What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-13 compared with 2022-03-14 · 557 added, 533 removed, 1459 unchanged (43% of the section changed)

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As of March 3, 2023, there were 48 holders of record of our common stock.

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.

While we have historically declared quarterly dividends, our board of directors did not declare a dividend for the second, third or fourth quarters of 2022.

The declaration and payment of dividends will continue to 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, which limit our ability to pay dividends, 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 “

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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.

During the three months ended December 31, 2022, we purchased 341,075 shares of common stock for an aggregate of $625,000 under our stock repurchase program.

In addition, we acquired 18,422 shares of common stock for a total cost of $35,739 during the quarter ended December 31, 2022 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.

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(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.

(2) The reported repurchases were made under the prior $25.0 million repurchase plan, which expired on December 31, 2022.

Effective December 31, 2022, the Board of Directors established a new share repurchase program.

The new share repurchase program, which commenced upon the expiration of the prior repurchase share plan, allows the Company to repurchase up to an aggregate of $10.0 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, 2023.

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.

The following five year graph and table compare the cumulative total stockholder return of our common stock over the period from December 31, 2016 through 2022, assuming an initial investment of $100 and reinvestment of dividends with the performance among Heritage, 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.

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Russell 2000 Index

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.

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.

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.

We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint.

We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York.

We provide personal residential insurance in Florida on both an admitted and non-admitted basis and in California on a non-admitted basis.

As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution.

Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.

Inflation, Underwriting and Pricing

We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates and inflation guard factors resulting in an increase in the average premium per policy of 18.1% for the year ended December 31, 2022 as compared to the prior year 2021.

New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year.

As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements.

For that reason, we account for inflation in our rate indications and filings with our regulators.

We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses.

Our retention has remained steadily in the range of 90% despite the rate increases we have implemented, in large part due to a challenging property insurance market in many of the regions in which we operate.

Weather losses and a higher cost of reinsurance have impacted these markets.

While we believe our rates are generally competitive with private market insurers operating in our space, we are focused on managing exposure and achieving rate adequacy throughout our book of business.

We continue to experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business.

Our Florida personal lines market is also seeing claim costs impacted by litigated claims, which substantially increases loss costs thereby driving up rates for the insurance buying public.

Our response to this phenomenon is a combination of raising rates and reducing exposure.

Claims abuse has extended throughout much of Florida, generated from assignment of benefits, excessive roof claims, and unwarranted litigated claims which far exceeds levels experienced in other states.

Correspondingly, our exposure reduction plan expanded to personal lines business throughout the state of Florida.

Our industry experienced higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in the Spring 2022 renewals.

We anticipate continued cost increases and availability constraints for the 2023 renewal season.

As described herein, we are carefully managing exposure by reducing new business written in certain geographies, non-renewing unprofitable business in compliance with regulatory requirements, increasing rates, where permitted by regulators, and narrowing our underwriting requirements.

While we see improvement in the geographic distribution of our business, which is becoming more rate adequate, our Florida loss costs have continued to increase from a combination of adverse weather and exacerbation of losses on weather and other claims resulting from the litigated claims environment.

Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress toward reducing losses from abusive claim reporting practices.

The special legislative session of December 2022 included a number of additional provisions aimed at driving down claims abuses and stabilizing the Florida property insurance market.

We plan to evaluate the impact of this legislation before growing exposures in the Florida personal lines market.

The table below provides policy count, premiums-in-force, and TIV for Florida and all other states.

Our goal is to reduce exposure in Florida given historical abusive claims practices.

Florida policies-in-force and TIV have each declined from the prior year but premiums in force increased as a result of rate actions taken.

For markets outside of Florida, the premiums-in-force increased while the policy count decreased due to rate actions taken.

At December 31,

Policies in force:

Premiums in force:

1,284,065,715

1,172,103,942

Total Insured Value:

103,752,777,168

107,144,880,580

306,070,446,229

290,830,572,887

409,823,223,397

397,975,453,467

Strategic Profitability Initiatives

The following provides an update to our strategic initiatives that we expect will enable us to achieve consistent long-term quarterly earnings and drive shareholder value.

Generate underwriting profit though rate adequacy and more selective underwriting.

o Significant rating actions throughout the book of business resulting in an increase in average premium per policy of 18.1% over fourth quarter 2021 and 5.6% over third quarter 2022.

o Premiums-in-force of $1.3 billion are up 9.6% from fourth quarter 2021 while policy count is down 7.2% through more selective underwriting.

o Continued focus on timely rate actions, tightening underwriting criteria, and expanding restrictions on new business written in over-concentrated markets or products.

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

o Increased commercial residential premium by 41.1% year over year while TIV only increased 21.5% and policies in force increased by only 0.4%.

o Reduced policy count for Florida personal lines business by 16.2% as compared fourth quarter 2021.

The disciplined underwriting and rating actions have reduced Florida personal lines TIV by 11.1% while reducing premiums in force by only 1.9%.

o This disciplined underwriting approach resulted in a policy count reduction of 2.5% in other states while generating a 11.9% increase in premiums in force.

Improve portfolio diversity.

o No state represents over 26% of the Company’s TIV.

o The top four states grew TIV by an average 2.2% while the smallest five states grew by 56.7%.

o As a result of diversification efforts, the top five personal lines states represented 79.2% of all TIV at fourth quarter 2022 compared to 79.8% of all TIV at fourth quarter 2021.

Provide coverages suitable to the market and return targets.

o Offering Excess & Surplus lines (“E&S”) policies in California and Florida.

o Expanding E&S to South Carolina during second quarter of 2023.

o Continue to evaluate other states for E&S and other products.

Key Components of our Results of Operations

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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.

The 2022 and 2021 effective tax rates were adversely impacted by the mostly non-deductible goodwill impairment reported of $92.0 million and $60.5 million, respectively.

At December 31, 2022, the Company recognized a valuation allowance of $6.4 million against the net deferred tax asset generated at its foreign domiciled captive reinsurer, Osprey Re.

The Company can only realize those net deferred tax assets to the extent Osprey Re generates future taxable income.

Ceded premium ratio represents ceded premiums earned as a percentage of gross premiums earned.

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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.

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market conditions on our business.

As a result of general supply chain disruptions and inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims.

Goodwill impairment Charge

We evaluate goodwill and other intangible assets for impairment annually, or whenever events or changes in circumstances indicate that it is likely that the carrying amount of goodwill and other intangible assets may exceed the implied fair value.

Any impairment is charged to operations in the period that the impairment is identified.

The evaluation of goodwill impairment requires considerable management judgment and includes a review of a variety of factors as described in Note 3, Goodwill and Other Intangible assets to our consolidated financial statements.

Any adverse change in those factors could have a significant impact on the recoverability of goodwill and a material impact on our financial results.

During the second quarter of 2022, we concluded it was appropriate to perform an interim evaluation of goodwill for potential impairment given a variety of market trends.

As a result of the analysis, management determined the entire amount of remaining goodwill was impaired, which reduced our carrying value of goodwill from $92.0 million to $0 based on the following factors:

(i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events;

(ii) elevated loss ratios for property insurers in our markets;

and (iii) trading of our stock below book value.

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

Overview of 2022 Financial Results

In the following section, we discuss our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.

For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, 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, 2021, which was filed with the SEC on March 14, 2022.

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, including certain key performance indicators such as net combined ratio, ceded premium ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

This discussion should be read in conjunction with our consolidated financial statements and the related notes included under Part II, Item 8 of this Annual Report on Form 10-K.

Net loss for the year ended December 31, 2022 was $154.4 million or $5.86 per diluted share, compared to a net loss of $74.7 million or $2.69 per diluted share in the prior year, with the increase stemming from a $90.8 million, net of income tax, non-cash goodwill impairment charge in the second quarter contributing a $3.45 loss per share, compared to a $60.5

million, non-cash goodwill impairment charged reported in the fourth quarter of 2021 contributing a $2.18 loss per share;

combined with higher losses and loss adjustments expenses incurred for the year ended December 31, 2022, which included net losses associated with Hurricanes Ian and Nicole.

In addition, the Company recorded a $6.4 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey Re, our captive reinsurer domiciled in Bermuda.

The total amount of these expenses exceeded the increase in total revenue as described below.

Gross premiums written of $1.3 billion, up 9.5% from $1.2 billion in the prior year, driven primarily by rate actions taken in all states with a policy count reduction of 7.2% driven substantially by a reduction in the number of Florida personal lines policies.

Rate increases continued to meaningfully benefit written premiums throughout the book of business.

Gross premiums earned of $1.2 billion, up 5.7% from $1.1 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy.

Net premiums earned of $637.1 million, up 4.3% from $611.1 million in the prior year, reflecting the higher gross earned premium outpacing the increase in ceded premiums for the year.

Losses and loss adjustment expenses incurred of $501.2 million, up 17.3% from $427.4 million in the prior year.

The increase primarily stems from retained losses from Hurricanes Ian and Nicole in 2022 as well as an increase in attritional losses.

Additionally, we experienced $3.7 million of adverse prior year development compared to $3.5 million of favorable prior year development in the prior year.

Ceded premium ratio of 47.3%, up 0.7 points from 46.6% in the prior year driven by a higher cost of the 2022-2023 catastrophe excess of loss program, stemming primarily from higher costs, which was partly offset by a higher cost for severe convective storm coverage in 2021 which did not recur in 2022.

The ceded premium ratio change was dampened by the increase in gross premiums earned which exceeded the increase in the cost of the reinsurance program.

Net loss ratio of 78.7%, 8.8 points higher than the prior year of 69.9%, driven by higher losses incurred and higher ceded premium as described above.

Net expense ratio of 35.6%, up 0.9 points from the prior year amount of 34.7%, driven by a higher ceded premium ratio as described above, as well as higher policy acquisition associated with the increase in gross premiums written.

Net combined ratio of 114.3%, up 9.7 points from 104.6% in the prior year, driven by higher net loss and net expense ratios as described above.

Effective tax rate was 7.1% compared to 1.7% in the prior year.

The effective tax rate for 2022 was significantly lower than the statutory rate due to a non-cash, mostly tax non-deductible goodwill impairment of $92.0 million recorded in the second quarter as well as a $6.4 million valuation allowance against our Osprey Re net deferred tax assets whose utilization may be limited under the Internal Revenue Code.

The effective tax rate for 2021 was lower than the statutory rate primarily due to a mostly non-deductible non-cash goodwill impairment of $60.5 million.

The effective tax rate can also vary driven by the impact of permanent differences in relation to the pre-tax income or loss each year.

Consolidated Results of Operations

The following table summarizes our results of operations for the periods indicated:

The following table summarizes our results of operations for the years indicated:

Year Ended December 31,

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Interest expense, net

(Loss) income before income taxes

Loss before income taxes

Benefit for income taxes

Net (loss) income

Basic net (loss) income per share

Diluted net (loss) income per share

Basic net loss per share

Diluted net loss per share

not meaningful

Total revenue

Total revenue was $662.5 million for the year ended December 31, 2022, up 4.9% compared to $631.6 million in the prior year.

The increase primarily stems from higher net premiums earned and investment income partly offset by a reduction in policy fee income, as described below.

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 written of $1.3 billion, up 9.5% year-over-year from $1.2 billion.

We experienced premiums written growth of 12.1% outside Florida and 7.1% in Florida.

Growth throughout our book of business was largely driven by rate increases resulting in a higher average premium per policy.

Premiums-in-force were $1.3 billion as of December 31, 2022, representing a 9.6% increase from the prior year due to continued proactive underwriting and rate actions despite a reduction in policy count reduction of approximately 40,000.

The reduction in policies-in-force from the fourth quarter of 2021 reflects our intentional exposure management initiatives.

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.

Gross premiums earned were $1.2 billion for the year ended December 31, 2022, up 5.7% compared to $1.1 billion in the prior year.

The increase in gross premiums earned reflects higher gross premiums written over the last twelve months driven by rate increases, which resulted in higher average premium per policy, as described above.

Ceded premiums

Ceded premiums were $571.8 million for the year ended December 31, 2022, up 7.3% compared to $533.1 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.

The increase is primarily attributable to a higher cost of catastrophe excess of loss reinsurance coupled with higher ceded premiums for our quota share coverage due to the higher gross premiums written in the northeast, partly offset by a lower cost for our severe convective storm coverage from the prior year.

Net premiums earned

Net premiums earned were $637.1 million for the year ended December 31, 2022, up 4.3% compared to $611.1 million in the prior year.

The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums.

The increase primarily stems from higher gross premiums earned, partly offset by higher ceded premiums as described above.

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.

Net investment income, inclusive of realized investment gains (losses) and unrealized gains (losses) on equity securities, was $11.7 million for the year ended December 31, 2022, up 109.0% compared to $5.6 million in the prior year.

The increase stems from a higher interest rate environment in 2022 as compared to the prior year.

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.

Other revenue was $13.7 million for the year ended December 31, 2022, down 7.9% compared to $14.9 million in the prior year.

The decrease was driven largely by lower policy fee income as a result of the reduction in policy count in Florida.

Year Ended December 31,

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Total operating expenses

Losses and loss adjustment expenses

Total operating expenses

Total operating expenses were $819.8 million, or 17.2% from $699.6 million in the prior year.

As described below, the drivers included the increase in losses and loss adjustment expenses, an increase in acquisition costs, and additional goodwill impairment.

Losses and loss adjustment expenses (LAE)

Losses and LAE were $501.2 million for the year ended December 31, 2022, up 17.3% compared to $427.4 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.

The increase was driven primarily by more severe catastrophe weather activity in 2022 than in 2021.

The remainder was driven by higher attritional losses, as well as unfavorable loss development of $3.7 million in 2022 compared to favorable loss development of $3.5 million in 2021.

Policy acquisition costs

Policy acquisition costs were $156.3 million for the year ended December 31, 2022, up 7.1% compared to $146.0 million in the prior year.

Higher acquisition costs relate to the increase in gross premiums written.

Higher acquisition costs were driven by 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.

General and administrative expenses were $70.4 million for the year ended December 31, 2022, up 7.0% compared to $65.8 million in the prior year.

The increase is primarily attributable to higher human capital costs, mostly driven by employee benefits costs, as well as the non-recurrence of a $1.5 million state tax credit recorded in 2021.

Goodwill impairment

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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.

The Goodwill impairment evaluation 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.

As a result of our analysis for goodwill impairment, we impaired $60.5 million of goodwill in the fourth quarter of 2021 and impaired the entire amount of remaining goodwill in the second quarter of 2022, reducing our carrying value of goodwill from $92.0 million at December 31, 2021 to $0 at December 31, 2022.

See the section titled “Goodwill Impairment Charge”

above and Note 3 of the notes to our consolidated financial statements for more detail on our impairment of goodwill.

Year Ended December 31,

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Interest expense, net

(Loss) income before income taxes

Loss before income taxes

Benefit for income taxes

Net (loss) income

Basic net (loss) income per share

Diluted net (loss) income per share

Net loss for the year ended December 31, 2022 was $154.4 million, up 106.6% from net loss of $74.7 million in the prior year.

The increase primarily relates to a goodwill impairment charge as described in Note 3 to the consolidated financial statements coupled with higher catastrophe weather losses described above and a $6.4 million valuation allowance against our net deferred tax asset as described above, partly offset by higher total revenue as described above.

Interest expense, net

Interest expense was $8.0 million for the year ended December 31, 2021, flat from the prior year.

Interest expense was $8.8 million for the year ended December 31, 2022, above the prior year by 10.5% as a result of rising interest rates.

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 benefit for income taxes was $11.8 million for the year ended December 31, 2022 compared to a benefit for income taxes of $1.3 million for the year ended December 31, 2021.

The effective tax rate for the current year is 7.1% compared to 1.7% 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.

Our effective tax rate for both years was impacted by the non-deductible goodwill impairment of $92.0 million recognized during the second quarter of 2022 and $60.5 million during the fourth quarter of 2021.

See further discussion of the goodwill impairment in the Note 3 of the Notes to our consolidated financial statements.

The effective tax rate for the year ended December 31, 2022 was also impacted by a $6.4 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey Re, our captive reinsurer domiciled in Bermuda, whose utilization may be limited under the Internal Revenue Code.

Finally, 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 and from the impact of permanent differences on pre-tax income or loss.

Year Ended December 31,

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Net combined ratio

The net combined ratio was 114.3% for the year ended December 31, 2022, up 9.7 points from 104.6% in the prior year.

The increase stems primarily from a higher net loss and net expense ratios, described below.

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.

The ceded premium ratio was 47.3% for the year ended December 31, 2022, up 0.7 points from 46.6% in the prior year.

The increase primarily stems from ceded premium growth that was partly offset by growth in gross premiums earned as described above.

Net loss and LAE ratio

The net loss and LAE ratio was 78.7% for the year ended December 31, 2022, up 8.8 points from 69.9% in the prior year.

The increase primarily relates to higher weather and attritional losses in the current year as a percentage of net premium earned, mostly driven by Hurricanes Ian and Nicole and $3.7 million of unfavorable prior year reserve development in 2022 compared to $3.5 million of favorable prior year reserve development in 2021, as a percentage of net premiums earned.

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.

The net expense ratio was 35.6% for the year ended December 31, 2022, up 0.9 points from 34.7% in the prior year.

The increase primarily stems from the impact of a higher ceded premium ratio as well as higher policy acquisition associated with the increase in gross premiums written.

Liquidity and Capital Resources

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As of December 31, 2022, we held $280.9 million in cash and cash equivalents and $653.6 million in investments, compared to $359.3 million and $694.7 million as of December 31, 2021.

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.

The decrease in cash and cash equivalents was primarily driven by payment of reinsurance premiums, claim payment, stock repurchases,

and payment of dividends.

The decrease in investments was driven by higher unrealized losses on our fixed income securities caused by rising interest rates.

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.

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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.

Net cash used in operating activities for the year ended December 31, 2022 was $34.3 million compared to net cash provided by of $60.1 million during the prior year.

The decrease in cash from operating activities relates primarily to timing of cash flows associated with claim and reinsurance payments as well as reinsurance reimbursements during the year ended December 31, 2022 compared to the year ended December 31, 2021.

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.

Net cash used in investing activities for the year ended December 31, 2022 was $37.9 million compared to net cash used of $124.5 million in the prior year.

The change in cash used in investing activities relates primarily to allocations of funds for investment in each period.

Strategic sales of investments to yield realized gains in 2020 produced proceeds which were re-invested in 2021, driving up the cash used for investing activities for that period.

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.

Net cash used in financing activities for the year ended December 31, 2022 was $5.1 million, compared to net cash used of $17.3 million in the prior year.

The decrease in cash used for financing activities was primarily driven by draws from our Revolving Credit Facility (defined below) totaling $35 million to purchase and retire $22.5 million of Convertible Notes and contribute capital to our captive reinsurer, Osprey Re.

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”).

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”

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

Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement.

In order to avoid a covenant violation, on November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the Credit Agreement to, among other things, (i) decrease the Revolving Credit Facility commitments from $75 million to $50 million, (ii) establish a new $25 million Term Loan Facility (defined below) to refinance loans outstanding under the existing Revolving Credit Facility and to pay fees, costs and expenses related thereto, (iii) reduce, from $50 million to $25 million, the aggregate amount of potential future increases to the Revolving Credit Facility commitments and/or Term Loan Facility commitments, (iii) modify the amortization of the existing term loan facility and new term loan facility to 10% per annum, paid quarterly, and (iv) increase the applicable margin for loans under the

Credit Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10% credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50% to 3.00%).

The amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement.

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

and together with the Term Loan Facility, the “Credit Facilities”).

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The Term Loan Facility matures on July 28, 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.

As of November 7, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $73.9 million in aggregate principal outstanding under the Term Loan Facility.

As of December 31, 2022, there was $89.1 million in aggregate principal outstanding under the Term Loan Facility.

Revolving Credit Facility.

The Revolving Credit Facility allows for borrowings of up to $75 million inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans.

As of 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.

The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility.

As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility.

In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the amendment, the borrowings under the Revolving Credit Facility were repaid in full.

On December 23, 2022, the Company borrowed $10.0 million under the Revolving Credit facility.

At December 31, 2022, the Company had unused letters of credit totaling $32.6 million.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin (described below) and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate”

of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin (described below).

The applicable margin for loans under the Credit Facilities varies from 2.75% per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to greater than 2.25-to-1.

Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for SOFR loans) or, if the duration of the applicable interest period exceeds three months, then every three months.

As of December 31, 2022, the borrowings under the Term Loan Facility and Revolving Credit Facility accruing interest at a rate of 7.32% and 7.42% per annum, respectively.

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).

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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.

The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries

and regulated subsidiaries) plus the net cash proceeds of any equity transactions.

Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts;

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The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions.

The net proceeds from the offering of the Convertible Notes, after deducting

discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million.

The offering was completed on August 16, 2017.

The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million.

The offering of the Convertible Notes was completed on August 16, 2017.

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

The Convertible Notes bear interest at a rate of 5.875% per year.

Interest 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.

Interest is payable semi-annually in arrears, on February 1 and August 1 of each year.

The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes;

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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.

At any time 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.

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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

$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.

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 Convertible Notes automatically become immediately due and payable.

In January 2022, the Company repurchased $11.7 million principal amount of outstanding Convertible Notes.

As of December 31, 2022, there was $885,000 principal amount of outstanding Convertible Notes, net of $21.1 million of Convertible Notes held by an insurance company subsidiary.

As discussed above, holders of the Convertible Notes issued by the Company had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase the aggregate principal amount of Convertible Notes that are validly tendered.

The Company received notice from the Depositary for the Convertible Notes that, on July 29, 2022, $10.9 million aggregate principal amount of the Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, and the Company has requested that the Trustee cancel the Convertible Notes tendered.

The outstanding balance as of December 31, 2022 of non-affiliated Notes was $885,000.

On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $10.9 million and $320,041, respectively.

The Company has drawn $10.0 million from the Revolving Credit Facility to replenish the cash used to pay the $10.9 million for the purchase of the tendered Convertible Notes.

FHLB Loan Agreements

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Membership in the FHLB required an investment in FHLB’s common stock which was purchased on December 31, 2018 and valued at $1.4 million.

As of December 31, 2022, the common stock was valued at $1.5 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.

The proceeds from the loan were used to prepay the Company’s Senior Secured Notes due 2023 in 2018.

Contractual Obligations and Commitments

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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

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.

When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S.

generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report.

Certain of these estimates result from judgments that can be subjective and complex.

As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments.

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.

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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.

Our billing system is equity based such that policies are canceled 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.

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Our external reserving actuaries evaluated the adequacy of our reserves as of December 31, 2022 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.

In addition to $300.6 million of recorded case reserves, we recorded $831.2 million of IBNR reserves as of December 31, 2022 to achieve overall gross reserves of $1.1 billion.

At December 31, 2022, ceded IBNR and net IBNR were $546.0 million and $285.2 million, respectively.

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Net Loss Reserves

Net (loss) income

Stockholders’

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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.

We also earn ceding commission on our quota share reinsurance contracts, which is presented as a reduction of policy acquisition costs with any 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.

Our accounting policy is to allocate ceding commission between policy acquisition costs and general and administrative expenses for financial reporting purposes based upon the proportion these costs bear to production of new business.

For the years ended December 31, 2022, 2021 and 2020, we earned ceding commission income of $61.8 million, $62.7 million and $57.1 million of which $46.5 million, $47.1 million and $43.0 million was allocable to policy acquisition costs.

Deferred taxes .

At December 31, 2022, we assessed our deferred tax position and hold a $6.4 million valuation against our net deferred tax assets.

We intend to continue maintaining the valuation allowance on our net deferred tax asset until there is sufficient evidence to support the reversal of all or some portion of the allowance.

Provision for Premium Deficiency .

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to our consolidated financial statements included in this Annual Report on Form 10-K, for further information.

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.

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 investment portfolios at December 31, 2022, include interest rate-sensitive securities, mainly fixed income securities.

Our fixed income securities portfolio is comprised primarily of investment grade (investments receiving Standard & Poor's Global Ratings (“S&P”) or an equivalent rating of BBB- or above) corporate securities, U.S.

government and agency securities, municipal obligations, collateralized loan obligations (“CLO”) and other asset-backed securities (“ABS”), and mortgage-backed securities (“MBS”).

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’

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.

Investment securities are managed by a nationally recognized asset manager and are overseen by the investment committee appointed by our board of directors.

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’

As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’

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.

Unrealized gains and losses for any equity securities held 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.

On November 7, 2022, the Company amended its Credit Agreement to replace LIBOR with an alternative benchmark rate.

Borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate”

of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin, eliminating any reference to LIBOR.

Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates.

Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control.

All else being equal, a rise in interest rates will decrease the fair value of our existing fixed income investments, and a decline in interest rates will increase the fair value of our existing fixed income investments.

However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates.

We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and managing the effective duration of our portfolio to maximize yield while managing interest rate risk at an acceptable level.

The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.179 years at December 31, 2022 and 3.903 years at December 31, 2021.

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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.

As of December 31, 2022, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A+, at fair value, consistent with our average credit quality rating at December 31, 2021.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 2022 (in thousands, except percentages):

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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.

Our equity investment portfolio at December 31, 2022 consisted of membership shares held of FHLB common stock which 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 canceled, as the membership cannot be sold.

The following table illustrates the composition of our equity portfolio at December 31, 2022 (in thousands):

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Notes to Consolidated Financial Statements

Rep ort of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

Report of Indepe ndent Registered Public Accounting Firm

To the Stockholders and Board of Directors

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”).

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Heritage Insurance Holdings, Inc.

(the “Company”) as of December 31, 2022 and 2021;

the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022;

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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).

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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.”

The Company's management is responsible for these financial statements;

maintaining effective internal control over financial reporting;

and 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.

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.

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We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reportin g

Definition and Limitations of Internal Control Over Financial Reporting

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.

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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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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 estimated liability for unpaid losses and loss adjustment expense (LAE) totaled $1.1 billion at December 31, 2022.

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.

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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.

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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

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

Denver, Colorado

March 13, 2023

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Income taxes receivable

Deferred income tax asset, net

Deferred policy acquisition costs, net

Property and equipment, net

Right-of-use lease asset, net

Right-of-use lease asset, finance

Right-of-use lease asset, operating

Intangibles, net

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Accrued compensation

Lease liability

Lease liability, finance

Lease liability, operating

Accounts payable and other liabilities

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Stockholders’

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

Common stock, $ 0.0001 par value, 50,000,000 shares authorized, 37,796,107 shares issued and 25,539,433 outstanding at December 31, 2022 and 37,340,248 shares issued and 26,753,511 outstanding at December 31, 2021

Additional paid-in capital

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Treasury stock, at cost, 12,231,674 shares and 10,536,737 shares at December 31, 2022 and December 31, 2021

Retained earnings

Retained (deficit) earnings

Total Stockholders' Equity

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Gross premiums earned

Ceded premiums

Ceded premiums earned

Net premiums earned

Net investment income

Net realized and unrealized (losses) gains

Net realized (losses) gains

Other revenue

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Interest expense, net

Other non-operating loss, net

(Loss) income before income taxes

(Benefit) provision for income taxes

Benefit for income taxes

Net (loss) income

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Change in net unrealized gains (losses) on investments

Reclassification adjustment for net realized investment gains

Reclassification adjustment for net realized investment losses (gains)

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

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(In thousands, except share and per share data)

Earnings (Deficit)

Comprehensive

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Balance at December 31, 2019

Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2021

Balance at January 1, 2021 (as adjusted for change in accounting principle)

Net unrealized change in investments, net of tax

Repurchase of common stock

Restricted stock award withholdings

Convertible Option debt extinguishment, net of tax

Surrendered shares for tax withholding

Restricted stock vested

Issued restricted stock

Stock buy-back

Stock-based compensation on restricted stock

Stock issued on convertible note conversion

Deferred tax adjustment for credit expected losses

Cash dividends declared ($ 0.24 per share of common stock)

Balance at December 31, 2020

Cumulative effect of adoption accounting guidance for expected credit losses, net of tax at January 1, 2020

Balance at January 1, 2020 (as adjusted for change in accounting principle)

Net unrealized change in investments, net of tax

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Stock-based compensation on restricted stock

Deferred tax adjustment for credit expected losses

Cash dividends declared ($ 0.24 per share of common stock)

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Issued restricted stock

Forfeiture on restricted stock

Stock buy-back

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Net loss from sale of asset

Net loss on repurchase of debt

Deferred income taxes, net of acquired

Deferred income taxes

Goodwill impairment

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Accrued interest

Income taxes payable

Leasehold incentives

Advance premiums

Accrued compensation

Lease liability

Lease liability, net

Other liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

INVESTING ACTIVITIES

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Other investment purchases

Leasehold improvements

Proceeds from other investments sold

Collection of promissory note receivable

Software in progress

Cost of property and equipment acquired

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Supplemental Cash Flows Information:

Income taxes paid, net

Income taxes (refunded) paid, net

Interest paid

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Non-cash acquisition of shares of common stock

Issuance of shares on conversion of convertible notes

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

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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.

NBIC Holdings, Inc., and NBIC Service Company which provides services to NBIC.

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.

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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.

Restricted cash related to individual state regulatory deposits was $ 6.7 and $ 5.4 million for the years ended December 31, 2022 and 2021, respectively.

The Company earned interest income of $ 12,612 and $ 11,918 on its restricted cash deposits.

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Refer to Note 2 “Investments”

to our consolidated statements included in this Annual Report on Form 10-K, for further information.

to these consolidated financial statements for further information.

Short-term Securities

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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.

Under the guidance, an entity may no longer consider the length of time fair value has been less than amortized cost.

As of December 31, 2022 and 2021, management evaluated and determined a credit allowance was not significant to the financial statements.

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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.

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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.

Changes 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.

The Company maintains various interests in other investments without a readily determinable fair value that are evaluated for impairment at each reporting period.

When such events or changes occur, the Company evaluates the estimated present value of future cash flows compared to its cost basis in the investment to evaluate whether there may be an impairment.

For the year ended December 31, 2022, the Company recorded no impairment charges on its other investments compared to recording an impairment of $ 2.2 million for the year ended December 31, 2021.

Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis.

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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.

to these consolidated financial statements for further information on our 2021 and 2022 goodwill impairment charges.

At December 31, 2022, all goodwill had been written off.

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.

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.

to these consolidated financial statements for further information.

The Company records direct and assumed premiums written as revenue 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.

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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.

An allowance of $ 451,000 was recorded as of December 31, 2022 and 2021.

Bad debt expense related to uncollectible premiums was $ 0 , $ 0 and $ 161,300 for the years ended December 31, 2022, 2021 and 2020, respectively.

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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.

We earn ceding commission on our 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.

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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.

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In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends,

(iii) the low interest rate environment and (iv) the stressed global economy, including the impact of COVID-19.

(iii) the interest rate environment and (iv) the stressed global economy.

Reinsurance recoverables are reported on the consolidated balance sheets net of the CECL allowance, if any.

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Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred.

Capitalized Software

Costs associated with the implementation of certain internal systems are capitalized and carried at capitalized less accumulated amortization once they are it is placed in service and are included as a component of fixed assets on the Company’s consolidated balance sheet.

Costs capitalized include internal personnel costs, external developer costs, and interest.

The implementation costs relate to systems built on software which the Company purchased or licensed and developed both internally and with third party vendors.

As such, capitalized costs will be amortized over the term of the useful life of the software.

We lease office space under finance and operating leases with expiration dates through 2031 .

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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.

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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.

Under the 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.

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An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value.

The remaining balance of goodwill was written off during the second quarter of 2022.

The Company reviews amortizable intangible assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

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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.

to these consolidated financial statements, for further information on our 2022 goodwill impairment charge.

Unpaid Losses and Loss Adjustment Expenses

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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.

To recover assessments which are paid in advance to the guaranty fund or other insurance-related entity, 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.

There were no such assessments during the periods presented.

The Company collects pass through 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.

As of December 31, 2022, the Company has approximately $ 885,000 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 “

Refer 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.

to these consolidated financial statements for further information .

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.

As of December 31, 2022, all debt issuance and discount costs have been fully amortized.

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.

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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.

Common equivalent shares include incremental shares from diluted vested and unvested shares of restricted common stock and convertible notes outstanding during the period based on the "if converted" method under the guidance of ASU 2020-06, adopted by the Company on January 1, 2022.

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.

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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 Adopted

In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity".

The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity.

The if-converted method will be the only permissible method for computing the dilutive effect of the convertible debt instruments.

Interest expense no longer includes amortization of debt discount.

The Company adopted the guidance of ASU 2020-06 on January 1, 2022, reporting no material impact to the Company's consolidated condensed financial statements or disclosures for the year ended December 31, 2022.

Accounting Pronouncements Not Yet Adopted

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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.

In March 2022, the FASB issued ASU 2022-02, “2022-02 Financial Instruments-Credit Losses”

Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”).

ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases.

ASU 2022-02 is effective for annual periods beginning after December 15, 2022, including interim periods within those periods.

Early adoption is permitted.

The Company will adopt ASU 2022-02 during the first quarter of 2023 and will provide the required disclosures, if determined to be material.

In June 2022, the FASB issued ASU 2022-03 , Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”).

ASU 2022-03 clarifies that a contractual sales restriction on an equity security is not considered when determining the security's fair value.

This ASU was issued to eliminate diversity in practice by clarifying that contractual arrangements restricting an entity's ability to sell the security for a certain period of time is a characteristic of the reporting entity and should not be contemplated when determining the security's fair value.

ASU 2022-03 requires new disclosures that provide investors with information about the restriction, including the nature and remaining duration of the restriction.

The ASU is effective for annual periods beginning after December 15, 2023, including interim periods within those annual periods.

Early adoption is permitted.

We are currently evaluating the impact of this guidance.

Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements have or will have a material impact on its consolidated financial statements.

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows:

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Special revenue

Hybrid securities

Industrial and miscellaneous

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The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time.

The Company’s unrealized losses on corporate bonds have not been recognized because the bonds are of a high credit quality with investment grade ratings.

The decline in fair value is deemed to be caused by rising interest rates resulting in no credit loss allowance recorded for the year ended December 31, 2022.

December 31, 2021

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The proceeds from the sale of debt securities were $ 27.1 million, $ 30.4 million and $ 381.2 million for the years ended December 31, 2022, 2021 and 2020, 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:

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

For the Years ended December 31,

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Realized losses

Net realized gains

Net realized (losses) gains

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, 2022, 2021 and 2020, respectively:

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Gross realized losses on sales of available-for-sale securities

Gross realized and unrealized on equity securities

Gross realized and unrealized losses on equity securities

Gross realized and unrealized gains in other investments

Gross realized and unrealized losses in other investments

Impairment charge in other investments

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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.

For the years ended December 31, 2022, 2021 and 2020, the Company had no net holding realized and unrealized gains or (losses) reported.

The following table presents the Company's equity investments as of December 31, 2022 and 2021, respectively.

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Membership Shares

Total equity investments, at cost

Total equity investments

Net Investment Income

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Net investment income, less investment expenses

Unrealized Losses on Debt Securities

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:

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Industrial and miscellaneous

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’s unrealized losses on corporate bonds have not been recognized because the bonds are of a 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.

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Measure Alternative

Class A Preferred Units (3)

Preferred Interests (2)

Other Investments

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Total non-consolidated VIEs

(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.

(1) 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.

(2) The preferred membership interests 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.

As of December 31, 2022, the Company received in aggregate a return of capital of approximately $ 14.0 million and executed a new preferred membership interest agreement in aggregate of $ 8.5 million subject to fixed principal and interest schedules with a maturity date of July 1, 2027 .

(3) 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.

(4) For the year ended December 31, 2021, the Company acquired common shares and warrants of an Insurtech company.

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

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Investments in non-consolidated VIEs

The Company’s maximum exposure to loss with respect to these investments is limited to the investments carrying amounts reported as “other investments”

The Company’s maximum exposure to loss with respect to these investments is limited to the investment 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.

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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.

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:

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

During the second quarter of 2022, management determined a triggering event occurred for which it deemed an interim evaluation of goodwill was appropriate and concluded the remaining balance of its goodwill was fully impaired.

The carrying value of $ 92.0 million was written off based on the following factors:

(i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events;

(ii) elevated loss ratios for property insurers in 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 .

(ii) elevated loss ratios for property insurers in the Company’s markets;

and (iii) the Company’s market cap was below book value.

These factors reduced the Company’s previously modeled fair value of the Company and resulted in a $ 92.0 million goodwill impairment charge, as of the second quarter of 2022, most of which was not tax deductible.

Other Intangible Assets

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

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.

Amortization expense of intangible assets was $ 6.4 million for each of the years ending December 31, 2022, 2021 and 2020, respectively.

Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:

The following table sets forth the computation of basic and diluted net (loss) income per share for the periods indicated:

For the Year Ended December 31,

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Diluted (loss) earnings per share:

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.

The Company had 84,263 and 1,569,236 anti-dilutive shares for the years ended December 31, 2022 and 2021, respectively.

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

Fair Value Measurements

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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

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 valuation service 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.

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Special revenue

Hybrid securities

Industrial and miscellaneous

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(in thousands)

Real Estate Corporation, measurement alternative (2)

(1) Non-cash impairment charge recorded in operating expenses in the consolidated statement of operations by the insurance companies and non-insurance companies.

Other Investments

Carrying Value Balance, January 1, 2021

Amounts impaired

Carrying Value Balance, December 31, 2021

(in thousands)

(1) Non-cash impairment charge recorded in operating expenses in the consolidated statement of operations by the legal entity or related holding companies acquired.

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.

During the second quarter of 2022, th e Company recorded a goodwill impairment of approximately $ 92.0 million.

Management concluded there was a goodwill impairment based on the following factors:

(i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events;

(ii) elevated loss ratios for property insurers in the Company’s markets;

and (iii) the Company’s market cap was below book value.

For the December 31, 2021, the goodwill impairment charge of $ 60.5 million 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.

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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.

Other Comprehensive Income

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Prepaid expense

Premium taxes

Unallocated Remittances

Total other assets

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The Company used the implicit rates within the finance leases.

The components of lease costs were as follows (in thousands):

The components of lease costs were as follows (in thousands) for the respective years:

For the Year Ended

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December 31, 2021

Amortization of ROU assets - Finance leases

Interest on lease liabilities - Finance leases

Variable lease cost (cost excluded from lease payments)

Operating lease cost (cost resulting from lease payments)

Total lease cost

Operating lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations

Finance lease cost:

Amortization of assets, included in General & Administrative expenses on the Consolidated Statements of Operations

Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Operations

Total finance lease cost

Variable lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations

Short-term lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations

Right-of-use lease asset and Lease Liability was as follows (in thousands):

Balance Sheet Classification

Operating Leases

December 31, 2022

December 31, 2021

Right-of-use assets - operating

Right-of-use lease asset, net

Right-of-use assets - finance

Right-of-use lease asset, net

Lease Liability - operating

Right of use assets

Lease liability

Lease Liability - finance

Finance Leases

Right of use assets

Lease liability

Weighted-average remaining lease term and discount rate for our operating and financing leases was as follows:

Weighted-average remaining lease term

December 31, 2022

December 31, 2021

Weighted average lease term - Finance leases

Weighted average lease term - Operating leases

Weighted average discount rate - Finance leases

Weighted average discount rate - Operating leases

Operating lease

Finance lease

Weighted-average discount rate

Operating lease

Finance lease

Supplemental disclosure of cash flow information related to leases were as follows:

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Operating lease - Operating cash flows (liability reduction)

Maturities of lease liabilities were as follows as of December 31, 2021 (in thousands):

December 31, 2021

Maturities of lease liabilities for financing and operating leases were as follows as of December 31, 2022 (in thousands):

Financing Lease

Operating Lease

2028 and thereafter

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(in thousands)

Software in progress

Computer hardware and software

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Property and equipment, net

Through December 31, 2022, the Company had invested approximately $ 6.9 million for software development and implementation services for a new policy, billing and claims system for which one component is anticipated to be completed and placed in service during the third quarter of 2023 with the remaining components anticipated to be placed in service in early 2024.

Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $ 2.0 million, $ 2.1 million, $ 1.6 million, respectively.

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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.

For the year ended December 31, 2022, 2021 and 2020 the Company allocated ceding commission income of $ 46.5 million, $ 47.1 million and $ 43.0 million to policy acquisition costs and $ 15.4 million, $ 15.6 million and $ 14.1 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, 2022, 2021 and 2020.

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Ending balance of deferred ceding commission income

Deferred ceding commission income is included in Other Liabilities in the Company's consolidated financial statements.

Deferred Policy Acquisition Costs

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The Company has strong relationships with reinsurers, which it attributes to its management’s industry experience, disciplined underwriting, and claims management capabilities.

For each of the

twelve months beginning June 1, 2020 and 2021, the Company purchased reinsurance from the following sources:

For each of the twelve months beginning June 1, 2021 and 2022, the Company purchased reinsurance from the following sources:

(i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) for Florida policies only, (ii) private reinsurers, all of which were rated “A-”

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(“Osprey”).

We also sponsored catastrophe bonds in 2022 through Citrus Re Ltd.

In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance.

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The Company shares portions of its reinsurance program coverage among its insurance company affiliates.

2021-2022 Reinsurance Towers

Layer 4 FL - SE Only

100 % of $ 100 M xs $ 40 M

2022-2023 Reinsurance Towers by Region

The following graphics depict our reinsurance program structure for the 2022-2023 hurricane season by region.

Layer 4 FL/SE

100 % of $ 100 M xs $ 550 M

100 % of $ 160 M xs $ 390 M

1@ 100 % w/ RPP

100 % of $ 250 M xs $ 140 M

1@ 100 % w/ RPP

100 % of $ 100 M xs $ 40 M

Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M)

Top and Agg 80 % of

$ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M)

Northeast Only

72.97 % of $ 370 M xs $ 85 0M

Northeast Only Bond

27.03 % of $ 370 M xs $ 850 M

$ 300 M xs $ 550 M

1@ 100 % w/ RPP

100 % of $ 160 M xs $ 39 0M

100 % of $ 250 M xs $ 140 M

1@ 100 % w/ RPP

100 % of $ 100 M xs $ 40 M

1@ 100 % w/ RPP

Net Quota Share

50 % of $ 20 M

100 % of $ 90 M xs $ 690 M

Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M)

Top and Agg 80 % of

$ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M)

Net Quota Share 56.5 % of $ 20 M ($ 11.3 M)

$ 300 M xs $ 390 M

1@ 100 % w/ RPP

100 % of $ 250 M xs $ 140 M

1@ 100 % w/ RPP

100 % of $ 100 M xs $ 40 M

1@ 100 % w/ RPP

6 % of $ 50 M xs $ 40 M, 1@ 100 %

Cat 43 6 % of $ 50 M xs $ 40 M ($ 3 M)

Top and Agg 80 % of

$ 20 M xs $ 20 M xs $ 10 M AAD ($ 8 M)

* xs = in excess

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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-”

Effective June 1, 2022, the Company entered into catastrophe excess of loss reinsurance agreements covering Heritage Property & Casualty Insurance Company (“He ritage P&C”), Zephyr Insurance Company (“Zephyr”) and Narragansett Bay Insurance Company (“NBIC”).

The catastrophe reinsurance programs are allocated among traditional reinsurers, the Florida Hurricane Catastrophe Fund (“FHCF”), Citrus Re 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 2022 hurricane season.

Osprey Re will provide reinsurance for a portion of the Heritage P&C, NBIC and Zephyr programs.

The Company’s third-party reinsurers are either rated “A-”

or higher by A.M.

Best or S&P or are fully collateralized, to reduce credit risk.

Osprey Re is fully collateralized.

The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses.

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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.

$ 40.0 million, of which $ 35.0 million would be ceded to Osprey;

NBIC –

$ 30.0 million of which $ 30 million would be ceded to Osprey in a shared contract with Zephyr;

and Zephyr –

$ 40 million, of which $ 30 million would be ceded to Osprey in a shared contract with NBIC.

The Company is responsible for all losses and loss adjustment expenses in excess of our reinsurance program.

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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 .

Additionally, the Company placed an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on Decemb er 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 Company placed an aggregate contract for the Company’s business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 1, 2022, expiring March 31, 2023 .

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 $ 2.0 million franchise deductible.

Net Quota Share Reinsurance

The Company’s Net Quota Share coverage is proportional reinsurance, which applies to business underwritten by NBIC, for which certain of the Company’s other reinsurance (property catastrophe excess of loss and the second layer of the general excess of loss) inures to the quota share program.

The Company’s Net Quota Share coverage is pro portional 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.

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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.

For losses arising from commercial residential business underwritten by NBIC, the Company also purchased property per risk coverage for losses and loss adjustments expenses in excess of $ 750,000 per claim.

The limit recovered for an individual loss is $ 250,000 and total limit for all losses is $ 750,000 .

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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 .

For the contract period of July 1, 2022 through June 30, 2023, the coverage is $ 2.75 million excess $ 750,000 for property losses and $ 1.25 million excess $ 750,000 for casualty losses.

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

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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 Company’s losses incurred for the year ended December 31, 2022, reflect adverse development of $ 3.7 million and for the years ended December 31, 2021 and 2020 reflect prior year favorable development of $ 3.5 million and $ 19.6 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, 2022, 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.

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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.

In August 2017 and September 2017, the C ompany 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.

Holders of the Convertible Notes had an optional put right, pursuant to the indenture governing the Convertible Notes, to require the Company to repurchase the aggregate principal amount of Convertible Notes that are validly tendered.

The Company received notice from the Depositary for the Convertible Notes that, on July 29, 2022, $ 10.9 million aggregate principal amount of the Convertible Notes has been validly tendered in accordance with the terms of the indenture and the Company’s notice with respect to the optional put right of the Convertible Notes, and the Company directed the trustee to cancel the Convertible Notes tendered.

Prior to this transaction, the outstanding balance as of July 31, 2022 of non-affiliated Convertible Notes was $ 11.8 million.

On August 1, 2022, the Company made payments for the principal amount of the Convertible Notes tendered and unpaid interest in the aggregate amounts of $ 10.9 million and $ 320,041 , respectively.

The Company used $ 10.0 million from its revolving credit facility to replenish the cash used to pay the $ 10.9 million for the purchase of the tendered Convertible Notes.

In January 2022, the Company reacquired and retired $ 11.7 million of its outstanding Convertible Notes.

Payment was made in cash and the Convertible Notes were retired a t the time of repurchase.

In addition, the Company expensed $ 242,700 which represents the proportionate amount of the unamortized issuance and debt discount costs associated with this repurchase.

As of December 31, 2022, the Company had approximately $ 885,000 of the Convertible Notes outstanding, net of $ 21.1 million of Convertible Notes held by an insurance company subsidiary.

For the year ended December 31, 2022, the Company made interest payments, net of affiliated Convertible Notes of approximately $ 1.4 million, on the outstanding Convertible Notes.

As of December 31, 2021, the Company had $ 22.9 m illion 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

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.

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’

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 %.

Pursuant to the terms of the mortgage loan, on October 30, 2022, the interest rate adjusted 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 %, which resulted in an increase of the rate from 4.95 % to 7.42 % per annum.

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.

For each of the respective years ended December 31, 2022 and 2021, the Company made principal and interest payments of $ 892,850 on the mortgage loan, respectively.

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”

The Company is party to a credit agreement dated as of December 14, 2018 (as amended from time to time, the “Credit Agreement”) with a syndicate of lenders.

On November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the Credit Agreement (the “Seventh Amendment”) to, among other things, (1) decrease the Revolving Credit Facility (defined below) commitments from $ 75 million to $ 50 million, (2) establish a new $ 25 million Term Loan Facility (defined below) to refinance loans outstanding under the existing Revolving Credit Facility and to pay fees, costs and expenses related thereto, (3) reduce, from $ 50 million to $ 25 million, the aggregate amount of potential future increases to the Revolving Credit Facility commitments and/or Term Loan Facility commitments, (4) modify the amortization of the existing term loan facility and new term loan facility to 10 % per annum, paid quarterly, and (5) increase the applicable margin for loans under the Credit Agreement to a range from 2.75 % to 3.25 % per annum for SOFR loans (plus a 0.10 % credit adjustment spread) and based on a leverage ratio (an increase from the prior range of 2.50 % to 3.00 %).

The Seventh Amendment also modified certain financial covenants in the Credit Agreement which may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement.

Specifically, starting in the first quarter of 2023, the Seventh Amendment amended certain financial covenants as follows:

(1) require additional leverage ratios under the Consolidated Leverage Ratio covenant (as defined in the Credit Agreement) after the initial step down to 2.50 x in the second quarter of 2023 not to exceed 2.25 x as of the second quarter of 2024 and 2.00 x as of the second quarter of 2025 , (2) apply all (A) Restricted Payments (as defined in the Credit Agreement) and (B) fee forgiveness & other capital contributions to the Company’s regulated insurance companies that are not a party to the Credit Agreement that exceed $ 38 million, when calculating (i) Consolidated Tangible Net Worth (as defined in the Credit Agreement) which is required to be not less than $ 100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions and (ii) Consolidated Fixed Charge Ratio (as defined in the Credit Agreement) which is required to be 1.20 x .

The Seventh Amendment also (A) eliminated the current $ 10 million basket available to the Company to pay dividends to its shareholders or to repurchase its securities, (B) provides for a dividend of up to $ 2 million in the fourth quarter of 2024 under certain conditions and (C) restricts future dividends based on maintenance of certain financial ratios, including Consolidated Tangible Net Worth.

As a result, going forward, dividends and stock repurchases may be limited or restricted entirely and the Company’s ability to contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement may be limited.

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

and together with the Term Loan Facility, the “Credit Facilities”).

Term Loan Facility.

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.

As amended by the Seventh Amendment, the principal amount of the Term Loan Facility amortizes in quarterly installments, which began with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $ 1.9 million per quarter, payable quarterly, decreasing to $ 875,000 per quarter commencing with the quarter ending December 31, 2021, and increasing to $ 2.4 million per quarter commencing with the quarter ending December 31, 2022, with the remaining balance payable at maturity.

The Term Loan Facility matures on July 28, 2026 .

As of 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.

As of December 31, 2022, there was $ 89.1 million in aggregate principal outstanding under the Term Loan Facility and as of December 31, 2022, after giving effect to the additional term loan advance that was used to refinance amounts outstanding under the Revolving Credit Facility and to pay fees, costs and expenses related thereto, there was $ 10.0 million in aggregate principal outstanding under the Revolving Credit Facility.

For the year ended December 31, 2022, the Company made principal and interest payments of approximately $ 5.0 million and $ 2.3 million, respectively and for the comparable year of 2021, the Company made principal and interest payments of approximately $ 4.7 million and $ 2.0 million on the Term Loan Facility, respectively.

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.

of Regions Bank, (b) the federal funds rate plus 0.50 %, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00 %, plus an applicable margin.

At 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.

The Revolving Credit Facility allows for borrowings of up to $ 50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to

the lesser of $ 25 million and the unused amount of the Revolving Credit Facility.

As of December 31, 2022, we had $ 10.0 million in borrowings and a $ 31.8 million letters of credit outstanding under the Revolving Credit Facility.

In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the Seventh Amendment, the borrowings under the Revolving Credit Facility were repaid in full.

On December 23, 2022, the Company drew $ 10 million from the amended Revolving Credit Facility, resulting in an outstanding principal balance under the Revolving Credit Facility in the amount of $ 10 million.

At December 31, 2022, the Company had $ 32.6 million letters of credit outstanding under the Revolving Credit Facility.

At January 31, 2023 , $ 22.6 million letters of credit were terminated and there remained a letter of credit in the amount of $ 10 million.

At our option, borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10 % or (2) a base rate determined by reference to the highest of (a) the “prime rate”

of Regions Bank, (b) the federal funds rate plus 0.50 %, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00 %, plus an applicable margin.

The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type.

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.

At December 31, 2022, the effective interest rate on for the Term Loan Facility and Revolving Credit Facility was 7.317 % and 7.423 %, respectively.

FHLB Loan Agreements

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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, 2022, the fair value of the collateralized securities was $ 24.2 million and the equity investment in FHLB common stock was valued at $ 1.5 million.

As of December 31, 2022 and 2021, the Company made quarterly interest payments of approximately $ 601,000 and $ 604,000 per the terms of the agreement, respectively.

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Total long-term debt

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.

As of the date of this report, we were in compliance with the applicable terms of all our covenants and other requirements under the Credit Agreement, Convertible Notes, 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 in the Credit Agreement may limit the Company’s flexibility in connection with future financing transactions and in the allocation of capital in the future, including the Company’s ability to pay dividends and make stock repurchases, and contribute capital to its insurance subsidiaries that are not parties to the Credit Agreement.

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.

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(in thousands)

(Benefit)/provision for Federal income tax

Provision for State income tax expense

(Benefit)/provision for income taxes

Benefit for Federal income tax

(Benefit)/Provision for State income tax expense

Benefit for income taxes

The income tax (benefit) expense differs from the amounts computed by applying the U.S.

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Tax rate change

Valuation allowance

Reported income tax expense

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 effective tax rates for 2022 and 2021 were impacted by non-deductible goodwill impairment of $ 92.0 million recognized during the second quarter of 2022 and $ 60.5 million during fourth quarter of 2021.

Furthermore, the 2022 effective tax rate was impacted by the recognition of a $ 6.4 million valuation allowance related to a portion of its deferred tax inventory associated with its foreign domiciled captive reinsurer, Osprey Re.

The Company may only realize those net deferred tax assets to the extent Osprey Re generates future taxable income.

Additionally, the effective tax rates 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 Coronavirus Aid, Relief, and Economic Security (CARES) Act.

On March 27, 2020, former President Trump signed into law the 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.

Net operating losses generated by a corporation during these taxable years are allowed a five-year carryback

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:

Enactment of the Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (Tax Act) was enacted on August 16, 2022.

Along with other changes, the Tax Act created a new corporate alternative minimum tax (AMT) for certain corporations based on 15 % of adjusted financial statement income for the taxable year.

The Company does not meet the requirements to be subject to the AMT for 2023.

In addition, the Tax Act imposes a 1 % excise tax on corporate stock repurchases.

The effective date of these two provisions was January 1, 2023.

The significant components of deferred tax assets and liabilities included in the consolidated balance sheets as of December 31, 2022 and 2021 were as follows:

For the Year Ended December 31,

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Unrealized losses

Dual Consolidated loss limitation

Total deferred tax asset

Valuation allowance

Adjusted deferred tax asset

Deferred tax liabilities:

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Prepaid expenses

Unrealized gain

Property and equipment

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Total deferred tax liabilities

Net deferred tax liability

Net deferred tax assets (liabilities)

The Company had no capital loss carryforward as of December 31, 2022.

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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.

During 2022, the Company recorded a $ 6.4 million valuation allowance related to a portion of its deferred tax inventory related to a portion of its deferred tax inventory associated with its foreign domiciled captive reinsurer, Osprey Re.

The Company may only realize those net deferred tax assets to the extent Osprey Re generates future taxable income.

As of December 31, 2022, the Company has a gross operating loss carryforward for federal and state income tax purposes of $ 0 and $ 27.4 million, respectively, which will expire between 2040 and 2042.

The statute of limitations related to our federal and state income tax returns remains open from our filings for 2019 through 2021.

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.

There are currently no tax years under examination.

As of December 31, 2022, the Company had no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.

Our reinsurance affiliate, Osprey Re, Ltd., which is based in Bermuda, made an irrevocable election under section 953(d) of the U.S.

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As a result of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S.

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.

As of December 31, 2022, the Comp any had no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.

Statutory Accounting and Regulations

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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.

Specifically, the 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.

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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.

to these consolidated financial statements 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.

There are currently assessments being collected from policyholders and remitted to 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.

The Company reported its insurance subsidiaries’

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Deferred ceding commission

Outstanding claim checks

Accounts payable and other payables

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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.

For the year ended December 31, 2022, the Company recognized bonus expense of $ 2.1 million, of which $ 2.0 million remains unpaid.

For the year ended December 31, 2021, the Company recognized employee bonus compensation expense in aggregate of $ 3.4 million, of which $ 3.0 million was unpaid until 2022.

Related Party Transactions

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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.

For the years ended December 31, 2022, 2021 and 2020, the contributions made to the plan on behalf of the participating employees were approximately $ 1.3 million, $ 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.

For the years ended December 31, 2022, 2021 and 2020, the Company incurred medical costs of $ 4.9 million, $ 3.5 million and $ 4.1 million, respectively.

December 31, 2022 and 2021, the Company had $ 221,386 and $ 422,800 of liability from the Company’s legacy self-insured healthcare plan.

The current healthcare plan is fully insured.

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.

As of December 31, 2022, the Company had 25,539,433 shares of common stock outstanding, 12,231,674 treasury shares of common stock and 648,493 shares of unvested shares of restricted common stock issued reflecting total paid-in capital of $ 334.7 million as of such date.

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.

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The stock purchase program expired on December 31, 2022 .

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").

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.

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

Total cash dividends paid

December 15, 2020

March 15, 2021

June 15, 2021

September 15, 2021

January 15, 2021

April 6, 2021

October 6, 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 of 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 .

As of December 31, 2022, the Company repurchased in aggregate 1,694,937 shares of its common stock under its repurchase program for $ 7.3 million.

The stock purchase program expired on December 31, 2022.

On December 15, 2022, the Board of Directors established a new share repurchase program plan to commence upon December 31, 2022 , for the purpose of repurchasing up to an aggregate of $ 10.0 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, 2023 (the "New Share Repurchase Plan").

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 .

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

On August 3, 2022 , the Board of Directors elected to allocate the $ 0.06 per share typically used to pay a quarterly dividend to shareholders to repurchase common stock totaling $ 1.7 million.

The Board of Directors re-evaluates dividend distribution on a quarterly basis and will make a determination, in part, based on the current stock trading price as compared to book value.

Stock-Based Compensation

Restricted Stock

The Company has adopted the Heritage Insurance Holdings, Inc., Omnibus Incentive Plan (the “Plan”) effective on May 22, 2014.

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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.

The Company has 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.

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dividends accrue but are not paid until vesting for recipients of restricted stock awards granted 2021 and thereafter.

Effective January 1, 2022, the Board of Directors approved the recommendations made by the Compensation Committee to revise the non-employee director compensation policy to provide that:

(i) each non‐employee director of the Company is entitled to an annual cash fee of $ 125,000 , payable quarterly;

(ii) each member of a committee of the Board is entitled to an additional annual cash fee of $ 2,500 ;

(iii) each chair of a committee of the Board is entitled to an additional $ 5,000 annual cash fee;

(iv) the chair of the Board, to the extent the chair is a non‐employee director, is entitled to an additional annual cash fee of $ 20,000 ;

and (v) each non‐employee director of the Company is granted annually a number of shares of restricted stock with a value equal to $ 40,000 at the date of issuance, a grant date of the date of the annual meeting of stockholders of the Company and which restricted stock will vest on the earlier of the one‐year anniversary of the date of issuance and the day immediately prior to the date of the following year’s annual meeting of stockholders of the Company.

During the first quarter of 2022, the Company awarded 3,636 shares and 115,327 shares of time-based restricted stock with at the time of grant a fair value of $ 5.50 and $ 6.72 per share, respectively to certain employees.

The time-based restricted stock will vest in two and three year equal installments on December 27, 2022, 2023 and 2024, respectively.

In addition, during the first quarter of 2022, the Company awarded 10,909 shares and 245,536 shares of performance-based restricted stock with at the time grant a fair value of $ 5.50 and $ 6.72 per share, respectively.

The performance-based restricted stock has a three-year performance period beginning on January 1, 2022 and ending on December 31, 2024 and will vest following the end of the performance period but no later than March 5, 2025.

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

The Company's annual shareholders meeting was held on June 23, 2022, at which time the restricted stock was effectively vested.

In June 2022, the Company awarded to non-employee directors in aggregate 99,376 shares of restricted stock with a fair value at the time of grant of $ 3.22 per share.

The awards will vest on the earlier of the one year anniversary of the grant date and the date immediately prior to the date of the next annual meeting of the Company's stockholders that occurs after the award date, provided the member remains on the Board until such date.

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

The Plan authorizes the Company to grant stock options at exercise prices equal to the fair market value of the Company’s stock on the dates the options are granted.

The Company has not granted any stock options since 2015 and all unexercised stock options have since been forfeited.

Restricted stock activity for the three years ended December 31, 2022, 2021 and 2020 is as follows:

6 unchanged sentences

Non-vested, at December 31, 2020

Granted - Performance-based restricted stock

Granted - Time-based restricted stock

Canceled and surrendered

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The Company recognized $ 2.0 million, $ 1.2 million and $ 4.7 million of compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.

During the year ended December 31, 2022, the Company granted in aggregate 484,130 , net of 12,422 canceled shares of time-based and performance-based restricted stock.

During the year ended December 31, 2022, 96,961 shares of restricted stock were vested and released.

Of the stock released to employees, 28,271 shares were withheld to cover withholding taxes of $ 94,000 .

During the year ended December 31, 2021, the Company granted in aggregate 254,793 shares of time-based and performance-based restricted stock.

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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.

At December 31, 2022, there was approximately $ 926,640 unrecognized expense related to time-based unvested restricted stock and an additional $ 1.1 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below.

For the comparable period in 2021, there was $ 2.0 million of unrecognized expense.

Additional information regarding our outstanding unvested restricted stock at December 31, 2021 is as follows:

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

Restricted shares unvested

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February 12, 2018

April 24, 2020

January 4, 2021

1 unchanged sentence

October 18, 2021

March 3, 2022

March 16, 2022

June 23, 2022

Selected Quarterly Financial Data (unaudited)

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Total operating expenses (1)

Operating income (loss)

Net income (loss)

Basic net income (loss) per share

Diluted net income (loss) per share

Operating (loss) income

Net (loss) income

Basic net (loss) income per share

Diluted net (loss) income per share

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.

(1) The second quarter of 2022 and the fourth quarter of 2021 results include a $ 92.0 million and $ 60.5 million impairment of goodwill, respectively.

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.

to these consolidated financial statements for further information on our 2022 and 2021 goodwill impairment charge.

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.

The Company performed an evaluation of subsequent events through the date the condensed consolidated financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of December 31, 2022.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity