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

☒

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

For the quarterly period ended March 31, ~~2021~~2022

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

☐

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

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 Drive, Suite 300~~1401 N. Westshore Blvd

~~Clearwater, Florida 33759~~Tampa, FL33607

(Address, including zip code, of principal executive offices)

~~(727)~~ (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 May ~~3, 2021~~2, 2022 was ~~27,965,190~~26,469,720.

HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents


	Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: March 31, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021		2
Condensed Consolidated Statements of Operations and Other Comprehensive ~~Income:~~Loss: Three ~~months ended~~Months Ended March 31, ~~2021~~2022 and ~~2020~~2021 (unaudited)		3
Condensed Consolidated Statements of Stockholders’ Equity: Three ~~months ended~~Months Ended March 31, ~~2021~~2022 and ~~2020 (unaudited)~~ 2021(unaudited)		4
Condensed Consolidated Statements of Cash Flows: Three ~~months ended~~Months Ended March 31, ~~2021~~2022 and ~~2020 (unaudited)~~2021(unaudited)		5
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3 Quantitative and Qualitative Disclosures about Market Risk		3029
Item 4 Controls and Procedures		30
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		31
Item 1A Risk Factors		31
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 5 Other Information	31
Item 6 Exhibits		3132
Signatures		33

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 adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (iii) business and risk management strategies, including acquisitions, strategic investments and risk diversification; (iv) our estimates with respect to tax and accounting matters including the impact on our financial statements; ~~(iv)~~(vi) future dividends, if any; ~~(v)~~(vi) our expectations related to our financing activities; ~~(vi)~~(vii) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; ~~(vii)~~(viii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital ~~requirements; (viii)~~requirements and the source of funds needed to fund our business and risk management strategies; (ix) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; ~~(ix)~~(x) our intentions with respect to our credit risk investments; (xi) the future impact of the COVID-19 pandemic; and ~~(x)~~(xii) the potential effects of our current legal proceedings.

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

•

~~the possibility that actual losses may exceed reserves;~~

•

the possibility that actual losses may exceed reserves;

•

~~the concentration of our business in coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms;~~

•

the concentration of our business in coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms;

•

~~our exposure to catastrophic weather events;~~

•

our exposure to catastrophic weather events;

•

~~inherent uncertainty of our models and our reliance on such models as a tool to evaluate risk;~~

•

inherent uncertainty of our models and our reliance on such models as a tool to evaluate risk;

•

~~the fluctuation in our results of operations;~~

•

the fluctuation in our results of operations;

•

~~increased costs of reinsurance, non-availability of reinsurance, non-collectability of reinsurance and our ability to obtain reinsurance on terms and at a cost acceptable to us;~~

•

increased costs of reinsurance, non-availability of reinsurance, non-collectability of reinsurance and our ability to obtain reinsurance on terms and at a cost acceptable to us;

•

~~increased competition, competitive pressures, and market conditions;~~

•

increased competition, competitive pressures, and market conditions;

•

~~our failure to accurately access and price the risks we underwrite;~~

•

our failure to accurately assess and price the risks we underwrite;

•

~~our failure to identify suitable business acquisitions, effectively manage our growth and integrate acquired companies;~~

•

our failure to identify suitable business acquisitions, effectively manage our growth and integrate acquired companies;

•

~~our failure to execute our diversification strategy;~~

•

our failure to execute our diversification strategy;

•

~~our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents;~~

•

our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents;

•

~~the failure of our claims department to effectively manage or remediate claims;~~

•

the failure of our claims department to effectively manage or remediate claims;

•

~~low renewal rates and failure of such renewals to meet our expectations;~~

•

low renewal rates and failure of such renewals to meet our expectations;

•

~~our inability to maintain our financial stability rating;~~

•

our inability to maintain our financial stability rating;

•

~~our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business;~~

•

our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business;

•

~~our inability to generate investment income;~~

•

our inability to generate investment income;

•

~~effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;~~

•

effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;

•

~~the failure of our risk mitigation strategies or loss limitation methods;~~

•

the failure of our risk mitigation strategies or loss limitation methods;

•

~~lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write;~~

•

lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write;

•

~~the regulation of our insurance operations;~~

•

the regulation of our insurance operations;

•

~~changes in regulations and our failure to meet increased regulatory requirements, including minimum capital and surplus requirements;~~

•

changes in regulations and our failure to meet increased regulatory requirements, including minimum capital and surplus requirements;

•

~~litigation or regulatory actions;~~

•

climate change, health crisis, severe weather conditions and other catastrophe events;

•

~~regulation limiting rate increases or that require us to participate in loss sharing or assessments;~~

•

litigation or regulatory actions;

•

~~the terms of our indebtedness;~~

•

regulation limiting rate increases or that require us to participate in loss sharing or assessments;

•

~~our ability to maintain effective internal controls over financial reporting;~~

•

the terms of our indebtedness;

•

~~certain characteristics of our common stock;~~

•

our ability to maintain effective internal controls over financial reporting;

•

the continued and potentially prolonged impact of COVID-19 on the economy, demand for our products and our operations, including measures taken by the governmental authorities to address COVID-19, which may precipitate or exacerbate other risks and/or uncertainties;

•

certain characteristics of our common stock;

•

~~failure of our information technology systems or those of our key service providers and unsuccessful development and implementation of new technologies;~~

•

~~a lack of redundancy in our operations; and~~

•

failure of our information technology systems or those of our key service providers and unsuccessful development and implementation of new technologies;

•

~~our failure to attract and retain qualified employees and independent agents or our loss of key personnel.~~

•

a lack of redundancy in our operations;

•

our failure to attract and retain qualified employees and independent agents or our loss of key personnel; and

•

the impact of macroeconomic and geopolitical conditions, including the impact of supply chain constraints, inflationary pressures, labor availability and the conflict between Russia and Ukraine.

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)


	March 31, 2021			December 31, 2020			March 31, 2022			December 31, 2021
ASSETS	(unaudited)						(unaudited)
Fixed maturities, available-for-sale, at fair value (amortized cost of $625,773 and $553,172)	$	622,923		$	561,011
Equity securities, at cost		1,415			1,599
Other investments		26,409			26,409
Fixed maturities, available-for-sale, at fair value (amortized cost of $711,156 and $675,245)							$	673,511		$	669,354
Equity securities, at fair value, (cost $1,417 and $1,415)								1,417			1,415
Other investments, net								14,561			23,929
Total investments		650,747			589,019			689,489			694,698
Cash and cash equivalents		402,770			440,956			286,170			359,337
Restricted cash		5,427			5,427			7,416			5,415
Accrued investment income		2,872			2,737			3,290			3,167
Premiums receivable, net		84,336			77,471			74,512			71,925
Reinsurance recoverable on paid and unpaid claims, net of allowance for estimated uncollectible reinsurance of $45		326,276			355,037
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45								288,779			269,391
Prepaid reinsurance premiums		172,223			245,818			178,565			265,873
Income taxes receivable		29,896			32,224
Income tax receivable								1,365			11,739
Deferred income tax asset, net								12,451			0
Deferred policy acquisition costs, net		88,876			89,265			90,641			93,881
Property and equipment, net		18,674			18,685			17,144			17,426
Right-of-use lease asset, net								26,963			27,753
Intangibles, net		60,689			62,277			54,338			55,926
Goodwill		152,459			152,459			91,959			91,959
Other assets		19,549			18,004			13,314			12,272
Total Assets	$	2,014,794		$	2,089,379		$	1,836,396		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	637,882		$	659,341		$	588,420		$	590,166
Unearned premiums		573,411			569,618			586,236			590,419
Reinsurance payable		144,206			161,918			116,218			191,728
Long-term debt, net		119,501			120,998			123,689			120,757
Deferred income tax, net		11,109			18,477
Deferred income tax liability, net								0			9,426
Advance premiums		21,497			18,268			39,167			24,504
Accrued compensation		8,112			9,325			5,770			8,014
Lease liability								30,475			31,172
Accounts payable and other liabilities		71,628			89,090			64,655			71,525
Total Liabilities	$	1,587,346		$	1,647,035		$	1,554,630		$	1,637,711

Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 27,965,190 shares issued and 27,904,923 shares outstanding at March 31, 2021; 27,883,873 shares issued and 27,748,606 shares outstanding at December 31, 2020		3			3
Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,469,720 shares issued and 26,444,720 outstanding at March 31, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021								3			3
Additional paid-in capital		332,000			331,867			333,213			332,797
Accumulated other comprehensive (loss) income		(2,145	)		6,057
Treasury stock, at cost, 9,279,839 and 9,279,839 shares		(115,365	)		(115,365	)
Accumulated other comprehensive loss, net of taxes								(28,894	)		(4,573	)
Treasury stock, at cost, 11,257,855 and 10,536,737 shares at March 31, 2022 and December 31, 2021								(128,557	)		(123,557	)
Retained earnings		212,955			219,782			106,001			138,381
Total Stockholders' Equity		427,448			442,344			281,766			343,051
Total Liabilities and Stockholders' Equity	$	2,014,794		$	2,089,379		$	1,836,396		$	1,980,762

See accompanying notes to unaudited condensed consolidated financial statements.

HERITAGE INSURANCE HOLDINGS, INC.

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

(Unaudited)

(Amounts in thousands, except per share and share amounts)


	For the Three Months Ended March 31,
	2022			2021
REVENUES:
Gross premiums written	$	283,196		$	274,181
Change in gross unearned premiums		4,172			(3,770	)
Gross premiums earned		287,368			270,411
Ceded premiums		(134,439	)		(128,212	)
Net premiums earned		152,929			142,199
Net investment income		2,000			1,293
Net realized (losses) gains		(16	)		80
Other revenue		3,695			3,671
Total revenues		158,608			147,243
EXPENSES:
Losses and loss adjustment expenses		140,038			97,909
Policy acquisition costs, net of ceding commission income (1)		38,257			35,366
General and administrative expenses, net of ceding commission income(2)		19,724			19,800
Total expenses		198,019			153,075
Operating Loss		(39,411	)		(5,832	)
Interest expense, net		1,972			1,878
Loss before income taxes		(41,383	)		(7,710	)
Benefit for income taxes		(10,624	)		(2,562	)
Net loss	$	(30,759	)	$	(5,148	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments		(31,770	)		(10,597	)
Reclassification adjustment for net realized investment losses (gains)		16			(80	)
Income tax benefit related to items of other comprehensive loss		7,433			2,475
Total comprehensive loss	$	(55,080	)	$	(13,350	)
Weighted average shares outstanding
Basic		26,787,379			27,827,804
Diluted		26,787,379			27,827,804
Loss per share
Basic	$	(1.15	)	$	(0.19	)
Diluted	$	(1.15	)	$	(0.19	)

For the Three Months Ended
March 31,

2021

2020

REVENUES:

Gross premiums written

$
274,181

$
229,102

Change in gross unearned premiums

(3,770
)

5,614

Gross premiums earned

270,411

234,716

Ceded premiums

(128,212
)

(108,710
)
Net premiums earned

142,199

126,006

Net investment income

1,293

3,670

Net realized gains

80

59

Other revenue

3,671

2,971

Total revenues

147,243

132,706

EXPENSES:

Losses and loss adjustment expenses

97,909

68,181

Policy acquisition costs, net of ceding commission income ⁽¹⁾

35,366

30,047

General and administrative expenses, net of ceding commission income ⁽²⁾

19,800

21,718

Total expenses

153,075

119,946

Operating (loss) income

(5,832
)

12,760

Interest expense, net

1,878

1,966

(Loss) income before income taxes

(7,710
)

10,794

(Benefit) provision for income taxes

(2,562
)

3,174

Net (loss) income

$
(5,148
)

$
7,620

OTHER COMPREHENSIVE INCOME

Change in net unrealized (losses) gains on investments

(10,597
)

2,027

Reclassification adjustment for net realized investment gains

(80
)

(59
)
Income tax expense (benefit) related to items of other comprehensive income

2,475

(456
)
Total comprehensive (loss) income

$
(13,350
)

$
9,132

Weighted average shares outstanding

Basic

27,827,804

28,548,830

Diluted

27,827,804

28,549,012

(Loss) earnings per share

Basic

$
(0.19
)

$
0.27

Diluted

$
(0.19
)

$
0.27

(1)

Policy acquisition costs includes $11.7 million and $11.3 million of ceding commission income for the three months ended March 31, 2022 and 2021, respectively.

(2)

General and administration includes $3.9 million and $3.7 million of ceding commission income for the three months ended March 31, 2022 and 2021, respectively.

~~(1)~~

~~Policy acquisition costs includes $11.3 million and $10.4 million of ceding commission income for the three months ended March 31, 2021 and 2020, respectively.~~

~~(2)~~

~~General and administration includes $3.7 million and $3.5 million of ceding commission income for the three months ended March 31, 2021 and 2020, respectively.~~

See accompanying notes to unaudited condensed consolidated financial statements.

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
Earnings

Treasury Shares

Accumulated Other Comprehensive (Loss) Income

Total
Stockholders'
Equity

Balance at December 31, 2020

27,748,606

$
3

$
331,867

$
219,782

$
(115,365
)

$
6,057

$
442,344

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

	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at December 31, 2019		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
																				Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
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		—			—		—			—			—			1,512		1,512			—			—		—			—			—			(24,321	)		(24,321	)
Shares tendered for income taxes withholding		(17,500	)		—		(233	)		—			—			—		(233	)		(9,849	)		—		(89	)		—			—			—			(89	)
Restricted stock vested		25,000			—		—			—			—			—		—			25,000			—		—			—			—			—			—
Issued restricted stock																					397,176			—		—			—			—			—			—
Stock-based compensation on restricted stock		—			—		1,345			—			—			—		1,345			—			—		505			—			—			—			505
Stock buy-back		(766,900	)		—		—			—			(7,986	)		—		(7,986	)		(721,118	)		—		—			—			(5,000	)		—			(5,000	)
Cash dividends declared ($0.06 per common stock)		—			—		—			(1,726	)		—			—		(1,726	)
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
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


	Common Shares			Par Value		Additional Paid-In Capital			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive Income (Losses)			Total Stockholders' Equity
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

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

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2021			2020			2022			2021
OPERATING ACTIVITIES
Net (loss) income	$	(5,148	)	$	7,620
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Net loss							$	(30,759	)	$	(5,148	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation		260			1,345			505			260
Bond amortization and accretion		917			1,359			910			917
Amortization of original issuance discount on debt		455			349			521			455
Depreciation and amortization		2,020			2,024			2,047			2,020
Allowance for bad debt		76			—			(14	)		76
Net realized investment gains		(80	)		(59	)		16			(80	)
Deferred income taxes		(4,893	)		(4,452	)		(14,444	)		(4,893	)
Changes in operating assets and liabilities:
Accrued investment income		(135	)		115			(123	)		(135	)
Premiums receivable, net		(6,941	)		771			(2,573	)		(6,941	)
Prepaid reinsurance premiums		73,595			78,073			87,308			73,595
Reinsurance recoverable on paid and unpaid claims		28,761			53,880			(19,388	)		28,761
Income taxes receivable		2,328			3,171			10,374			2,328
Deferred policy acquisition costs, net		389			2,316			3,240			389
Right of use leased asset		245			110			790			245
Other assets		(1,790	)		(8,739	)		(1,042	)		(1,790	)
Unpaid losses and loss adjustment expenses		(21,459	)		(6,356	)		(1,746	)		(21,459	)
Unearned premiums		3,793			(5,593	)		(4,183	)		3,793
Reinsurance payable		(17,712	)		(54,391	)		(75,510	)		(17,712	)
Accrued interest		(666	)		(1,172	)		(342	)		(666	)
Accrued compensation		(1,213	)		2,890			(2,244	)		(1,213	)
Advance premiums		3,229			12,890			14,663			3,229
Income taxes payable		—			8,878
Operating lease liabilities		(271	)		(264	)		(697	)		(271	)
Other liabilities		(16,533	)		(9,068	)		(6,515	)		(16,533	)
Net cash provided by operating activities		39,227			85,697
Net cash (used in) provided by operating activities								(39,206	)		39,227
INVESTING ACTIVITIES
Fixed maturity securities sales, maturities and paydowns		40,470			58,462			22,132			40,470
Fixed maturity securities purchases		(113,890	)		(83,891	)		(58,969	)		(113,890	)
Equity securities sales		177			26
Equity securities purchases		—			(6	)
Equity securities sales and return of capital								9,368			177
Equity securities reinvestments of dividends								(2	)		0
Cost of property and equipment acquired		(421	)		(76	)		(177	)		(421	)
Net cash used in investing activities		(73,664	)		(25,485	)		(27,648	)		(73,664	)
FINANCING ACTIVITIES
Repayment of term note		(1,875	)		(3,750	)		(875	)		(1,875	)
Mortgage loan payments		(77	)		(72	)		(81	)		(77	)
Draw from revolver								15,000			0
Repurchase of convertible notes								(11,633	)		0
Purchase of treasury stock		—			(7,986	)		(5,000	)		0
Tax withholdings on share-based compensation awards		(127	)		(233	)		(89	)		(127	)
Dividends paid		(1,670	)		(1,750	)		(1,634	)		(1,670	)
Net cash used in financing activities		(3,749	)		(13,791	)		(4,312	)		(3,749	)
(Decrease) increase in cash, cash equivalents, and restricted cash		(38,186	)		46,421
Decrease in cash, cash equivalents, and restricted cash								(71,166	)		(38,186	)
Cash, cash equivalents and restricted cash, beginning of period		446,383			283,008			364,752			446,383
Cash, cash equivalents and restricted cash, end of period	$	408,197		$	329,429		$	293,586		$	408,197
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid	$	—		$	—		$	0		$	0
Interest paid	$	1,808		$	2,418		$	1,578		$	1,808

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



	March 31, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	(In thousands)				(In thousands)
Cash and cash equivalents	$	402,770	$	440,956	$	286,170	$	359,337
Restricted cash		5,427		5,427		7,416		5,415
Total	$	408,197	$	446,383	$	293,586	$	364,752

Restricted cash primarily represents funds held to meet ~~our contractual obligations related to the catastrophe bonds issued by Citrus Re and by the Company’s insurance subsidiaries~~regulatory requirements in certain states in which ~~such subsidiaries conduct business to meet regulatory requirements.~~the Company operates.

See accompanying notes to unaudited condensed consolidated financial statements.

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, ~~2020~~2021 filed on March 14, 2022 (the ~~“2020~~“2021 Form 10-K”).

Significant accounting policies

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

Reclassification

~~Reclassification~~

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

Accounting Pronouncements adopted

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

Accounting Pronouncements not yet adopted

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

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

No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on ~~our~~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:


March 31, 2022	Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale	(In thousands)
U.S. government and agency securities (1)	$	105,575	$	10	$	2,504	$	103,081
States, municipalities and political subdivisions		107,919		11		6,631		101,299
Special revenue		299,712		59		17,449		282,322
Industrial and miscellaneous		197,950		113		11,254		186,809
Total	$	711,156	$	193	$	37,838	$	673,511

(1)

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


December 31, 2021		Cost or Adjusted / Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale	(In thousands)
U.S. government and agency securities (1)		$	73,923	$	184	$	282	$	73,825
States, municipalities and political subdivisions			106,727		242		1,270		105,699
Special revenue			291,005		1,084		3,520		288,569
Hybrid securities			99		—		—		99
Industrial and miscellaneous			203,491		636		2,965		201,162
Total		$	675,245	$	2,146	$	8,037	$	669,354

March 31, 2021

Cost or Adjusted /
Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

Debt Securities Available-for-sale

(In thousands)

U.S. government and agency securities ⁽¹⁾

$
43,089

$
433

$
3

$
43,519

States, municipalities and political subdivisions

97,804

312

1,191

96,925

Special revenue

291,277

1,779

2,970

290,086

Hybrid securities

99

1

—

100

Industrial and miscellaneous

193,504

1,439

2,650

192,293

Total

$
625,773

$
3,964

$
6,814

$
622,923

(1)

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

Net Realized (Losses) Gains

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

~~(1)~~

Includes securities at March 31, 2021 with a carrying amount of $22.2 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

December 31, 2020

Cost or Adjusted /
Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

Debt Securities Available-for-sale
(In thousands)

U.S. government and agency securities ⁽¹⁾

$
29,985

$
609

$
1

$
30,593

States, municipalities and political subdivisions

84,597

1,077

4

85,670

Special revenue

271,194

3,154

27

274,321

Hybrid securities

100

—

—

100

Industrial and miscellaneous

167,296

3,070

39

170,327

Total

$
553,172

$
7,910

$
71

$
561,011

~~(1)~~

Includes securities at December 31, 2020 with a carrying amount of $20.2 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

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


	2022					2021
Three Months Ended March 31,	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	7		$	910	$	83		$	10,431
Total realized losses		(23	)		1,685		(3	)		642
Net realized (losses) and gains	$	(16	)	$	2,595	$	80		$	11,073

2021

2020

Three Months Ended March 31,

Gains
(Losses)

Fair Value at Sale

Gains
(Losses)

Fair Value at Sale

(In thousands)

Debt Securities Available-for-Sale

Total realized gains

$
83

$
10,431

$
60

$
8,510

Total realized losses

(3
)

642

(1
)

256

Net realized gains and (losses)

$
80

$
11,073

$
59

$
8,766

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


	At March 31, 2022
	Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total
Maturity dates:						(In thousands)
Due in one year or less	$	55,378		7.8	%	$	55,109		8.2	%
Due after one year through five years		339,179		47.7	%		324,660		48.2	%
Due after five years through ten years		233,249		32.8	%		214,130		31.8	%
Due after ten years		83,350		11.7	%		79,612		11.8	%
Total	$	711,156		100.0	%	$	673,511		100.0	%

Net Investment Income

At March 31, 2021

Cost or Amortized Cost

Percent of Total

Fair Value

Percent of Total

Maturity dates:

(In thousands)

Due in one year or less

$
78,937

13
%

$
79,291

13
%
Due after one year through five years

177,382

28
%

178,603

29
%
Due after five years through ten years

204,746

33
%

200,886

32
%
Due after ten years

164,708

26
%

164,143

26
%
Total

$
625,773

100
%

$
622,923

100
%

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


	Three Months Ended March 31,
	2022		2021
	(In thousands)
Debt securities	$	2,275	$	1,418
Equity securities		—		—
Cash and cash equivalents		16		28
Other investments		230		371
Net investment income		2,521		1,817
Less: Investment expenses		521		524
Net investment income, less investment expenses	$	2,000	$	1,293

Three Months Ended March 31,

2021

2020

(In thousands)

Debt securities

$
1,418

$
4,162

Equity securities

—

—

Cash and cash equivalents

28

352

Other investments

371

94

Net investment income

1,817

4,608

Less: Investment expenses

524

938

Net investment income, less investment expenses

$
1,293

$
3,670

The following tables present, for all debt securities available-for-sale in an unrealized loss position (including securities pledged), and for which 0 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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively:

	Less Than Twelve Months						Twelve Months or More
March 31, 2021	Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
													Less Than Twelve Months						Twelve Months or More
March 31, 2022													Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale
U.S. government and agency securities		4	$	3	$	361	$	—	$	—	$	—		82	$	2,504	$	97,916		—	$	—	$	—
States, municipalities and political subdivisions		66		1,191		55,427		—		—		—		113		6,170		87,509		8		461		5,340
Special revenue		159		2,966		127,866		10		4		101		446		15,252		217,316		36		2,197		22,707
Industrial and miscellaneous		131		2,650		102,756		—		—		—		208		7,014		135,467		55		4,240		36,812
Total fixed maturity securities		360	$	6,810	$	286,410		10	$	4	$	101		849	$	30,940	$	538,208		99	$	6,898	$	64,859


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

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

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

Quarterly, the Company considers whether it intends to sell ~~and~~an available-for-sale security or if it is ~~unlikely the Company~~more likely than not that it will be required to sell the ~~securities prior to their anticipated~~security before recovery ~~and the~~of its amortized costs. In these instances, a decline in fair value is ~~deemed due to changes~~recognized in ~~interest rates and other market conditions. The bond issuers continue to make timely principal and interest payments~~net income based on the ~~bonds. Further, we did not believe we had~~fair value of the security at the time of assessment, resulting in a ~~credit event and therefore did 0t record any credit allowance~~new cost basis for ~~securities that were in an unrealized loss position at March 31, 2021. We attribute~~ the ~~price decline and subsequent increase in our unrealized losses to interest rates rather than any sort of fundamental deterioration.~~security.

Less Than Twelve Months

Twelve Months or More

December 31, 2020

Number of
Securities

Gross
Unrealized
Losses

Fair Value

Number of
Securities

Gross
Unrealized
Losses

Fair Value

Debt Securities Available-for-sale

U.S. government and agency securities

3

$
1

$
73

1

$
—

$
7

States, municipalities and political subdivisions

6

4

5,158

—

—

—

Special revenue

27

24

16,439

9

3

73

Industrial and miscellaneous

26

39

16,025

—

—

—

Total fixed maturity securities

62

$
68

$
37,695

10

$
3

$
80

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

These investments are generally of a passive nature and the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. Investments in these entities are by nature less liquid and may involve more risk than other investments. The Company’s maximum exposure to loss with respect to these investments is limited to the investments carrying amounts reported as “other investments” in the Company’s condensed consolidated balance sheet.

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, 2021, respectively. For the three months ended March 31, 2021, the Company received $348,000 in interest payments from the preferred units. There is no active market for these investments.

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

For the Three Months Ended March 31,

2021

2020

Carrying Value

Maximum Loss Exposure

Carrying Value

Maximum Loss Exposure

(in thousands)

Investments in non-consolidated VIEs

$
26,409

$
26,409

$
6,375

$
6,375



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

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.

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

March 31, 2021	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

March 31, 2022									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Invested Assets:	(in thousands)								(in thousands)
Debt Securities Available-for-sale
U.S. government and agency securities	$	43,519	$	370	$	43,149	$	—	$	103,081	$	361	$	102,720	$	0
States, municipalities and political subdivisions		96,925		—		96,925		—		101,299		0		101,299		0
Special revenue		290,086		—		290,086		—		282,322		0		282,322		0
Hybrid securities		100		—		100		—
Industrial and miscellaneous		192,293		—		192,293		—		186,809		0		186,809		0
Total investments	$	622,923	$	370	$	622,553	$	—	$	673,511	$	361	$	673,150	$	0


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)
Debt Securities Available-for-sale
U.S. government and agency securities	$	73,825	$	364	$	73,461	$	0
States, municipalities and political subdivisions		105,699		0		105,699		0
Special revenue		288,569		0		288,569		0
Hybrid securities		99		0		99		0
Industrial and miscellaneous		201,162		0		201,162		0
Total investments	$	669,354	$	364	$	668,990	$	0

December 31, 2020

Total

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Invested Assets:

(in thousands)

Debt Securities Available-for-sale

U.S. government and agency securities

$
30,593

$
371

$
30,222

$
—

States, municipalities and political subdivisions

85,670

—

85,670

—

Special revenue

274,321

—

274,321

—

Hybrid securities

100

—

100

—

Industrial and miscellaneous

170,327

—

170,327

—

Total investments

$
561,011

$
371

$
560,640

$
—

Financial Instruments excluded from the fair value hierarchy

The carrying value of premium receivables and accounts payable, accrued expense, revolving loans and borrowings under ~~our~~the Company’s senior secured credit facility approximate their fair value. The rate at which revolving loans and borrowings under ~~our~~the Company’s senior secured credit facility bear interest resets periodically at market interest rates. ~~All of these items are considered Level 1 assets and liabilities.~~

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 March 31, 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, ~~we determine~~the Company determines the fair value of the goodwill and intangible assets using a combination of a discounted cash flow approach and market approaches, which contain significant unobservable inputs and therefore are considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.

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

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

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


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

For the Three Months Ended March 31,

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

$
(10,597
)

$
2,457

$
(8,140
)

$
2,027

$
(469
)

$
1,558

Reclassification adjustment of realized gains included in net income

(80
)

18

(62
)

(59
)

13

(46
)
Effect on other comprehensive (loss) income

$
(10,677
)

$
2,475

$
(8,202
)

$
1,968

$
(456
)

$
1,512

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.~~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 ~~our~~the Company’s right-of-use assets and lease obligations. ~~Our~~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 ~~our~~the Company’s lease costs for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 were as follows (in thousands):


	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Amortization of ROU assets - Finance leases	$	646	$	37
Interest on lease liabilities - Finance leases		249		9
Variable lease cost (cost excluded from lease payments)		186		121
Operating lease cost (cost resulting from lease payments)		353		340
Total lease cost	$	1,434	$	507

Three Months Ended
March 31, 2021

Three Months Ended
March 31, 2020

Amortization of ROU assets - Finance leases

$
37

$
22

Interest on lease liabilities - Finance leases

9

6

Variable lease cost (cost excluded from lease payments)

121

130

Operating lease cost (cost resulting from lease payments)

340

343

Total lease cost

$
507

$
501

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


	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Finance lease - Operating cash flows	$	247	$	9
Finance lease - Financing cash flows	$	509	$	30

Operating lease - Operating cash flows (fixed payments)	$	393	$	367
Operating lease - Operating cash flows (liability reduction)	$	308	$	271

Three Months Ended
March 31, 2021

Three Months Ended
March 31, 2020

Finance lease - Operating cash flows

$
9

$
6

Finance lease - Financing cash flows

$
30

$
18

Operating lease - Operating cash flows (fixed payments)

$
367

$
368

Operating lease - Operating cash flows (liability reduction)

$
271

$
264

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


	Balance Sheet Classification	March 31, 2022
Right-of-use assets - operating	Right-of-use lease asset, net	$	4,924
Right-of-use assets - finance	Right-of-use lease asset, net	$	22,039
Lease liability - operating (1)	Lease liability	$	6,400
Lease liability - finance	Lease liability	$	24,075

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

Balance Sheet
Classification

March 31, 2021

Right-of-use assets - operating

Other assets

$
5,747

Right-of-use assets - finance

Other assets

$
469

Lease liability - operating ⁽¹⁾

Accounts payable and other liabilities

$
7,371

Lease liability - finance

Accounts payable and other liabilities

$
515

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

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


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

March 31, 2021

March 31, 2020

Weighted average lease term - Finance leases

3.54 yrs.

3.42 yrs.

Weighted average lease term - Operating leases

6.78 yrs.

7.68 yrs.

Weighted average discount rate - Finance leases

6.9
%

7.1
%
Weighted average discount rate - Operating leases

5.3
%

5.3
%

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


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

March 31, 2021

2021 remaining

$
1,242

2022

1,660

2023

1,550

2024

1,183

2025

885

Thereafter

2,906

Total lease payments

9,426

Less: imputed interest

(1,540
)
Present value of lease liabilities

$
7,886

NOTE 6. PROPERTY AND EQUIPMENT, NET

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


	March 31, 2021			December 31, 2020			March 31, 2022			December 31, 2021
	(In thousands)						(In thousands)
Land	$	2,582		$	2,582		$	2,582		$	2,582
Building		10,141			10,141			10,141			10,141
Computer hardware and software		6,680			6,358			7,315			7,204
Office furniture and equipment		2,034			2,027			1,366			1,355
Tenant and leasehold improvements		8,225			8,133			8,309			8,255
Vehicle fleet		850			850			720			720
Total, at cost		30,512			30,091			30,434			30,257
Less: accumulated depreciation and amortization		(11,838	)		(11,406	)		(13,290	)		(12,831	)
Property and equipment, net	$	18,674		$	18,685		$	17,144		$	17,426

Depreciation and amortization expense for property and equipment was ~~$432,300~~approximately $459,000 and ~~$432,000~~$432,300 for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company’s real estate consists of 15 acres of land, ~~and 5~~2 buildings with a gross area of ~~191,200~~88,378 square feet and a parking garage. Approximately 75% of the building in Clearwater is leased to unaffiliated tenants. Following our planned relocation to our new Tampa headquarters, which is expected to occur in the second half of 2021, we intend 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 March 31, ~~2021~~2022 and December 31, ~~2020~~2021, goodwill was ~~$152.5~~$92.0 million and intangible assets were ~~$60.7~~$54.3 million and ~~$62.3~~$55.9 million, respectively. The Company has determined the useful life of the other intangible assets to range between ~~2.5-15 years. The Company has recorded $1.3~~2.5-15 years. Intangible assets include $1.3 million relating to insurance licenses ~~and has~~which is classified ~~the licenses~~ as an indefinite lived intangible ~~which~~and is subject to annual impairment testing concurrent with goodwill.

	Goodwill
	(in thousands)		Goodwill
Balance as of December 31, 2020	$	152,459
			(in thousands)
Balance as of December 31, 2021			$	91,959
Goodwill acquired	—		0
Impairment	—		0
Balance as of March 31, 2021	$	152,459
Balance as of March 31, 2022			$	91,959

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

Other Intangible Assets

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

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

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


Year	Amount
2022 - remaining	$	4,763
2023	$	6,351
2024	$	6,351
2025	$	6,315
2026	$	6,114
Thereafter	$	23,129
Total	$	53,023

Year

Amount⁽¹⁾

2021 - remaining

$
4,763

2022

$
6,351

2023

$
6,351

2024

$
6,351

2025

$
6,315

Thereafter

$
29,243

Total

$
59,374

~~(1)~~

~~Excludes insurance licenses valued at $1.3 million and classified as an indefinite lived intangible which is subject to annual impairment testing and not amortized~~.

NOTE 8. ~~EARNINGS~~LOSS PER SHARE

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

Three Months Ended March 31,

2021

2020

Basic (loss) earnings per share:

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

$
(5,148
)

$
7,620

Weighted average shares outstanding

27,827,804

28,548,830

Basic (loss) earnings per share:

$
(0.19
)

$
0.27

Diluted (loss) earnings per share:

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

$
(5,148
)

$
7,620

Weighted average shares outstanding

27,827,804

28,548,830

Weighted average dilutive shares

—

182

Total weighted average dilutive shares

27,827,804

28,549,012

Diluted (loss) earnings per share:

$
(0.19
)

$
0.27


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

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

~~Due to the net loss~~The Company had 1,903,039 and 1,629,503 antidilutive shares for the ~~three months~~period ended March 31, 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 our common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the ~~treasury method. The~~"if converted" method under the guidance of ASU 2020-06, adopted by the Company ~~had 1,629,503 and 1,889,770 antidilutive shares as of March 31, 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 March 31, ~~2021~~2022 and ~~2020,~~2021, the Company allocated ceding commission income of ~~$11.3~~$11.7 million and ~~$10.4~~$11.3 million to policy acquisition costs and ~~$3.7~~$3.9 million and ~~$3.5~~$3.7 million to general and administrative expense, respectively.

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


		Three Months Ended March 31,
		2022			2021
	(In thousands)
Beginning balance of deferred ceding commission income		$	40,405		$	39,995
Ceding commission deferred			12,454			13,029
Less: ceding commission earned			(15,614	)		(15,033	)
Ending balance of deferred ceding commission income		$	37,245		$	37,991

Three Months Ended March 31,

2021

2020

(In thousands)

Beginning balance of deferred ceding commission income

$
39,995

$
37,464

Ceding commission deferred

13,029

10,845

Less: ceding commission earned

(15,033
)

(13,929
)
Ending balance of deferred ceding commission income

$
37,991

$
34,380

1.

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

NOTE 10. DEFERRED POLICY ACQUISITION COSTS

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

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


		Three Months Ended March 31,
		2022			2021
	(In thousands)
Beginning Balance		$	93,881		$	89,265
Policy acquisition costs deferred			49,992			46,675
Amortization			(53,232	)		(47,064	)
Ending Balance		$	90,641		$	88,876

Three Months Ended March 31,

2021

2020

(In thousands)

Beginning Balance

$
89,265

$
77,211

Policy acquisition costs deferred

46,675

38,131

Amortization

(47,064
)

(40,447
)
Ending Balance

$
88,876

$
74,895

NOTE 11. INCOME TAXES

For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company recorded an income tax benefit of ~~$(2.6)~~$10.6 million and ~~an income tax expense of $3.2~~$2.6 million, respectively, which corresponds to effective tax rates of ~~33.2%~~25.7% and ~~29.4%~~33.2%, respectively. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each ~~three month~~ period was affected by various permanent tax differences, ~~predominately~~including disallowed executive compensation deductions which ~~were~~was further limited in 2018 and future years upon the enactment of H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Additionally, the state effective income tax rate can also fluctuate as a result of changes in the geographic dispersion of ~~our~~the Company’s business. The effective tax rate can fluctuate throughout the year as estimates used in the tax provision for each quarter are updated as more information becomes available throughout the year.

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



	March 31, 2021			December 31, 2020			March 31, 2022		December 31, 2021
Deferred tax assets:	(In thousands)						(In thousands)
Unearned premiums	$	19,271		$	15,303		$	20,639	$	15,805
Unearned commission		8,807			9,272			8,718		9,459
Net operating loss		1,484			1,885			857		1,222
Tax-related discount on loss reserve		3,426			3,322			4,130		3,872
Stock-based compensation		114			113			175		84
Accrued expenses		1,110			982			867		1,182
Leases		379			394			814		792
Unrealized losses		661			—			9,347		1,913
Consolidated loss limitation								7,949		0
Other		358			343			405		472
Total deferred tax asset		35,610			31,614			53,901		34,801
Deferred tax liabilities:
Deferred acquisition costs		20,604			20,694			21,218		21,977
Prepaid expenses		202			236			193		177
Unrealized gains		—			1,814
Property and equipment		1,605			1,669			1,410		1,504
Note discount		286			326			102		187
Basis in purchased investments		48			53			33		34
Basis in purchased intangibles		15,346			15,693			13,348		14,550
Internal revenue code 481(a)-Accounting method change		7,505			8,577			3,312		4,416
Other		1,123			1,029			1,834		1,382
Total deferred tax liabilities		46,719			50,091			41,450		44,227
Net deferred tax liability	$	(11,109	)	$	(18,477	)
Net deferred tax asset (liability)							$	12,451	$	(9,426	)

The statute of limitations related to ~~our~~the Company’s federal and state income tax returns remains open from ~~our~~the Company’s filings for 2018 through 2020. In April 2019, the Company was notified by the tax authority that the federal income tax returns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority for the examined tax years, reporting that the returns were accepted as final. No further action will be required and no other tax years are under examination.2021.

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

NOTE 12. REINSURANCE

Overview

In order to limit the Company’s potential exposure to individual risks and catastrophic events, ~~we purchase~~the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of ~~our~~the Company’s risk strategy, and premiums ceded to reinsurers is one of ~~our~~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, ~~2019~~2020 and ~~2020,~~2021, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per

risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate.

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

The Company’s reinsurance agreements are prospective contracts. ~~We record~~The Company records an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of ~~our~~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.

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

Effect of Reinsurance

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


	Three Months Ended March 31,
	2022			2021
	(In thousands)
Premium written:
Direct	$	283,196		$	274,181
Ceded		(47,131	)		(54,617	)
Net	$	236,066		$	219,564
Premiums earned:
Direct	$	287,368		$	270,411
Ceded		(134,439	)		(128,212	)
Net	$	152,929		$	142,199
Loss and Loss Adjustment Expenses
Direct	$	199,668		$	125,495
Ceded		(59,630	)		(27,585	)
Net	$	140,038		$	97,909

Three Months Ended March 31,

2021

2020

(In thousands)

Premium written:

Direct

$
274,181

$
229,102

Ceded

(54,617
)

(30,637
)
Net

$
219,564

$
198,465

Premiums earned:

Direct

$
270,411

$
234,716

Ceded

(128,212
)

(108,710
)
Net

$
142,199

$
126,006

Loss and Loss Adjustment Expenses

Direct

$
125,495

$
107,365

Ceded

(27,585
)

(39,184
)
Net

$
97,909

$
68,181

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. ~~We estimate our~~The Company estimates its IBNR reserves by projecting ~~our~~its ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses.

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

Three Months Ended March 31,

2021

2020

(In thousands)

Balance, beginning of period

$
659,341

$
613,533

Less: reinsurance recoverable on unpaid losses

397,688

393,630

Net balance, beginning of period

261,653

219,903

Incurred related to:

Current year

99,504

72,331

Prior years

(1,595
)

(4,150
)
Total incurred

97,909

68,181

Paid related to:

Current year

25,826

21,236

Prior years

62,266

47,308

Total paid

88,092

68,544

Net balance, end of period

271,470

219,540

Plus: reinsurance recoverable on unpaid losses

366,412

387,637

Balance, end of period

$
637,882

$
607,177


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

As of March 31, ~~2021,~~2022, the Company reported ~~$271.5~~$311.7 million in unpaid losses and loss adjustment expenses, net of reinsurance which included ~~$205.0~~$319.4 million attributable to IBNR net of reinsurance recoverable, or ~~75.5%~~74.4% of net reserves for unpaid losses and loss adjustment expenses.

NOTE 14. LONG-TERM DEBT

Convertible Senior Notes

In August 2017 and September 2017, the Company issued in aggregate ~~$136.8~~$136.8 million of ~~5.875%~~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, commencing in 2018.~~year.

As of March 31, ~~2021,~~2022, the Company had ~~$22.3~~$11.7 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately ~~$1.1 million.~~$101,560 and net of $21.1 million of Convertible Notes held by an insurance company subsidiary. For each of the ~~three months~~three-month periods ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company made interest payments, net of affiliated Convertible Notes of approximately ~~$687,800~~$630,650 and ~~$687,800 respectively~~$687,750, on the Convertible ~~Notes.~~Notes, respectively.

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

Senior Secured Credit Facility

~~In December 2018, the~~The Company ~~entered into~~is party to afive-year, ~~$125.0~~$150.0 million credit agreement ~~(the~~(as amended from time to time, the “Credit Agreement”) with a syndicate of ~~lenders consisting of $75.0 million~~lenders.

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

Term Loan Facility: The principal amount of the Term Loan Facility amortizes in quarterly installments, ~~beginning~~which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to ~~$1.9~~$1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and increasing to $1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. ~~As of~~The Term Loan Facility matures on July 27, 2026. On December 31, ~~2020,~~2021, there was ~~$60.0~~$69.1 million in aggregate principal outstanding on the Term Loan Facility. As of March 31, ~~2021,~~2022, there was $68.3 million in aggregate principal outstanding on the ~~balance of the term loan was $58.1 million.~~ Term Loan Facility.

For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company made principal and interest payments of approximately ~~$706,800~~$1.4 million and ~~$1.2~~$2.6 million, respectively on the ~~term loan, respectively.~~Term Loan Facility.

Revolving Credit ~~Facility~~:Facility: The Revolving Credit Facility allows for borrowings of up to ~~$50.0~~$75 million inclusive of a ~~$5.0~~$5 million sublimit for the issuance of letters of credit and a ~~$10.0~~$10 million sublimit for swingline loans. As of ~~March~~December 31, 2021, ~~and December 31, 2020,~~ the Company had ~~$10.0~~0 borrowings and 0 letters of credit outstanding under the Revolving Credit Facility. As of March 31, 2022, the Company had $15.0 million of borrowings and ~~0 letters~~a $7.5 million letter of credit outstanding under the Revolving Credit Facility. For the three months

ended March 31, ~~2021~~2022 and ~~2020,~~March 31, 2021, the Company made interest payments of ~~approximately $116,805~~$100,908 and ~~$265,900~~$116,805 under the ~~revolving credit facility,~~Revolving Credit Facility, respectively.

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

At March 31 ~~2021,~~2022, the ~~Company’s,~~ effective interest rate on for the Term Loan Facility and ~~for the~~ Revolving Credit Facility was ~~3.38%.~~3.0% and 3.19%, 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.

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

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

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~~$12.7 million, bearing interest of ~~4.95%~~4.95% per annum and maturing on October 30, ~~2027.~~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%~~3.10%. The Company makes monthly principal and interest payments towards the loan. For each of the respective three-month periods ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company made principal and interest payments of approximately ~~$223,200~~$223,200 on the mortgage loan.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company received a ~~3.094%~~3.094% fixed interest rate cash loan of ~~$19.2~~$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~~$1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of March 31, ~~2021,~~2022, the fair value of the collateralized securities was ~~$22.2~~$22.2 million and the equity investment in FHLB common stock was ~~$1.2~~$1.2 million. AsFor each of the three months ended March 31, ~~2021,~~2022, and ~~2020,~~2021, the Company made quarterly interest payments as per the terms of the loan agreement of approximately ~~$150,160 and $150,000, respectively.~~$150,160. As of March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston valued at ~~$139,300~~$221,800 and ~~$76,600,~~$215,900, respectively.

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


	March 31, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	(in thousands)				(in thousands)
Convertible debt	$	23,413	$	23,413	$	11,779	$	23,413
Mortgage loan		11,750		11,827		11,440		11,521
Term loan facility		58,125		60,000
Credit loan facility						68,250		69,125
Revolving credit facility		10,000		10,000		15,000		0
FHLB loan agreement		19,200		19,200		19,200		19,200
Total principal amount	$	122,488	$	124,440	$	125,669	$	123,259
Less: unamortized discount and issuance costs	$	2,987	$	3,442
Deferred finance costs					$	1,980	$	2,502
Total long-term debt	$	119,501	$	120,998	$	123,689	$	120,757

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

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

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


Year	Amount
	(In thousands)
2022 remaining	$	2,867
2023		23,039
2024		4,292
2025		5,624
2026		68,331
Thereafter		21,516
Total	$	125,669

Year

Amount

(In thousands)

2021 remaining

$
5,855

2022

7,822

2023

74,539

2024

354

2025

374

Thereafter

33,544

Total

$
122,488

NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

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


Description	March 31, 2022		December 31, 2021
	(In thousands)
Deferred ceding commission	$	37,245	$	40,406
Outstanding claims checks		3,978		—
Accounts payable and other payables		7,498		10,086
Accrued interest and issuance costs		393		735
Accrued dividends		1,621		1,634
Premium tax		—		871
Other liabilities		548		195
Commission payables		13,372		17,598
Total other liabilities	$	64,655	$	71,525

Description

March 31, 2021

December 31, 2020

(In thousands)

Deferred ceding commission

$
37,991

$
39,995

Outstanding claim checks

—

10,864

Accounts payable and other payables

7,951

9,248

Lease obligations

7,886

8,155

Accrued interest and issuance costs

167

833

Accrued dividends

1,678

1,670

Premium tax

1,886

—

Other liabilities

676

80

Commission payables

13,395

18,245

Total other liabilities

$
71,628

$
89,090

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 ~~our~~the Company’s insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, restrict the allowable investment types and investment mixes, and subject the Company’s insurers to assessments.

The Company’s insurance subsidiaries Heritage Property & Casualty Insurance Company (“Heritage P&C)”, Narragansett Bay Insurance Company (“NBIC”), Zephyr Insurance Company (“Zephyr”), and Pawtucket Insurance Company (“PIC”) must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain capital and surplus equal to the greater of ~~$15~~$15 million or ~~10%~~10% of their respective liabilities. Zephyr is required to maintain a deposit of ~~$750,000~~$750,000 in a federally insured financial institution. NBIC is required to maintain capital and surplus of ~~$3.0~~$3.0 million. The combined statutory surplus for Heritage P&C, Zephyr, NBIC and PIC was ~~$305.6~~$294.5 million at March 31, ~~2021~~2022 and ~~$333.3~~$302.1 million at December 31, ~~2020.~~2021. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, and risk-based capital requirements with which the Company is in compliance. At March 31, ~~2021, our~~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.

In July 2020, the Company entered into a ten year, non-cancellable operating lease agreement for approximately 88,600 square feet of office space located in Tampa, Florida. The Company anticipates relocating from the Clearwater Corporate office to the new location during the second half of 2021. The anticipated principal contractual commitments based on the terms and conditions of the agreement is approximately $29.7 million through 2031.

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 March 31, 2022 and 2021.

•

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

$309,800, respectively.

•

In July 2019, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for Company. The Company pays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a director. For the three months ended March 31, 2021 and 2020, the Company paid agency commission to Comegys of approximately $309,800 and $179,800, respectively.

NOTE 19. EMPLOYEE BENEFIT PLANS

The Company provides a 401(k) plan for substantially all employees. The Company provides a matching contribution of ~~100%~~100% on the first 3% of employees’ contribution and ~~50%~~50% on the next 2% of the employees’ contribution to the plan. The maximum match is 4%4%. For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the contributions made to the plan on behalf of the participating employees were approximately ~~$322,200~~$396,600 and ~~$339,300,~~$322,200, respectively.

~~The~~Effective September 1, 2021, the Company ~~provides~~terminated its ~~employees with a partially~~ self-insured healthcare plan and ~~benefits.~~enrolled in a flex healthcare plan which allows employees the choice of three medical plans with a range of coverage levels and costs. For the three months ended March 31, 2022 and 2021, ~~and 2020,~~the Company incurred medical premium costs ~~amounted to an aggregate~~including the new 2021-2022 healthcare premiums, of ~~$990,100 and $910,000, respectively. An additional liability of approximately $1.8~~$1.2 million and ~~$1.4 million is recorded for unpaid claims as of March 31, 2021 and December 31, 2020,~~$990,100, respectively. A stop loss reinsurance policy caps the maximum loss that could be incurred by the Company under the self-insured plan. The Company’s stop loss coverage per employee is $125,000 for which any excess cost would be covered by the reinsurer subject to an aggregate limit for losses in excess of $1.5 million which would provide up to $1.0 million of coverage. Any excess of the coverage limits would be borne by the Company. The aggregate stop loss commences once our expenses exceed 120% of the annual aggregate expected claims.

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 March 31, ~~2021,~~2022, the Company had ~~27,904,923~~26,444,720 shares of common stock outstanding, ~~9,279,839~~11,257,855 treasury shares of common stock and ~~219,084~~655,268 unvested ~~shares of~~ restricted common stock ~~issued~~with accrued dividends reflecting total paid-in capital of ~~$332.0~~$333.2 million as of such date.

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

Common Stock

Holders of common stock are entitled to one vote for each share held on all matters subject to a vote of stockholders, subject to the rights of holders of any outstanding preferred stock. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the rights of holders of any outstanding preferred stock. Holders of common stock will be entitled to receive ratably any dividends that the board of directors may declare out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to receive ratably its net assets available after the payment of all debts and other liabilities and subject to the prior rights of holders of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There ~~are~~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 Board of Directors established a new share repurchase program plan to commence upon December 31, 2021, for the purpose or repurchasing up to an aggregate of $25.0 million of Common Stock, through the open market or in such other manner as will comply with the terms of applicable federal and state securities laws and regulations, including without limitation, Rule 10b-18 under the Securities Act at any time or from time to time on or prior to December 31, 2022 (the "New Share Repurchase Plan"). As of March 31, 2022, the Company repurchased in aggregate 721,118 shares of its common stock under its repurchase program for $5.0 million.

At March 31, 2022, the Company has the capacity under the New Share Repurchase Plan to repurchase $20.0 million of its common shares until December 31, 2022.

Dividends

On March 4, 2022, the Company announced that its Board of Directors ratified a stock repurchase program authorizing the Company to repurchase up to $50.0 million of its common stock which had expired on December 31, 2020. As of December 31, 2020, 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 our 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 our current Rule 10b5-1 trading plan, which allows the Company to purchase shares below a predetermined price per share, or otherwise. NaN shares were repurchased during the three months ended March 31, 2021 under the share repurchase program.

~~At March 31, 2021 the Company has the capacity to repurchase $50 million of its common shares until December 31, 2021.~~

~~Dividends~~

~~On March 3, 2021, the Company’s Board of Directors~~ declared a ~~$0.06~~$0.06 per share quarterly dividend payable on April 6, ~~2021,~~2022 to stockholders of record as of March ~~15, 2021.~~17, 2022.

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

NOTE 21. STOCK-BASED COMPENSATION

Common, Restricted and Performance-based Stock

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

At March 31, ~~2021~~2022 there were ~~981,709~~473,557 shares available for grant under the Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards.

~~During the quarter ended March 31, 2021,~~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.

In January 2022, the Company awarded to ~~its Chief Executive Officer 95,878 performance-based~~non-employee directors in aggregate 21,768 shares of restricted ~~shares~~stock with a ~~market~~fair value at the time of grant of ~~$10.43~~$5.88 per share. The awards shall vest on the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date.

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

For the performance-based restricted stock the numbers of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In addition, the Board issued this executive 47,939 time-based restricted shares with a market value at the time of grant of $10.43 per share. The 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.

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

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

Restricted Stock

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

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

				Weighted-Average
				Grant-Date Fair					Weighted-Average
	Number of shares			Value per Share					Grant-Date Fair
Non-vested, at December 31, 2020		100,267		$	15.37
						Number of shares			Value per Share
Non-vested, at December 31, 2021							283,092		$	9.32
Granted - Performance-based restricted stock		95,878			10.43		256,445			6.67
Granted - Time-based restricted stock		47,939			10.43		140,731			6.56
Vested		(12,500	)		16.35		(15,151	)		5.88
Canceled and surrendered		(12,500	)		16.35		(9,849	)		5.88
Non-vested, at March 31, 2021		219,084		$	12.02
Non-vested, at March 31, 2022							655,268		$	7.82

Awards are being amortized to expense over the ~~one~~two to five-year vesting period. The Company recognized ~~$260,000~~$505,730 and ~~$1.3 million~~$260,000 of compensation expense for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. For the three months ended March 31, ~~2021,~~ 2022, 25,000 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, ~~12,500~~9,849 shares were withheld by the Company to cover withholding taxes of ~~$127,000.~~$89,000. For the comparable period of 2021, 25,000 shares were vested and released of which 12,500 shares were withheld by the Company to cover withholding taxes of $127,000.

At March 31, ~~2021 and 2020~~2022, there was approximately ~~$2.0~~$1.6 million ~~and $4.2 million, representing~~ unrecognized expense related to ~~the~~time-based non-vested restricted stock and an additional $1.7 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in 2021, there was $2.0 million of unrecognized expense.

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


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

Grant date

Restricted shares unvested

Share Value at Grant Date Per Share

Remaining Restriction Period (Years)

February 12, 2018

50,000

$
16.35

2.00

September 3, 2018

10,267

$
15.08

0.80

April 24, 2020

10,000

$
10.60

1.50

September 21, 2020

5,000

$
10.83

0.80

January 4, 2021

143,817

$
10.43

3.00

219,084

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 March 31, ~~2021.~~2022.

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

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

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included ~~and~~ elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“~~2020~~2021 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

~~FINANCIAL HIGHLIGHTS~~Overview

~~Overview~~

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

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document.

Recent Developments

COVID-19 and Other Matters

With regard to the COVID-19 pandemic, our first priority remains the health and safety of our employees and their families. Approximately 50% of our total personnel are either working from home full-time or on a hybrid schedule between office and home. Our corporate and remote offices remain operational, we are practicing social distancing, and have enhanced cleaning protocols and are using personal protective equipment in addition to employing other preventative measures.

We continue to monitor the ~~short-and~~short- and long-term impacts of the COVID-19 virus and its ~~variants, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020.~~variants. For the ~~year~~quarter ended ~~December~~March 31, ~~2020,~~2022, we saw ~~virtually no~~negligible impact to our business. As a residential property insurer, we view our business as somewhat insulated because property owners and renters generally view our products as a necessity. The majority of our gross and net premiums written are from renewals of expiring policies. New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio. ~~In a prolonged recessionary and social-distancing environment, we~~We could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition. Changes in the cost of materials and labor for home repairs can influence our loss costs associated with claims.

~~Although~~While we have not experienced a significant amount of payment delays, or non-payment, there may be delays in premium payments in geographies that might require us to grant policyholders additional time to pay their premiums and, under prolonged recessionaryacknowledge uncertainties associated with future economic conditions, we ~~could experience more significant delays in premium payments and possibly non-payment of premiums.~~

Global credit and financial markets experienced extreme volatility and disruptions during the second quarter of 2020 as a result of the COVID-19 pandemic, including diminished liquidity and credit availability, declines in consumer confidence, increases in unemployment rates and uncertainty about economic stability. Although we were relatively unaffected by the condition of the credit markets, if the credit and financial markets again experience significant deterioration at a time when we need additional liquidity, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Notwithstanding these actual and potential impacts, we currently believe that our cash on hand, revolving credit facility and expected earnings give us sufficient liquidity to fund our operations. However, if we need additional liquidity at a time when equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive.

~~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 onto our ~~liquidity or our financial results, except for the benefit associated with a 5-year carryback of our 2020 tax net operating loss.~~business going forward. We will continue to monitor economic conditions and, ~~assess~~in the ~~impact the CARES Act and similar legislation may have on~~case of a prolonged economic slowdown as a result of COVID-19, will take necessary actions to mitigate any negative impacts to our business, ~~and~~operations or financial results.

Financial Results ~~Highlights~~ for the ~~First Quarter~~first quarter of ~~2021~~2022

•

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

•

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

•

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

•

Gross premiums written of $283.2 million, up 3.3% from the prior year quarter, with intentional exposure-management and re-underwriting efforts resulting in a 4.0% reduction in Florida, offset by growth of 11.4% in other regions.

•

Premiums in force of $1.2 billion, up 4.7% from first quarter 2021.

•

Net current accident year weather losses of $63.8 million, up substantially from $31.4 million in the prior year quarter. Current accident year weather losses include $45.0 million of net current accident quarter catastrophe losses, up from $15.4 million in the prior year quarter, and $18.8 million of other weather losses, up from $16.1 million in the prior year quarter.

•

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

•

~~Net loss for the quarter was $5.1 million, or ($0.19) per diluted share.~~

•

~~Book value per share of $15.32, down 4.9% from $16.11 at March 31, 2020 and down 3.9% from year-end 2020.~~

•

~~Gross premiums written of $274.2 million, up 19.7% year-over-year, including 21.9% growth outside Florida and 17.7% growth in Florida.~~

•

~~Premiums in force of $1.1 billion, up $167.4 million quarter-over-quarter.~~

•

~~Policies-in-force of 591,924, up 10.0% year-over-year.~~

•

~~Favorable prior year reserve development of $1.6 million.~~

•

Net current accident year weather losses of $31.4 million, up substantially from $21.2 million in the prior year quarter. Current accident year weather losses include $15.4 million of net current accident quarter catastrophe losses, down from $17.0 million in the prior year quarter, and $16.1 million of other weather losses, up from $4.1 million in the prior year quarter.

•

~~Total capital returned to shareholders of $1.7 million, representing a $0.06 per share regular quarterly dividend.~~

Results of Operations

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

Revenue


	For the Three Months Ended March 31,												For the Three Months Ended March 31,
(Unaudited)	2021			2020			$ Change			% Change			2022			2021			$ Change			% Change
	(in thousands)												(in thousands)
REVENUE:
Gross premiums written	$	274,181		$	229,102		$	45,079			19.7	%	$	283,196		$	274,181		$	9,015			3.3	%
Change in gross unearned premiums		(3,770	)		5,614			(9,384	)		(167.1	)%		4,172			(3,770	)		7,942			(210.7	)%
Gross premiums earned		270,411			234,716			35,695			15.2	%		287,368			270,411			16,957			6.3	%
Ceded premiums		(128,212	)		(108,710	)		(19,502	)		17.9	%		(134,439	)		(128,212	)		(6,227	)		4.9	%
Net premiums earned		142,199			126,006			16,193			12.9	%		152,929			142,199			10,730			7.5	%
Net investment income		1,293			3,670			(2,377	)		(64.8	)%		2,000			1,293			707			54.7	%
Net realized gains		80			59			21			35.9	%		(16	)		80			(96	)	NM
Other revenue		3,671			2,971			700			23.6	%		3,695			3,671			24			0.7	%
Total revenue	$	147,243		$	132,706		$	14,537			11.0	%	$	158,608		$	147,243		$	11,365			7.7	%

NM= Not Meaningful

Gross premiums written

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

Premiums-in-force were $1.2 billion in first quarter 2022, up 4.7% from first quarter 2021, while policies-in-force were down 5.5%, with the delta largely stemming from rate increases. Policies-in-force were 559,496, a 5.5% reduction from 591,924 policies at first quarter 2021. The reduction in policies in force from the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $287.4 million in first quarter ~~2021,~~2022, up ~~19.7%~~6.3% from $229.1 million in the prior year quarter. The increase reflects 21.9% growth outside Florida and 17.7% 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.

~~Premiums-in-force were $1.1 billion as of first quarter 2021, representing a 16.0% annualized growth rate from year-end 2020. The increase stems from the same items impacting gross premiums written.~~

~~Gross premiums earned~~

~~Gross premiums earned were~~ $270.4 ~~million in first quarter 2021, up 15.2% from $234.7~~ million in the prior year quarter. The increase reflects higher gross premiums written over the ~~past~~last twelve months.

Ceded premiums

Ceded premiums were ~~$128.2~~$134.4 million in first quarter ~~2021,~~2022, up ~~17.9%~~4.9% from ~~$108.7~~$128.2 million in the prior year quarter. The increase is ~~primarily~~ attributable to an increase in the cost of our catastrophe excess of loss reinsurance program ~~and~~driven by an increase in ~~total insured value (“TIV”) associated with premium growth.~~TIV for the respective reinsurance contract periods.

Net premiums earned

Net premiums earned were ~~$142.2~~$152.9 million in first quarter ~~2021,~~2022, up ~~12.9%~~7.5% from ~~$126.0~~$142.2 million in the prior year quarter. The increase primarily stems from ~~higher~~growth in gross premiums earned ~~partly offset by higher~~outpacing the increase in ceded premiums, as described above.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was ~~$1.4~~$2.0 million in first quarter ~~2021, down 62.1%~~2022, compared to ~~$3.7~~$1.4 million in the prior year quarter. The ~~decrease~~increase is primarily due to ~~lower yields associated with~~higher balances in our fixed income portfolio than the ~~continued low interest rate environment.~~prior year quarter.

Other revenue

Other revenue was $3.7 million in first quarter ~~2021, up 23.6% million from $3.0 million in~~2022, relatively flat when compared to the prior year quarter. ~~The increase relates primarily to policy fee income associated with policy count growth.~~

Total revenue

Total revenue was ~~$147.2~~$158.6 million in first quarter ~~2021,~~2022, up ~~11.0%~~7.7% from ~~$132.7~~$147.2 million in the prior year quarter. The increase primarily stems from higher net premiums earned, as described above.

For the Three Months Ended March 31,

(Unaudited)

2021

2020

$ Change

% Change

OPERATING EXPENSES:

(in thousands)

Losses and loss adjustment expenses

97,909

68,181

29,728

43.6
%
Policy acquisition costs

35,366

30,047

5,319

17.7
%
General and administrative expenses

19,800

21,718

(1,918
)

(8.8
)%
Total operating expenses

153,075

119,946

33,129

27.6
%


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

Losses and loss adjustment expenses

Losses and loss adjustment expenses (“LAE”) were ~~$97.9~~$140.0 million in first quarter ~~2021,~~2022, up ~~43.6%~~43.0% from ~~$68.2~~$97.9 million in the prior year quarter. The increase stems from higher ~~attritional and~~net weather ~~net loss ratios and from a larger book of business.~~losses, as described above.

Policy acquisition costs

Policy acquisition costs were ~~$35.3~~$38.3 million in first quarter ~~of 2021,~~2022, up ~~17.7%~~8.2% from ~~$30.0~~$35.4 million in the prior year quarter. The increase is primarily attributable to ~~higher acquisition costs associated with~~ growth in gross premiums ~~written.~~written and is partially offset by higher ceding commission income.

General and administrative expenses

General and administrative expenses were ~~$19.8~~$19.7 million in first quarter ~~2021, down 9% from $21.7 million in~~2022, relatively flat when compared to the prior year quarter. The decrease is primarily attributable to compensation associated with executive management changes in late 2020 as well as a reduction in stock compensation as larger tranches of restricted stock were fully vested in 2020.

For the Three Months Ended March 31,

(Unaudited)

2021

2020

$ Change

% Change

(in thousands, except per share and share amounts)

Operating (loss) income

(5,832
)

12,760

(18,592
)

(145.7
)%
Interest expense, net

1,878

1,966

(88
)

(4.5
)%
(Loss) income before income taxes

(7,711
)

10,794

(18,505
)

(171.4
)%
(Benefit) provision for income taxes

(2,562
)

3,174

(5,736
)

(180.7
)%
Net (loss) income

$
(5,148
)

$
7,620

$
(12,768
)

(167.6
)%
Basic net (loss) income per share

$
(0.19
)

$
0.27

$
(0.45
)

(169.3
)%
Diluted net (loss) income per share

$
(0.19
)

$
0.27

$
(0.45
)

(169.3
)%


	For the Three Months Ended March 31,
(Unaudited)	2022			2021			$ Change			% Change
	(in thousands, except per share amounts)
Operating loss		(39,411	)		(5,832	)		(33,579	)		575.8	%
Interest expense, net		1,972			1,878			94			5.0	%
Loss before income taxes		(41,383	)		(7,710	)		(33,672	)		436.8	%
Benefit for income taxes		(10,624	)		(2,562	)		(8,062	)		314.6	%
Net loss	$	(30,759	)	$	(5,148	)	$	(25,611	)		497.5	%
Basic net loss per share	$	(1.15	)	$	(0.19	)	$	(0.96	)	NM
Diluted net loss per share	$	(1.15	)	$	(0.19	)	$	(0.96	)	NM

Interest expense, net

Net interest expense was ~~$1.9~~$2.0 million in the first quarter of 2022, relatively flat quarter-over-quarter.

Benefit for income taxes

Benefit for income taxes was $10.6 million in first quarter ~~2021, effectively flat quarter-over-quarter.~~

~~(Benefit) provision for income taxes~~

~~(Benefit) provision for income taxes was ($2.6) million in first quarter 2021~~2022 compared to ~~$3.2~~$2.6 million in the prior year quarter. The effective tax rate was ~~33.2%~~25.7% in first quarter ~~2021, 3.8~~2022, 7.6 points ~~above~~below the prior year quarter’s ~~29.4%~~33.2% rate. The ~~higher~~lower effective tax rate relates to the impact of permanent tax ~~differences.~~differences on projected results of operations for the calendar year. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional ~~information.~~information.

Net ~~(loss) income~~loss

First quarter ~~2021~~2022 net loss was ~~$5.1~~$30.8 million ~~(($0.19)~~($1.15 loss per ~~diluted~~ share), ~~down 167.6%~~up from net ~~income~~loss of ~~$7.6~~$5.2 million ~~of net income~~ ($~~0.27~~0.19 loss per ~~diluted~~ share) in the prior year quarter. The ~~decrease~~year-over-year change primarily ~~reflects~~stems from a larger underwriting loss driven by significantly higher ~~net loss ratio,~~weather losses, which was partly offset by ~~a lower~~growth in net ~~expense ratio.~~earned premium, as described above.

Ratios


	For the Three Months Ended March 31,
(Unaudited)	2022			2021
Ceded premium ratio		46.8	%		47.4	%

Net loss and LAE ratio		91.6	%		68.9	%
Net expense ratio		37.9	%		38.8	%
Net combined ratio		129.5	%		107.7	%

For the Three Months Ended March 31,

(Unaudited)

2021

2020

Ceded premium ratio

47.4
%

46.3
%

Net loss and LAE ratio

68.9
%

54.1
%
Net expense ratio

38.8
%

41.1
%
Net combined ratio

107.7
%

95.2
%

Ceded premium ratio

The ceded premium ratio was ~~47.4%~~46.8% in first quarter ~~2021, up 1.1~~2022, down 0.6 points from ~~46.3%~~47.4% in the prior year ~~quarter. The increase is primarily attributable to higher costs associated with our catastrophe excess-of-loss reinsurance program, partly offset by higher~~quarter, reflecting the growth in gross premiums ~~earned.~~earned outpacing the growth in ceded premiums.

Net loss and LAE ratio

The net loss and LAE ratio was ~~68.9%~~91.6% in first quarter ~~2021,~~2022, up ~~14.7~~22.7 points from ~~54.1%~~68.9% in the prior year ~~quarter. The~~quarter, driven by higher weather losses compared to the prior year quarter, which was partly offset by the 7.5% increase ~~primarily stems from higher current accident year attritional and weather~~in net ~~loss ratios and lower favorable reserve development.~~premiums earned.

Net expense ratio

The net expense ratio was ~~38.8%~~37.9% in first quarter ~~2021, down 2.3 points from 41.1%~~2022, relatively flat compared to 38.8% in the prior year quarter. ~~The decrease primarily stems from a lower G&A expense ratio.~~

Net combined ratio

The net combined ratio was ~~107.6%~~129.5% in first quarter ~~2021,~~2022, up ~~12.5~~21.8 points from ~~95.2%~~107.7% in the prior year quarter. The increase primarily stems from a higher net loss and LAE ratio ~~partly offset by~~with a ~~lower~~relatively flat net expense ~~ratio, as described above.~~ratio.

Liquidity and Capital Resources

Our principal sources of liquidity include cash flows generated from operations, ~~our~~existing cash and cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of March 31, ~~2021,~~2022, we had ~~$402.8~~$286.2 million of cash and cash equivalents and ~~$650.7~~$689.5 million in investments, compared to ~~$441.0~~$359.3 million and ~~$589.0~~$694.7 million, respectively, as of December 31, ~~2020.~~2021. The decrease in cash and cash equivalents was primarily due ~~primarily~~ to the ~~decrease in investment~~timing of ~~funds held in cash at December 31, 2020, which was partly offset by cash provided by operating activities.~~reinsurance payments for our catastrophe excess of loss ("XOL") program.

We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates.

We believe that our sources of ~~cash~~liquidity are adequate to meet our cash requirements for at least the next twelve months.

We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes.

Cash Flows


	For the Three Months Ended March 31,
	2022			2021			Change
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(39,206	)	$	39,227		$	(78,433	)
Investing activities		(27,648	)		(73,664	)		46,016
Financing activities		(4,312	)		(3,749	)		(563	)
Net (decrease) increase in cash and cash equivalents	$	(71,166	)	$	(38,186	)	$	(32,980	)

For the Three Months Ended March 31,

2021

2020

Change

(in thousands)

Net cash provided by (used in):

Operating activities

$
39,227

$
85,697

$
(46,470
)
Investing activities

(73,664
)

(25,485
)

(48,179
)
Financing activities

(3,749
)

(13,791
)

10,042

Net (decrease) increase in cash and cash equivalents

$
(38,186
)

$
46,421

$
(84,607
)

Operating Activities

Net cash ~~provided by~~used in operating activities was $39.2 million for the three months ended March 31, ~~2021~~2022 compared to net cash provided by operating activities of ~~$85.7~~$39.2 million for the comparable period in ~~2020.~~2021. The decrease in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments ~~and~~as well as reinsurance reimbursements during the first three months of ~~2021~~2022 compared to the first three months of ~~2020.~~2021.

Investing Activities

Net cash used in investing activities for the three months ended March 31, ~~2021~~2022 was ~~$73.7~~$27.6 million as compared to net cash used in investing activities of ~~$25.5~~$73.7 million for the comparable period in ~~2020.~~2021. The change in cash used ~~for~~in investing activities relates primarily to ~~investment of proceeds from fixed income securities sold during 2020 as well as the timing of~~ allocations of funds for ~~investment.~~investment in each period. Strategic sales of investments to yield realized gains in 2020 produced proceeds which were invested in early 2021.

Financing Activities

Net cash used in financing activities for the three months ended March 31, ~~2021~~2022 was ~~$3.7~~$4.3 million, as compared to cash used in financing activities of ~~$13.8~~$3.7 million for the comparable period in ~~2020. The reduction in~~2021. While net cash used in financing activities ~~is due primarily~~was relatively flat from the prior year quarter, we drew $15 million from our Revolving Credit Facility (defined below) to purchase and retire $11.7 million of Convertible Notes (defined below) during the ~~decrease~~first quarter of 2022, as described in ~~the amount of stock repurchased under the stock repurchase program.~~Note 14.

Credit Facilities

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

~~Pursuant to the~~The Credit Agreement, ~~the participating Lenders agreed to provide~~as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of ~~$50~~$75 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). As

Term Loan Facility. The principal amount of ~~December 31, 2020, the Company had in aggregate $60.0 million principal outstanding under~~ the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and ~~$10.0~~increasing to $1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27, 2026. As of March 31, 2022, there was $68.3 million in aggregate principal outstanding on the Term Loan Facility.

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

The applicable margin for loans under the Credit Facilities varies from ~~3.25%~~2.5% per annum to ~~3.75%~~3.0% per annum (for LIBOR loans) and ~~2.25%~~1.5% to ~~2.75%~~2.0% per annum (for base rate loans) based on our consolidated leverage ~~ratio.~~ratio ranging from 1.25-to-1 to greater than 2.25-to-1. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of March 31, ~~2021,~~2022, the borrowing under our Credit Facilities were accruing interest at a rate of ~~3.38%~~3.0% per annum.

In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by our consolidated leverage ratio.

Each of the Revolving Credit Facility and the Term Loan Facility mature on December 14, 2023. 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 monthly or quarterly, with the balance payable at maturity.

~~The Company~~We may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of LIBOR loans. In addition, ~~the Company is~~we are required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).

All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”).

The Company and the Guarantors ~~entered into~~are party to a Pledge and Security Agreement, ~~on December 14, 2018 (the~~(as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.

The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of ~~2.75 to 1.00 for each fiscal quarter in 2021, stepping down to~~ 2.50 to 1.00 ~~in 2022 and thereafter;~~ (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.

Convertible Notes

On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017.

The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”).

The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted.

Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.

During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances.

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

Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 but prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date.

The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Notes automatically become immediately due and payable.

In ~~the second quarter of 2018,~~January 2022, the Company repurchased ~~$10.6~~$11.7 million principal amount of outstanding Convertible ~~Notes for cash. In the fourth quarter~~Notes. As of ~~2018 and first quarter of 2019, the Company repurchased Convertible Notes in the aggregate~~March 31, 2022, there was $11.7 million principal amount of $81.6 million for a combination of cash and the issuance of an aggregate of 3,880,653 shares of the Company’s common stock, valued at $53.0 million, leaving $23.4 million in aggregate principal amount outstanding. There were no repurchases ofoutstanding Convertible ~~Notes subsequent to the first quarter of 2019.~~Notes.

FHLB Loan Agreements

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

Critical Accounting Policies and Estimates

When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three months ended March 31, ~~2021,~~2022, we reassessed our critical accounting policies and estimates as disclosed within our ~~2020~~2021 Annual Report on Form 10-K.

~~Contractual Obligations~~

As of March 31, 2021, there have been no material changes to the contractual obligations table disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K.

Seasonality of our Business

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

Recent Accounting Pronouncements

The information set forth under Note 1 to the condensed consolidated financial statements under the caption “Basis of Presentation and Significant Accounting Policies” is incorporated herein by reference. We do not expect any recently issued accounting pronouncements to have a material effect on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.758 years and 3.744 years at March 31, 2022 and 2021, ~~3.137 years at March 31, 2020,~~ and ~~3.615~~3.903 years at December 31, ~~2020.~~ 2021. As interest rates continue to rise, the fair value of our fixed rate debt securities are subject to decline. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of March 31, ~~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.

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

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Due to the COVID-19 pandemic, a portion of our employees continue to work from home or are on a hybrid schedule working both at our offices and from home. Established business continuity plans have been activated in order to continue business operations while mitigating any adverse impact to our control environment, operating procedures, data and internal controls. The design of our processes and controls allow for remote execution with accessibility to secure data.

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 March 31, ~~2021.~~2022.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

~~Issuer purchases of equity securities~~

During the three months ended March 31, ~~2021, the Company acquired 12,500~~2022, we purchased 721,118 shares of ~~its~~common stock for an aggregate of $5.0 million under out stock repurchase program. In addition, we acquired 9,849 shares of common stock for a total cost of ~~$127,000~~$89,000 during the quarter ended March 31, 2022 that were not part of the publicly announced ~~share~~stock repurchase program authorization. These shares were delivered to the Company by employees to satisfy tax withholding obligations ~~in connection~~ with the vesting of restricted stock awards.

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


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

Total Number of
Shares
Purchased

Average Price
Paid Per Share

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

Dollar Value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
January 1 - January 31, 2021

12,500

$16.35

—

$50,000
February 1 - February 29, 2021

—

$ —

—

$50,000
March 1 - March 31, 2021

—

$ —

—

$50,000
Total

12,500

—

(1)

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

(2)

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

Item 5. Other Information

Item 1.01 Entry into a Material Definitive Agreement.

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

The above summary description of the Sixth Amendment is subject to, and qualified in its entirety by reference to, the Sixth Amendment, a copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference herein.

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

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

Item 6. Exhibits

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

Index to Exhibits

~~Exhibit~~ ~~Number~~		~~Description~~

3.1		Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, ~~2014)~~2014
3.2		By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 6, ~~2014)~~2014
4		Form of Stock Certificate ~~(Incorporated~~(incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)
4.1		Form of 5.875% Convertible Senior Notes due 2037 (included in Exhibit 4.1), ~~incorporated~~(incorporated by reference to 1.1 to our Form 8-K filed on August 16, ~~2017~~2017)
4.2		Indenture, ~~date~~dated as of August 16, 2017, by and among the Company. Heritage MGA, LLC as guarantor, and Wilmington Trust, National Association, as trustee, ~~incorporated~~(incorporated by reference to Exhibit 4.1 to ~~our~~the Company's Form 8-K filed on August 16, ~~2017~~2017)
~~10.18~~	10.1*	~~Employment Agreement dated January 5, 2021 between Heritage Insurance Holdings, Inc. and Ernie Garateix, (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 6, 2021)~~
~~10.19~~		~~Employment Agreement dated April 13, 2021 between Heritage Insurance Holdings, Inc. and Kirk Lusk, (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on April 14, 2021)~~
10.20*		~~Employment Agreement dated January 1, 2015 between Heritage Insurance Holdings, Inc. and Sharon Binnun~~
10.21*		~~Employment Agreement dated April 2, 2018 between Zephyr Insurance Company, Inc. and Tim Johns~~

10.22*		~~Form of Restricted Stock Award Agreement (Time-Based and Performance-Based Vesting)~~
10.23*		~~Fourth~~Sixth Amendment to Credit Agreement, dated ~~March 24, 2021,~~May 4, 2022, among Heritage Insurance Holdings, Inc., certain subsidiaries of Heritage Insurance Holdings, Inc. from time to time party as guarantors, the lenders from time to time party and Regions Bank, as Administrative Agent and Collateral Agent
31.1*		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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

* Filed herewith

** Furnished herewith

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: May ~~7, 2021~~9, 2022	By:	/s/ ERNESTO GARATEIX
		Ernesto Garateix
		Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)

Date: May ~~7, 2021~~9, 2022	By:	/s/ KIRK LUSK
		Kirk Lusk
		Chief Financial Officer (Principal Financial ~~and Accounting~~ Officer)

	At March 31, 2021
	Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total
Maturity dates:						(In thousands)
Due in one year or less	$	78,937		13	%	$	79,291		13	%
Due after one year through five years		177,382		28	%		178,603		29	%
Due after five years through ten years		204,746		33	%		200,886		32	%
Due after ten years		164,708		26	%		164,143		26	%
Total	$	625,773		100	%	$	622,923		100	%

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Amortization of ROU assets - Finance leases	$	37	$	22
Interest on lease liabilities - Finance leases		9		6
Variable lease cost (cost excluded from lease payments)		121		130
Operating lease cost (cost resulting from lease payments)		340		343
Total lease cost	$	507	$	501

	March 31, 2021			March 31, 2020
Weighted average lease term - Finance leases	3.54 yrs.			3.42 yrs.
Weighted average lease term - Operating leases	6.78 yrs.			7.68 yrs.
Weighted average discount rate - Finance leases		6.9	%		7.1	%
Weighted average discount rate - Operating leases		5.3	%		5.3	%

	March 31, 2021
2021 remaining	$	1,242
2022		1,660
2023		1,550
2024		1,183
2025		885
Thereafter		2,906
Total lease payments		9,426
Less: imputed interest		(1,540	)
Present value of lease liabilities	$	7,886

Year	Amount⁽¹⁾
2021 - remaining	$	4,763
2022	$	6,351
2023	$	6,351
2024	$	6,351
2025	$	6,315
Thereafter	$	29,243
Total	$	59,374

	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
January 1 - January 31, 2021	12,500	$16.35	—	$50,000
February 1 - February 29, 2021	—	$ —	—	$50,000
March 1 - March 31, 2021	—	$ —	—	$50,000
Total	12,500		—