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

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

Indicate by check mark whether the ~~Registrant~~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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes☒ No ☐

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

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

Indicate by check mark whether the ~~Registrant~~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 ~~$0.0001 par value,~~ outstanding on November ~~1, 2017~~7, 2022 was ~~24,400,174.~~25,876,390.

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 ~~anticipated growth in revenue, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and~~(i) our ability to meet our investment objectives and to manage and mitigate market risk with respect to our ~~investments.~~ investments; (ii) the expected positive impact of our strategic initiatives on our future financial results, including focus on profitability, exposure management, rate adequacy and our ability to create value for our shareholders; (iii) our ability to achieve consistent long-term quarterly earnings and drive shareholder value; (iv) expected continued changes in our portfolio to reduce exposure and generate long term returns; (v) the expected benefits of excess and surplus insurance products; (vi) expected losses from Hurricane Ian (vii) the adequacy of our reinsurance program and our ability to diversify risk and safeguard our financial position; (viii) business and risk management strategies, including acquisitions, strategic investments and risk diversification; (ix) our estimates with respect to tax and accounting matters including the impact on our financial statements; (x) future dividends, if any; (xi) our expectations related to our financing activities; (xii) the sufficiency of our liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events; (xiii) the sufficiency of our capital resources, together with cash provided from our operations, to meet currently anticipated working capital requirements and the source of funds needed to fund our business and risk management strategies; (xiv) the potential effects of the seasonality of our business, including effects on our reinsurance business and financial results; (xv) our ability to successfully mitigate the effects of inflation on our business; (xvi) our intentions with respect to our credit risk investments; (xvii) the future impact of the COVID-19 pandemic; and (xviii) the potential effects of our current legal proceedings.

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

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

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2016 and in our other filings with the SEC.~~2021. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

See accompanying notes to unaudited condensed consolidated financial statements.

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

See accompanying notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of ~~Other Comprehensive Income (Loss)~~Stockholders’ Equity

See accompanying notes to unaudited condensed consolidated financial statements.

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

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

See accompanying notes to unaudited condensed consolidated financial statements.

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

NOTE 2. ~~ACQUISITION~~INVESTMENTS

~~Pending Acquisitions~~Securities Available-for-Sale

~~On August 8, 2017, the Company entered into an Agreement~~The amortized cost, gross unrealized gains and ~~Plan of Merger (the “Merger Agreement”) by~~losses, and among the Company, Gator Acquisition Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), and NBIC Holdings, Inc. (“NBIC”) and PBRA, LLC, in its capacity as Stockholder Representative. ~~Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into NBIC, resulting in NBIC becoming a wholly-owned subsidiary of the~~

Company (the “Acquisition”). NBIC owns 100% of the stock of Narragansett Bay Insurance Company, a provider of homeowners’ insurance in the northeast, with a presence in New York, New Jersey, Connecticut, Rhode Island and Massachusetts.

~~The purchase price for the Acquisition will consist of $210 million in cash (the “Cash Consideration”), plus approximately $40 million~~fair value of the Company’s common stock (the “Stock Consideration”), subject to a post-closing book value adjustment. The value of each share of the Company’s common stock will be based on the volume-weighted average price of the Company’s common stock during the five business-day period ending on the business day immediately preceding closing. The Stock Consideration will be issued at closing in an exempt private placement pursuant to Section 4(a)(2) of the Securities Act of 1933,debt securities available-for-sale are as ~~amended (the “Securities Act”). Following the closing of the Acquisition, the Company intends to file a shelf registration statement on Form S-3 with the SEC providing~~follows for the ~~registered resale~~periods presented:


September 30, 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)	$	118,629	$	11	$	4,354	$	114,286
States, municipalities and political subdivisions		105,221		1		13,037		92,185
Special revenue		290,424		47		34,153		256,318
Industrial and miscellaneous		190,091		44		19,732		170,403
Total	$	704,365	$	103	$	71,276	$	633,192

(1)

Includes securities at September 30, 2022 with a carrying amount of $26.4 million that were pledged as collateral for the ~~Stock Consideration. In accordance~~advance agreement entered into with ~~the Merger Agreement,~~ a ~~certain~~financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the ~~Stock Consideration will be placed~~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

(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 ~~an escrow account at closing~~2018. The Company is permitted to ~~secure~~withdraw or exchange any ~~amounts payable pursuant to the post-closing book value adjustment provisions set forth in the Merger Agreement. The size of this escrow will be either $12.5 million or $25.0 million~~portion of the ~~Stock Consideration (depending on~~pledged collateral over the ~~preliminary, pre-closing estimate of the closing book value of NBIC and its subsidiaries, and subject to further potential adjustment depending on whether there are~~minimum requirement at any disputes between the Company and NBIC with respect to this pre-closing estimate that remain unresolved as of the closing). The Company estimates completion of the Acquisition to occur in the fourth quarter of 2017.

time.

~~Completed Acquisitions~~

On March 21, 2016, the Company completed its acquisition of ZAC and acquired 100% of its outstanding stock and its wholly-owned subsidiary, Zephyr, in exchange for approximately $110.3 million in cash, net of cash acquired. Zephyr is a specialty property insurance provider that offers policies for residential customers in Hawaii that only cover the peril of windstorm-hurricane events.

The purchase consideration for this acquisition has been allocated to the estimated fair market value of the net assets acquired, including approximately $31.8 million in identifiable intangible assets (primarily value of business acquired (“VOBA”), brand, customer relationships and trade name), and a residual amount of goodwill of approximately $38.4 million. This acquisition furthers the Company’s strategic push to diversify business operations and achieve potential reinsurance synergies while expanding growth opportunities outside of Florida.

~~The following table sets forth the allocation of the purchase consideration for the acquisition of ZAC.~~

Net Realized (Losses)Gains

Purchase Consideration

Cash, net of cash acquired
$
110,319

Assets acquired

Investments
$
76,543

Premiums and agent's receivable

1,403

Other assets

526

Prepaid reinsurance premiums

4,792

Intangible assets – value of business acquired

7,600

Intangible assets

24,245

Total assets acquired
$
115,109

Total liabilities assumed
$
(43,216
)

Net assets acquired
$
71,893

Goodwill

38,426

Total purchase price
$
110,319

~~Pro Forma Information~~

The following table presents selected pro forma information, assuming the acquisition of ZAC had occurred on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results that the Company would have achieved had the transaction taken place on January 1, 2016 and the unaudited pro forma information does not purport to be indicative of future financial results.

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2016

(In thousands, except per share)

Revenue
$
109,306

$
344,972

Net income
$
10,930

$
38,673

Basic, earnings per share
$
0.37

$
1.33

Diluted, earnings per share
$
0.37

$
1.33

~~NOTE 3. INVESTMENTS~~

~~The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2017 and December 31, 2016:~~

Cost or Adjusted /
Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

(In thousands)

September 30, 2017

U.S. government and agency securities

$
30,369

$
15

$
381

$
30,003

States, municipalities and political
subdivisions

274,468

2,276

1,077

275,667

Special revenue

55,103

53

416

54,740

Industrial and miscellaneous

128,182

1,451

227

129,406

Redeemable preferred stocks

4,672

21

25

4,668

Total fixed maturities

492,794

3,816

2,126

494,484

Nonredeemable preferred stocks

14,305

60

85

14,280

Equity securities

13,423

442

2,749

11,116

Total equity securities

27,728

502

2,834

25,396

Total Investments

$
520,522

$
4,318

$
4,960

$
519,880

Cost or Adjusted /
Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

(In thousands)

December 31, 2016

U.S. government and agency securities

$
107,968

$
29

$
449

$
107,548

States, municipalities and political
subdivisions

281,935

298

4,872

277,361

Special revenue

53,726

29

759

52,996

Industrial and miscellaneous

129,687

535

577

129,645

Redeemable preferred stocks

3,595

15

149

3,461

Total fixed maturities

576,911

906

6,806

571,011

Nonredeemable preferred stocks

14,935

40

460

14,515

Equity securities

19,255

1,197

2,996

17,456

Total equity securities

34,190

1,237

3,456

31,971

Total Investments

$
611,101

$
2,143

$
10,262

$
602,982

~~The Company calculates the gain or loss~~net realized (losses) gains on the sale of investments by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. The Company determines the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following tables detail the Company’s ~~net realized gains (losses) by major investment category~~debt securities available-for-sale for the three and nine months ended September 30, ~~2017~~2022 and ~~2016.~~2021, respectively:

2017

2016

Gains
(Losses)

Fair Value at Sale

Gains
(Losses)

Fair Value at Sale

(In thousands)

Three Months Ended September 30,

Fixed maturities

$
413

$
253,673

$
1,091

$
17,301

Equity securities

1,260

16,454

289

1,739

Total realized gains

1,673

270,127

1,380

19,040

Fixed maturities

(23
)

26,602

(232
)

575

Equity securities

(1,285
)

6,781

(29
)

445

Total realized losses

(1,308
)

33,383

(261
)

1,020

Net realized gain

$
365

$
303,510

$
1,119

$
20,060


	2022					2021
Three Months Ended September 30,	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	—		$	50	$	2		$	3,470
Total realized losses		(3	)		110		(8	)		226
Net realized (losses) and gains	$	(3	)	$	160	$	(6	)	$	3,696


	2022					2021
Nine Months Ended September 30,	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(In thousands)
Debt Securities Available-for-Sale
Total realized gains	$	32		$	2,451	$	106		$	24,265
Total realized losses		(153	)		6,206		(10	)		1,043
Net realized (losses) and gains	$	(121	)	$	8,657	$	96		$	25,308

As of September 30, 2021, the Company recorded on its condensed consolidated statement of operations in net realized (losses) gains an impairment of approximately $1.0 million on its REIT investment which is excluded from the table above.

2017

2016

Gains
(Losses)

Fair Value at Sale

Gains
(Losses)

Fair Value at Sale

(In thousands)

Nine Months Ended September 30,

Fixed maturities

$
448

$
463,538

$
2,668

$
166,350

Equity securities

2,231

22,848

46

7,855

Total realized gains

2,679

486,386

2,714

174,205

Fixed maturities

(197
)

40,192

(66
)

12,973

Equity securities

(1,471
)

10,610

(886
)

2,948

Total realized losses

(1,668
)

50,802

(952
)

15,921

Net realized gain

$
1,011

$
537,188

$
1,762

$
190,126

The table below summarizes the Company’s ~~fixed maturities~~debt securities at September 30, ~~2017~~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.

	September 30, 2017
	Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total			At September 30, 2022
	(In thousands)					(In thousands)					Cost or Amortized Cost		Percent of Total			Fair Value		Percent of Total
Due one year or less	$	65,863		13	%	$	65,879		13	%
Maturity dates:																(In thousands)
Due in one year or less											$	95,442		14	%	$	93,586		15	%
Due after one year through five years		142,019		29	%		142,550		29	%		342,738		49	%		313,712		50	%
Due after five years through ten years		160,873		33	%		161,468		33	%		199,300		28	%		165,917		26	%
Due after ten years		124,039		25	%		124,587		25	%		66,885		9	%		59,977		9	%
Total	$	492,794		100	%	$	494,484		100	%	$	704,365		100	%	$	633,192		100	%

The following tables present, for all debt securities available-for-sale in an ~~aging~~unrealized loss position (including securities pledged) and for which no credit loss allowance been established to date, the aggregate fair value and gross unrealized loss by length of ~~our~~time the security has continuously been in an unrealized loss position at September 30, 2022 and December 31, 2021, respectively:

~~For~~Fair value is determined based on the ~~Company’s investments~~exchange price that would be received to sell an asset or paid to transfer a liability in ~~U.S government securities that do~~the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

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

The highest priority is assigned to Level 1 inputs and ~~therefore represent~~the lowest priority to Level 23 inputs. The Company did not hold any Level 3 assets or liabilities as of September 30, 2022 or December 31, 2021.

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

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.

For the year ended December 31, 2021, the Company recorded a goodwill impairment following its annual valuation review of approximately $61 million. 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. During the second quarter of 2022, Management concluded that it had a full impairment of its remaining goodwill and that the carrying value of $92.0 million should be written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in the Company's markets; and (iii) the Company's market cap was below book value.

NOTE 5. LEASES

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

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

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


	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021
Amortization of ROU assets - Finance leases	$	651	$	647
Interest on lease liabilities - Finance leases		244		263
Variable lease cost (cost excluded from lease payments)		287		112
Operating lease cost (cost resulting from lease payments)		350		339
Total lease cost	$	1,532	$	1,361


	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Amortization of ROU assets - Finance leases	$	1,943	$	1,321
Interest on lease liabilities - Finance leases		739		524
Variable lease cost (cost excluded from lease payments)		713		373
Operating lease cost (cost resulting from lease payments)		1,055		1,018
Total lease cost	$	4,450	$	3,236

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


	At September 30, 2022		At September 30, 2021
Finance lease - Operating cash flows	$	737	$	31
Finance lease - Financing cash flows	$	1,540	$	100

Operating lease - Operating cash flows (fixed payments)	$	1,188	$	1,123
Operating lease - Operating cash flows (liability reduction)	$	942	$	840

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


	Balance Sheet Classification	September 30, 2022		December 31, 2021
Right-of-use assets - operating	Right-of-use lease asset, net	$	4,437	$	5,035
Right-of-use assets - finance	Right-of-use lease asset, net	$	20,781	$	22,718
Lease liability - operating	Lease liability	$	5,821	$	6,551
Lease liability - finance	Lease liability	$	23,080	$	24,621

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


	September 30, 2022			September 30, 2021
Weighted average lease term - Finance leases	8.37 yrs.			9.34 yrs.
Weighted average lease term - Operating leases	5.68 yrs.			6.40 yrs.
Weighted average discount rate - Finance leases		4.2	%		4.2	%
Weighted average discount rate - Operating leases		5.4	%		5.3	%

Maturities of lease liabilities by fiscal year ~~ended December 31, 2016, there~~for the Company’s operating and financing leases were ~~no transfers in or out of Level 1, 2, and 3.~~as follows (in thousands):

September 30, 2017

Total

Level 1

Level 2

Level 3

(In thousands)

Fixed maturities Investments:

U.S. government and agency securities

$
30,003

$
2,844

$
27,159

$
—

States, municipalities and political
subdivisions

275,667

—

275,667

—

Special revenue

54,740

27,427

27,313

—

Industrial and miscellaneous

129,406

—

129,406

—

Redeemable preferred stocks

4,668

4,668

—

—

Total fixed maturities Investments

$
494,484

$
34,939

$
459,545

$
—

Nonredeemable preferred stocks

14,280

14,280

—

—

Equity securities

11,116

11,116

—

—

Total equity securities

$
25,396

$
25,396

$
—

$
—

Total Investments

$
519,880

$
60,335

$
459,545

$
—


	September 30, 2022
2022 remaining	$	1,161
2023		4,592
2024		4,263
2025		3,970
2026		3,990
Thereafter		16,225
Total lease payments		34,201
Less: imputed interest		(5,300	)
Present value of lease liabilities	$	28,901

December 31, 2016

Total

Level 1

Level 2

Level 3

(In thousands)

Fixed maturities Investments:

U.S. government and agency securities

$
107,548

$
103,997

$
3,551

$
—

States, municipalities and political
subdivisions

277,361

—

277,361

—

Special revenue

52,996

—

52,996

—

Industrial and miscellaneous

129,645

—

129,645

—

Redeemable preferred stocks

3,461

3,461

—

—

Total fixed maturities Investments

$
571,011

$
107,458

$
463,553

$
—

Nonredeemable preferred stocks

14,515

14,515

—

—

Equity securities

17,456

17,456

—

—

Total equity securities

$
31,971

$
31,971

$
—

$
—

Total Investments

$
602,982

$
139,429

$
463,553

$
—

NOTE 5.6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at September 30, ~~2017~~2022 and December 31, ~~2016:~~2021:


	September 30, 2017		December 31, 2016		September 30, 2022			December 31, 2021
	(In thousands)				(In thousands)
Land	$	2,582	$	2,582	$	2,582		$	2,582
Building		10,301		10,301		10,141			10,141
Computer hardware and software		3,122		3,113		12,089			7,204
Office furniture and equipment		759		759		1,381			1,355
Tenant and leasehold improvements		3,547		3,334		10,172			8,255
Vehicle fleet		815		842		720			720
Total, at cost		21,126		20,931		37,085			30,257
Less: accumulated depreciation and amortization		4,928		3,752		(14,301	)		(12,831	)
Property and equipment, net	$	16,198	$	17,179	$	22,784		$	17,426

Depreciation and amortization expense for property and equipment was ~~$394 thousand~~approximately $544,900 and ~~$797 thousand~~$736,000 for the three months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively and $1.5 million and $1.6 million for the nine months ended ~~$ 1.2 million~~September 30, 2022 and ~~$1.2 million,~~2021, respectively. The Company’s real estate consists of 1415 acres of land, ~~and four~~two buildings with a gross area of ~~191 thousand~~88,378 square ~~feet.~~feet and a parking garage.

NOTE 12. REINSURANCE

AsOverview

In order to limit the Company’s potential exposure to individual risks and catastrophic events, the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of ~~September 30, 2017, and December 31, 2016, we had no significant uncertain tax positions.~~

~~NOTE 10. REINSURANCE~~

~~The Company’s reinsurance program is designed, utilizing~~ the Company’s risk ~~management methodology,~~strategy, and premiums ceded to address its exposure to catastrophes or large non-catastrophic losses. The Company’s program provides reinsurance protection for catastrophes including hurricanes, tropical storms and tornadoes. The Company’s reinsurance agreements are partreinsurers is one of its catastrophe management strategy, which is intended to provide its stockholders an acceptable return on the risks assumed in its property business, and to reduce variability of earnings, while providing protection to the Company’s ~~policyholders.~~

~~2017 - 2018 Reinsurance Program~~

largest costs. The Company ~~placed~~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, 2021 and 2022, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). Additionally, for the 2022 hurricane season, the Company purchased a portion of the Company's catastrophe excess of loss reinsurance program ~~for the period~~ from June 1, 2017 through May 31, 2018 during the second quarter of 2017. This reinsurance program incorporates the catastrophe risk of our two insurance subsidiaries, Heritage P&C, a Florida based insurer writing property insurance in multiple states, and Zephyr, a Hawaii based insurer. The programs are allocated amongst traditional reinsurers, catastrophe bonds issued by Citrus Re Ltd. (“Citrus Re), a Bermuda special purpose insurer formed in 2014, through the 2022-1 notes, which cover catastrophe losses incurred for specific states. In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate.

Purchasing a sufficient amount of reinsurance to cover catastrophic losses from single or multiple events or significant non-catastrophe losses is an important part of the Company’s risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies the Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are

unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss.

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

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

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

2022-2023 Reinsurance Program

Catastrophe Excess of Loss Reinsurance

Effective June 1, 2022, the Company entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“~~Citrus Re”~~Heritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”). The catastrophe reinsurance programs are allocated among traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”). Coverage is specific to each insurer unless otherwise noted. The 2017-2018 reinsurance program provides, including retention, first event coverage up to $1.75 billion in Florida, first event coverage up to $731 million in Hawaii,, Citrus Re Ltd., and ~~multiple event coverage up to $2.6 billion. This coverage exceeds the requirements established by~~Osprey Re Ltd (“Osprey”), the Company’s ~~rating agency, Demotech, Inc., the~~captive reinsurer. The FHCF covers Florida ~~Office of Insurance Regulation,~~risks only and the ~~Hawaii Insurance Division.~~ Company elected to participate at 90% for the 2022 hurricane season. Osprey Re will provide reinsurance for a portion of the Heritage P&C, NBIC and Zephyr programs. The Company’s third-party reinsurers are either rated “A-” or higher by A.M. Best or S&P or are fully collateralized, to reduce credit risk. Osprey Re is fully collateralized.

The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The ~~Company’s 2017-2018~~2022-2023 reinsurance program ~~incorporates~~provides first event coverage up to $1.3 billion for Heritage P&C, first event coverage up to $1.2 billion for NBIC, and first event coverage up to $780.0 million for Zephyr. The Company’s first event retention in a 1 in 100-year event would include retention for the mandatory coverage required by law to be placed with FHCF, which is available only for Florida catastrophe risk. For the 2017 hurricane season, the Company maintained the prior year selected participation percentage in the FHCF at 45%. The Company also purchased private reinsurance below and alongside

~~the FHCF layer,~~respective insurance company as well as ~~aggregate reinsurance coverage.~~ ~~The Company is not utilizing its captive, Osprey, for~~ any ~~catastrophe risk for the 2017 hurricane season. The Company has a primary~~ retention ~~of the first $20 million of losses and loss adjustment expenses. Additionally, the December 1, 2016 treaty between Heritage P&C and Osprey was commuted effective June 1, 2017.~~

~~Heritage P&C provides property insurance coverage for states other than Hawaii. The following describes the various layers of its June 1, 2017 to May 31, 2018 reinsurance program:~~

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~~Heritage P&C’s Retention~~. If a first catastrophic event strikes a Heritage P&C risk, its primary retention is the first $20 million ($15 million plus $5 million co-participation on the Top and Aggregate layer described below) of losses and loss adjustment expenses. If a second catastrophic event strikes a Heritage P&C risk, its primary retention decreases to $16 million and the remainder of the losses are ceded to third parties. In a first event exceeding approximately $878 million, there is an additional co-participation of 20% subject to a maximum co-participation of $727,000. Assuming a 1-100yr 1^st event, a second event exceeding approximately $420 million, results in an additional Company co-participation of 11.5% subject to a maximum co-participation of $36 million. Heritage P&C has a $16 million (including 20% co-participation) primary retention after a 1-100 yr. 1^st ~~event for events beyond the second catastrophic event.~~

~~Shared Layers. Immediately above the retention, the Company has purchased $372 million of reinsurance from third party reinsurers~~. This coverage includes the following layers: Top and Aggregate layer, Underlying layer, Layer 1, Layer 2 and a private sliver alongside those layers. Through the payment of a reinstatement premium, Heritage P&C and Zephyr are able to reinstate $352 million of this reinsurance one time. There is $20 million of shared coverage subject to a seasonal aggregate of $68 million.

~~FHCF Layer~~. Heritage P&C’s FHCF program provides coverage for Florida events only and includes an estimated maximum provisional limit of 45% of $1.3 billion, in excess of its retention of $414 million. The limit and retention of the FHCF coverage is subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. Heritage P&C has purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re. To the extent the FHCF coverage is adjusted, this private reinsurance with third party reinsurers and Citrus Re will adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events.

~~Layers alongside the FHCF.~~ The Heritage P&C reinsurance program includes third party layers alongside the FHCF. These include 2015 B and 2015 C series catastrophe bonds, 2016 D and 2016 E catastrophe bonds and 2017-2 catastrophe bonds issued by Citrus Re, which total $412.5 million of coverage, as discussed below, as well as a traditional reinsurance layer providing $5 million of coverage.

~~2017-2 Notes:~~ During May 2017, Heritage P&C entered into a catastrophe reinsurance agreement with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2017. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $35 million of principal-at-risk variable notes due March 2020 to fund the reinsurance trust account and its obligations to Heritage P&C for $35 million of coverage under the reinsurance agreements. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~2016 Class D and E Notes:~~ During February 2016, Heritage P&C and Zephyr entered into two catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2016. For the 2017 hurricane seasons these notes provide coverage only to Heritage P&C who pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $250 million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class D notes provide $150 million of coverage and the Class E notes provide $100 million of coverage. The Class D and Class E notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

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~~2015 Class B and C Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re.~~ The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class B notes provide $97.5 million of coverage, and the Class C notes provide $30 million of coverage. The Class B and Class C notes provide

reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~Layers above the FHCF - Florida program~~

~~2017-1 Notes:~~ During March 2017, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2017. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due March 2020 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The notes provide $125 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~2015 Class A Notes:~~ During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class A notes provide $150 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~Multi-Zonal Layers.~~ ~~The Company purchased additional layers which provide coverage for Heritage P&C for a second event and both first and second event coverage for Hawaii.~~Osprey. The first event ~~coverage~~maximum retention up to a 1 in 100-year event for ~~Hawaii~~each insurance company subsidiary is ~~a counterpart to the multi-state catastrophe bond layers and FHCF layer. There is a total of $254~~as follows: Heritage P&C – $40.0 million, of ~~reinsurance coverage purchased on this basis, for~~ which ~~the Company has a prepaid reinstatement.~~

~~Aggregate Coverage. In addition~~$35.0 million would be ceded to ~~what is described above, much~~Osprey; NBIC – $30.0 million of ~~the reinsurance is structured~~which $30.0 million would be ceded to Osprey in a ~~way to provide aggregate coverage. $984~~shared contract with Zephyr; and Zephyr – $40.0 million, of limit is structured on this basis (Top and Aggregate, Underlying, Layer 1, Layer 2, Private layers, Multi-Zonal, 2017-1 Notes, 2017-2 Notes, and 2015 Class A Notes). To the extent that this coverage is not fully exhausted in the first catastrophic event, it provides coverage commencing at its reduced retention for second and subsequent events where underlying coverage has been previously exhausted. $606which $30.0 million has a reinstatement, which is prepaid. Layers (with exception to FHCF, 2016 Class D & E Notes, and 2015 Class B & C Notes) are “net” of a $40 million attachment point. Layers inure to the subsequent layers if the aggregate limit of the preceding layer(s) is exhausted, and the subsequent layer cascades down in its place.

~~Zephyr provides property insurance coverage for Hawaii. The various layers of its 2017-2018 reinsurance program area as follows:~~

~~Zephyr’s Retention~~. If a first catastrophic event strikes Hawaii, Zephyr has a primary retention of the first $20 million ($15 million plus $5 million co-participation on the Top and Aggregate layer) of losses and loss adjustment expenses. If a second event strikes Hawaii, Zephyr’s primary retention decreases to $16 million and the remainder of losses arewould be ceded to third parties. In a first event exceeding approximately $386 million, there is an additional co-participation of 3.8% subject to a maximum co-participation of $12 million. Assuming a 1-100-year event, a second event exceeding approximately $386 million results in an additional co-participation of 117.7%, subject to a maximum co-participation of $56 million. Zephyr has a $16 million primary retention for events beyond the second catastrophic event.

~~Shared Layers above retention~~. Immediately above the retention, the Company has purchased $372 million of reinsurance from third party reinsurers. This coverage includes the following layers: Top and Aggregate layer, Underlying layer, Layer 1, Layer 2 and a private sliver alongside those layers. Through the payment of a reinstatement premium, Heritage P&C and Zephyr are able to reinstate $352 million of this reinsurance one time. There is $20 million of shared coverage subject to a seasonal aggregate of $68 million.

•

~~Multi-Zonal Layers.~~ The Company purchased additional layers which provide coverage for Florida for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii is a counterpart to the multi-state catastrophe bond layers and FHCF layer. There is a total of $302 million of reinsurance coverage purchased on this basis, with $254 million having a prepaid reinstatement. The multi-zonal occurrence layer provides first and second event coverage of $254 million for Hawaii and second event coverage of $254 million for Florida. A Top and Aggregate multi-

~~zonal layer provides first event coverage of $48 million for Hawaii and second or subsequent event coverage of $48 million for Florida.~~

~~Top Hawaii only layer.~~ ~~Zephyr has an additional layer purchased from third party reinsurers which provides $26 million of coverage for Hawaii only losses. This layer has one free reinstatement.~~

~~Aggregate Coverage. In addition to what is described above, much of the reinsurance is structured~~Osprey in a ~~way to provide aggregate coverage. An aggregate of $700 million of limit~~shared contract with NBIC.

The Company is structured on this basis (Top and Aggregate, Underlying, Layer 1, Layer 2, Private Layers, Multi-Zonal, Hawaii Only). To the extent that this coverage is not fully exhausted in the first catastrophic event, it provides coverage commencing at its reduced retention for second and subsequent events where underlying coverage has been previously exhausted. $632 million has a reinstatement, which is prepaid or free.

~~For a first catastrophic event striking Florida, our reinsurance program provides coverage up to $1.75 billion of losses and loss adjustment expenses, including our retention, and we are~~ responsible for all losses and loss adjustment expenses in excess of ~~such amount.~~the Company's reinsurance program. For a first catastrophic event striking Hawaii, our reinsurance program provides coverage up to $731 million of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. Forsecond or subsequent catastrophic events, ~~our~~the Company’s total available coverage depends on the magnitude of the first event, as wethe Company may have coverage remaining from layers that were not previously fully exhausted. An aggregate of ~~$632 million~~$3.2 billion of limit purchased in ~~2017~~2022 includes a reinstatement ~~all~~through the purchase of ~~which is prepaid or free. In total, we have purchased $2.6 billion~~reinstatement premium protection. The amount of ~~potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this~~ coverage, however, will be subject to the severity and frequency of such events. Hurricane losses in states other than Hawaii would be covered under the Heritage P&C program with the exception of the FHCF and the series 2015, 2016 and 2017 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina, South Carolina, Georgia and Alabama.

~~In placing our 2017-2018 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate uncertainty surrounding the future~~The Company's estimated net cost of our reinsurance by negotiating multi-year arrangements. The $687.5 million of aggregate coverage we have purchased from Citrus Re Ltd, which includes the 2015 Class A, B, and C notes, the 2016 Class D & E notes, and the 2017 Series notes extends $277.5 million of coverage until May 2018, $250 million of coverage for another two-year period and $160 million of coverage for a three-year period. To the extent coverage is all or partially exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage from Citrus Re Ltd accounts for approximately 26% of our purchases of private reinsurance for the ~~2017 hurricane season.~~2022-2023 catastrophe excess of loss reinsurance programs was approximately $359.5 million. This cost estimate is based on projected exposures for which there is a true up as of August 31, 2022.

Additionally, the Company placed an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2021, expiring December 31, 2022. The ~~terms~~limit on the contract is $20.0 million with a retention of ~~each of the multi-year coverage arrangements described above are subject to adjustment depending on, among other things, the size~~$20.0 million and ~~composition of our portfolio of insured risks in future periods.~~has one reinstatement available.

~~2016 - 2017 Reinsurance Program~~

The Company placed ~~its reinsurance program~~an aggregate contract for the period from June 1, 2016 through May 31, 2017 during the second quarter of 2016. This reinsurance program incorporated the catastrophe risk of our two insurance subsidiaries, Heritage P&C, a Florida based insurer and Zephyr, a Hawaii based insurer, into one reinsurance structure. The programs were incorporated into one reinsurance structure and are allocated amongst traditional reinsurers, catastrophe bonds issuedCompany’s business underwritten by Citrus Re and the FHCF. Coverage was shared by both insurers unless otherwise noted. The 2016-2017 reinsurance program provided, including retention, first event coverage up to $1.9 billion in Florida, first event coverage up to $1.1 billion in Hawaii, and multiple event coverage up to $3 billion.

~~The reinsurance program,~~NBIC which ~~was segmented into layers of coverage, protected the Company for excess property~~covers all catastrophe losses excluding named storms, on December 1, 2021, expiring March 31, 2022. The limit on the contract is $20.0 million with an aggregate retention of $21.0 million, with a $21.0 million per occurrence cap, and ~~loss adjustment expenses.~~ a $1.0 million franchise deductible.

Net Quota Share Reinsurance

The Company’s ~~2016-2017~~Net Quota Share coverage is proportional reinsurance, ~~program incorporates the mandatory coverage required~~which applies to business underwritten by ~~law to be placed with FHCF,~~NBIC, for which was available only for Florida catastrophe risk. For the 2016 hurricane season, the Company reduced its selected participation percentage in the FHCF from 75% to 45%. The Company also purchased private reinsurance below, alongside and above the FHCF layer, as well as aggregate reinsurance coverage. The following describes the various layerscertain of the Company’s ~~June 1, 2016 to May 31, 2017~~other reinsurance ~~program.~~

~~The Company’s Retention. If a first catastrophic event struck Florida,~~(property catastrophe excess of loss and the ~~Company had a primary retention~~second layer of the ~~first $40~~general excess of loss) inures to the quota share program. An occurrence limit of $20.0 million for catastrophe losses is in effect on the quota share program, subject to certain aggregate loss limits that vary by reinsurer. The amount and rate of ceding commissions slide, within a prescribed minimum and maximum, depending on loss performance. The Net Quota Share program was renewed on December 31, 2021 ceding 50.0% of the net premiums and losses and ~~loss adjustment expenses, of which Osprey was responsible for $20 million. If a first catastrophic event struck Hawaii, the Company had a primary retention~~5% of the ~~first $30 million of~~prior year quota share is in run off.

Per Risk Coverage

For losses and loss adjustment expenses, of which Osprey was responsible for $15 million. If a second catastrophic event struck Florida, Heritage P&C’s primary retention decreased to $15 million and the remainder of the losses were ceded to third parties. If a second event struck Hawaii, Zephyr’s primary retention decreased to $5 million. In the second event only for a loss exceeding $190 million, there was an additional Company co-participation of 5.4% subject to a maximum co-participation of $11.6 million.arising from business underwritten by Heritage P&C and Zephyr each had a $5 million primary retention for events beyond the second catastrophic event. Osprey had no primary retention beyond the first catastrophic event in Florida or Hawaii. Additionally, Osprey was responsible for payment of up to $5.3 million of reinstatement premium, depending on the amount of losses ~~incurred.~~

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~~Shared Layers above retention and below FHCF. Immediately above the retention, the Company purchased $374 million of reinsurance~~arising from commercial residential business underwritten by NBIC, excluding losses from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $374 million or a portion thereof was exhausted in a first catastrophic event, the Company purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage.

~~FHCF Layer~~. The Company’s FHCF program provided coverage for Florida events only and included an estimated maximum provisional limit of 45% of $1.5 billion, in excess of its retention of $460 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re. To the extent the FHCF coverage was adjusted, this private reinsurance with third party reinsurers and Citrus Re would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage could be reinstated once exhausted, but it did provide coverage for multiple events.

~~Layers alongside the FHCF.~~ The Florida reinsurance program included third party layers alongside the FHCF. These included 2015 C and 2015 B series catastrophe bonds, which covered Florida only for the 2016 season, and 2016 D and 2016 E catastrophe bond series issued by Citrus Re, which total $377.5 million of coverage, as discussed below, as well as a traditional reinsurance layer providing $200 million of coverage. Through a reinstatement, the Company was able to reinstate the full amount of the $200 million of reinsurance one time. These 2016 catastrophe bonds and the traditional reinsurance layer provided coverage for both Florida and Hawaii catastrophe losses.

~~2016 Class D and E Notes:~~ ~~During February 2016, Heritage P&C and Zephyr entered into two catastrophe reinsurance agreements with Citrus Re. The agreements provided for three years of coverage from catastrophic losses caused by~~ named storms, including hurricanes, beginning on June 1, 2016. Heritage P&C and Zephyr pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $250 million of principal-at-risk variable notes due February 2019 to fund the reinsurance trust account and its obligations to Heritage P&C and Zephyr under the reinsurance agreements. The Class D notes provided $150 million of coverage and the Class E notes provided $100 million of coverage. The Class D and Class E notes provided reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage was fully collateralized by a reinsurance trust account for the benefit of Heritage P&C and Zephyr. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~2015 Class B and C Notes: During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re.~~ The 2015 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class B notes provided $97.5 million of coverage, and the Class C notes provided $30 million of coverage. The Class B and Class C notes provided reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~Layers above the FHCF - Florida program~~

~~2015 Class A Notes:~~ During April 2015, Heritage P&C entered into catastrophe reinsurance agreements with Citrus Re. The 2015 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provided for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C paid a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued principal-at-risk variable notes due April 2018 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The Class A notes provided $150 million of coverage for a layer above the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~2014 Class A Notes:~~ Coverage immediately below and above the 2015 Class A notes was provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re provided $150 million of coverage immediately below 2015 Class A, and the second contract provided an additional $50 million of coverage which sits immediately above 2015 Class A. During April 2014, Heritage P&C entered into two catastrophe reinsurance agreements with Citrus Re. The 2014 notes did not provide coverage for Zephyr for the 2016 hurricane season. The agreements provide for three years of coverage from catastrophe losses caused by certain named storms, including hurricanes, beginning on June 1, 2014. The limit of coverage of $200 million is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued $200 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~Multi-Zonal Layers.~~ The Company purchased additional layers which provided coverage for Florida for a second event and both first and second event coverage for Hawaii. The first event coverage for Hawaii was a counterpart to the Florida-only catastrophe bond layers and FHCF layer. There was a total of $282 million of reinsurance coverage purchased on this basis, with $260 million having a prepaid reinstatement. The multi-zonal occurrence layer provides first and second event coverage of $260 million for Hawaii and second event coverage of $260 million for Florida. A top and drop multi-zonal layer provides first and subsequent event coverage of $22 million for Hawaii and second or subsequent event coverage of $22 million for Florida.

~~Aggregate Coverage~~. In addition to what is described above, much of the reinsurance is structured in a way to provide aggregate coverage. An aggregate of $682 million of limit is structured on this basis. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention for second and subsequent events where underlying coverage had been previously exhausted. An aggregate of $460 million had a reinstatement, which was prepaid.

For a first catastrophic event striking Florida, our reinsurance program provided coverage for $2 billion of losses and loss adjustment expenses, including our retention, and we are responsible for all losses and loss adjustment expenses in excess of such amount. For a first catastrophic event striking Hawaii, our reinsurance program provides coverage for $1.1 billion of losses and loss adjustment expenses, including our retention, and we were responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depended on the magnitude of the first event, as we may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $860 million of limit purchased in 2016 included a reinstatement, with $825 million being prepaid. In total, we purchased $3.1 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, was subject to the severity and frequency of such events. Hurricane losses in states other than Hawaii would have been covered under the Heritage P&C program with the exception of the FHCF and the series 2015 and 2016 catastrophe bonds. Management deemed this reinsurance protection to be sufficient given the level of catastrophe exposure in 2017 for North Carolina and South Carolina.

In placing our 2016-2017 reinsurance program, we sought to capitalize on favorable reinsurance pricing and mitigate uncertainty surrounding the future cost of our reinsurance by negotiating multi-year arrangements. The $727.5 million of aggregate coverage we have purchased from Citrus Re Ltd, which included the 2014 Class A & B notes, the 2015 Class A, B, and C notes, and the 2016 Class D & E notes extends $200 million until May of 2017, $277.5 million for another two-year period and $250 million for a three-year period. To the extent coverage is all or partially exhausted before the end of three years, it cannot be reinstated. In the aggregate, multi-year coverage from Citrus Re Ltd accounts for approximately 42% of our purchases of private reinsurance for the 2016 hurricane season. The terms of each of the multi-year coverage arrangements described above are subject to adjustment depending on, among other things, the size and composition of our portfolio of insured risks in future periods.

~~2015 – 2016 Reinsurance Program~~

~~During the second quarter of 2015,~~ the Company placed its reinsurance program for the period from June 1, 2015 through May 31, 2016. The Company’s reinsurance program, which was segmented into layers of coverage, protected it for excess property catastrophe losses and loss adjustment expenses. The Company’s 2015-2016 reinsurance program incorporated the mandatory coverage required by law to be placed with FHCF. For the 2015 hurricane season, the Company selected 75% participation in the FHCF. The Company also purchased private reinsurance below, alongside and above the FHCF layer, as well as aggregate reinsurance coverage. The following describes the various layers of the Company’s June 1, 2015 to May 31, 2016 reinsurance program.

~~The Company’s Retention. For the first catastrophic event, the Company had a primary retention of the first $35 million of losses and loss adjustment expenses, of~~ ~~which~~ Osprey was responsible for $20 million. For a second event, Heritage P&C’s primary retention decreases to $5 million and Osprey was responsible for $10 million. To the extent that there was reinsurance coverage remaining, Heritage P&C has a $5 million primary retention for events beyond the second catastrophic event. Osprey has no primary retention beyond the second catastrophic event.

~~Layers Below FHCF~~. Immediately above the Company’s retention, the Company purchased $440 million of reinsurance from third party reinsurers. Through the payment of a reinstatement premium, the Company was able to reinstate the full amount of this reinsurance one time. To the extent that $440 million or a portion thereof was exhausted in a first catastrophic event, the Company purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of this coverage. A portion of this coverage wrapped around the FHCF and provided coverage alongside and above the FHCF.

~~FHCF Layer~~. The Company’s FHCF coverage includes an estimated maximum provisional limit of 75% of $920 million, or $690 million, in excess of its retention and private reinsurance of $336 million. The limit and retention of the FHCF coverage was subject to upward or downward adjustment based on, among other things, submitted exposures to FHCF by all participants. The Company purchased coverage alongside from third party reinsurers and through reinsurance agreements with Citrus Re Ltd To the extent the FHCF coverage was adjusted, this private reinsurance with third party reinsurers and Citrus Re Ltd would adjust to fill in any gaps in coverage up to the reinsurers’ aggregate limits for this layer. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events.

~~CAT Bond Layer alongside the FHCF~~. During April 2015 Heritage P&C entered into three catastrophe reinsurance agreements with Citrus Re Ltd. The agreements provide for three years of coverage from catastrophic losses caused by named storms, including hurricanes, beginning on June 1, 2015. Heritage P&C pays a periodic premium to Citrus Re during this three-year risk period. Citrus Re issued an aggregate of $277.5 million of principal-at-risk variable notes due April 2017 to fund the reinsurance trust account and its obligations to Heritage P&C under the reinsurance agreements. These notes were issued in three classes. The Class A notes provide $150 million of coverage for the layer immediately above the FHCF. The Class B notes provide $97.5 million of coverage, and the Class C notes provide $30 million of coverage. The Class B and Class C notes provide reinsurance coverage for a sliver of the catastrophe coverage that had previously been provided by the FHCF. The limit of coverage is fully collateralized by a reinsurance trust account for the benefit of Heritage P&C. The maturity date of the notes may be extended up to two additional years to satisfy claims for catastrophic events occurring during the three-year term of the reinsurance agreements.

~~CAT Bond Layer above the FHCF~~. Immediately above the FHCF layer was the coverage provided by the 2015 reinsurance agreement entered into with Citrus Re as described above in this footnote. The Citrus Re 2015 Class A notes provided up to $150 million of coverage immediately above the FHCF layer. Coverage immediately above the 2015 Class A notes is provided by the 2014 reinsurance agreements entered into with Citrus Re. The first contract with Citrus Re provides $150 million of coverage and the second contract provided an additional $50 million of coverage.

~~Aggregate Coverage~~. In addition to the layers described above, the Company also purchased $125 million of aggregate reinsurance coverage for losses and loss adjustment expenses in excess of $1.648 billion for a first catastrophic event. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention for second and subsequent events and where underlying coverage has been previously exhausted. There is no reinstatement of the aggregate reinsurance coverage once exhausted, but it does provide coverage for multiple events.

For a first catastrophic event, our reinsurance program provided coverage for $1.8 billion of losses and loss adjustment expenses, including our retention, and we were responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, our total available coverage depended on the magnitude of the first event, as we may have had coverage remaining from layers that were not previously fully exhausted. We also have purchased reinstatement premium protection insurance to provide an additional $440.0 million of coverage. Our aggregate reinsurance layer also provided coverage for second and subsequent events to the extent not exhausted in prior events. In total, we purchased $2.3 billion of potential reinsurance coverage, including our retention, for multiple catastrophic events. Our ability to access this coverage, however, was subject to the severity and frequency of such events.

~~Property Per Risk Coverage~~

~~For the 2017 hurricane season, the Company also~~ purchased property per risk coverage for losses and loss adjustment expenses in excess of ~~$1.0~~$1.0 million per claim. The limit recovered for an individual loss is ~~$9.0~~$9.0 million and ~~the~~ total limit for all losses is ~~$27.0~~$27.0 million. There are two reinstatements available with additional premium due based on the amount of the layer exhausted. For losses arising from commercial residential business underwritten by NBIC, the Company also purchased property per risk coverage for losses and loss adjustments expenses in excess of $750,000 per claim. The limit recovered for an individual loss is $250,000 and total limit for all losses is $750,000. There are two reinstatements available with additional premium due based on the amount of the layer exhausted.

In addition, the Company purchased facultative reinsurance for losses in excess of ~~$10.0~~$10.0 million for any ~~commercial~~ properties it insured ~~for which~~where the total insured value exceeded ~~$10.0~~$10.0 million.

~~Assumption Transactions and Assumed Premiums Written~~

~~The following table depicts written premiums, earned premiums~~ This coverage applies to losses arising from business underwritten by Heritage P&C and losses ~~showing~~arising commercial residential business underwritten by NBIC, excluding losses from named storms.

General Excess of Loss

The Company’s general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. For the ~~effects that~~contract period of July 1, 2021 through June 30, 2022, the ~~Company’s assumption transactions have on these components~~coverage is in two layers in excess of the Company’s retention of the first $500,000 of loss. The first layer is $250,000 excess $500,000 for property and casualty losses and the second layer for property losses is $2.75 million excess $750,000. The second layer for casualty losses is $1.25 million excess $750,000. For the contract period of July 1, 2022 through June 30, 2023, the coverage for property losses is $2.75 million excess $750,000 and for casualty losses is $1.25 million excess $750,000.

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

For a detailed discussion of the Company’s 2021-2022 Reinsurance Program please refer to Part II, Item 8, “Financial Statements and Supplementary Data” and “Note 12. Reinsurance” in the Company’s 2021 Form 10-K.

Effect of Reinsurance

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2022			2021			2022			2021
	(In thousands)						(In thousands)						(In thousands)						(In thousands)
Premium written:
Direct	$	154,355		$	147,691		$	455,900		$	463,778		$	304,501		$	274,178		$	952,981		$	886,059
Assumed		—			(459	)		(55	)		8,015
Ceded		1,199			(5,164	)		(229,535	)		(248,823	)		(60,885	)		(53,505	)		(536,139	)		(491,677	)
Net premium written	$	155,554		$	142,068		$	226,310		$	222,970
Change in unearned premiums:
Direct	$	(1,292	)	$	8,538		$	3,735		$	(32,143	)
Assumed		—			8,926			445			40,626
Ceded		(59,054	)		(57,977	)		47,346			85,362
Net increase	$	(60,346	)	$	(40,513	)	$	51,526		$	93,845
Net													$	243,616		$	220,673		$	416,842		$	394,382
Premiums earned:
Direct	$	153,063		$	156,229		$	459,635		$	431,635		$	307,959		$	294,409		$	891,539		$	850,466
Assumed		—			8,467			390			48,641
Ceded		(57,855	)		(63,141	)		(182,189	)		(163,461	)		(148,266	)		(131,964	)		(420,645	)		(399,323	)
Net premiums earned	$	95,208		$	101,555		$	277,836		$	316,815
Losses and LAE incurred:
Net													$	159,693		$	162,445		$	470,894		$	451,143
Loss and Loss Adjustment Expenses
Direct	$	416,842		$	59,381		$	513,233		$	141,181		$	809,993		$	195,099		$	1,147,243		$	483,382
Assumed		15,501			(3,753	)		18,508			30,208
Ceded		(368,308	)		(1,722	)		(375,013	)		(1,726	)		(654,144	)		(65,467	)		(749,834	)		(155,006	)
Net losses and LAE incurred	$	64,035		$	53,906		$	156,728		$	169,663
Net													$	155,849		$	129,632		$	397,409		$	328,376

~~The following table highlights the effects that the Company’s assumption transactions have on unpaid losses and loss adjustment expenses and unearned premiums:~~

The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date. The

Company estimates its IBNR reserves by projecting its ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses. Hurricane Ian struck Florida as a strong Category 4 hurricane on September 28, 2022. Gross catastrophe losses from Hurricane Ian are estimated to be of $655.4 million with net retained losses of $40.0 million. Gross losses from Hurricane Irma caused an increase in the ending balance as indicated below.

As of September 30, ~~2017, we~~2022, the Company reported ~~$121.3~~$379.5 million in unpaid losses and loss adjustment expenses, net of ~~reinsurance. We reported~~reinsurance which included $266.8 million attributable to IBNR net of ~~$173.4 million~~reinsurance recoverable, or 70.34% of ~~which $75.6 million relates to non-Irma claims.~~

The Company’s losses incurred for the nine months ended September 30, 2017 and 2016 reflect a prior year deficiency of $1.5 million and a deficiency of $17.3 million, respectively, associated with management’s best estimate of the actuarial loss and LAEnet reserves with consideration given to Company specific historical loss experience. The $1.5 million of unfavorable development for the nine months ended September 30, 2017 resulted from $6.1 million of unfavorable development from catastrophe losses related to Hurricane Matthew, offset by $4.6 million favorable development non-catastrophe losses. Most of the unfavorable development during the nine months ended September 30, 2016 was from personal lines. Additionally, most of the unfavorable emergence came from the second, third and fourth quarters of 2015, primarily related to claims involving litigation and claims that were represented by attorneys, public adjusters or others (sometimes referred to as Assignment of Benefits). Also, a majority of the unfavorable development in the nine months ended September 30, 2016 was isolated to the tri-county region of Florida (the counties of Miami-

~~Dade, Broward and Palm Beach). The favorable development recorded in the first nine months ended September 30, 2017 is generally related to lower expected loss adjustment expenses.~~

The Company writes insurance in the states of Florida, North Carolina, South Carolina, Hawaii, Alabama and Georgia, any of which could be exposed to hurricanes or other natural catastrophes. Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, such an event is unlikely to be so material as to disrupt our overall normal operations. However, the Company is unable to predict the frequency or severity of any such events that may occur in the near term or thereafter. The Company believes that the reserve for unpaid losses ~~reasonably represents the amount necessary to pay all claims~~ and ~~related expenses which may arise from incidents that have occurred as of the September 30, 2017.~~loss adjustment expenses.

NOTE 14. LONG-TERM DEBT

The Company actively monitors its catastrophe risk within the United States. Current year catastrophe losses by the event and magnitude are shown in the following table for the nine months ended September 30,Convertible Senior Notes

In August 2017 and ~~2016, respectively.~~

2017

2016

Number of Events

Incurred Loss and LAE ⁽¹⁾

Combined Ratio Impact

Number of Events

Incurred Loss and LAE ⁽¹⁾

Combined Ratio Impact

(In thousands)

(In thousands)

Nine Months Ended September 30,

Current period catastrophe losses incurred

$10 million to $50 million ⁽²⁾

1

$
20,000

—

—

$
—

—

$1 million to $10 million ⁽³⁾

—

—

—

1

4,094

—

Total

1

$
20,000

—

1

$
4,094

—

~~(1)~~

Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserve, net of losses ceded to reinsurers. During the third quarter of 2017, we incurred losses and LAE from one named storm, Hurricane Irma.

~~(2)~~

~~Reflects 2017 losses from hurricane Irma in~~ September ~~2017, net of reinsurance recoverables.~~

~~(3)~~

~~Reflects 2016 losses from Hurricane Hermine.~~

~~NOTE 12. LONG-TERM DEBT~~

~~Long-term debt as September 30, 2017, consisted of the following:~~

Principal

Unamortized Debt Issuance Costs

(In thousands)

Senior Secured Notes, due December 15, 2023 (interest computed at 8.75% plus 3 month Libor average, at September 30, 2017)
$
79,500

$
5,985

Convertible Senior Notes, due August 1, 2037 (interest computed at 5.875% per annum, at September 30, 2017)
$
136,750

$
5,105

~~Senior Secured Notes~~

On December 15, 2016, we issued $79.5 million aggregate amounts of Senior Secured Notes (“Secured Notes”) to six accredited investors. The Secured Notes bear interest of 8.75% per annum plus the three month average of LIBOR. Principal and interest is paid quarterly. Interest payments commenced on March 15, 2017 and the quarterly principal payments commence on December 31, 2018. At September 30, 2017, we owed $73.3 million on the Secured Notes, net of issuance costs which totaled approximately $6.2 million. For the nine-month period ended September 30, 2017, the Company made interest payments of approximately $3.9 million.

The Secured Notes contain customary restrictive covenants relating to merger, modification of the indenture, subordination, issuance of debt securities and sale of assets, the most significant of which include limitations with respect to certain designated subsidiaries on the incurrence of additional indebtedness or guarantees secured by any security interest on any shares of their capital stock. The Secured Notes covenants also limit the Company’s ability to sell or otherwise dispose of any shares of capital stock of such designated subsidiaries. The Secured Notes do not have the benefit of any sinking funds. They also contain customary limitations and lien provisions as well as customary events of default provisions, which if breached, could result in the accelerated maturity of the

~~Secured Notes. The Company was in compliance with the Senior Notes covenants for the three and nine months ended September 30, 2017.~~

Subject to the replacement capital covenant, the Secured Notes may be redeemed, in whole or in part, at any time on or after December 15, 2018, based on the quarterly payment date, at the following redemption prices (as a percentage of outstanding principal amount of the notes to be redeemed) plus accrued and unpaid interest and principal: 2018 – 103%; 2019 – 102%; 2020 – 101%; and thereafter at 100%. If there is a change in control, a holder has the right to require the Company to purchase such holder’s Secured Notes at a price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any.

~~At September 30, 2017,~~ ~~the effective interest rate, taking into account the stated interest expense and amortization of debt issuance costs, approximates 10%.~~

~~Convertible Senior Notes~~

~~On August 16,~~ 2017, the Company issued ~~$125.0~~in aggregate $136.8 million ~~aggregate principal amount~~ of ~~5.875%~~5.875% Convertible Senior Notes ~~due 2037 (the “Convertible~~(“Convertible Notes”) under an Indenture (the “Indenture”) by and among the Company, as issuer, Heritage MGA, LLC, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes were issued in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended. On September 7, 2017, the Company issued an additional $11.75 million aggregate principal amount of Convertible Notes pursuant to the initial purchaser’s option.

~~The Convertible Notes bear interest at a rate of 5.875% per year.~~ maturing on August 1, 2037, unless earlier repurchased, redeemed or converted. Interest ~~accrues from August 16, 2017 and will be~~is payable semi-annually in arrears, on February 1, and August 1 of each ~~year, beginning on February 1, 2018. The Convertible Notes are senior unsecured obligations~~year.

As of September 30, 2022, the Company that will 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 Guarantor, which will fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

~~The Convertible Notes will mature on August 1, 2037 (the “Maturity Date”), 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 pricehad $885,000 of the Convertible Notes ~~in effect~~outstanding, net of $21.1 million of Convertible Notes held by an insurance company subsidiary. For each of the nine-month periods ended September 30, 2022 and 2021, the Company made interest payments, net of affiliated Convertible Notes of approximately $1.0 million and $1.3 million, 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%~~respectively.

Holders of the ~~closing sale price~~5.875% Convertible Senior Notes due 2037 (the “Notes”) issued by the Company had an optional put right, pursuant to the indenture governing the Notes, to require the Company to repurchase the aggregate principal amount of Notes that are validly tendered. The Company received notice from the Depositary for the Notes that, on July 29, 2022, $10,895,000 aggregate principal amount of the Notes has been validly tendered in accordance with the terms of the indenture and the Company’s ~~common stock on such date multiplied by~~notice with respect to the ~~then-current conversion rate; (3) if~~optional put right of the Notes, and the Company ~~calls any or all~~directed the trustee to cancel the Notes tendered. Prior to this transaction, the outstanding balance as of September 30, 2022 of non-affiliated Notes was $11.8 million. On August 1, 2022, the Company made payments for the principal amount of the Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company used $10.0 million from its revolving credit facility to replenish the cash used to pay the $10.9 million for the purchase of the tendered Notes.

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

Senior Secured Credit Facility

The Company is party to a five-year, $150.0 million credit agreement (as amended from time to time, the “Credit Agreement”) with a syndicate of lenders.

On November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the ~~close~~Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related

thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of ~~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~~potential future increases to the ~~close of business on~~revolving credit facility commitments and/or term loan commitments, (iii) modify 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 the Maturity Date, holders may surrender their Convertible Notes for conversion at any time, regardlessamortization of the ~~foregoing circumstances.~~existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%). The Seventh Amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement. For additional information regarding the changes to the financial covenants in the Credit Agreement, refer to Part II, Item 5, “Other Information” in this Quarterly Report on Form 10-Q.

~~Unless~~The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”) and ~~until the Company obtains shareholder approval under Rule 312.03~~(2) a five-year senior secured revolving credit facility in an aggregate principal amount of ~~The New York Stock Exchange Listed Company Manual~~$50 million (inclusive of a sublimit for the issuance of letters of credit equal to the ~~Company’s common stock in excess~~unused amount of the ~~limitations set forth therein,~~revolving credit facility and a sublimit for swingline loans equal to the ~~Company will pay to any converting holder in respect~~lesser of ~~each $1,000~~$25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

Term Loan Facility. As amended by the Seventh Amendment, the principal amount of ~~Convertible Notes being converted solely cash~~the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of September 30, 2022, there was $66.5 million in aggregate principal outstanding on the Term Loan Facility and as of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding on the Term Loan Facility.

For the nine months ended September 30, 2022, the Company made principal and interest payments of approximately $2.6 million and $1.7 million, respectively and for the comparable period of 2021, the Company made interest payments of approximately $1.5 million on the Term Loan Facility.

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

Pursuant to the Sixth Amendment, the consolidated fixed charge coverage ratio included in the Credit Agreement will be calculated based on the Company’s consolidated tangible net worth, rather than the Company’s consolidated net worth as was required under the existing Credit Agreement. Specifically, the Sixth Amendment provides that, effective as of March 31, 2022 and for future fiscal quarters, the Company’s consolidated tangible net worth, which is gross of accumulated other comprehensive income, as of the end of a fiscal quarter may not be less than the sum of (1) $162,333,750, plus (2) 25% of the sum of the ~~daily conversion values (as defined in the Indenture) for each~~positive consolidated net income of the ~~40 consecutive trading days during the related conversion period (as defined in the Indenture). Following the Company’s receipt of shareholder approval, the~~ Company ~~will settle conversions of Convertible Notes through payment or delivery, as the case may be, of cash, shares of~~and its common stock or a combination of cash and shares of its common stock, at its election, based on such daily conversion values (other than for settlement only in shares). The conversion rate for the Convertible Notes is initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalentsubsidiaries with respect 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 Indenture)) that occur prior to August 5, 2022.

Upon the occurrence of a fundamental change (as defined in the Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the 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 toeach full fiscal quarter, plus (3) 100% of the ~~principal~~net cash proceeds of certain equity issuance transactions of the Company and its subsidiaries. All other material terms of the Credit Agreement remained unchanged.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the ~~Convertible Notes~~Revolving Credit Facility and a sublimit for swingline loans equal to ~~be repurchased,~~the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the Seventh Amendment, the borrowings under the Revolving Credit Facility were repaid in full.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus ~~accrued~~an applicable margin and ~~unpaid~~a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin.

~~Except~~second quarter of 2024 and 2.00 to 1.00 as ~~described below,~~of the second quarter of 2025, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company ~~may not redeem the Convertible Notes prior~~and its subsidiaries, which is required to August 5, 2022. If the NBIC Acquisition is not consummated for any reason by June 8, 2018, or if the acquisition agreement relating to the NBIC Acquisition is terminated for any reason (other than by consummation of the NBIC Acquisition), the Company may redeem all, butbe not less than ~~all,~~$100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the ~~outstanding Convertible Notes for~~net cash ~~on a redemption date~~proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to ~~occur on~~perform or prior to August 31, 2018 for a redemption price for each $1,000 principal amount of Convertible Notes equal to the sum of (i) $1,010, (ii) accrued and unpaid interest on such Convertible Notes to, but excluding, the redemption date and (iii) 75% of the excess, if any, of the redemption conversion value (as defined in the Indenture) over the initial conversion value (as defined in the Indenture). 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 will be 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 Indenture contains customary terms and~~observe certain covenants and events of default. If an Event of Default (as defined in the 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 ~~Indenture) with respect~~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.

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

At September 30, 2022, the effective interest rate on for the Term Loan Facility and Revolving Credit Facility was 5.88% and 5.69%, respectively. The Company monitors the rates prior to the reset date which allows it to establish if the payment is monthly or quarterly payment based on the most beneficial rate used to calculate the interest payment.

Mortgage Loan

In October 2017, the Company ~~100%~~and its subsidiary, Skye Lane Properties LLC, jointly obtained a commercial real estate mortgage loan in the amount of $12.7 million, bearing interest of 4.95% per annum and maturing on October 30, 2027. On October 30, 2022, the interest rate shall adjust to an interest rate equal to the annualized interest rate of the United States 5-year Treasury Notes as reported by Federal Reserve on a weekly average basis plus 3.10%. The Company makes monthlyprincipal and interest payments toward the loan. For each of the respective nine-month periods ended September 30, 2022 and ~~accrued~~2021, the Company made principal and ~~unpaid~~ interest ~~if any,~~payments of approximately $670,000 on the ~~Convertible Notes will automatically become immediately due~~mortgage loan.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. In connection with the loan agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and ~~payable.~~valued at $1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of September 30, 2022, the fair value of the collateralized securities was $26.4 million and the equity investment in FHLB common stock was $1.2 million. For each of the nine-month periods ended September 30, 2022, and 2021, the Company made quarterly interest payments as per the terms of the loan agreement of approximately $450,500. As of September 30, 2022, and December 31, 2021, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston valued at $319,100 and $215,900, respectively.

The following table summarizes the Company’s long-term ~~debt.~~

September 30, 2017

December 31, 2016

(In thousands)

5.85% Convertible Senior Notes, due August 2037
$
136,750

$
—

Senior Secured Note, due December 15, 2023

79,500

79,500

Total principal amount

216,250

79,500

Less: unamortized discount and issuance costs

27,616

6,595

Total long-term debt
$
188,634

$
72,905

~~The trading price of the underlying Secured Note~~debt and credit facilities as of September 30, ~~2017 was approximately 1.07 of par value. Debt issuance costs are capitalized~~2022 and ~~presented~~December 31, 2021:


	September 30, 2022		December 31, 2021
	(in thousands)
Convertible debt	$	885	$	23,413
Mortgage loan	$	11,281	$	11,521
Credit loan facility	$	66,500	$	69,125
Revolving credit facility	$	25,000	$	—
FHLB loan agreement	$	19,200	$	19,200
Total principal amount	$	122,866	$	123,259
Deferred finance costs	$	1,583	$	2,502
Total long-term debt	$	121,283	$	120,757

After giving effect to Seventh Amendment, as ~~a deduction from the carrying value~~ of the ~~debt.~~date of this report, the Company was in compliance with the applicable terms of all its covenants and other requirements under the Credit Agreement, Convertible Notes indenture, cash borrowings and other loans. The Company’s ability to secure future debt ~~discount and issuance costs are amortized to interest expense over the expected life of the underlying debt of 5 years. As there are offsetting puts and calls on the debt security~~financing depends, in ~~August 2022 at par, it will be economically beneficial for one party, either the company or the noteholders to exercise their option~~.

~~The Company records the fair value of these derivatives~~part, on its ~~balance sheet at fair value~~ability to remain in such compliance.

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

The schedule of ~~these derivatives reflected in the consolidated statement~~principal payments on long-term debt as of operations. The embedded derivatives are valued using the Convertible Lattice model at issuance and at the end of each quarter and marked to fair value with corresponding adjustment as “gain or loss” on change in fair values included in Other Non-Operating expense in the condensed consolidated statements of operations. For the three and nine month periods ended September 30, ~~2017, the Company recognized a loss on change in the fair value totaling $6.9 million.~~2022 is as follows:

~~The valuation of the embedded derivatives within the convertible note was completed with the following assumptions.~~


Year	Amount
	(In thousands)
2022 remaining	$	957
2023		23,039
2024		4,292
2025		5,624
2026		78,331
Thereafter		10,623
Total	$	122,866

~~The following table summarizes the derivative liability activity for the period ending September 30, 2017. See~~ ~~Note 13~~ ~~Derivative liability, accounts payable and other liabilities.~~

~~The following table summarizes the Company’s interest expense in relation to the long-term debt for the periods stated:~~

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 ~~are required to file with state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income~~Heritage P&C, NBIC, Zephyr, and surplus as regards policyholders, which is called stockholders’ equity under GAAP. On a combined basis, the Company’s insurance subsidiaries reported statutory net loss of $12.1 million and a net income of $24 thousand for the nine months ended September 30, 2017 and 2016, respectively. The Company’s insurance subsidiariesPawtucket 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 ~~its~~their respective liabilities. Zephyr is required to maintain a deposit of ~~$750 thousand~~$750,000 in a federally insured financial institution. NBIC is required to maintain capital and surplus of $3.0 million. The ~~insurance subsidiaries~~ combined statutory surplus for Heritage P&C, Zephyr, NBIC and PIC was ~~$257.6 million and $276.1~~$261.4 million at September 30, ~~2017~~2022 and $302.1 million at December 31, ~~2016, respectively.~~2021. State law also requires the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, and risk-based capital requirements with which the Company is in compliance. At September 30, ~~2017, our~~2022, the Company’s insurance subsidiaries met the financial and regulatory requirements of each of the states in which they doconduct business.

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. ~~When determinable, the Company discloses the range of possible losses in excess of those accrued and for reasonably possible losses.~~

~~At September 30, 2017, the Company was not involved in any material non-claims-related legal actions. See~~ ~~Note 12~~ ~~for information regarding commitments related to the Senior Secured Notes and Convertible Notes.~~

NOTE ~~19.~~21. STOCK-BASED COMPENSATION

Common, Restricted and Performance-based Stock

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

At September 30, ~~2017 and December 31, 2016,~~2022 there were ~~413,814 and 170,814~~386,603 shares available for grant under the ~~Plan, respectively.~~

Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards.

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

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

In January 2022, the Company awarded to non-employee directors in aggregate 21,768 shares of restricted stock with a fair value at the time of grant of $5.88 per share. The awards will vest on the date of the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date. The Company's annual shareholders meeting was held on June 23, 2022, at which time the restricted stock was effectively vested.

In June 2022, the Company awarded to non-employee directors in aggregate 99,376 shares of restricted stock with a fair value at the time of grant of $3.22 per share. The awards will vest on the earlier of the one year anniversary of the grant date and the date immediately prior to the date of the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date.

For the performance-based restricted stock the numbers of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition.

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. The Company has not granted any stock options since 2015 and all unexercised stock options 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 years periods following the date of grant for employee options. If a participant’s employment relationship ends, the participant’s vested awards will remain exercisable for the shorter of a period of 30 days or the period ending on the latest date on which such award could havesince been exercisable. The fair value of each option grant is separately estimated for each grant date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company estimates the fair value of all stock option awards as of the date of the grant by applying

the Black-Scholes-Merton multiple-option pricing valuation model (“Black-Scholes model”). The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.forfeited.

~~Stock Options and~~ Restricted Stock

~~Stock Options~~

~~A summary of information related to stock options and restricted stock outstanding at September 30, 2017 is as follows:~~

Stock Options

Weighted-Average Grant Date Fair Value

Balance at December 31, 2016

1,149,923

$
2.99

Granted

—

Expired

(243,000
)

$
2.70

Exercised

—

Balance at September 30, 2017

906,923

$
3.07

Vested and exercisable as of September 30, 2017

906,923

$
3.07

~~No compensation expense was recognized for stock options granted above for the three and nine months ended September 30, 2017 and 2016.~~

~~Restricted Stock~~

The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to ~~employees~~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 ~~values~~value of restricted stock awards ~~are~~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. No~~dividends; dividends accrue but are not paid until vesting for recipients of restricted stock ~~was~~awards granted ~~as of September 30, 2017.~~ 2021 and thereafter.

Restricted stock activity ~~during~~for the nine months ended September 30, ~~2017~~2022 is as follows:

Weighted-Average

Grant-Date Fair

Number of shares

Value per Share

Non-vested, at December 31, 2016

900,000

$
18.82

Granted

—

Vested

—

Canceled and forfeited

—

Non-vested, at September 30, 2017

900,000

$
18.82


				Weighted-Average
				Grant-Date Fair
	Number of shares			Value per Share
Non-vested, at December 31, 2021		283,092		$	9.32
Granted - Performance-based restricted stock		256,445			6.67
Granted - Time-based restricted stock		240,107			5.18
Vested		(41,919	)		4.81
Canceled and surrendered		(22,271	)		4.40
Non-vested, at September 30, 2022		715,454		$	7.40

Awards are being amortized to expense over the ~~five year~~two to five-year vesting period. For the three months ended September 30, 2022 and 2021, the Company recognized $499,000 and $320,000 of compensation expense, respectively. The Company recognized ~~$3.6~~$1.5 million and ~~$3.6 million~~$867,000 of compensation expense for the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively. ~~There~~For the nine months ended September 30, 2022, 51,768 shares of restricted stock were vested and released, all of which had been granted to employees. Of the shares released to employees, 9,849 shares were withheld by the Company to cover withholding taxes of $58,000. For the comparable period of 2021, 40,267 shares were vested and released of which 18,973 shares were withheld by the Company to cover withholding taxes of $171,000.

At September 30, 2022, there was approximately ~~$14.9~~$1.2 million unrecognized expense related to time-based non-vested restricted stock and an additional $1.4 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in 2021, there was $2.1 million of unrecognized ~~compensation expense related to~~expense.

Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at September 30, ~~2017. The Company expects to recognize the remaining compensation expense over a weighted average period of 3.2 years.~~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
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
March 3, 2022		14,545		5.50		2.88
March 16, 2022		360,863		6.72		2.88
June 23, 2022		86,954		3.22		1.00
		715,454

NOTE ~~20.~~22. SUBSEQUENT EVENTS

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

On ~~October 31, 2017,~~November 7, 2022, Heritage Insurance Holdings, Inc. and its subsidiary guarantors (together, the “Company”) amended that certain Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent, collateral agent, swingline lender and issuing bank.

The Seventh Amendment amended the Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the revolving credit facility commitments and/or term loan commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%).

The Seventh Amendment also modifies certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future. Specifically, starting in the first quarter of 2023, the Seventh Amendment amends certain financial covenants as follows: (1) require additional leverage ratios under the Consolidated Leverage Ratio covenant (as defined in the Credit Agreement) after the initial step down to 2.50x in the second quarter of 2023 not to exceed 2.25x as of the second quarter of 2024 and 2.00x as of the second quarter of 2025, (2) apply all (A) Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement (“Non-credit Parties”) that exceed $38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20x. The Seventh Amendment also (A) eliminates the current $10 million basket available to the Company ~~announced that~~to pay dividends to its ~~Board~~shareholders or to repurchase its securities, (B) provides for a dividend of ~~Directors declared a~~up to $2.0 million in the fourth quarter ~~dividend~~ of ~~$0.06 per common share. The dividend is payable~~2024 under certain conditions and (C) restricts future dividends based on ~~December 15, 2017~~maintenance of certain financial ratios, including Consolidated Tangible

Net Worth. As a result, going forward, dividends and stock repurchases may be limited or restricted entirely and the Company’s ability to ~~stockholders of record on November 17, 2017.~~contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement may be limited.

On October 30, 2017, the Company entered into a ten-year term, 25-year amortization Term-Loan for $12.7 million. The interest rate is fixed at 4.95% for the first five years with the remaining years repriced at the 5-year Treasury Security plus 3.10%. The loan is collateralized by our real estate located at 2600 and 2650 McCormick Drive, Clearwater, FL. 33759, including assignment of leases, rents and profits.28

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

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included ~~and~~ elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2021 (“~~2016~~2021 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms ~~“we,” “us,”~~“we”, “us”, “our”, “the Company”, “our~~” “the Company,” “our company,”~~ Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

~~Financial Results Highlights~~Overview

We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York. We provide personal residential insurance in Florida on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.

Trends

Inflation, Underwriting and Pricing

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates, resulting in an increase in the average premium per policy of 13.6% for the ~~Three and Nine Months Ended~~quarter ended September 30, ~~2017~~2022 as compared to the prior year quarter. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

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

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. Our Florida personal lines market is also seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public. Our response to this phenomenon is a combination of raising rates and reducing exposure. Since that time the claims abuse has extended throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeds levels experienced in other states. Correspondingly, our exposure reduction plan expanded to personal lines business throughout the state of Florida.

Our industry experienced higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in the Spring 2022 renewals. We anticipate continued cost increases and availability constraints for the 2023 renewal season. As described herein, we are carefully managing exposure by reducing new business written in certain geographies, non-renewing unprofitable business in compliance with regulatory requirements, increasing rates, and narrowing our underwriting requirements.

While we see improvement in the geographic distribution of our business, which is becoming more rate adequate, our Florida loss costs have continued to increase from a combination of adverse weather and exacerbation of losses on weather and other claims resultant from the litigated claims environment. Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress toward reducing losses from abusive claim reporting practices.

The table below shows reductions in Florida policy count and total insured value (“TIV”) of 17.6% and 10.3%, respectively, from the prior year quarter. During this period, Florida premium in force declined by only 2.6% as rate increases dampened the impact of the reduction in policy count. For markets outside of Florida, the premiums-in-force increased at a much larger rate than the increases in policies in force and TIV, primarily due to rate increases.


		At September 30,
		2022			2021		% Change
Policies in force:
Florida			188,383			228,572		-17.6	%
Other States			352,989			352,714		0.1	%
Total			541,372			581,286		-6.9	%

Premiums in force:
Florida	$		569,589,537	$		584,994,491		-2.6	%
Other States			672,812,875			589,527,230		14.1	%
Total	$		1,242,402,412	$		1,174,521,721		5.8	%

Total Insured Value:
Florida	$		102,784,056,201	$		114,537,338,974		-10.3	%
Other States			304,657,398,158			284,498,624,168		7.1	%
Total	$		407,441,454,359	$		399,035,963,142		2.1	%

Strategic Profitability Initiatives

The following provides an update to the Company’s strategic initiatives that we expect will enable Heritage to achieve consistent long-term quarterly earnings and drive shareholder value. The Supplemental Information table included in this earnings release demonstrates progress made since third quarter 2021.

•

~~Approximately 331,330~~Generate underwriting profit though rate adequacy and more selective underwriting.

Premiums-in-force of $1.24 billion are up 5.8% from the prior year quarter, while policy count is down 6.9%, driven by higher rates.

Average premium per policy throughout the book increased 13.6% over the prior year quarter.

Continued focus on tightening underwriting criteria while also restricting new business written in over-concentrated markets or products.

•

Optimize capital allocation toward products and geographies that maximize long-term returns.

Reduction of policy count for Florida personal lines product is a key focus and will continue if meaningful legislation to reduce abusive claims practices does not occur. Florida PRES policies in force intentionally declined by 18.8% as compared to the prior year period.

Continued offering of Florida commercial lines product with 18.2% growth in annual premium while value TIV increased only 4.2%.

•

Improve portfolio diversity.

Diversification efforts led to a premium in-force ~~at September~~ growth of 14.1% in other States other than Florida.

Overall premium-in-force increase of 5.8%, despite an 8.5% reduction in Florida admitted personal lines business.

TIV in other states improved to 74.8%, compared to 71.3% as of the third quarter of 2021.

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general supply chain disruptions and inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims.

Goodwill Impairment Charge

We evaluate goodwill and other intangible assets for impairment annually, or whenever events or changes in circumstances indicate that it is likely that the carrying amount of goodwill and other intangible assets may exceed the implied fair value. Any impairment is charged to operations in the period that the impairment is identified. The evaluation of goodwill impairment requires considerable management judgment and includes a review of a variety of factors as described below. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial results. During the second quarter of 2022, we concluded it was appropriate to perform an interim evaluation of goodwill for potential impairment given a variety of market factors as described below. As a result of the analysis, we impaired the entire amount of remaining goodwill, which reduced our carrying value of goodwill from $92.0 million to $0 based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) trading of our stock below book value. These

30 ~~2017,~~

factors reduced our previously modeled fair value of the Company and resulted in a $92.0 million non-cash goodwill impairment charge, most of which ~~approximately 43.8% were assumed~~is not tax deductible.

Third Quarter 2022 Financial Results

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from ~~Citizens, 50.9% were from voluntary sales~~year to year, including certain key performance indicators such as net combined ratio, net expense ratio and ~~5.3% were acquired~~net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in ~~connection~~conjunction with our consolidated financial statements and the ~~Zephyr acquisition~~related notes that appear elsewhere in this document.

•

Third quarter net loss of $48.2 million or $1.83 per diluted share, compared to a net loss of $16.4 million or $0.59 per diluted share in the prior year quarter, driven primarily by current accident year weather losses including a $40 million net retention for Hurricane Ian. In addition the Company recorded a $10.7 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey Re, our captive reinsurer domiciled in Bermuda.

•

Gross premiums written of ~~$455.8~~$304.5 million, up 11.1% from $274.2 million in the prior year quarter, reflecting a 4.8% rate related increase in Florida, despite a policy count reduction of approximately 40,000, and ~~total revenue~~15.4% growth in other states primarily due to rate increases. Rate increases continued to meaningfully benefit written premiums throughout the book of ~~$298.0 million~~

business.

•

~~Net~~Gross premiums written of $304.5 million, up 11.1% from $274.2 million in the prior year quarter, reflecting a 4.8% rate related increase in Florida, despite a policy count reduction of approximately 40,000, and 15.4% growth in other states primarily due to rate increases. Rate increases continued to meaningfully benefit written premiums throughout the book of business.

•

Gross premiums earned of ~~$277.8~~$308.0 million,

up 4.6% from $294.4 million in the prior year quarter, reflecting higher gross premiums written over the last twelve monthsdriven by higher average premium per policy.

•

Net ~~income~~earned premiums of ~~$3.9~~$159.7 million,

down 1.7% from $162.4 million in the prior year quarter, reflecting a 12.4% increase in contract year reinsurance cost with higher ceded premium outpacing the increase in gross earned premiums for the quarter.

•

~~Combined~~Net current accident year weather losses of $63.8 million, up 24.2% from $51.4 million in the prior year quarter. Current accident year catastrophe weather losses are $40.0 million up 150.5% from $16.0 million in the prior year quarter. The catastrophe loss for the current quarter represents our $40.0 million retention for Hurricane Ian. Current accident year other weather losses are $23.8 million, down 32.8% from $35.4 million in the prior year quarter.

•

Ceded premium ratio of ~~103.4% on~~48.1%, up 3.3 points from 44.8% in the prior year quarter driven by a ~~gross basis and 105.5% on a net basis, inclusive~~higher cost of the ~~effects~~2022-2023 catastrophe excess of ~~Hurricane Irma~~

loss program, stemming from both higher costs and higher TIV.

•

~~Cash, cash equivalents~~Net loss ratio of 97.6%, 17.8 points higher than the prior year quarter of 79.8%, driven by higher losses incurred and ~~investments~~slightly lower net earned premium than the prior year quarter.

•

Net expense ratio of ~~$872.2 million with total assets~~35.7%, up 3.0 points from the prior year quarter amount of ~~$1.6 billion~~

~~Recent Developments~~

~~NBIC Acquisition Agreement~~

On September 1, 2017, Heritage Property & Casualty Insurance Company (“HPCI”) entered into an Administrative Supervision Plan Agreement (“the Agreement”) with Sawgrass Mutual Insurance Company (“Sawgrass”) which was approved32.7%, mostly driven by the ~~Florida Office~~reduction of ~~Insurance Regulation. Pursuant~~net earned premium from the prior year quarter, with a small portion of the increase related to higher underwriting costs associated with an increase in gross premiums written.

•

Net combined ratio of 133.3%, up 20.8 points from 112.5% in the prior year quarter, driven by a higher net loss ratio and net expense ratio as described above.

•

Effective tax rate was 2.2% compared to 6.4% in the prior year quarter, driven by the impact of permanent differences in relation to the ~~agreement, HPCI has~~pre-tax loss each quarter, as well as a $10.7 million valuation allowance as described above in the right to offer a new policy of insurance, effective September 1, 2017 to all Sawgrass policyholders having in force policies without the need for Sawgrass policyholders to file a new application with HPCI or pay premium that had already been paid to Sawgrass. As of September 1, 2017, Sawgrass had 17,778 policies in force, representing approximately $31.2 million of in force premium and unearned premium of $16.5 million. The coverage on those policies will terminate at the end of the original Sawgrass policy period. Upon termination of each of these policies, HPCI will offer to renew such policies using HPCI forms and rates. HPCI was assigned the unearned premium, premium receivable, loss reserves and reinsurance recoverable on paid and unpaid claims and received a partial payment of these amounts on September 1, 2017. At September 30, 2017, 17,455 policies were in force representing approximately $30.8 million of annualized premium. HPCI assumed no other liability or obligation, direct or indirect, absolute or contingent, other than the liability and any reinsurance recoveries for Sawgrass policy claims incurred prior to the Agreement date.

current period quarter.

Results of Operations

~~The following table reports our unaudited results of operations for the three and nine months ended September 30, 2017 and 2016:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(unaudited)

(unaudited)

REVENUE:

Gross premiums written

$
154,355

$
147,232

$
455,845

$
471,793

Change in gross unearned premiums

(1,292
)

17,464

4,180

8,483

Gross premiums earned

153,063

164,696

460,025

480,276

Ceded premiums

(57,855
)

(63,141
)

(182,189
)

(163,461
)
Net premiums earned

95,208

101,555

277,836

316,815

Net investment income

2,735

2,326

8,210

6,586

Net realized gains

365

1,119

1,011

1,762

Other revenue

3,466

4,306

10,948

10,988

Total revenue

101,774

109,306

298,005

336,151

OPERATING EXPENSES:

Losses and loss adjustment expenses

64,035

53,906

156,728

169,663

Policy acquisition costs

20,906

22,597

66,086

61,478

General and administrative expenses

15,420

14,191

48,826

44,602

Total operating expenses

100,361

90,694

271,640

275,743

Operating income

1,413

18,612

26,365

60,408

Interest expense, net

3,076

—

7,010

—

Amortization of debt issuance costs

675

—

1,153

—

Other non-operating expense, net

6,883

—

6,883

—

(Loss) income before income taxes

(9,221
)

18,612

11,319

60,408

Provision for income taxes

(525
)

7,682

7,390

23,688

Net (loss) income

$
(8,696
)

$
10,930

$
3,929

$
36,720

Diluted (loss) earnings per share

$
(0.34
)

$
0.37

$
0.14

$
1.23

Selected Other Data

Book value per share⁽¹⁾

$
12.84

$
13.00

$
12.84

$
13.00

Growth in book value per share

(1.2
)%

18.4
%

(1.2
)%

18.4
%
Return on average equity ⁽²⁾

(10.4
)%

11.7
%

1.6
%

13.3
%

~~(1)~~

~~Book value per share is calculated by dividing shareholders’ equity by total outstanding shares, as of the end of the period.~~

~~(2)~~

~~Return on average equity is calculated by dividing the annualized net income by the average shareholders’ equity for the end of the period.~~

Comparison of ~~the Three Months Ended September 30, 2017 and 2016~~

~~Revenue~~

~~Gross premiums written~~

~~Gross premiums written increased to $154.4 million for~~ the three months ended September 30, ~~2017 as compared to $147.2~~2022 and 2021

Revenue


	For the Three Months Ended September 30,
(Unaudited)	2022			2021			$ Change			% Change
	(in thousands)
REVENUE:
Gross premiums written	$	304,501		$	274,178		$	30,323			11.1	%
Change in gross unearned premiums		3,458			20,231			(16,773	)		(82.9	)%
Gross premiums earned		307,959			294,409			13,550			4.6	%
Ceded premiums earned		(148,266	)		(131,964	)		(16,302	)		12.4	%
Net premiums earned		159,693			162,445			(2,752	)		(1.7	)%
Net investment income		2,887			1,548			1,339			86.5	%
Net realized losses		(3	)		(6	)		3			(50.0	)%
Other revenue		2,916			3,421			(505	)		(14.8	)%
Total revenue	$	165,493		$	167,408		$	(1,916	)		(1.1	)%

Total revenue

Total revenue was $165.5 million ~~for the three months ended September 30, 2016. The increase~~ in gross premiums written relates to $18.7 million of additional premium associated with the Sawgrass transaction, which was partially offset by a reduction in gross premiums written by Heritage P&C of approximately $10 million and a reduction of Zephyr premium of approximately $1.2 million. Additionally, new business production in the month of September was adversely impacted by Hurricane Irma. Heritage P&C’s premium in force decreased $9.3 million during the third quarter of ~~2017~~2022, down 1.1% from $167.4 million in the prior year quarter. The decrease primarily stems from lower net premiums earned, driven by higher reinsurance costs, partly offset by an increase in investment income, as wedescribed in detail below.

Gross premiums written

Gross premiums written were $304.5 million, up 11.1% from $274.2 million the prior year quarter, reflecting a 4.8% growth in Florida and 15.4% growth in other states, primarily from increased rates as well as a small increase in policy count in states outside of Florida. Rate increases continued to ~~manage~~meaningfully benefit written premiums throughout the book of business.

Premiums-in-force were $1.24 billion in the third quarter of 2022, up 5.8% from third quarter 2021, while policies-in-force were down 6.9%. The increase in premiums-in-force reflects the impact of rate increases more than offsetting the premiums associated with the reduction in policies-in-force. The reduction in policies-in-force from the third quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $308.0 million in ~~geographic locations which have produced a disproportionate share~~the third quarter of ~~attritional losses and geographic risks for which~~2022, up 4.6% from $294.4 million in the ~~price to manage catastrophe risk is not cost efficient. Personal residential business accounted for $139.9 million and commercial residential accounted for $14.5 million of the total~~prior year quarter. The increase reflects higher gross premiums written ~~for~~over the ~~three~~last twelve months, ~~ended September 30, 2017. There was no~~which is primarily related to higher rates on a smaller book of business ~~assumed from Citizens for either period.~~based on policy count.

~~Gross~~Ceded premiums earned

~~Gross~~Ceded premiums earned ~~decreased to $153.1~~were $148.3 million for the three months ended September 30, 2017 as compared to $164.7 million for the three months ended September 30, 2016. This decrease is consistent with the quarter-over-quarter change in gross premiums written before the addition of the Sawgrass business, for which only one month of premium was earned this quarter.

~~Ceded premiums~~

Ceded premiums decreased to $57.9 million for the three months ended September 30, 2017 as compared to $63.1 million for the three months ended September 30, 2016. Our catastrophe reinsurance programs renew each year on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared to $247.0 million for the 2016 season. The reduction in premium in force described previously resulted in a reduction in the ~~amount~~third quarter of ~~catastrophe reinsurance purchased~~2022, up 12.4% from ~~approximately $3.1 billion~~$132.0 million in the ~~2016 season~~prior year quarter. The growth results primarily from higher reinsurance costs due to ~~approximately $2.6 billion~~market conditions and higher TIV, as well as higher ceded premium for ~~the 2017 season. As described~~our net quota share reinsurance program, driven by growth in ~~Note 10 to~~ our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million for the first event compared to $40.0 million for the 2016 season for a first event. northeast business.

Net premiums earned

Net premiums earned ~~decreased to $95.2~~were $159.7 million in the third quarter of 2022, down 1.7% from $162.4 million in the prior year quarter, reflecting a 12.4% increase in contract year reinsurance cost with higher ceded premium outpacing the increase in gross earned premiums for the three months ended September 30, 2017 as compared to $101.6 million for the three months ended September 30, 2016. The decrease in net premiums earned relates to the decrease in gross premium earned partially offset by the decrease in ceded premium described above.quarter.

Net investment income

Net investment income, inclusive of realized investment ~~gain or loss, decreased to $3.1~~gains and unrealized gains on equity securities, was $2.9 million ~~for~~in the ~~three months ended September 30, 2017 as~~third quarter 2022, compared to a net investment gain of $1.5 million in the prior year quarter. The increase is driven by a higher interest rate environment compared to the prior year quarter.

Other revenue

Other revenue was $2.9 million in the third quarter of 2022, down by 14.8% from $3.4 million ~~for~~in the ~~three months ended September 30, 2016. The decrease resulted~~prior year quarter, driven primarily by a decline in policy fee income associated with the reduction of policies in force.


	For the Three Months Ended September 30,
(Unaudited)	2022		2021		$ Change		% Change
OPERATING EXPENSES:	(in thousands)
Losses and loss adjustment expenses	$	155,849	$	129,632	$	26,217		20.2	%
Policy acquisition costs		39,194		35,984		3,210		8.9	%
General and administrative expenses		17,758		17,169		589		3.4	%
Total operating expenses		212,801		182,785		30,017		16.4	%

Total operating expenses

Total operating expenses were up $30.0 million, or 16.4% in the third quarter of 2022. As described below, the driver was primarily from ~~a decrease~~the increase in ~~realized gains of approximately $.8 million, partially offset by~~losses and loss adjustment expenses as well as an increase in ~~net investment income due to invested proceeds associated with the Secured Notes issued in December 2016 and Convertible Notes issued in August 2017.~~acquisition costs.

~~Other revenue~~

Other revenue decreased to $3.5 million for the three months ended September 30, 2017 as compared to $4.3 million for the three months ended September 30, 2016. The decrease in other revenue is primarily attributable to the timing of certain items being recorded in 2016 and a reduction in non-insurance construction revenue associated with BRC third party construction projects in 2016.

~~Total revenue~~

Total revenue decreased to $101.8 million for the three months ended September 30, 2017 as compared to $109.3 million for the three months ended September 30, 2016. The reduction in total revenue relates primarily to the decrease in net premiums earned described above.

~~Expenses~~

Losses and loss adjustment expenses

Losses and loss adjustment expenses (“LAE”) ~~increased to $64.0~~were $155.8 million for the three months ended September 30, 2017 as compared to $53.9 million for the three months ended September 30, 2016. The increase in losses and LAE relates primarily to retained losses incurred from Hurricane Irma. Our retention for Hurricane Irma losses is $20 million, of which the excess of our projected losses of $388 million will be recovered from reinsurance compared to $4.0 million of catastrophe losses associated with Hurricane Hermine as of September 30, 2016.

~~Policy acquisition costs~~

Policy acquisition costs decreased to $20.9 million for the three months ended September 30, 2017 as compared to $22.6 million for the three months ended September 30, 2016. The variance relates primarily to the reduction in gross earned premium quarter over quarter.

~~General and administrative expenses~~

General and administrative expenses increased to $15.4 million for the three months ended September 30, 2017 as compared to $14.2 million for the three months ended September 30, 2016. This increase relates primarily to approximately $1.1 million of transaction costs associated with the upcoming acquisition of NBIC as described in Note 2 to our unaudited condensed consolidated financial statements in this Form 10-Q.

~~Interest expense and amortization of debt issuance costs~~

As described in Note 12 – Long-Term Debt to our unaudited condensed consolidated financial statement appearing elsewhere in this Form 10-Q, Heritage issued $79.5 million in Secured Notes due 2023 on December 15, 2016 and issued $136.8 million in Convertible Notes in the third quarter of ~~2017, resulting~~2022, up from $129.6 million in ~~interest expense~~the prior year quarter driven by higher weather and attritional losses. Net current accident year weather losses were $63.8 million, up 24.2% from $51.4 million in the prior year quarter. Current accident year weather losses include $40.0 million of ~~$3.1~~net current accident quarter catastrophe losses from Hurricane Ian, up from $16.0 million in the prior year quarter, and ~~amortization~~$23.8 million of ~~debt issuance~~other weather losses, down from $35.4 million in the prior year quarter.

Policy acquisition costs

Policy acquisition costs were $39.2 million in the third quarter of ~~$0.7~~2022, up 8.9% from $36.0 million ~~for~~in the prior year quarter. The ~~interest expense includes approximately $0.3~~increase is primarily attributable to growth of 11.1% in gross premiums written.

General and administrative expenses

General and administrative expenses were $17.8 million ~~of amortization of the original issue discount related to the Convertible Notes.~~

~~Other non-operating expense, net~~

As described in Note 12- Long-Term Debt to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, the conversion option of the Convertible Notes will be accounted for as a separate derivative instrument liability in accordance with applicable U.S. GAAP guidance until shareholder approval is obtained to settle the conversion option liability in common stock. As such, until stockholder approval to settle the conversion option has occurred, the Company must assess the fair value of the conversion option liability on a quarterly basis, and any changes to the fair value are recorded in the ~~statement~~third quarter of ~~income as a financial gain or loss.~~ 2022, up 3.4% from $17.2 million in the prior year quarter, driven primarily by compensation related items.

~~For~~


	For the Three Months Ended September 30,
(Unaudited)	2022			2021			$ Change			% Change
	(in thousands, except per share and share amounts)
Operating loss	$	(47,308	)	$	(15,377	)	$	(31,931	)		207.7	%
Interest expense, net		2,027			2,150			(123	)		(5.7	)%
Loss before income taxes		(49,335	)		(17,527	)		(31,809	)		181.5	%
Benefit for income taxes		(1,095	)		(1,117	)		23			(2.0	)%
Net loss	$	(48,240	)	$	(16,410	)	$	(31,831	)		194.0	%
Basic net loss per share	$	(1.83	)	$	(0.59	)	$	(1.24	)		210.2	%
Diluted net loss per share	$	(1.83	)	$	(0.59	)	$	(1.24	)		210.2	%

Net loss

Third quarter 2022 net loss was $48.2 million ($1.83 loss per share), down from net loss of $16.4 million ($0.59 loss per share) in the prior year quarter, ~~ended September 30, 2017, the fair value of the conversion option increased approximately $6.9 million due to~~driven primarily from the increase in ~~our stock price~~net losses and ~~is presented~~loss adjustment expenses incurred as described above and the relatively small benefit for income taxes as described below.

Interest expense, net

Net interest expense was $2.0 million in the ~~Income Statement as~~third quarter of 2022, slightly down from $2.2 million in the prior year quarter mostly due to a ~~charge to non-operating earnings. For tax purposes, any financial gain or loss~~reduction in debt discount associated with the ~~change~~repurchase of convertible notes in the ~~value of the conversion option is not deductible.~~

Once stockholder approval is obtained, the terms of the Convertible Notes provide that the Company will have the option to settle the conversion option in shares of common stock, cash or a combination thereof, and at such time the conversion option of the Convertible Notes will (subject to ongoing evaluation of variance factor) qualify for equity classification and will no longer be accounted for as a separate derivative instrument liability in accordance with applicable U.S. GAAP guidance. A stockholder vote seeking approval to settle the conversion option in common stock has been scheduled for later in the fourthsecond quarter of ~~2017.~~2022.

~~Provision~~Benefit for income taxes

~~The provision (benefit)~~Benefit for income taxes was ~~$(525) thousand and $7.7~~$1.1 million ~~for~~in third quarter 2022 compared to $1.1 million in the three months ended September 30, 2017 and 2016, respectively. Our effective tax rate for the three months ended September 30, 2017 and 2016 was 5.7% and 41.3%, respectively. The charges for amortization of conversion option discount and valuation of the conversion option associated with the Convertible Notes for the quarter ended September 30, 2017 are not deductible for income tax purposes. This had a significant adverse impact on the effective tax rate for the quarter. Additionally, the expiration of unexercised stock options in September 2017 adversely affected the effective tax rate for theprior year quarter. The effective tax rate in third quarter 2022 was impacted by the impact of permanent tax differences on projected results of operations for the calendar year as well as impacts to the effective tax rate, which can also fluctuate throughout the year as estimates used in the quarterly tax provision ~~for~~are updated with additional information. The effective tax rate was 2.2% compared to 6.4% in the prior year quarter, driven by the impact of permanent differences in relation to the pre-tax loss each quarter, ~~are updated~~ as ~~more information becomes available throughout~~well as a $10.7 million valuation allowance in the ~~year.~~ current period quarter. The valuation allowance was recorded against our deferred tax asset related to our captive

reinsurer, Osprey Re, for which net operating losses can only be used to offset income at Osprey Re due to the 953(d) election made when Osprey Re was formed. This was accounted for as an increase of income tax expense for the quarter.

Ratios


	For the Three Months Ended September 30,
(Unaudited)	2022			2021
Ceded premium ratio		48.1	%		44.8	%

Net loss and LAE ratio		97.6	%		79.8	%
Net expense ratio		35.7	%		32.7	%
Net combined ratio		133.3	%		112.5	%

Net ~~(loss) income~~combined ratio

The net combined ratio was 133.3% in the third quarter of 2022, up 20.8 points from 112.5% in the prior year quarter. The increase stems primarily from the increase in the net loss and LAE ratio, as described below.

Ceded premium ratio

The ceded premium ratio was 48.1% in the third quarter of 2022, up 3.3 points from 44.8% in the prior year quarter, reflecting a higher cost of the 2022-2023 catastrophe excess of loss program, stemming from both higher costs and higher TIV, driving the growth in ceded premiums earned to outpace the growth in gross premiums earned described above.

Net loss and LAE ratio

The net loss and LAE ratio was ~~$8.7~~97.6% in the third quarter of 2022, up 17.8 points from 79.8% in the prior year quarter, driven by higher weather and attritional losses. Net current accident year weather losses of $63.8 million, for the quarter ended September 30, 2017 compared to net income of $10.9 million for the quarter ended September 30, 2016. Operating related items, primarily Hurricane Irma and adverse development on Hurricane Matthew caused the variance. In addition, non-operating items, particularly the non-cash charge in valuation of the convertible option feature and interest expense caused $9.5up 24.2% from $51.4 million in ~~variance.~~the prior year quarter. Current accident year weather losses include $40.0 million of net current accident quarter catastrophe losses from Hurricane Ian, up from $16.0 million in the prior year quarter, and $23.8 million of other weather losses, down from $35.4 million in the prior year quarter.

Net expense ratio

The net expense ratio was 35.7% in the third quarter of 2022, up 3.0 points from 32.7% in the prior year quarter. This was driven by higher underwriting costs associated with the growth in gross premiums written.

Results of Operations

Comparison of the Nine Months Ended September 30, ~~2017~~2022 and ~~2016~~2021

~~Revenue~~


	For the Nine Months Ended September 30,
	2022			2021			$ Change			% Change
(Unaudited)	(in thousands)
REVENUE:
Gross premiums written	$	952,981		$	886,059		$	66,922			7.6	%
Change in gross unearned premiums		(61,442	)		(35,593	)		(25,849	)		72.6	%
Gross premiums earned		891,539			850,466			41,073			4.8	%
Ceded premiums earned		(420,645	)		(399,323	)		(21,322	)		5.3	%
Net premiums earned		470,894			451,143			19,751			4.4	%
Net investment income		7,050			3,797			3,253			85.7	%
Net realized losses		(121	)		(926	)		805			(86.9	)%
Other revenue		10,049			10,835			(786	)		(7.3	)%
Total revenue	$	487,872		$	464,849		$	23,022			5.0	%

Total revenue

~~Gross premiums written~~

~~Gross premiums written decreased to $455.8~~Total revenue was $487.9 million for the nine months ended September 30, ~~2017~~2022, up 5.0% from $464.8 million in the prior year period. The increase primarily stems from higher net premiums earned and investment income, as ~~compared to $471.8~~described below.

Gross premiums written

Gross premiums written were $953.0 million for the nine months ended September 30. 2022, up 7.6% from $886.1 million in the prior year period. We experienced growth of 13.1% outside of Florida and 1.8% growth in Florida. Growth throughout our book of business was largely driven by rate increases resulting in a higher average premium per policy.

Premiums-in-force were $1.24 billion in the third quarter of 2022, up 5.8% from third quarter 2021, while policies-in-force were down 6.9%, with the difference largely stemming from rate increases. The reduction in policies-in-force from the third quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $891.5 million for the nine months ended September 30. 2022, up 7.0% from $850.5 million in the prior year period. The increase reflects higher gross premiums written over the preceding twelve months, driven primarily by higher rates.

Ceded premiums earned

Ceded premiums earned were $420.6 million for the nine months ended September 30, ~~2016.~~2022, up 5.3% from $399.3 million in the prior year period. The ~~decrease in gross premiums written relates primarily to a reduction in gross premium written by Heritage P&C partially offset by an~~ increase ~~related~~is attributable to the ~~addition of Sawgrass business and an increase in~~

~~Zephyr premium written due to the timing~~higher cost of the ~~Zephyr acquisition in late March 2016. Gross premium written for the nine months ended September 30, 2017 includes nine months~~current year catastrophe excess of Zephyr written premium whereas approximately six months of Zephyr premium was included for the nine months ended September 30, 2016. Heritage P&C’s premium in force decreased from September 30, 2016 as we continue to manage exposure in geographic locations which have produced a disproportional share of attritional losses as well as for geographic risksloss contract for which the ~~price to manage catastrophe risk is not cost efficient. There~~impact was ~~no business assumed from Citizens during 2017 compared to approximately $8~~partly offset by a $18 million ~~of business assumed from Citizens during~~ceded premium on the ~~nine months ended September 30, 2016. Personal residential business accounted for $387.4 million and commercial residential accounted for $68.4 million of~~severe convective storm contract included in the ~~total gross~~prior year amount.

Net premiums ~~written for the nine months ended September 30, 2017.~~earned

~~Gross premiums earned~~

~~Gross~~Net premiums earned ~~decreased to $460.0~~were $470.9 million for the nine months ended September 30, ~~2017 as compared~~2022, up 4.4% from $451.1 million in the prior year period. On a year-to-date basis, growth in gross premiums earned exceeded the growth in ceded premiums earned. However, on a quarter-to-date basis, the growth in ceded premiums earned exceeded the growth in gross premiums earned. This relates primarily to ~~$480.3~~the cost of our severe convective storm reinsurance contract in 2021, which was fully earned by the second quarter of 2021.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized gains on equity securities, was $6.9 million for the nine months ended September 30, ~~2016. Our premiums~~2022, compared to $2.9 million in ~~force as of September 30, 2017 and September 30, 2016 were approximately $625.6 million and $646.0 million, respectively, including~~ the ~~Sawgrass business acquired on September 1, 2017, which contributed $30.8 million of in-force business.~~prior year period. The ~~premiums earned from Sawgrass were $2.6 million for~~increase is primarily due to higher balances in our fixed income portfolio than the prior nine-month period, ~~ending September 30, 2017.~~coupled with a higher interest rate environment.

~~Ceded premiums~~Other revenue

~~Ceded premiums increased to $182.2~~Other revenue was $10.0 million for the nine months ended September 30, ~~2017 as compared to $163.5~~2022, down 7.3% from $10.8 million in the prior year period, driven primarily by a decline in policy fee income associated with the reduction of policies in force.


	For the Nine Months Ended September 30,
(Unaudited)	2022		2021		$ Change		% Change
OPERATING EXPENSES:	(in thousands)
Losses and loss adjustment expenses	$	397,409	$	328,376	$	69,033		21.0	%
Policy acquisition costs		115,826		109,183		6,643		6.1	%
General and administrative expenses		54,947		52,490		2,457		4.7	%
Goodwill impairment		91,959		—		91,959	NM
Total operating expenses		660,141		490,049		170,092		34.7	%

NM -Not meaningful

Total operating expenses

Total operating expenses were $660.1 million for the nine months ended September 30, ~~2016. Our catastrophe reinsurance programs renew each~~2022, up 34.7% from $490.0 million in the prior year ~~on June 1. The cost for catastrophe reinsurance for the 2017 hurricane season is approximately $225.0 million compared~~period, primarily due to the ~~cost for the 2016 season of $247.0 million. The reduction in premium in force described previously resulted in a reduction~~$92.0 million pre-tax goodwill impairment charge taken in the ~~amount~~second quarter of ~~catastrophe reinsurance purchased from approximately $3.1 billion~~2022, and a $69.0 million increase in the 2016 season to approximately $2.6 billion for the 2017 season. As described in Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, the Company’s retention for the 2017 hurricane season is $20.0 million compared to $40.0 million for the 2016 season for a first event.losses and loss adjustment expenses detailed below.

Reinsurance costs are amortized over a twelve-month period, reflecting the term of the coverage, which begins June 1. As such, we incur the cost of the previous year’s program from January through May of each year. The cost of the 2015 catastrophe reinsurance program was significantly lower than the 2016 reinsurance program due to a smaller amount of premium in force coupled with the mix of business. In 2016, the reinsurance cost increasedLosses and that higher cost was reflected in the months June 2016 through May 2017. The 2017 catastrophe reinsurance program is approximately $20 million less than the 2016 program. As such, the 2017 catastrophe reinsurance cost is higher for the first five months of the year than 2016 before we recognize the benefit of the lower cost of the 2017 program starting in June 2017. We also have reinsurance costs associated with our larger risks which could vary monthly depending upon the business written.loss adjustment expenses

~~Net premiums earned~~

~~Net premiums earned decreased to $277.8~~Losses and LAE were $397.4 million for the nine months ended September 30, ~~2017 as compared to $316.8~~2022, up 21.0% from $328.4 million in the prior year period driven by higher weather and attritional losses. Net current accident year weather losses were $165.7 million, up 40.1% from $118.3 million in the prior year period. Current accident year catastrophe weather losses were $117.1 million, up from $55.8 million in the prior year period, with current accident year other weather losses of $48.6 million, down from $62.5 million in the prior year period. Net current accident year catastrophe weather losses include a $40.0 million retention for Hurricane Ian.

Policy acquisition costs

Policy acquisition costs were $115.8 million for the nine months ended September 30, ~~2016.~~2022, up 6.1% from $109.2 million in the prior year period. The ~~decrease in net premiums earned~~increase is primarily attributable to ~~the decrease~~growth in ~~the amount of premium in force during the nine months ended September 30, 2017 as compared to the same period in 2016, coupled with the increased ceded~~gross premiums ~~earned.~~written.

~~Net investment income~~35

~~Net investment income, inclusive of realized investment gains, increased to $9.2~~General and administrative expenses

General and administrative expenses were $54.7 million for the nine months ended September 30, ~~2017 as~~2022, up 4.7% from $52.5 million in the prior year period. The increase is primarily attributable to a $1.5 million state tax credit recorded in the prior year period.

Goodwill impairment

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


	For the Nine Months Ended September 30,
(Unaudited)	2022			2021			$ Change			% Change
	(in thousands, except per share and share amounts)
Operating loss	$	(172,269	)	$	(25,200	)	$	(147,069	)	NM
Interest expense, net		5,750			5,953			(203	)		(3.4	)%
Loss before income taxes		(178,019	)		(31,153	)		(146,866	)		471.4	%
Benefit for income taxes		(11,155	)		(5,644	)		(5,511	)		97.6	%
Net loss	$	(166,864	)	$	(25,509	)	$	(141,355	)	NM
Basic net loss per share	$	(6.29	)	$	(0.91	)	$	(5.37	)	NM
Diluted net loss per share	$	(6.29	)	$	(0.91	)	$	(5.37	)	NM

NM -Not meaningful

Net loss

Net loss for the nine months ended September 30, 2022 was $166.9 million ($6.29 loss per share), compared to ~~$8.3~~a net loss of $25.5 million ($0.91 loss per share) in the prior year period. The year-over-year change primarily stems from a $90.8 million (net of a $1.2 million tax deductible portion) non-cash goodwill impairment charge, as described above, coupled with an underwriting loss generated for the nine-month period driven by higher weather and attritional losses over the prior period, which includes a net retention of $40.0 million related to Hurricane Ian, as described above. Additionally, the benefit for income taxes was lower than our statutory rate, as described below.

Interest expense, net

Net interest expense was $5.8 million for the nine months ended September 30, ~~2016. The increase in net investment income is due to the increase in cash and invested assets during the nine months ended September 31, 2017 over~~2022, slightly down from the prior ~~year. The increase resulted primarily from invested proceeds associated with the Secured Notes and Convertible Notes, coupled with the additional investment~~year period.

Benefit for income ~~from Zephyr in 2017 due to the timing of the acquisition.~~taxes

~~Other revenue~~

~~Other revenue remained stable at approximately $11.0 million~~Benefit for ~~both periods.~~

~~Total revenue~~

~~Total revenue decreased to $298.0~~income taxes was $11.2 million for the nine months ended September 30, ~~2017 as~~2022 compared to ~~$336.2~~$5.6 million in the prior year period. The effective tax rate was 6.3% for the nine months ended September 30, ~~2016. The decrease in total revenue was due primarily to the reduction in premium in force~~

~~throughout the nine months ended September 30, 2017 which resulted in a lesser amount of gross premiums earned as~~2022 compared to ~~the same period in~~18.1% for the prior year ~~coupled with an increase in ceded premiums earned.~~

~~Expenses~~

~~Losses and loss adjustment expenses~~

~~Losses and LAE decreased to $156.7 million for the nine months ended September 30, 2017 as compared to $169.7 million for the nine months ended September 30, 2016.~~period. The decrease is primarily due to the reduction in earned premiums. Additionally, the Company’s losses incurred during the nine months ended September 30, 2017 and 2016 reflect a prior year deficiency of $1.5 million and a deficiency of $17.3 million, respectively, associated with management’s best estimate of the actuarial loss and LAE reserves with consideration given to Company specific historical loss experience.

~~Policy acquisition costs~~

Policy acquisition costs increased to $66.1 million for the nine months ended September 30, 2017 as compared to $61.5 million for the nine months ended September 30, 2016. The increase is primarily attributable to having a full nine months of policy acquisition costs related to Zephyr in 2017 compared to just six months in 2016 due to timing of that acquisition, as well as the favorable impact of assumed premiums from Citizens for the nine months ended September 30, 2016.

~~General and administrative expenses~~

General and administrative expenses increased to $48.8 million for the nine months ended September 30, 2017 as compared to $44.0 million for the nine months ended September 30, 2016. The increase relates to acquisition costs associated with NBIC and nine months of general and administrative expenses associated with Zephyr for the nine months ended September 30, 2017 whereas only six months of Zephyr expenses were included for the nine months ended September 30, 2016.

~~Interest expense and amortization of debt issuance costs~~

As described in Note 12 – Long-Term Debt to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q, Heritage issued $79.5 million in Secured Notes due 2023 on December 15, 2016 and issued $136.8 million in Convertible Notes in the third quarter of 2017, resulting in interest expense of $7.0 million and amortization of debt issuance costs of $1.2 million for the nine months ended September 30, 2017. Interest expense includes approximately $0.3 million of amortization of the original issue discount related to the Convertible Notes.

~~Other non-operating expense, net~~

For the quarter ended September 30, 2017, the fair value of the conversion option increased approximately $6.9 million and is presented on the Income Statement as a charge to non-operating expense. For tax purposes, any financial gain or loss associated with the change in the value of the conversion option is not deductible.

~~Provision for income taxes~~

~~The provision for income taxes was $7.4 million and $23.7 million for the nine months ended September 30, 2017 and 2016, respectively. Our~~ effective tax rate for the nine months ended September 30, ~~2017 and 2016~~2022 was ~~65.3% and 39.2%, respectively.~~ impacted by the mostly non-deductible goodwill impairment charge as described above as well as a valuation allowance of $10.7 million recorded against our deferred tax asset, related to our captive reinsurer, Osprey Re, related to the IRC Section 953(d) election made when Osprey Re was formed. As a result of this election, net operating losses for Osprey Re may only be used to offset taxable income at Osprey Re.

The ~~amortization~~impact of ~~the conversion option discount and valuation change~~permanent tax differences on projected results of operations for the ~~conversion option associated with the Convertible Notes for the nine months ended September 30, 2017 are not deductible for income tax purposes. This had a significant adverse impact on~~calendar year also impacts the effective tax rate, for the nine months ended September 30, 2017. Excluding the impact of the non-deductible items related to the convertible note, the 2017 year-to-date effective tax rate would be 41.1%. The effective tax ratewhich can also fluctuate throughout the year as estimates used in the quarterly tax provision ~~for each quarter~~ are updated ~~as more~~with additional information ~~becomes available throughout the year.~~.

Ratios


	For the Nine Months Ended September 30,
(Unaudited)	2022			2021
Ceded premium ratio		47.2	%		47.0	%

Net loss and LAE ratio		84.4	%		72.8	%
Net expense ratio		36.3	%		35.8	%
Net combined ratio		120.7	%		108.6	%

Net ~~income~~combined ratio

~~Our results~~The net combined ratio was 120.7% for the ~~nine months~~nine-month period ended September 30, ~~2017 reflect~~2022, up 12.1 points from 108.6% in the prior year period. The increase primarily stems from a higher net ~~income of $3.9 million compared to $36.7 million~~loss and LAE ratio as well as a small increase in the net expense ratio, as described below.

Ceded premium ratio

The ceded premium ratio was 47.2% for the ~~nine months~~nine-month period ended September 30, ~~2016. Operating related items discussed above caused $22.7 million~~2022, relatively flat from 47.0% in the prior year period. The cost of the ~~variance. Non-operating items, particularly interest expense and non-cash change in valuation~~current year catastrophe excess of loss contract was higher than the ~~convertible option feature caused $10.2 million of the variance.~~

~~Ratios~~

~~Due to~~prior year but the impact ~~our reinsurance costs have on net premiums earned from period to period, our management believes the ratios discussed below are more meaningful when viewed on~~was partly offset by a ~~gross basis.~~

Three Months Ended September 30,

2017

2016

Ratios to Gross Premiums Earned:

(unaudited)
Ceded premium ratio

37.8
%

38.4
%

Loss ratio

41.8
%

32.7
%

Operating expense ratio

23.8
%

22.3
%

Combined ratio

103.4
%

93.4
%

Ratios to Net Premiums Earned:

Loss ratio ⁽¹⁾

67.3
%

53.1
%

Operating expense ratio⁽²⁾

38.2
%

36.2
%

Combined ratio⁽³⁾

105.5
%

89.3
%

~~(1)~~

~~The net loss ratio is calculated as losses and LAE divided by net premiums earned.~~

~~(2)~~

~~The net expense ratio is calculated as all operating expenses divided by net premiums earned.~~

~~(3)~~

~~The net combined ratio is calculated as the sum of losses and LAE and all operating expenses divided by net premiums earned.~~

~~Ceded premium ratio~~

~~Our~~$18 million ceded premium on the severe convective storm contract included in the prior year amount.

Net loss and LAE ratio

The net loss and LAE ratio ~~decreased to 37.8%~~was 84.4% for the ~~three months~~nine-month period ended September 30, ~~2017~~2022, up 11.6 points from 72.8% in the prior year period, driven by higher weather and attritional losses, including the $40 million retention for Hurricane Ian, compared to ~~38.4%~~the prior year period, which was partly offset by the 4.4% increase in net premiums earned.

Net expense ratio

The net expense ratio was 36.3% for the ~~three months~~nine-month period ended September 30, 2016. As described above, both gross earned premium and ceded premium decreased quarter over quarter. The proportional decrease in ceded premium for the 2017 hurricane season reinsurance program over the 2016 hurricane season was greater than the decrease in gross earned premium and thereby reduced the ceded premium ratio.

~~Gross loss ratio~~

~~Our gross loss ratio increased to 41.8% for the three months ended September 30, 2017 compared to 32.7% for the three months ended September 30, 2016. The increase~~2022, slightly up from 35.8% in the ~~loss ratio was primarily attributable to retained losses associated with Hurricane Irma.~~

~~Net loss ratio~~

Our net loss ratio increased to 67.3% for the three months ended September 30, 2017 compared to 53.1% for the three months ended September 30, 2016, primarily related to net retained losses associated with Hurricane Irma, partially offset by the decrease in the ceded premium ratio.

~~Gross operating expense ratio~~

Our gross operating expense ratio increased to 23.8% for the three months ended September 30, 2017 compared to 22.3% for the three months ended September 30, 2016. The increase relates primarily to transaction costs associated with the upcoming acquisition of NBIC.

~~Net operating expense ratio~~

Our net operating expense ratio increased to 38.2% for the three months ended September 30, 2017 compared to 36.2% for the three months ended September 30, 2016, primarily due to the increase in the gross expense ratio discussed above, slightly offset by the lower ceded premium ratio.

~~Combined ratio~~

Our combined ratio on a gross basis increased to 103.4% for the three months ended September 30, 2017 compared to 93.4% for the three months ended September 30, 2016. Our combined ratio on a net basis increased to 105.5% for the three months ended September 30, 2017 compared to 89.3% for the three months ended September 30, 2016. The gross combined ratio increased due to the increase in the loss and gross expense ratios slightly offset by the decrease in the ceded premium ratio as described above.

~~Ratios~~

~~Due to the impact our reinsurance costs have on net premiums earned from~~prior year period, ~~to period, our management believes the ratios discussed below are more meaningful when viewed on a gross basis.~~

Nine Months Ended September 30,

2017

2016

Ratios to Gross Premiums Earned:

(unaudited)
Ceded premium ratio

39.6
%

34.0
%

Loss ratio

34.1
%

35.3
%

Operating expense ratio

25.0
%

22.1
%

Combined ratio

98.7
%

91.4
%

Ratios to Net Premiums Earned:

Loss ratio ⁽¹⁾

56.4
%

53.6
%

Operating expense ratio⁽²⁾

41.4
%

33.4
%

Combined ratio⁽³⁾

97.8
%

87.0
%

~~Ceded premium ratio~~

Our ceded premium ratio increased to 39.6% for the nine months ended September 30, 2017 compared to 34.0% for the nine months ended September 30, 2016. The variance relates to higher reinsurance costs for the first six months of 2017 compared to 2016 due to timing of the reinsurance placement as previously discussed. The 2016 ratio also benefitted from approximately $32.1 million of Citizens assumption activity that occurred in the fourth quarter of 2015 and approximately $9.1 million in the first quarter of 2016 compared to no assumptions in the last quarter of 2016 or the throughout 2017. Citizens assumptions provided a benefit for the nine months ended September 30, 2016 due to the favorable timing of reinsurance costs associated with assumed premium. Additionally, the reinsurance ratio in the first half of 2017 was adversely impacted by reinstatements for the per risk treaty which were triggered by large losses.

~~Gross loss ratio~~

Our gross loss ratio decreased to 34.1% for the nine months ended September 30, 2017 compared to 35.3% for the nine months ended September 30, 2016. The nine months ended September 30, 2017 included retained losses from Hurricane Irma and $6.1 million of adverse development from Hurricane Matthew losses partially offset by $4.6 million of favorable development on non-catastrophe losses. The nine months ended September 30, 2016 included Hurricane Hermine losses of $4.1 million as well as adverse development on prior accident year losses of approximately $17.0 million.

~~Net loss ratio~~

Our net loss ratio increased to 56.4% for the nine months ended September 30, 2017 compared to 53.6% for the nine months ended September 30, 2016 due to the increase in the ceded premium ratio as discussed above.

~~Gross operating expense ratio~~

Our gross expense ratio increased to 25.0% for the nine months ended September 30, 2017 compared to 22.1% for the nine months ended September 30, 2016. The increase relates to a combination of the favorable effect of Citizens take-out activity on the 2016 ratio, transaction costs associated with the NBIC acquisition in 2017 and fixed personnel and other costs which were diluted in 2016 due to higher gross earned premium. Assumptions from Citizens had a favorable impact on the 2016 expense ratio because assumed policies have no acquisition costs until the policies renew onto Heritage policy forms.

~~Net operating expense ratio~~

Our net expense ratio increased to 41.4% for the nine months ended September 30, 2017 compared to 33.4% for the nine months ended September 30, 2016, due to the gross operating expense ratio variance discussed above coupled with the increase in the ceded premium ratio.

~~Combined ratio~~

Our combined ratio on a gross basis increased to 98.7% for the nine months ended September 30, 2017 compared to 91.4% for the nine months ended September 30, 2016. Our combined ratio on a net basis increased to 97.8% for the nine months ended September 30, 2017 compared to 87.0% for the nine months ended September 30, 2016. The gross combined ratio increased due to the increases in the ceded premiums ratio and gross operating expense ratio, partially offsetdriven by a lower ~~gross loss~~PAC ratio.

Liquidity and Capital Resources

Our principal sources of liquidity include cash flows generated from operations, existing cash and cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of September 30, ~~2017,~~2022, we had ~~$352.3~~$297.5 million of cash and cash equivalents ~~which primarily consisted~~and $651.8 million in investments, compared to $359.3 million and $694.7 million, respectively, as of December 31, 2021. The decrease in cash and ~~money market accounts.~~ cash equivalents was primarily due to the timing of reinsurance payments for our catastrophe excess of loss program as well as timing of reinsurance recoveries. The decrease in investments is due to the unrealized losses on the Company’s available-for-sale fixed income securities portfolio. The unrealized losses resulted from the continued decline in bond prices throughout 2022 as a result of the higher interest rate environment. The Company’s fixed income portfolio average credit rating is A+ with a duration of 3.4 years at September 30, 2022.

We ~~typically~~generally hold substantial cash balances to meet seasonal liquidity needs ~~which includes~~including amounts to pay quarterly reinsurance ~~installments.~~ 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 ~~held additional funds in cash and cash equivalents at September 30, 2017 to fund catastrophe claim payments associated with Hurricane Irma and to provide resources for the purchase~~believe that our sources of Narragansett Bay Insurance, which we plan to close in the fourth quarter of 2017. In addition, we held approximately $61 million of advances from reinsurers for Hurricane Irma claim payments. We also had $18.4 million in restricted cashliquidity are adequate to meet our contractual obligations related to the catastrophe bonds issued by Citrus Re Ltd. Although we can provide no assurances, we believe that we maintain sufficient liquidity to pay our insurance company affiliates’ claims and expenses, as well as to satisfy commitments in the event of unforeseen events such as inadequate premium rates or reserve deficiencies. We maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position.

~~Although we can provide no assurance, we believe our current capital resources, together with~~ cash ~~provided from our operations, will be sufficient to meet currently anticipated working capital~~ 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.

As part of the Seventh Amendment to the Credit Agreement, discussed below, going forward, dividends and stock repurchases may be limited or restricted entirely and our ability to contribute capital to our insurance subsidiaries that are not parties to the Credit Agreement may be limited.

Cash Flows

	Nine Months Ended September 30,
	2017		2016			Change			For the Nine Months Ended September 30,
	(in thousands)								2022			2021			Change
Net cash provided by (used in):
									(in thousands)
Net cash (used in) provided by:
Operating activities	$	98,703	$	99,595		$	(892	)	$	(15,480	)	$	72,772		$	(88,252	)
Investing activities		84,570		(179,247	)		263,817			(33,507	)		(112,927	)		79,420
Financing activities		63,231		(25,790	)		89,021			(11,952	)		(7,402	)		(4,550	)
Net increase (decrease) in cash and cash equivalents	$	246,504	$	(105,442	)	$	351,946
Net (decrease) increase in cash and cash equivalents									$	(60,939	)	$	(47,557	)	$	(13,382	)

Operating Activities

~~Cash provided by~~Net cash used in operating activities ~~increased to $98.7~~was $15.5 million for the nine months ended September 30, ~~2017~~2022 compared to ~~$99.6 million for the nine months ended September 30, 2016. The increase in~~net cash provided by operating activities ~~was~~of $72.8 million for the comparable period in 2021. The decrease in cash from operating activities

relates primarily ~~due~~ to ~~lower~~timing of cash flows associated with claim and reinsurance ~~premium paid and advance~~ payments ~~made by reinsurers in anticipation of Hurricane Irma claim payment somewhat offset by a large amount of claims payments, particularly related to Hurricanes Matthew and Irma, made~~as well as reinsurance reimbursements during the first nine months ~~ended September 30, 2017~~of 2022 compared to the ~~same period~~first nine months of ~~2016.~~2021.

Investing Activities

Net cash ~~provided by~~used in investing activities for the nine months ended September 30, ~~2017~~2022 was ~~$84.6~~$33.5 million as compared to net cash used byin investing activities of ~~$179.2~~$112.9 million for the comparable period in ~~2016.~~2021. The change in cash ~~provided by (used in)~~used in investing activities relates primarily ~~relates~~ to ~~$110.3 million paid~~allocations of funds for investment in each period. Strategic sales of investments to yield realized gains in 2020 produced proceeds which were re-invested in 2021, driving up the ~~acquisition of Zephyr, net of~~ cash ~~acquired. In addition, we liquidated a portion of our invested assets in preparation~~used for ~~our upcoming acquisition of NBIC in 2017.~~investing activities for that period.

Financing Activities

Net cash ~~provided by~~used in financing activities for the nine months ended September 30, ~~2017~~2022 was ~~$63.2~~$12.0 million, as compared to ~~net~~ cash ~~using~~used in financing activities of ~~$25.8~~$7.4 million for the comparable period in ~~2016.~~2021. The increase in cash ~~provided by~~used for financing activities ~~relates~~was driven by draws from our Revolving Credit Facility (defined below) totaling $25 million to purchase and retire $22.5 million of Convertible Notes and a larger amount of treasury stock purchases during the nine months ended September 30, 2022.

Credit Facilities

The Company is party to a 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 (as amended from time to time, the “Credit Agreement”).

Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement. In order to avoid a covenant violation, on November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the Credit Agreement to, among other things, (i) decrease the revolving credit facility from $75 million to $50 million, (ii) establish a new $25 million term loan facility to refinance loans outstanding under the existing revolving credit facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the revolving credit facility commitments and/or term loan commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iii) increase the applicable margin for loans under the Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%). The Seventh Amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement. For additional information regarding the changes to the financial covenants in the Credit Agreement, refer to Part II, Item 5, “Other Information” in this Quarterly Report on Form 10-Q.

The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $100 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $50 million (inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the revolving credit facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the revolving credit facility) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).

Term Loan Facility. As amended by the Seventh Amendment, the principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity. The Term Loan Facility matures on July 28, 2026. As of September 30, 2022, there was $66.5 million in aggregate principal outstanding on the Term Loan Facility and as of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding on the Term Loan Facility.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the Seventh Amendment, the borrowings under the Revolving Credit Facility were repaid in full.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin (described below) and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin (described below).

The applicable margin for loans under the Credit Facilities varies from 2.75% per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for base rate loans) based on our consolidated leverage 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 SOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of September 30, 2022, the borrowing under our Credit Facilities were accruing interest at a rate of 5.88% per annum.

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 SOFR loans. In addition, 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 are party to a Pledge and Security Agreement, (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 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a 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 January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of September 30, 2022, there was $885,000 principal amount of outstanding Convertible Notes, net of $21.1 million of Convertible Notes held by an insurance company subsidiary.

As discussed above, holders of the Convertible Notes issued ~~partially offset~~ by ~~shares repurchased under~~ the ~~stock~~Company had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase ~~program.~~

~~Senior Secured~~the aggregate principal amount of Convertible Notes ~~and~~that are validly tendered. The Company has received notice from the Depositary for the Convertible ~~Senior~~ Notes

~~The following table summarizes~~ that, on July 29, 2022, $10,895,000 aggregate principal amount of the ~~principal and interest payment~~Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, ~~listed below:~~

	~~Maturity Date~~	~~Interest Payment Due Date~~
~~8.75% plus LIBOR Senior Secured Notes (0.95%)~~	~~December 15, 2023~~	~~March 15, June 15, September 15~~ and ~~December 15~~
~~5.875% Convertible Senior Notes~~	~~August 1, 2037~~	~~February 1 and August 1 - semi annual~~

~~See Note 12 –” Long-Term Debt” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10Q for additional information.~~

~~Seasonality of our Business~~

~~Our insurance business is seasonal as hurricanes typically occur during~~ the ~~period from June 1 through November 30 each year. With our reinsurance program effective on June 1 each year, any variation in~~Company has requested that the ~~cost of our reinsurance, whether due to changes to reinsurance rates or changes in~~trustee cancel 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.~~

~~Contractual Obligations~~

Convertible Notes tendered. The ~~following table represents our contractual obligations for which cash flows are fixed or determined~~outstanding balance as of September 30, ~~2017.~~2022 of non-affiliated Notes was $11.8 million. On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million from its revolver to replenish the cash used to pay the $10.9 million for the purchase of the tendered Convertible Notes.

Payments Due by Period

Total

2017

2018-2019

2020-2021

After 2021

(in thousands)

Senior secured notes ⁽¹⁾
$
79,500

$
—

$
1,987

$
7,465

$
70,048

Convertible senior notes⁽¹⁾

136,750

—

—

—

136,750

Interest on notes

148,502

2,024

15,816

15,549

115,113

Reinsurance⁽²⁾

200,645

—

200,645

—

—

Total Contractual Obligations
$
565,397

$
2,024

$
218,448

$
23,014

$
321,911

~~1. See Part 1. Financial information, Item 1. Financial Statements, Note 12-Long-Term Debt.~~FHLB Loan Agreements

~~2. Represents~~In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $26.4 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. As of September 30, 2022, the common stock is value at $1.2 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum ~~payment~~collateral requirement at any time, other than in the event of ~~reinsurance premiums under multi-year reinsurance contacts.~~a default by the subsidiary. The proceeds from the loan was used to prepay the Company’s Senior Secured Notes due 2023 in 2018.

~~Off-Balance Sheet Arrangements~~

We obtained a $12.7 million irrevocable letter of credit from a financial institution to secure Osprey’s obligations arising from our reinsurance program. We collateralized this letter of credit facility with otherwise unencumbered real estate. The letter of credit, which terminated on May 31, 2017, was not renewed because the treaties with Osprey either terminated or were commuted.

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”)~~(GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. ~~During the nine months ended~~In September 2022, we assessed our deferred tax position and recorded a $10.7 million valuation against our net deferred tax asset at September 30, ~~2017, we reassessed~~2022. We intend to continue maintaining the valuation allowance on our ~~critical accounting policies and estimates as disclosed within our 2016 Form 10-K; we~~net deferred tax asset until there is sufficient evidence to support the reversal of all or some portion of the allowance. We have made no other material changes or additions with regard to ~~such~~those policies and ~~estimates.~~estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

~~JOBS Act~~Seasonality of our Business

~~We qualify as an “emerging growth company” under~~Our insurance business is seasonal; hurricanes typically occur during the ~~JOBS Act. Section 107 of~~period from June 1 through November 30 and winter storms generally impact the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail

~~ourselves of this extended transition period~~first and ~~as a result, we will adopt new or revised accounting standards~~fourth quarters each year. With our catastrophe reinsurance program effective on ~~the relevant dates on which adoption of such standards is required for other public companies.~~

~~We are~~June 1 each year, any variation in the ~~process~~cost of ~~evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject~~our reinsurance, whether due to ~~certain conditions set forth~~changes to reinsurance rates or changes in the JOBS Act, if as an emerging growth company we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total ~~annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market~~insured value of our ~~common stock that~~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 ~~held~~incorporated herein by ~~non-affiliates exceeds $700.0 million as of the last business day of~~reference. We do not expect any recently issued accounting pronouncements to have a material effect on our ~~prior second fiscal quarter, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.~~condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk.

~~Our investment portfolios at September 30, 2017 included fixed maturity and equity securities,~~The duration of the ~~purposes of which~~financial instruments held in our portfolio that are not for trading or speculation. Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet policyholder obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities’ prices. We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. Investment securities are managed by a group of nationally recognized asset managers and are overseen by the investment committee appointed by our board of directors. Our investment portfolios are primarily exposedsubject to interest rate risk ~~credit risk~~was 3.358 years and ~~equity price risk. We classify our fixed maturity~~3.891 years at September 30, 2022 and ~~equity securities as available-for-sale~~2021, and ~~report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity.~~3.903 years at December 31, 2021. As ~~such, any material temporary changes in the fair value of such securities can adversely impact the carrying value of our stockholders’ equity.~~

~~Interest Rate Risk~~

~~Our fixed maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in~~ interest rates ~~and considering our future capital needs.~~

~~The following table illustrates the impact of hypothetical changes in 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 atportfolio. As of September 30, ~~2017 (in thousands):~~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, 2021.

Hypothetical Change in Interest rates

Estimated Fair Value After Change

Change in Estimated Fair
Value

Percentage Increase
(Decrease) in Estimated
Fair Value

300 basis point increase

$
436,574

$
(57,910
)

(12
)%
200 basis point increase

$
455,874

$
(38,610
)

(8
)%
100 basis point increase

$
475,178

$
(19,306
)

(4
)%
100 basis point decrease

$
513,763

$
19,279

4
%
200 basis point decrease

$
530,443

$
35,959

7
%
300 basis point decrease

$
536,843

$
42,359

9
%

Under the amended term loan agreement dated November 7, 2022, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin, eliminating any reference to LIBOR.

~~Credit Risk~~

~~Credit risk can expose us to potential losses arising principally from adverse changes~~The Federal Reserve has tightened monetary policy, including multiple interest rate increases in the ~~financial condition~~first half of 2022; however, the ~~issuer~~outlook is less certain for longer-term rates during the second half of ~~our fixed maturities. We mitigate this risk by investing in fixed maturities that are generally investment grade~~2022 and ~~by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector.~~

~~The following table presents the composition of our fixed maturity portfolio by rating at September 30, 2017 (in thousands):~~

Comparable
Rating

Amortized
Cost

% of Total
Amortized
Cost

Estimated
Fair Value

% of total
Estimated
Fair Value

AAA

$
35,436

7
%

$
35,690

7
%
AA+

$
36,053

7
%

$
36,414

7
%
AA

$
48,256

10
%

$
48,613

10
%
AA-

$
69,568

14
%

$
69,878

14
%
A+

$
42,853

9
%

$
43,106

9
%
A

$
66,114

13
%

$
66,203

13
%
A-

$
148,161

30
%

$
147,508

30
%
BBB+

$
700

0
%

$
707

0
%
BBB

$
104

0
%

$
103

0
%
BBB-

$
706

0
%

$
720

0
%
BB

$
604

0
%

$
604

0
%
BB+

$
574

0
%

$
571

0
%
BB-

$
9,837

2
%

$
9,985

2
%
B+

$
4,892

1
%

$
4,989

1
%
B

$
27,409

6
%

$
27,867

6
%
NA and NR

$
1,526

0
%

$
1,526

0
%
Total

$
492,794

100
%

$
494,484

100
%

~~Equity Price Risk~~

Our equity investment portfolio at September 30, 2017 consists of common stocks and redeemable and non-redeemable preferred stocks. We may incur potential losses due to adverse changes in equity security prices. We manage this risk primarily through industry and issuer diversification and asset allocation techniques.

~~The following table illustrates the composition of our equity portfolio at September 30, 2017 (in thousands):~~

% of Total

Estimated
Fair Value

Estimated
Fair value

Stocks by sector:

Financial

$
2,106

8
%
Energy

10,957

43
%
Other

12,173

48
%
Subtotal

$
25,236

99
%
Mutual Funds and ETF by type:

Equity

$
160

1
%
Total

$
25,396

100
%

~~Foreign Currency Exchange Risk~~

beyond. At September 30, ~~2017,~~2022, we ~~did~~have not ~~have any~~experienced a material ~~exposure~~impact when compared to ~~foreign currency related risk.~~the tabular presentations of our interest rate and market risk sensitive instruments in our 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

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

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, ~~2017.~~2022.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant changes to our internal control over financial reporting for the period ending September 30, 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 ~~disclosed~~ in ~~the section entitled “Risk Factors” in our Annual Report~~Item 1A of Part I of its annual report on Form 10-K for the year ended December 31, ~~2016,~~2021, filed on March ~~15, 2017 set forth information relating~~14, 2022. There have been no material changes to ~~various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Those~~the Company’s risk factors ~~continue to be relevant to an understanding~~since the filing of ~~our business, financial condition and operating results. No material changes have occurred with respect to those risk factors.~~that report.

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

~~Issuer purchases~~The Company's Board of ~~equity securities~~Directors authorized during the second quarter of 2022 the $0.06 per share typically used to pay a quarterly dividend to shareholders to be allocated to repurchase common stock. The authorization was for $2.0 million to repurchase common stock commencing in August 2022.

During the third quarter ended September 30, ~~2017, we~~2022, the Company purchased ~~1,103,848~~632,744 shares of common stock ~~for~~in aggregate of $1.7 million with an ~~aggregate purchase of $13.0 million under our~~average share ~~repurchase program. We purchased 3,552,397 shares of common stock for an aggregate purchase~~ price of ~~$40.0 million in connection with the issuance of the Convertible Notes.~~ $2.73 per share.

A summary of our common stock repurchases during the quarter ended September 30, ~~2017 under our share repurchase program~~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)
July 1 - July 31, 2022		—	$	—		—	$	20,000
August 1 - August 31, 2022		237,911	$	2.78		237,911	$	19,328
September 1 - September 30, 2022		394,833	$	2.70		394,833	$	18,252
Total		632,744				632,744

Total Number of Shares Purchased

Average Price Paid Per Share⁽¹⁾

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

July 1, 2017 through July 31, 2017

—

—

—

$
35,831

August 1, 2017 through August 30, 2017

3,808,709

$
11.52

256,312

$
32,836

September 1, 2017 through September 30, 2017

847,536

$
11.77

847,536

$
22,836

Total

4,656,245

1,103,848

(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 with an initial value of $25.0 million and with an expiration date of December 31, 2022.

~~(1)~~

~~Average price paid per share excludes cash paid for commissions.~~

Item ~~4. Mine Safety Disclosures~~5. Other Information

~~None~~Item 1.01 Entry into a Material Definitive Agreement

Seventh Amendment to Credit Agreement

On November 7, 2022, Heritage Insurance Holdings, Inc. and its subsidiary guarantors (together, the “Company”) amended that certain Credit Agreement dated as of December 14, 2018 (as amended to date, the “Credit Agreement”) by entering into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”) with the lenders party to the Credit Agreement, and Regions Bank, as administrative agent, collateral agent, swingline lender and issuing bank.

Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement (“Non-credit Parties”) that exceed $38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20x . The Seventh Amendment also (A) eliminates the current $10 million basket available to the Company to pay dividends to its shareholders or to repurchase its securities, (B) provides for a dividend of up to $2 million in the fourth quarter of 2024 under certain conditions and (C) restricts future dividends based on maintenance of certain financial ratios, including Consolidated Tangible Net Worth. As a result, going forward, dividends and stock repurchases may be limited or restricted entirely and the Company’s ability to contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement may be limited.

All other material terms of the Credit Agreement remain unchanged.

Certain Relationships

The lenders under the Credit Agreement and their affiliates may in the future engage in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they may receive customary fees and expenses.

The above summary description of the Seventh Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Seventh Amendment, a copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference.

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~~3.1		~~Description~~Certificate of Incorporation of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2014
3.2	By-laws of Heritage Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly	Report on Form 10-Q filed on August 6, 2014
~~4.1~~	4	Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-195409) filed on May 13, 2014)
4.1	Form of 5.875% Convertible Senior Notes due 2037 (included in Exhibit 4.1), ~~incorporated~~(incorporated by reference to ~~4.2~~1.1 to our Form 8-K filed on August 16, ~~2017~~2017)

4.2		Indenture, dated as of August 16, 2017, by and among the ~~Company,~~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)

~~4.3~~	10.1*	Seventh Amendment to Credit Agreement, ~~and Plan of Merger,~~ dated ~~as of August 8, 2017, by and~~November 7, 2022, among Heritage Insurance Holdings, Inc., ~~Gator Acquisition Merger Sub, Inc. and NBIC~~certain subsidiaries of Heritage Insurance Holdings, Inc. from time to time party as guarantors, the lenders from time to time party and ~~PBRA, LLC, in its capacity~~Regions Bank, as ~~Stockholder Representative, incorporated by reference to Exhibit 2.1 to our Form 8-K filed on August 8, 2017~~Administrative Agent and Collateral Agent

~~4.4~~	31.1*	Supplemental Indenture, dated August 16, 2017, to that certain Indenture, dated December 15, 2016, by and among the Company, The Bank of New York Mellon, a New York banking corporation, as trustee, The Bank of New York Mellon, London Branch, as paying agent, and The Bank of New York Mellon (Luxembourg) S.A., as registrar, incorporated by reference to Exhibit 4.1 to our Form 8-K on August 22, 2017

~~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~~	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~~	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~~	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*
~~101.INS~~		~~XBRL Instance Document~~

~~101.SCH~~		~~101. SCH XBRL Taxonomy Extension Schema.~~

~~101.CAL~~		~~101. CAL~~Inline XBRL Taxonomy Extension Calculation ~~Linkbase.~~Linkbase Document
101.DEF*
~~101.DEF~~		~~101. DEF~~Inline XBRL Taxonomy Extension Definition ~~Linkbase.~~Linkbase Document
101.LAB*
~~101.LAB~~		~~101. LAB~~Inline XBRL Taxonomy Extension Label ~~Linkbase.~~Linkbase Data Document
101.PRE*
~~101.PRE~~		~~101. PRE~~Inline XBRL Taxonomy Extension Presentation ~~Linkbase.~~Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.* Filed herewith

** Furnished herewith

~~SIGNATURES~~

SIGNATURES

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


	HERITAGE INSURANCE HOLDINGS, INC.

Date: November ~~2, 2017~~9, 2022	By:	/s/ ~~BRUCE LUCAS~~ERNESTO GARATEIX
		~~Bruce Lucas~~Ernesto Garateix
		~~Chairman and~~ Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer)

Date: November ~~2, 2017~~9, 2022	By:	/s/ ~~STEVEN MARTINDALE~~KIRK LUSK
		~~Steven Martindale~~Kirk Lusk
		Chief Financial Officer (Principal Financial Officer)


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


		Page
PART I – FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets: September 30, ~~2017~~2022 (unaudited) and December 31, ~~2016~~2021		2
Condensed Consolidated Statements of ~~Income (Loss):~~Operations and Other Comprehensive Loss: Three and Nine ~~months ended~~Months Ended September 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)		3
~~Condensed Consolidated Statements of Other Comprehensive Income (Loss): Three and Nine months ended September 30, 2017 and 2016 (unaudited)~~		4
Condensed Consolidated Statements of Stockholders’ Equity: Three and Nine ~~months ended~~Months Ended September 30, ~~2017~~2022 and ~~2016 (unaudited)~~2021(unaudited)		54
Condensed Consolidated Statements of Cash Flows: Nine ~~months ended~~Months Ended September 30, ~~2017~~2022 and ~~2016 (unaudited)~~2021(unaudited)		6
Notes to Unaudited Condensed Consolidated Financial Statements		78
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		3329
Item 3 Quantitative and Qualitative Disclosures about Market Risk		4341
Item 4 Controls and Procedures		4442
PART II – OTHER INFORMATION
Item 1 Legal Proceedings		4543
Item 1A Risk Factors		4543
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		4543
Item ~~4 Mine Safety Disclosures~~5 Other Information		4543
Item 6 Exhibits		4544
Signatures		4746


	September 30, 2017			December 31, 2016			September 30, 2022			December 31, 2021
ASSETS	(unaudited)						(unaudited)
Fixed maturity securities, available for sale, at fair value (amortized cost of $492,794 and $576,911 in 2017 and 2016, respectively)	$	494,484		$	571,011
Equity securities, available for sale, at fair value (cost of $27,728 and $34,190 in 2017 and 2016, respectively)		25,396			31,971
Fixed maturities, available-for-sale, at fair value (amortized cost of $704,365 and $675,245)							$	633,192		$	669,354
Equity securities, at fair value, (cost $1,514 and $1,415)								1,514			1,415
Other investments, net								17,084			23,929
Total investments		519,880			602,982			651,790			694,698
Cash and cash equivalents		352,321			105,817			297,548			359,337
Restricted cash		19,853			20,910			6,265			5,415
Accrued investment income		4,635			4,764			3,517			3,167
Premiums receivable, net		35,326			42,720			76,126			71,925
Reinsurance recoverable on paid and unpaid claims		370,751			—
Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $45								866,625			269,391
Prepaid reinsurance premiums		153,955			106,609			381,368			265,873
Income taxes receivable		1,649			10,713
Income tax receivable								13,760			11,739
Deferred income tax asset, net								14,637			—
Deferred policy acquisition costs, net		41,888			42,779			100,649			93,881
Property and equipment, net		16,198			17,179			22,784			17,426
Right-of-use lease asset, net								25,218			27,753
Intangibles, net		22,967			26,542			51,163			55,926
Goodwill		46,454			46,454			—			91,959
Other assets		13,107			5,775			11,133			12,272
Total Assets	$	1,598,984		$	1,033,244		$	2,522,583		$	1,980,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses	$	489,580		$	140,137		$	1,209,352		$	590,166
Unearned premiums		313,843			318,024			651,913			590,419
Reinsurance payable		158,122			96,667			278,298			191,728
Long-term debt		188,634			72,905
Deferred income taxes		4,493			3,003
Funds held by company under reinsurance treaties		61,732			—
Long-term debt, net								121,283			120,757
Deferred income tax liability, net								—			9,426
Advance premiums		20,397			18,565			37,855			24,504
Accrued compensation		6,955			4,303			8,067			8,014
Derivative liability, accounts payable and other liabilities		53,547			21,681
Lease liability								28,901			31,172
Accounts payable and other liabilities								69,217			71,525
Total Liabilities	$	1,297,303		$	675,285		$	2,404,886		$	1,637,711
Commitments and contingencies (Note 15)

Commitments and contingencies (Note 17)
Stockholders’ Equity:
Common stock, $0.0001 par value, 50,000,000 shares authorized, 24,400,176 shares issued and 23,500,174 outstanding at September 30, 2017 and 29,740,441 shares issued and 28,840,443 outstanding at December 31, 2016		2			3
Common stock, $0.0001 par value, 50,000,000 shares authorized, 25,923,930 shares issued and 25,898,930 outstanding at September 30, 2022 and 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021								3			3
Additional paid-in capital		209,338			205,727			334,246			332,797
Accumulated other comprehensive loss		(422	)		(5,018	)
Treasury stock, at cost, 7,099,597 shares at September 30, 2017 and 1,759,330 shares at December 31, 2016		(87,185	)		(25,562	)
Retained earnings		179,948			182,809
Accumulated other comprehensive loss, net of taxes								(54,573	)		(4,573	)
Treasury stock, at cost, 11,890,599 and 10,536,737 shares at September 30, 2022 and December 31, 2021								(130,286	)		(123,557	)
Retained (deficit) earnings								(31,693	)		138,381
Total Stockholders' Equity		301,681			357,959			117,697			343,051
Total Liabilities and Stockholders' Equity	$	1,598,984		$	1,033,244		$	2,522,583		$	1,980,762

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net (loss) income		(8,696	)		10,930			3,929			36,720
OTHER COMPREHENSIVE INCOME:
Change in net unrealized (losses) gains on investments		593			(1,237	)		8,473			11,773
Reclassification of gains included in net income		(365	)		(1,119	)		(1,011	)		(1,762	)
Income tax benefit (expense) related to items of other comprehensive income		(81	)		908			(2,866	)		(3,862	)
Total comprehensive (loss) income	$	(8,549	)	$	9,482		$	8,525		$	42,869

	Common Shares			Par Value			Additional Paid-In Capital		Retained Earnings (Deficit)			Treasury Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance at December 31, 2016		28,840,443		$	3		$	205,727	$	182,809			(25,562	)	$	(5,018	)	$	357,959
Stock buy-back		(5,340,267	)		(1	)		—		—			(61,623	)		—			(61,624	)
Stock-based compensation		—			—			3,611		—			—			—			3,611
Dividends declared on common stock		—			—			—		(6,790	)		—			—			(6,790	)
Net unrealized change in investments, net of tax		—			—			—		—			—			4,596			4,596
Net income		—			—			—		3,929			—			—			3,929
Balance at September 30, 2017		23,500,176		$	2		$	209,338	$	179,948		$	(87,185	)	$	(422	)	$	301,681


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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021
REVENUES:
Gross premiums written	$	304,501		$	274,178		$	952,981		$	886,059
Change in gross unearned premiums		3,458			20,231			(61,442	)		(35,593	)
Gross premiums earned		307,959			294,409			891,539			850,466
Ceded premiums earned		(148,266	)		(131,964	)		(420,645	)		(399,323	)
Net premiums earned		159,693			162,445			470,894			451,143
Net investment income		2,887			1,548			7,050			3,797
Net realized losses		(3	)		(6	)		(121	)		(926	)
Other revenue		2,916			3,421			10,049			10,835
Total revenues		165,493			167,408			487,872			464,849
EXPENSES:
Losses and loss adjustment expenses		155,849			129,632			397,409			328,376
Policy acquisition costs, net of ceding commission income (1)		39,194			35,984			115,826			109,183
General and administrative expenses, net of ceding commission income(2)		17,758			17,169			54,947			52,490
Goodwill impairment		—			—			91,959			—
Total expenses		212,801			182,785			660,141			490,049
Operating Loss		(47,308	)		(15,377	)		(172,269	)		(25,200	)
Interest expense, net		2,027			2,150			5,750			5,953
Loss before income taxes		(49,335	)		(17,527	)		(178,019	)		(31,153	)
Benefit for income taxes		(1,095	)		(1,117	)		(11,155	)		(5,644	)
Net loss	$	(48,240	)	$	(16,410	)	$	(166,864	)	$	(25,509	)
OTHER COMPREHENSIVE LOSS
Change in net unrealized losses on investments		(17,471	)		(1,344	)		(65,403	)		(8,316	)
Reclassification adjustment for net realized investment losses (gains)		3			6			121			(96	)
Income tax expense related to items of other comprehensive losses		4,089			310			15,282			1,950
Total comprehensive loss	$	(61,619	)	$	(17,438	)	$	(216,864	)	$	(31,971	)
Weighted average shares outstanding
Basic		26,369,265			27,938,028			26,536,700			27,902,814
Diluted		26,369,265			27,938,028			26,536,700			27,902,814
Loss per share
Basic	$	(1.83	)	$	(0.59	)	$	(6.29	)	$	(0.91	)
Diluted	$	(1.83	)	$	(0.59	)	$	(6.29	)	$	(0.91	)

Purchase Consideration
Cash, net of cash acquired	$	110,319

Assets acquired
Investments	$	76,543
Premiums and agent's receivable		1,403
Other assets		526
Prepaid reinsurance premiums		4,792
Intangible assets – value of business acquired		7,600
Intangible assets		24,245
Total assets acquired	$	115,109
Total liabilities assumed	$	(43,216	)

Net assets acquired	$	71,893
Goodwill		38,426
Total purchase price	$	110,319


	Less Than Twelve Months						Twelve Months or More
September 30, 2022	Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
Debt Securities Available-for-sale
U.S. government and agency securities		93	$	4,023	$	98,801		5	$	331	$	8,911
States, municipalities and political subdivisions		61		5,166		39,273		64		7,871		47,766
Special revenue		378		15,277		121,001		153		18,876		103,038
Industrial and miscellaneous		190		7,376		98,431		103		12,356		66,066
Total fixed maturity securities		722	$	31,842	$	357,506		325	$	39,434	$	225,781


	As of September 30, 2022				As of December 31, 2021
	Carrying Value		Maximum Loss Exposure		Carrying Value		Maximum Loss Exposure
	(in thousands)
Investments in non-consolidated VIEs - Equity Method	$	3,517	$	3,517	$	3,852	$	3,852
Investments in non-consolidated VIEs - Amortized Cost	$	8,490	$	8,490	$	15,000	$	15,000
Investments in non-consolidated VIEs - Measure Alternative	$	5,077	$	5,077	$	5,077	$	5,077
Total non-consolidated VIEs	$	17,084	$	17,084	$	23,929	$	23,929

	Less Than Twelve Months						Twelve Months or More
	Number of Securities		Gross Unrealized Losses		Fair Value		Number of Securities		Gross Unrealized Losses		Fair Value
	(In thousands)
December 31, 2016
U.S. government and agency securities		35	$	448	$	24,649		2	$	1	$	200
States, municipalities and political subdivisions		265		4,869		220,034		2		3		1,497
Special revenue		161		571		56,996		2		6		974
Industrial and miscellaneous		189		631		44,712		11		129		1,828
Redeemable preferred stocks		19		143		2,425		1		6		212
Total fixed maturities		669		6,662		348,816		18		145		4,711
Nonredeemable preferred stocks		77		439		11,298		5		20		234
Equity securities		26		191		2,542		29		2,805		7,317
Total equity securities		103		630		13,840		34		2,825		7,551
Total Investments		772	$	7,292	$	362,656		52	$	2,970	$	12,262


September 30, 2022	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Invested Assets:	(in thousands)
Debt Securities Available-for-sale
U.S. government and agency securities	$	114,286	$	—	$	114,286	$	—
States, municipalities and political subdivisions		92,185		—		92,185		—
Special revenue		256,318		—		256,318		—
Industrial and miscellaneous		170,403		—		170,403		—
Total investments	$	633,192	$	—	$	633,192	$	—

September 30, 2017	Total		Level 1		Level 2		Level 3
	(In thousands)
Fixed maturities Investments:
U.S. government and agency securities	$	30,003	$	2,844	$	27,159	$	—
States, municipalities and political subdivisions		275,667		—		275,667		—
Special revenue		54,740		27,427		27,313		—
Industrial and miscellaneous		129,406		—		129,406		—
Redeemable preferred stocks		4,668		4,668		—		—
Total fixed maturities Investments	$	494,484	$	34,939	$	459,545	$	—
Nonredeemable preferred stocks		14,280		14,280		—		—
Equity securities		11,116		11,116		—		—
Total equity securities	$	25,396	$	25,396	$	—	$	—
Total Investments	$	519,880	$	60,335	$	459,545	$	—


	Goodwill
	(in thousands)
Balance as of December 31, 2021	$	91,959
Goodwill acquired	—
Impairment		(91,959	)
Balance as of September 30, 2022	$	—

September 30, 2017	Weighted -average Amortization (years)		Gross Carrying Amount		Accumulated Amortization			Intangible Assets, net
Amortizing intangible assets
Brand		15	$	1,210	$	(174	)	$	1,036
Agent relationships		12		4,800		(600	)		4,200
Renewal rights		15		16,600		(1,660	)		14,940
Customer relations		10		870		(188	)		682
Trade names		10		2,000		(300	)		1,700
Value of business acquired		1		7,600		(7,600	)		—
Non-compete		2.5		790		(556	)		234
Non-amortizing intangible assets
License acquired				175		—			175
Total intangible assets			$	34,045	$	(11,078	)	$	22,967


Year	Amount
2022 - remaining	$	1,588
2023	$	6,351
2024	$	6,351
2025	$	6,315
2026	$	6,114
Thereafter	$	23,129
Total	$	49,848

	September 30, 2017			December 31, 2016
Deferred tax assets:	(In thousands)
Unearned premiums	$	16,730		$	17,209
Tax-related discount on loss reserve		1,677			1,829
Unrealized loss		246			3,113
Stock-based compensation		2,363			1,604
Prepaid expenses		1,438			1,482
Convertible notes option liability		6,446			—
Other		304			312
Total deferred tax asset		29,204			25,549
Deferred tax liabilities:
Deferred acquisition costs		15,898			16,377
Convertible notes option discount		6,446			—
Property and equipment		355			355
Basis in purchased investments		1,600			1,697
Basis in purchased intangibles		9,066			9,791
Other		332			332
Total deferred tax liabilities		33,697			28,552
Less: valuation allowance		—			—
Net deferred tax liability	$	(4,493	)	$	(3,003	)

	2017						2016
	Number of Events		Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact		Number of Events		Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact
			(In thousands)						(In thousands)
Nine Months Ended September 30,
Current period catastrophe losses incurred
$10 million to $50 million ⁽²⁾		1	$	20,000		—		—	$	—		—
$1 million to $10 million ⁽³⁾		—		—		—		1		4,094		—
Total		1	$	20,000		—		1	$	4,094		—

	Principal		Unamortized Debt Issuance Costs
	(In thousands)
Senior Secured Notes, due December 15, 2023 (interest computed at 8.75% plus 3 month Libor average, at September 30, 2017)	$	79,500	$	5,985
Convertible Senior Notes, due August 1, 2037 (interest computed at 5.875% per annum, at September 30, 2017)	$	136,750	$	5,105

Assumptions	August 10, 2017			September 30, 2017
Dividend yield		2.13	%		1.82	%
Yield		10.2	%		8.5	%
Risk-free rate		2.55	%		2.63	%
Volatility		25.8	%		20.5	%
Remaining Term (years)	4.98			4.84
Stock price	$	11.26		$	13.21


Description	Derivative Liabilities
	(In thousands)
Fair value at issuance	$	16,838
Change due to issuances		—
Change in fair value		6,883
Fair value at September 30, 2017	$	23,721

	Three Months Ended September 30				Nine Months Ended September 30
	2017		2016		2017		2016
Interest Expense:	(In thousands)
Contractual interest	$	3,076	$	—	$	7,010	$	—
Non-cash expense⁽¹⁾		675		—		1,153		—
Total interest expense	$	3,751	$	—	$	8,163	$	—

	Stock Options			Weighted-Average Grant Date Fair Value
Balance at December 31, 2016		1,149,923		$	2.99
Granted		—
Expired		(243,000	)	$	2.70
Exercised		—
Balance at September 30, 2017		906,923		$	3.07
Vested and exercisable as of September 30, 2017		906,923		$	3.07

	Payments Due by Period
	Total		2017		2018-2019		2020-2021		After 2021
	(in thousands)
Senior secured notes ⁽¹⁾	$	79,500	$	—	$	1,987	$	7,465	$	70,048
Convertible senior notes⁽¹⁾		136,750		—		—		—		136,750
Interest on notes		148,502		2,024		15,816		15,549		115,113
Reinsurance⁽²⁾		200,645		—		200,645		—		—
Total Contractual Obligations	$	565,397	$	2,024	$	218,448	$	23,014	$	321,911

Hypothetical Change in Interest rates	Estimated Fair Value After Change		Change in Estimated Fair Value			Percentage Increase (Decrease) in Estimated Fair Value
300 basis point increase	$	436,574	$	(57,910	)		(12	)%
200 basis point increase	$	455,874	$	(38,610	)		(8	)%
100 basis point increase	$	475,178	$	(19,306	)		(4	)%
100 basis point decrease	$	513,763	$	19,279			4	%
200 basis point decrease	$	530,443	$	35,959			7	%
300 basis point decrease	$	536,843	$	42,359			9	%

Comparable Rating	Amortized Cost		% of Total Amortized Cost			Estimated Fair Value		% of total Estimated Fair Value
AAA	$	35,436		7	%	$	35,690		7	%
AA+	$	36,053		7	%	$	36,414		7	%
AA	$	48,256		10	%	$	48,613		10	%
AA-	$	69,568		14	%	$	69,878		14	%
A+	$	42,853		9	%	$	43,106		9	%
A	$	66,114		13	%	$	66,203		13	%
A-	$	148,161		30	%	$	147,508		30	%
BBB+	$	700		0	%	$	707		0	%
BBB	$	104		0	%	$	103		0	%
BBB-	$	706		0	%	$	720		0	%
BB	$	604		0	%	$	604		0	%
BB+	$	574		0	%	$	571		0	%
BB-	$	9,837		2	%	$	9,985		2	%
B+	$	4,892		1	%	$	4,989		1	%
B	$	27,409		6	%	$	27,867		6	%
NA and NR	$	1,526		0	%	$	1,526		0	%
Total	$	492,794		100	%	$	494,484		100	%

			% of Total
	Estimated Fair Value		Estimated Fair value
Stocks by sector:
Financial	$	2,106		8	%
Energy		10,957		43	%
Other		12,173		48	%
Subtotal	$	25,236		99	%
Mutual Funds and ETF by type:
Equity	$	160		1	%
Total	$	25,396		100	%

	Total Number of Shares Purchased		Average Price Paid Per Share⁽¹⁾		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
July 1, 2017 through July 31, 2017		—		—		—	$	35,831
August 1, 2017 through August 30, 2017		3,808,709	$	11.52		256,312	$	32,836
September 1, 2017 through September 30, 2017		847,536	$	11.77		847,536	$	22,836
Total		4,656,245				1,103,848