 ) $ (0.59 ) $ (1.24 ) 210.2 % Diluted net loss per share $ (1.83 ) $ (0.59 ) $ (1.24 ) 210.2 % Net loss For the Three Months Ended September 30, (Unaudited) 2021 2020 $ Change % Change (in thousands, except per share and share amounts) Operating loss (15,377 ) (4,482 ) (10,895 ) 243.1 % Interest expense, net 2,150 2,251 (101 ) (4.5 )% Loss before income taxes (17,527 ) (6,733 ) (10,793 ) 160.3 % Benefit for income taxes (1,117 ) (1,500 ) 383 (25.5 )% Net loss $ (16,410 ) $ (5,233 ) $ (11,177 ) 213.6 % Basic net loss per share $ (0.59 ) $ (0.19 ) $ (0.40 ) 209.1 % Diluted net loss per share $ (0.59 ) $ (0.19 ) $ (0.40 ) 209.1 % Third quarter 2022 net loss was $48.2 million ($1.83 loss per share), down from net loss of $16.4 million ($0.59 loss per share) in the prior year quarter, driven primarily from the increase in net losses and loss adjustment expenses incurred as described above and the relatively small benefit for income taxes as described below. Interest expense, net Net interest expense was Benefit for income taxes Benefit for income taxes was $1.1 million in third quarter 33 reinsurer, Osprey Re, for which net operating losses can only be used to offset income at Osprey Re due to the 953(d) election made when Osprey Re was formed. This was accounted for as an increase of income tax expense for the quarter. Ratios For the Three Months Ended September 30, (Unaudited) 2022 2021 Ceded premium ratio 48.1 % 44.8 % Net loss and LAE ratio 97.6 % 79.8 % Net expense ratio 35.7 % 32.7 % Net combined ratio 133.3 % 112.5 % Net combined ratio The net combined ratio was 133.3% in the third quarter of 2022, up 20.8 points from 112.5% in the prior year quarter. The increase stems primarily from the increase in the net loss and LAE ratio, as described below. Ceded premium ratio The ceded premium ratio was 48.1% in the third quarter of 2022, up 3.3 points from 44.8% in the prior year quarter, reflecting a higher cost of the 2022-2023 catastrophe excess of loss program, stemming from both higher costs and higher TIV, driving the growth in ceded premiums earned to outpace the growth in gross premiums earned described above. Net loss and LAE ratio The net loss and LAE ratio was 97.6% in the third quarter of 2022, up 17.8 points from 79.8% in the prior year quarter, driven by higher weather and attritional losses. Net current accident year weather losses of $63.8 million, up 24.2% from $51.4 million in the prior year quarter. Current accident year weather losses include $40.0 million of net current accident quarter catastrophe losses from Hurricane Ian, up from $16.0 million in the prior year quarter, and $23.8 million of other weather losses, down from $35.4 million in the prior year quarter. Net expense ratio The net expense ratio was 35.7% in the third quarter of 2022, up 3.0 points from 32.7% in the prior year quarter. This was driven by higher underwriting costs associated with the growth in gross premiums written. Results of Operations Comparison of the Nine Months Ended September 30, 2022 and 2021 For the Nine Months Ended September 30, 2022 2021 $ Change % Change (Unaudited) (in thousands) REVENUE: Gross premiums written $ 952,981 $ 886,059 $ 66,922 7.6 % Change in gross unearned premiums (61,442 ) (35,593 ) (25,849 ) 72.6 % Gross premiums earned 891,539 850,466 41,073 4.8 % Ceded premiums earned (420,645 ) (399,323 ) (21,322 ) 5.3 % Net premiums earned 470,894 451,143 19,751 4.4 % Net investment income 7,050 3,797 3,253 85.7 % Net realized losses (121 ) (926 ) 805 (86.9 )% Other revenue 10,049 10,835 (786 ) (7.3 )% Total revenue $ 487,872 $ 464,849 $ 23,022 5.0 % Total revenue Total revenue was $487.9 million for the nine months ended September 30, 2022, up 5.0% from $464.8 million in the prior year period. The increase primarily stems from higher net premiums earned and investment income, as described below. Gross premiums written Gross premiums written were $953.0 million for the nine months ended September 30. 2022, up 7.6% from $886.1 million in the prior year period. We experienced growth of 13.1% outside of Florida and 1.8% growth in Florida. Growth throughout our book of business was largely driven by rate increases resulting in a higher average premium per policy. 34 Premiums-in-force were $1.24 billion in the third quarter of 2022, up 5.8% from third quarter 2021, while policies-in-force were down 6.9%, with the difference largely stemming from rate increases. The reduction in policies-in-force from the third quarter of 2021 reflects our exposure management initiatives. Gross premiums earned Gross premiums earned were $891.5 million for the nine months ended September 30. 2022, up 7.0% from $850.5 million in the prior year period. The increase reflects higher gross premiums written over the preceding twelve months, driven primarily by higher rates. Ceded premiums earned Ceded premiums earned were $420.6 million for the nine months ended September 30, 2022, up 5.3% from $399.3 million in the prior year period. The increase is attributable to the higher cost of the current year catastrophe excess of loss contract for which the impact was partly offset by a $18 million ceded premium on the severe convective storm contract included in the prior year amount. Net premiums earned Net premiums earned were $470.9 million for the nine months ended September 30, 2022, up 4.4% from $451.1 million in the prior year period. On a year-to-date basis, growth in gross premiums earned exceeded the growth in ceded premiums earned. However, on a quarter-to-date basis, the growth in ceded premiums earned exceeded the growth in gross premiums earned. This relates primarily to the cost of our severe convective storm reinsurance contract in 2021, which was fully earned by the second quarter of 2021. Net investment income Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $6.9 million for the nine months ended September 30, 2022, compared to $2.9 million in the prior year period. The increase is primarily due to higher balances in our fixed income portfolio than the prior nine-month period, coupled with a higher interest rate environment. Other revenue Other revenue was $10.0 million for the nine months ended September 30, 2022, down 7.3% from $10.8 million in the prior year period, driven primarily by a decline in policy fee income associated with the reduction of policies in force. For the Nine Months Ended September 30, (Unaudited) 2022 2021 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses $ 397,409 $ 328,376 $ 69,033 21.0 % Policy acquisition costs 115,826 109,183 6,643 6.1 % General and administrative expenses 54,947 52,490 2,457 4.7 % Goodwill impairment 91,959 — 91,959 NM Total operating expenses 660,141 490,049 170,092 34.7 % NM -Not meaningful Total operating expenses Total operating expenses were $660.1 million for the nine months ended September 30, 2022, up 34.7% from $490.0 million in the prior year period, primarily due to the $92.0 million pre-tax goodwill impairment charge taken in the second quarter of 2022, and a $69.0 million increase in losses and loss adjustment expenses detailed below. Losses and loss adjustment expenses Losses and LAE were $397.4 million for the nine months ended September 30, 2022, up 21.0% from $328.4 million in the prior year period driven by higher weather and attritional losses. Net current accident year weather losses were $165.7 million, up 40.1% from $118.3 million in the prior year period. Current accident year catastrophe weather losses were $117.1 million, up from $55.8 million in the prior year period, with current accident year other weather losses of $48.6 million, down from $62.5 million in the prior year period. Net current accident year catastrophe weather losses include a $40.0 million retention for Hurricane Ian. Policy acquisition costs Policy acquisition costs were $115.8 million for the nine months ended September 30, 2022, up 6.1% from $109.2 million in the prior year period. The increase is primarily attributable to growth in gross premiums written. 35 General and administrative expenses General and administrative expenses were $54.7 million for the nine months ended September 30, 2022, up 4.7% from $52.5 million in the prior year period. The increase is primarily attributable to a $1.5 million state tax credit recorded in the prior year period. Goodwill impairment As a result of our analysis for goodwill impairment performed during the second quarter of 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. For the Nine Months Ended September 30, (Unaudited) 2022 2021 $ Change % Change (in thousands, except per share and share amounts) Operating loss $ (172,269 ) $ (25,200 ) $ (147,069 ) NM Interest expense, net 5,750 5,953 (203 ) (3.4 )% Loss before income taxes (178,019 ) (31,153 ) (146,866 ) 471.4 % Benefit for income taxes (11,155 ) (5,644 ) (5,511 ) 97.6 % Net loss $ (166,864 ) $ (25,509 ) $ (141,355 ) NM Basic net loss per share $ (6.29 ) $ (0.91 ) $ (5.37 ) NM Diluted net loss per share $ (6.29 ) $ (0.91 ) $ (5.37 ) NM NM -Not meaningful Net loss Net loss for the nine months ended September 30, 2022 was $166.9 million ($6.29 loss per share), compared to a net loss of $25.5 million ($0.91 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, as described above, coupled with an underwriting loss generated for the nine-month period driven by higher weather and attritional losses over the prior period, which includes a net retention of $40.0 million related to Hurricane Ian, as described above. Additionally, the benefit for income taxes was lower than our statutory rate, as described below. Interest expense, net Net interest expense was $5.8 million for the nine months ended September 30, 2022, slightly down from the prior year period. Benefit for income taxes Benefit for income taxes was $11.2 million for the nine months ended September 30, 2022 compared to $5.6 million in the prior year period. The effective tax rate was 6.3% for the nine months ended September 30, 2022 compared to 18.1% for the prior year period. The effective tax rate for the nine months ended September 30, 2022 was impacted by the mostly non-deductible goodwill impairment charge as described above as well as a valuation allowance of $10.7 million recorded against our deferred tax asset, related to our captive reinsurer, Osprey Re, related to the IRC Section 953(d) election made when Osprey Re was formed. As a result of this election, net operating losses for Osprey Re may only be used to offset taxable income at Osprey Re. The impact of permanent tax differences on projected results of operations for the calendar year also impacts the effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information. For the Nine Months Ended September 30, (Unaudited) 2022 2021 Ceded premium ratio 47.2 % 47.0 % Net loss and LAE ratio 84.4 % 72.8 % Net expense ratio 36.3 % 35.8 % Net combined ratio 120.7 % 108.6 % 36 For the Three Months Ended September 30, (Unaudited) 2021 2020 Ceded premium ratio 44.8 % 45.8 % Net loss and LAE ratio 79.8 % 86.6 % Net expense ratio 32.7 % 36.1 % Net combined ratio 112.5 % 122.7 % Net combined ratio The net combined ratio was For the Nine Months Ended September 30, 2021 2020 $ Change % Change (Unaudited) (in thousands) REVENUE: Gross premiums written $ 886,059 $ 797,776 $ 88,283 11.1 % Change in gross unearned premiums (35,593 ) (66,287 ) 30,694 (46.3 )% Gross premiums earned 850,466 731,489 118,977 16.3 % Ceded premiums (399,323 ) (338,197 ) (61,126 ) 18.1 % Net premiums earned 451,143 393,292 57,851 14.7 % Net investment income 3,797 9,783 (5,986 ) (61.2 )% Net realized and unrealized (losses) gains (926 ) 20,377 (21,303 ) NM Other revenue 10,835 10,385 450 4.3 % Total revenue $ 464,849 $ 433,837 $ 31,013 7.1 % For the Nine Months Ended September 30, (Unaudited) 2021 2020 $ Change % Change OPERATING EXPENSES: (in thousands) Losses and loss adjustment expenses 328,376 266,769 61,607 23.1 % Policy acquisition costs 109,183 92,243 16,940 18.4 % General and administrative expenses 52,490 59,583 (7,093 ) (11.9 )% Total operating expenses 490,049 418,595 71,454 17.1 % For the Nine Months Ended September 30, (Unaudited) 2021 2020 $ Change % Change (in thousands, except per share and share amounts) Operating (loss) income (25,200 ) 15,242 (40,442 ) (265.3 )% Interest expense, net 5,953 5,939 14 0.2 % (Loss) income before income taxes (31,153 ) 9,303 (40,456 ) (434.9 )% (Benefit) provision for income taxes (5,644 ) 2,784 (8,428 ) (302.7 )% Net (loss) income $ (25,509 ) $ 6,519 $ (32,028 ) (491.3 )% Basic net (loss) income per share $ (0.91 ) $ 0.23 $ (1.14 ) (497.5 )% Diluted net (loss) income per share $ (0.91 ) $ 0.23 $ (1.14 ) (497.5 )% For the Nine Months Ended September 30, (Unaudited) 2021 2020 Ceded premium ratio 47.0 % 46.2 % Net loss and LAE ratio 72.8 % 67.8 % Net expense ratio 35.8 % 38.6 % Net combined ratio 108.6 % 106.4 % Ceded premium ratio The ceded premium ratio was Net loss and LAE ratio The net loss and LAE ratio was Net expense ratio The net expense ratio was PAC ratio. Liquidity and Capital Resources Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of September 30, 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 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. As part of the Seventh Amendment to the Credit Agreement, discussed below, going forward, dividends and stock repurchases may be limited or restricted entirely and our ability to contribute capital to our insurance subsidiaries that are not parties to the Credit Agreement may be limited. Cash Flows For the Nine Months Ended September 30, 2021 2020 Change (in thousands) Net cash provided by (used in): Operating activities $ 70,150 $ 118,561 $ (48,411 ) Investing activities (110,305 ) 136,642 (246,947 ) Financing activities (7,402 ) (23,178 ) 15,776 Net (decrease) increase in cash and cash equivalents $ (47,557 ) $ 232,025 $ (279,582 ) For the Nine Months Ended September 30, 2022 2021 Change (in thousands) Net cash (used in) provided by: Operating activities $ (15,480 ) $ 72,772 $ (88,252 ) Investing activities (33,507 ) (112,927 ) 79,420 Financing activities (11,952 ) (7,402 ) (4,550 ) Net (decrease) increase in cash and cash equivalents $ (60,939 ) $ (47,557 ) $ (13,382 ) Operating Activities Net cash 37 relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the first nine months of Investing Activities Net cash used in investing activities for the nine months ended September 30, Financing Activities Net cash used in financing activities for the nine months ended September 30, nine months ended September 30, 2022. Credit Facilities Term Loan Facility. As amended by the Seventh Amendment, the principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of September 30, Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility 38 At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to The applicable margin for loans under the Credit Facilities 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. 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 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 Convertible Notes On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017. The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other 39 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 30, As discussed above, holders of the Convertible Notes issued 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 40 FHLB Loan Agreements In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of Critical Accounting Policies and Estimates When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. Seasonality of our Business Our insurance business is seasonal; hurricanes typically occur during the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters each year. With our catastrophe reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments. Recent Accounting Pronouncements The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.358 years and 3.891 years at September 30, 2022 and 2021, 41 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, Changes in Internal Control over Financial Reporting There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant changes to our internal control over financial reporting for the period ending September 30, PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to claims and legal actions arising routinely in the ordinary course of our business. Although we cannot predict with certainty the ultimate resolution of the claims and lawsuits asserted against us, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our condensed consolidated financial position results of operations or cash flow. Item 1A. Risk Factors The Company documented its risk factors in Item 1A of Part I of its annual report on Form 10-K for the year ended December 31, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's Board of Directors authorized during the second quarter of 2022 the $0.06 per share typically used to pay a quarterly dividend to shareholders to be allocated to repurchase common stock. The authorization was for $2.0 million to repurchase common stock commencing in August 2022. During the third quarter ended September 30, A summary of our common stock repurchases during the quarter ended September 30, Total Number of Average Price Total Number of Shares Dollar Value of July 1 - July 31, 2021 — $ — — $ 50,000 August 1 - August 29, 2021 — $ — — $ 50,000 September 1 - September 31, 2021 154,582 $ 6.83 148,109 $ 48,995 Total 154,582 148,109 Total Number of Average Price (1) Total Number of Shares Dollar Value of July 1 - July 31, 2022 — $ — — $ 20,000 August 1 - August 31, 2022 237,911 $ 2.78 237,911 $ 19,328 September 1 - September 30, 2022 394,833 $ 2.70 394,833 $ 18,252 Total 632,744 632,744 Item 5. Other Information Item 1.01 Entry into a Material Definitive Agreement Seventh Amendment to Credit Agreement On November 7, 2022, Heritage Insurance Holdings, Inc. and its subsidiary guarantors (together, the “Company”) amended that certain Credit Agreement dated as of December The Seventh Amendment amended the Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the revolving credit facility commitments and/or term loan commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%). The Seventh Amendment also modifies certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future. Specifically, starting in the first quarter of 2023, the Seventh Amendment amends certain financial covenants as follows: (1) require additional leverage ratios under the Consolidated Leverage Ratio covenant (as defined in the Credit Agreement) after the initial step down to 2.50x in the second quarter of 2023 not to exceed 2.25x as of the second quarter of 2024 and 2.00x as of the second quarter of 2025, (2) apply all (A) 43 Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement (“Non-credit Parties”) that exceed $38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20x . The Seventh Amendment also (A) eliminates the current $10 million basket available to the Company to pay dividends to its shareholders or to repurchase its securities, (B) provides for a dividend of up to All other material terms of the Credit Agreement remain unchanged. Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement. In order to avoid a covenant violation, the parties agreed to the terms of the Seventh Amendment as described above. Certain Relationships The lenders under the The above summary description of the Seventh Amendment does not purport to Item 2.03 Creation of a Direct Financial Obligation or The information contained in Item 1.01 is hereby incorporated into this Item 2.03 by reference thereto. Item 6. Exhibits The information required by this Item 6 is set forth in the Index to Exhibits accompanying this Quarterly Report on Form 10-Q. Index to Exhibits 3.1 3.2 4 4.1 4.2 10.1* 31.1* 31.2* 32.1** 32.2** 101.INS* Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Data Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HERITAGE INSURANCE HOLDINGS, INC. Date: November By: /s/ ERNESTO GARATEIX Ernesto Garateix Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) Date: November By: /s/ KIRK LUSK Kirk Lusk Chief Financial Officer (Principal Financial Officer)Financial Results Highlights for the 2021Net$48.2 million or $1.83 per diluted share, compared to a net loss for the quarter wasof $16.4 million or 0.59 loss$0.59 per share, up from net loss of $5.2 million or $0.19 loss perdiluted share in the prior year quarter.27Book value per share of $14.57, down 4.1% from second quarter, 2021 and 8.8% year-over-year.driven primarily by current accident year weather losses including a $40 million net retention for Hurricane Ian. In addition the Company recorded a $10.7 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey Re, our captive reinsurer domiciled in Bermuda.•down 1.5% year-over-year, stemming fromin the prior year quarter, reflecting a 12.4% exposure management driven reduction4.8% rate related increase in Florida, partly offset by 8.0%despite a policy count reduction of approximately 40,000, and 15.4% growth in other states.states primarily due to rate increases. Rate increases continued to meaningfully benefit written premiums throughout the book of business.•PremiumsGross premiums written of $304.5 million, up 11.1% from $274.2 million in forcethe prior year quarter, reflecting a 4.8% rate related increase in Florida, despite a policy count reduction of $1.2 billion, relatively flat from second quarter 2021approximately 40,000, and up 13.3% year-over-year.15.4% growth in other states primarily due to rate increases. Rate increases continued to meaningfully benefit written premiums throughout the book of business.•Policies-in-forceGross premiums earned of 581,286, a 2.1% reduction$308.0 million, up 4.6% from second$294.4 million in the prior year quarter, 2021 and a 3.0% year-over-year increase.reflecting higher gross premiums written over the last twelve monthsdriven by higher average premium per policy.•FavorableNet earned premiums of $159.7 million, down 1.7% from $162.4 million in the prior year reserve development of $0.8 million.quarter, reflecting a 12.4% increase in contract year reinsurance cost with higher ceded premium outpacing the increase in gross earned premiums for the quarter.•quarteryear weather losses of $51.4$63.8 million, up 24.2% from $47.3$51.4 million in the prior year quarter. Current accident quarteryear catastrophe weather losses includeare $40.0 million up 150.5% from $16.0 million of net current accident quarter catastrophe losses, down from $24.6 million in the prior year quarter. The catastrophe loss for the current quarter and $35.5represents our $40.0 million ofretention for Hurricane Ian. Current accident year other weather losses upare $23.8 million, down 32.8% from $22.8$35.4 million in the prior year quarter.•Total capital returnedCeded premium ratio of 48.1%, up 3.3 points from 44.8% in the prior year quarter driven by a higher cost of the 2022-2023 catastrophe excess of loss program, stemming from both higher costs and higher TIV.shareholdershigher underwriting costs associated with an increase in gross premiums written.$2.7133.3%, up 20.8 points from 112.5% in the prior year quarter, driven by a higher net loss ratio and net expense ratio as described above.representing a $0.06 per share regular quarterly dividend and repurchase of 148,109 shares of stock.valuation allowance as described above in the current period quarter.Three Months Endedthree months ended September 30, 20212022 and 20202021NM= Not MeaningfulTotal revenue was $165.5 million in the third quarter of 2022, down 1.1% from $167.4 million in the prior year quarter. The decrease primarily stems from lower net premiums earned, driven by higher reinsurance costs, partly offset by an increase in investment income, as described in detail below.1.5% from $278.2 million6.9%. The increase in premiums-in-force reflects the prior year quarter. The decrease reflects 12.4%impact of rate increases more than offsetting the premiums associated with the reduction in Florida gross written premium, partially offset by 8.0% growth in other states.policies-in-force. 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 up 13.3% year-over-year. Policies-in-force were 581,286, a 2.1% reduction from 593,786 policies at second quarter 2021 and a 3.0% increase year-over-year. The reduction in policies in forcepolicies-in-force from the secondthird quarter of 2021 reflects our exposure management initiatives.$294.4$308.0 million in the third quarter of 2021,2022, up 15.5%4.6% from $255.0$294.4 million in the prior year quarter. The increase reflects the earning of higher gross premiums written over the last twelve months, ended September 30, 2021 comparedwhich is primarily related to premiums written over the twelve months ended September 30, 2020.Ceded premiumshigher rates on a smaller book of business based on policy count.$132.0$148.3 million in the third quarter 2021,of 2022, up 13.0%12.4% from $116.8$132.0 million in the prior year quarter. The increase is attributablegrowth results primarily from higher reinsurance costs due to an increase in the cost ofmarket conditions and higher TIV, as well as higher ceded premium for our catastrophe excess of lossnet quota share reinsurance program, driven by an increasegrowth in TIV.our northeast business.$162.4$159.7 million in the third quarter 2021, up 17.5%of 2022, down 1.7% from $138.2$162.4 million in the prior year quarter. Thequarter, reflecting a 12.4% increase primarily stems from higher gross premiums earned, partly offset byin contract year reinsurance cost with higher ceded premium outpacing the increase in gross earned premiums as described above.for the quarter.28$1.5$2.9 million in the third quarter 2021,2022, compared to $23.2a net investment gain of $1.5 million in the prior year quarter. The decreaseincrease is primarily due to opportunistic sales of fixed income securities which resulted in significant realized gains in third quarter 2020 and todriven by a lesser extent, lower yields associated with the continued lowhigher interest rate environment.environment compared to the prior year quarter.$3.4$2.9 million in the third quarter of 2021, relatively flat when compared to the prior year quarter.Total revenueTotal revenue was $167.4 million in third quarter 2021, up 1.4%2022, down by 14.8% from $165.1$3.4 million in the prior year quarter. The increasequarter, 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.thirdthe prior year quarter 2021,driven by higher weather and attritional losses. Net current accident year weather losses were $63.8 million, up 8.3%24.2% from $119.7$51.4 million in the prior year quarter. The increase stems from higher netCurrent accident year weather losses lower favorable reserve developmentinclude $40.0 million of net current accident quarter catastrophe losses from Hurricane Ian, up from $16.0 million in the prior year quarter, and $23.8 million of other weather losses, down from a larger book of business.$35.4 million in the prior year quarter.$36.0$39.2 million in the third quarter 2021,of 2022, up 12.6%8.9% from $32.0$36.0 million in the prior year quarter. The increase is primarily attributable to growth of 11.1% in gross premiums written growth and is partially offset by higher ceding commission income.written.$17.2$17.8 million in the third quarter 2021, down 4.2%of 2022, up 3.4% from $17.9$17.2 million in the prior year quarter. The decrease isquarter, driven primarily attributable to higher ceding commission associated with gross premiums written growth and lower executive compensation.by compensation related items.$2.1$2.0 million in the third quarter of 2021, effectively flat quarter-over-quarter.2022, slightly down from $2.2 million in the prior year quarter mostly due to a reduction in debt discount associated with the repurchase of convertible notes in the second quarter of 2022.20212022 compared to $1.5$1.1 million in the prior year quarter. The effective tax rate was 6.4% in third quarter 2021, 15.9 points below the prior year quarter’s 22.3% rate. The lower effective tax rate relates to2022 was impacted by the impact of permanent tax differences on projected results of operations for the calendar year. A changeyear as well as impacts to the effective tax rate, which can also fluctuate throughout the year as estimates used in the estimate from the prior quarter impacted the effect of permanentquarterly tax differences. provision are updated with additional information. The effective tax rate was 2.2% compared to 6.4% in the prior year quarter, driven by the impact of permanent differences in relation to the pre-tax loss each quarter, as well as a $10.7 million valuation allowance in the current period quarter. The valuation allowance was recorded against our deferred tax asset related to our captive29RatiosNet lossThird quarter 2021 net loss was $16.4 million ($0.59 per diluted share), up from net loss of $5.2 million ($0.19 per diluted share) in the prior year quarter. The year-over-year change primarily stems from lower realized capital gains, partly offset by a smaller underwriting loss. Higher losses and LAE contributed significantly to the net loss for the quarter, as described above.RatiosCeded premium ratioThe ceded premium ratio was 44.8% in third quarter 2021, down 1.0 point from 45.8% in the prior year quarter. The decrease is primarily attributable to higher gross earned premium which exceeded the higher cost associated with our reinsurance program.Net loss ratioThe net loss ratio was 79.8% in third quarter 2021, down 6.8 points from 86.6% in the prior year quarter. Although the dollar amount of losses is significantly higher than the prior year quarter, the loss ratio is lower than the prior year quarter due to higher net earned premium fueled by growth and rate changes as described above.Net expense ratioThe net expense ratio was 32.7% in third quarter 2021, down 3.4 points from 36.1% in the prior year quarter. The decrease primarily stems from lower G&A and policy acquisition cost ("PAC") expense ratio associated with higher net earned premium over the prior year despite an increase in PAC and G&A expenses.112.5% in third quarter 2021, down 10.2 points from 122.7% in the prior year quarter. The decrease primarily stems from lower net loss and operating expense ratios. The net loss increased despite the lower net combined ratio due to the reduction in investment gains from the prior year quarter as described above.Comparison of the Nine Months Ended September 30, 2021 and 2020Gross premiums writtenGross premiums written were $886.1 million120.7% for the nine monthsnine-month period ended September 30, 2021,2022, up 11.1%12.1 points from $797.8 million in the prior year period. The increase reflects 16.2% growth outside Florida and 3.6% growth in Florida. Rate increases materially benefited 2021 gross premiums written growth, particularly in Florida. Growth in all states was organic, including growth via independent agents and strategic partnerships with national carriers.Gross premiums earned30Gross premiums earned were $850.5 million for the nine months ended September 30, 2021, up 16.3% from $731.5 million in the prior year period. The increase reflects the earning of higher gross premiums written over the twelve months ended September 30, 2021 compared to premiums written over the twelve months ended September 30, 2020.Ceded premiums earnedCeded premiums earned were $399.3 million for the nine months ended September 30, 2021, up 18.1% from $338.2 million in the prior year period. The increase is attributable to an increase in the cost of our catastrophe excess of loss reinsurance program and an increase in TIV associated with premium growth as well as higher premium for our severe convective storm reinsurance coverage.Net premiums earnedNet premiums earned were $451.1 million for the nine months ended September 30, 2021, up 14.7% from $393.3 million108.6% in the prior year period. The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums, as described above.Net investment incomeNet investment income, inclusive of realized investment gains and unrealized gains on equity securities for the nine months ended September 30, 2021, was $2.9 million, down 90.3% from $30.2 million in the prior year period. The decrease is primarily due to opportunistic sales of fixed income securities which held significant unrealized gains in third quarter 2020 and to a lesser extent, lower yields associated with the continued low interest rate environment.Other revenueOther revenue was $10.8 million for the nine months ended September 30, 2021, relatively flat from $10.4 million in the prior year period.Total revenueTotal revenue was $464.8 million for the nine months ended September 30, 2021, up 7.1% from $433.8 million in the prior year period. The increase primarily stems from higher net premiums earned, partially offset by a reduction in net investment income, as described above.Losses and loss adjustment expensesLosses and loss adjustment expenses (“LAE”) were $328.4 million for the nine months ended September 30, 2021, up 23.1% from $266.8 million in the prior year period. The increase primarily stems from higher net weather losses and from a larger book of business.Policy acquisition costsPolicy acquisition costs were $109.2 million for the nine months ended September 30, 2021, up 18.4% from $92.2 million in the prior year period. The increase is primarily attributable to higher acquisition costs associated with growth in gross premiums written.General and administrative expensesGeneral and administrative expenses were $52.5 million for the nine months ended September 30, 2021, down 11.9% from $59.6 million in the prior year period. The decrease is primarily attributable to a state tax credit recorded in second quarter 2021 and lower executive compensation expense.31Interest expense, netInterest expense was $6.0 million for the nine months ended September 30, 2021, relatively flat from $5.9 million in the prior year period.(Benefit) Provision for income taxes(Benefit) provision for income taxes was $(5.6) million and $2.8 million for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rate for the current year period was 18.1%, 11.8 points lower than the prior year’s 29.9%. The lower effective tax rate relates to the impact of permanent tax differences on projected results of operations for the calendar year. A change in the estimate from the prior quarter impacted the effect of permanent tax differences. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information.Net (loss) incomeNet 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 and LAE ratio largely driven by elevated weather losses, and lower investment income, partly offset by higher total revenue andas well as a lowersmall increase in the net expense ratio.ratio, as described below.47.0%47.2% for the nine monthsnine-month period ended September 30, 2021, up 0.8 points2022, relatively flat from 46.2%47.0% in the prior year period. The increase resulted from a larger increase in gross earned premiumcost of the current year catastrophe excess of loss contract was higher than the increaseprior year but the impact was partly offset by a $18 million ceded premium on the severe convective storm contract included in ceded premium.the prior year amount.72.8%84.4% for the nine monthsnine-month period ended September 30, 2021,2022, up 5.011.6 points from 67.8%72.8% in the prior year period. The increase primarily stems fromperiod, driven by higher current accident year weather and lower favorable reserve development,attritional losses, including the $40 million retention for Hurricane Ian, compared to the prior year period, which was partly offset by the 4.4% increase in net earned premium.premiums earned.35.8%36.3% for the nine monthsnine-month period ended September 30, 2021, down 2.8 points2022, slightly up from 38.6%35.8% in the prior year period. The decrease primarily stems from a lower net G&A expense ratio,period, 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.Net combined ratioThe net combined ratio was 108.6% for nine months ended September 30, 2021, up 2.2 points from 106.4% in the prior year period. The increase primarily stems from a higher net loss ratio, partly offset by a lower net expense ratio, as described above.322021,2022, we had $393.4$297.5 million of cash and cash equivalents and $686.1$651.8 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 allocationtiming of cash usedreinsurance payments for investing activities.our catastrophe excess of loss 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 continued decline in bond prices throughout 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 3.4 years at September 30, 2022.cashliquidity are adequate to meet our cash requirements for at least the next twelve months.provided byused in operating activities was $70.1$15.5 million for the nine months ended September 30, 20212022 compared to net cash provided by operating activities of $118.6$72.8 million for the comparable period in 2020.2021. The decrease in cash from operating activities20212022 compared to the first nine months of 2020.2021.20212022 was $110.3$33.5 million as compared to net cash provided byused in investing activities of $136.6$112.9 million for the comparable period in 2020.2021. The change in cash used forin investing activities relates primarily to allocations of funds for investment in the current period compared to our strategiceach 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 for that period.20212022 was $7.4$12.0 million, as compared to cash used in financing activities of $23.2$7.4 million for the comparable period in 2020.2021. The reductionincrease in cash used infor financing activities is due primarilywas driven by draws from our Revolving Credit Facility (defined below) totaling $25 million to the decrease in thepurchase and retire $22.5 million of Convertible Notes and a larger amount of treasury stock repurchased underpurchases during the stock repurchase program and use of proceeds from our term loan facility which offset principal payments made.33On December 14, 2018, theThe Company entered intois 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,Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement. In order to avoid a covenant violation, on November 7, 2022, the Company and its subsidiary guarantors entered into the Fifth Amendmentan 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) increasedecrease the revolving credit facility from $75 million to $50 million, to $75 million and make related changes to the Credit Agreement, (ii) provide forestablish a $13.75 million advance under the existing $75new $25 million term loan facility for anto refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of $70 million principal amount outstanding as ofpotential future increases to the date of the Fifth Amendment, extend the maturity of therevolving credit facility commitments and/or term loan facility from December of 2023 to July 2026 and reducecommitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) reduceincrease the applicable margin for loans under the Credit Agreement to 2.5%a range from 2.75% to 3.0%3.25% per annum for LIBORSOFR loans (reduced(plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 3.25%2.50% to 3.75%3.00%). The Seventh Amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and 1.5%in the allocation of capital in the future, including the Company’s ability to 2.0% per annum for base rate loans (reduced frompay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the prior range of 2.25%Credit Agreement. For additional information regarding the changes to 2.75%),the financial covenants in each case basedthe Credit Agreement, refer to Part II, Item 5, “Other Information” in this Quarterly Report 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.Form 10-Q.Pursuant to theThe Credit Agreement, as amended, the participating Lenders agreed to provideprovides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75$100 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $75$50 million (inclusive of a $5 million sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a $10 million sublimit for swingline loans)loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).2021, the Company had2022, there was $66.5 million in aggregate $70principal outstanding on the Term Loan Facility and as of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding on the Term Loan Facility.which was increasedpursuant to $70 million on the date ofSeventh Amendment, the Fifth Amendment, and no borrowings outstanding under the Revolving Credit Facility.Facility were repaid in full.LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements,SOFR, plus an applicable margin (described below) and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the greatesthighest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicableadjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin.margin (described below).as amended, varies from 2.5%2.75% per annum to 3.0%3.25% per annum (for LIBORSOFR loans) and 1.5%1.75% to 2.0%2.25% 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 LIBORSOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of JuneSeptember 30, 2021,2022, the borrowing under our Credit Facilities were accruing interest at a rate of 3.38%5.88% per annum.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 CompanyWe 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 LIBORSOFR loans. In addition, the Company iswe 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).entered intoare 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.342.752.50 to 1.00, for each fiscal quarter in 2021, stepping down to 2.502.25 to 1.00 in 2022as of the second quarter of 2024 and thereafter;2.00 to 1.00 as of the second quarter of 2025, (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.subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.352021,2022, there werewas $885,000 principal amount of outstanding Convertible Notes, innet of $21.1 million of Convertible Notes held by an insurance company subsidiary.$23.4Convertible 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 September 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.$31.0$26.4 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. As of September 30, 2022, the common stock is value at $1.2 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.During the nine months endedIn September 2022, we assessed our deferred tax position and recorded a $10.7 million valuation against our net deferred tax asset at September 30, 2021, we reassessed2022. We intend to continue maintaining the valuation allowance on our critical accountingnet deferred tax asset until there is sufficient evidence to support the reversal of all or some portion of the allowance. We have made no other material changes or additions with regard to those policies and estimates as disclosed withinin our 2020 Annual Report on Form 10-K.10-K for the year ended December 31, 2021.2.971 years at September 30, 2020, and 3.6153.903 years at December 31, 2020.2021. As interest rates continue to rise, the fair value of our fixed rate debt securities are subject to decline. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of September 30, 2021,2022, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with the average rating at December 31, 2020.2021.36On July 28, 2021,Under the Company amended its Credit Agreement to provide mechanics relating to a transition away from LIBOR as a benchmark interest rate for its indebtednessterm loan agreement dated November 7, 2022, borrowings under the Credit AgreementFacilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and replace LIBOR witha credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an alternative benchmark rate.interest period of one month plus 1.00%, plus an applicable margin, eliminating any reference to LIBOR.WeThe 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 September 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 20202021 Annual Report on Form 10-K for the year ended December 31, 2020.2021.2021.2022.2021.2022.374220202021, 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.2021, we2022, the Company purchased 148,109632,744 shares of common stock for anin aggregate of $1.0$1.7 million under our stock repurchase program. In addition, the Company acquired 6,473 shareswith an average share price 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.$2.73 per share.2021,2022, is set forth in the table below (in thousands, except shares and price per share):
Shares
Purchased
Paid Per Share (1)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Shares that May
Yet be Purchased
Under the Plans
or Programs
Shares
Purchased
Paid Per Share
Purchased as Part of
Publicly Announced
Plans or Programs
Shares that May
Yet be Purchased
Under the Plans
or Programs (2) On November 2, 2020,extended the Company’s priorestablished a new share repurchase program fromwith an initial value of $25.0 million and with an expiration date of December 31, 20202022.31, 2021, authorizing14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent, collateral agent, swingline lender and issuing bank.$50.0$2 million in the fourth quarter of its common2024 under certain conditions and (C) restricts future dividends based on maintenance of certain financial ratios, including Consolidated Tangible Net Worth. As a result, going forward, dividends and stock through such date. Repurchasesrepurchases may be madelimited or restricted entirely and the Company’s ability to contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement may be limited.Company’s current Rule 10b5-1 trading plan, which allowsCredit Agreement and their affiliates may in the future engage in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they may receive customary fees and expenses.purchase shares belowbe complete and is subject to, and qualified in its entirety by reference to, the Seventh Amendment, a predetermined price per share,copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference.otherwise. At September 30, 2021, the Company has the capacity to repurchase $49.0 millionan Obligation under an Off-Balance Sheet Arrangement of its common stock until December 31, 2021.a RegistrantExhibit NumberDescription3.13.2Report on Form 10-Q filed on August 6, 201444.138444.210.24*10.25*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 200231.2*32.1**32.2**39458, 20219, 20228, 20219, 20224046