Heritage Insurance Holdings, Inc. 10-K

Item 5. Market For Registrant’s Common Equity, Related Stoc kholder Matters and Issuer Purchases of Equity Securities Common Stock Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HRTG”. As of March 1, 2022, we had 26,815,430 shares of common stock outstanding, including 279,860 shares of restricted stock for which restrictions have not lapsed. Holders of Record As of March 1, 2022, there were 47 holders of record of our common stock. Dividends In March 2022, our board of directors declared a cash dividend of $0.06 per share. While we have historically declared dividends, the declaration and payment of dividends will be at the discretion of our board of directors and will depend on our profits, financial requirements and other factors, such as restrictions under our credit facilities and other legal and regulatory restrictions on the payment of dividends, our overall business condition and other elements our board of directors considers relevant. Refer to Note 22 “ Equity” to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Stock Repurchase Program During the three months ended December 31, 2021, we purchased 1,108,789 shares of common stock for an aggregate of $7.2 million under out stock repurchase program. In addition, we acquired 9,284 shares common stock for a total cost of $60,000 during the quarter ended December 31, 2021 that were not part of the publicly announced stock repurchase program authorization. These shares were delivered to the Company by employees to satisfy tax withholding obligations with the vesting of restricted stock awards. A summary of our common stock repurchases during the quarter ended December 31, 2021, is set forth in the table below (in thousands, except shares and price per share): Period 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 (2) October 1 - October 31, 2021 — $ — — $ 48,995 November 1 - November 30, 2021 488,873 $ 6.77 488,873 $ 45,663 December 1 - December 31, 2021 629,200 $ 6.22 619,916 $ 25,000 Total 1,118,073 1,108,789 (1) Represents the balance before commission and fees at the end of each period. (2) On December 19, 2021, the Board of Directors established a new share repurchase program, replacing the prior program which expired on December 31, 2021 with approximately $45.7 million in remaining authorization. The new share repurchase program, which commenced on December 31, 2021, allows the Company to repurchase up to an aggregate of $25.0 million of Common Stock, through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, and/or in privately negotiated transactions at management’s discretion based on market and business conditions, applicable legal requirements, and other factors, in such manner as will comply with the terms of applicable federal and state securities laws and regulations, at any time or from time to time on or prior to December 31, 2022. 28 Stock Performance Graph The following five year graph and table compare the cumulative total stockholder return of our common stock for the quarterly periods of December 31, 2016 through 2021, assuming an initial investment of $100 and reinvestment of dividends with the performance among Heritage Insurance Holdings Inc., NASDAQ Insurance Index and Russell 2000 Index. We are a component of the Russell 2000 index and it provides a small and mid-cap benchmark index. The NASDAQ Insurance Index consists of all publicly traded insurance underwriters in the property and casualty sector in the United States. Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Heritage Insurance Holdings, Inc 100 117 97 89 69 42 NASDAQ Insurance Index 100 103 94 120 121 137 Russell 2000 Index 100 113 99 123 146 165 Item 6. Selected Financial Data Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301. 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. Overview Heritage Insurance Holdings, Inc., is a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across its multi-state footprint. We provide personal residential insurance in sixteen states and commercial residential insurance in three of those states, while maintaining licenses in one additional state. As a vertically integrated insurer, we control or manage substantially all aspects of underwriting, customer service, actuarial analysis, distribution and claims processing and adjusting. The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document. COVID-19 and Other Matters We continue to monitor the short- and long-term impacts of the COVID-19 virus and its variants. For the year ended December 31, 2021, we saw negligible impact to our business, and that trend continued through the fourth quarter of 2021. As a residential property insurer, we view our business as somewhat insulated because property owners and renters generally view our products as a necessity. The majority of our gross and net premiums written are from renewals of expiring policies. New business, which accounts for a smaller portion of our revenue, may be impacted if consumers are not buying as many new homes in our geographies, but this could be partially or fully offset by increased retention in our renewal portfolio. In a prolonged recessionary and social-distancing environment, we could experience disruptions to our independent agency distribution channel, which may have a negative impact on our revenues and financial condition. Changes in the cost of materials and labor for home repairs can influence our loss costs associated with claims. The Company has implemented return-to-office and hybrid programs, with the latter including a combination of in-office and remote work. While we acknowledge uncertainties associated with future economic conditions, we do not expect a material impact to our business going forward. We will continue to monitor economic conditions and, in the case of a prolonged economic slowdown as a result of COVID-19, will take necessary actions to mitigate any negative impacts to our business, operations or financial results. Coronavirus Aid, Relief, and Economic Security Act The CARES Act was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the TCJ Act, and estimated income tax payments that were deferred to future periods. As of December 31, 2021, the Company has paid back 50% of the deferred payroll tax to the IRS with the remaining balance due in December 2022. We do not currently expect the CARES Act to have a material impact on our liquidity or our financial results, except for the benefit associated with a 5 year carryback of our 2020 tax net operating loss. We will continue to monitor and assess the impact the CARES Act and similar legislation may have on our business and financial results. Goodwill Impairment Charge Goodwill impairment We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed their implied fair value. Goodwill is evaluated at the reporting unit level, for which we have one reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. The evaluation of such factors requires considerable management judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our Consolidated Financial Statements. During the fourth quarter of 2021, we completed our annual analysis of goodwill for potential impairment. As a result of the analysis, we impaired a portion of our goodwill, reducing our carrying value of goodwill from $152.5 million to $92 million. 30 Key Components of our Results of Operations Revenue Gross premiums written represent, with respect to a period, the sum of direct premiums written (premiums from policies written during the period, net of any midterm cancellations and renewals of voluntary policies) and assumed premiums written (primarily premiums from state fair plan policies), in each case prior to ceding premiums to reinsurers. Gross premiums earned represent the total premiums earned during a period from policies written. Premiums associated with new and renewal policies are earned ratably over the twelve-month term of the policy and premiums associated with assumed policies are earned ratably over the remaining term of the policy. Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost of our reinsurance program ratably over term of the arrangement, which is typically twelve months. Our catastrophe excess of loss reinsurance generally incepts June 1 and runs through May 31 of the following year. Our net quota share treaty incepts December 31. Our other reinsurance programs may be purchased on a calendar or fiscal year basis. Net premiums earned reflect gross premiums earned less ceded premiums during the period. Net investment income represents interest earned on fixed maturity securities, short term securities and other investments, dividends on equity securities. Net realized and unrealized gains or losses represent gains or losses on investment sales and unrealized gains or losses on equity securities. Other revenue includes rental income due under non-cancelable leases for space at the Company’s commercial property in Clearwater, Florida, and all policy and pay-plan fees. Our regulators have approved a policy fee on each policy written for certain states; to the extent these fees are not subject to refund, the Company recognizes the income immediately when collected. The Company also charges pay-plan fees to policyholders that pay premiums in more than one installment and record the fees as income when collected. Expenses Losses and loss adjustment expenses (“LAE”) reflect losses paid, expenses paid to resolve claims, such as fees paid to adjusters, attorneys and investigators, and changes in our reserves for unpaid losses and loss adjustment expenses during the period, in each case net of losses ceded to reinsurers. Our reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of resolving all reported claims plus all losses we incurred related to insured events that we assume have occurred as of the reporting date, but that policyholders have not yet reported to us (which are commonly referred to as incurred but not reported, or “IBNR”). We estimate our reserves for unpaid losses using individual case-based estimates for reported claims and actuarial estimates for IBNR losses. We continually review and adjust our estimated losses as necessary based on our evolving claims experience, new information obtained and industry development trends. If our unpaid losses and loss adjustment expenses are considered deficient or redundant, we increase or decrease the liability in the period in which we identify the difference and reflect the change in our current period results of operations. Policy acquisition costs (“PAC”) consist of: (i) commissions paid to outside agents at the time of policy issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes and (iv) inspection fees. We recognize policy acquisition costs ratably over the term of the underlying policy. We earn ceding commissions on our net quota share reinsurance contract and certain other reinsurance contracts, which are reported as a reduction to policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. Refer to Note 11 “ Deferred Policy Acquisition Costs” to our consolidated financial statements under Item 8 of this Annual Report on Form 10K. Ceding commission income is deferred and earned over the contract period. The amount and rate of ceding commissions earned on the net quota share contract can slide within a prescribed minimum and maximum, depending on loss performance and how future losses develop. General and administrative expenses (“G&A”) include compensation and related benefits, professional fees, office lease and related expenses, information system expenses, corporate insurance, and other general and administrative costs. As noted above, a certain portion of our ceding commissions are allocated to general and administrative expenses. Provision for income taxes consists of federal and state corporate level income taxes. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year. The effective tax rate can vary from the 26.5% statutory federal and state blended rate depending on the amount of pretax income in proportion to permanent tax differences as well as state tax apportionment. The 2020 effective tax rate was favorably impacted by the rate benefit associated with the 2020 tax loss carrybacks afforded through the CARES Act enactment. 31 Ratios Ceded premium ratio represents ceded premiums earned as a percentage of gross premiums earned. Net loss ratio represents net losses and LAE as a percentage of net premiums earned. Net expense ratio represents PAC and G&A expenses as a percentage of net premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses. Net combined ratio represents the sum of the net loss and expense ratio. The net combined ratio is a key measure of underwriting performance traditionally used in the property and casualty insurance industry. A net combined ratio under 100% generally reflects profitable underwriting results. Financial Results Highlights for the Year Ended December 31, 2021 • Net loss was $74.7 million, or $(2.69) per diluted share. • Book value per share decreased to $12.82 down 19.6% from year-end 2020. • Gross premiums written and gross premiums in force of $1.2 billion, with gross premiums written up 7.8% year-over-year, including 16.2% growth outside Florida and a 0.1% reduction in Florida. • Policies-in-force of 571,316, down 1.7% year-over-year. • Realized and unrealized capital losses of $16,000, down from gains of $22.4 million in the prior year. • Favorable prior year reserve development of $3.5 million. • Net current accident year weather losses of $148.1 million, up from $134.2 million in the prior year. Current accident year weather losses include $67.5 million of catastrophe losses, down from $83.5 million in the prior year, and $80.7 million of other weather losses, up from $50.7 million in the prior year. • Repurchased 1.3 million shares for $8.2 million at an average price of $6.52 per share, well below GAAP book value per share. • Board of Directors approved a new $25.0 million share repurchase authorization through December 31, 2022. • Total capital returned to shareholders of $14.9 million, including $0.06 per share regular quarterly dividend. Results of Operations In the following section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 9, 2021. Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. 32 Consolidated Results of Operations The following table summarizes our results of operations for the periods indicated: Year Ended December 31, 2021 2020 $ Change % Change (in thousands, expect per share amounts) REVENUE: Gross premiums written $ 1,164,879 $ 1,080,100 $ 84,779 7.8 % Change in gross unearned premiums (20,717 ) (83,258 ) 62,541 (75.1 %) Gross premiums earned 1,144,162 996,842 147,320 14.8 % Ceded premiums (533,091 ) (452,120 ) (80,971 ) 17.9 % Net premiums earned 611,071 544,722 66,349 12.2 % Net investment income 5,652 12,302 (6,650 ) (54.1 %) Net realized gains (16 ) 22,395 (22,411 ) (100.1 %) Other revenue 14,854 13,966 888 6.4 % Total revenue $ 631,561 $ 593,385 $ 38,176 6.4 % OPERATING EXPENSES: Losses and loss adjustment expenses $ 427,370 $ 373,387 $ 53,983 14.5 % Policy acquisition costs 145,968 128,276 17,692 13.8 % General and administrative expenses 65,787 81,537 (15,750 ) (19.3 %) Goodwill impairment 60,500 — 60,500 NM Total operating expenses 699,625 583,200 116,425 20.0 % Operating (loss) income (68,064 ) 10,185 (78,249 ) (768.3 %) Interest expense, net 7,970 7,972 (2 ) (0.0 %) (Loss) income before income taxes (76,034 ) 2,213 (78,248 ) NM Benefit for income taxes (1,307 ) (7,113 ) 5,806 (81.7 %) Net (loss) income $ (74,727 ) $ 9,326 $ (84,053 ) (901.3 %) Basic net (loss) income per share $ (2.69 ) $ 0.33 $ (3.02 ) (915.2 %) Diluted net (loss) income per share $ (2.69 ) $ 0.33 $ (3.02 ) (915.2 %) NM – not meaningful Gross premiums written Gross premiums written of $1.2 billion, up 7.8% year-over-year, including 16.2% growth outside Florida and a 0.1% reduction in Florida. The overall increase relates largely to rate-driven organic growth and policy count growth outside Florida. The largest amount of growth occurred in the northeast. Rate increases materially benefited the growth in 2021 gross premiums written, contributing to a 10.1% increase in average premium per policy across the book and a 15.5% increase per policy in our Florida personal residential book. Gross premiums earned Gross premiums earned were $1.1 billion for the year ended December 31, 2021, up 14.8% compared to $996.8 million in the prior year. The increase in gross premiums earned reflects higher gross premiums written over the last twelve months. Ceded premiums Ceded premiums were $533.1 million for the year ended December 31, 2021, up 17.9% compared to $452.1 million in the prior year. The increase is primarily attributable to purchasing increased reinsurance coverage for a larger book of business. Ceded premiums associated with our quota share coverage increased due to the higher gross premiums written in the northeast. Additionally, favorable reinsurance premium true ups in the prior year contributed to the 2021 overall ceded premium increase. Net premiums earned Net premiums earned were $611.1 million for the year ended December 31, 2021, up 12.2% compared to $544.7 million in the prior year. The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums. Net investment income Net investment income, inclusive of realized investment gains (losses) and unrealized gains (losses) on equity securities, was $5.6 million for the year ended December 31, 2021, down 83.8% compared to $34.7 million in the prior year. The decrease relates primarily to higher realized gains on investments sold in the prior year, coupled with a lower interest rate environment as the proceeds from those 2020 investment sales were re-invested. 33 Other revenue Other revenue was $14.9 million for the year ended December 31, 2021, up 6.4% compared to $14.0 million in the prior year. The increase was driven largely by policy fee income associated with growing gross premiums written. Total revenue Total revenue was $631.6 million for the year ended December 31, 2021, up 6.4% compared to $593.4 million in the prior year. The increase primarily stems from higher net premiums earned partly offset by the decrease in net investment income, as described above. Year Ended December 31, 2021 2020 $ Change % Change OPERATING EXPENSES: Losses and loss adjustment expenses $ 427,370 $ 373,387 $ 53,983 14.5 % Policy acquisition costs 145,968 128,276 17,692 13.8 % General and administrative expenses 65,787 81,537 (15,750 ) (19.3 %) Goodwill impairment 60,500 — 60,500 NM Total operating expenses $ 699,625 $ 583,200 $ 116,425 20.0 % Losses and loss adjustment expenses Losses and LAE were $427.4 million for the year ended December 31, 2021, up 14.5% compared to $373.4 million in the prior year. The majority of the increase stems from a larger book of business, a $13.9 million uptick in current accident year weather losses and a $16.1 million reduction in favorable reserve development from prior year. Policy acquisition costs Policy acquisition costs were $146.0 million for the year ended December 31, 2021, up 13.8% compared to $128.3 million in the prior year. Higher acquisition costs relate to the increase in gross premiums written. General and administrative expenses General and administrative expenses were $65.8 million for the year ended December 31, 2021, down 19.3% compared to $81.5 million in the prior year. The decrease primarily relates to separation payments to two of our executive officers as well as vesting of a significant amount of stock compensation in 2020. Goodwill impairment We evaluate goodwill and other intangible assets for impairment at least on an annual basis or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed their implied fair value. Goodwill is evaluated at the reporting unit level, for which we have one reporting unit level. Any impairment is charged to operations in the period that the impairment is identified. The evaluation Goodwill impairment includes a review of a variety of factors as described below, which require considerable management judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our Consolidated Financial Statements. During the fourth quarter of 2021, we completed our annual analysis of goodwill for potential impairment. As a result of the analysis, we impaired a portion of our goodwill, reducing our carrying value of goodwill from $152.5 million to $92 million based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) trading of our stock below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $60.5 million goodwill impairment charge, which is not tax deductible. Year Ended December 31, 2021 2020 $ Change % Change Operating income $ (68,064 ) $ 10,185 $ (78,249 ) (768.3 %) Interest expense, net 7,970 7,972 (2 ) (0.0 %) (Loss) income before income taxes (76,034 ) 2,213 (78,248 ) NM Benefit for income taxes (1,307 ) (7,113 ) 5,806 (81.6 %) Net (loss) income $ (74,727 ) $ 9,326 $ (84,053 ) (901.3 %) Basic net (loss) income per share $ (2.69 ) $ 0.33 $ (3.02 ) (915.2 %) Diluted net (loss) income per share $ (2.69 ) $ 0.33 $ (3.02 ) (915.2 %) 34 Interest expense, net Interest expense was $8.0 million for the year ended December 31, 2021, flat from the prior year. Benefit for income taxes The benefit for income taxes was $1.3 million for the twelve months ended December 31, 2021 compared to a benefit for income taxes of $7.1 million for the twelve months ended December 31, 2020. The effective tax rate for the current year is 1.7% compared to (321.3%) for the prior year. The variance in the effective tax rate relates primarily to a tax net operating loss for the year ended December 31, 2020, which was carried back five years under The CARES Act and deductible at a 35% corporate income tax rate rather than the current 21% statutory corporate income tax rate. Our effective tax rate was also impacted by the non-deductible goodwill impairment recognized during the fourth quarter of 2021. See further discussion of the goodwill impairment in the critical accounting estimates section and Note 1 of the Notes to our Consolidated Financial Statements. Additionally, the effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year, including changes to pre-tax income. For the year ended December 31, 2021, the effective tax rate was lower than the statutory rate primarily due to the impact of permanent differences on the pre-tax loss. Net (loss) income Net loss for the twelve months ended December 31, 2021 was $74.7 million, down 901.3% from net income of $9.3 million in the prior year. The decrease primarily relates to a goodwill impairment charge as described in Note 3 to the consolidated financial statements and large realized investment gains and income tax benefits in the prior year which offsets the increase in revenue over the prior year, each of which is described above. Ratios Year Ended December 31, 2021 2020 Ceded premium ratio 46.6 % 45.4 % Net loss and LAE ratio 69.9 % 68.5 % Net expense ratio 34.7 % 38.5 % Net combined ratio 104.6 % 107.0 % Ceded premium ratio The ceded premium ratio was 46.6% for the twelve months ended December 31, 2021, up 1.2 points from 45.4% in the prior year. The increase primarily stems from ceded premium growth that outpaced growth in gross premiums earned, as described above. Net loss ratio The net loss and LAE ratio was 69.9% for the twelve months ended December 31, 2021, up 1.4 points from 68.5% in the prior year. The increase primarily relates to lower favorable prior year reserve development as a percentage of net premiums earned, coupled with higher weather losses in the current year. Net expense ratio The net expense ratio was 34.7% for the twelve months ended December 31, 2021, down 3.8 points from 38.5% in the prior year. The decrease primarily stems from growth in net premiums earned and lower general and administrative expenses, as described above. Net combined ratio The net combined ratio was 104.6% for the twelve months ended December 31, 2021, down 2.4 points from 107.0% in the prior year. The decrease stems from a lower net expense ratio, partly offset by a higher net loss ratio, as described above. 35 Liquidity and Capital Resources Our principal sources of liquidity include cash flows generated from operations, our cash, cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of December 31, 2021, we held $364.8 million in cash and cash equivalents and $694.7 million in investments, compared to $446.4 million and $589.0 million as of December 31, 2020. The decrease in cash and cash equivalents was primarily due to the re-investment in fixed income securities in 2021 using proceeds from sales of fixed income securities in 2020. We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates. We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months. We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes. Statement of Cash Flows The net increases (decreases) in cash and cash equivalents are summarized in the following table: For the Year Ended December 31, 2021 2020 2019 2021 vs 2020 Change 2020 vs 2019 Change Net cash provided by (used in): (in thousands) Operating activities $ 60,130 $ 170,211 $ 119,657 $ (110,081 ) $ 50,554 Investing activities (124,480 ) 22,062 (53,585 ) (146,542 ) 75,647 Financing activities (17,281 ) (28,898 ) (45,434 ) 11,617 16,536 Net change in cash, cash equivalents, and restricted cash $ (81,631 ) $ 163,375 $ 20,638 $ (245,006 ) $ 142,737 Operating Activities Net cash provided by operating activities for December 31, 2021 was $60.1 million compared to net cash provided by of $170.2 million during the prior year. The decrease was driven primarily by the net loss for the year ended December 31, 2021 coupled with an increase in claim payments, a smaller increase in unearned premiums due to significant premium growth during 2020, and collection of income taxes receivable in 2021 related to our income tax return filings from previous years. Investing Activities Net cash (used in) provided by investing activities for the year ended December 31, 2021 was ($124.5) million compared to net cash provided by of $22.1 million in the prior year. The variance relates primarily to proceeds from strategic sales of fixed income securities in 2020 the proceeds of which were re-invested during 2021. Financing Activities Net cash used in financing activities for the year ended December 31, 2021 was $17.3 million, compared net cash used of $28.9 million in the prior year. The variance relates primarily to payments on our term loan facility during 2020, coupled with larger purchases of treasury stock in 2020, as well as income tax withholding in 2020 related to the vesting of a large amount of restricted stock. Credit Facilities The Company is party to a credit agreement (the “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”). The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal 36 amount of $75 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). Term Loan Facility. The principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9 million per quarter, payable quarterly, decreasing to $875,000 per quarter commencing with the quarter ending December 31, 2021 and increasing to $1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27, 2026. As of December 31, 2021, there was $70.0 million in aggregate principal outstanding on the Term Loan Facility. On July 28, 2021, the principal amount of the term loan outstanding under the Term Loan Facility was increased by $13.75 million to a total of $70.0 million from $56.25 million prior to the advance. Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $75 million inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans. As of December 31, 2021, and December 31, 2020, we had no borrowings and no letters of credit outstanding under the Revolving Credit Facility. At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin or (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00%, plus an applicable margin. The applicable margin for loans under the Credit Facilities varies from 3.25% per annum to 3.75% per annum (for LIBOR loans) and 1.5% to 2.0% per annum (for base rate loans) based on our consolidated leverage ratio. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. As of December 31, 2021, the borrowing under our Credit Facilities were accruing interest at a rate of 2.9375% 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 LIBOR 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 2.75 to 1.00 for each fiscal quarter ending in 2021, stepping down to 2.50 to 1.00 in 2022 and thereafter; (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries. Convertible Notes On August 10, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $125.0 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting 37 discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering 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 began accruing on August 16, 2017 and is payable semi-annually in arrears, on February 1 and August 1 of each year, starting on February 1, 2018. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis. The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted. Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances. The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022. Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Except as described below, the Company may not redeem the Convertible Notes prior to August 5, 2022. On or after August 5, 2022 but prior to February 1, 2037, the Company may redeem for cash all or any portion of the Convertible Notes, at the Company’s option, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes, which means that the Company is not required to redeem or retire the Convertible Notes periodically. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the Notes automatically become immediately due and payable. In the second quarter of 2018, the Company repurchased $10.6 million principal amount of Convertible Notes for cash. In the fourth quarter of 2018 and first quarter of 2019, the Company repurchased Convertible Notes in the aggregate principal amount of 38 $81.6 million for a combination of cash and the issuance of an aggregate of 3,880,653 shares of the Company’s common stock, valued at $53.0 million, leaving $23.4 million in aggregate principal amount outstanding as of December 31, 2021. In January 2022, the Company reacquired an additional $11.7 million principal amount of outstanding Convertible Notes. FHLB Loan Agreements In December 2018, a subsidiary of the Company pledged U.S. government and agency fixed maturity securities with an estimated fair value of $31.0 million as collateral and received $19.2 million in a cash loan under an advance agreement with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a fixed interest rate of 3.094% with interest payments due quarterly commencing in March 2019. The principal balance on the loan has a maturity date of December 13, 2023. In connection with the agreement, the subsidiary became a member of FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan was used to prepay the Company’s Senior Secured Notes due 2023 in 2018. Contractual Obligations and Commitments The following table summarizes our material contractual obligations and commitments as of December 31, 2021: Contractual Obligations and Commercial Commitments Total Less Than 1 Year 1-3 Years 3-5 Years More than 5 - Years (in thousands) Term loans, notes and interest (1) $ 77,260 $ 5,515 $ 11,141 60,603 $ — Convertible debt (1) 35,793 1,376 2,751 2,751 28,915 Mortgage loan (1) 18,601 893 1,786 1,786 14,137 FHLB agreement (1) 20,375 602 19,773 — — Operating lease obligations 37,444 4,566 8,694 7,960 16,224 Total Contractual Obligations $ 189,473 $ 12,952 $ 44,145 $ 73,100 $ 59,276 (1) Amounts represent principal and interest payments to debt obligations. Debt obligations are classified based on their stated maturity date. For further information on long-term debt, Refer to Note 14 “ Long Term Debt ” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different due to changes to agreed-upon amounts for some obligations. Critical Accounting Policies and Estimates The following discussion and analysis presents the more significant factors that affected our financial conditions as of December 31, 2021 and 2020 and results of operations for each of the years then ended. The preparation of financial statements in conformity with accounting principles of generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimates in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our consolidated financial statements. Goodwill and Intangible Assets. Goodwill and Other Intangible Assets arise as a result of business combinations and consist of the excess of the fair value of consideration paid over the tangible and intangible assets acquired and liabilities assumed. Goodwill is subject to evaluation for impairment using a fair value-based test. This evaluation is performed annually, during the fourth quarter or more frequently if facts and circumstances warrant. An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value. We review amortizable intangible assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If we have concluded that impairment exists, the carrying amount is reduced to fair value. For the year ended December 31, 2021, the Company recognized $60.5 million for a goodwill impairment charge. There was deemed to be no impairment of the amortizable intangible assets. Impairment of Long-Lived Assets Including Intangible Assets Subject to Amortization. We assess the recoverability of long-lived assets when events or circumstances indicate that the assets might have become impaired. We determine whether the assets can be recovered from undiscounted future cash flows and, if not recoverable, we would recognize impairment to reduce the carrying value to 39 fair value. Recoverability of long-lived assets is dependent upon, among other things, our ability to maintain profitability, so as to be able to meet its obligations when they become due. No impairment was recognized in any period presented. Premiums . We recognize direct and assumed premiums written as revenue, net of ceded amounts, on a daily pro rata basis over the contract period of the related policies that are in force. For any portion of premiums not earned at the end of the reporting period, we record an unearned premium liability. Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. Our billing system is equity based such that policies are cancelled if the unpaid premium exceeds the amount of premium earned. When we receive payments on amounts previously charged off, we credit bad debt expense in the period we receive the payment. Balances in premiums receivable and the associated allowance account are removed upon cancellation of the policy due to non-payment. We recorded bad debt expense of approximately $0, $161,300 and $290,300 in 2021, 2020, 2019, respectively. When we receive premium payments from policyholders prior to the effective date of the related policy, we record an advance premium liability. On the policy effective date, we reduce the advance premium liability and record the premiums as described above. Reserves for Unpaid Losses and Loss Adjustment Expenses . Reserves for unpaid losses and loss adjustment expenses, also referred to as loss reserves, represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management’s best estimate of the amount we will ultimately pay for losses and loss adjustment expenses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date. We establish two categories of loss reserves as follows: Case reserves —When a claim is reported, we establish an initial estimate of the losses that will ultimately be paid on the reported claim. Our initial estimate for each claim is based upon the judgment of our claims professionals who are familiar with property and liability losses associated with the coverage offered by our policies. Then, our claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve, as necessary. As claims mature, we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site reviews and any other information we gather while reviewing the claims. IBNR reserves —Our IBNR reserves include true IBNR reserves plus “bulk” reserves. True IBNR reserves represent amounts related to claims for which a loss occurred on or before the date of the financial statements, but which have not yet been reported to us. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on known claims. We estimate our IBNR reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date. When we establish our reserves, we analyze various factors such as the evolving historical loss experience of the insurance industry as well as our experience, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the interaction of the foregoing factors, there is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any future projections, the ultimate amount we will pay for losses will be different from the reserves we record. We determine our ultimate loss reserves by selecting an estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the point estimate is influenced by the analysis of our paid losses and incurred losses since inception. Our external reserving actuaries evaluated the adequacy of our reserves as of December 31, 2021 and concluded that our reported loss reserves would meet the requirements of the insurance laws of the states in which our insurance subsidiaries are domiciled, be consistent with reserves computed in accordance with accepted loss reserving standards and principles, and make a reasonable provision for all unpaid loss and loss adjustment expense obligations under the terms of our contracts and agreements. In addition to $297.0 million of recorded case reserves, we recorded $293.2 million of IBNR reserves as of December 31, 2021 to achieve overall gross reserves of $590.2 million. At December 31, 2021, ceded IBNR and net IBNR were $76.8 million and $216.4 million, respectively. The process of establishing our reserves is complex and inherently imprecise, as it involves using judgment that is affected by many variables. We believe a reasonably likely change in almost any of the factors we evaluate as part of our loss reserve analysis could have an impact on our reported results, financial position and liquidity. 40 The following table quantifies the pro forma impact of hypothetical changes in our net loss reserves on our net income and stockholders’ equity as of and for the year ended December 31, 2021 (in thousands): Actual Low Estimate % Change from Actual High Estimate % Change from Actual Net Loss Reserves $ 288,409 $ 264,399 8.3 % $ 378,583 (31.3 )% Impact on: Net (loss) income $ (74,727 ) $ (57,079 ) (23.6 )% $ (141,005 ) (88.7 )% Stockholders’ equity $ 343,051 $ 360,699 (5.1 )% $ 276,773 19.3 % Cash, cash equivalents and investments (1) $ 1,054,035 $ 1,071,683 (1.7 )% $ 987,758 6.3 % (1) Estimated cash, cash equivalents and investments is intended to reflect the impact of loss reserves, net of taxes. Policy Acquisition Costs. We incur policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes and (iv) inspection fees. We capitalize policy acquisition costs to the extent recoverable, then we amortize those costs over the contract period of the related policy. We also earn ceding commission on our quota share reinsurance contracts, which is presented as a reduction of policy acquisition costs with any excess unearned ceding commission recognized as a liability. Ceding commission income is deferred and earned over the contract period. The amount and rate of ceding commissions earned on the net quota share contract can slide within a prescribed minimum and maximum, depending on loss performance and how future losses develop. We earn ceding commission on its gross and net quota share reinsurance contracts. Our accounting policy is to allocate ceding commission between policy acquisition costs and general and administrative expenses for financial reporting purposes. Ceding commission is allocated between policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. For the years ended December 31, 2021, 2020 and 2019, we earned ceding commission income of $62.7 million, $57.1 million and $62.4 million of which $47.1 million, $43.0 million and $47.0 million was allocable to policy acquisition costs. Provision for Premium Deficiency . At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of our expected losses, deferred policy acquisition costs and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs. No accruals for premium deficiency were considered necessary as of December 31, 2021 and 2020. Reinsurance. We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss. Our reinsurance agreements are prospective contracts. We record an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize our prepaid reinsurance premiums over the 12-month contract period. In the event that we incur losses recoverable under our reinsurance program, we record amounts recoverable from our 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 our liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to our estimate of unpaid losses. In the event that we incur losses recoverable under the reinsurance program, the estimate of amounts recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to our reserves for unpaid losses. We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. We had no uncollectible amounts under our reinsurance program or bad debt expense related to reinsurance for the years ended December 31, 2021, 2020 and 2019. Recent Accounting Pronouncements Not Yet Effective The Company describes the recent pronouncements that have had or may have a significant effect on its financial statements or on its disclosures. The Company does not discuss recent pronouncements that a) are not anticipated to have an impact on, or b) are unrelated to its financial condition, results of operations, or related disclosures. For accounting pronouncements not yet adopted, Refer to Note 1 “ Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices” to our consolidated financial statements included in this Annual Report on Form 10-K, for further information. 41 Seasonality of our Business Our insurance business is seasonal; hurricanes typically occur during the period from June 1 through November 30 and winter storms generally impact the first and fourth quarters each year. With our catastrophe reinsurance program effective on June 1 each year, any variation in the cost of our reinsurance, whether due to changes to reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning June 1 of each year, subject to certain adjustments. Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk. Our investment portfolios at December 31, 2021 included fixed-maturity and equity securities, the purposes of which 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 when establishing our investment policy, 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 nationally recognized asset managers and are overseen by the investment committee appointed by our board of directors. Our investment portfolios are primarily exposed to interest rate risk, credit risk and equity price risk. We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. Unrealized gains and losses for equity securities are reported in our consolidated statement of operations as a component of net realized and unrealized gains and losses. Interest Rate Risk On July 28, 2021, the Company amended its Credit Agreement to provide mechanics relating to a transition away from LIBOR as a benchmark interest rate for its indebtedness under the Credit Agreement and replace LIBOR with an alternative benchmark rate. Approximately 59% of our total debt outstanding at December 31, 2021 is at a fixed rate. The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.903 years at December 31, 2021 and 3.615 years at December 31, 2020. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of December 31, 2021, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with an average credit quality rating at December 31, 2020. Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs. The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 2021 (in thousands, except percentages): 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 $ 590,985 $ (78,369 ) (12 )% 200 basis point increase $ 617,105 $ (52,249 ) (8 )% 100 basis point increase $ 643,229 $ (26,125 ) (4 )% 100 basis point decrease $ 694,662 $ 25,308 4 % 200 basis point decrease $ 711,521 $ 42,167 6 % 300 basis point decrease $ 712,789 $ 43,435 6 % Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed-maturity securities. The Company’s Investment Committee has the responsibility to create, oversee, implement and review investment policies. The Investment Committee is responsible for ensuring the policies mitigate this risk by investing in fixed-maturity securities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector. 42 The following table presents the composition of our fixed-maturity portfolio by rating at December 31, 2021 (in thousands, except percentages): Comparable Rating Amortized Cost % of Total Amortized Cost Fair Value % of Total Fair Value AAA $ 135,004 20 % $ 134,613 20 % AA+, AA, AA- $ 314,194 47 % $ 310,821 47 % A+, A, A-1+ $ 134,857 20 % $ 133,983 20 % BBB+, BBB, BBB- $ 91,054 13 % $ 89,800 13 % Not rated $ 136 0 % $ 136 0 % $ 675,245 100 % $ 669,354 100 % Below investment grade securities have different characteristics than investment grade corporate fixed-maturity securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Typically, below investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also issuers of below-grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment grade issuers. At December 31, 2021, the Company held two securities in aggregate of $136,000, at fair value, that were not rated. Our equity investment portfolio at December 31, 2021 of membership shares held of FHLB common stock are carried at cost. The estimated fair value of the FHLB common stock was based on the amount we would receive if our memberships were cancelled, as the membership cannot be sold. The following table illustrates the composition of our equity portfolio at December 31, 2021 (in thousands): % of Total Estimated Fair Value Estimated Fair value Stocks by sector: Financial $ — 0 % Energy — 0 % Other 1,415 100 % Subtotal $ 1,415 100 % Mutual Funds and ETF by type: Equity $ — 0 % Subtotal $ — 0 % Total $ 1,415 100 % Foreign Currency Exchange Risk At December 31, 2021, we did not have any material exposure to foreign currency related risk. 43 Item 8. Financial Statemen ts and Supplementary Data HERITAGE INSURANCE HOLDINGS, INC. INDEX OF CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( Plante & Moran, PLLC East Lansing, MI, PCAOB ID 166 ) 45 Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020 48 Consolidated Statements of Operations and Comprehensive (Loss) Income for the Years Ended December 31, 2021, 2020 and 2019 49 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019 50 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 51 Notes to Consolidated Financial Statements 53 44 Rep ort of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Heritage Insurance Holdings, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying balance sheets of Heritage Insurance Holdings, Inc (the “Company”) as of December 31, 2021 and 2020, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and schedules (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the COSO framework. Basis for Opinion The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reportin g A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 45 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Liability for Unpaid Losses and Loss Adjustment Expenses - Refer to Notes 1 and 13 to the Financial Statements Critical Audit Matter Description The Company’s estimated liability for unpaid losses and loss adjustment expense (LAE) totaled $590.2 million at December 31, 2021. The Company’s reserve for unpaid losses and LAE represents the estimated ultimate cost of settling all claims incurred related to insured events that have occurred as of the reporting date. The Company determines the reserve for unpaid losses and LAE on an individual-case basis for those claims reported as of December 31, 2021, with bulk reserves for additional development, if any, on the reported claims and an estimate for unpaid losses and LAE for all claims incurred related to insured events that have occurred as of December 31, 2021 but have not yet been reported by the policyholders to the Company (collectively referred to as incurred but not reported, or IBNR). The Company estimates IBNR reserves by projecting ultimate losses using industry-accepted actuarial methods. Management engages independent actuarial firms to prepare an actuarial analysis of unpaid losses and LAE and provides statements of actuarial opinion on management’s estimate of unpaid losses and LAE. Estimating the liability for unpaid losses and LAE requires significant judgment, relating to factors such as claim development patterns, severity, type and jurisdiction of loss, economic conditions, legislative development, and a variety of actuarial assumptions. Estimating the liability for unpaid losses and LAE is inherently uncertain, dependent on management’s judgment, and significantly impacted by claim and actuarial factors and conditions that may change over time. The ultimate settlement of unpaid losses and LAE may vary materially from the recorded liability, and such variance may adversely affect the Company’s financial results. For these reasons, we identified the estimate of unpaid losses and LAE as a critical audit matter, as it involved especially subjective auditor judgment. How the Critical Audit Matter was Addressed in the Audit Our audit procedures related to the unpaid losses and LAE reserve included the following, among others: • We obtained an understanding, evaluated the design, and tested the operating effectiveness of key controls over the process and data used by management to estimate the liability for unpaid losses and LAE, including those controls related to the estimation of and management’s review of the estimated liability of unpaid losses and LAE. • We tested the completeness, integrity, and accuracy of the underlying data used by the Company’s actuaries, such as paid loss data, case reserve data, loss adjustment expense data, and loss development tables. • We verified the consistency of the estimation process between the current year and those used in prior years and assessed the reasonableness of management’s selection of its estimate for unpaid losses and LAE. With assistance from our engaged actuarial specialist, we reviewed the reasonableness of the methods and assumptions used by the Company and their engaged actuaries to develop their unpaid losses and LAE reserve estimate. • We evaluated management’s prior year estimate for unpaid losses and LAE and the factors leading to changes in the estimate recognized in the current year. With the assistance of our engaged actuarial specialist, we assessed the reasonableness of management’s revisions to the estimate for unpaid losses and LAE. Goodwill Impairment Assessment - Refer to Notes 1 and 3 to the Financial Statements Critical Audit Matter Description Management tests goodwill for impairment annually during the fourth quarter, or more frequently should events or changes in circumstances indicate that goodwill might be impaired. For the year ended December 31, 2021, the Company performed a quantitative impairment analysis on its one reporting unit and concluded to recognize an impairment charge, as further described in Note 3. The Company used a weighting of the income (discounted cash flow model) and market approaches (guideline public company method and guideline transaction method) to determine the fair value of the reporting unit. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future income and losses and LAE expenses, which are sensitive to changes in expectations about future market or economic conditions. The determination of 46 the fair value using the guideline public company method requires management to make significant assumptions related to price to tangible book value multiples and price to earnings multiples, as well as significant assumptions related to control premiums. The determination of the fair value using the guideline transaction method requires management to review the value of the business based on pricing multiples derived from the sale of companies that are similar to the Company. We identified the Company’s goodwill impairment assessment as a critical audit matter because of the significant estimates and assumptions involved in determining the fair value of the reporting unit. Given the significance of the reported goodwill balance and the recorded impairment combined with the inherent uncertainty involved in estimating the fair value of the reporting unit, which included evaluating management’s selection and weighting of valuation methodologies and determining the reasonableness of significant assumptions and projected cash flows, the goodwill impairment evaluation required a high degree of auditor judgment, including the need to involve our fair value specialists. How the Critical Audit Matter was Addressed in the Audit Our audit procedures related to the goodwill impairment assessment, which involved the support of our internal valuation specialists, included the following, among others: • We obtained an understanding of management’s process to estimate the fair value of its reporting unit and ensure the accuracy of key data used in their estimation process. We also evaluated the design and tested the operating effectiveness of key controls used by management to develop their fair value estimates. • We evaluated management’s forecasts, including premium growth and losses and LAE expenses, for reasonableness by comparing the forecasts to historical results, and obtained supporting evidence for assumptions and estimates related to management’s forecasts, • We assessed the appropriateness of the valuation methodologies selected by management, including the weighting of those methodologies, and tested the reasonableness of significant assumptions by comparing them to current and forecasted industry data, analyst reports, recent transaction activity, and peer company information obtained from publicly available sources, where applicable. • We reviewed management’s sensitivity analysis, which included changes to significant inputs and assumptions in order to evaluate the appropriateness of the changes in the fair value estimate of the Company. We have served as the Company’s auditor since 2018. East Lansing, Michigan March 14, 2022 47 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED B ALANCE SHEETS (In thousands, except share and per share data) December 31, 2021 2020 ASSETS Fixed maturities, available-for-sale, at fair value (amortized cost of $ 675,245 and $ 553,172 ) $ 669,354 $ 561,011 Equity securities, at fair value, (cost $ 1,415 and $ 1,599 ) 1,415 1,599 Other investments, net 23,929 26,409 Total investments 694,698 589,019 Cash and cash equivalents 359,337 440,956 Restricted cash 5,415 5,427 Accrued investment income 3,167 2,737 Premiums receivable, net 71,925 77,471 Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $ 45 269,391 355,037 Prepaid reinsurance premiums 265,873 245,818 Income taxes receivable 11,739 32,224 Deferred policy acquisition costs, net 93,881 89,265 Property and equipment, net 17,426 18,685 Right-of-use lease asset, net 27,753 6,461 Intangibles, net 55,926 62,277 Goodwill 91,959 152,459 Other assets 12,272 11,543 Total Assets $ 1,980,762 $ 2,089,379 LIABILITIES AND STOCKHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 590,166 $ 659,341 Unearned premiums 590,419 569,618 Reinsurance payable 191,728 161,918 Long-term debt, net 120,757 120,998 Deferred income tax liability, net 9,426 18,477 Advance premiums 24,504 18,268 Accrued compensation 8,014 9,325 Lease liability 31,172 8,155 Accounts payable and other liabilities 71,525 80,935 Total Liabilities $ 1,637,711 $ 1,647,035 Commitments and contingencies (Note 17) Stockholders’ Equity: Common stock, $ 0.0001 par value, 50,000,000 shares authorized, 26,803,511 shares issued and 26,753,511 outstanding at December 31, 2021 and 27,833,873 shares issued and 27,748,606 outstanding at December 31, 2020 3 3 Additional paid-in capital 332,797 331,867 Accumulated other comprehensive income, net of taxes ( 4,573 ) 6,057 Treasury stock, at cost, 10,536,737 shares and 9,279,839 shares at December 31, 2021 and December 31, 2020 ( 123,557 ) ( 115,365 ) Retained earnings 138,381 219,782 Total Stockholders' Equity 343,051 442,344 Total Liabilities and Stockholders' Equity $ 1,980,762 $ 2,089,379 The accompanying notes are an integral part of these consolidated financial statements. 48 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIO NS AND COMPREHENSIVE (LOSS) INCOME (In thousands, except share and per share data) For the Year Ended December 31, 2021 2020 2019 REVENUES: Gross premiums written $ 1,164,879 $ 1,080,100 $ 937,937 Change in gross unearned premiums ( 20,717 ) ( 83,258 ) ( 13,690 ) Gross premiums earned 1,144,162 996,842 924,247 Ceded premiums ( 533,091 ) ( 452,120 ) ( 445,534 ) Net premiums earned 611,071 544,722 478,713 Net investment income 5,652 12,302 14,432 Net realized and unrealized (losses) gains ( 16 ) 22,395 4,163 Other revenue 14,854 13,966 13,997 Total revenues 631,561 593,385 511,305 EXPENSES: Losses and loss adjustment expenses 427,370 373,387 273,288 Policy acquisition costs, net of ceding commission income (1) 145,968 128,276 107,906 General and administrative expenses, net of ceding commission income (2) 65,787 81,537 80,544 Goodwill impairment 60,500 — — Total expenses 699,625 583,200 461,738 Operating (loss) income ( 68,064 ) 10,185 49,567 Interest expense, net 7,970 7,972 8,523 Other non-operating loss, net — — 48 (Loss) income before income taxes ( 76,034 ) 2,213 40,996 (Benefit) provision for income taxes ( 1,307 ) ( 7,113 ) 12,360 Net (loss) income $ ( 74,727 ) $ 9,326 $ 28,636 OTHER COMPREHENSIVE (LOSS) INCOME Change in net unrealized gains (losses) on investments ( 13,661 ) 20,738 19,765 Reclassification adjustment for net realized investment gains ( 64 ) ( 22,395 ) ( 1,734 ) Income tax benefit (expense) related to items of other comprehensive (loss) income 3,095 384 ( 4,174 ) Total comprehensive (loss) income $ ( 85,357 ) $ 8,053 $ 42,493 Weighted average shares outstanding Basic 27,804,355 27,978,519 29,213,910 Diluted 27,804,355 27,988,966 29,232,981 (Loss) earnings per share Basic $ ( 2.69 ) $ 0.33 $ 0.98 Diluted $ ( 2.69 ) $ 0.33 $ 0.98 (1) Policy acquisition costs includes $ 47.1 million, $ 43.0 million and $ 47.0 million of ceding commission income for the reporting years 2021, 2020 and 2019, respectively . (2) General and administration includes $ 15.6 million, $ 14.1 million and $ 15.4 million of ceding commission income for the reporting years 2021, 2020 and 2019, respectively . The accompanying notes are an integral part of these consolidated financial statements. 49 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHA NGES IN STOCKHOLDERS’ EQUITY (In thousands, except share and per share data) Common Shares Common Shares Amount Additional Paid-in- Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Deficit) Total Stockholders' Equity Balance at December 31, 2018 29,477,756 3 325,292 195,750 ( 89,185 ) ( 6,527 ) 425,333 Net unrealized change in investments, net of tax — — — — — 13,857 13,857 Repurchase of common stock ( 1,134,686 ) — — — ( 16,183 ) — ( 16,183 ) Restricted stock award withholdings 22,647 — ( 3,521 ) — — — ( 3,521 ) Convertible Option debt extinguishment, net of tax — — ( 1,792 ) — — — ( 1,792 ) Stock-based compensation on restricted stock — — 5,379 — — — 5,379 Stock issued on convertible note conversion 285,201 — 4,210 — — — 4,210 Cash dividends declared ($ 0.24 per share of common stock) — — — ( 7,120 ) — — ( 7,120 ) Net income — — — 28,636 — — 28,636 Balance at December 31, 2019 28,650,918 $ 3 $ 329,568 $ 217,266 $ ( 105,368 ) $ 7,330 $ 448,799 Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020 — — — ( 34 ) — — ( 34 ) Balance at January 1, 2020 (as adjusted for change in accounting principle) 28,650,918 $ 3 $ 329,568 $ 217,232 $ ( 105,368 ) $ 7,330 $ 448,765 Net unrealized change in investments, net of tax — — — — — ( 1,273 ) ( 1,273 ) Surrendered shares for tax withholding ( 247,223 ) — ( 2,384 ) — — — ( 2,384 ) Restricted stock vested 260,267 — — — — — — Issued restricted stock 15,000 — — — — — — Stock buy-back ( 930,356 ) — — — ( 9,997 ) — ( 9,997 ) Stock-based compensation on restricted stock — — 4,683 — — — 4,683 Deferred tax adjustment for credit expected losses — — — ( 4 ) — — ( 4 ) Cash dividends declared ($ 0.24 per share of common stock) — — — ( 6,772 ) — — ( 6,772 ) Net income — — — 9,326 — — 9,326 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 ( 10,630 ) ( 10,630 ) Surrendered shares for tax withholding ( 28,257 ) — ( 231 ) — — — ( 231 ) Restricted stock vested 35,267 — — — — — — Issued restricted stock 254,793 — — — — — — Stock buy-back ( 1,256,898 ) — — — ( 8,192 ) — ( 8,192 ) Stock-based compensation on restricted stock — — 1,161 — — — 1,161 Cash dividends declared ($ 0.24 per share of common stock) — — — ( 6,674 ) — — ( 6,674 ) Net loss — — — ( 74,727 ) — — ( 74,727 ) Balance at December 31, 2021 26,753,511 $ 3 $ 332,797 $ 138,381 $ ( 123,557 ) $ ( 4,573 ) $ 343,051 The accompanying notes are an integral part of these consolidated financial statements. 50 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2021 2020 2019 OPERATING ACTIVITIES Net (loss) income $ ( 74,727 ) $ 9,326 $ 28,636 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation 1,161 4,683 5,379 Bond amortization and accretion 4,054 5,229 5,087 Amortization of original issuance discount on debt 1,784 1,415 1,419 Depreciation and amortization 8,449 8,101 10,436 Allowance for bad debt — 161 290 Net realized gains ( 64 ) ( 22,395 ) ( 1,734 ) Net change for unrealized gains (losses) in other investments 80 — ( 2,429 ) Net loss from sale of asset 168 9 — Net loss on repurchase of debt — — 48 Deferred income taxes, net of acquired ( 5,956 ) 6,238 ( 898 ) Goodwill impairment 60,500 — — Changes in operating assets and liabilities: Accrued investment income ( 430 ) 1,640 91 Premiums receivable, net 5,547 ( 13,948 ) ( 6,685 ) Prepaid reinsurance premiums ( 20,055 ) ( 21,716 ) 8,969 Reinsurance premiums receivable and recoverable 85,646 73,823 ( 110,973 ) Income taxes receivable 20,485 ( 29,053 ) 32,415 Deferred policy acquisition costs, net ( 4,616 ) ( 12,054 ) ( 4,156 ) Right-of-use asset, net ( 21,292 ) ( 185 ) ( 6,645 ) Other assets ( 729 ) 291 ( 1,728 ) Unpaid losses and loss adjustment expenses ( 69,175 ) 45,808 181,174 Unearned premiums 20,801 83,398 13,863 Reinsurance payable 29,810 5,567 ( 10,624 ) Accrued interest 26 ( 214 ) 175 Income taxes payable — — 12,624 Advance premiums 6,236 1,764 ( 3,496 ) Accrued compensation ( 1,311 ) 3,978 ( 3,879 ) Lease liability 23,017 214 8,369 Other liabilities ( 9,278 ) 18,131 ( 36,071 ) Net cash provided by operating activities 60,130 170,211 119,657 INVESTING ACTIVITIES Fixed maturity securities sales, maturities and paydowns 208,527 492,216 161,160 Fixed maturity securities purchases ( 334,584 ) ( 450,463 ) ( 228,047 ) Equity securities sales 184 26 26,766 Equity securities purchases — ( 6 ) ( 4,583 ) Return on other investments 2,400 — — Other investment purchases — ( 20,034 ) ( 24,250 ) Proceeds from other investments sold — 1,078 19,995 Collection of promissory note receivable — — 358 Cost of property and equipment acquired ( 1,007 ) ( 755 ) ( 4,984 ) Net cash (used in) provided by investing activities ( 124,480 ) 22,062 ( 53,585 ) FINANCING ACTIVITIES Proceeds from term loan facility 2,782 — — Repurchase of convertible notes — — ( 2,869 ) Mortgage loan payments ( 306 ) ( 290 ) ( 277 ) Principal payments on term loan facility ( 4,625 ) ( 9,375 ) ( 15,625 ) Tax withholding on share-based compensation awards ( 231 ) ( 2,384 ) ( 3,521 ) Purchase of treasury stock ( 8,192 ) ( 9,997 ) ( 16,183 ) Dividends paid ( 6,709 ) ( 6,852 ) ( 6,959 ) Net cash used in financing activities ( 17,281 ) ( 28,898 ) ( 45,434 ) (Decrease) increase in cash, cash equivalents, and restricted cash ( 81,631 ) 163,375 20,638 Cash, cash equivalents and restricted cash, beginning of period 446,383 283,008 262,370 Cash, cash equivalents and restricted cash, end of period $ 364,752 $ 446,383 $ 283,008 51 For the Year Ended December 31, 2021 2020 2019 Supplemental Cash Flows Information: Income taxes paid, net $ 528 $ 15,691 $ 14,165 Interest paid $ 5,282 $ 6,206 $ 7,298 Supplemental Disclosure of Non-Cash Investing and Financing Activities Conversion of promissory notes into Class A Preferred Units $ — $ 7,500 $ — Non-cash acquisition of shares of common stock $ 2,100 $ — $ — Issuance of shares on conversion of convertible notes $ — $ — $ 53,044 Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets: December 31, 2021 December 31, 2020 (in thousands) Cash and cash equivalents $ 359,337 $ 440,956 Restricted cash 5,415 5,427 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 364,752 $ 446,383 The accompanying notes are an integral part of these consolidated financial statements. 52 HERITAGE INSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices Business Description Heritage Insurance Holdings, Inc. is an insurance holding company. Our insurance subsidiaries are Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”), Narragansett Bay Insurance Company (“NBIC”) and Pawtucket Insurance Company (“PIC”). PIC is currently inactive and has no policies in force or outstanding claims. Our other subsidiaries include: Heritage MGA, LLC (“MGA”), the managing general agent that manages substantially all aspects of our insurance subsidiaries’ business; Contractors’ Alliance Network, LLC, our vendor network manager; Skye Lane Properties, LLC, our property management subsidiary; Osprey Re Ltd., our reinsurance subsidiary that may provide a portion of the reinsurance protection purchased by our insurance subsidiaries; Heritage Insurance Claims, LLC, an inactive subsidiary reserved for future development; Zephyr Acquisition Company (“ZAC”); NBIC Holdings, Inc., NBIC Service Company which provides services to NBIC and Westwind Underwriters, Inc., an inactive subsidiary of NBIC Holdings, Inc. Our primary products are personal and commercial residential insurance, which we currently offer in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia. We conduct our operations under a single reporting segment. Basis of Presentation The consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. and its wholly-owned subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and all other entities in which the Company has a controlling financial interest (none of which are variable interest entities). All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with United States Generally Accepted Accounting Principles (“U.S. GAAP”) requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates. Cash and Cash Equivalents The Company’s cash and cash equivalents include demand deposits with financial institutions and short-term, highly-liquid financial instruments with original maturities of three months or less when purchased. The carrying amounts reported in the consolidated balance sheets for interest bearing deposits approximate their fair value because of the short maturity of these financial instruments. To the extent there are negative cash balances with any individual financial institution, the Company excludes the negative amount from cash and cash equivalents neg ative cash balances and reports as accounts payable and other liabilities Restricted Cash Restricted cash related to individual state regulatory deposits, was $ 5.4 million for each of the respective years ended December 31, 2021 and 2020. The Company earned interest income of $ 11,918 and $ 33,400 on its restricted cash deposits. Investments Fixed-Maturity Securities The Company classifies all of its investments in debt securities as available-for-sale and reports them at fair value. Subsequent to its acquisition of debt securities available-for-sale, the Company records changes in value through the date of disposition as unrealized holding gains and losses, net of tax effects, and includes them as a component of other comprehensive income. Refer to Note 2 “Investments” to our consolidated statements included in this Annual Report on Form 10-K, for further information. 53 Short-term Securities Short-terms securities have an original maturity of less than one year and are carried at amortized cost, which approximates fair value. Accumulated Other Comprehensive Income Accumulated other comprehensive income consists solely of unrealized gains and losses on debt securities available-for-sale, net of tax. Investment Gains and Losses Net realized investment gains and losses are included as a component of pre-tax revenues based upon specific identification of the investments sold on the trade date. Included in net realized and unrealized gains (losses) are credit impairment losses on invested assets other than those investments accounted for using the equity method of accounting described in the “Allowance for Credit Losses” and “Impairment of Other Investments” section discussed below. Allowance for Credit Losses (Available-for-Sale-Debt Securities) The impairment model for available-for-sale (“AFS”) debt securities differs from the current expected credit loss (“CECL”) methodology applied for held to maturity debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Under the new guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. As of December 31, 2021 and 2020, management evaluated and determined a credit allowance was not significant to the financial statements. Other Investments Non-Consolidating Variable Interest Entities (“VIEs”) The Company makes passive investments in limited partnerships (“LPs”), corporations, and a Real Estate Investment Trust (“REIT”). The Company determines at the inception of each arrangement whether an entity in which it has made an investment or in which it has other variable interests is considered a variable interest entity ("VIE"). The Company consolidates VIEs when it is determined to be the primary beneficiary. The Company is the primary beneficiary of a VIE when it has the power to direct activities that most significantly affect the economic performance of the VIE and has the obligation to absorb the majority of their losses or benefits. If the Company is not the primary beneficiary in a VIE, it will account for the investment or other variable interests in a VIE in accordance with applicable GAAP. For the year ended December 31, 2021 and 2020, the Company was not the primary beneficiary to any of its other investments and therefore considered the other investments as non-consolidated VIEs. Equity securities that do not result in consolidation and are not accounted for under the equity method, are measured at fair value. Equity securities without a readily determinable fair value are reported at cost, less impairment, unless we identify observable price changes in orderly transactions for the identical or a similar investment of the same issuer (measurement alternative). Change in fair value are reflected in the Company’s consolidated statements of operations. Certain other investments provide the Company with monthly or quarterly return on capital on a regular schedule. Impairment of Other Investments The Company maintains various interests in other investments which are without a readily determinable fair value and are measured at cost less impairment for observable changes in price or impairments or at net asset value. The Company reviews these investments each reporting period to determine whether an impairment or observable price change for the investment has occurred. When such events or changes occur, the Company evaluates the fair value compared to its cost basis in the investment. Gains or losses from a change in fair value are included in net realized gains and unrealized gains and losses in the Company’s consolidated statement of operations. For the year ended December 31, 2021, the Company recorded impairment charges totaling $ 2.2 million on its other investments compared to having no impairment in 2020. 54 Fair Value Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis when impaired, which include long-lived assets, goodwill, asset retirement obligations and other investments that the Company cannot significantly influence. Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the principal or most advantageous market in which we would transact is analyzed. Assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance, are considered. The Company estimates the fair value of its investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE and NASDAQ. For securities for which quoted prices in active markets are unavailable, the Company uses observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. The Company does not have any investments in its portfolio which require the use of unobservable inputs. The Company’s estimate of fair value reflects the interest rate environment that existed as of the close of business on December 31, 2021. Changes in interest rates after December 31, 2021 may affect the fair value of the Company’s investments. The Company’s non-financial assets, such as goodwill and intangible assets, are carried at cost until there are indicators of impairment and are recorded at fair value only when an impairment charge is recognized. Refer to Note 3 “ Goodwill and Other Intangible Assets ” to our consolidated statements included in this Annual Report on Form 10-K, for further information on our 2021 goodwill impairment charge. Long term debt is recorded at carrying value, Refer to Note 14 “ Long-Term Debt” to our consolidated statements included in this Annual Report on Form 10-K, for further information. Premiums The Company records direct and assumed premiums written as revenue net of ceded amounts on a daily pro rata basis over the contract period of the related in force policies or reinsurance contract. For any portion of premiums not earned at the end of the reporting period, the Company records an unearned premium liability. Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a policy-level evaluation to determine the extent to which the balance of premiums receivable exceeds the balance of unearned premiums. When we receive payments on amounts previously charged off, we reduce bad debt expense in the period we receive the payment. Balances in premiums receivable and the associated allowance account are removed upon cancellation of the policy due to non-payment. We recorded $ 451,000 and $ 451,600 allowance for the year ended December 31, 2021 and 2020. Bad debt expense related to uncollectible premiums was $ 0 , $ 161,300 and $ 290,300 for the years ended December 31, 2021, 2020 and 2019, respectively. When the Company receives premium payments from policyholders prior to the effective date of the related policy, the Company records an advance premiums liability. On the policy effective date, the Company reduces the advance premium liability and records the premiums as described above. 55 Policy Acquisition Costs The Company incurs policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance; (ii) policy administration fees paid to a third-party administrator at the time of policy issuance; (iii) premium taxes; and (iv) inspection fees. The Company capitalizes policy acquisition costs to the extent recoverable, then the Company amortizes those costs over the contract period of the related policy. We earn ceding commission on our gross and net quota share reinsurance contracts. Our accounting policy is to allocate ceding commission between policy acquisition costs and general and administrative expenses for financial reporting purposes. Ceding commission is allocated between policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. For the years ended December 31, 2021 and 2020, we earned ceding commission income of $ 62.7 million and $ 57.1 million of which $ 47.1 million and $ 43.0 million was allocable to policy acquisition costs. Ceding commission income is deferred and recognized over the quota share contract period. The amount and rate of ceding reinsurance commissions earned on the net quota share contract can slide within a prescribed minimum and maximum, depending on loss performance and how future losses develop. Premium Deficiency Reserve At each reporting date, the Company determines whether it has a premium deficiency. A premium deficiency would result if the sum of the Company’s expected losses, deferred policy acquisition costs, and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded the Company’s related unearned premiums plus investment income. Should the Company determine that a premium deficiency exists, the Company would write off the unrecoverable portion of deferred policy acquisition cost. Reinsurance The Company follows industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies the Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss. 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 consolidated financial statements. The Company’s reinsurance agreements are generally short-term, prospective contracts. The Company records an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of new reinsurance agreements. The Company amortizes its prepaid reinsurance premiums over the 12-month contract period. When the Company incurs losses 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 the Company’s liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to the estimate of unpaid losses. Given that an estimate of amounts recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to the Company’s reserves for unpaid losses, a reasonable possibility exists that an estimated recovery may change significantly from initial estimates. . The Company remains liable for claims payments if any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economics characteristics of the reinsurers to minimize its exposure to significant loses from reinsurers insolvencies. The Company contracts with a diverse population of reinsurers to secure its annual reinsurance coverage, for which the excess of loss treaties generally become effective June 1st each year. Allowance for Credit Losses for Reinsurance Recoverables The allowance for credit losses for reinsurance recoverable is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The Company monitors the credit quality of its reinsurance recoverables through the use of A.M. Best’s Financial Strength rating ("FSR"), or in the absence of an FSR consideration of credit ratings issued by approved rating agencies such as S&P, Moody’s, or Fitch. At December 31, 2021, the determination of the allowance for credit losses on reinsurance recoverables included analysis of (i) reinsurance recoverable balances by reinsurer FSR, (ii) estimated payment patterns associated with the claims underlying the reinsurance balances and (iii) historical default rates by reinsurer FSR as published by A.M. Best. In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends, 56 (iii) the low interest rate environment and (iv) the stressed global economy, including the impact of COVID-19. Reinsurance recoverables are reported on the consolidated balance sheets net of the CECL allowance, if any. Long-Lived Assets—Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building— 40 years ; computer hardware and software 3-years ; office and furniture equipment— 3 to 7 years . Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Leases We lease office space under finance and operating leases with expiration dates through 2031 . We determine whether an arrangement constitutes a lease and record lease liabilities and right-of-use assets on our consolidated balance sheets at lease commencement. We primarily use our incremental borrowing rates for our operating leases (rates are not readily determinable) and implicit rates for our financing leases in determining the present value of lease payments. The Company used the implicit rates within the finance leases. We measure right-of-use assets based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs we incur and (iii) tenant incentives under the lease. We begin recognizing rent expense when the lessor makes the underlying asset available to us, we do not assume renewals or early terminations unless we are reasonably certain to exercise these options at commencement, and we do not allocate consideration between lease and non-lease components. For short-term leases, we record rent expense in our consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred. Goodw ill and Intangible Assets On January 1, 2020, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASC 350) ("ASU 2017-04"), which changed the guidance on goodwill impairment. Under the new guidance, the qualitative assessment of the recoverability of goodwill remains the same, but the second step of the two-step quantitative test, which required calculation of the implied fair value of goodwill, has been eliminated. Instead, an impairment charge is recognized when the carrying value of a reporting unit exceeds its fair value. Any excess of carrying value over fair value is written down as an impairment. This evaluation is performed annually, during the fourth quarter or more frequently if facts and circumstances warrant. An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value. The Company reviews amortizable intangible assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If the Company concludes that impairment exists, the carrying amount is reduced to fair value. Refer to Note 3 “ Goodwill and Other Intangible Assets ” to our consolidated statements included in this Annual Report on Form 10-K, for further information on our 2021 goodwill impairment charge. " Unpaid Losses and Loss Adjustment Expenses The Company’s reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of settling all reported claims plus all claims we incurred related to insured events that have occurred as of the reporting date, but that policyholders have not yet reported to the Company (incurred but not reported, or “IBNR”). The reserve for unpaid losses is the estimate of amounts necessary to settle all reported and unreported incurred claims for the ultimate cost of insured losses, based upon the facts of each case and the Company’s experience with similar cases. Salvage and subrogation are deducted from the reserve for claims and claims expense on a cash basis. The establishment of appropriate reserves, including reserves for catastrophe losses, is an inherently uncertain and complex process. Reserve estimates are primarily derived using an actuarial estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident or report year to create an estimate of how losses are likely to develop over time. Development factors are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses, and paid losses combined with case reserves. The historical development patterns for these data elements are used as the assumptions to calculate reserve estimates, including the reserves for reported and unreported claims. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting re-estimates are reflected in current results of operations. The Company reports its reserves for unpaid losses and loss adjustment expenses gross of the amounts related to unpaid losses recoverable from reinsurers and reports loss and loss adjustment expenses net of amounts ceded to reinsurers. The Company does not discount its loss reserves for financial statement purposes. 57 Other Revenue Our insurance affiliates may charge policyholders a policy fee on each policy written; to the extent these fees are not subject to refund, and the Company recognizes the income immediately when collected, which coincide with related service obligations. The Company also charges pay-plan fees to policyholders that pay its premiums in more than one installment and records the fees as income when collected. Other income also includes rental income due under non-cancelable leases for space at the Company’s commercial property. Assessments Guaranty fund and other insurance-related assessments imposed upon the Company’s insurance company affiliates are recorded as policy acquisition costs in the period the regulatory agency imposes the assessment. To recover guaranty or other insurance-related assessments, the Company recoups such assessments from our policyholders in the form of a policy surcharge. Once the recoupment period begins, the entire recoupment amount is recorded as an asset on our balance sheet. There were no assessments during the periods presented. The Company collects other assessments imposed upon policyholders as a policy surcharge and records the amounts collected as a liability until the Company remits the amounts to the regulatory agency that imposed the assessment. Convertible Notes In August 2017 and September 2017, the Company issued collectively $ 136.8 million of 5.875 % Convertible Senior Notes (the “Convertible Notes”) due August 1, 2037 . The Convertible notes are accounted for in accordance with ASC 470-20. At the time of issuance and until December 1, 2017, the Company recorded the fair value of the derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statement of operations. As of December 31, 2021, the Company has $ 23.4 million of the Convertible Notes outstanding. This amount is net of $ 21.1 million of Convertible Notes reacquired and held by an insurance company subsidiary. Refer to the paragraph below under Debt Extinguishmen t for accompanying information regarding the repurchases, and Note 14 “ Long-Term Debt” to our consolidated statements included in this Annual Report on Form 10-K, for further information . Debt Extinguishment The Company has reacquired Convertible Notes over a series of transactions in 2019, 2018 and most recently in January 2022. In accordance with ASC 470 “ Debt ”, the Company evaluated the accounting treatment to determine if the repurchase of the Convertible Notes constituted a debt extinguishment. ASC 405-20-40-1 provides implementation guidance in order to determine if the Company is legally released from being the primary obligor under the liability, either judicially or by the creditor. Based on the reacquisition of the Convertible Notes, the Company derecognized the related debt and conversion option liability. Upon extinguishment, the Company performed a discounted cash flow (“DCF”) analysis for each transaction based on its date and principal amount, leveraging market debt yield data as of each trade date to estimate the costs of the debt. Debt Issuance and Discount Costs In connection with the issuance of debt, any debt issuance and discount costs are reflected on the balance sheet as an offset to long-term debt and amortized using the effective interest method over the life of the underlying debt instrument. Stock-Based Compensation The Company measures stock-based compensation at the grant date based on the fair value of the award and recognizes stock-based compensation expense over the requisite vesting period in accordance with ASC Topic 718, Compensation—Stock Compensation . Restricted stock awards are valued based on the fair value of the stock on the grant date and the related compensation expense is recognized over the vesting period. For awards with performance-based vesting conditions expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight line basis from the award date. The award will continue to be expensed on a straight-line basis until probability of achieving the performance-based conditions changes, if applicable. Earnings Per Share Basic net earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net earnings per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the reported period. Common equivalent shares include incremental shares from diluted vested and unvested restricted shares and convertible notes outstanding during the period using the treasury stock method. 58 Income tax Income taxes are accounted for under the asset and liability method, that recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities based on the tax rates expected to be in effect during the periods in which the temporary differences reverse. Temporary differences arise when income or expenses are recognized in different periods in the consolidated financial statements than on the tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. Income taxes includes both estimated federal and state income taxes. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. The Company has reclassed from other assets and accounts payable, the right-of-use lease asset and lease liability, respectively on the balance sheet for the year 2020 to conform to the current year's presentation. This also changed presentation only on the Statement of Cashflows for 2020 and 2019. No presentation changes impacted the Changes in Stockholders' Equity or the Statement of Operations. Accounting Pronouncements Not Yet Adopted The Company describes below recent pronouncements that may have a significant effect on its consolidated financial statements or on its disclosures upon future adoption. The Company does 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. In August 2020, the FASB issued ASU 2020-06 related to the measurement and disclosure requirements for convertible instruments and contracts in an entity’s own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s in own equity. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The Company expects that its adoption of ASU 2020-06 will not have an impact on its senior convertible notes. The Company expects that in the periods in which the Company reports a net income, the number of shares outstanding for the diluted earnings per share calculation will include approximately 2.8 million additional shares under the if-converted method, impacting the Company's consolidated EPS results. The Company intends to adopt the ASU 2020-06 during the first quarter of 2022. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective for contract modifications made between March 12, 2020 and December 31, 2022. The new guidance reduces the operational and financial impacts of contract modifications that replace a reference rate, such as London Interbank Offered Rate (LIBOR), affected by reference rate reform. The adoption of the new guidance provides relief from current GAAP and is not anticipated to have a material impact on the Company’s consolidated financial statements. The Company has concluded that the ASU 2020-04 will have no material impact on the Company's consolidated financial statements. For additional information refer to Note 14 “ Long-Term Debt” to our consolidated statements included in this Annual Report on Form 10-K, for further information . Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. Note 2. Investments The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows: December 31, 2021 Cost or Adjusted / Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale 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 59 (1) Includes securities at December 31, 2021 with a carrying amount of $ 22.5 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time. December 31, 2020 Cost or Adjusted / Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities (1) $ 29,985 $ 609 $ 1 $ 30,593 States, municipalities and political subdivisions 84,597 1,077 4 85,670 Special revenue 271,194 3,154 27 274,321 Hybrid securities 100 — — 100 Industrial and miscellaneous 167,296 3,070 39 170,327 Total $ 553,172 $ 7,910 $ 71 $ 561,011 (1) Includes securities at December 31, 2020 with a carrying amount of $ 21.6 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time. The table below summarizes the Company’s fixed maturity securities at December 31, 2021 and 2020 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. December 31, 2021 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Debt Securities Available-for-sale (in thousands) (in thousands) Due in one year or less $ 42,200 6 % $ 42,323 6 % Due after one year through five years 311,799 46 % 309,744 46 % Due after five years through ten years 224,654 34 % 220,777 34 % Due after ten years 96,592 14 % 96,510 14 % Total $ 675,245 100 % $ 669,354 100 % December 31, 2020 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Debt Securities Available-for-sale (in thousands) (in thousands) Due in one year or less $ 68,587 12 % $ 69,027 12 % Due after one year through five years 142,969 26 % 145,675 26 % Due after five years through ten years 166,240 30 % 168,979 30 % Due after ten years 175,376 32 % 177,330 32 % Total $ 553,172 100 % $ 561,011 100 % Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions. Net Realized and Unrealized (Losses) Gains The proceeds from the sale of debt securities were $ 30.4 million, $ 381.3 million and $ 171.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. The following table presents net realized gains (losses) on the Company’s debt securities available-for-sale for the years ended December 31, 2021, 2020 and 2019, respectively: For the Years ended December 31, 2021 2020 2019 Realized Gains (Losses) Fair Value at Sale Realized Gains (Losses) Fair Value at Sale Realized Gains (Losses) Fair Value at Sale (in thousands) Debt Securities Available-for-sale Realized gains $ 716 $ 26,029 $ 22,466 $ 374,863 $ 2,119 $ 157,125 Realized losses ( 652 ) 4,359 ( 71 ) 6,368 ( 211 ) 14,580 Net realized gains $ 64 $ 30,388 $ 22,395 $ 381,231 $ 1,908 $ 171,705 60 The following table presents the reconciliation of net realized and unrealized (losses) gains on the Company’s investments reported for the years ended December 31, 2021, 2020 and 2019, respectively: For the Year Ended December 31, 2021 2020 2019 (in thousands) Gross realized gains on sales of available-for-sale securities $ 716 $ 22,466 $ 2,119 Gross realized losses on sales of available-for-sale securities ( 652 ) ( 71 ) ( 211 ) Gross realized and unrealized on equity securities — — 2,703 Gross realized and unrealized losses on equity securities — — ( 1,441 ) Gross realized and unrealized gains in other investments 2,100 — 1,050 Gross realized and unrealized losses in other investments — — ( 57 ) Impairment charge in other investments ( 2,180 ) — — Net realized and unrealized (losses) gains $ ( 16 ) $ 22,395 $ 4,163 Equity Investments For the years ended December 31, 2021 and 2020, the Company had no net realized and unrealized gains or (losses) reported. For the year ended December 31, 2019, the Company net realized gains were $ 3.8 million and net realized losses were $ 1.5 million, respectively. The following table presents the Company's equity investments as of December 31, 2021 and 2020, respectively. For the Year Ended December 31, 2021 2020 Common stock $ — $ — Membership Shares 1,415 1,599 Total equity investments, at cost $ 1,415 $ 1,599 Net Investment Income The following table summarizes the Company’s net investment income by major investment category for the years ended December 31, 2021, 2020 and 2019, respectively: For the Year Ended December 31, 2021 2020 2019 (in thousands) Debt securities available-for-sale $ 7,220 $ 12,067 $ 13,761 Equity securities — — 1,436 Cash and cash equivalents 71 223 1,470 Other investments 1,435 1,100 505 Net investment income 8,726 13,390 17,172 Investment expenses 3,074 1,088 2,740 Net investment income, less investment expenses $ 5,652 $ 12,302 $ 14,432 The following tables present, for all debt securities available-for-sale in an unrealized loss position, for which no allowance for credit loss is established (including securities pledged), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position: 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 (in thousands) 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 585 $ 7,424 $ 480,588 32 $ 613 $ 12,812 61 Less Than Twelve Months Twelve Months or More December 31, 2020 Number of Securities Gross Unrealized Losses Fair Value Number of Securities Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities 3 $ 1 $ 73 1 $ — $ 7 States, municipalities and political subdivisions 6 4 5,158 — — — Special revenue 27 24 16,439 9 3 73 Industrial and miscellaneous 26 39 16,025 — — — Total 62 $ 68 $ 37,694 10 $ 3 $ 80 The Company’s unrealized losses on corporate bonds have not been recognized because the bonds are of high credit quality with investment grade ratings. The Company does not intend to sell and it is unlikely the Company will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is deemed due to changes in interest rates and other market conditions. The debt issuers continue to make timely principal and interest payments on the bonds. After taking into account these and other factors previously described, the Company believes these unrealized losses generally were caused by a decrease in market interest rates since the time the securities were purchased and not as a result of credit losses. Other Investments Non-Consolidated Variable Interest Entities (“VIEs”) The Company makes passive investments in limited partnerships (“LPs”), which is accounted for using the equity method, with income reported in net realized and unrealized gains and losses. The Company also makes passive investments in a Real Estate Investment Trust (“REIT”) and Insuretech 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, as described in the table below. The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2021 and 2020 (in thousands): Carrying Value For the Year Ended December 31, Balance Sheet Method 2021 2020 Other Real Estate LLC (1) Other Investments Equity Method $ 1,843 $ 3,000 Real Estate Corporation (2) Other Investments Measure Alternative 2,977 4,000 Class A Preferred Units (3) Other Investments Amortized Cost 15,000 17,400 Non-real estate related (4) Other Investments Equity Method 2,009 2,009 Insurtech Stock (5) Other Investments Measure Alternative 2,100 — Total non-consolidated VIEs $ 23,929 $ 26,409 (1) For the year ended December 31, 2021, a $ 1.2 million loss using the equity method of valuation was recognized in net realized and unrealized gains (losses) on the Statement of Operations. (2) For the year ended December 31, 2021, a $ 1.0 million impairment was recognized in net realized and unrealized gains (losses) on the Statement of Operations. (3) The Class A preferred units issued originally at $ 7.5 million and $ 9.9 million were measured at amortized cost under the guidance of ASC 320 and are subject to a fixed principal and interest payment schedule with maturity dates of February 1, 2023 and April 1, 2024 , respectively. (4) Certain underlying assets of the funds are expected to be liquidated over the period of approximately 3 to 5 years from December 31, 2021. In addition, the Company does not have the ability to redeem or withdraw from the funds, or to sell, assign, or transfer its investment, without the consent of the General Partner or Managers of each fund, but will receive distributions based on the liquidation of the underlying assets and interest processed from the underlying assets. (5) For the year ended December 31, 2021, the Company acquired common shares and warrants of an Insurtech company and this investment is reported using the measurement alternative method. The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at December 31, 2021 and 2020: As of December 31, 2021 As of December 31, 2020 Carrying Value Maximum Loss Exposure Carrying Value Maximum Loss Exposure (in thousands) Investments in non-consolidated VIEs $ 23,929 $ 23,929 $ 26,409 $ 26,409 62 The Company’s maximum exposure to loss with respect to these investments is limited to the investments carrying amounts reported as “other investments” in the Company’s consolidated balance sheet. For the year ended December 31, 2021, the Company recognized $ 1.0 million for other investment impairment on its Real Estate Corporation investment and $ 1.2 million loss on its Other Real Estate investment as a result of changes in its equity method valuation. No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment. Note 3. Goodwill and Other Intangible Assets For the years ended December 31, 2021 and 2020, goodwill was $ 92.0 million and $ 152.5 million, respectively, and intangible assets were $ 55.9 million and $ 62.3 million, respectively. The Company has recorded $ 1.3 million relating to insurance licenses classified as an indefinite lived intangible. Goodwill Amount Balance as of December 31, 2019 $ 152,459 Goodwill acquired — Impairment — Balance as of December 31, 2020 $ 152,459 Goodwill acquired — Impairment ( 60,500 ) Balance as of December 31, 2021 $ 91,959 The Company utilizes a combination of approaches to value the Company’s single reporting unit. The estimate of fair value was derived from the weighting of the income approach (discounted cash flow model) in conjunction with the market approach (guideline public company method and guideline transaction method) to determine the fair value of the single reporting unit. The estimate of fair value from the income approach was based on significant estimates and assumptions related to forecasts of future income and losses and LAE expenses, which are sensitive to changes in expectations about future market or economic conditions. The determination of the fair value using the guideline public company method requires management to make significant assumptions related to the price to tangible book value multiples and price to earnings multiples as well significant assumptions related to control premiums. The determination of the fair value using the guideline transaction method requires management to review the value of the business based on pricing multiples derived from the sale of companies that are similar to the Company. As a result of the analysis, we impaired a portion of our goodwill, reducing our carrying value of goodwill from $ 152.5 million to $ 92 million based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in our markets; and (iii) our market cap was below book value. These factors reduced our previously modeled fair value of the Company and resulted in a $ 60.5 million goodwill impairment charge, which is not tax deductible . Other Intangible Assets Our intangible assets resulted primarily from the acquisitions of Zephyr Acquisition Company and NBIC Holdings, Inc. and consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses. Finite-lived intangibles assets are amortized over their useful lives from one to fifteen years . The tables below detail the finite-lived intangible assets, net as of December 31, 2021 and 2020, respectively (amounts in thousands): For the Year Ended December 31, 2021 2020 Amortizing intangible assets (in thousands) Brand $ 1,210 $ 1,210 Agent relationships 15,500 15,500 Renewal rights 57,200 57,200 Customer relations 870 870 Trade names 9,000 9,000 Non-compete 4,790 4,790 88,570 88,570 Accumulated amortization ( 33,959 ) ( 27,608 ) Total infinite-lived intangible assets, net 54,611 60,962 Indefinite-lived intangible assets: License acquired 1,315 1,315 Total intangible assets, net $ 55,926 $ 62,277 63 Estimated annual pretax amortization of intangible assets for each of the next five years and thereafter is as follows (in thousands): Year Amount 2022 $ 6,351 2023 6,351 2024 6,351 2025 6,315 2026 6,078 Thereafter 23,165 $ 54,611 Amortization expense of intangible assets was $ 6.4 million, $ 6.4 million and $ 8.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Note 4. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated: For the Year Ended December 31, 2021 2020 2019 Basic (loss) earnings per share: Net (loss) income attributable to common stockholders (000's) $ ( 74,727 ) $ 9,326 $ 28,636 Weighted average shares outstanding 27,804,355 27,978,519 29,213,910 Basic (loss) earnings per share: $ ( 2.69 ) $ 0.33 $ 0.98 Diluted (loss) earnings per share: Net (loss) income attributable to common stockholders (000's) $ ( 74,727 ) $ 9,326 $ 28,636 Weighted average shares outstanding 27,804,355 27,978,519 29,213,910 Add: Effect of dilutive securities Impact of unvested equity awards — 10,447 19,071 Diluted weighted average common shares outstanding 27,804,355 27,988,966 29,232,981 Diluted (loss) earnings per share: $ ( 2.69 ) $ 0.33 $ 0.98 The Company had 2,809,453 , 2,029,162 and 1,914,770 antidilutive shares for the years ended December 31, 2021, 2020 and 2019, respectively. The convertible notes were excluded from the computations because the conversion price on these notes were greater than the average market price of our common shares during each of the respective periods, and therefore, would be anti-dilutive to earnings per share under the treasury method. Note 5. Fair Value Measurements Certain of the Company’s assets are carried at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Accordingly, when market observable data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows: Level 1 – Unadjusted quoted prices are available in active markets for identical assets/liabilities as of the reporting date. Level 2 – Valuations based on observable inputs, such as quoted prices similar assets or liabilities at the measurement date; quoted prices in the markets that are not active; or other inputs that are observable, either directly or indirectly. Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. For the Company’s investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, the Company obtains the fair values from its third-party valuation service and evaluates the relevant inputs, assumptions, methodologies and conclusions associated with such valuations. The valuation service 64 calculates prices for 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 their calculations are not quoted prices in active markets, but are observable inputs, and therefore represent Level 2 inputs. The following table presents information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy. For the years ended December 31, 2021 and 2020, there were no transfers in or out of Level 1, 2, and 3. December 31, 2021 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Invested Assets: (in thousands) 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 debt securities $ 669,354 $ 364 $ 668,990 $ — December 31, 2020 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Invested Assets: (in thousands) Debt Securities Available-for-sale U.S. government and agency securities $ 30,593 $ 371 $ 30,222 $ — States, municipalities and political subdivisions 85,670 — 85,670 — Special revenue 274,321 — 274,321 — Hybrid securities 100 — 100 — Industrial and miscellaneous 170,327 — 170,327 — Total debt securities $ 561,011 $ 371 $ 560,640 $ — Non-recurring fair value measurements Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. To evaluate such assets for a potential impairment, we determine 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. Certain of our investments in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. The following table presents information for assets measured at an estimated fair value on a nonrecurring basis as of December 31, 2021: Other Investments Carrying Value Balance, January 1, 2021 Amounts impaired Carrying Value Balance, December 31, 2021 (in thousands) Goodwill (1) $ 152,459 $ ( 60,500 ) 91,959 Real Estate Corporation, measurement alternative (2) 4,000 ( 1,023 ) 2,977 Total $ 156,459 $ ( 61,523 ) $ 94,936 65 (1) Non-cash impairment charge recorded in operating expenses in the consolidated statement of operations by the insurance companies and non-insurance companies. Goodwill that is impaired and subject to nonrecurring fair value measurements is a Level 3 valuation. (2) Impairment on these investments were recognized in the second quarter of 2021 based on the estimated fair value of the Company’s ownership interest. For the December 31, 2021, the goodwill impairment charge was recorded following the Company's annual valuation review and principally stemmed from its common stock valuation and prevailing valuation multiples in the property insurance market. The Company used a weighting of the income and market approaches to determine the fair value of the reporting unit. The impairment was based on the following factors: (i) the fair value of our stock trading significantly below book value, (ii) market capitalization control premium; and (iii) financial performance such as a negative or declining cash flows due to recent weather related catastrophes. There were no non-recurring fair value adjustments during 2020 and 2019. Note 6. Other Comprehensive Income The following table is a summary of other comprehensive (loss) income and discloses the tax impact of each component of other comprehensive (loss) income for the years ended December 31, 2021, 2020 and 2019, respectively: For the Year Ended December 31, 2021 2020 2019 Pre-tax Tax After- tax Pre- tax Tax After- tax Pre-tax Tax After- tax (in thousands) Other comprehensive (loss) income Change in unrealized gains on investments, net $ ( 13,661 ) 3,081 $ ( 10,580 ) $ 20,738 $ ( 4,807 ) $ 15,931 $ 19,765 $ ( 4,575 ) $ 15,190 Reclassification adjustment of realized (gains) losses included in net (loss) income ( 64 ) 14 ( 50 ) ( 22,395 ) 5,191 $ ( 17,204 ) ( 1,734 ) 401 $ ( 1,333 ) Effect on other comprehensive (loss) income $ ( 13,725 ) $ 3,095 $ ( 10,630 ) $ ( 1,657 ) $ 384 $ ( 1,273 ) $ 18,031 $ ( 4,174 ) $ 13,857 Note 7. Other Assets The following table summarizes the Company’s other assets for the years ended December 31, 2021 and 2020: Description December 31, 2021 December 31, 2020 (in thousands) Other amounts receivable $ 1,934 $ 1,816 State underwriting pooling & assoc. 3,956 4,753 Prepaid expense 6,382 4,726 Premium taxes — 248 Total other assets $ 12,272 $ 11,543 Note 8. 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 our right-of-use assets and lease obligations. Our 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. The components of lease costs were as follows (in thousands): For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 Amortization of ROU assets - Finance leases $ 1,969 $ 98 Interest on lease liabilities - Finance leases 785 25 Variable lease cost (cost excluded from lease payments) 557 538 Operating lease cost (cost resulting from lease payments) 1,359 1,362 Total lease cost $ 4,670 $ 2,023 66 Right-of-use lease asset and Lease Liability was as follows (in thousands): Balance Sheet Classification December 31, 2021 December 31, 2020 Right-of-use assets - operating Right-of-use lease asset, net $ 5,035 $ 5,955 Right-of-use assets - finance Right-of-use lease asset, net $ 22,718 $ 506 Lease Liability - operating Lease liability $ 6,551 $ 7,610 Lease Liability - finance Lease liability $ 24,621 $ 545 Weighted-average remaining lease term and discount rate for our operating and financing leases was as follows: December 31, 2021 December 31, 2020 Weighted average lease term - Finance leases 9.1 3.76 Weighted average lease term - Operating leases 6.23 6.99 Weighted average discount rate - Finance leases 4.18 % 6.92 % Weighted average discount rate - Operating leases 5.33 % 5.30 % Supplemental disclosure of cash flow information related to leases were as follows: For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 Cash payments for: (in thousands) Finance lease - Operating cash flows $ 291 $ 25 Finance lease - Financing cash flows $ 599 $ 82 Operating lease - Operating cash flows (fixed payments) $ 1,505 $ 1,452 Operating lease - Operating cash flows (liability reduction) $ 1,133 $ 1,031 Maturities of lease liabilities were as follows as of December 31, 2021 (in thousands): December 31, 2021 2022 $ 4,566 2023 4,500 2024 4,194 2025 3,970 2026 3,990 2027 and thereafter 16,224 Total lease payments 37,444 Less: imputed interest ( 6,272 ) Present value of lease liabilities $ 31,172 Note 9. Property and Equipment Property and equipment, net consists of the following at December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (in thousands) Land $ 2,582 $ 2,582 Building 10,141 10,141 Computer hardware and software 7,204 6,358 Office furniture and equipment 1,355 2,027 Tenant and leasehold improvements 8,255 8,133 Vehicle fleet 720 850 Total, at cost 30,257 30,091 Less: accumulated depreciation and amortization ( 12,831 ) ( 11,406 ) Property and equipment, net $ 17,426 $ 18,685 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $ 2.1 million, $ 1.6 million, $ 2.2 million, respectively. The Company’s own real estate consists of 15 acres of land, two buildings with a gross area of 88,378 square feet and a parking garage. 67 Expected annual rental income due under non-cancellable operating leases for our real estate properties is as follows (in thousands): Year Amount 2022 $ 2,763 2023 2,905 2024 2,801 2025 2,473 2026 2,525 2027 and Thereafter 17,140 Total $ 30,607 Note 10. Deferred Reinsurance Ceding Commission The Company defers certain income in connection with its quota share treaties, the ceded reinsurance commissions income, called deferred reinsurance ceding commissions (“DRCC”), which are deferred and earned over the terms of the reinsurance agreements. Ceding commission on quota share agreements call for provisional ceding rate, subject sliding scale adjustments based on the loss experience of the reinsurers. Adjustments are reflected in current operations. The Company allocates 75 % of total ceding commission income to policy acquisition costs and 25 % of total ceding commission income to general and administrative expense. The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the year ended December 31, 2021, 2020 and 2019 the Company allocated ceding commission income of $ 47.1 million and $ 43.0 million and $ 47.0 million to policy acquisition costs and $ 15.6 million and $ 14.1 million and $ 15.4 million to general and administrative expense, respectively. The table below depicts the activity with regard to deferred reinsurance ceding commission during the years ended December 31, 2021, 2020 and 2019. For the Year Ended December 31, 2021 2020 2019 (in thousands) Beginning balance of deferred ceding commission income $ 39,995 $ 37,464 $ 44,819 Ceding commission deferred $ 63,131 59,664 55,095 Less: ceding commission earned $ ( 62,721 ) ( 57,134 ) ( 62,450 ) Ending balance of deferred ceding commission income $ 40,405 $ 39,995 $ 37,464 Note 11. Deferred Policy Acquisition Costs The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“DPAC”), which are amortized over the effective period of the related insurance policies. The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC for the years ended December 31, 2021, 2020 and 2019: For the Year Ended December 31, 2021 2020 2019 (in thousands) Beginning Balance $ 89,265 $ 77,211 $ 73,055 Policy acquisition costs deferred $ 193,106 171,275 149,095 Amortization $ ( 188,490 ) ( 159,220 ) ( 144,939 ) Ending Balance $ 93,881 $ 89,265 $ 77,211 Note 12. Reinsurance Overview Reinsurance In order to limit the Company’s potential exposure to individual risks and catastrophic events, the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of the Company’s risk strategy, and premiums ceded to reinsurers is one of the Company’s largest costs. The Company has strong relationships with reinsurers, which it attributes to its management’s industry experience, disciplined underwriting, and claims management capabilities. For each of the 68 twelve months beginning June 1, 2020 and 2021, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate. Purchasing a sufficient amount of reinsurance to cover catastrophic losses from single or multiple events or significant non-catastrophe losses is an important part of the Company’s risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss. The Company’s insurance regulators require all insurance companies, like us, to have a certain amount of capital and reinsurance coverage in order to cover losses and loss adjustment expenses upon the occurrence of a catastrophic event. The Company’s reinsurance program provides reinsurance in excess of its state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event estimated to occur once in every 100 years based on its portfolio of insured risks. The nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a particular catastrophic event could be a one-in-100-year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company. The Company also purchases reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. The Company shares portions of its reinsurance program coverage among its insurance company affiliates. 2021-2022 Reinsurance Towers 69 Millions $ 1,432.3 $ 1,332.3 Layer 4 FL - SE Only 100 % of $ 100 M xs $ 40 M Nil Reinst. Layer 3 100 % of $ 160 M xs $ 40 M Nil Reinst. $ 1,224.2 $ 1,194.0 FHCF Layer 90 % of $ 869.3 M xs $ 354.9 M ($ 782.4 M) $ 705.7 $ 354.9 Layer 2 100 % of $ 250 M xs $ 40 M 1@ 100 % w/ RPP $ 140.0 Layer 1 94 % of $ 100 M xs $ 40 M 1@ 100 % w/ RPP ($ 94 M) 6 % of $ 50 M xs $ 40 M, 1@ 100 % ($ 3 M) Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M) $ 40.0 20 % Co-Par Top and Agg 80 % of $ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M) $ 30.0 Retention FL 1st Event 70 Millions $ 1,062.0 $ 1,061.6 Northeast Only 100 % of $ 222 M xs $ 40 M Nil Reinst. $ 840.0 Multi-Zonal 100 % of $ 290 M xs $ 40 M 1@ 100 % w/ RPP $ 550.0 Layer 3 100 % of $ 160 M xs $ 40 M Nil Reinst. $ 390.0 Layer 2 100 % of $ 250 M xs $ 40 M 1@ 100 % w/ RPP $ 140.0 Layer 1 94 % of $ 100 M xs $ 40 M 1@ 100 % w/ RPP ($ 94 M) 6 % of $ 50 M xs $ 40 M, 1@ 100 % ($ 3 M) Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M) $ 40.0 20 % Co-Par Top and Agg 80 % of $ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M) $ 30.0 Retention $ 20.0 Net Quota Share 56.5 % of $ 20 M ($ 11.3 M) NE 1st Event 71 Millions $ 680.0 Multi-Zonal 100 % of $ 290 M xs $ 40 M 1@ 100 % w/ RPP $ 390.0 Layer 2 100 % of $ 250 M xs $ 40 M 1@ 100 % w/ RPP $ 140.0 Layer 1 94 % of $ 100 M xs $ 40 M 1@ 100 % w/ RPP ($ 94 M) 6 % of $ 50 M xs $ 40 M, 1@ 100 % ($ 3 M) Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M) $ 40.0 20 % Co-Par Top and Agg 80 % of $ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M) $ 30.0 Retention HI 1st Event * xs = in excess 2021-2022 Reinsurance Program Catastrophe Excess of Loss Reinsurance E ffective June 1, 2021, the Company entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”). The catastrophe reinsurance programs are allocated among traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”) and Osprey Re Ltd (“Osprey”), the Company’s captive reinsurer. The FHCF covers Florida risks only and the Company elected to participate at 90 %. For the 2021 hurricane season, Osprey Re will provide reinsurance only for a portion of the Heritage P&C program, covering the southeastern region. T he 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. The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The 2021-2022 reinsurance program provides first event coverage up to $ 1.43 billion for Heritage P&C, first event coverage up to $ 1.1 billion for NBIC, and first event coverage up to $ 680.0 million for Zephyr. The Company’s first event retention in a 1 in 100 year event would include retention for the respective insurance company as well as any retention by Osprey. The first event maximum retention up to a 1 in 100 year event for each insurance company subsidiary is as follows: Heritage P&C – $ 32.0 million, which would be 100 % ceded to Osprey; Zephyr – $ 32 million; and NBIC – $ 20.7 million. The majority of the Company’s program was placed on a cascading basis which provides greater horizontal protection in a multiple small events scenario and features additional coverage enhancements. The Company is responsible for all losses and loss adjustment expenses in excess of our reinsurance program. For second or subsequent catastrophic events, the Company’s total available coverage depends on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $ 2.8 billion of limit purchased in 2021 includes reinstatement through the purchase of reinstatement premium protection. The amount of coverage, however, will be subject to the severity and frequency of such events. The Company's estimated net cost for the 2021-2022 catastrophe reinsurance programs is approximately $ 312.0 mill ion. Additionally, the Company placed 100 % of an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2021, expiring December 31, 2022 . The limit on the contract is $ 20.0 million with a retention of $ 20.0 million and has one reinstatement available. The Company placed 50 % of an aggregate contract for the Company’s business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 1, 2021, expiring March 31, 2022 . The limit on the contract is $ 20.0 million with an aggregate retention of $ 21.0 million, with a $ 21.0 million per occurrence cap, and a $ 1.0 million franchise deductible . Net Quota Share Reinsurance 72 The Company’s Net Quota Share coverage is proportional reinsurance, which applies to business underwritten by NBIC, for which certain of the Company’s other reinsurance (property catastrophe excess of loss and the second layer of the general excess of loss) inures to the quota share program. An occurrence limit of $ 20.0 million for catastrophe losses is in effect on the quota share program, subject to certain aggregate loss limits that vary by reinsurer. The amount and rate of ceding commissions slide, within a prescribed minimum and maximum, depending on loss performance. The Net Quota Share program was renewed on December 31, 2021 ceding 50.0 % of the net premiums and losses and 5 % of the prior year quota share is in run off. Per Risk Coverage For losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms, the Company purchased property per risk coverage for losses and loss adjustment expenses in excess of $ 1.0 million per claim. The limit recovered for an individual loss is $ 9.0 million and total limit for all losses is $ 27.0 million. There are 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 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 million for any properties it insured where the total insured value exceeded $ 10.0 million. This coverage applies to losses arising from business underwritten by Heritage P&C and losses arising commercial residential business underwritten by NBIC, excluding losses from named storms. General Excess of Loss The Company’s general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. For the contract period of July 1, 2021 through June 30, 2022, the coverage is in 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 . In addition, the Company purchased facultative reinsurance for losses underwritten by NBIC in excess of $ 3.5 million . For a discussion of 2020-2021 Reinsurance Program please Refer to Part II, Item 8, “Financial Statements and Supplementary Data” further “ Note 12. Reinsurance ” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 9, 2021. Effect of Reinsurance The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statement of Income for the year ended December 31, 2021, 2020 and 2019: For the Year Ended December 31, 2021 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 1,164,879 $ 1,144,162 $ 625,748 Ceded ( 553,147 ) ( 533,091 ) ( 198,378 ) Net $ 611,732 $ 611,071 $ 427,370 For the Year Ended December 31, 2020 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 1,080,100 $ 996,842 $ 609,593 Ceded ( 473,836 ) ( 452,120 ) ( 236,206 ) Net $ 606,264 $ 544,722 $ 373,387 For the Year Ended December 31, 2019 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 937,937 $ 924,247 $ 696,289 Ceded ( 436,564 ) ( 445,534 ) ( 423,001 ) Net $ 501,373 $ 478,713 $ 273,288 73 Note 13. Reserve For Unpaid Losses The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date. We estimate our IBNR reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses. The table below summarizes the activity related to the Company’s reserve for unpaid losses: For the Year Ended December 31, 2021 2020 2019 (in thousands) Balance, beginning of period $ 659,341 $ 613,533 $ 432,359 Less: reinsurance recoverable on unpaid losses 397,688 393,630 250,507 Net balance, beginning of period 261,653 219,903 181,852 Incurred related to: Current year 430,907 392,976 276,985 Prior years ( 3,537 ) ( 19,589 ) ( 3,696 ) Total incurred 427,370 373,387 273,289 Paid related to: Current year 247,903 228,394 137,764 Prior years 152,711 103,243 97,474 Total paid 400,614 331,637 235,238 Net balance, end of period 288,409 261,653 219,903 Plus: reinsurance recoverable on unpaid losses 301,757 397,688 393,630 Balance, end of period $ 590,166 $ 659,341 $ 613,533 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 balance sheet date. The Company’s losses incurred for the years ended December 31, 2021, 2020 and 2019 reflect prior year favorable development of $ 3.5 million, $ 19.6 million and $ 3.7 million, respectively, associated with management’s best estimate of actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. The following is information about incurred and paid claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim payments and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts The information by accident year is presented as required supplementary information and are unaudited. Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance (in thousands, except number of claims) Unaudited Accident year 2012 & prior 2013 2014 2015 2016 2017 2018 2019 2020 2021 Net IBNR Reserves Reported Claims 2012 & prior $ 102,723 $ 105,765 $ 107,842 $ 106,493 $ 106,331 $ 106,654 $ 106,446 $ 106,628 $ 106,437 $ 106,506 $ 22 53,356 2013 61,157 61,483 62,969 62,166 62,354 62,378 62,564 62,829 62,812 48 13,098 2014 118,991 114,899 113,847 114,984 115,838 115,234 115,409 115,708 321 18,493 2015 179,255 197,744 203,792 205,164 206,011 205,437 204,961 1,154 26,120 2016 237,207 242,611 250,990 250,235 250,067 250,482 3,226 27,606 2017 189,163 195,240 192,749 194,618 195,602 3,226 73,260 2018 199,565 193,672 192,474 198,064 2,688 34,281 2019 258,876 231,545 228,419 12,599 26,007 2020 370,058 364,380 36,620 34,948 2021 388,949 144,245 — Total $ 2,115,883 $ 204,149 74 Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance Unaudited Accident year 2012 & prior 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 & prior $ 92,909 $ 101,323 $ 102,750 $ 104,093 $ 104,362 $ 105,053 $ 105,875 $ 106,475 $ 106,689 $ 106,747 2013 35,771 50,716 55,589 57,647 59,395 60,581 61,191 62,235 62,337 2014 68,732 95,076 101,456 108,509 112,518 113,609 113,975 114,898 2015 103,918 162,654 181,672 192,967 197,524 199,600 201,495 2016 132,679 211,512 233,540 238,868 241,875 244,820 2017 103,148 169,743 178,622 184,313 188,928 2018 84,552 152,592 170,301 187,386 2019 124,664 185,667 205,442 2020 210,548 313,811 2021 213,830 Total $ 1,839,694 Reconciliation of Reserve Balances to Liability for Unpaid Loss and Loss Adjustment Expenses Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance $ 276,197 Reinsurance recoverable on unpaid losses 301,757 Unpaid Unallocated Loss Adjustment Expense 12,212 Unpaid losses and loss adjustment expenses $ 590,166 Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2021 (Unaudited) Year - 1 Year - 2 Year - 3 Year - 4 Year - 5 Thereafter Percentage 56 % 29 % 6 % 9 % 0 % 0 % Note 14. Long-Term Debt Convertible Senior Notes In August 2017 and September 2017, the Company issued in aggregate $ 136.8 million of 5.875 % Convertible Senior Notes (“Convertible Notes”) maturing on August 1, 2037 , unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037. 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. 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 Aug ust 1, 2032, in each case at 100 % of their principal amount, plus accrued unpaid interest to, but excluding, the relevant repurchase date. A s of December 31, 2021, the Company had $ 22.9 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately $ 506,000 and net of $ 21.1 million of Convertible Notes held by an insurance company subsidiary. For the year ended December 31, 2021, the Company made interest payments, net of affiliated Convertible Notes of approximately $ 1.4 million, on the outstanding Convertible Notes. At December 31, 2020, the Company had $ 22.1 million of the Convertible Notes outstanding, net of issuance and debt discount costs in aggregate of approximately $ 1.3 million and net of $ 21.1 million of Convertible Notes held by an insurance company subsidiary. For the year ended December 31, 2020, the Company made interest payments, net of affiliated Convertible Notes of approximately $ 1.4 million, on the outstanding Convertible Notes. As of December 31, 2019, the Company had $ 21.3 million of the Convertible Notes outstanding, net of debt issuance and debt discount costs which totaled approximately $ 2.1 million and net of $ 21.1 million of Convertible Notes held by an insurance company subsidiary. For the year ended December 31, 2019, the Company made interest payments, net of affiliated Convertible Notes of approximately $ 1.5 million on the Convertible Notes. Debt Extinguishment The Company reacquired convertible senior notes over a series of transactions in 2019, 2018 and 2017. In accordance with ASC 470 “ Debt ”, the Company evaluated the accounting treatment to determine if the repurchase of the Convertible Notes constituted a debt extinguishment. ASC 405-20-40-1 provides implementation guidance in order to determine if the Company is legally released 75 from being the primary obligor under the liability, either judicially or by the creditor. Based on the reacquisition of the Convertible Notes, the Company should derecognize the related debt and conversion option liability. Upon extinguishment, the Company performed a discounted cash flow (“DCF”) analysis for each transaction based on its date and principal amount, leveraging market debt yield data as of each trade date to estimate the costs of the debt. On February 19, 2019, the Company reacquired $ 5.8 million of its outstanding Convertible Notes, payment was made in cash of approximately $ 2.9 million and issuance of 285,201 shares of the Company’s common stock valued at $ 4.2 million. The repurchase resulted in a $ 48,000 non-operating loss. For 2019 debt repurchases, the Company removed the respective net debt amount and the related portion of the derivative that was included in shareholders’ equity. The extinguishment of debt was measured at the then-current fair value at the time of purchase, with any difference recorded as a gain or loss on the extinguishment. In accordance with the purchase agreement governing the Company’s offer and sale of convertible debt, the Company or its affiliates are prohibited from reselling the notes once acquired. The repurchased Convertible Notes hold no registration rights. Mortgage Loan In October 2017, the Company and its subsidiary, Skye Lane Properties LLC, jointly obtained a commercial real estate mortgage loan in the amount of $ 12.7 million, bearing interest of 4.95 % per annum and maturing on October 30, 2027 . On October 30, 2022, the interest rate shall adjust to an interest rate equal to the annualized interest rate of the United States 5-year Treasury Notes as reported by Federal Reserve on a weekly average basis plus 3.10 %. The Company makes monthly principal and interest payments against the loan. For each of the respective years ended December 31, 2021 and 2020, the Company made principal and interest payments of $ 892,850 on the mortgage loan. Senior Secured Credit Facility The Company is party to a five-year , $ 125.0 million credit agreement (as amended from time to time, the “Credit Agreement”) with a syndicate of lenders consisting of $ 75.0 million senior secured term loan facility (the “Term Loan Facility”) and a $ 50.0 million senior secured revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). The Credit Agreement, as amended, provides for (1) a five-year senior secured term loan facility in an aggregate principal amount of $ 75 m illion (the “Term Loan Facility”) and (2) a five-year senior secured revolving credit facility in an aggregate principal amount of $ 75 million (inclusive of a $ 5 million sublimit for the issuance of letters of credit and a $ 10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). Term Loan Facility: 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 $ 1.3 million per quarter commencing with the quarter ending December 31, 2024, with the remaining balance payable at maturity. The Term Loan Facility matures on July 27, 2026 . As of December 31, 2021, there was $ 70.0 million in aggregate principal outstanding on the Term Loan Facility. On July 28, 2021, the principal amount of the term loan outstanding under the Term Loan Facility was increased by $ 13.75 million to a total of $ 70.0 million from $ 56.25 million prior to the advance. For the period January 1, 2021 to July 28, 2021, the Company made principal and interest payments of approximately $ 3.8 million and $ 1.2 million, respectively against the Term Loan Facility. For the period July 29, 2021 to December 31, 2021, the Company made principal and interest payments of approximately $ 875,000 and $ 846,270 million, respectively on Term Loan Facility, as amended. For the year ended December 31, 2020, the Company made interest payments of approximately $ 2.6 million on the term loan. Revolving Credit Facility : The Revolving Credit Facility allows for borrowings of up to $ 75 million inclusive of a $ 5 million sublimit for the issuance of letters of credit and a $ 10 million sublimit for swingline loans. As of December 31, 2021, and December 31, 2020, we had no borrowings and no letters of credit outstanding under the Revolving Credit Facility. For the years ended December 31, 2021 and 2020, the Company made interest payments of $ 196,500 and $ 403,000 under the Revolving Credit Facility, respectively. At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin or (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50 %, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00 %, plus an applicable margin. 76 At December 31, 2021, the effective interest rate on for the Term Loan Credit Facility was 2.9375 %. 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. On March 31, 2021, the Company closed the July 1, 2020 standby letter of credit in the amount of $ 31.5 million that was issued by Regions Bank. On June 1, 2020, the Company amended the Credit Agreement by entering into the Third Amendment to Credit Agreement (the “Third Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Third Amendment modified the Credit Agreement to increase the letter of credit sublimit from $ 5 million to $ 40 million and to make related modifications to certain of the negative covenants in the Credit Agreement. On April 27, 2020, the Company amended the Credit Agreement by entering into the Second Amendment to Credit Agreement (the “Second Amendment”) with the lenders from time to time party to the Credit Agreement, and Regions Bank, as administrative agent and collateral agent. The Second Amendment modified the negative covenants in the Credit Agreement to permit the Company to make acquisitions and investments if, after giving effect to the acquisition or investment, either (1) the Company has an aggregate of $ 25.0 million in cash and availability under the revolving credit facility or (2) the consolidated leverage ratio under the Credit Agreement is at least a quarter turn less than the required ratio for the trailing four quarters. The amendment gives the Company more flexibility to make acquisitions and investments in the future. All other material terms of the Credit Agreement remain unchanged. FHLB Loan Agreements In December 2018, a subsidiary of the Company received a fixed interest rate 3.094 % cash loan of $ 19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta, with 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 in December 2018 and valued at $ 1.4 million. Additionally, the transaction required securities be pledged as collateral. As of December 31, 2021, the fair value of the collateralized securities was $ 22.5 million and the equity investment in FHLB common stock was $ 1.4 million. As of December 31, 2021 and 2020, the Company made quarterly interest payments of approximately $ 601,000 and $ 604,000 per the terms of the agreement, respectively. As of December 31, 2021, and December 31, 2020, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston carried at $ 215,900 and $ 222,900 , respectively. The following table summarizes the Company’s long-term debt: December 31, 2021 December 31, 2020 (in thousands) Convertible debt $ 23,413 $ 23,413 Mortgage loan 11,521 11,827 Credit loan facility 69,125 60,000 Revolving credit facility — 10,000 FHLB loan agreement 19,200 19,200 Total principal amount $ 123,259 $ 124,440 Deferred finance costs $ 2,502 $ 3,442 Total long-term debt $ 120,757 $ 120,998 As of the date of this report, we were in compliance with the applicable terms of all our covenants and other requirements under the Revolving agreement, Term Note, Convertible Debt, cash borrowings and other loans. Our ability to secure future debt financing depend, in part, on our ability to remain in such compliance. As long as there is no default or an event of default exist, we are allowed to payout dividends in an aggregate amount not to exceed $ 10.0 million in any fiscal year. The covenants and other requirements under the revolving agreement represent the most restrictive provisions that we are subject to with respect to our long-term debt. The schedule of principal payments on long-term debt is as follows: December 31, Amount 2022 $ 3,822 2023 23,039 2024 4,292 2025 5,624 2026 53,331 Thereafter 33,151 Total principal payments $ 123,259 77 Note 15. Income Taxes The following table summarizes the provision for income taxes: For the Year Ended December 31, 2021 2020 2019 (in thousands) Federal: Current $ 3,015 $ ( 14,863 ) $ 9,674 Deferred ( 5,872 ) 6,859 584 (Benefit)/provision for Federal income tax ( 2,857 ) ( 8,004 ) 10,258 State: Current 1,634 1,501 1,785 Deferred ( 84 ) ( 610 ) 317 Provision for State income tax expense 1,550 891 2,102 (Benefit)/provision for income taxes $ ( 1,307 ) $ ( 7,113 ) $ 12,360 The income tax (benefit) expense differs from the amounts computed by applying the U.S. federal income tax rate of as indicated below to pretax income as a result of the following (in thousands): For the Year Ended December 31, 2021 2020 2019 Expected income tax expense at federal rate 21.0 % 21.0 % 21.0 % State tax expense ( 1.0 )% 25.9 % 3.6 % Permanent items ( 0.5 )% 16.0 % 0.9 % Goodwill impairment ( 16.7 )% — — Non-deductible stock compensation ( 0.2 )% 22.4 % ( 0.4 )% Tax exempt interest 0.1 % ( 18.4 )% ( 1.6 )% Executive compensation 162(m) ( 0.2 )% 20.3 % 6.1 % Political contributions ( 0.2 )% 6.2 % 0.3 % Tax rate change ( 0.5 )% ( 409.1 )% 0.6 % Other 0.0 % ( 5.6 )% ( 0.4 )% Reported income tax expense 1.7 % ( 321.3 )% 30.1 % The effective tax rates for 2021, 2020 and 2019 were affected by various permanent tax differences, including disallowed executive compensation deductions which were further limited in 2017 and future years upon the enactment of H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The effective tax rate for 2020 benefitted from a tax rate change related to a carryback of a tax net operating loss, which was carried back five years under The CARES Act. 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. On March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. The CARES Act amended the law for net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021. Net operating losses generated by a corporation during these taxable years are allowed a five-year carryback period. As the Company had a 2020 tax net operating loss, the Company’s 2020 rate reconciliation reflects the favorable $ 7.1 million tax benefit from carrying back tax losses to years for which the statutory rate was 35%. The significant components of deferred tax assets and liabilities included in the consolidated balance sheets as December 31 were as follows: 78 For the Year Ended December 31, 2021 2020 Deferred tax assets: (in thousands) Unearned premiums $ 15,805 $ 15,303 Unearned commission 9,459 9,272 Net operating loss 1,222 1,885 Tax-related discount on loss reserve 3,872 3,322 Stock-based compensation 84 113 Accrued expenses 1,182 982 Leases 792 394 Unrealized losses 1,913 — Other 472 343 Total deferred tax asset 34,801 31,614 Deferred tax liabilities: Deferred acquisition costs $ 21,977 $ 20,694 Prepaid expenses 177 236 Unrealized gain — 1,814 Property and equipment 1,504 1,669 Note discount 187 326 Basis in purchased investments 34 53 Basis in purchased intangibles 14,550 15,693 Internal revenue code 481(a) 4,416 8,577 Other 1,382 1,029 Total deferred tax liabilities 44,227 50,091 Net deferred tax liability $ ( 9,426 ) $ ( 18,477 ) The Company had no capital loss carryforward as of December 31, 2021. In assessing the net carrying amount of deferred tax assets, we consider whether it is more likely than not that we will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. We had non-deductible goodwill of $ 87.3 million and $ 144.4 million for the years ended December 31, 2021 and 2020, respectively. Of the goodwill that may be amortized for income tax purposes, the remaining tax basis to amortize is $ 4.4 million for the year ended December 31, 2021 and $ 4.9 million for the year ended December 31, 2020. The statute of limitations related to our federal and state income tax returns remains open from our filings for 2018 through 2020. For the 2014 tax year, the federal income tax return was examined by the tax authority resulting in no material adjustments. In April 2019, the Company was notified by the tax authority that the federal income tax returns for the years 2015, 2016 and 2017 would be examined. In August 2020, the Company received a notice from the tax authority for the examined tax years, reporting that the returns were accepted as final. No further action will be required and no other tax years are under examination. Our reinsurance affiliate, Osprey Re, Ltd., which is based in Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S. corporation. As of December 31, 2021, the Company had no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. 79 Note 16. Statutory Accounting and Regulations State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our 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 report under the statutory-basis of accounting which differs from GAAP, among other items, net income and surplus as regards policyholders, which is called stockholder’s equity under GAAP. Combined results of the Company’s insurance subsidiaries reported statutory-basis net loss of $ 38.3 million a nd $ 24.3 million for the years ended December 31, 2021 and 2020, respectively. The Company’s insurance subsidiaries 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 statutory-basis capital and surplus equal to the greater of $ 15 million or 10 % of their respective liabilities. Zephyr is required to maintain a deposit of $ 750,000 in a federally insured financial institution. NBIC is required to maintain statutory-basis capital and surplus of $ 3.0 million. The combined statutory surplus for Heritage P&C, NBIC, and Zephyr w as $ 302.1 million at December 31, 2021. The combined statutory-basis surplus for Heritage P&C, NBIC, and Zephyr was $ 333.3 million at December 31, 2020. State laws also require the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, with which the Company’s insurance affiliates are complying. At December 31, 2021, our insurance subsidiaries met the financial and regulatory requirements of the states in which they do business. The legislatures of the states of domicile of our insurance affiliates have adopted the National Association of Insurance Commissioners (“NAIC”) recommendations with regard to expansion of the regulation of insurers to include non-insurance entity affiliates. Specifically, the new law permits the state insurance regulators to examine affiliated entities within an insurance holding company system in order to ascertain the financial condition of the insurer. The law also provides for certain disclosures regarding enterprise risk, which are satisfied by the provision of related information filed with the SEC. The NAIC published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory-basis surplus provides for policy holders. Most states, including Florida, Hawaii, and Rhode Island, have enacted the NAIC guidelines as statutory requirements, and insurers having less statutory-basis surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital. State laws for Florida, Hawaii, and Rhode Island permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The applicable laws pertain to the state of domicile of each insurance company affiliate and provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or distributions that would require prior approval of the insurance regulatory authority. In the state of Florida, a dividend may be taken without regulatory approval if the dividend is equal to or less than the greater of 10 % of the insurer’s surplus or the insurer’s net income. In the state of Rhode Island, a dividend may be taken without regulatory approval if the dividend is equal to or less than the lesser of 10 % of the insurer’s surplus or the insurer’s net income excluding realized capital gains. The state of Hawaii restricts dividends without regulatory approval to the smaller of prior years’ net income or 10 % of prior year’s surplus. Heritage P&C and NBIC have no t paid dividends in any of the last three years. Zephyr paid dividends of $ 6.8 mil lion and $ 13.7 million for the years ended December 31, 2021 and 2020. Statutory risk-based capital requirements may further restrict our insurance subsidiaries ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory-basis surplus to fall below minimum risk-based capital requirements. State insurance laws limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. The Company’s insurance affiliates were in compliance with all investment restrictions at December 31, 2021 and 2020. Governmental agencies or certain quasi-governmental entities can levy assessments upon the Company in the states in which the Company writes policies. Refer to Note 1 “ Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices” to our consolidated statements included in this Annual report on Form 10-K, for further information for a description of how the Company recovers assessments imposed upon it. Governmental agencies or certain quasi-governmental entities can also levy assessments upon policyholders, and the Company collects the amount of the assessments from policyholders as surcharges for the benefit of the assessing agency. There are currently no assessments to be collected from policyholders and remitted to any governmental or quasi-governmental entities. If an assessment becomes levied the Company would multiply the premium written on each policy by these assessment percentages to determine the additional amount that it will collect from the policyholder and remit to the assessing agencies. 80 The Company reported its insurance subsidiaries’ assets, liabilities and results of operations in accordance with GAAP, which varies from statutory-basis accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The Company’s reinsurance subsidiary, Osprey, which was incorporated on April 23, 2013 , is licensed as a Class 3A Insurer under The Bermuda Insurance Act 1978 and related regulations. Osprey is required to meet and maintain certain minimum levels of solvency and liquidity. Each year Osprey is required to file with the Bermuda Monetary Authority (the “Authority”) a Capital and Solvency Return, Statutory Financial Return and Audited Financial Statements within four months of its relevant financial year end. Osprey maintains sufficient collateral to comply with regulatory requirements as of December 31, 2021. Bermuda’s standard for financial statement reporting is U.S. GAAP. Note 17. Commitments and Contingencies The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. Note 18. Accounts Payable and Other Liabilities Other liabilities consist of the following as of December 31, 2021 and 2020: Description December 31, 2021 December 31, 2020 (in thousands) Deferred ceding commission 40,406 $ 39,995 Outstanding claim checks — 10,864 Accounts payable and other payables 10,086 9,248 Accrued dividends 1,634 1,670 Accrued interest and issuance costs 735 833 Other liabilities 195 80 Premium tax 871 — Commission payables 17,598 18,245 Total other liabilities $ 71,525 $ 80,935 Note 19. Accrued Bonus Compensation At December 31, 2021, the Company recognized bonus compensation expense of $ 3.4 million, of which $ 3.0 million was unpaid. At December 31, 2020, the Company recognized employee bonus compensation expense in aggregate of $ 6.4 million, of which $ 2.1 million related to the consolidated severance payment due, as disclosed in Part IV, Item 6. Exhibit 10.5 Separation agreement dated December 1, 2020, and of which $ 2.9 million was unpai d as of December 31, 2020. Note 20. Related Party Transactions In July 2020, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for Company. The Company pays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a director. For the years ended December 31, 2021 and 2020, the Company paid agency commission to Comegys of approximately $ 843,180 and $ 1.0 million, respectively. Note 21. Employee Benefit Plan . The Company provides a 401(k) plan for substantially all employees. The Company provides a matching contribution of 100 % on the first 3% of employees’ contribution and 50 % on the next 2% of the employees’ contribution to the plan. The maximum match is 4 %. For the years ended December 31, 2021 and 2020, the contributions made to the plan on behalf of the participating employees were approximately $ 1.3 million and $ 1.2 million, respectively. Effective September 1, 2021, the Company terminated its self-insured healthcare plan and enrolled in a flex healthcare plan which allows employees the choice of three medical plans with a range of coverage levels and costs. For the years ended December 31, 2021 and 2020, the Company incurred medical premium costs of $ 3.5 million and $ 4.1 million, respectively. An additional liability from the Company's legacy self-insured healthcare plan was accrued for approximately $ 422,800 and $ 1.4 million for unpaid claims as of December 31, 2021 and December 31, 2020, respectively. 81 Note 22. 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 December 31, 2021, the Company had 26,753,511 shares of common stock outstanding, 10,536,737 , treasury shares of common stock and 283,092 shares of unvested restricted common stock issued reflecting total paid-in capital of $ 332.8 million as of such date. 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 (excluding restricted stock) are fully paid and nonassessable. Stock Repurchase Program On August 1, 2019, the Company announced that its Board of Directors ratified a stock repurchase program authorizing the Company to repurchase up to $ 50.0 million of its common stock which had expired on December 31, 2020 . As of December 31, 2020, the Company repurchased in aggregate 2,065,042 shares of its common stock since authorizing the stock repurchase program for $ 26.2 million. On November 2, 2020, the Board of Directors extended the Company’s existing share repurchase program from December 31, 2020 to December 31, 2021 and increased the authorization under the program from the $ 23.8 million remaining to $ 50.0 million, which repurchases may be made under the Company’s current Rule 10b5-1 trading plan, which allows the Company to purchase shares below a predetermined price per share, or otherwise. As of December 31, 2021, the Company repurchased in aggregate 1,256,898 shares of its common stock under its repurchase program for $ 8.2 million. The stock purchase program expired on December 31, 2021 . On December 19, 2021, the Board of Directors established a new share repurchase program plan to commence upon December 31, 2021, for the purpose or repurchasing up to an aggregate of $ 25.0 million of Common Stock, through the open market or in such other manner as will comply with the terms of applicable federal and state securities laws and regulations, including without limitation, Rule 10b-18 under the Securities Act at any time or from time to time on or prior to December 31, 2022 (the "New Share Repurchase Plan"). Dividends 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. Dividends For the year ended December 31, 2021, we recorded quarterly cash dividends totaling approximately $ 6.7 million as follows: Quarter Ended December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 Cash dividend per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06 Total cash dividends paid $ 1,670,032 $ 1,677,911 $ 1,680,432 $ 1,680,149 Record date December 15, 2020 March 15, 2021 June 15, 2021 September 15, 2021 Payment date January 15, 2021 April 6, 2021 July 6, 2021 October 6, 2021 82 Note 23. Stock-Based Compensation Common 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. At December 31, 2021, there were 870,733 shares available for grant under the Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards. During the quarter ended March 31, 2021, the Company issued to its Chief Executive Officer 95,878 shares of performance-based restricted stock with a fair value at the time of grant of $ 10.43 per share. The performance-based restricted stock has a three-year performance period beginning on January 1, 2021 and ending on December 31, 2023 and will vest following the end of the performance period but no later than March 5, 2024. The number of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In addition, the Company issued this executive 47,939 shares of time-based restricted stock with a market value at the time of grant of $ 10.43 per share. The time-based restricted stock will vest in three equal installments of 15,979 on December 27, 2021, and 15,980 on December 27, 2022 and 2023, respectively. During the second quarter ended June 30, 2021, the Company issued to its Chief Financial Officer 28,012 shares of performance-based restricted stock with a fair value at the time of grant of $ 10.71 per share. The performance-based restricted stock has a three-year performance period beginning on January 1, 2021 and ending December 31, 2023 and will vest following the end of the performance period but no later than March 5, 2024. The number of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In addition, the Company issued this executive 14,006 shares of time-based restricted stock with a fair value at the time of grant of $ 10.71 per share. The time-based restricted stock will vest in three equal installments 4,668 on December 27, 2021 and 4,669 on December 27, 2022 and 2023, respectively. During the fourth quarter ended December 31, 2021, the Company issued to certain executives in aggregate 18,159 shares of restricted stock with a grant date fair value of $ 6.89 per share. Each of the restricted stock grants vest in three equal installments on December 27, 2021, 2022 and 2023. The Company also awarded 50,799 shares of performance-based restricted stock with a fair value at the time of grant of $ 6.89 per share. The performance-based restricted stock has a three-year performance period beginning on January 1 , 2021 and ending on December 31, 2023 and will vest following the end of the performance period but no later than March 5, 2024. The number of shares that will be earned at the end of the performance period is subject to decrease based on the results of the performance condition. In 2020, the Company awarded 10,000 and 5,000 shares of restricted stock with at the time of grant a fair value of $ 10.60 per share and $ 10.83 per share, respectively. The 2020 restricted stock grants vest over a 2 year and 12 month , period commencing from the date of grant, respectively. No restricted stock was granted during the year ended December 31, 2019. The Plan authorizes the Company to grant stock options at exercise prices equal to the fair market value of the Company’s stock on the dates the options are granted. Any options granted would typically have a maximum term of ten years from the date of grant and vest primarily in equal annual installments over a range of one to five-year periods following the date of grant for employee options. The Company has not granted any stock options since 2015 and all unexercised stock options have since been forfeited. Restricted Stock The Company has also granted shares of its common stock subject to certain restrictions under the Plan. Restricted stock awards granted to employee’s vest in equal installments generally over a three to five year period from the grant date subject to the recipient’s continued employment. The fair value of restricted stock awards is estimated by the market price at the date of grant and amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards granted prior to 2021 have the right to receive dividends; dividends accrue but are not paid until vesting for recipients of restricted stock awards granted 2021 and thereafter. 83 Restricted stock activity for the three years ended December 31, 2021, 2020 and 2019 is as follows: Weighted-Average Grant-Date Fair Number of shares Value per Share Non-vested, at December 31, 2018 605,801 $ 20.41 Granted — — Vested ( 22,647 ) 14.28 Canceled and surrendered ( 237,620 ) 14.82 Non-vested, at December 31, 2019 345,534 $ 19.56 Granted 15,000 10.68 Vested ( 13,044 ) 13.17 Canceled and surrendered ( 247,223 ) 9.49 Non-vested, at December 31, 2020 100,267 $ 15.37 Granted - Performance-based restricted stock 174,689 9.45 Granted - Time-based restricted stock 80,104 9.68 Vested ( 43,711 ) 9.61 Canceled and surrendered ( 28,257 ) 10.69 Non-vested, at December 31, 2021 283,092 $ 9.32 Awards are being amortized to expense over a one to five year vesting period. The Company recognized $ 1.2 million, $ 4.7 million and $ 5.4 million of compensation expense for the years ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, the Company granted in aggregate 254,793 shares of time-based and performance-based restricted stock. During the year ended December 31, 2021, 71,968 shares of restricted stock were vested and released. Of the stock released to employees, 28,257 shares were withheld to cover withholding taxes of $ 231,000 . During the year ended December 31, 2020, 260,267 shares of restricted stock were vested and released. Of the stock released to employees, 247,223 shares were withheld by the Company to cover withholding taxes of $ 2.4 million. During 2019, 237,620 shares were withheld to cover withholding taxes of $ 3.5 million arising from the vesting of restricted stock. We recognized no tax benefit from the restricted stock awards and related paid dividends for the years 2021, 2020 and 2019, respectively. At December 31, 2021, there was approximately $ 1.0 million unrecognized expense related to time-based unvested restricted stock and an additional $ 1.0 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in 2020, there was $ 1.1 million of unrecognized expense. Additional information regarding our outstanding unvested restricted stock at December 31, 2021 is as follows: Grant date Restricted shares unvested Share Value at Grant Date Per Share Remaining Restriction Period (Years) February 12, 2018 50,000 16.35 1.00 April 24, 2020 5,000 10.60 0.25 January 4, 2021 127,837 10.43 2.00 April 13, 2021 37,349 10.71 2.00 October 18, 2021 62,906 6.89 2.00 283,092 84 Note 24. Selected Quarterly Financial Data (unaudited) The following table provides a summary of unaudited quarterly results for the periods presented (in thousands, except per share data): For the year ended December 31, 2021 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned $ 142,199 $ 146,499 $ 162,445 $ 159,928 Investment income $ 1,293 $ 956 $ 1,548 $ 1,855 Total revenues $ 147,243 $ 150,197 $ 167,408 $ 166,712 Total operating expenses (1) $ 153,075 $ 154,187 $ 182,785 $ 209,578 Operating (loss) income $ ( 5,832 ) $ ( 3,990 ) $ ( 15,377 ) $ ( 42,865 ) Net (loss) income $ ( 5,148 ) $ ( 3,950 ) $ ( 16,410 ) $ ( 49,218 ) Basic net (loss) income per share $ ( 0.19 ) $ ( 0.14 ) $ ( 0.59 ) $ ( 1.79 ) Diluted net (loss) income per share $ ( 0.19 ) $ ( 0.14 ) $ ( 0.59 ) $ ( 1.79 ) For the year ended December 31, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned $ 126,006 $ 129,057 $ 138,230 $ 151,430 Investment income $ 3,670 $ 3,296 $ 2,817 $ 2,519 Total revenues $ 132,706 $ 136,012 $ 165,119 $ 159,548 Total operating expenses $ 119,946 $ 129,049 $ 169,601 $ 164,604 Operating income (loss) $ 12,760 $ 6,963 $ ( 4,482 ) $ ( 5,056 ) Net income (loss) $ 7,620 $ 4,132 $ ( 5,233 ) $ 2,808 Basic net income (loss) per share $ 0.27 $ 0.15 $ ( 0.19 ) $ 0.10 Diluted net income (loss) per share $ 0.27 $ 0.15 $ ( 0.19 ) $ 0.10 The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period. (1) The fourth quarter results include a $ 60.5 million impairment of goodwill. Refer to Note 3 “ Goodwill and Other Intangible Assets ” to our consolidated statements included in this Annual Report on Form 10-K, for further information on our 2021 goodwill impairment charge. Note 25. Subsequent Events On March 4, 2022, the Company announced that its Board of Directors declared a $ 0.06 per share quarterly dividend payable on April 6, 2022 to stockholders of record as of March 17, 2022 . In January 2022, the Company reacquired $ 11.7 million of its outstanding Convertible Senior Notes. Payment was made in cash. The Convertible Notes were retired at the time of repurchase. In January 2022, the Company withdrew $ 15 million from the Revolving Credit Facility to reacquire a part of the outstanding Convertible Senior Notes. 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None