UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

Form 10-Q

 

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

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

For the quarterly period ended September 30, 20172022

OR

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

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

Commission File Number

001-36462

 

Heritage Insurance Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

45-5338504

(State of Incorporation)

 

(IRS Employer

Identification No.)

2600 McCormick Drive, Suite 3001401 N. Westshore Blvd

Clearwater, Florida 33759Tampa, FL33607

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

(727) (727) 362-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

HRTG

New York Stock Exchange

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

 

Large accelerated filer

Accelerated filer

Accelerated filerEmerging growth company

Non-accelerated filer

Smaller reporting company

 

Emerging growth company    

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

Indicate by check mark whether the Registrantregistrant 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, 20177, 2022 was 24,400,174.25,876,390.

 

 


HERITAGE INSURANCE HOLDINGS, INC.

Table of Contents

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

Item 1 Unaudited Financial Statements

 

 

Condensed Consolidated Balance Sheets: September 30, 20172022 (unaudited) and December 31, 20162021

 

2

Condensed Consolidated Statements of Income (Loss):Operations and Other Comprehensive Loss: Three and Nine months endedMonths Ended September 30, 20172022 and 20162021 (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 endedMonths Ended September 30, 20172022 and 2016 (unaudited)2021(unaudited)

 

54

Condensed Consolidated Statements of Cash Flows: Nine months endedMonths Ended September 30, 20172022 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 Disclosures5 Other Information

 

4543

Item 6 Exhibits

 

4544

Signatures

 

4746

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) or in documents incorporated by reference that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about 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:

our limited operating history;

the possibility that actual losses may exceed reserves;

the concentration of our business in Florida and Hawaii;

coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms;

our exposure to catastrophic weather events;

the fluctuation in our results of operations;

increased costs of reinsurance, non-availability of reinsurance, and non-collectability of reinsurance;

increased competition, competitive pressures, and market conditions;

our failure to accurately price the risks we underwrite;

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

the fluctuation in our results of operations;

increased costs of reinsurance, non-availability of reinsurance, non-collectability of reinsurance and our ability to obtain reinsurance on terms and at a cost acceptable to us;
increased competition, competitive pressures, and market conditions;
our failure to accurately assess and price the risks we underwrite;
continued and increase impact of abusive and unwarranted claims;
our failure to identify suitable business acquisitions, effectively manage our growth and integrate acquired companies;
our failure to execute our diversification strategy;
our reliance on independent agents to write insurance policies for us on a voluntary basis and our ability to attract and retain agents;
the failure of our claims department to effectively manage or remediate claims;

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

our inability to maintain our financial stability rating;
our ability to access sufficient liquidity or obtain additional financing to fund our operations and expand our business;
our inability to generate investment income;
effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions;
the failure of our risk mitigation strategies or loss limitation methods;


lack of effectiveness of exclusions and loss limitation methods in the insurance policies we assume or write;
the regulation of our insurance operations;
changes in regulations and our failure to executemeet increased regulatory requirements, including minimum capital and surplus requirements;
climate change, health crisis, severe weather conditions and other catastrophe events;
litigation or regulatory actions;
regulation limiting rate increases or that require us to participate in loss sharing or assessments;
the terms of our growth strategy,indebtedness and our inability to comply with the financial and other covenants of our debt facilities;
our ability to maintain effective internal controls over financial reporting;
certain characteristics of our common stock;
the continued and potentially prolonged impact of COVID-19 on the economy, demand for our products and our operations, including through acquisitions and expansion into geographic markets inmeasures taken by the governmental authorities to address COVID-19, which we do not currently operate;

may precipitate or exacerbate other risks and/or uncertainties;

disruptions to our independent distribution agency channel;

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

oura lack of significant redundancy in our operations;

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

and

our inability to generate investment income;

our inability to maintain our financial stability rating;

effectsthe impact of emerging claimmacroeconomic and coverage issues relating to legal, judicial, environmentalgeopolitical conditions, including the impact of supply chain constraints, inflationary pressures, labor availability and social conditions;

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

The failure to obtain stockholder approval relating to the issuance of common stock upon conversion of our convertible senior notes;conflict between Russia and

the items set forth 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.

Ukraine.

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

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements we make in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 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.

 


 

PART I – FINANCIALFINANCIAL INFORMATION

Item 1 – Financial Statements

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

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

 

 

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

 

 

See accompanying notes to unaudited condensed consolidated financial statements.


2


HERITAGE INSURANCE HOLDINGS, INC.

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

(Unaudited)

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

 

 

 

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

)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

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

 

(Benefit) provision for income taxes

 

 

(525

)

 

 

7,682

 

 

 

7,390

 

 

 

23,688

 

Net (loss) income

 

 

(8,696

)

 

 

10,930

 

 

 

3,929

 

 

 

36,720

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

Diluted

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,786,156

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

Diluted

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

(1)
Policy acquisition costs includes $11.7 million and $34.9 million of ceding commission income for the three and nine months ended September 30, 2022 and $12.0 million and $35.2 million for the three and nine months of September 30, 2021, respectively.
(2)
General and administration includes $3.8 million and $11.5 million of ceding commission income for the three and nine months ended September 30, 2022 and $4.0 million and $11.6 million for the three and nine months ended September 30, 2021, respectively.

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 


HERITAGE INSURANCE HOLDINGS, INC.

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

(Unaudited)

(Amounts in thousands)thousands, except share amounts)

 

 

 

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
(Deficit) Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive Loss

 

 

Total
Stockholders'
Equity

 

Balance at December 31, 2021

 

 

26,753,511

 

 

$

3

 

 

$

332,797

 

 

$

138,381

 

 

$

(123,557

)

 

$

(4,573

)

 

$

343,051

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,321

)

 

 

(24,321

)

Shares tendered for income taxes withholding

 

 

(9,849

)

 

 

 

 

 

(89

)

 

 

 

 

 

 

 

 

 

 

 

(89

)

Restricted stock vested

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued restricted stock

 

 

397,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

505

 

 

 

 

 

 

 

 

 

 

 

 

505

 

Stock buy-back

 

 

(721,118

)

 

 

 

 

 

 

 

 

 

 

 

(5,000

)

 

 

 

 

 

(5,000

)

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,621

)

 

 

 

 

 

 

 

 

(1,621

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(30,759

)

 

 

 

 

 

 

 

 

(30,759

)

Balance at March 31, 2022

 

 

26,444,720

 

 

$

3

 

 

$

333,213

 

 

$

106,001

 

 

$

(128,557

)

 

$

(28,894

)

 

$

281,766

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,300

)

 

 

(12,300

)

Adjustment to shares tendered for income taxes withholding

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

31

 

Issued restricted stock

 

 

99,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

503

 

 

 

 

 

 

 

 

 

 

 

 

503

 

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,588

)

 

 

 

 

 

 

 

 

(1,588

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(87,866

)

 

 

 

 

 

 

 

 

(87,866

)

Balance at June 30, 2022

 

 

26,544,096

 

 

$

3

 

 

$

333,747

 

 

$

16,547

 

 

$

(128,557

)

 

$

(41,194

)

 

$

180,546

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,379

)

 

 

(13,379

)

Adjustment to shares tendered for income taxes withholding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture on restricted stock

 

 

(12,422

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

499

 

 

 

 

 

 

 

 

 

 

 

 

499

 

Stock buy-back

 

 

(632,744

)

 

 

 

 

 

 

 

 

 

 

 

(1,729

)

 

 

 

 

 

(1,729

)

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(48,240

)

 

 

 

 

 

 

 

 

(48,240

)

Balance at September 30, 2022

 

 

25,898,930

 

 

$

3

 

 

$

334,246

 

 

$

(31,693

)

 

$

(130,286

)

 

$

(54,573

)

 

$

117,697

 

 

4


 

 

Common Shares

 

 

Par Value

 

 

Additional Paid-In Capital

 

 

Retained
Earnings

 

 

Treasury Shares

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Total
Stockholders'
Equity

 

Balance at December 31, 2020

 

 

27,748,606

 

 

$

3

 

 

$

331,867

 

 

$

219,782

 

 

$

(115,365

)

 

$

6,057

 

 

$

442,344

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,202

)

 

 

(8,202

)

Shares tendered for income taxes withholding

 

 

(12,500

)

 

 

 

 

 

(127

)

 

 

 

 

 

 

 

 

 

 

 

(127

)

Restricted stock vested

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued restricted stock

 

 

143,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

260

 

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,679

)

 

 

 

 

 

 

 

 

(1,679

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,148

)

 

 

 

 

 

 

 

 

(5,148

)

Balance at March 31, 2021

 

 

27,904,923

 

 

$

3

 

 

$

332,000

 

 

$

212,955

 

 

$

(115,365

)

 

$

(2,145

)

 

$

427,448

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,768

 

 

 

2,768

 

Restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

287

 

 

 

 

 

 

 

 

 

 

 

 

287

 

Issued restricted stock

 

 

42,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,680

)

 

 

 

 

 

 

 

 

(1,680

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,950

)

 

 

 

 

 

 

 

 

(3,950

)

Balance at June 30, 2021

 

 

27,946,941

 

 

$

3

 

 

$

332,287

 

 

$

207,325

 

 

$

(115,365

)

 

$

623

 

 

$

424,873

 

Net unrealized change in investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,028

)

 

 

(1,028

)

Shares tendered for income taxes withholding

 

 

(6,473

)

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Restricted stock vested

 

 

10,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation on restricted stock

 

 

 

 

 

 

 

 

320

 

 

 

 

 

 

 

 

 

 

 

 

320

 

Stock buy-back

 

 

(148,109

)

 

 

 

 

 

 

 

 

 

 

 

(1,005

)

 

 

 

 

 

(1,005

)

Cash dividends declared ($0.06 per common stock)

 

 

 

 

 

 

 

 

 

 

 

(1,680

)

 

 

 

 

 

 

 

 

(1,680

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(16,410

)

 

 

 

 

 

 

 

 

(16,410

)

Balance at September 30, 2021

 

 

27,802,626

 

 

$

3

 

 

$

332,562

 

 

$

189,235

 

 

$

(116,370

)

 

$

(405

)

 

$

405,025

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ EquityCash Flows

Nine Months ended September 30, 2017 and 2016(Unaudited)

(Unaudited)

(Amounts in thousands, except share amounts)thousands)

 

 

 

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

 

 

 

For the Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(166,864

)

 

$

(25,509

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Stock-based compensation

 

 

1,507

 

 

 

866

 

Bond amortization and accretion

 

 

2,561

 

 

 

3,018

 

Amortization of original issuance discount on debt

 

 

919

 

 

 

1,454

 

Goodwill impairment

 

 

91,959

 

 

 

 

Depreciation and amortization

 

 

6,233

 

 

 

6,345

 

Allowance for bad debt

 

 

10

 

 

 

106

 

Net realized investment losses (gains)

 

 

121

 

 

 

(96

)

Net change for unrealized losses in other investments

 

 

 

 

 

1,022

 

Deferred income taxes, net

 

 

(8,781

)

 

 

(2,862

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accrued investment income

 

 

(350

)

 

 

(305

)

Premiums receivable, net

 

 

(4,211

)

 

 

2,488

 

Prepaid reinsurance premiums

 

 

(115,495

)

 

 

(92,354

)

Reinsurance recoverable on paid and unpaid claims

 

 

(597,234

)

 

 

8,663

 

Income taxes receivable, net

 

 

(2,021

)

 

 

(3,266

)

Deferred policy acquisition costs, net

 

 

(6,768

)

 

 

(6,160

)

Right of use leased asset

 

 

2,535

 

 

 

(22,192

)

Other assets

 

 

1,139

 

 

 

(1,676

)

Lease incentives

 

 

1,622

 

 

 

2,622

 

Unpaid losses and loss adjustment expenses

 

 

619,186

 

 

 

(23,195

)

Unearned premiums

 

 

61,494

 

 

 

35,686

 

Reinsurance payable

 

 

86,570

 

 

 

162,812

 

Accrued interest

 

 

(160

)

 

 

(15

)

Accrued compensation

 

 

53

 

 

 

105

 

Advance premiums

 

 

13,351

 

 

 

15,073

 

Operating lease liabilities

 

 

(2,271

)

 

 

23,809

 

Other liabilities

 

 

(585

)

 

 

(13,667

)

Net cash (used in) provided by operating activities

 

 

(15,480

)

 

 

72,772

 

INVESTING ACTIVITIES

 

 

 

 

 

 

Fixed maturity securities sales, maturities and paydowns

 

 

56,334

 

 

 

147,406

 

Purchases in other investments

 

 

(7,500

)

 

 

 

Fixed maturity securities purchases

 

 

(88,137

)

 

 

(258,548

)

Return of capital in other investments

 

 

14,345

 

 

 

1,684

 

Equity securities reinvestments of dividends

 

 

(99

)

 

 

 

Leasehold improvements

 

 

(3,539

)

 

 

(2,622

)

Proceeds from sale of assets

 

 

 

 

 

45

 

Cost of property and equipment acquired

 

 

(4,911

)

 

 

(892

)

Net cash used in investing activities

 

 

(33,507

)

 

 

(112,927

)

FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of term note

 

 

(2,625

)

 

 

(3,750

)

Mortgage loan payments

 

 

(240

)

 

 

(228

)

Draw from credit facility

 

 

25,000

 

 

 

 

Proceeds from term loan facility

 

 

 

 

 

2,781

 

Repurchase of convertible notes

 

 

(22,529

)

 

 

 

Purchase of treasury stock

 

 

(6,729

)

 

 

(1,005

)

Tax withholdings on share-based compensation awards

 

 

(58

)

 

 

(171

)

Dividends paid

 

 

(4,771

)

 

 

(5,029

)

Net cash used in financing activities

 

 

(11,952

)

 

 

(7,402

)

Decrease in cash, cash equivalents, and restricted cash

 

 

(60,939

)

 

 

(47,557

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

364,752

 

 

 

446,383

 

Cash, cash equivalents and restricted cash, end of period

 

$

303,813

 

 

$

398,826

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Income taxes paid

 

$

6,222

 

 

$

489

 

Interest paid

 

$

4,245

 

 

$

4,214

 

 

 

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, 2015

 

 

30,441,410

 

 

$

3

 

 

$

202,628

 

 

$

155,955

 

 

$

 

 

$

(2,033

)

 

$

356,553

 

Stock buy-back

 

 

(1,424,666

)

 

 

 

 

 

 

 

 

 

 

 

(20,562

)

 

 

 

 

 

(20,562

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,612

 

 

 

 

 

 

 

 

 

 

 

 

3,612

 

Dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(5,228

)

 

 

 

 

 

 

 

 

(5,228

)

Net unrealized change in investments,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,149

 

 

 

6,149

 

Net income

 

 

 

 

 

 

 

 

 

 

 

36,720

 

 

 

 

 

 

 

 

 

36,720

 

Balance at September 30, 2016

 

 

29,016,744

 

 

$

3

 

 

$

206,240

 

 

$

187,447

 

 

$

(20,562

)

 

$

4,116

 

 

$

377,244

 

 

6


 

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

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

297,548

 

 

$

359,337

 

Restricted cash

 

 

6,265

 

 

 

5,415

 

Total

 

$

303,813

 

 

$

364,752

 

 

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

See accompanying notes to unaudited condensed consolidated financial statements.

7


 


HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

3,929

 

 

$

36,720

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,611

 

 

 

3,612

 

Amortization of bond discount

 

 

6,810

 

 

 

5,924

 

Depreciation and amortization

 

 

5,904

 

 

 

6,075

 

Change in fair value of long-term debt conversion feature

 

 

6,883

 

 

 

 

Net realized investment gains

 

 

(1,011

)

 

 

(1,762

)

Deferred income taxes, net of acquired

 

 

(1,376

)

 

 

11,069

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accrued investment income

 

 

129

 

 

 

(1,215

)

Premiums receivable, net

 

 

7,394

 

 

 

(3,194

)

Restricted cash

 

 

1,057

 

 

 

(6,176

)

Prepaid reinsurance premiums

 

 

(47,346

)

 

 

(85,341

)

Reinsurance recoverable

 

 

(370,751

)

 

 

 

Income taxes receivable

 

 

9,064

 

 

 

(5,280

)

Deferred policy acquisition costs, net

 

 

891

 

 

 

(7,329

)

Other assets

 

 

(7,332

)

 

 

225

 

Unpaid losses and loss adjustment expenses

 

 

349,443

 

 

 

41,973

 

Unearned premiums

 

 

(4,180

)

 

 

(8,483

)

Reinsurance payable

 

 

61,455

 

 

 

117,657

 

Funds held by company under reinsurance treaties

 

 

61,732

 

 

 

 

Accrued interest

 

 

(1,363

)

 

 

 

Income taxes payable

 

 

 

 

 

(2,092

)

Accrued compensation

 

 

2,652

 

 

 

1,977

 

Advance premiums

 

 

1,832

 

 

 

6,153

 

Other liabilities

 

 

9,276

 

 

 

(10,918

)

Net cash provided by operating activities

 

 

98,703

 

 

 

99,595

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of investments available for sale

 

 

96,467

 

 

 

135,802

 

Purchases of investments available for sale

 

 

(11,702

)

 

 

(203,091

)

Acquisition of a business, net of cash acquired

 

 

 

 

 

(110,319

)

Cost of property and equipment acquired

 

 

(195

)

 

 

(1,639

)

Net cash provided by (used in) investing activities

 

 

84,570

 

 

 

(179,247

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from issuance of secured convertible debt

 

 

136,750

 

 

 

 

Debt acquisition costs

 

 

(5,105

)

 

 

 

Dividends

 

 

(6,790

)

 

 

(5,228

)

Purchase of treasury stock

 

 

(61,624

)

 

 

(20,562

)

Net cash provided by (used in) financing activities

 

 

63,231

 

 

 

(25,790

)

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

246,504

 

 

 

(105,442

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

105,817

 

 

 

236,277

 

Cash, cash equivalents and restricted cash at end of period

 

$

352,321

 

 

$

130,835

 

Supplemental Cash Flows Disclosures:

 

 

 

 

 

 

 

 

Income taxes paid, net

 

$

 

 

$

27,912

 

Interest paid

 

$

5,969

 

 

$

 

See accompanying notes to unaudited condensed consolidated financial statements.


HERITAGE INSURANCE HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements asinclude the accounts of and for the three and nine months ended September 30, 2017 and 2016 include Heritage Insurance Holdings, Inc. (“Parent Company”) and(together with its wholly-owned subsidiaries: Heritage Property & Casualty Insurance Company (“Heritage P&C”), which provides personal and commercial residential insurance; Heritage MGA, LLC,subsidiaries, the managing general agent that manages substantially all aspects of our Florida insurance subsidiary’s business; Contractors’ Alliance Network, LLC (“CAN”“Company”), our vendor network manager for Florida claims which includes BRC Restoration Specialists, Inc. (“BRC”), our provider of restoration, emergency and recovery services; Zephyr Acquisition Company (“ZAC”) and its wholly-owned subsidiary, Zephyr Insurance Company, Inc. (“Zephyr”), our provider for writing insurance policies for residential wind insurance within the State of Hawaii; Skye Lane Properties, LLC, our property management subsidiary; First Access Insurance Group, LLC, our retail agency; Osprey Re Ltd. (“Osprey”), our reinsurance subsidiary that may provide a portion of the reinsurance protection purchased by our insurance subsidiaries; and Heritage Insurance Claims, LLC, an inactive subsidiary reserved for future development. The assets of BRC, a building restoration company, were acquired and merged into CAN in 2015. The assets of SVM Restoration Services Inc. (“SVM”), a water mitigation company, were acquired and merged into CAN in 2014. In September 2017, in connection with the pending acquisition of Narragansett Bay Insurance, Inc. (“NBIC”) a wholly-owned subsidiary of NBIC Holdings, Inc., the Company formed Gator Acquisition Merger Sub, Inc., a wholly-owned subsidiary of the Parent Company.

Through our insurance subsidiaries, Heritage P&C and Zephyr, we write personal residential insurance for single-family homeowners and condominium owners, and rental property insurance in the states of Florida, Hawaii, North Carolina, South Carolina, Alabama and Georgia. We also provide commercial residential insurance for Florida properties and are also licensed in the state of Mississippi. We are vertically integrated and control or manage substantially all aspects of insurance underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. We conduct our operations under a single reporting segment.

The condensed consolidated financial information included herein as of and for the three and nine months ended September 30, 2017 and 2016 does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. However, such information reflects all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for a fair statement of the financial condition and results of operations for the interim periods. The results for the three and nine months ended September 30, 2017 and 2016 are not indicative of annual results. The accompanying unaudited condensed consolidated financial. These statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual consolidated financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. In the opinion of the Company’s management, all material intercompany transactions and balances have been eliminated and all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial condition and results of operations for the interim periods have been reflected. The December 31, 2016accompanying interim condensed consolidated balance sheet was derived fromfinancial statements and related footnotes should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016.

For further information, refer to the consolidated financial statements andrelated footnotes thereto included in Heritage Insurance Holdings, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. References to “we,” “us,” “our,” or the “Company” refer to Heritage Insurance Holdings, Inc. and its consolidated subsidiaries.

The Company qualifies as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, the Company is eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. The Company intends to continue to take advantage of some, but not all, of the exemptions available to emerging growth companies until such time that it is no longer an emerging growth company. The Company has, however, irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Changes to significant accounting policies

We have added one new policy to our significant accounting policies as reported in ourCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.

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


Significant accounting policies

a)
Income Taxes

New Accounting Policy

Long-term debt instrument with embedded features suchDuring a third quarter assessment of the Company's deferred tax position, a valuation allowance of $10.7 million was recorded against the Company's deferred tax asset as conversion and redemption options is evaluated to determine whether bifurcation and derivative accounting is applicable. If such instrument is not subject to derivative accounting, it is further evaluated to determine ifof September 30, 2022. Based on the Internal Revenue Code (“IRC”) Section 953(d) election made for Osprey Re, the Company's captive reinsurer domiciled in Bermuda, the Company is requiredconcluded a valuation allowance for its net deferred tax assets was necessary because those net deferred tax assets can only be applied to separately account foroffset future taxable income of Osprey Re. Based on current available evidence, management does not believe there will be sufficient future Osprey Re taxable income over the liability and equity components.

To determinenext year in order to realize those net deferred tax assets. In the carrying valuesevent Osprey Re recognizes future taxable income, the proportionate amount of the debtnet operating loss carryforward will be used and derivative components at issuance,an equivalent amount of the valuation allowance will reverse.

b)
Changes to Significant Accounting Policies

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

Reclassification

Certain prior year amounts reported on the condensed consolidated statements of a similar liability, including any embedded features other than the conversion option, and assigns such valuecashflows have been reclassified to conform to the liability or equity component. The liability component’s fair value is then subtracted from the initial proceeds to determine the carrying value of the debt instrument’s derivative component. The conversion option liability is revalued each quarter. Any gain or loss is recorded as a non-operating expense on the Condensed Consolidated Statements of Income (Loss) and Other Comprehensive Income (Loss).current year presentation.

Recently Adopted Accounting Pronouncements adopted

In March 2016,August 2020, the FASB issued ASU 2020-06, "Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09")for Convertible Instruments and Contracts in an Entity's Own Equity". The amendments in ASU 2016-09 intend to improvei)simplifies the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,convertible debt and classification on the statement of cash flows. ASU 2016-09 requires that companies elect to account for forfeitures based on an estimate ofconvertible preferred stock by reducing the number of awardsaccounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for whichcontracts in an entity's own equity, including share-based compensation, and iii) amends the requisite service perioddiluted earnings per share calculations for convertible instruments and contracts in an entity's own equity. The if-converted method will not be rendered or to accountthe only permissible method for forfeitures as they occur. An entity may elect to applycomputing the amendments related todilutive effect of the presentationconvertible debt instruments. Interest expense no longer includes amortization of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.debt discount. The Company adopted the new guidance in ASU 2016-09 in the quarter ended June 30, 2017. At the time of adoption, the Company did not have any excess tax benefits recorded on the consolidated balance sheets, statement of operations or statement of cash flows for the periods ended September 30, 2017 or 2016. The adoption of ASU 2016-092020-06 on ourJanuary 1, 2022, reporting no material impact to the Company's consolidated financial statements had no impact.

Accounting Pronouncements

The Company describes below recent pronouncements that may have a significant effect on itscondensed financial statements or on its disclosures upon future adoption. The Company doesdisclosures.

Accounting Pronouncements not discuss recent pronouncements that are not anticipated to have an impact on, or are unrelated to, its financial condition, results of operations, or related disclosures.yet adopted

In May 2017,March 2022, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation2022-02, “2022-02 Financial Instruments-Credit Losses (Topic 718)326): ScopeTroubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of Modification Accounting, clarifying when a change to the terms or conditions of a share-based payment award must be accountedorigination for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately beforefinancing receivables and after a change to the terms and conditions of the award. The new guidancenet investments in leases. ASU 2022-02 is effective for theannual periods beginning after December 15, 2022, including interim periods within those periods. Early adoption is permitted. The Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

In March 2017, the FASB issuedwill adopt ASU No 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, this update shortens the amortization period of certain purchased callable debt securities to the earliest call date. The new guidance is effective for the Company beginning with2022-02 during the first quarter of 2019. Early adoption is permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 intend to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard is effective for the Company in the first quarter of 2020 on a prospective basis with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides additional guidance on evaluating whether transactions should be accounted for as acquisitions of assets or


businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the new guidance would define this as an asset acquisition; otherwise, the entity then evaluates whether the asset meets the requirement that a business include, at a minimum, an input and substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. This new guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is a new accounting standard that will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This updated guidance is effective on January 1, 2018,2023 and will require adoption on a retrospective basis with early adoption permitted. provide the required disclosures, if determined to be material.

The Company has not experienced any transactions that are withindocumented the scopesummary of this guidance and accordingly will evaluate the effect of this guidance further if and when any such transactions occur.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Measurement of Credit Losses on Financial Instruments.  The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assetits significant accounting policies in order to present the net carrying value at the amount expected to be collected on the financial asset on the consolidated balance sheet. The guidance also amends the current accounting for other-than-temporary impairment model by requiring an estimate of the expected credit loss only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer impact the determination of whether a potential credit loss exists. The available-for-sale debt security model will also require the use of a valuation allowance as comparedits Notes to the current practice of writing down the asset. The standard is effective for the Company in the first quarter of 2020 with early adoption permitted in the first quarter of 2019. The Company is in the early stages of evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU 2016-01, which will significantly change the income statement impact of equity investments held by an entity, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. The guidance requires equity investments to be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) and an assessment of a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The standard is effective for the Company in the first quarter of 2018. The Company is in the early stages of evaluating the effect that the updated standard will have on the Company’sAudited Consolidated Financial Statements and related disclosures. The effect of adopting this guidance will be principally affected by the level of unrealized gains or losses associated with equity investments with readily determinable market values. Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment with future unrealized gains or losses reflected in the statement of income and comprehensive income. Refer to Note 3 for the current status of such unrealized gains and losses levels that are currently recognized as other comprehensive income.

In May 2014, the FASB issued ASU Topic 2014-09, Revenue from Contracts with Customers. This guidance is not applicable to insurance contracts. The ASU 2014-09 creates a new topic, Topic 606, to provide guidanceannual report on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The standard is effective for the Company in the first quarter of 2018 with early adoption permitted. The Company has determined that this pronouncement is not applicable to its insurance contracts and will not beForm 10-K. There have been no material changes to the Company’s Consolidated Financial Statements.accounting policies since the filing of that report.

There are no8


No other recentlynew accounting pronouncements issued accounting standards that apply to the Companybut not yet effective have had, or that are expected to have, a material impact on the Company’s results of operations or financial condition, or cash flows.position.

NOTE 2. ACQUISITIONINVESTMENTS

Pending AcquisitionsSecurities Available-for-Sale

On August 8, 2017, the Company entered into an AgreementThe amortized cost, gross unrealized gains and Plan of Merger (the “Merger Agreement”) bylosses, 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 millionfair 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 providingfollows for the registered resaleperiods 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 accordanceadvance agreement entered into with the Merger Agreement, a certainfinancial institution in 2018. The Company is permitted to withdraw or exchange any portion of the Stock Consideration will be placedpledged 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 closing2018. The Company is permitted to securewithdraw 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 millionportion of the Stock Consideration (depending onpledged 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 areminimum 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 lossnet 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 categorydebt securities available-for-sale for the three and nine months ended September 30, 20172022 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.

9


 

 

 

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 maturitiesdebt securities at September 30, 20172022 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

%

Net Investment Income

The following table summarizes the Company’s net investment income by major investment category for the three and nine months ended September 30, 20172022 and 2016,2021, respectively:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

 

(In thousands)

 

Debt securities

 

$

2,992

 

 

$

1,986

 

 

$

7,695

 

 

$

5,164

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

273

 

 

 

17

 

 

 

433

 

 

 

72

 

Other investments

 

 

135

 

 

 

514

 

 

 

447

 

 

 

1,101

 

Net investment income

 

 

3,400

 

 

 

2,517

 

 

 

8,575

 

 

 

6,337

 

Less: Investment expenses

 

 

513

 

 

 

969

 

 

 

1,525

 

 

 

2,540

 

Net investment income, less investment expenses

 

$

2,887

 

 

$

1,548

 

 

$

7,050

 

 

$

3,797

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

 

(In thousands)

 

Fixed maturities

 

$

2,479

 

 

$

2,338

 

 

$

7,640

 

 

$

6,368

 

Equity securities

 

 

479

 

 

 

495

 

 

 

1,458

 

 

 

1,465

 

Cash, cash equivalents and short-term Investments

 

 

441

 

 

 

79

 

 

 

544

 

 

 

215

 

Other investments

 

 

(24

)

 

 

14

 

 

 

(24

)

 

 

(96

)

Net investment income

 

 

3,375

 

 

 

2,926

 

 

 

9,618

 

 

 

7,952

 

Investment expenses

 

 

640

 

 

 

600

 

 

 

1,408

 

 

 

1,366

 

Net investment income, less investment expenses

 

$

2,735

 

 

$

2,326

 

 

$

8,210

 

 

$

6,586

 


The following tables present, for all debt securities available-for-sale in an agingunrealized 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 ourtime the security has continuously been in an unrealized loss position at September 30, 2022 and December 31, 2021, respectively:

 

 

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

 

 

 

Less Than Twelve Months

 

 

Twelve Months or More

 

December 31, 2021

 

Number of
Securities

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

Number of
Securities

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

Debt Securities Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

43

 

 

$

282

 

 

$

57,420

 

 

 

 

 

$

 

 

$

 

States, municipalities and political
   subdivisions

 

 

98

 

 

 

1,270

 

 

 

80,972

 

 

 

 

 

 

 

 

 

 

Special revenue

 

 

253

 

 

 

3,485

 

 

 

195,450

 

 

 

14

 

 

 

35

 

 

 

1,214

 

Industrial and miscellaneous

 

 

191

 

 

 

2,387

 

 

 

146,746

 

 

 

18

 

 

 

578

 

 

 

11,598

 

Total fixed maturity securities

 

 

585

 

 

$

7,424

 

 

$

480,588

 

 

 

32

 

 

$

613

 

 

$

12,812

 

The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is the result of a credit loss. All available-for-sale securities with unrealized losses by investment classare reviewed. The Company considers

10


many factors in completing its quarterly review of securities with unrealized losses for credit-related impairment to determine whether a credit loss exists, including the extent to which fair value is below cost, the implied yield to maturity, rating downgrades of the security and whether or not the issuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of the issuer and industry factors that could negatively impact the capital markets.

If the decline in fair value of an available-for-sale security below its amortized cost is considered to be the result of a credit loss, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. For the three and nine months ending September 30, 2022, management concluded that the decline in the fair value was not a result of credit losses but rather as a direct result from the increase in the market interest rates. Therefore, the Company did not have an allowance for credit losses as of September 30, 20172022 or December 31, 2021.

Quarterly, the Company considers whether it intends to sell an available-for-sale security or if it is more likely than not that it will be required to sell the security before recovery of its amortized costs. In these instances, a decline in fair value is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.

Other Investments

Non-Consolidating Variable Interest Entities (“VIEs”)

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

The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at September 30, 2022 and December 31, 2016:2021:

 

 

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)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

68

 

 

$

353

 

 

$

27,694

 

 

 

6

 

 

$

28

 

 

$

874

  

States, municipalities and political

   subdivisions

 

 

104

 

 

 

902

 

 

 

98,619

 

 

 

18

 

 

 

174

 

 

 

16,142

 

Special revenue

 

 

155

 

 

 

162

 

 

 

38,331

 

 

 

14

 

 

 

65

 

 

 

2,244

 

Industrial and miscellaneous

 

 

200

 

 

 

339

 

 

 

40,090

 

 

 

51

 

 

 

78

 

 

 

4,841

 

Redeemable preferred stocks

 

 

20

 

 

 

21

 

 

 

2,416

 

 

 

5

 

 

 

4

 

 

 

61

 

Total fixed maturities

 

 

547

 

 

 

1,777

 

 

 

207,150

 

 

 

94

 

 

 

349

 

 

 

24,162

 

Nonredeemable preferred stocks

 

 

123

 

 

 

78

 

 

 

7,847

 

 

 

17

 

 

 

8

 

 

 

208

 

Equity securities

 

 

32

 

 

 

296

 

 

 

1,913

 

 

 

74

 

 

 

2,452

 

 

 

5,564

 

Total equity securities

 

 

155

 

 

 

374

 

 

 

9,760

 

 

 

91

 

 

 

2,460

 

 

 

5,772

 

Total Investments

 

 

702

 

 

$

2,151

 

 

$

216,910

 

 

 

185

 

 

$

2,809

 

 

$

29,934

 

 

 

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

 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 4.3. FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS

ForFair value is determined based on the Company’s investmentsexchange price that would be received to sell an asset or paid to transfer a liability in U.S government securities that dothe 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 haveobservable in the market. The three levels in the hierarchy are as follows:

Level 1 – Unadjusted quoted prices are available in active markets agency securities, state and municipal governments, and corporate bonds,for identical assets/liabilities as of the Company obtains the fair value from its third-party valuation service and we evaluate the relevantreporting date.
Level 2 – Valuations based on observable inputs, assumptions, methodologies and conclusions associated with such valuations. The valuation service calculatesas quoted prices for similar assets or liabilities at the Company’s investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve as of quarter end. The inputs the valuation service uses in its calculations are notmeasurement date; quoted prices in activethe markets butthat are not active; or other inputs that are observable, either directly or indirectly.
Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

The highest priority is assigned to Level 1 inputs and therefore representthe 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 following tables presenttable presents information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the

11


event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the


recognitions of transfers between levels of the fair value hierarchy.

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

September 30, 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

 

 

$

 

December 31, 2021

 

Total

 

 

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

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Invested Assets:

 

(in thousands)

 

Debt Securities Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

73,825

 

 

$

364

 

 

$

73,461

 

 

$

 

States, municipalities and political subdivisions

 

 

105,699

 

 

 

 

 

 

105,699

 

 

 

 

Special revenue

 

 

288,569

 

 

 

 

 

 

288,569

 

 

 

 

Hybrid securities

 

 

99

 

 

 

 

 

 

99

 

 

 

 

Industrial and miscellaneous

 

 

201,162

 

 

 

 

 

 

201,162

 

 

 

 

Total investments

 

$

669,354

 

 

$

364

 

 

$

668,990

 

 

$

 

Financial Instruments excluded from the fair value hierarchy

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

Non-recurring fair value measurements

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.

12


NOTE 4. OTHER COMPREHENSIVE LOSS

The following table is a summary of other comprehensive loss and discloses the tax impact of each component of other comprehensive loss for the three and nine months ended September 30, 20172022 and 2021, respectively:

 

 

For the Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

 

(in thousands)

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized losses on investments, net

 

$

(17,471

)

 

$

4,090

 

 

$

(13,381

)

 

$

(1,344

)

 

$

311

 

 

$

(1,033

)

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

 

 

3

 

 

 

(1

)

 

 

2

 

 

 

6

 

 

 

(1

)

 

 

5

 

Effect on other comprehensive loss

 

$

(17,468

)

 

$

4,089

 

 

$

(13,379

)

 

$

(1,338

)

 

$

310

 

 

$

(1,028

)

 

 

For the Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

 

(in thousands)

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized losses on investments, net

 

$

(65,403

)

 

$

15,310

 

 

$

(50,093

)

 

$

(8,316

)

 

$

1,928

 

 

$

(6,388

)

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

 

 

121

 

 

 

(28

)

 

 

93

 

 

 

(96

)

 

 

22

 

 

 

(74

)

Effect on other comprehensive loss

 

$

(65,282

)

 

$

15,282

 

 

$

(50,000

)

 

$

(8,412

)

 

$

1,950

 

 

$

(6,462

)

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

 

13


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

 

 

At September 30, 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, therefor 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, 20172022 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

 

14


 

Depreciation and amortization expense for property and equipment was $394 thousandapproximately $544,900 and $797 thousand$736,000 for the three months ended September 30, 20172022 and 2016,2021, respectively and $1.5 million and $1.6 million for the nine months ended $ 1.2 millionSeptember 30, 2022 and $1.2 million,2021, respectively. The Company’s real estate consists of 1415 acres of land, and fourtwo buildings with a gross area of 191 thousand88,378 square feet.feet and a parking garage.

NOTE 6.7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Intangible Assets

As ofAt September 30, 2017,2022 and December 31, 20162021, goodwill was $46.5$0 and $92.0 million and intangible assets were $23.0$51.2 million and $26.5$55.9 million, respectively. The Company has determined the useful life of the value of the business acquired (see Note 2) to be one


year. The Company has determined the useful life of the other intangible assets to range between 2.5-15 years. The Company has recorded $175 thousand2.5-15 years. Intangible assets include $1.3 million relating to an insurance license andlicenses which is classified as an indefinite lived intangible whichand is subject to annual impairment testing.testing concurrent with goodwill.

 

 

 

Goodwill

 

 

 

(in thousands)

 

Balance as of December 31, 2021

 

$

91,959

 

Goodwill acquired

 

 

Impairment

 

 

(91,959

)

Balance as of September 30, 2022

 

$

 

Management tests goodwill and other intangible assets for impairment annually during the fourth quarter, or more frequently should events or changes in circumstances indicate that goodwill or the Company’s other intangible assets might be impaired. During the second quarter of 2022, management determined a triggering event occurred for which it deemed an interim evaluation of goodwill was appropriate and concluded the remaining balance of its goodwill was fully impaired. The carrying value of $92.0 million was written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in the Company’s markets; and (iii) the Company’s market cap was below book value. These factors reduced the Company’s previously modeled fair value of the Company and resulted in a $92.0 million goodwill impairment charge, as of the second quarter of 2022, most of which was not tax deductible.

Other Intangible Assets

OurThe Company’s intangible assets resulted primarily from the acquisition of Zephyr and consistsconsist of brand, agent relationships, renewal rights, customer relations, trade names, non-competenon-competes and insurance licenses. Finite-lived intangible assets are amortized over their useful lives from one to fifteen years.

Amortization expense of ourthe Company’s intangible assets for three months ended September 30, 2022 and 2021 was $55 thousand$1.6 million and $3.6 million for the three and nine months ended September 30, 2017, respectively. Amortization expense of our intangible assets2022 and 2021 was $2.1 million and $4.9 million for the three and nine months ended September 30, 2016, respectively.  $4.8 million. No impairment in the value of amortizing or non-amortizing intangiblesintangible assets was recognized during the three and nine months ended September 30, 2017.

The tables below detail the finite-lived intangibles assets, net as of September 30, 2017 and December 31, 2016, respectively (in thousands).

2022 or 2021.

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

 

December 31, 2016

Weighted -average Amortization (years)

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Intangible Assets, net

 

Amortizing intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brand

 

15

 

 

$

1,210

 

 

$

(114

)

 

$

1,096

 

Agent relationships

 

12

 

 

 

4,800

 

 

 

(300

)

 

 

4,500

 

Renewal rights

 

15

 

 

 

16,600

 

 

 

(830

)

 

 

15,770

 

Customer relations

 

10

 

 

 

870

 

 

 

(123

)

 

 

747

 

Trade names

 

10

 

 

 

2,000

 

 

 

(150

)

 

 

1,850

 

Value of business acquired

 

1

 

 

 

7,600

 

 

 

(5,700

)

 

 

1,900

 

Non-compete

 

2.5

 

 

 

790

 

 

 

(286

)

 

 

504

 

Non-amortizing intangible assets (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License acquired

 

 

 

 

 

175

 

 

 

 

 

 

175

 

Total intangible assets

 

 

 

 

$

34,045

 

 

$

(7,503

)

 

$

26,542

 


Estimated annual pretax amortization of intangible assets for remainder of 2017 and each of the next five years and thereafter is as follows (in thousands):

 

Year

 

Amount

 

2017

 

$

558

 

2018

 

$

1,982

 

2019

 

$

1,898

 

2020

 

$

1,888

 

2021

 

$

1,875

 

2022

 

$

1,875

 

Thereafter

 

$

12,716

 

 

 

$

22,792

 

Year

 

Amount

 

2022 - remaining

 

$

1,588

 

2023

 

$

6,351

 

2024

 

$

6,351

 

2025

 

$

6,315

 

2026

 

$

6,114

 

Thereafter

 

$

23,129

 

Total

 

$

49,848

 

 

NOTE 7. (LOSS) EARNINGS8. LOSS PER SHARE

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

15


 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders (000's)

 

$

(48,240

)

 

$

(16,410

)

 

$

(166,864

)

 

$

(25,509

)

Weighted average shares outstanding

 

 

26,369,265

 

 

 

27,938,028

 

 

 

26,536,700

 

 

 

27,902,814

 

Basic loss per share:

 

$

(1.83

)

 

$

(0.59

)

 

$

(6.29

)

 

$

(0.91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders (000's)

 

$

(48,240

)

 

$

(16,410

)

 

$

(166,864

)

 

$

(25,509

)

Weighted average shares outstanding

 

 

26,369,265

 

 

 

27,938,028

 

 

 

26,536,700

 

 

 

27,902,814

 

Total weighted average dilutive shares

 

 

26,369,265

 

 

 

27,938,028

 

 

 

26,536,700

 

 

 

27,902,814

 

Diluted loss per share:

 

$

(1.83

)

 

$

(0.59

)

 

$

(6.29

)

 

$

(0.91

)

The Company had 196,914 and 2,677,355 antidilutive shares as of September 30, 2022 and 2021, respectively. The convertible notes were excluded from the computations because the conversion price on these notes was greater than the average market price of our common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the "if converted" method under the guidance of ASU 2020-06, adopted by the Company on January 1, 2022.

NOTE 9. DEFERRED REINSURANCE CEDING COMMISSION

The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the three months ended September 30, 2022 and 2021, the Company allocated ceding commission income of $11.7 million and $12.0 million to policy acquisition costs and $3.8 million and $4.0 million to general and administrative expense, respectively. For the nine months ended September 30, 2022 and 2021, the Company allocated ceding commission income of $34.9 million and $35.2 million to policy acquisition costs and $11.5 million and $11.6 million to general and administrative expense, respectively.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(8,696

)

 

$

10,930

 

 

$

3,929

 

 

$

36,720

 

Weighted average shares outstanding

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

Basic (loss) earnings per share:

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(8,696

)

 

$

10,930

 

 

$

3,929

 

 

$

36,720

 

Weighted average shares outstanding

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,742,984

 

Weighted average dilutive shares

 

 

 

 

 

 

 

 

 

 

 

43,172

 

Total weighted average dilutive shares

 

 

25,883,267

 

 

 

29,213,222

 

 

 

27,647,146

 

 

 

29,786,156

 

Diluted (loss) earnings per share:

 

$

(0.34

)

 

$

0.37

 

 

$

0.14

 

 

$

1.23

 

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Beginning balance of deferred reinsurance ceding commission income

 

$

38,529

 

 

$

39,940

 

 

$

40,405

 

 

$

39,995

 

Ceding commission deferred

 

 

17,046

 

 

 

17,659

 

 

 

46,110

 

 

 

48,447

 

Less: ceding commission earned

 

 

(15,486

)

 

 

(15,978

)

 

 

(46,426

)

 

 

(46,821

)

Ending balance of deferred reinsurance ceding commission income

 

$

40,089

 

 

$

41,621

 

 

$

40,089

 

 

$

41,621

 

NOTE 8.10. DEFERRED POLICY ACQUISITION COSTS

The Company defers certain costs in connection with written policies, called deferred policy acquisition Costscosts (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called deferred reinsurance ceding commissions (“DRCC”). Net DPAC iswhich are amortized over the effective period of the related insurance policies.

The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard toregarding DPAC duringfor the three and nine month periods ended September 30, 2017 and 2016:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Beginning Balance

 

$

41,792

 

 

$

42,568

 

 

$

42,779

 

 

$

34,800

 

Policy acquisition costs deferred

 

 

21,002

 

 

 

22,158

 

 

 

65,195

 

 

 

68,807

 

Amortization

 

 

(20,906

)

 

 

(22,597

)

 

 

(66,086

)

 

 

(61,478

)

Ending Balance

 

$

41,888

 

 

$

42,129

 

 

$

41,888

 

 

$

42,129

 

NOTE 9. INCOME TAXES

During the nine months ended September 30, 20172022 and 2016,2021.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Beginning Balance

 

$

99,468

 

 

$

95,967

 

 

$

93,881

 

 

$

89,265

 

Policy acquisition costs deferred

 

 

39,194

 

 

 

47,976

 

 

 

139,028

 

 

 

144,380

 

Amortization

 

 

(38,013

)

 

 

(48,518

)

 

 

(132,260

)

 

 

(138,220

)

Ending Balance

 

$

100,649

 

 

$

95,425

 

 

$

100,649

 

 

$

95,425

 

NOTE 11. INCOME TAXES

The Company files a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred taxes for temporary differences between the financial statement and tax return basis of assets and liabilities.

16


Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which the Company has already recorded $7.4 million and $23.7 million, respectively, ofthe tax benefit in its income statement. Deferred tax liabilities generally represent tax expense which corresponds to an estimated annual effective tax rate of 65.2% and 39.2%, respectively. The increaserecognized in the effectiveCompany's financial statements for which payment has been deferred or expenditures for which the Company has already taken a deduction in its tax ratereturn but have not yet been recognized in 2017 primarily relatesits financial statements. Under GAAP the Company is required to certain non-deductible financial charges related toevaluate the issuancerecoverability of convertible notes during the current quarter coupled with the write off of the deferred tax asset related to non-qualified stock options upon the expiration of the Company’s stock options occurring in the current quarter.


The table below summarizes the significant components of our netits deferred tax assets (liabilities):

 

 

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

)

In assessing the net realizable value ofand establish a valuation allowance if necessary to reduce its deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances.

The Company considered whetherestablishes or adjusts valuation allowances for deferred tax assets when it estimates that it is more likely than not that itfuture taxable income will notbe insufficient to realize some portion or allthe value of the deferred tax assets. The Company evaluates all significant available positive and negative evidence as part of its analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions its uses in forecasting future taxable income require significant judgment and take into account the Company's recent performance. The ultimate realization of deferred tax assets depends uponon the generation of future taxable income during the periods in which those temporary differences become deductible.are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in its results of operations.

As of September 30, 2022. the Company recognized a valuation allowance of $10.7 million against the net deferred tax assets generated at its foreign domiciled captive reinsurer, Osprey Re. The Company considers the scheduled reversal ofcan only realize those net deferred tax liabilities, projectedassets to the extent Osprey Re contributes future taxable income to the consolidated group. Management believes there is not sufficient evidence at the current time to realize the Osprey Re net deferred tax assets within the next calendar year. The valuation allowance is accounted for as an increase to income tax expense for the quarter. Osprey Re’s future taxable income can be used to apply against its net deferred tax assets to reduce taxable income and the valuation allowance will decrease proportionately resulting in a reduction of income tax planning strategiesexpense. Changes in making this assessment.tax laws and rates may affect recorded deferred tax assets and liabilities and its effective tax rate in the future.

For the three months ended September 30, 2022 and 2021, the Company recorded a tax benefit of $1.1 million and $1.1 million, respectively, which corresponds to effective tax rates of 2.2% and 6.4%, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded an income tax benefit of $11.2 million and $5.6 million, respectively, which corresponds to effective tax rates of 6.3% and 18.1%, respectively. The effective tax rates for the three and nine months ended September 30, 2022 were impacted by the mostly non-deductible goodwill impairment charge taken in the second quarter of 2022 described in Note 7. Goodwill and Other Intangible Assets as well as the valuation allowance described above. Effective tax rates are dependent upon components of pre-tax earnings and the related tax effects. The effective tax rate for each period was also affected by various permanent tax differences, including disallowed executive compensation deductions which was further limited in 2018 and future years upon the enactment of H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Additionally, the state effective income tax rate can also fluctuate as a result of changes in the geographic dispersion of the Company’s business. Finally, the effective tax rate can fluctuate throughout the year as estimates used in the tax provision for each quarter are updated as more information becomes available throughout the year.

17


The table below summarizes the significant components of the Company’s net deferred asset (liability):

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Deferred tax assets:

 

(In thousands)

 

Unearned premiums

 

$

13,454

 

 

$

15,805

 

Unearned commission

 

 

9,384

 

 

 

9,459

 

State net operating loss

 

 

1,490

 

 

 

1,222

 

Tax-related discount on loss reserve

 

 

4,799

 

 

 

3,872

 

Stock-based compensation

 

 

455

 

 

 

84

 

Accrued expenses

 

 

1,481

 

 

 

1,182

 

Leases

 

 

841

 

 

 

792

 

Unrealized losses

 

 

17,195

 

 

 

1,913

 

Federal net operating loss carryforward

 

 

15,752

 

 

 

 

Other

 

 

416

 

 

 

472

 

Valuation allowance

 

 

(10,650

)

 

 

 

Total deferred tax asset

 

 

54,617

 

 

 

34,801

 

Deferred tax liabilities:

 

 

 

 

 

 

Deferred acquisition costs

 

 

23,561

 

 

 

21,977

 

Prepaid expenses

 

 

118

 

 

 

177

 

Property and equipment

 

 

1,221

 

 

 

1,504

 

Note discount

 

 

225

 

 

 

187

 

Basis in purchased investments

 

 

666

 

 

 

34

 

Basis in purchased intangibles

 

 

 

 

 

14,550

 

Internal revenue code 481(a)-Accounting method change

 

 

1,104

 

 

 

4,416

 

Amortization of goodwill

 

 

11,459

 

 

 

 

Other

 

 

1,626

 

 

 

1,382

 

Total deferred tax liabilities

 

 

39,980

 

 

 

44,227

 

Net deferred tax asset (liability)

 

$

14,637

 

 

$

(9,426

)

As of September 30, 2022, the Company has a gross operating loss carryforward for federal and state income tax purposes of $20.7 million and $45.8 million, respectively, which will expire after 2042. The statute of limitations related to ourthe Company’s federal and state income tax returns remains open from our firstthe Company’s filings for 20132018 through 2016. For the 2014 tax year, the federal2021.

Osprey Re, our reinsurance affiliate, based in Bermuda, made an irrevocable election under IRC Section 953(d) to be treated as a domestic insurance company for U.S. Federal income tax return was examined bypurposes. As a result of this election, the tax authority resulting in no material adjustment.  Currently, no taxing authorities are examining any of our federal or stateCompany's reinsurance subsidiary is subject to United States income tax returns.as if it were a U.S. corporation. Furthermore, limitations may be imposed on the ability to utilize Osprey Re’s deferred tax assets to the extent it has not contributed income to the consolidated group during its inclusion in the consolidated group.

NOTE 12. REINSURANCE

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 placedhas 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

18


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

The Company’s reinsurance agreements are prospective contracts. The Company 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 byOsprey Re Ltd (“Osprey”), the Company’s rating agency, Demotech, Inc., thecaptive 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 2017-20182022-2023 reinsurance program incorporatesprovides 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:

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 1st 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. 1st 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.

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 coveragemaximum retention up to a 1 in 100-year event for Hawaiieach insurance company subsidiary is a counterpart to the multi-state catastrophe bond layers and FHCF layer. There is a total of $254as 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, muchOsprey; NBIC – $30.0 million of the reinsurance is structuredwhich $30.0 million would be ceded to Osprey in a way to provide aggregate coverage. $984shared 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 structuredOsprey in a way to provide aggregate coverage. An aggregate of $700 million of limitshared 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, ourthe 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 20172022 includes a reinstatement allthrough the purchase of which is prepaid or free. In total, we have purchased $2.6 billionreinstatement 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 futureThe 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 termslimit 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 programan 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 propertycovers 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.

19


Net Quota Share Reinsurance

The Company’s 2016-2017Net Quota Share coverage is proportional reinsurance, program incorporates the mandatory coverage requiredwhich 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, 2017other reinsurance program.

The Company’s Retention. If a first catastrophic event struck Florida,(property catastrophe excess of loss and the Company had a primary retentionsecond layer of the first $40general 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 retention5% of the first $30 million ofprior 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.


Shared Layers above retention and below FHCF. Immediately above the retention, the Company purchased $374 million of reinsurancearising 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 whichwhere 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 showingarising 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 thatcontract period of July 1, 2021 through June 30, 2022, the Company’s assumption transactions have on these componentscoverage 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 statementsstatement 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:

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Unpaid losses and loss adjustment expenses:

 

 

 

 

 

 

 

 

Direct

 

$

460,616

 

 

$

119,339

 

Assumed

 

 

28,964

 

 

 

20,798

 

Gross unpaid losses and LAE

 

 

489,580

 

 

 

140,137

 

Ceded

 

 

(368,310

)

 

 

 

Net unpaid losses and LAE

 

$

121,270

 

 

$

140,137

 

Unearned premiums:

 

 

 

 

 

 

 

 

Direct

 

$

313,843

 

 

$

317,579

 

Assumed

 

 

 

 

 

445

 

Gross unearned premiums

 

 

313,843

 

 

 

318,024

 

Ceded

 

 

(153,955

)

 

 

(106,609

)

Net unearned premiums

 

$

159,888

 

 

$

211,415

 

NOTE 11.13. RESERVE FOR UNPAID LOSSES

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

20


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

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

(In thousands)

 

 

(In thousands)

 

 

(In thousands)

 

Balance, beginning of period

 

$

122,785

 

 

$

117,485

 

 

$

140,137

 

 

$

83,722

 

 

$

553,909

 

 

$

625,979

 

 

$

590,166

 

 

$

659,341

 

Less: reinsurance recoverable on paid losses

 

 

2,499

 

 

 

 

 

 

589

 

 

 

 

Less: reinsurance recoverable on unpaid losses

 

 

235,239

 

 

 

366,879

 

 

 

301,757

 

 

 

397,688

 

Net balance, beginning of period

 

 

120,286

 

 

 

117,485

 

 

 

139,548

 

 

 

83,722

 

 

 

318,670

 

 

 

259,100

 

 

 

288,409

 

 

 

261,653

 

Incurred related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

60,436

 

 

 

50,746

 

 

 

155,255

 

 

 

152,372

 

 

 

156,855

 

 

 

130,425

 

 

 

395,921

 

 

 

331,374

 

Prior years

 

 

3,599

 

 

 

3,160

 

 

 

1,473

 

 

 

17,291

 

 

 

(1,006

)

 

 

(793

)

 

 

1,489

 

 

 

(2,998

)

Total incurred

 

 

64,035

 

 

 

53,906

 

 

 

156,728

 

 

 

169,663

 

 

 

155,849

 

 

 

129,632

 

 

 

397,410

 

 

 

328,376

 

Paid related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

62,842

 

 

 

33,330

 

 

 

102,079

 

 

 

71,383

 

 

 

70,914

 

 

 

75,508

 

 

 

170,255

 

 

 

171,128

 

Prior years

 

 

16,198

 

 

 

12,366

 

 

 

88,917

 

 

 

56,307

 

 

 

24,088

 

 

 

27,273

 

 

 

136,047

 

 

 

132,950

 

Total paid

 

 

79,040

 

 

 

45,696

 

 

 

190,996

 

 

 

127,690

 

 

 

95,002

 

 

 

102,781

 

 

 

306,302

 

 

 

304,078

 

Unpaid claim liabilities from Sawgrass

 

 

15,991

 

 

 

 

 

 

 

15,991

 

 

 

 

 

Net balance, end of period

 

 

121,270

 

 

 

125,695

 

 

 

121,270

 

 

 

125,695

 

 

 

379,517

 

 

 

285,951

 

 

 

379,517

 

 

 

285,951

 

Plus: reinsurance recoverable on unpaid losses

 

 

368,310

 

 

 

 

 

 

368,310

 

 

 

 

 

 

829,835

 

 

 

350,195

 

 

 

829,835

 

 

 

350,195

 

Balance, end of period

 

$

489,580

 

 

$

125,695

 

 

$

489,580

 

 

$

125,695

 

 

$

1,209,352

 

 

$

636,146

 

 

$

1,209,352

 

 

$

636,146

 

 

As of September 30, 2017, we2022, the Company reported $121.3$379.5 million in unpaid losses and loss adjustment expenses, net of reinsurance. We reportedreinsurance which included $266.8 million attributable to IBNR net of $173.4 millionreinsurance 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.

Catastrophe Management

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 $125.0in 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 beis 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 obligationsyear.

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 effectoutstanding, 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 price5.875% 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 bynotice with respect to the then-current conversion rate; (3) ifoptional put right of the Notes, and the Company calls any or alldirected 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 anythe time priorof 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 closeCredit 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

21


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, 2022potential future increases to the close of business onrevolving 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.

UnlessThe 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 excessunused 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 respectlesser 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 cashthe 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 eachpositive 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 ofand 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 principalnet 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 NotesRevolving 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 accruedan applicable margin and unpaida credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin.

The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to but excluding,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 fundamental change repurchase date.

Exceptsecond 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 priorand 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 fornet cash on a redemption dateproceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to occur onperform 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 andobserve 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 respectCredit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a

22


change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.

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

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

Mortgage Loan

In October 2017, the Company 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 accrued2021, the Company made principal and unpaid interest if any,payments of approximately $670,000 on the Convertible Notes will automatically become immediately duemortgage 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 Notedebt and credit facilities as of September 30, 2017 was approximately 1.07 of par value. Debt issuance costs are capitalized2022 and presentedDecember 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 securityfinancing 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 derivativespart, on its balance sheet at fair valueability 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 valuesrespect to its long-term debt.

The schedule of these derivatives reflected in the consolidated statementprincipal 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

 

23


 

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

 


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.

 

 

 

 

 

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

 

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

 

 

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

 

 

$

 

(1)

Represents amortization of debt issuance costs and debt discount.

NOTE 13. DERIVATIVE LIABILTY,15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

OtherAccounts payable and other liabilities consist of the following as of September 30, 20172022 and December 31, 2016:2021:

 

Description

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(In thousands)

 

Deferred reinsurance ceding commission

 

$

40,089

 

 

$

40,406

 

Accounts payable and other payables

 

 

11,057

 

 

 

10,086

 

Accrued interest and issuance costs

 

 

575

 

 

 

735

 

Accrued dividends

 

 

72

 

 

 

1,634

 

Premium tax

 

 

1,523

 

 

 

871

 

Other liabilities

 

 

30

 

 

 

195

 

Commission payables

 

 

15,871

 

 

 

17,598

 

Total other liabilities

 

$

69,217

 

 

$

71,525

 

Description

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Accounts payable and other payables

 

$

20,982

 

 

$

6,804

 

Accrued interest and issuance costs

 

 

1,363

 

 

 

5,704

 

Accrued dividends

 

 

1,784

 

 

 

1,784

 

Escrow

 

 

1,210

 

 

 

1,210

 

Conversion option liability

 

 

23,721

 

 

 

 

Commission payables

 

 

4,487

 

 

 

6,179

 

Total other liabilities

 

$

53,547

 

 

$

21,681

 

NOTE 14.16. STATUTORY ACCOUNTING AND REGULATIONS

State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as ourthe 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 incomeHeritage 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 itstheir 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, 20172022 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, our2022, the Company’s insurance subsidiaries met the financial and regulatory requirements of each of the states in which they doconduct business.


NOTE 15.17. COMMITMENTS AND CONTINGENCIES

The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. 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 16.18. RELATED PARTY TRANSACTIONS

TheFrom time to time the Company has been party to various related party transactions involving certain of its officers, directors and significant stockholders, including as set forth below. The Company has entered into each of these arrangements without obligation to continue its effect in the future and the associated expense was immaterial to its results of operations or financial position as of September 30, 20172022 and 2016.2021.

In July 2019, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for Company. The Company has entered into an agreementpays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a real estate management company controlled by onedirector. For the three months ended September 30, 2022 and 2021, the Company paid agency commission to Comegys of its directors to manage its Clearwater office space. Management services are provided at a fixed fee, plus ordinaryapproximately $53,735 and necessary out of pocket expenses. Fees for additional services, such as the oversight of construction activity, are provided for on an as-needed basis.$53,900, respectively. For the nine month periodsmonths ended September 30, 20172022 and 2016,2021, the Company paid the management service company approximately $75 thousand and $86 thousand, respectively.

In January 2017, the Company entered into a consulting agreement with Mrs. Shannon Lucas, the wife of the Chairman and CEO, in which she agreedagency commission to provide consulting services related to the Company’s catastrophe reinsurance and risk management program at a rate of $400 per hour. The consulting agreement has no specific term and either party may terminate the agreement upon providing written notice. Additionally, she serves as a director of Heritage P&C with an annual compensation of $150 thousand. For the nine-month period ended September 30, 2017, the Company paid consulting fees to Ms. LucasComegys of approximately $371 thousand.

$549,988 and $595,700, respectively.

NOTE 17.19. EMPLOYEE BENEFIT PLANPLANS

The Company provides a 401(k) plan for substantially all of its employees. The Company contributesprovides a matching contribution of 100% on the first 3% of employees’ salary, up tocontribution and 50% on the maximum allowable contribution, regardlessnext 2% of the employees’ level of participation incontribution to the plan. The maximum match

24


is 4%. For the nine-month periodsthree and nine months ended September 30, 2017 and 2016,2022, the Company’s contributions made to the plan on behalf of the participating employees were $478 thousandapproximately $276,090 and $408 thousand,$1.0 million, respectively. For the three and nine months ended September 30, 2021, the contributions made to the plan on behalf of the participating employees were approximately $293,000 and $985,000, respectively.

TheEffective September 1, 2021, the Company provides forterminated its employees a partially self-insured healthcare plan and benefits.enrolled in a flex healthcare plan which allows employees the choice of three medical plans with a range of coverage levels and costs. For the nine months ended September 30, 20172022 and 2016,2021, the Company incurred medical premium costs inincluding the aggregatenew 2021-2022 healthcare premiums, of $2.2$3.4 million and $1.4$2.6 million, respectively. The Company also recorded approximately $298 thousand as unpaid claims asAs of September 30, 2017. A stop loss reinsurance policy caps the maximum loss that could be incurred by2022 and December 31, 2021, the Company under the self-insured plan. The Company’s stop loss coverage per employee is $60 thousand, for which any excess cost would be covered by the reinsurer subject to an aggregate limit for losses in excess of $1.5had $0 million which would provide up to $1.0and $1.4 million of coverage. Any excess of the $1.5 million retentionunapplied insurance premiums and the $1 million of aggregate coverage would be borne by the Company. The aggregate stop loss commences once our expenses exceed 125% of the annual aggregate expected claims.additional liability recorded for unpaid claims, respectively.

NOTE 20. EQUITY

NOTE 18. EQUITY

The total amount of authorized capital stock consists of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of September 30, 2017,2022, the Company had 23,500,17425,898,930 shares of common stock outstanding, 7,099,59711,890,599 treasury shares of common stock and 900,000715,454 unvested shares of restricted common stock issued,with accrued dividends reflecting total paid-in capital of $209.3$334.2 million as of such date.

As more fully disclosed in ourthe Company’s audited consolidated financial statements for the year ended December 31, 2016,2021, there were, 28,840,44326,753,511 shares of common stock outstanding, 1,149,92310,536,737 treasury shares of common stock options outstanding, and 900,000283,092 unvested shares of restricted common stock, grants, representing $205.7$332.8 million of additional paid-in capital at December 31, 2016.capital.


Common Stock

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

Stock Repurchase Program

On May 4, 2016,December 19, 2021, the Company announced that the Company’s Board of Directors authorizedestablished a stocknew share repurchase program authorizingplan to commence upon December 31, 2021, for the Company to repurchasepurpose or repurchasing up to $70an aggregate of $25.0 million of Common Stock, through the Company’s common stock. The stock repurchase program expiresopen market or in such other manner as will comply with the terms of applicable federal and state securities laws and regulations, including without limitation, Rule 10b-18 under the Securities Act at any time or from time to time on or prior to December 31, 2017.  

During2022 (the "New Share Repurchase Plan"). For the quarternine months ended March 31, 2017,September 30, 2022, the Company repurchased anin aggregate of 361,211 shares at a cost of $4.5 million through open market or private transactions. During the quarter ended June 30, 2017, the Company repurchased an aggregate of 322,811 shares of the Company’s stock in open market transactions for $4.1 million. During the quarter ended September 30, 2017, the Company repurchased an aggregate of 1,103,848 shares of the Company’s common stock in open market transactions for $13.0 million. As of September 30, 2017, the Company had $22.8 million remaining to purchase shares under its authorized $70 million shares repurchase plan. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report for additional information.

In connection with the issuance of the Convertible Notes as described in Note 12Long-Term Debt, the Board authorized the repurchase of up to $40.0 million of the Company’s common stock with the net proceeds of the Convertible Notes. During the quarter ended September 30, 2017, the Company repurchased 3,552,3971,353,862 shares of its common stock at a priceunder its repurchase programs for $6.7 million.

At September 30, 2022, the Company has the capacity under the New Share Repurchase Plan to repurchase $18.3 million of $11.26 per share from institutional investors. This $40 million repurchase of the Company’sits common stock was approved by the Board of Directors and is in addition to the Company’s existing $70 million repurchase program, which expires inshares until December 2017.31, 2022.

Dividends

On November 8, 2016,March 4, 2022, the Company announced that its Board of Directors declared a $0.06$0.06 per share quarterly dividend payable on January 4, 2017April 6, 2022 to stockholders of record as of December 15, 2016. March 17, 2022.

On March 2, 2017, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on April 4, 2017, to stockholders of record March 15, 2017. On May 2, 2017, the Company’s Board of Directors declared a $0.06 per share quarterly dividend payable on July 5, 2017, to stockholders of record June 15, 2017. On August 3, 2017,2022, the Company announced that its Board of Directors declared a third quarter$0.06 per share quarterly dividend of $0.06 per common share. The dividend is payable on October 2, 2017July 5, 2022 to stockholders of record as of June 14, 2022.

On August 3, 2022, the Board of Directors elected to allocate the $0.06 per share typically used to pay a quarterly dividend to shareholders to repurchase common stock totaling $1.7 million. The Board of Directors re-evaluates dividend distribution on September 15, 2017. a quarterly basis and will make a determination, in part, based on the current stock trading price as compared to book value.

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

25


NOTE 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 170,814386,603 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 grantsawarded 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 employeesemployee’s vest in equal installments generally over a five-yeartwo to five year period from the grant date subject to the recipient’s continued employment. The fair valuesvalue of restricted stock awards areis 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. Nodividends; dividends accrue but are not paid until vesting for recipients of restricted stock wasawards granted as of September 30, 2017. 2021 and thereafter.

Restricted stock activity duringfor the nine months ended September 30, 20172022 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

 

26


 

Awards are being amortized to expense over the five yeartwo 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, 20172022 and 2016,2021, respectively. ThereFor 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 toexpense.

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 thatto pay dividends to its Boardshareholders or to repurchase its securities, (B) provides for a dividend of Directors declared aup to $2.0 million in the fourth quarter dividend of $0.06 per common share. The dividend is payable2024 under certain conditions and (C) restricts future dividends based on December 15, 2017maintenance of certain financial ratios, including Consolidated Tangible

27


Net Worth. As a result, going forward, dividends and stock repurchases may be limited or restricted entirely and the Company’s ability to 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, 20162021 (“20162021 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 HighlightsOverview

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 Endedquarter ended September 30, 20172022 as compared to the prior year quarter. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

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

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

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

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

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

29


 

 

At September 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

% Change

 

Policies in force:

 

 

 

 

 

 

 

 

 

Florida

 

 

188,383

 

 

 

228,572

 

 

 

-17.6

%

Other States

 

 

352,989

 

 

 

352,714

 

 

 

0.1

%

Total

 

 

541,372

 

 

 

581,286

 

 

 

-6.9

%

 

 

 

 

 

 

 

 

 

 

Premiums in force:

 

 

 

 

 

 

 

 

 

Florida

$

 

569,589,537

 

$

 

584,994,491

 

 

 

-2.6

%

Other States

 

 

672,812,875

 

 

 

589,527,230

 

 

 

14.1

%

Total

$

 

1,242,402,412

 

$

 

1,174,521,721

 

 

 

5.8

%

 

 

 

 

 

 

 

 

 

 

Total Insured Value:

 

 

 

 

 

 

 

 

 

Florida

$

 

102,784,056,201

 

$

 

114,537,338,974

 

 

 

-10.3

%

Other States

 

 

304,657,398,158

 

 

 

284,498,624,168

 

 

 

7.1

%

Total

$

 

407,441,454,359

 

$

 

399,035,963,142

 

 

 

2.1

%

Strategic Profitability Initiatives

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

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

o
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.
o
Average premium per policy throughout the book increased 13.6% over the prior year quarter.
o
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.
o
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.
o
Continued offering of Florida commercial lines product with 18.2% growth in annual premium while value TIV increased only 4.2%.
Improve portfolio diversity.
o
Diversification efforts led to a premium in-force at September growth of 14.1% in other States other than Florida.
o
Overall premium-in-force increase of 5.8%, despite an 8.5% reduction in Florida admitted personal lines business.
o
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 assumedis 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 salesyear to year, including certain key performance indicators such as net combined ratio, net expense ratio and 5.3% were acquirednet 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 connectionconjunction with our consolidated financial statements and the Zephyr acquisitionrelated 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 revenue15.4% 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.

NetGross 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 months
driven by higher average premium per policy.

Net incomeearned 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.

CombinedNet 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% on48.1%, up 3.3 points from 44.8% in the prior year quarter driven by a gross basis and 105.5% on a net basis, inclusivehigher cost of the effects2022-2023 catastrophe excess of Hurricane Irma

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

Cash, cash equivalentsNet loss ratio of 97.6%, 17.8 points higher than the prior year quarter of 79.8%, driven by higher losses incurred and investmentsslightly lower net earned premium than the prior year quarter.

Net expense ratio of $872.2 million with total assets35.7%, 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 Officereduction of Insurance Regulation. Pursuantnet 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 haspre-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.

31


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 $147.22022 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 20172022, 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 managemeaningfully 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 sharethe third quarter of attritional losses and geographic risks for which2022, 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 totalprior year quarter. The increase reflects higher gross premiums written forover the threelast twelve months, ended September 30, 2017. There was nowhich is primarily related to higher rates on a smaller book of business assumed from Citizens for either period.based on policy count.


GrossCeded premiums earned

GrossCeded premiums earned decreased to $153.1were $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 amountthird quarter of catastrophe reinsurance purchased2022, up 12.4% from approximately $3.1 billion$132.0 million in the 2016 seasonprior year quarter. The growth results primarily from higher reinsurance costs due to approximately $2.6 billionmarket conditions and higher TIV, as well as higher ceded premium for the 2017 season. As describedour 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 $95.2were $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 $3.1gains and unrealized gains on equity securities, was $2.9 million forin the three months ended September 30, 2017 asthird 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 forin the three months ended September 30, 2016. The decrease resultedprior year quarter, driven primarily by a decline in policy fee income associated with the reduction of policies in force.

32


 

 

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 decreasethe increase in realized gains of approximately $.8 million, partially offset bylosses 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 $64.0were $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, resulting2022, up from $129.6 million in interest expensethe 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 $3.1net 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 issuanceother 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 $0.72022, up 8.9% from $36.0 million forin the prior year quarter. The interest expense includes approximately $0.3increase 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 statementthird 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 todriven primarily from the increase in our stock pricenet losses and is presentedloss 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 asthird 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 lossreduction in debt discount associated with the changerepurchase 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.

ProvisionBenefit for income taxes

The provision (benefit)Benefit for income taxes was $(525) thousand and $7.7$1.1 million forin 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 forare 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 throughoutwell 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

33


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

Ratios

 

 

For the Three Months Ended September 30,

 

(Unaudited)

 

2022

 

 

2021

 

 Ceded premium ratio

 

 

48.1

%

 

 

44.8

%

 

 

 

 

 

 

 

Net loss and LAE ratio

 

 

97.6

%

 

 

79.8

%

Net expense ratio

 

 

35.7

%

 

 

32.7

%

Net combined ratio

 

 

133.3

%

 

 

112.5

%

Net (loss) incomecombined 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 $8.797.6% 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, 20172022 and 20162021

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 $455.8Total revenue was $487.9 million for the nine months ended September 30, 20172022, 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 $471.8described below.

Gross premiums written

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

34


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

Gross premiums earned

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

Ceded premiums earned

Ceded premiums earned were $420.6 million for the nine months ended September 30, 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 relatedis attributable to the addition of Sawgrass business and an increase in


Zephyr premium written due to the timinghigher cost of the Zephyr acquisition in late March 2016. Gross premium written for the nine months ended September 30, 2017 includes nine monthscurrent 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. Thereimpact was no business assumed from Citizens during 2017 compared to approximately $8partly offset by a $18 million of business assumed from Citizens duringceded 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 ofsevere convective storm contract included in the total grossprior year amount.

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

Gross premiums earned

GrossNet premiums earned decreased to $460.0were $470.9 million for the nine months ended September 30, 2017 as compared2022, 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 $480.3the 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 premiums2022, 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 forincrease 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 premiumsOther revenue

Ceded premiums increased to $182.2Other revenue was $10.0 million for the nine months ended September 30, 2017 as compared to $163.52022, 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 each2022, 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 comparedperiod, 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 amountsecond quarter of catastrophe reinsurance purchased from approximately $3.1 billion2022, 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 $277.8Losses and LAE were $397.4 million for the nine months ended September 30, 2017 as compared to $316.82022, 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 earnedincrease is primarily attributable to the decreasegrowth 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 cededgross premiums earned.written.

Net investment income35


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

General and administrative expenses were $54.7 million for the nine months ended September 30, 2017 as2022, 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 $8.3a 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 over2022, 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 investmentyear 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 millionBenefit for both periods.

Total revenue

Total revenue decreased to $298.0income taxes was $11.2 million for the nine months ended September 30, 2017 as2022 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 as2022 compared to the same period in18.1% 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 20162022 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 amortizationimpact of the conversion option discount and valuation changepermanent 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 oncalendar 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 morewith 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

%

36


Net incomecombined ratio

Our resultsThe net combined ratio was 120.7% for the nine monthsnine-month period ended September 30, 2017 reflect2022, 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 millionloss 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 monthsnine-month period ended September 30, 2016. Operating related items discussed above caused $22.7 million2022, 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 valuationcurrent year catastrophe excess of loss contract was higher than the convertible option feature caused $10.2 million of the variance.


Ratios

Due toprior 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 onwas 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 monthsnine-month period ended September 30, 20172022, 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 monthsnine-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 increase2022, 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 fromprior 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 lossPAC 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 consistedand $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 typicallygenerally hold substantial cash balances to meet seasonal liquidity needs which includesincluding 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 purchasebelieve 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 byNet cash used in operating activities increased to $98.7was $15.5 million for the nine months ended September 30, 20172022 compared to $99.6 million for the nine months ended September 30, 2016. The increase innet cash provided by operating activities wasof $72.8 million for the comparable period in 2021. The decrease in cash from operating activities

37


relates primarily due to lowertiming 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, madeas well as reinsurance reimbursements during the first nine months ended September 30, 2017of 2022 compared to the same periodfirst nine months of 2016.2021.

Investing Activities

Net cash provided byused in investing activities for the nine months ended September 30, 20172022 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 paidallocations 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 preparationused for our upcoming acquisition of NBIC in 2017.investing activities for that period.

Financing Activities

Net cash provided byused in financing activities for the nine months ended September 30, 20172022 was $63.2$12.0 million, as compared to net cash usingused in financing activities of $25.8$7.4 million for the comparable period in 2016.2021. The increase in cash provided byused for financing activities relateswas 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.

38


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.

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.

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

39


liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis.

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

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

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

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

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

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

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

In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes. As of September 30, 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 stockCompany had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase program.


Senior Securedthe aggregate principal amount of Convertible Notes andthat 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 paymentConvertible 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 inCompany has requested that the cost of our reinsurance, whether due to changes to reinsurance rates or changes intrustee 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 determinedoutstanding 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.

40

 

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. RepresentsIn 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 paymentcollateral 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 endedIn September 2022, we assessed our deferred tax position and recorded a $10.7 million valuation against our net deferred tax asset at September 30, 2017, we reassessed2022. We intend to continue maintaining the valuation allowance on our critical accounting policies and estimates as disclosed within our 2016 Form 10-K; wenet 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 suchthose policies and estimates.estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

JOBS ActSeasonality of our Business

We qualify as an “emerging growth company” underOur insurance business is seasonal; hurricanes typically occur during the JOBS Act. Section 107 ofperiod 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 periodfirst and as a result, we will adopt new or revised accounting standardsfourth 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 areJune 1 each year, any variation in the processcost of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subjectour reinsurance, whether due to certain conditions set forthchanges 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 marketinsured value of our common stock thatpolicy 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 heldincorporated herein by non-affiliates exceeds $700.0 million as of the last business day ofreference. 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 aboutAbout Market Risk.

Our investment portfolios at September 30, 2017 included fixed maturity and equity securities,The duration of the purposes of whichfinancial 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 riskwas 3.358 years and equity price risk. We classify our fixed maturity3.891 years at September 30, 2022 and equity securities as available-for-sale2021, 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 ratescontinue 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 changesThe Federal Reserve has tightened monetary policy, including multiple interest rate increases in the financial conditionfirst half of 2022; however, the issueroutlook 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 grade2022 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 didhave not have anyexperienced a material exposureimpact 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.

41


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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


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

42


 

PART II. OTHER INFORMATION

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 ReportItem 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 relating14, 2022. There have been no material changes to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Thosethe Company’s risk factors continue to be relevant to an understandingsince 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 purchasesThe Company's Board of equity securitiesDirectors 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, we2022, the Company purchased 1,103,848632,744 shares of common stock forin aggregate of $1.7 million with an aggregate purchase of $13.0 million under ouraverage 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 program2022, 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 Disclosures5. Other Information

NoneItem 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.

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

The Seventh Amendment also modifies certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future. Specifically, starting in the first quarter of 2023, the Seventh Amendment amends certain financial covenants as follows: (1) require additional leverage ratios under the Consolidated Leverage Ratio covenant (as defined in the Credit Agreement) after the initial step down to 2.50x in the second quarter of 2023 not to exceed 2.25x as of the second quarter of 2024 and 2.00x as of the second quarter of 2025, (2) apply all (A)

43


Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement (“Non-credit Parties”) that exceed $38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20x . The Seventh Amendment also (A) eliminates the current $10 million basket available to the Company to pay dividends to its shareholders or to repurchase its securities, (B) provides for a dividend of up to $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.

Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement. In order to avoid a covenant violation, the parties agreed to the terms of the Seventh Amendment as described above.

Certain Relationships

The lenders under the 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

Number3.1

DescriptionCertificate 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 4.21.1 to our Form 8-K filed on August 16, 20172017)

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 ourthe 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 andNovember 7, 2022, among Heritage Insurance Holdings, Inc., Gator Acquisition Merger Sub, Inc. and NBICcertain 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 capacityRegions Bank, as Stockholder Representative, incorporated by reference to Exhibit 2.1 to our Form 8-K filed on August 8, 2017Administrative 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

44


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. CALInline XBRL Taxonomy Extension Calculation Linkbase.Linkbase Document

101.DEF*

 

101.DEF

101. DEFInline XBRL Taxonomy Extension Definition Linkbase.Linkbase Document

101.LAB*

 

101.LAB

101. LABInline XBRL Taxonomy Extension Label Linkbase.Linkbase Data Document

101.PRE*

 

101.PRE

101. PREInline 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

45



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, 20179, 2022

By:

 

/s/ BRUCE LUCASERNESTO GARATEIX

 

 

 

Bruce LucasErnesto Garateix

 

 

 

Chairman and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

 

 

 

 

Date: November 2, 20179, 2022

By:

 

/s/ STEVEN MARTINDALEKIRK LUSK

 

 

 

Steven MartindaleKirk Lusk

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

46

47