Heritage Insurance Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, New Jersey, and New York. We provide personal residential insurance in Florida and South Carolina 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. 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 inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. Additionally, we anticipate continued rising costs and constrained availability of catastrophe reinsurance. We mitigate these conditions by continued exposure management, implementation of increased rates and the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and TIV. In December 2023, the Company completed a public and private offering by issuing 3.9 million of its common stock for cash proceeds of approximately $24.7 million, net of offering costs. The Company intends to use the net proceeds for general corporate and operational purposes and to provide capital for anticipated growth and expansion efforts. Goodwill impairment Charge (2022) 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, Intangible Assets, net 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 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. Supplemental Information The Supplemental Information table below demonstrates progress on our initiatives by providing policy count, premiums-in-force, and TIV for Florida and all other states as of December 31, 2023 and comparing those metrics to December 31, 2022. One of our strategies has been to reduce personal lines exposure in Florida, given historical abusive claims practices. While the Florida legislature made significant progress aimed at curtailing assignment of benefits and litigated claims abuse, we continue to carefully manage our Florida personal lines exposure. 31   At December 31, Policies in force:  2023 2022 % Change Florida  153,387  182,673  (16.0 ) % Other States  297,288  347,234  (14.4 ) % Total  450,675  529,907  (15.0 ) %      Premiums in force:     Florida $ 695,010,638 $ 599,596,526  15.9 % Other States  661,392,787  684,469,189  (3.4 ) % Total $ 1,356,403,425 $ 1,284,065,715  5.6 %      Total Insured Value:     Florida $ 103,535,162,876 $ 103,752,777,168  (0.2 ) % Other States  286,860,809,967  306,070,446,229  (6.3 ) % Total $ 390,395,972,843 $ 409,823,223,397  (4.7 ) % Florida policies-in-force declined from the prior year by 16.0% while premiums-in-force increased 15.9%, and TIV was down by 0.2%. The increase in Florida premiums-in-force was driven by organic growth of our commercial residential business which generates higher average premium, rate increases across the book of business and use of inflation guard, partly offset by a premium reduction associated with fewer Florida personal lines policies. The Florida TIV remained relatively flat based on the reduction in personal lines policies offset by the strategic growth of our commercial residential portfolio, as well as use of inflation guard across the book of business. Compared to the year ended December 31, 2022, the policy count for markets outside of Florida decreased 14.4% due to underwriting actions and intentional exposure management, resulting in a TIV decrease of 6.3% while premiums-in-force decreased only 3.4% due to rating actions. 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 continues to favorably impact the book of business resulting in an increase in average premium per policy of 24.2% over the prior year. o Gross premiums earned increased 9.5% from the prior year, driven by rate actions taken in 2022 and 2023 as well as growth in commercial residential business, which helps drive the higher average premium. o Premiums-in-force of $1.4 billion are up 5.6% from the prior year while policy count is down 15.0% due to continued underwriting efforts aimed at rate adequacy, managing the reinsurance cost and improving the quality of the book of business. o Continued focus on timely rate actions, tightening underwriting criteria, and expanding restrictions on new business written in over-concentrated markets or products. • Allocate capital to products and geographies that maximize long-term returns. o Selectively increased commercial residential policy count driving an increase in premiums-in-force by 63.9% year over year while TIV only increased 20.7% and policies in force increased by only 3.0%. Commercial residential business tends to have a significantly lower attritional loss ratio and generates materially higher premium, and the TIV increase from growth is offset by a reduction in personal lines exposure, which manages reinsurance costs and is additive to underwriting income and return on equity. Commercial residential business represents 18.7% of in-force premium compared to 12.0% as of the prior year . o As part of our exposure management strategy, reduced policy count for Florida personal lines business by 16.3% as compared to the prior year. The disciplined underwriting and rating actions have reduced Florida personal lines TIV by 9.4% while reducing premiums in force by only 0.7% and improved the quality of our Florida book of business. o This disciplined underwriting approach resulted in a policy count reduction of 14.4% in other states, with a reduction in TIV by 6.3%, resulting in a reduction in premiums in force of only 3.4%. • Maintain a balanced and diversified portfolio. 32 o Selective diversification of the portfolio by product and state, which can change based on market conditions, serves to reduce performance volatility. o No state represents over 26.5% of the Company’s TIV. o TIV for the top four states declined by 18.4%, while TIV for all other states increased by 88.0%. o In-force premium for the four states with the highest TIV decreased by 4.6% while in-force premium for all other states grew by 89.4%. o As a result of diversification efforts, personal lines TIV for the five states with the highest TIV decreased by 5.2% from the prior year period and represented 71.6% of all TIV at December 31, 2023 compared to 71.9% of all TIV at December 31, 2022. • Provide coverages suitable to the market and return targets. o Offering Excess & Surplus lines (“E&S”) policies in California, Florida, and South Carolina. This product allows greater flexibility in product terms as well as speed to market. o Continuing to evaluate other states for E&S and other products. Reinsurance Commutation As further described in Note 17, Commitments and Contingencies, to the condensed consolidated financial statements for the second quarter of 2023, our 2017 reinsurance agreement with the FHCF required a commutation no later than 60 months after the end of the contract year. As part of this process, Heritage and FHCF terminated the 2017 reinsurance agreement and agreed on the amount that the FHCF would pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process resulted in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma. Social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims, could result in adverse development of these claims, which creates uncertainty as to the ultimate cost to settle all of the remaining Hurricane Irma claims. Accordingly, the final amount paid by the FHCF could vary from the Company’s future estimation of losses to be recovered from the FHCF. As such, should further re-estimations to Hurricane Irma losses increase the Company's expected loss reserves, all the increase will be retained by the Company. The commutation process was finalized and binding for both parties upon completion which occurred during the quarter ended September 30, 2023 and the final payment by the FHCF was received by the Company in September 2023. Trends Inflation, Underwriting and Pricing We continue to address rising reinsurance and loss costs in the property insurance sector through continued implementation of increased rates and inflation guard factors resulting in an increase in the average premium per policy of 24.2% for the year ended December 31, 2023 as compared to the prior year. The increase in average premium includes rate changes, inclusion of inflation in premiums as described below, and in the mix of business written. We experienced intentional growth of our commercial residential business during 2023 and this line of business generates significantly higher average premium per policy. 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. Recent legislative changes have been made in Florida in each of the last three years, which we believe is making some progress 33 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. The impact of this legislation continues to be evaluated by management before growing exposures in the Florida personal lines market. Our industry experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in the Spring 2022 renewals. This trend continued but to a lesser extent during the Spring 2023 renewals. As described herein, we are carefully managing exposure by reducing new personal lines business written in many geographies, non-renewing unprofitable business in compliance with regulatory requirements, and narrowing our underwriting requirements. We have improved the geographic distribution of our business, which is becoming more rate adequate. Our Florida net incurred losses and LAE declined for the year ended December 31, 2023, mostly due to more favorable weather, our improved portfolio, and legislative changes aimed at curtailing claims abuse. Our Florida net incurred losses and LAE for the year ended December 31, 2022 were significantly higher from a combination of adverse weather and exacerbation of losses on weather and other claims resulting from the litigated claims environment. Key Components of our Results of Operations Revenue Gross premiums written represent, with respect to a period, the sum of direct premiums written (premiums from policies written during the period, net of any midterm cancellations and renewals of voluntary policies) and assumed premiums written (primarily premiums from state fair plan policies), in each case prior to ceding premiums to reinsurers. Gross premiums earned represent the total premiums earned during a period from policies written. Premiums associated with new and renewal policies are earned ratably over the twelve-month term of the policy and premiums associated with assumed policies are earned ratably over the remaining term of the policy. Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost of our reinsurance program ratably over term of the arrangement, which is typically twelve months. Our catastrophe excess of loss reinsurance generally incepts June 1 and runs through May 31 of the following year. Our net quota share treaty incepts December 31. Our other reinsurance programs may be purchased on a calendar or fiscal year basis. Net premiums earned reflect gross premiums earned less ceded premiums during the period. Net investment income represents interest earned on fixed maturity securities, short term securities and other investments, dividends on equity securities. Net realized and unrealized gains or losses represent gains or losses on investment sales and unrealized gains or losses on equity securities. Other revenue includes rental income due under non-cancelable leases for space at the Company’s commercial property in Clearwater, Florida, and all policy and pay-plan fees. Our regulators have approved a policy fee on each policy written for certain states; to the extent these fees are not subject to refund, the Company recognizes the income immediately when collected. The Company also charges pay-plan fees to policyholders that pay premiums in more than one installment and record the fees as income when collected. Expenses Losses and loss adjustment expenses (“LAE”) reflect losses paid, expenses paid to resolve claims, such as fees paid to adjusters, attorneys and investigators, and changes in our reserves for unpaid losses and loss adjustment expenses during the period, in each case net of losses ceded to reinsurers. Our reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of resolving all reported claims plus all losses we incurred related to insured events that we assume have occurred as of the reporting date, but that policyholders have not yet reported to us (which are commonly referred to as incurred but not reported, or “IBNR”). We estimate our reserves for unpaid losses using individual case-based estimates for reported claims and actuarial estimates for IBNR losses. We continually review and adjust our estimated losses as necessary based on our evolving claims experience, new information obtained and industry development trends. If our unpaid losses and loss adjustment expenses are considered deficient or redundant, we increase or decrease the liability in the period in which we identify the difference and reflect the change in our current period results of operations. Policy acquisition costs (“PAC”) consist of: (i) commissions paid to outside agents at the time of policy issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes and (iv) inspection fees. We recognize policy acquisition costs ratably over the term of the underlying policy. We earn ceding commissions on our net quota share reinsurance contract and certain other reinsurance contracts, which are reported as a reduction to policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. Refer to Note 11 “ Deferred Policy Acquisition Costs” to our consolidated financial statements under Item 8 of this Annual Report on Form 10K. Ceding 34 commission income is deferred and earned over the contract period. The amount and rate of ceding commissions earned on the net quota share contract can slide within a prescribed minimum and maximum, depending on loss performance and how future losses develop. General and administrative expenses (“G&A”) include compensation and related benefits, professional fees, office lease and related expenses, information system expenses, corporate insurance, and other general and administrative costs. As noted above, a certain portion of our ceding commissions are allocated to general and administrative expenses. Provision for income taxes consists of federal and state corporate level income taxes. The effective tax rate can fluctuate throughout the year as estimates used in the quarterly tax provision are updated with additional information throughout the year and updated with actual amounts in the fourth quarter. 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 2023 effective tax rate was favorably impacted by the release of valuation allowance associated with the operations of our captive reinsurer, Osprey. The December 31, 2022 effective tax rate was adversely impacted by the non-deductible goodwill impairment and the establishment of a valuation allowance associated with the operations of our captive reinsurer, Osprey. Ratios Ceded premium ratio represents ceded premiums earned as a percentage of gross premiums earned. Net loss ratio represents net losses and LAE as a percentage of net premiums earned. Net expense ratio represents PAC and G&A expenses as a percentage of net premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses. Net combined ratio represents the sum of the net loss and expense ratio. The net combined ratio is a key measure of underwriting performance traditionally used in the property and casualty insurance industry. A net combined ratio under 100% generally reflects profitable underwriting results. Overview of 2023 Financial Results In the following section, we discuss our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, 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, 2022, which was filed with the SEC on March 13, 2023. 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 income for the year ended December 31, 2023 was $45.3 million or $1.73 per diluted share, compared to a net loss of $154.4 million or $5.86 diluted loss per share in the prior year. The increase was driven mostly by the positive impact of rate actions, underwriting actions, and exposure management undertaken during 2022 and 2023, which favorably affected 2023 results. Additionally, net income benefitted from significantly lower losses as described below and a $6.4 million reduction in the valuation allowance associated with certain tax elections made by Osprey. Certain factors adversely affected 2022 results and impacted the year over year variance. The 2022 net loss stemmed from a $90.8 million, net of income tax, non-cash goodwill impairment charge contributing a $3.45 loss per share, combined with higher losses and loss adjustment expenses incurred for the year as described below. In addition, during 2022 the Company recorded a $6.4 million valuation allowance against our net deferred tax asset related to certain tax elections made by Osprey, our captive reinsurer domiciled in Bermuda. • Gross premiums written of $1.34 billion, up 5.3% from $1.28 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. The decline in gross premiums written associated with the decline in personal lines policies was more than offset by growth in the commercial line gross premiums written. Additionally, rate increases continued to meaningfully benefit written premiums throughout the book of business and use of inflation guard results in higher premium. 35 • Gross premiums earned of $1.32 billion, up 9.5% from $1.28 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 $697.2 million, up 9.4% from $637.1 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 $426.1 million, down 15.0% from $501.2 million in the prior year. The decrease primarily stems from lower weather and attritional losses as described below. Additionally, we experienced $1.6 million of favorable prior year development compared to $3.7 million of adverse prior year development in 2022. • Ceded premium ratio of 47.3%, flat from 47.3% in the prior year. The impact of higher catastrophe excess of loss reinsurance premium was partly offset by the increase in gross premiums earned. • Net loss ratio of 60.4%, an 18.3 point improvement over the prior year of 78.7%, driven by lower weather and attritional losses incurred and benefiting from higher net premiums earned as described above. • Net expense ratio of 35.2%, down 0.4 points from the prior year amount of 35.6%, as growth in net premiums earned outpaced higher policy acquisition costs and general and administrative expenses. The increase in policy acquisition costs is associated with the increase in gross premiums written. The increase in general and administrative expenses is driven mostly by software and other costs associated with the implementation of a new claims system that was placed in service in June 2023 as well human capital costs. • Net combined ratio of 95.6%, an 18.7 point improvement from 114.3% in the prior year, primarily driven by lower net loss and net expense ratios as described above. • Effective tax rate was 12.9% compared to 7.1% in the prior year. The effective tax rate for 2023 benefitted from a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year, as operating income at Osprey for the year ended December 31, 2023 resulted in sufficient positive evidence to release the valuation allowance on the Osprey net deferred assets. In contrast, for the year ended December 31, 2022 a $6.4 million valuation allowance was established against our Osprey net deferred tax assets whose utilization may be limited under the Internal Revenue Code. The effective tax rate for 2022 was also 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. 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. 36 Consolidated Results of Operations The following table summarizes our results of operations for the years indicated: Year Ended December 31, 2023 2022 $ Change % Change (in thousands, expect per share amounts) REVENUE: Gross premiums written $ 1,343,101 $ 1,275,031 $ 68,070 5.3 % Change in gross unearned premiums (19,458 ) (66,207 ) 46,749 (70.6 %) Gross premiums earned 1,323,643 1,208,824 114,819 9.5 % Ceded premiums (626,458 ) (571,759 ) (54,698 ) 9.6 % Net premiums earned 697,186 637,065 60,121 9.4 % Net investment income 25,756 11,977 13,778 115.0 % Net realized losses and impairment losses (972 ) (258 ) (713 ) 276.1 % Other revenue 13,529 13,676 (147 ) (1.1 %) Total revenue $ 735,499 $ 662,460 $ 73,039 11.0 % OPERATING EXPENSES: Losses and loss adjustment expenses $ 426,129 $ 501,162 $ (75,033 ) (15.0 %) Policy acquisition costs 167,610 156,304 11,306 7.2 % General and administrative expenses 77,777 70,396 7,381 10.5 % Goodwill or intangible asset impairment 767 91,959 (91,193 ) (99.2 %) Total expenses 672,283 819,821 (147,538 ) (180.0 %) Operating income (loss) 63,216 (157,361 ) 220,577 (140.2 %) Interest expense, net 11,210 8,809 2,402 27.3 % Income (loss) before taxes 52,006 (166,170 ) 218,175 (131.3 %) Provision (benefit) for income taxes 6,698 (11,807 ) 18,506 (156.7 %) Net income (loss) $ 45,308 $ (154,363 ) $ 199,670 (129.4 %) Basic net income (loss) per share $ 1.73 $ (5.86 ) $ 7.59 (129.5 %) Diluted net income (loss) per share $ 1.73 $ (5.86 ) $ 7.59 (129.5 %) Total revenue Total revenue was $735.5 million for the year ended December 31, 2023, up 11.0% compared to $662.5 million in the prior year. The increase primarily stems from higher net premiums earned and net investment income as described below. Gross premiums written Gross premiums written were $1.34 billion, up 5.3% year-over-year from $1.28 billion, reflecting a strategic and substantial increase in Florida commercial residential lines business and a higher average premium per policy throughout the book of business, partly offset by intentional targeted exposure management resulting in premium reductions of personal lines business in most states. We experienced premiums written growth of 15.3% in Florida driven by growth of the commercial residential portfolio and rate actions and a premium written reduction of 12.1% outside Florida driven by intentional exposure management which was partly offset by rate actions. Premiums-in-force were $1.4 billion as of December 31, 2023, representing a 5.6% increase from the prior year due to continued proactive underwriting action and rate increases across the entire portfolio and strategic growth in our commercial residential product, despite a policy count reduction of approximately 79,000, driven by an intentional reduction in our personal lines policy count. Concurrently, TIV decreased by 4.7%. Gross premiums earned Gross premiums earned were $1.3 billion for the year ended December 31, 2023, up 9.5% compared to $1.2 billion in the prior year, reflecting higher gross premiums written over the last twelve months driven by a higher average premium per policy, use of inflation guard, and organic growth of the commercial residential business. Ceded premiums Ceded premiums were $626.5 million for the year ended December 31, 2023, up 9.6% compared to $571.8 million in the prior year. The increase is primarily attributable to a higher cost of catastrophe excess of loss reinsurance. 37 Net premiums earned Net premiums earned were $697.2 million for the year ended December 31, 2023, up 9.4% compared to $637.1 million in the prior year. The increase primarily stems from higher gross premiums earned outpacing 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 $24.8 million for the year ended December 31, 2023, up 112.0% compared to $11.7 million in the prior year. The increase stems from a strategy to reinvest bond maturity proceeds into higher yielding short term instruments such as bank sweep accounts and treasury bills. Year Ended December 31, 2023 2022 $ Change % Change (in thousands) OPERATING EXPENSES: Losses and loss adjustment expenses $ 426,129 $ 501,162 $ (75,033 ) (15.0 %) Policy acquisition costs 167,610 156,304 11,306 7.2 % General and administrative expenses 77,777 70,396 7,381 10.5 % Goodwill or intangible asset impairment 767 91,959 (91,193 ) (99.2 %) Total operating expenses $ 672,283 $ 819,821 $ (147,538 ) (18.0 %) Total operating expenses Total operating expenses were $672.3 million, down 18.0% from $819.8 million in the prior year. As described below, lower operating expenses were driven by a reduction in losses and loss adjustment expenses, partly offset by higher acquisition costs and general and administrative expenses, mostly associated with growth in gross premiums written. Additionally significant goodwill impairment was recorded during 2022, resulting in no remaining Goodwill as of December 31, 2022. During 2023, named intangibles associated with a construction division were impaired given management changes to its operations. Losses and loss adjustment expenses (LAE) Losses and LAE were $426.1 million for the year ended December 31, 2023, down 15.0% compared to $501.2 million in the prior year. The decrease was driven by lower weather losses and lower attritional losses compared to the prior year. Net current accident year weather losses were $109.2 million, down $84.0 million from $193.2 million in the prior year. Current year catastrophe losses were $48.3 million compared to catastrophe weather losses of $132.4 million in the prior year. Other weather losses were $60.9 million, relatively flat from $60.8 million in the prior year. Attritional losses were lower, primarily associated with the reduction in personal lines policy count and related underwriting criteria enhancements, which improved the book of business. Additionally, we experienced $1.6 million of favorable prior year development compared to $3.7 million of adverse prior year development in 2022. Policy acquisition costs Policy acquisition costs were $167.6 million for the year ended December 31, 2023, up 7.2% compared to $156.3 million in the prior year. The increase is primarily attributable to acquisition costs associated with growth in gross premiums written and is partly offset by higher ceding commission income. General and administrative expenses General and administrative expenses were $77.8 million for the year ended December 31, 2023, up 10.5% compared to $70.4 million in the prior year. The increase is primarily attributable to amortization of software and other costs that can no longer be capitalized associated with the implementation of a new claims system. Additional costs were incurred in the current year associated with the installation of the new telephone system. The new claims and telephone systems are expected to drive future efficiencies. In addition, the company incurred higher human capital costs in the current year. Goodwill or intangible asset 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 was 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 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. 38 As a result of our analysis for goodwill impairment, we impaired $92.0 million of goodwill during the second quarter of 2022, reducing our carrying value of goodwill to $0 at December 31, 2022. Additionally, during 2023, we impaired named intangibles associated with our construction division due to management changes to its operations. See the section titled “ Goodwill Impairment Charge ” above and Note 3 " Intangible Assets, net " of the notes to our consolidated financial statements for more detail on our prior year impairment of our goodwill. Year Ended December 31, 2023 2022 $ Change % Change (in thousands, expect per share amounts) Operating income (loss) $ 63,216 $ (157,361 ) $ 220,577 (140.2 %) Interest expense, net 11,210 8,809 2,402 27.3 % Income (loss) before taxes 52,006 (166,170 ) 218,175 (131.3 %) Provision (benefit) for income taxes 6,698 (11,807 ) 18,506 (156.7 %) Net income (loss) $ 45,308 $ (154,363 ) $ 199,670 (129.4 %) Basic net income (loss) per share $ 1.73 $ (5.86 ) $ 7.59 (129.5 %) Diluted net income (loss) per share $ 1.73 $ (5.86 ) $ 7.59 (129.5 %) Net income (loss) Net income for the year ended December 31, 2023 was $45.3 million, up 129.4% from net loss of $154.4 million in the prior year. The increase was driven mostly by the positive impacts of rate actions, underwriting actions, and exposure management undertaken during 2022 and 2023, which resulted in higher net earned premium, significantly lower losses and loss adjustment expenses as described above and the benefit of a $6.4 million reduction in the valuation allowance associated with Osprey operations. The 2022 net loss stemmed from a $90.8 million, net of income tax, non-cash goodwill impairment charge contributing a $3.45 loss per share, combined with higher losses and loss adjustment expenses incurred for the year, driven largely by weather losses. In addition, during 2022 we recorded a $6.4 million valuation allowance against our net deferred tax asset resulting from the operation of certain tax elections made by Osprey, our captive reinsurer domiciled in Bermuda which reduced the income tax benefit for the year. Interest expense, net Interest expense was $11.2 million for the year ended December 31, 2023, above the prior year by 27.3% as a result of higher interest rates on our variable rate debt. Provision (benefit) for income taxes The provision for income taxes was $6.7 million for the year ended December 31, 2023 compared to a benefit for income taxes of $11.8 million for the year ended December 31, 2022. The effective tax rate for the year ended December 31, 2023 was 12.9% compared to 7.1% in the prior year. The effective tax rate for 2023 benefitted from a $6.4 million reduction in the valuation allowance against our Osprey net deferred tax assets that had been established in the prior year as operating income at Osprey for the year ended December 31, 2023 resulted in full use of Osprey operating losses. In contrast, for the year ended December 31, 2022 a $6.4 million valuation allowance was established against our Osprey net deferred tax assets whose utilization may be limited under the Internal Revenue Code. The effective tax rate for pre-tax loss experienced for the year ended December 31, 2022 was also 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. 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. Year Ended December 31, 2023 2022 Ceded premium ratio 47.3 % 47.3 % Net loss and LAE ratio 61.1 % 78.7 % Net expense ratio 35.2 % 35.6 % Net combined ratio 96.3 % 114.3 % Net combined ratio The net combined ratio was 96.3% for the year ended December 31, 2023, an 18.7 point improvement from 114.3% in the prior year. The improvement stems primarily from a significantly lower net loss and LAE ratio, described below. 39 Ceded premium ratio The ceded premium ratio was 47.3% for the year ended December 31, 2023, flat compared to the prior year. The increase in gross premiums earned year over year offset the increase in ceded premium. Net loss and LAE ratio The net loss and LAE ratio was 61.1% for the year ended December 31, 2023, a 17.6 point improvement from 78.7% in the prior year. The improvement primarily relates to significantly lower weather and attritional losses in the current year and higher net premiums earned as described above. Net expense ratio The net expense ratio was 35.2% for the year ended December 31, 2023, down 0.4 points from 35.6% in the prior year. The decrease primarily stems from the impact of higher net premiums earned which offset higher policy acquisition costs and G&A costs as described above. Financial Condition – December 31, 2023 compared to December 31, 2022 Cash and Cash Equivalents At December 31, 2023, cash and cash equivalents increased to $463.6 million from $280.9 million at December 31, 2022. The increase is primarily due to re-investment of proceeds from the maturity of fixed income securities into higher earning short duration investments. In addition, the Company benefitted from significant reinsurance recoveries from Hurricane Irma and Ian during 2023. This includes recoveries from the FHCF from the Hurricane Irma loss commutation as referenced in Note 13 , " Reserve for Unpaid Losses ". Finally, the Company received proceeds of approximately $24.7 million from the December 14, 2023 public and private offering of shares of its common stock as referenced in Note 22 , “ Equity ”. Fixed Maturity Securities At December 31, 2023, fixed income securities decreased by $74.9 million to $569.4 million from $653.6 million at December 31, 2022. The decrease is primarily due to re-investment of proceeds from maturity of fixed income securities into higher earning short duration investments as described above. Additionally, an insurance company affiliate liquidated approximately $27.0 million of investments in advance of maturity to generate cash for the payment of claims. This relates to claims for Maui wildfire catastrophic losses that occurred during the third quarter of 2023. Reinsurance Recoverable on Paid and Unpaid Claims At December 31, 2023, reinsurance recoverable on paid and unpaid claims decreased by $322.6 million to $482.4 million from $805.1 million at December 31, 2022. The decrease is primarily due to reinsurance reimbursements received during 2023 for claim payments related to Hurricanes Irma and Ian. Unpaid Losses and Loss Adjustment Expenses At December 31, 2023, unpaid losses and loss adjustment expenses decreased by $285.8 million to $846.0 million from $1.1 billion at December 31, 2022. The decrease is primarily due to payment of Hurricane Irma and Ian claims during 2023. Total Shareholders’ Equity At December 31, 2023, total shareholders’ equity increased by $89.2 million to $220.3 million from $131.0 million at December 31, 2022. The increase is primarily due to net income for the year ended December 31, 2023, coupled with a reduction in unrealized losses on fixed maturity investments and proceeds from the public and private offering of shares of our common stock. Rising interest rates during 2022 resulted in significant unrealized losses at December 31, 2022. As interest rates tempered during 2023 and certain investments matured at face value, unrealized losses declined from the prior year. Liquidity and Capital Resources Our principal sources of liquidity include cash flows generated from operations, our cash, cash equivalents, our marketable securities balances and borrowings available under our credit facilities. As of December 31, 2023, we held $463.6 million in cash and cash equivalents and $569.4 million in investments, compared to $280.9 million in cash and $653.6 million in investments as of December 31, 2022. The increase in cash and cash equivalents was primarily driven by proceeds from issuance of our common stock in the December 2023 underwritten public offering, higher cash levels at our captive reinsurer Osprey to provide collateral for affiliate reinsurance transactions, timing of receipt of reinsurance recoveries, a reinsurance commutation with the FHCF for which proceeds were received in advance of claim payments made by the Company, and reinvesting proceeds from investment maturities to short term instruments which provided a higher yield than fixed income securities, which was partly offset by costs associated with an enhanced 40 policy, billing and claims system. The decrease in investments was driven by maturities which were not reinvested as described above which was partly offset by lower unrealized losses on our fixed income securities as interest rates stabilized. We generally hold substantial cash balances to meet seasonal liquidity needs including amounts to pay quarterly reinsurance installments as well as meet the collateral requirements of Osprey, our captive reinsurance company, which is required to maintain a collateral trust account equal to the risk that it assumes from our insurance company affiliates. We believe that our sources of liquidity are adequate to meet our cash requirements for at least the next twelve months. We may continue to pursue the acquisition of complementary businesses and make strategic investments. We may increase capital expenditures consistent with our investment plans and anticipated growth strategy. Cash and cash equivalents may not be sufficient to fund such expenditures. As such, in addition to the use of our existing Credit Facilities, we may need to utilize additional debt to secure funds for such purposes. Statement of Cash Flows The net increases (decreases) in cash and cash equivalents are summarized in the following table: For the Year Ended December 31, 2023 2022 2021 2023 vs 2022 Change 2022 vs 2021 Change Net cash provided by (used in): (in thousands) Operating activities $ 70,415 $ (34,260 ) $ 60,130 $ 104,675 $ (94,390 ) Investing activities 100,806 (37,862 ) (124,480 ) 138,668 86,618 Financing activities 14,546 (5,058 ) (17,281 ) 19,604 12,223 Net change in cash, cash equivalents, and restricted cash $ 185,767 $ (77,180 ) $ (81,631 ) $ 262,947 $ 4,451 Operating Activities Net cash provided by operating activities for the year ended December 31, 2023 was $70.4 million compared to net cash used in operating activities of $34.3 million during the prior year. The increase in cash provided by operating activities was primarily driven by timing of receipt of reinsurance recoveries including a reinsurance commutation with the FHCF for which proceeds were received in advance of claim payments made by the Company, timing of cash flows associated with claim and reinsurance payments, and higher cash levels at our captive reinsurer Osprey to provide collateral for affiliate reinsurance transactions. Investing Activities Net cash provided by investing activities for the year ended December 31, 2023 was $100.8 million compared to net cash used of $37.9 million in the prior year. The change in cash used in investing activities primarily relates to our reinvestment of proceeds from maturities into short term investments which provided security and liquidity while achieving higher yields, which was partly offset by costs associated with an enhanced policy, billing and claims system. Financing Activities Net cash provided by financing activities for the year ended December 31, 2023 was $14.5 million, compared to net cash used of $5.1 million in the prior year. The increase in cash provided by financing activities was primarily driven by the December 2023 underwritten public offering and contemporaneous private placement of an aggregate of 3,919,169 shares of our common stock resulting in gross proceeds of approximately $26.5 million before deducting underwriting discounts, commissions and other offering expenses as referenced in Note 22. " Equity " , partly offset by principal payments on debt. Credit Facilities The Company is party to a Credit Agreement by and among the Company, as borrower, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners (as amended from time to time, the “Credit Agreement”). Based on the Company’s results for the third quarter of 2022, management considered it likely at that time that the Company would be out of compliance with certain financial covenants in the Credit Agreement. In order to avoid a covenant violation, on November 7, 2022, the Company and its subsidiary guarantors entered into an amendment to the Credit Agreement to, among other things, (i) decrease the Revolving Credit Facility 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 41 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”). 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 $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 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, 2023, there was $79.6 million in aggregate principal outstanding under the Term Loan Facility. Revolving Credit Facility. The Revolving Credit Facility allows for borrowings of up to $50 million inclusive of a sublimit for the issuance of letters of credit equal to the unused amount of the Revolving Credit Facility and a sublimit for swingline loans equal to the lesser of $25 million and the unused amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0 million in borrowings and a $22.6 million letters of credit outstanding under the Revolving Credit Facility. In connection with the incurrence of additional amounts under the Term Loan Facility pursuant to the 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, 2023, the outstanding balance under the Revolving Credit facility was $10.0 million. The Company secured additional letters of credit during 2023; however at December 31, 2023 all of the letters of credit were terminated and the Company had no outstanding letter of credits issued from 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 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, 2023, the borrowings under the Term Loan Facility and Revolving Credit Facility accruing interest at a rate of 8.179% and 8.198% 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 SOFR loans. In addition, we are required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights). All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”). The Company and the Guarantors are party to a Pledge and Security Agreement, (as amended from time to time the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the 42 Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries. The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 2.50 to 1.00, stepping down to 2.25 to 1.00 as of the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025, (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries, which is required to be not less than $100 million plus 50% of positive quarterly net income (including its subsidiaries and regulated subsidiaries) plus the net cash proceeds of any equity transactions. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries. Convertible Note On August 10, 2017 and September 6, 2017, the Company and Heritage MGA, LLC (the “Notes Guarantor”) entered into a purchase agreement (the “Purchase Agreement”) with Citigroup Global Markets Inc., as the initial purchaser (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $136.8 million aggregate principal amount of the Company’s 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”) in a private placement transaction pursuant to Rule 144A under the Securities Act, as amended (the “Securities Act”). The Purchase Agreement contained customary representations, warranties and agreements of the Company and the Notes Guarantor and customary conditions to closing, indemnification rights and obligations of the parties and termination provisions. The net proceeds from the offering of the Convertible Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, were approximately $120.5 million. The offering of the Convertible Notes was completed on August 16, 2017. The Company issued the Convertible Notes under an Indenture (the “Convertible Note Indenture”), dated August 16, 2017, by and among the Company, as issuer, the Notes Guarantor, as guarantor, and Wilmington Trust, National Association, as trustee (the “Trustee”). The Convertible Notes bear interest at a rate of 5.875% per year. Interest is payable semi-annually in arrears, on February 1 and August 1 of each year. The Convertible Notes are senior unsecured obligations of the Company that rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness or other liabilities incurred by the Company’s subsidiaries other than the Notes Guarantor, which fully and unconditionally guarantee the Convertible Notes on a senior unsecured basis. The Convertible Notes mature on August 1, 2037, unless earlier repurchased, redeemed or converted. Holders may convert their Convertible Notes at any time prior to the close of business on the business day immediately preceding February 1, 2037, other than during the period from, and including, February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2017, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (2) during the ten consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. During the period from and including February 1, 2022 to the close of business on the second business day immediately preceding August 5, 2022, and on or after February 1, 2037 until the close of business on the second business day immediately preceding August 1, 2037, holders may surrender their Convertible Notes for conversion at any time, regardless of the foregoing circumstances. The conversion rate for the Convertible Notes was initially 67.0264 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $14.92 per share of common stock). The conversion rate is subject to adjustment in certain circumstances and is subject to increase for holders that elect to convert their Convertible Notes in 43 connection with certain corporate transactions (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture)) that occur prior to August 5, 2022. Upon the occurrence of a fundamental change (as defined in the Convertible Note Indenture) (but not, at the Company’s election, a public acquirer change of control (as defined in the Convertible Note Indenture), holders of the Convertible Notes may require the Company to repurchase for cash all or a portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. 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. Holders of the Convertible Notes are able to cause the Company to repurchase their Convertible Notes for cash on any of August 1, 2022, August 1, 2027 and August 1, 2032, in each case at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. The Convertible Note Indenture contains customary terms and covenants and events of default. If an Event of Default (as defined in the Convertible Note Indenture) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding by notice to the Company and the Trustee, may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization (as set forth in the Convertible Note Indenture) with respect to the Company, 100% of the principal of, and accrued and unpaid interest, if any, on, the 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, 2023, 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, 2023 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. In November 2022, the Company drew $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 In December 2018, a subsidiary of the Company received a 3.094% fixed interest rate cash loan of $19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. On September 29, 2023, the Company restructured the December 2018 agreement to extend the maturity date to March 28, 2025, with a 5.109% fixed interest rate payable quarterly commencing on December 28, 2023. The subsidiary continues to be a member in the FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $1.4 million. As of December 31, 2023, the common stock was valued at $1.4 million. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary. The proceeds from the loan were used to prepay the Company’s Senior Secured Notes due 2023 in 2018. Contractual Obligations and Commitments The following table summarizes our material contractual obligations and commitments as of December 31, 2023: Contractual Obligations and Commercial Commitments Total Less Than 1 Year 1-3 Years 3-5 Years More than 5 - Years (in thousands) Term loans, notes and interest (1) $ 106,057 $ 16,609 $ 89,448 $ — $ — Convertible debt (1) 39,029 1,190 2,379 2,379 33,080 Mortgage loan (1) 11,019 354 768 9,897 — FHLB agreement (1) 19,534 97 19,437 — — Operating lease obligations 32,961 4,825 9,585 9,687 8,864 Total Contractual Obligations $ 208,600 $ 23,075 $ 121,618 $ 21,963 $ 41,944 44 (1) Amounts represent principal and interest payments to debt obligations. Debt obligations are classified based on their stated maturity date. For further information on long-term debt, Refer to Note 14 “ Long Term Debt ” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different due to changes to agreed-upon amounts for some obligations. Market Sensitive Instruments and Risk Management Our investment results are subject to a variety of risks, including risks related to changes in the business, financial condition or results of operations of the entities in which we invest, as well as changes in general economic conditions and overall market conditions. We are also exposed to potential loss from various market risks, including changes in equity prices and interest rates. In accordance with the SEC's Financial Reporting Release No 48, we performed sensitivity analysis, also referenced as the hypothetical analysis (refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk ) to determine the effects that market risk exposures could have on the Company's future portfolio's earnings, fair value or cash flow as of December 31, 2023. Market risk represents the risk of changes in the fair value of financial instrument and consists of several components, including liquidity, basis and price risks. The sensitivity analysis performed as of December 31, 2023 presents hypothetical losses in cash flows, earnings and fair values of market sensitive instruments which were held by as of the year ended December 31, 2023 and are sensitive to changes in interest rates. This risk management discussion and the estimated amounts generated from the following sensitivity analysis represent forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis methods used by us to assess and mitigate risk should not be considered projections of future events of losses. Exposure to market risk is managed and monitored by senior management of the parent company and its subsidiaries along with a nationally recognized asset manager. The investment committee, appointed by our board of directors approves the overall investment strategy and has responsibility to ensure that the investment positions are consistent with that strategy with an acceptable level of risk. Management of risk may include buying or selling instruments or entering into offsetting positions. Fixed Income Securities We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed maturities, short-term investments and certain of our other investments, and investment funds accounted for using the equity method which invest in fixed income securities (collectively, “Fixed Income Securities”) and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our Fixed Income Securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. The Company’s invested assets at December 31, 2023 were $569.4 million, of which 98.5% was invested in fixed maturity and short-term investments, 0.3% in equity securities, and 1.2% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a thoughtful investment philosophy that focuses on appropriate risk-adjusted returns. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt and taxable U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds. Effects of Inflation General economic inflation has increased in recent quarters and may continue to remain at elevated levels for an extended period of time. The potential also exists, after a catastrophe loss or pandemic events like COVID-19, for the development of inflationary pressures in a local economy. This may have a material effect on the adequacy of our reserves for losses and loss adjustment expenses, especially in longer-tailed lines of business, and on the market value of our investment portfolio through rising interest rates. The anticipated effects of inflation are considered in our pricing models, reserving processes and exposure management, across all lines of business and types of loss including natural catastrophe events. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled and will vary by the specific type of inflation affecting our business. The carrying value of the Company’s fixed maturity portfolio at December 31, 2023 was $560.7 million. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “A+” at both December 31, 2023 and 2022. Below investment grade securities represented 0.1% of the total fixed maturity investment portfolio at both December 31, 2023 and 2022. The weighted average effective duration of fixed maturities and short-term securities was 2.67 (3.14 excluding short-term securities) at December 31, 2023 and 3.18 (3.25 excluding short-term securities) at December 31, 2022. 45 Critical Accounting Policies and Estimates The following discussion and analysis presents the more significant factors that affected our financial conditions as of December 31, 2023 and 2022 and results of operations for each of the years then ended. The preparation of financial statements in conformity with accounting principles of generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimates in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our consolidated financial statements. 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. Premiums . We recognize direct and assumed premiums written as revenue, net of ceded amounts, on a daily pro rata basis over the contract period of the related policies that are in force. For any portion of premiums not earned at the end of the reporting period, we record an unearned premium liability. Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. Our billing system is equity based such that policies are 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. Balances in premiums receivable and the associated allowance account are removed upon cancellation of the policy due to non-payment and returned agent commission. We recorded bad debt expense of approximately $855,750, $0 and $0 in 2023, 2022, and 2021, respectively. When we receive premium payments from policyholders prior to the effective date of the related policy, we record an advance premium liability. On the policy effective date, we reduce the advance premium liability and record the premiums as described above. Reserves for Unpaid Losses and Loss Adjustment Expenses . Reserves for unpaid losses and loss adjustment expenses, also referred to as loss reserves, represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management’s best estimate of the amount we will ultimately pay for losses and loss adjustment expenses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date. We establish two categories of loss reserves as follows: Case reserves —When a claim is reported, we establish an initial estimate of the losses that will ultimately be paid on the reported claim. Our initial estimate for each claim is based upon the judgment of our claims professionals who are familiar with property and liability losses associated with the coverage offered by our policies. Then, our claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve, as necessary. As claims mature, we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site reviews and any other information we gather while reviewing the claims. IBNR reserves —Our IBNR reserves include true IBNR reserves plus “bulk” reserves. True IBNR reserves represent amounts related to claims for which a loss occurred on or before the date of the financial statements, but which have not yet been reported to us. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on known claims. We estimate our IBNR reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date. When we establish our reserves, we analyze various factors such as the evolving historical loss experience of the insurance industry as well as our experience, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the interaction of the foregoing factors, there is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any future projections, the ultimate amount we will pay for losses will be different from the reserves we record. We determine our ultimate loss reserves by selecting an estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the point estimate is influenced by the analysis of our paid losses and incurred losses since inception. 46 Our external reserving actuaries evaluated the adequacy of our reserves as of December 31, 2023 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 $292.1 million of recorded case reserves, we recorded $553.4 million of IBNR reserves as of December 31, 2023 to achieve overall gross reserves of $846.0 billion. At December 31, 2023, ceded IBNR and net IBNR were $277.2 million and $276.6 million, respectively. The process of establishing our reserves is complex and inherently imprecise, as it involves using judgment that is affected by many variables. We believe a reasonably likely change in almost any of the factors we evaluate as part of our loss reserve analysis could have an impact on our reported results, financial position and liquidity. The following table quantifies the pro forma impact of hypothetical changes in our net loss reserves on our net income and stockholders’ equity as of and for the year ended December 31, 2023 (in thousands): Actual Low Estimate % Change from Actual High Estimate % Change from Actual Net Loss Reserves $ 424,157 $ 347,145 18.2 % $ 461,208 (8.7 )% Impact on: Net income $ 45,307 $ 101,911 124.9 % $ 18,074 (60.1 )% Stockholders’ equity $ 220,280 $ 276,884 25.7 % $ 193,047 (12.4 )% Cash, cash equivalents and investments (1) $ 1,033,055 $ 1,089,659 5.5 % $ 1,005,822 (2.6 )% (1) Estimated cash, cash equivalents and investments is intended to reflect the impact of loss reserves, net of taxes. Policy Acquisition Costs. We incur policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance, (ii) policy administration fees paid to a third-party administrator at the time of policy issuance, (iii) premium taxes and (iv) inspection fees. We capitalize policy acquisition costs to the extent recoverable, then we amortize those costs over the contract period of the related policy. We also earn ceding commission on our quota share reinsurance contracts, which is presented as a reduction of policy acquisition costs with any 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. 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, 2023, 2022 and 2021, we earned ceding commission income of $64.8 million, $62.7 million and $57.1 million of which $48.7 million, $47.1 million and $43.0 million was allocable to policy acquisition costs. Deferred taxes . At December 31, 2023, we assessed our deferred tax position and hold no valuation against our net deferred tax assets as there is sufficient evidence to support the recorded net deferred tax asset. Provision for Premium Deficiency . At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of our expected losses, deferred policy acquisition costs and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs. No accruals for premium deficiency were considered necessary as of December 31, 2023 and 2022. Reinsurance. We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss. Our reinsurance agreements are prospective contracts. We record an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize our prepaid reinsurance premiums over the 12-month contract period. In the event that we incur losses recoverable under our reinsurance program, we record amounts recoverable from our reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of our liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to our estimate of unpaid losses. In the event that we incur losses recoverable under the reinsurance program, the estimate of amounts recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to our reserves for unpaid losses. 47 We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. We had no uncollectible amounts under our reinsurance program or bad debt expense related to reinsurance for the years ended December 31, 2023, 2022, and 2021. Recent Accounting Pronouncements Not Yet Effective The Company describes the recent pronouncements that have had or may have a significant effect on its financial statements or on its disclosures. The Company does not discuss recent pronouncements that a) are not anticipated to have an impact on, or b) are unrelated to its financial condition, results of operations, or related disclosures. For accounting pronouncements not yet adopted, Refer to Note 1 “ Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices” to our consolidated financial statements included in this Annual Report on Form 10-K, for further information. Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk. Our investment portfolios at December 31, 2023, 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’ prices. We consider many factors when establishing our investment policy, including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. Unrealized gains and losses for 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 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 2.67 years at December 31, 2023 and 3.18 years at December 31, 2022. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of December 31, 2023, 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, 2022. 48 The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 2023 (in thousands, except percentages): Hypothetical Change in Interest rates Estimated Fair Value After Change Change In Estimated Fair Value Percentage Increase (Decrease) in Estimated Fair Value 300 basis point increase $ 508,833 $ (51,849 ) (9 )% 200 basis point increase $ 526,107 $ (34,575 ) (6 )% 100 basis point increase $ 543,390 $ (17,291 ) (3 )% 100 basis point decrease $ 577,982 $ 17,300 3 % 200 basis point decrease $ 595,291 $ 34,609 6 % 300 basis point decrease $ 612,296 $ 51,614 9 % Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed-maturity securities. The Company’s Investment Committee has the responsibility to create, oversee, implement and review investment policies. The Investment Committee is responsible for ensuring the policies mitigate this risk by investing in fixed-maturity securities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector. The following table presents the composition of our fixed-maturity portfolio by rating at December 31, 2023 (in thousands, except percentages): Comparable Rating Amortized Cost % of Total Amortized Cost Fair Value % of Total Fair Value AAA $ 44,737 7 % $ 40,140 7 % AA+, AA, AA- $ 349,668 58 % $ 320,805 58 % A+, A, A-1+ $ 115,549 19 % $ 108,162 19 % BBB+, BBB, BBB- $ 96,277 16 % $ 91,192 16 % Not rated $ 415 0 % $ 383 0 % $ 606,646 100 % $ 560,682 100 % Below investment grade securities have different characteristics than investment grade corporate fixed-maturity securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Typically, below investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment grade issuers. Our equity investment portfolio at December 31, 2023 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, 2023 (in thousands): % of Total Estimated Fair Value Estimated Fair value Stocks by sector: Financial $ — 0 % Energy — 0 % Other 1,666 100 % Subtotal $ 1,666 100 % Mutual Funds and ETF by type: Equity $ — 0 % Subtotal $ — 0 % Total $ 1,666 100 % Foreign Currency Exchange Risk At December 31, 2023, we did not have any material exposure to foreign currency related risk. 49 Item 8. Financial Statemen ts and Supplementary Data HERITAGE INSURANCE HOLDINGS, INC. INDEX OF CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( Plante & Moran, PLLC, Chicago, IL, PCAOB ID 166 ) 51 Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 53 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021 54 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021 55 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 56 Notes to Consolidated Financial Statements 58 50 Report of Independ ent Registered Public Accounting Firm To the Stockholders and Board of Directors Heritage Insurance Holdings, Inc. 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, 2023 and 2022; 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, 2023; 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, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the COSO framework. Basis for Opinion 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. 51 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 $846 million at December 31, 2023. The Company’s reserve for unpaid losses and LAE represents the estimated ultimate cost of settling all claims incurred related to insured events that have occurred as of the reporting date. The Company determines the reserve for unpaid losses and LAE on an individual-case basis for those claims reported as of December 31, 2023, with bulk reserves for additional development, if any, on the reported claims and an estimate for unpaid losses and LAE for all claims incurred related to insured events that have occurred as of December 31, 2023 but have not yet been reported by the policyholders to the Company (collectively referred to as incurred but not reported or IBNR). The Company estimates IBNR reserves by projecting ultimate losses using industry-accepted actuarial methods. Management engages independent actuarial firms to prepare an actuarial analysis of unpaid losses and LAE and provides statements of actuarial opinion on management’s estimate of unpaid losses and LAE. Estimating the liability for unpaid losses and LAE requires significant judgment, relating to factors such as claim development patterns, severity, type and jurisdiction of loss, economic conditions, legislative developments, and a variety of actuarial assumptions. Estimating the liability for unpaid losses and LAE is inherently uncertain, dependent on management’s judgment, and significantly impacted by claim and actuarial factors and conditions that may change over time. The ultimate settlement of unpaid losses and LAE may vary materially from the recorded liability, and such variance may adversely affect the Company’s financial results. For these reasons, we identified the estimate of unpaid losses and LAE as a critical audit matter, as it involved especially subjective auditor judgment. How the Critical Audit Matter was Addressed in the Audit Our audit procedures related to the unpaid losses and LAE reserve included the following, among others: • We obtained an understanding, evaluated the design, and tested the operating effectiveness of key controls over the process and data used by management to estimate the liability for unpaid losses and LAE, including those controls related to the estimation of and management’s review of the estimated liability of unpaid losses and LAE. • We tested the completeness, integrity, and accuracy of the underlying data used by the Company’s actuaries, such as paid loss data, case reserve data, loss adjustment expense data, and loss development tables. • We verified the consistency of the estimation process between the current year and those used in prior years and assessed the reasonableness of management’s selection of its estimate for unpaid losses and LAE, including the key factors considered by management in arriving at such estimates. With assistance from our engaged actuarial specialist, we reviewed the reasonableness of the methods and assumptions used by the Company and its engaged actuaries to develop their unpaid losses and LAE reserve estimate. • We evaluated management’s prior year estimate for unpaid losses and LAE and the factors leading to changes in the estimate recognized in the current year. With the assistance of our engaged actuarial specialist, we assessed the reasonableness of management’s revisions to the estimate for unpaid losses and LAE. /s/ Plante & Moran, PLLC We have served as the Company’s auditor since 2018. Chicago, Illinois March 13, 2024 52 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED B ALANCE SHEETS (In thousands, except share and per share data) December 31, 2023 2022 ASSETS Fixed maturities, available-for-sale, at fair value (amortized cost of $ 606,646 and $ 705,548 ) $ 560,682 $ 635,572 Equity securities, at fair value, (cost $ 1,666 and $ 1,514 ) 1,666 1,514 Other investments, net 7,067 16,484 Total investments 569,415 653,570 Cash and cash equivalents 463,640 280,881 Restricted cash 9,699 6,691 Accrued investment income 4,068 3,817 Premiums receivable, net 89,490 92,749 Reinsurance recoverable on paid and unpaid claims, net of allowance for credit losses of $ 197 and $ 45 482,429 805,059 Prepaid reinsurance premiums 294,222 306,977 Income taxes receivable 13,354 12,118 Deferred income tax asset, net 11,111 16,841 Deferred policy acquisition costs, net 102,884 99,617 Property and equipment, net 33,218 25,729 Right-of-use lease asset, finance 17,606 20,132 Right-of-use lease asset, operating 6,835 7,335 Intangibles, net 42,555 49,575 Other assets 12,674 11,509 Total Assets $ 2,153,200 $ 2,392,600 LIABILITIES AND STOCKHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 845,955 $ 1,131,807 Unearned premiums 675,921 656,641 Reinsurance payable 159,823 199,803 Long-term debt, net 119,732 128,943 Advance premiums 23,900 26,516 Accrued compensation 9,461 6,594 Lease liability, finance 20,386 22,557 Lease liability, operating 8,076 8,690 Accounts payable and other liabilities 69,666 80,010 Total Liabilities $ 1,932,920 $ 2,261,561 Commitments and contingencies (Note 17) Stockholders’ Equity: Common stock, $ 0.0001 par value, 50,000,000 shares authorized, 42,450,612 shares issued and 30,218,938 outstanding at December 31, 2023 and 37,796,107 shares issued and 25,539,433 outstanding at December 31, 2022 3 3 Additional paid-in capital 360,310 334,711 Accumulated other comprehensive income, net of taxes ( 35,250 ) ( 53,585 ) Treasury stock, at cost, 12,231,674 shares at December 31, 2023 and 2022 ( 130,900 ) ( 130,900 ) Retained earnings (deficit) 26,117 ( 19,190 ) Total Stockholders' Equity 220,280 131,039 Total Liabilities and Stockholders' Equity $ 2,153,200 $ 2,392,600 The accompanying notes are an integral part of these consolidated financial statements. 53 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIO NS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data) For the Year Ended December 31, 2023 2022 2021 REVENUES: Gross premiums written $ 1,343,101 $ 1,275,031 $ 1,164,879 Change in gross unearned premiums ( 19,458 ) ( 66,207 ) ( 20,717 ) Gross premiums earned 1,323,643 1,208,824 1,144,162 Ceded premiums earned ( 626,458 ) ( 571,759 ) ( 533,091 ) Net premiums earned 697,185 637,065 611,071 Net investment income 25,756 11,977 5,652 Net realized losses and impairment losses ( 972 ) ( 258 ) ( 16 ) Other revenue 13,529 13,676 14,854 Total revenues 735,498 662,460 631,561 EXPENSES: Losses and loss adjustment expenses 426,129 501,162 427,370 Policy acquisition costs, net of ceding commission income (1) 167,610 156,304 145,968 General and administrative expenses, net of ceding commission income (2) 77,777 70,396 65,787 Goodwill or intangible asset impairment 767 91,959 60,500 Total expenses 672,283 819,821 699,625 Operating income (loss) 63,215 ( 157,361 ) ( 68,064 ) Interest expense, net 11,210 8,809 7,970 Income (loss) before income taxes 52,005 ( 166,170 ) ( 76,034 ) Provision (benefit) for income taxes 6,698 ( 11,807 ) ( 1,307 ) Net income (loss) $ 45,307 $ ( 154,363 ) $ ( 74,727 ) OTHER COMPREHENSIVE INCOME (LOSS) Change in net unrealized gains (losses) on investments 23,388 ( 64,335 ) ( 13,661 ) Reclassification adjustment for net realized investment losses (gains) 636 258 ( 64 ) Income tax (expense) benefit related to items of other comprehensive income (loss) ( 5,690 ) 15,065 3,095 Total comprehensive income (loss) $ 63,641 $ ( 203,375 ) $ ( 85,357 ) Weighted average shares outstanding Basic 26,193,065 26,343,826 27,804,355 Diluted 26,252,328 26,343,826 27,804,355 Earnings (loss) per share Basic $ 1.73 $ ( 5.86 ) $ ( 2.69 ) Diluted $ 1.73 $ ( 5.86 ) $ ( 2.69 ) (1) Policy acquisition costs includes $ 48.7 million, $ 46.5 million and $ 47.1 million of ceding commission income for the reporting years 2023, 2022 and 2021, respectively . (2) General and administration includes $ 16.1 million, $ 15.4 million and $ 15.6 million of ceding commission income for the reporting years 2023, 2022 and 2021, respectively . The accompanying notes are an integral part of these consolidated financial statements. 54 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHA NGES IN STOCKHOLDERS’ EQUITY (In thousands, except share and per share data) Common Shares Common Shares Amount Additional Paid-in- Capital Retained Earnings (Deficit) Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Balance at December 31, 2020 27,748,606 $ 3 $ 331,867 $ 219,782 $ ( 115,365 ) $ 6,057 $ 442,344 Net unrealized change in investments, net of tax ( 10,630 ) ( 10,630 ) Surrendered shares for tax withholding ( 28,257 ) — ( 231 ) — — — ( 231 ) Restricted stock vested 35,267 — — — — — — Issued restricted stock 254,793 — — — — — — Stock buy-back ( 1,256,898 ) — — — ( 8,192 ) — ( 8,192 ) Stock-based compensation on restricted stock — — 1,161 — — — 1,161 Cash dividends declared ($ 0.24 per share of common stock) — — — ( 6,674 ) — — ( 6,674 ) Net loss — — — ( 74,727 ) — — ( 74,727 ) Balance at December 31, 2021 26,753,511 $ 3 $ 332,797 $ 138,381 $ ( 123,557 ) $ ( 4,573 ) $ 343,051 Net unrealized change in investments, net of tax ( 49,012 ) ( 49,012 ) Surrendered shares for tax withholding ( 28,271 ) — ( 94 ) — — — ( 94 ) Restricted stock vested 25,000 — — — — — — Issued restricted stock 496,552 — — — — — — Forfeiture on restricted stock ( 12,422 ) — — — — — — Stock buy-back ( 1,694,937 ) — — — ( 7,343 ) — ( 7,343 ) Stock-based compensation on restricted stock — — 2,008 — — — 2,008 Cash dividends declared ($ 0.12 per share of common stock) — — — ( 3,208 ) — — ( 3,208 ) Net loss — — — ( 154,363 ) — — ( 154,363 ) Balance at December 31, 2022 25,539,433 $ 3 $ 334,711 $ ( 19,190 ) $ ( 130,900 ) $ ( 53,585 ) $ 131,039 Net unrealized change in investments, net of tax 18,335 18,335 Surrendered shares for tax withholding ( 68,865 ) — ( 429 ) — — — ( 429 ) Restricted stock vested 25,000 — — — — — — Issued restricted stock 1,286,855 — — — — — — Forfeiture on restricted stock ( 483,454 ) — ( 1,750 ) — — — ( 1,750 ) Stock-based compensation on restricted stock — 3,112 — — — 3,112 Issuance of common stock through public and private offering, net 3,919,969 — 24,666 24,666 Net income — — — 45,307 — — 45,307 Balance at December 31, 2023 30,218,938 $ 3 $ 360,310 $ 26,117 $ ( 130,900 ) $ ( 35,250 ) $ 220,280 The accompanying notes are an integral part of these consolidated financial statements. 55 HERITAGE INSURANCE HOLDINGS, INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2023 2022 2021 OPERATING ACTIVITIES Net income (loss) $ 45,307 $ ( 154,363 ) $ ( 74,727 ) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation 1,362 2,008 1,161 Bond amortization and accretion ( 3,488 ) 3,121 4,054 Amortization of original issuance discount on debt 469 1,037 1,784 Depreciation and amortization 8,689 8,359 8,449 Allowance for bad debt 856 ( 1 ) — Net realized losses and impairment losses 972 258 16 Net (gain) loss from sale of asset ( 35 ) ( 399 ) 168 Deferred income taxes 40 ( 11,202 ) ( 5,956 ) Goodwill or intangible asset impairment 767 91,959 60,500 Changes in operating assets and liabilities: Accrued investment income ( 251 ) ( 650 ) ( 430 ) Premiums receivable, net 2,403 ( 20,823 ) 5,547 Prepaid reinsurance premiums 12,755 ( 41,104 ) ( 20,055 ) Reinsurance premiums receivable and recoverable 322,630 ( 535,668 ) 85,646 Income taxes receivable ( 1,236 ) ( 379 ) 20,485 Deferred policy acquisition costs, net ( 3,267 ) ( 5,736 ) ( 4,616 ) Right-of-use asset, net 3,026 286 ( 21,292 ) Other assets ( 1,165 ) 763 ( 729 ) Unpaid losses and loss adjustment expenses ( 285,852 ) 541,641 ( 69,175 ) Unearned premiums 19,280 66,222 20,801 Reinsurance payable ( 39,980 ) 8,075 29,810 Accrued interest ( 410 ) ( 3 ) 26 Leasehold incentives — 1,622 — Advance premiums ( 2,616 ) 2,012 6,236 Accrued compensation 2,867 ( 1,420 ) ( 1,311 ) Lease liability, net ( 2,785 ) 75 23,017 Other liabilities ( 9,923 ) 10,050 ( 9,278 ) Net cash provided by (used in) operating activities 70,415 ( 34,260 ) 60,130 INVESTING ACTIVITIES Fixed maturity securities sales, maturities and paydowns 332,511 93,726 208,527 Fixed maturity securities purchases ( 230,743 ) ( 127,400 ) ( 334,584 ) Equity securities sales — — 184 Equity securities reinvestments of dividends ( 152 ) — — Return on other investments 1,080 14,945 2,400 Other investment sales 8,000 — — Other investment purchases — ( 7,599 ) — Leasehold improvements — ( 3,825 ) — Proceeds from other investments sold — 848 — Cost of property and equipment acquired ( 9,890 ) ( 8,557 ) ( 1,007 ) Net cash provided by (used in) investing activities 100,806 ( 37,862 ) ( 124,480 ) FINANCING ACTIVITIES Proceeds from term loan facility — 35,000 2,782 Issuance of common stock, net of offering costs 24,666 — — Repurchase of convertible notes — ( 22,529 ) — Mortgage loan payments ( 180 ) ( 322 ) ( 306 ) Principal payments on term loan facility ( 9,500 ) ( 5,000 ) ( 4,625 ) Tax withholding on share-based compensation awards ( 429 ) ( 94 ) ( 231 ) Purchase of treasury stock — ( 7,343 ) ( 8,192 ) Dividends paid ( 11 ) ( 4,770 ) ( 6,709 ) Net cash provided by (used in) financing activities 14,546 ( 5,058 ) ( 17,281 ) Increase (decrease) in cash, cash equivalents, and restricted cash 185,767 ( 77,180 ) ( 81,631 ) Cash, cash equivalents and restricted cash, beginning of period 287,572 364,752 446,383 Cash, cash equivalents and restricted cash, end of period $ 473,339 $ 287,572 $ 364,752 For the Year Ended December 31, 2023 2022 2021 Supplemental Cash Flows Information: Income taxes (refunded) paid, net $ 8,565 $ ( 285 ) $ 528 Interest paid $ 9,312 $ 7,837 $ 5,282 56 Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets: December 31, 2023 December 31, 2022 (in thousands) Cash and cash equivalents $ 463,640 $ 280,881 Restricted cash 9,699 6,691 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 473,339 $ 287,572 The accompanying notes are an integral part of these consolidated financial statements. 57 HERITAGE INSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices Business Description Heritage Insurance Holdings, Inc. is an insurance holding company. Our insurance subsidiaries are Heritage Property & Casualty Insurance Company (“Heritage P&C”), Zephyr Insurance Company (“Zephyr”), Narragansett Bay Insurance Company (“NBIC”) and Pawtucket Insurance Company (“PIC”). PIC is currently inactive and has no policies in force or outstanding claims. Our other subsidiaries include: Heritage MGA, LLC (“MGA”), the managing general agent that manages substantially all aspects of our insurance subsidiaries’ business; Contractors’ Alliance Network, LLC, our vendor network manager; Skye Lane Properties, LLC, our property management subsidiary; Osprey Re Ltd., our reinsurance subsidiary that may provide a portion of the reinsurance protection purchased by our insurance subsidiaries; Heritage Insurance Claims, LLC, an inactive subsidiary reserved for future development; Zephyr Acquisition Company (“ZAC”); NBIC Holdings, Inc., 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. We conduct our operations under a single reporting segment. Basis of Presentation The consolidated financial statements include the accounts of Heritage Insurance Holdings, Inc. and its wholly-owned subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and all other entities in which the Company has a controlling financial interest (none of which are variable interest entities). All intercompany accounts and transactions have been eliminated in consolidation. Reclassification We reclassified certain amounts in the 2021 consolidated statement of cash flows to conform to the 2023 presentation, relating to the presentation of "Net realized losses and impairment losses". Use of Estimates The preparation of consolidated financial statements in conformity with United States Generally Accepted Accounting Principles (“U.S. GAAP”) requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates. Cash and Cash Equivalents The Company’s cash and cash equivalents include demand deposits with financial institutions and short-term, highly-liquid financial instruments with original maturities of three months or less when purchased. The carrying amounts reported in the consolidated balance sheets for interest bearing deposits approximate their fair value because of the short maturity of these financial instruments. To the extent there are negative cash balances with any individual financial institution, the Company excludes the negative amount from cash and cash equivalents neg ative cash balances and reports as accounts payable and other liabilities. Restricted Cash Restricted cash related to individual state regulatory deposits of $ 9.7 million and $ 6.7 million as of December 31, 2023 and 2022, respectively. The Company earned interest income of $ 26,052 and $ 12,612 on its restricted cash deposits. Investments Fixed-Maturity Securities 58 The Company classifies all of its investments in debt securities as available-for-sale and reports them at fair value. Subsequent to its acquisition of debt securities available-for-sale, the Company records changes in value through the date of disposition as unrealized holding gains and losses, net of tax effects, and includes them as a component of other comprehensive income. Refer to Note 2 “Investments” to these consolidated financial statements for further information. Short-term Securities Short-terms securities have an original maturity of less than one year and are carried at amortized cost, which approximates fair value. Accumulated Other Comprehensive Income Accumulated other comprehensive income consists solely of unrealized gains and losses on debt securities available-for-sale, net of tax. Investment Gains and Losses Net realized investment gains and losses are included as a component of pre-tax revenues based upon specific identification of the investments sold on the trade date. Included in net realized and unrealized gains (losses) are credit impairment losses on invested assets other than those investments accounted for using the equity method of accounting described in the “Allowance for Credit Losses” and “Impairment of Other Investments” section discussed below. Allowance for Credit Losses (Available-for-Sale-Debt Securities) The impairment model for available-for-sale (“AFS”) debt securities differs from the current expected credit loss (“CECL”) methodology applied for held to maturity debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities where neither of the criteria are met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount that the fair value is less than the amortized cost basis. Under the guidance, an entity may no longer consider the length of time fair value has been less than amortized cost. As of December 31, 2023 and 2022, management evaluated and determined a credit allowance was not significant to the financial statements. Other Investments Non-Consolidating Variable Interest Entities (“VIEs”) Company holds certain passive investments as described in Note 2 " Investments " to these financial statements. The Company determines at the inception of each arrangement whether an entity in which it has made an investment or in which it has other variable interests is considered a variable interest entity ("VIE"). The Company consolidates VIEs when it is determined to be the primary beneficiary. The Company is the primary beneficiary of a VIE when it has the power to direct activities that most significantly affect the economic performance of the VIE and has the obligation to absorb the majority of their losses or entitled to benefits. If the Company is not the primary beneficiary in a VIE, it will account for the investment or other variable interests in a VIE in accordance with applicable GAAP. For the year ended December 31, 2023 and 2022, the Company was not the primary beneficiary to any of its other investments and therefore considered the other investments as non-consolidated VIEs. Equity securities that do not result in consolidation and are not accounted for under the equity method, are measured at fair value. Equity securities without a readily determinable fair value are reported at cost, less impairment, unless we identify observable price changes in orderly transactions for the identical or a similar investment of the same issuer (measurement alternative). 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. 59 Impairment of Other Investments 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, 2023, the Company recorded $2 .2 million impairment charges on its other investments. For the year ended December 31, 2022, the Company recorded no impairment charges on its other investments. Fair Value Major categories of financial assets and liabilities are measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis when impaired, which include long-lived assets, and other investments that the Company cannot significantly influence. Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the principal or most advantageous market in which we would transact is analyzed. Assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance, are considered. The Company estimates the fair value of its investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE and NASDAQ. For securities for which quoted prices in active markets are unavailable, the Company uses observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. The Company does not have any investments in its portfolio which require the use of unobservable inputs. The Company’s estimate of fair value reflects the interest rate environment that existed as of the close of business on December 31, 2023. Changes in interest rates after December 31, 2023 may affect the fair value of the Company’s investments. The Company’s non-financial assets, such as intangible assets, are carried at cost until there are indicators of impairment and are recorded at fair value only when an impairment charge is recognized. Refer to Note 3 “ Intangible Assets, net ” 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 these consolidated financial statements for further information. Premiums 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. Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a policy-level evaluation to determine the extent to which the balance of premiums receivable exceeds the balance of unearned premiums. When we receive payments on amounts previously charged off, we reduce bad debt expense in the period we receive the payment. Balances in premiums receivable and the associated allowance account are removed upon cancellation of the policy due to non-payment. An allowance of $ 1.3 million and $ 451,600 was recorded as of December 31, 2023 and 2022, respectively. Bad debt expense related to uncollectible premiums and agent commission due back to the Company for cancelled policies was $ 855,750 , $ 0 and $ 0 for the years ended December 31, 2023, 2022 and 2021, respectively. When the Company receives premium payments from policyholders prior to the effective date of the related policy, the Company records an advance premiums liability. On the policy effective date, the Company reduces the advance premium liability and records the premiums as described above. Policy Acquisition Costs The Company incurs policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist of the following four items: (i) commissions paid to outside agents at the time of policy issuance; (ii) policy administration fees paid to a third-party administrator at the time of policy issuance; (iii) premium taxes; and (iv) inspection fees. The Company capitalizes policy acquisition costs to the extent recoverable, then the Company amortizes those costs over the contract period of the related policy. 60 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. Ceding commission is allocated between policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. For the years ended December 31, 2023, 2022, and 2021, we earned ceding commission income of $ 64.8 million, $ 61.9 million and $ 62.7 million of which $ 48.7 million, $ 46.5 million and $ 47.1 million was allocable to policy acquisition costs. Ceding commission income is deferred and recognized over the quota share contract period. The amount and rate of ceding reinsurance commissions earned on the net quota share contract can slide within a prescribed minimum and maximum, depending on loss performance and how future losses develop. Premium Deficiency Reserve At each reporting date, the Company determines whether it has a premium deficiency. A premium deficiency would result if the sum of the Company’s expected losses, deferred policy acquisition costs, and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded the Company’s related unearned premiums plus investment income. Should the Company determine that a premium deficiency exists, the Company would write off the unrecoverable portion of deferred policy acquisition cost. At December 31, 2023 and 2022, the Company has recorded no premium deficiency reserve. Reinsurance The Company follows industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies the Company writes to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss. As a result, a reasonable possibility exists that an estimated recovery may change significantly in the near term from the amounts included in the Company’s consolidated financial statements. The Company’s reinsurance agreements are generally short-term, prospective contracts. The Company records an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of new reinsurance agreements. The Company amortizes its prepaid reinsurance premiums over the 12-month contract period. When the Company incurs losses recoverable under its reinsurance program, the Company records amounts recoverable from its reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of the Company’s liability for unpaid losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to the estimate of unpaid losses. Given that an estimate of amounts recoverable from reinsurers on unpaid losses may change at any point in the future because of its relation to the Company’s reserves for unpaid losses, a reasonable possibility exists that an estimated recovery may change significantly from initial estimates. The Company remains liable for claims payments if any reinsurer is unable to meet its obligations under the reinsurance agreements. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economics characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company contracts with a diverse population of reinsurers to secure its annual reinsurance coverage, for which the excess of loss treaties generally become effective June 1st each year. Allowance for Credit Losses for Reinsurance Recoverables The allowance for credit losses for reinsurance recoverable is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The Company monitors the credit quality of its reinsurance recoverables through the use of A.M. Best’s Financial Strength rating ("FSR"), or in the absence of an FSR consideration of credit ratings issued by approved rating agencies such as S&P, Moody’s, or Fitch. At December 31, 2023, the determination of the allowance for credit losses on reinsurance recoverables included analysis of (i) reinsurance recoverable balances by reinsurer FSR, (ii) estimated payment patterns associated with the claims underlying the reinsurance balances and (iii) historical default rates by reinsurer FSR as published by A.M. Best. In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends, (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. 61 Long-Lived Assets—Property and Equipment Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives as follows: building— 40 years ; computer hardware and software 3-years ; office and furniture equipment— 3 to 7 years . Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Expenditures for improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Capitalized Software Costs associated with the implementation of certain internal systems are capitalized and carried at the amount capitalized less accumulated amortization once 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. Leases We lease office space under finance and operating leases with expiration dates through 2031 . We determine whether an arrangement constitutes a lease and record lease liabilities and right-of-use assets on our consolidated balance sheets at lease commencement. We primarily use our incremental borrowing rates for our operating leases (rates are not readily determinable) and implicit rates for our financing leases in determining the present value of lease payments. We measure right-of-use assets based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs we incur and (iii) tenant incentives under the lease. We begin recognizing rent expense when the lessor makes the underlying asset available to us, we do not assume renewals or early terminations unless we are reasonably certain to exercise these options at commencement, and we do not allocate consideration between lease and non-lease components. For short-term leases, we record rent expense in our consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred. Goodw ill and Intangible Assets When the Company acquires a subsidiary or other business where it exerts significant influence, the fair value of the net tangible and intangible assets acquired is determined and compared to the amount paid for the subsidiary or business acquired. Any excess of the amount paid over the fair value of those net assets is considered to be goodwill. Any excess of carrying value over fair value is written down as an impairment. This evaluation is performed annually, during the fourth quarter or more frequently if facts and circumstances warrant. An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value. The remaining balance of goodwill was written off during the second quarter of 2022. Acquired intangible assets are amortized over their useful lives on a straight-line basis over the period of expected benefit, generally up to 15 years . Intangible assets are assessed for impairment generally when events or circumstances indicate a potential impairment. If it is determined that the carrying amount of the asset is not recoverable, the asset is written down to fair value and an impairment loss is recognized. The Company recorded an impairment of $ 767,000 associated with our construction affiliate resulting from changes to its operations. The Company did not identify any impairment indicators during the year ended December 31, 2022 and 2021. Unpaid Losses and Loss Adjustment Expenses The Company’s reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of settling all reported claims plus all claims we incurred related to insured events that have occurred as of the reporting date, but that policyholders have not yet reported to the Company (incurred but not reported, or “IBNR”). The reserve for unpaid losses is the estimate of amounts necessary to settle all reported and unreported incurred claims for the ultimate cost of insured losses, based upon the facts of each case and the Company’s experience with similar cases. Salvage and subrogation are deducted from the reserve for claims and claims expense on a cash basis. The establishment of appropriate reserves, including reserves for catastrophe losses, is an inherently uncertain and complex process. Reserve estimates are primarily derived using an actuarial estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident or report year to create an estimate of how losses are likely to develop over time. Development factors are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses, and paid losses combined with case reserves. The historical development patterns for these data elements are used as the assumptions to calculate reserve estimates, including the reserves for reported and unreported claims. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting re-estimates are reflected in current results of operations. 62 The Company reports its reserves for unpaid losses and loss adjustment expenses gross of the amounts related to unpaid losses recoverable from reinsurers and reports loss and loss adjustment expenses net of amounts ceded to reinsurers. The Company does not discount its loss reserves for financial statement purposes. Other Revenue Our insurance affiliates may charge policyholders a policy fee on each policy written. The Company recognizes the income immediately when collected, which coincide with related service obligations. The Company also charges pay-plan fees to policyholders that pay its premiums in more than one installment and records the fees as income when collected. Other income also includes rental income due under non-cancelable leases for space at the Company’s commercial property. Assessments Guaranty fund and other insurance-related assessments imposed upon the Company’s insurance company affiliates are recorded as policy acquisition costs in the period the regulatory agency imposes the assessment. To recover 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 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 . As of December 31, 2023, 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 Note 14 “ Long-Term Debt” to these consolidated financial statements for further information . 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 . For awards with performance-based vesting conditions expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight line basis from the award date. The award will continue to be expensed on a straight-line basis until probability of achieving the performance-based conditions changes, if applicable. Earnings Per Share Basic net earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net earnings per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the reported period. Common equivalent shares include incremental shares from diluted vested and unvested 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 tax Income taxes are accounted for under the asset and liability method, that recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities based on the tax rates expected to be in effect during the periods in which the temporary differences reverse. Temporary differences arise when income or expenses are recognized in different periods in the consolidated financial statements than on the tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. Income taxes includes both estimated federal and state income taxes. Accounting Pronouncements Adopted In March 2022, the FASB issued ASU 2022-02, “2022-02 Financial Instruments-Credit Losses” (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for annual periods beginning after December 15, 2022, including interim periods within those periods. Early adoption is permitted. The Company adopted ASU 2022-02 during the first quarter of 2023 with no impact to its financial statements. 63 Accounting Pronouncements Not Yet Adopted The Company describes below recent pronouncements that may have a significant effect on its consolidated financial statements or on its disclosures upon future adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on, or are unrelated to, its financial condition, results of operations, or related disclosures In 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. The Company does not hold any equity securities that are subject to this new guidance. In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 amends disclosure requirements for segment reporting by modifying and adding disclosure requirements. The additional disclosure requirements include the following on both an interim and annual basis: (i) significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"); (ii) amounts for "other segment items" by reportable segment and a description of its composition; and (iii) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. In addition, ASU 2023-07 requires all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280, Segment Reporting, to now be disclosed in interim periods. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. As it requires disclosure only, ASU 2023-07 will not have an impact on our financial condition or results of operations. In December of 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The updated accounting guidance requires expanded income tax disclosures, including the disaggregation of existing disclosures related to the effective tax rate reconciliation and income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024. Prospective application is required, with retrospective application permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures. 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. Note 2. Investments The amortized cost, gross unrealized gains and losses, and fair value of the Company’s debt securities available-for-sale are as follows: December 31, 2023 Cost or Adjusted / Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities (1) $ 82,376 $ 417 $ 1,353 $ 81,440 States, municipalities and political subdivisions 92,739 12 8,958 83,793 Special revenue 250,891 92 24,660 226,323 Corporate and miscellaneous 180,640 475 11,989 169,126 Total $ 606,646 $ 996 $ 46,960 $ 560,682 (1) Includes securities at December 31, 2023 with a carrying amount of $ 26.3 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time. The Company evaluated the available for sale investments that were in an unrealized loss position at December 31, 2023 and determined that the decline in fair value was caused by rising interest rates, resulting in no credit loss allowance recorded for the year ended December 31, 2023. 64 December 31, 2022 Cost or Adjusted / Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities (1) $ 121,811 $ 24 $ 4,093 $ 117,742 States, municipalities and political subdivisions 104,361 — 12,734 91,627 Special revenue 284,946 1 34,817 250,130 Corporate and miscellaneous 194,430 90 18,447 176,073 Total $ 705,548 $ 115 $ 70,091 $ 635,572 (1) Includes securities at December 31, 2022 with a carrying amount of $ 24.3 million that were pledged as collateral for the advance agreement entered into with a financial institution in 2018. The Company is permitted to withdraw or exchange any portion of the pledged collateral over the minimum requirement at any time. The table below summarizes the Company’s fixed maturity securities at December 31, 2023 and 2022 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations. December 31, 2023 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Debt Securities Available-for-sale (in thousands) (in thousands) Due in one year or less $ 90,919 15 % $ 89,529 16 % Due after one year through five years 344,368 57 % 322,394 57 % Due after five years through ten years 141,647 23 % 122,333 22 % Due after ten years 29,712 5 % 26,426 5 % Total $ 606,646 100 % $ 560,682 100 % December 31, 2022 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Debt Securities Available-for-sale (in thousands) (in thousands) Due in one year or less $ 115,959 16 % $ 113,683 18 % Due after one year through five years 344,554 49 % 314,420 49 % Due after five years through ten years 182,793 26 % 150,905 24 % Due after ten years 62,242 9 % 56,564 9 % Total $ 705,548 100 % $ 635,572 100 % Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions. Net Realized Loss and Impairment Losses The proceeds from the sale of debt securities were $ 76.9 million, $ 27.1 million and $ 30.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents net realized (losses) gains on the Company’s debt securities available-for-sale for the years ended December 31, 2023, 2022 and 2021, respectively: For the Years ended December 31, 2023 2022 2021 Realized Gains (Losses) Fair Value at Sale Realized Gains (Losses) Fair Value at Sale Realized Gains (Losses) Fair Value at Sale (in thousands) Debt Securities Available-for-sale Realized gains $ 2 $ 22,220 $ 37 $ 4,836 $ 716 $ 26,029 Realized losses ( 638 ) 54,672 ( 295 ) 22,245 ( 652 ) 4,359 Net realized (losses) gains $ ( 636 ) $ 76,892 $ ( 258 ) $ 27,081 $ 64 $ 30,388 65 The following table presents the reconciliation of net realized losses and impairment losses on the Company’s investments reported for the years ended December 31, 2023, 2022 and 2021, respectively: For the Year Ended December 31, 2023 2022 2021 (in thousands) Gross realized gains on sales of available-for-sale securities $ 2 $ 64 $ 716 Gross realized losses on sales of available-for-sale securities ( 638 ) ( 322 ) ( 652 ) Gross realized gains on sales of other investments 1,900 — 2,100 Impairment charge in other investments ( 2,236 ) — ( 2,180 ) Net realized losses and impairment losses $ ( 972 ) $ ( 258 ) $ ( 16 ) Equity Investments For the years ended December 31, 2023, 2022 and 2021, 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, 2023 and 2022, respectively. For the Year Ended December 31, 2023 2022 Common stock $ — $ — Membership Shares 1,666 1,514 Total equity investments $ 1,666 $ 1,514 Net Investment Income The following table summarizes the Company’s net investment income by major investment category for the years ended December 31, 2023, 2022 and 2021, respectively: For the Year Ended December 31, 2023 2022 2021 (in thousands) Debt securities available-for-sale $ 16,848 $ 11,037 $ 7,220 Equity securities 222 50 — Cash and cash equivalents 8,398 2,257 71 Other investments 2,309 693 1,435 Net investment income 27,777 14,037 8,726 Investment expenses 2,021 2,060 3,074 Net investment income, less investment expenses $ 25,756 $ 11,977 $ 5,652 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: Less Than Twelve Months Twelve Months or More December 31, 2023 Number of Securities Gross Unrealized Losses Fair Value Number of Securities Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities 3 $ 14 $ 2,962 43 $ 1,339 $ 43,083 States, municipalities and political subdivisions 1 8 992 108 8,950 79,894 Special revenue 15 13 2,890 412 24,647 212,054 Corporate and miscellaneous 10 24 6,398 201 11,965 131,104 Total 29 $ 59 $ 13,242 764 $ 46,901 $ 466,135 66 Less Than Twelve Months Twelve Months or More December 31, 2022 Number of Securities Gross Unrealized Losses Fair Value Number of Securities Gross Unrealized Losses Fair Value (in thousands) Debt Securities Available-for-sale U.S. government and agency securities 61 $ 2,040 $ 56,389 36 $ 2,053 $ 56,389 States, municipalities and political subdivisions 28 1,967 17,730 95 10,767 68,852 Special revenue 273 5,832 57,881 259 28,985 167,384 Corporate and miscellaneous 95 1,535 32,387 197 16,912 134,462 Total 457 $ 11,374 $ 164,387 587 $ 58,717 $ 427,087 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. After reviewing the Company's portfolio, if (i) the Company does not have the intent to sell, or (ii) it is more likely than not it will not be required to sell the security before its anticipated recovery, then the Company's intent is to hold the investment securities to recovery, or maturity if necessary to recover the decline in valuation as prices accrete to par. However, the Company's intent may change prior to maturity due to certain types of events, which include, but are not limited to, changes in the financial markets, the Company's analysis of an issuer’s credit metrics and prospects, changes in tax laws or the regulatory environment, or as a result of significant unforeseen changes in liquidity needs. As such, the Company may, from time to time, sell invested assets subsequent to the balance sheet date that it did not intend to sell at the balance sheet date. Conversely, the Company may not sell invested assets that the Company asserted it intended to sell at the balance sheet date. Such changes in intent are due to unforeseen events occurring subsequent to the balance sheet date. Other Investments Non-Consolidated Variable Interest Entities (“VIEs”) The Company makes passive investments in limited partnerships (“LPs”), which is accounted for using the equity method, with income reported in net realized and unrealized gains and losses. The Company also makes passive investments in a Real Estate Investment Trust (“REIT”) and Insuretech company, which are accounted for using the measurement alternative method, which is reported at cost less impairment (if any), plus or minus changes from observable price changes, as described in the table below. The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2023 and 2022 (in thousands): Carrying Value For the Year Ended December 31, Balance Sheet Method 2023 2022 Other Real Estate LLC Other Investments Equity Method $ 1,066 $ 1,508 Real Estate Corporation (1) Other Investments Measure Alternative 758 2,377 Preferred Membership/Interest (2) Other Investments Measure Alternative 4,490 8,490 Non-real estate related (3) Other Investments Equity Method 753 2,009 Insurtech Stock (4) Other Investments Measure Alternative — 2,100 Total non-consolidated VIEs $ 7,067 $ 16,484 (1) For the years ended December 31, 2023 and 2022, a $ 676,000 , and $ 0 impairment was recognized in Net realized losses and impairment losses on the Statement of Operations. (2) The preferred interest agreement dated June 2022 in aggregate of $ 8.5 million is subject to fixed principal and interest schedules with a maturity date of July 1, 2027 . In December 2023, the Company sold 47 % of its preferred interest for $ 4.0 million to a nonaffiliated third party. (3) Certain underlying assets of the funds are expected to be liquidated over the period of approximately 3 to 5 years . 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. For the year ended December 31, 2023, a $ 1.2 million impairment was recognized in net realized losses and impairment losses on the statement of operations. (4) During the first quarter of 2023, the Company sold its investment in an Insurtech company for $ 4.0 million, resulting in a $ 1.9 million realized gain on the investment. 67 The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at December 31, 2023 and 2022: As of December 31, 2023 As of December 31, 2022 Carrying Value Maximum Loss Exposure Carrying Value Maximum Loss Exposure Investments in non-consolidated VIEs - Equity method $ 1,819 $ 1,819 $ 3,517 $ 3,517 Investments in non-consolidated VIEs - Measurement alternative $ 5,248 $ 5,248 $ 12,967 $ 12,967 Total non-consolidated VIEs $ 7,067 $ 7,067 $ 16,484 $ 16,484 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. No agreements exist requiring the Company to provide additional funding to any of the non-consolidated VIEs in excess of the Company’s initial investment. Note 3. Intangible Assets, net For the years ended December 31, 2023 and 2022, other intangible assets were $ 42.6 million and $ 49.6 million, respectively. These amounts include $ 1.3 million relating to insurance licenses classified as an indefinite lived intangible. The Company utilizes a combination of approaches to value the Company’s single reporting unit. The estimate of fair value was derived from the weighting of the income approach (discounted cash flow model) in conjunction with the market approach (guideline public company method and guideline transaction method) to determine the fair value of the single reporting unit. Management reviewed intangibles and concluded no circumstances or events occurred that would indicate the carrying value of the intangible assets may not be recoverable other than what was recorded during the second quarter of 2023. During the second quarter of 2023, management impaired certain named intangible assets with a carrying value of $ 767,000 associated with our construction affiliate resulting from changes to its operations. During the second quarter of 2022, management determined a triggering event occurred for which it deemed an interim evaluation of goodwill was appropriate and concluded the remaining balance of its goodwill was fully impaired. The carrying value of $ 92.0 million was written off based on the following factors: (i) disruptions in the equity markets, specifically for property and casualty insurance companies, largely due to recent weather-related catastrophe events; (ii) elevated loss ratios for property insurers in the Company’s markets; and (iii) the Company’s market cap was below book value. These factors reduced the Company’s previously modeled fair value of the Company and resulted in a $ 92.0 million goodwill impairment charge, as of the second quarter of 2022, most of which was not tax deductible. During the fourth quarter of 2021 , the Company recognized $ 60.5 million for a goodwill impairment charge. Intangible Assets, net Our intangible assets resulted primarily from the acquisitions of Zephyr Acquisition Company and NBIC Holdings, Inc. and consist of brand, agent relationships, renewal rights, customer relations, trade names, non-competes and insurance licenses. Finite-lived intangibles assets are amortized over their useful lives from one to fifteen years . The tables below detail the finite-lived intangible assets, net as of December 31, 2023 and 2022, respectively (amounts in thousands): For the Year Ended December 31, 2023 2022 Amortizing intangible assets (in thousands) Brand $ 1,210 $ 1,210 Agent relationships 15,500 15,500 Renewal rights 57,200 57,200 Customer relations 870 870 Trade names 9,000 9,000 Non-compete 4,790 4,790 88,570 88,570 Accumulated amortization ( 47,330 ) ( 40,310 ) Total infinite-lived intangible assets, net 41,240 48,260 Indefinite-lived intangible assets: License acquired 1,315 1,315 Total intangible assets, net $ 42,555 $ 49,575 68 Estimated annual pretax amortization of intangible assets for each of the next five years and thereafter is as follows (in thousands): Year Amount 2024 $ 6,183 2025 $ 6,183 2026 $ 6,033 2027 $ 5,836 2028 $ 3,913 Thereafter $ 13,091 $ 41,240 Amortization expense of intangible assets was $ 6.3 million, $ 6.4 million and $ 6.4 million for the years ending December 31, 2023, 2022 and 2021, respectively. Note 4. Earnings (Loss) Per Share 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, 2023 2022 2021 Basic earnings (loss) per share: Net income (loss) attributable to common stockholders (000's) $ 45,307 $ ( 154,363 ) $ ( 74,727 ) Weighted average shares outstanding 26,193,065 26,343,826 27,804,355 Basic earnings (loss) per share: $ 1.73 $ ( 5.86 ) $ ( 2.69 ) Diluted earnings (loss) per share: Net income (loss) attributable to common stockholders (000's) $ 45,307 $ ( 154,363 ) $ ( 74,727 ) Weighted average shares outstanding 26,193,065 26,343,826 27,804,355 Add: Effect of dilutive securities 5.875 % Convertible Notes 59,263 — — Diluted weighted average common shares outstanding 26,252,328 26,343,826 27,804,355 Diluted earnings (loss) per share: $ 1.73 $ ( 5.86 ) $ ( 2.69 ) 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. Note 5. Fair Value Measurements Certain of the Company’s assets are carried at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Accordingly, when market observable data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows: Level 1 – Unadjusted quoted prices are available in active markets for identical assets/liabilities as of the reporting date. Level 2 – Valuations based on observable inputs, such as quoted prices similar assets or liabilities at the measurement date; quoted prices in the markets that are not active; or other inputs that are observable, either directly or indirectly. Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. For the Company’s investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, the Company obtains the fair values from its third-party valuation service and evaluates the relevant inputs, assumptions, methodologies and conclusions associated with such valuations. The valuation service 69 calculates prices for the Company’s investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve as of quarter end. The inputs the valuation service uses in their calculations are not quoted prices in active markets, but are observable inputs, and therefore represent Level 2 inputs. The following table presents information about the Company’s assets measured at fair value on a recurring basis. The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy. For the years ended December 31, 2023 and 2022, there were no transfers in or out of Level 1, 2, and 3. December 31, 2023 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Invested Assets: (in thousands) Debt Securities Available-for-sale U.S. government and agency securities $ 81,440 $ — $ 81,440 $ — States, municipalities and political subdivisions 83,793 — 83,793 — Special revenue 226,323 — 226,323 — Corporate and miscellaneous 169,126 — 169,126 — Total debt securities $ 560,682 $ — $ 560,682 $ — Equity Securities Common stock 1,666 1,666 — — Total equity securities 1,666 1,666 — — Total debt securities and equity securities $ 562,348 $ 1,666 $ 560,682 $ — December 31, 2022 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Invested Assets: (in thousands) Debt Securities Available-for-sale U.S. government and agency securities $ 117,742 $ — $ 117,742 $ — States, municipalities and political subdivisions 91,627 — 91,627 — Special revenue 250,130 — 250,130 — Corporate and miscellaneous 176,073 — 176,073 — Total debt securities 635,572 — 635,572 — Equity Securities Common stock 1,514 1,514 — — Total equity securities 1,514 1,514 — — Total debt securities and equity securities $ 637,086 $ 1,514 $ 635,572 $ — Non-recurring fair value measurements Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. To evaluate such assets for a potential impairment, we determine the fair value of the goodwill and intangible assets using a combination of a discounted cash flow approach and market approaches, which contain significant unobservable inputs and therefore are considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate. Certain of our investments in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. The following table presents information for assets measured at an estimated fair value on a nonrecurring basis as of December 31, 2022: 70 Carrying Value Balance, January 1, 2022 Amounts impaired Carrying Value Balance, December 31, 2022 (in thousands) Goodwill (1) $ 91,959 $ ( 91,959 ) $ — Total $ 91,959 $ ( 91,959 ) $ — (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. During the second quarter of 2023, the Company recorded an impairment of $ 767,000 of named intangible assets associated with a construction division given management changes to its operations. 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 weather-related catastrophe events; (ii) elevated loss ratios for property insurers in the Company’s markets; and (iii) the Company’s market cap was below book value. Note 6. Other Comprehensive Income The following table is a summary of other comprehensive income (loss) and discloses the tax impact of each component of other comprehensive income (loss) for the years ended December 31, 2023, 2022 and 2021, respectively: For the Year Ended December 31, 2023 2022 2021 Pre-tax Tax After- tax Pre- tax Tax After- tax Pre-tax Tax After- tax (in thousands) Other comprehensive income (loss) Change in unrealized gains (losses) on investments, net $ 23,388 ( 5,539 ) $ 17,850 $ ( 64,335 ) 15,126 $ ( 49,209 ) $ ( 13,661 ) $ 3,081 $ ( 10,580 ) Reclassification adjustment of realized losses (gains) included in net income (loss) 636 ( 151 ) 484 258 ( 61 ) 197 ( 64 ) 14 $ ( 50 ) Effect on other comprehensive income (loss) $ 24,024 $ ( 5,690 ) $ 18,335 $ ( 64,077 ) $ 15,065 $ ( 49,012 ) $ ( 13,725 ) $ 3,095 $ ( 10,630 ) Note 7. Other Assets The following table summarizes the Company’s other assets for the years ended December 31, 2023 and 2022: Description December 31, 2023 December 31, 2022 (in thousands) Other amounts receivable $ 1,508 $ 1,363 State underwriting pooling & assoc. $ 5,320 4,697 Prepaid expense $ 4,967 4,694 Unallocated Remittances $ 879 755 Total other assets $ 12,674 $ 11,509 Note 8. Leases The Company has entered into operating and financing leases primarily for real estate and vehicles. The Company will determine whether an arrangement is a lease at inception of the agreement. The operating leases have terms of one to ten years , and often include one or more options to renew . These renewal terms can extend the lease term from two to ten years and are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company considers these options in determining the lease term used in establishing our right-of-use assets and lease obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine present value of the lease payments. The Company used the implicit rates within the finance leases. 71 The components of lease costs were as follows (in thousands) for the respective years: December 31, 2023 December 31, 2022 Operating lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations $ 1,578 $ 1,449 Finance lease cost: Amortization of assets, included in General & Administrative expenses on the Consolidated Statements of Operations 2,569 2,591 Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Operations 890 977 Total finance lease cost $ 3,459 $ 3,568 Variable lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations $ 1,526 $ 952 Short-term lease cost, included in General & Administrative expenses on the Consolidated Statements of Operations $ 142 $ 188 Right-of-use lease asset and Lease Liability was as follows (in thousands): Operating Leases December 31, 2023 December 31, 2022 Right of use assets $ 6,835 $ 7,335 Lease liability $ 8,076 $ 8,690 Finance Leases Right of use assets $ 17,606 $ 20,132 Lease liability $ 20,386 $ 22,557 Supplemental cash flow information related to our operating and financial leases as follows (in thousands): Operating Leases December 31, 2023 December 31, 2022 Right of use assets $ 500 $ ( 2,300 ) Lease liability $ ( 614 ) $ 2,139 Finance Leases Right of use assets $ 2,526 $ 2,586 Lease liability $ ( 2,171 ) $ ( 2,064 ) Weighted-average remaining lease term and discount rate for our operating and financing leases was as follows: Weighted-average remaining lease term December 31, 2023 December 31, 2022 Operating lease 5.57 yrs. 6.49 yrs. Finance lease 7.16 yrs. 8.13 yrs. Weighted-average discount rate Operating lease 5.17 % 5.14 % Finance lease 4.15 % 4.16 % Maturities of lease liabilities for financing and operating leases were as follows as of December 31, 2023 (in thousands): Financing Lease Operating Lease 2024 $ 3,109 $ 1,716 2025 3,173 1,609 2026 3,216 1,587 2027 3,190 1,595 2028 3,269 1,633 2029 and thereafter 7,651 1,213 Total lease payments 23,608 9,353 Less: imputed interest 3,222 1,277 Present value of lease liabilities $ 20,386 $ 8,076 72 Note 9. Property and Equipment Property and equipment, net consists of the following at December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) Land $ 2,582 $ 2,582 Building 9,599 9,599 Software in progress 14,450 6,884 Computer hardware and software 10,717 8,851 Office furniture and equipment 1,484 1,381 Tenant and leasehold improvements 10,876 10,485 Vehicle fleet 515 594 Total, at cost 50,223 40,376 Less: accumulated depreciation and amortization ( 17,005 ) ( 14,647 ) Property and equipment, net $ 33,218 $ 25,729 The Company has capitalized certain costs related to a new policy, billing and claims system for which one component with a capitalized cost of $ 2.1 million was completed and placed into service during the second quarter of 2023. The remaining components are anticipated to be placed into service in early 2025. Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was $ 2.4 million, $ 2.0 million, $ 2.1 million, respectively. The Company’s own real estate consists of 13 acres of land, two buildings with a gross area of 88,378 square feet and a parking garage. The carrying value of the property is approximately $ 12.2 million with accumulated depreciation of approximately $ 2.5 million at December 31, 2023. Expected annual rental income due under non-cancellable operating leases for our real estate properties is as follows (in thousands): Year Amount 2024 $ 2,414 2025 2,466 2026 2,518 2027 2,569 2028 2,621 2029 and Thereafter 34,074 Total $ 46,662 Note 10. Deferred Reinsurance Ceding Commission The Company defers certain income in connection with its quota share treaties, the ceded reinsurance commissions income, called deferred reinsurance ceding commissions (“DRCC”), which are deferred and earned over the terms of the reinsurance agreements. Ceding commission on quota share agreements call for provisional ceding rate, subject sliding scale adjustments based on the loss experience of the reinsurers. Adjustments are reflected in current operations. The Company allocates 75 % of total ceding commission income to policy acquisition costs and 25 % of total ceding commission income to general and administrative expense. The Company defers reinsurance ceding commission income, which is amortized over the effective period of the related insurance policies. For the year ended December 31, 2023, 2022 and 2021 the Company allocated ceding commission income of $ 48.7 million, $ 46.5 million and $ 47.1 million to policy acquisition costs and $ 16.1 million, $ 15.4 million and $ 15.6 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, 2023, 2022 and 2021. For the Year Ended December 31, 2023 2022 2021 (in thousands) Beginning balance of deferred ceding commission income $ 42,758 $ 40,405 $ 39,995 Ceding commission deferred $ 55,639 64,201 63,131 Less: ceding commission earned $ ( 64,770 ) ( 61,848 ) ( 62,721 ) Ending balance of deferred ceding commission income $ 33,627 $ 42,758 $ 40,405 73 Deferred ceding commission income is included in Other Liabilities in the Company's consolidated financial statements. Note 11. Deferred Policy Acquisition Costs The Company defers certain costs in connection with written policies, called deferred policy acquisition costs (“DPAC”), which are amortized over the effective period of the related insurance policies. The Company anticipates that its DPAC costs will be fully recoverable in the near term. The table below depicts the activity with regard to DPAC for the years ended December 31, 2023, 2022 and 2021: For the Year Ended December 31, 2023 2022 2021 (in thousands) Beginning Balance $ 99,617 $ 93,881 $ 89,265 Policy acquisition costs deferred $ 216,295 202,793 193,106 Amortization $ ( 213,028 ) ( 197,057 ) ( 188,490 ) Ending Balance $ 102,884 $ 99,617 $ 93,881 Note 12. Reinsurance Overview Reinsurance In order to limit the Company’s potential exposure to individual risks and catastrophic events, the Company purchases significant reinsurance from third party reinsurers. Purchasing reinsurance is an important part of the Company’s risk strategy, and premiums ceded to reinsurers is one of the Company’s largest costs. The Company has strong relationships with reinsurers, which it attributes to its management’s industry experience, disciplined underwriting, and claims management capabilities. For each of the twelve months beginning June 1, 2023 and 2022, the Company purchased reinsurance from the following sources: (i) the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe fund (“FHCF”) which provide reinsurance for Florida admitted policies only, (ii) private reinsurers, all of which were rated “A-” or higher by A.M. Best Company, Inc. (“A.M. Best”) or Standard & Poor’s Financial Services LLC (“S&P”) or were fully collateralized, and (iii) the Company’s wholly-owned reinsurance subsidiary, Osprey Re Ltd. (“Osprey”). We also sponsored catastrophe bonds in 2023 and 2022 through Citrus Re Ltd. For the 2023 hurricane season, we also obtained reinsurance from the Florida State Board of Administration’s Reinsurance to assist Policyholders (“RAP”) program which provide reinsurance for Florida admitted policies only. The RAP component of our reinsurance program was provided at no cost to the Company and is a non-recurring reinsurance program. In addition to purchasing excess of loss catastrophe reinsurance, the Company also purchased quota share, property per risk and facultative reinsurance. The Company’s quota share program limits its exposure on catastrophe and non-catastrophe losses and provides ceding commission income. The Company’s per risk programs limit its net exposure in the event of a severe non-catastrophe loss impacting a single location or risk. The Company also utilizes facultative reinsurance to supplement its per risk reinsurance program where the Company capacity needs dictate. Purchasing a sufficient amount of reinsurance to cover catastrophic losses from single or multiple events or significant non-catastrophe losses is an important part of the Company’s risk strategy. Reinsurance involves transferring, or “ceding”, a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that the Company’s reinsurers are unable to meet the obligations they assume under the Company’s reinsurance agreements, the Company remains liable for the entire insured loss. The Company’s insurance regulators require all insurance companies, like us, to have a certain amount of capital and reinsurance coverage in order to cover losses and loss adjustment expenses upon the occurrence of a catastrophic event. The Company’s reinsurance program provides reinsurance in excess of its state regulator requirements, which are based on the probable maximum loss that it would incur from an individual catastrophic event estimated to occur once in every 100 years based on its portfolio of insured risks. The nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within such portfolio. As a result, a particular catastrophic event could be a one-in-100-year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company. The Company also purchases reinsurance coverage to protect against the potential for multiple catastrophic events occurring in the same year. The Company shares portions of its reinsurance program coverage among its insurance company affiliates. 2023-2024 Reinsurance Towers by Region The following graphics depict our reinsurance program structure for the 2023-2024 hurricane season by region. 74 Millions $ 1,120.3 Layer 4 FL/SE 100 % of $ 60 M xs $ 470 M 1@ 100 % $ 1,060.3 Layer 3 Ex- HI 100 % of $ 80 M xs $ 390 M 1@ 100 % $ 980.3 $ 838.8 FHCF Layer 90 % of $ 564.3 M xs $ 274.5 M ($ 507.9 M) $ 274.5 $ 283.7 RAP Layer 90 % of $ 91.6 M xs $ 192.1 M ($ 82.4 M) 192.1 Layer 2 100 % of $ 250 M xs $ 140 M 1@ 100 % w/RPP $ 140.0 Layer 1 100 % of $ 100 M xs $ 40 M 1@ 100 % w/ RPP $ 40.0 Retention SE 1st Event 75 Millions $ 1,255.0 Citrus Re 2023-1 Northeast/ Hawaii Only Bond 100 % of $ 115 M xs $ 1,140 M $ 1,140.0 Northeast Only 40.54 % of $ 370 M xs $ 770 M ($ 150 M) 1@ 100 % Citrus Re 2023-1 Northeast Only Bond 32.43 % of $ 370 M xs $ 770 M ($ 120 M) Citrus Re 2022-1 Northeast Only Bond 27.03 % of $ 370 M xs $ 770 M ($ 100 M) $ 770.0 Multi-Zonal 100 % of $ 300 M xs $ 470 M 1@ 100 % $ 470.0 Layer 3 Ex- HI 100 % of $ 80 M xs $ 390 M 1@ 100 % $ 390.0 Layer 2 100 % of $ 250 M xs $ 140 M 1@ 100 % $ 140.0 Layer 1 100 % of $ 100 M xs $ 40 M 1@ 100 % $ 40.0 Retention Net Quota Share NE 1st Event Millions $ 870.0 Citrus Re 2023-1 Northeast/ Hawaii Only Bond 100 % of $ 115 M xs $ 755 $ 755.0 HI Only 100 % of $ 65 M xs $ 690 M 1@ 100 % $ 690.0 Multi-Zonal 100 % of $ 300 M xs $ 390 M 1@ 100 % $ 390.0 Layer 2 100 % of $ 250 M xs $ 140 M 1@ 100 % $ 140.0 Layer 1 100 % of $ 100 M xs $ 40 M 1@ 100 % $ 40.0 Retention HI 1st Event * xs = in excess 2023 - 2024 Reinsurance Program Catastrophe Excess of Loss Reinsurance 76 Effective June 1, 2023, 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”), Citrus Re and Osprey. The FHCF covers Florida admitted market risks only and the Company elected to participate at 90 % for the 2023 hurricane season. Additionally, for Florida admitted market risks, the Company also has reinsurance from the Reinsurance to Assist Policyholders (“RAP”) program created by the Florida legislature, which provides reinsurance at no cost to the Company. Osprey 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 and Citrus Re are fully collateralized programs. The reinsurance program, which is segmented into layers of coverage, protects the Company for excess property catastrophe losses and loss adjustment expenses. The 2023-2024 reinsurance program provides first event coverage up to $ 1.1 billion for Heritage P&C, first event coverage up to $ 1.3 billion for NBIC, and first event coverage up to $ 870.0 million for Zephyr. The Company’s first event retention in a 1 in 100-year event would include retention for the respective insurance company as well as any retention by Osprey. The first event maximum retention up to a 1 in 100-year event for each insurance company subsidiary is as follows: Heritage P&C – $ 40.0 million, of which $ 40.0 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. For second or subsequent catastrophic events, the Company’s total available coverage depends on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. An aggregate of $ 2.9 billion of limit purchased in 2023 includes reinstatement through the purchase of reinstatement premium protection. The amount of coverage, however, will be subject to the severity and frequency of such events. Additionally, the Company placed an occurrence contract for business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2023, expiring December 31, 2024 . The contract is 60% placed with a $ 15.0 million limit in excess of a retention of $ 25.0 million, with the remaining 40% placed with a $ 20.0 million limit in excess of a retention of $ 20.0 million, with one reinstatement available. 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 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, as well a limit of $ 1.0 million per risk. The amount and rate of ceding commissions slide, within a prescribed minimum and maximum, depending on loss performance. The Net Quota Share program was renewed on December 31, 2023 ceding 41.0 % of the net premiums. Per Risk Coverage For losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms, the Company purchased property per risk coverage for losses and loss adjustment expenses in excess of $ 1.0 million per claim. The limit recoverable for an individual loss is $ 9.0 million and total limit for all losses is $ 27.0 million. There are two reinstatements available with additional premium due based on the amount of the layer exhausted. This coverage is 100 % placed for the contract period of June 15, 2022 through June 14, 2023, and 90 % placed for the contract period from June 15, 2023 through June 14, 2024. For losses arising from personal residential business underwritten by NBIC, the Company also purchased property per risk coverage for losses and loss adjustments expenses in excess of $ 750,000 per claim. The limit recovered for an individual loss is $ 250,000 and total limit for all losses is $ 750,000 . There are two reinstatements available with additional premium due based on the amount of the layer exhausted. In addition, the Company purchased facultative reinsurance for losses in excess of $ 10.0 million for any properties it insured where the total insured value exceeded $ 10.0 million. This coverage applies to losses arising from business underwritten by Heritage P&C and losses arising from commercial residential business underwritten by NBIC, excluding losses from named storms. The Company also purchased facultative reinsurance for losses underwritten by NBIC in excess of $ 3.5 million. General Excess of Loss The Company’s general excess of loss reinsurance protects business underwritten by NBIC and Zephyr multi-peril policies from single risk losses. For the contract period of July 1, 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, and is 67.5 % placed. For the contract period of July 1, 2023 through June 30, 2024, the coverage is $ 2.5 million excess $ 1.0 million for property losses and $ 1.0 million excess $ 1.0 million for casualty losses, and is 67.5 % placed. 77 For a detailed discussion of the Company’s 2022-2023 Reinsurance Program Refer to Part I, “Business”, Part II, Item 8, “Financial Statements and Supplementary Data” and “ Note 12. Reinsurance ” in the Company’s 2022 Form 10-K. Effect of Reinsurance The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statement of Income for the year ended December 31, 2023, 2022 and 2021: For the Year Ended December 31, 2023 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 1,343,101 $ 1,323,643 $ 875,475 Ceded ( 613,739 ) ( 626,458 ) ( 449,346 ) Net $ 729,362 $ 697,185 $ 426,129 For the Year Ended December 31, 2022 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 1,275,031 $ 1,208,824 $ 1,318,001 Ceded ( 612,863 ) ( 571,759 ) ( 816,839 ) Net $ 662,168 $ 637,065 $ 501,162 For the Year Ended December 31, 2021 Premiums Written Premiums Earned Losses and Loss Adjustment Expenses (in thousands) Direct $ 1,164,879 $ 1,144,162 $ 625,748 Ceded ( 553,147 ) ( 533,091 ) ( 198,378 ) Net $ 611,732 $ 611,071 $ 427,370 Note 13. Reserve For Unpaid Losses The Company determines the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts which are commonly referred to as incurred but not reported, or “IBNR”, claims as of the balance sheet date. We estimate our IBNR reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses. The table below summarizes the activity related to the Company’s reserve for unpaid losses: For the Year Ended December 31, 2023 2022 2021 (in thousands) Balance, beginning of period $ 1,131,807 $ 590,166 $ 659,341 Less: reinsurance recoverable on unpaid losses 759,681 301,757 397,688 Net balance, beginning of period 372,126 288,409 261,653 Incurred related to: Current year 427,702 497,428 430,907 Prior years ( 1,573 ) 3,734 ( 3,537 ) Total incurred 426,129 501,162 427,370 Paid related to: Current year 232,827 267,319 247,903 Prior years 141,270 150,126 152,711 Total paid 374,097 417,445 400,614 Net balance, end of period 424,158 372,126 288,409 Plus: reinsurance recoverable on unpaid losses 421,797 759,681 301,757 Balance, end of period $ 845,955 $ 1,131,807 $ 590,166 78 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. As of December 31, 2023, the Company reported $ 424.2 million in unpaid losses and loss adjustment expenses, net of reinsurance which included $ 276.6 million attributable to IBNR net of reinsurance recoverable, or 65.2 % of net reserves for unpaid losses and loss adjustment expenses. The Company’s losses incurred for the year ended December 31, 2023, reflect favorable development of $ 1.6 million and for the years ended December 31, 2022 and 2021 reflect prior year adverse development of $ 3.7 million and prior year favorable development of $ 3.5 million, respectively, associated with management’s best estimate of actuarial loss and LAE reserves with consideration given to Company specific historical loss experience. Reinsurance recoverable on unpaid losses includes expected reinsurance recoveries associated with reinsurance contracts the Company has in place. The amount may include recoveries from catastrophe excess of loss reinsurance, net quota share reinsurance, per risk reinsurance, and facultative reinsurance contracts. In the fourth quarter of 2022 we re-estimated our ultimate losses for Hurricane Irma, which struck Florida in 2017. As a result of that re-estimation, Heritage exhausted the private layers of reinsurance specific to Hurricane Irma but had a 45% participation in the FHCF limit remaining. As further described in Note 17, Commitments and Contingencies, to these consolidated financial statements, the Company's 2017 reinsurance agreement with the FHCF required a commutation no later than 60 months after the end of the contract year. As part of this process, Heritage and the FHCF terminated the 2017 reinsurance agreement and agreed on the amount that the FHCF would pay to the Company to settle all outstanding losses owed under the agreement related to losses from Hurricane Irma. As such, this commutation process resulted in a final determination of and payment for known, unknown or unreported claims relating to Hurricane Irma. Social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims, could result in future adverse development of these claims, which creates uncertainty as to the ultimate cost to settle all of the remaining Hurricane Irma claims. Accordingly, the final amount paid by the FHCF could vary from the Company’s future estimation of losses to have been recovered from the FHCF. Accordingly, should future re-estimations to Hurricane Irma losses increase the Company’s expected loss reserves, all of the increase will be retained by the Company. The following is information about incurred and paid claims development as of December 31, 2023, net of reinsurance, as well as cumulative claim payments and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information by accident year for years prior to 2023 is presented as required supplementary information and is unaudited. Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance (in thousands, except number of claims) Unaudited Accident year 2014 & prior 2015 2016 2017 2018 2019 2020 2021 2022 2023 Net IBNR Reserves Reported Claims 2014 & prior $ 288,316 $ 284,361 $ 282,344 $ 283,992 $ 284,662 $ 284,426 $ 284,675 $ 285,026 $ 285,114 $ 285,015 $ 35 84,987 2015 179,255 197,744 203,792 205,164 206,011 205,437 204,961 204,944 206,077 523 26,130 2016 237,207 242,611 250,990 250,235 250,067 250,482 249,315 250,707 559 27,635 2017 189,163 195,240 192,749 194,618 195,602 211,386 220,944 27,021 73,360 2018 199,565 193,672 192,474 198,064 207,569 210,310 1,031 34,493 2019 258,876 231,545 230,691 237,250 239,936 3,024 26,371 2021 370,058 362,108 372,212 374,606 15,701 39,844 2022 388,949 357,677 355,722 13,193 33,121 2022 447,817 429,315 69,843 41,861 2023 388,245 133,534 19,041 Total $ 2,960,877 $ 264,464 79 Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance Unaudited Accident year 2014 & prior 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 & prior $ 222,198 $ 254,758 $ 263,465 $ 272,957 $ 278,974 $ 281,275 $ 282,899 $ 283,982 $ 284,631 $ 284,965 2015 103,918 162,654 181,672 192,967 197,524 199,600 201,495 202,848 204,149 2016 132,679 211,512 233,540 238,868 241,875 244,820 246,826 249,901 2017 103,148 169,743 178,622 184,313 188,928 194,079 163,068 2018 84,552 152,592 170,301 187,386 199,007 206,965 2019 124,664 185,667 207,714 222,246 232,805 2021 210,548 311,539 336,574 346,651 2022 213,830 300,731 327,719 2022 220,141 328,881 2023 197,392 Total $ 2,542,496 Reconciliation of Reserve Balances to Liability for Unpaid Loss and Loss Adjustment Expenses Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance $ 412,020 Reinsurance recoverable on unpaid losses 421,797 Unpaid Unallocated Loss Adjustment Expense 12,138 Unpaid losses and loss adjustment expenses $ 845,955 Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2023 (Unaudited) Year - 1 Year - 2 Year - 3 Year - 4 Year - 5 Thereafter Percentage 55 % 28 % 8 % 3 % 3 % 3 % Note 14. Long-Term Debt Convertible Senior Notes 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 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. In November 2022, 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, 2023, 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 years ended December 31, 2023 and 2022, the Company made interest payments, net of affiliated Convertible Notes of approximately $ 104,000 , on the outstanding Convertible Notes. 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. 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 the Federal Reserve on a weekly average basis plus 3.10 %, which resulted in an 80 increase of the rate from 4.95 % to 7.42 % per annum. The Company makes monthly principal and interest payments against the loan. For the years ended December 31, 2023 and 2022, the Company made principal and interest payments of $ 975,532 and $ 892,850 on the mortgage loan, respectively. Senior Secured 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. 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, 2023 and 2022, there was $ 79.6 million and $ 89.1 million in aggregate principal outstanding under the Term Loan Facility and as of December 31, 2023 and 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, 2023, the Company made principal and interest payments of approximately $ 9.5 million and $ 7.0 million, respectively and for the comparable year of 2022, the Company made principal and interest payments of approximately $ 5.0 million and $ 2.3 million on the Term Loan Facility, respectively. Revolving Credit Facility . The Revolving Credit Facility allows for borrowings of up to $ 50 million inclusive of a sublimit for the issuance of letters of credit equal t o 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 $ 32.6 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 a November 2022 amendment to the Credit Agreement, the borrowings under the Revolving Credit Facility were repaid in full. On December 23, 2022, the Company drew $ 10 million from the amended 81 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 multiple letters of credit that totaled $ 32.6 million outstanding under the Revolving Credit Facility. The Company secured additional letters credit during 2023; however at December 31, 2023 all of the letters of credit were terminated and the Company had no outstanding letter of credits issued from the Revolving Credit Facility. For the year ended December 31, 2023, the Company made interest payments in aggregate of approximately $ 752,441 on the Revolving Credit Facility and $ 707,850 relating to letters of credit and unused availability commitment fees. At the Company's 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. In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by our consolidated leverage ratio. At December 31, 2023, the effective interest rate for the Term Loan Facility and Revolving Credit Facility was 8.179 % and 8.198 %, respectively. The Company monitors the rates prior to the reset date which allows it to establish if the payment is monthly or quarterly payment based on the most beneficial rate used to calculate the interest payment. FHLB Loan Agreements In December 2018, a subsidiary of the Company received a 3.094 % fixed interest rate cash loan of $ 19.2 million from the Federal Home Loan Bank (“FHLB”) Atlanta. On September 29, 2023, the Company restructured the December 2018 agreement to extend the maturity date to March 28, 2025 , with a 5.109 % fixed interest rate payable quarterly commencing on December 28, 2023. The subsidiary continues to be a member in the FHLB. Membership in the FHLB required an investment in FHLB’s common stock which was purchased in December 2018 and valued at $ 1.4 million. Additionally, the transaction required the acquired FHLB common stock and certain other investments to be pledged as collateral. As of December 31, 2023, the fair value of the collateralized securities was $ 26.3 million and the equity investment in FHLB common stock was $ 1.4 million. As of December 31, 2023 and 2022, the Company made quarterly interest payments of approximately $ 723,770 and $ 601,000 per the terms of the agreement, respectively. As of December 31, 2023 and December 31, 2022, the Company also holds other common stock from FHLB Des Moines, and FHLB Boston carried at $ 72,500 ; $ 177,197 , and $ 145,200 ; $ 173,900 , respectively. The following table summarizes the Company’s long-term debt: December 31, 2023 December 31, 2022 (in thousands) Convertible debt $ 885 $ 885 Mortgage loan 11,019 11,199 Credit loan facility 79,625 89,125 Revolving credit facility 10,000 10,000 FHLB loan agreement 19,200 19,200 Total principal amount $ 120,729 $ 130,409 Deferred finance costs $ 997 $ 1,466 Total long-term debt $ 119,732 $ 128,943 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. 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. The schedule of principal payments on long-term debt is as follows: 82 December 31, Amount 2024 $ 9,855 2025 29,074 2026 71,018 2027 9,897 2028 — Thereafter 885 Total principal payments $ 120,729 Note 15. Income Taxes The following table summarizes the provision for income taxes: For the Year Ended December 31, 2023 2022 2021 (in thousands) Federal: Current $ 5,572 $ ( 1,196 ) $ 3,015 Deferred 70 ( 9,714 ) ( 5,872 ) Provision (Benefit) for Federal income tax 5,642 ( 10,910 ) ( 2,857 ) State: Current 1,086 592 1,634 Deferred ( 30 ) ( 1,489 ) ( 84 ) Provision/(Benefit) for State income tax expense 1,056 ( 897 ) 1,550 Provision/(Benefit) for income taxes $ 6,698 $ ( 11,807 ) $ ( 1,307 ) The income tax provision (benefit) expense differs from the amounts computed by applying the U.S. federal income tax rate of as indicated below to pretax income as a result of the following (in thousands): For the Year Ended December 31, 2023 2022 2021 Expected income tax expense at federal rate 21.0 % 21.0 % 21.0 % State tax expense 4.2 % 1.0 % ( 1.0 )% Permanent items 0.5 % ( 0.3 )% ( 0.5 )% Goodwill impairment 0.0 % ( 10.6 )% ( 16.7 )% Non-deductible stock compensation 0.2 % ( 0.1 )% ( 0.2 )% Tax exempt interest ( 0.2 )% 0.1 % 0.1 % Executive compensation 162(m) 0.6 % ( 0.2 )% ( 0.2 )% Political contributions 0.1 % 0.0 % ( 0.2 )% Tax rate change ( 1.0 )% 0.0 % ( 0.5 )% Valuation allowance ( 12.3 )% ( 3.8 )% 0.0 % Other ( 0.2 )% 0.0 % 0.0 % Reported income tax expense 12.9 % 7.1 % 1.7 % The effective tax rate for 2023 benefitted from a reduction of a $ 6.4 million valuation allowance related to a portion of its deferred tax inventory associated with its foreign domiciled captive reinsurer, Osprey. 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. The Company may only realize those net deferred tax assets to the extent Osprey generates future taxable income; Osprey's 2023 results generated taxable income which resulted in the reversal of the valuation allowance in 2023. 83 The significant components of deferred tax assets and liabilities included in the consolidated balance sheets as of December 31, 2023 and 2022 were as follows : For the Year Ended December 31, 2023 2022 Deferred tax assets: (in thousands) Unearned premiums $ 18,507 $ 17,060 Unearned commission 7,964 10,053 Net operating loss 436 1,189 Tax-related discount on loss reserve 5,162 4,902 Stock-based compensation 331 297 Accrued expenses 1,677 1,016 Leases 940 885 Unrealized losses 11,655 16,987 Dual Consolidated loss limitation — 9,740 Other 473 238 Total deferred tax asset 47,145 62,367 Valuation allowance — ( 6,376 ) Adjusted deferred tax asset 47,145 55,991 Deferred tax liabilities: Deferred acquisition costs $ 24,366 $ 23,420 Prepaid expenses 189 180 Property and equipment 359 2,200 Note discount 152 290 Basis in purchased investments 8 28 Basis in purchased intangibles 9,327 11,178 Other 1,633 1,854 Total deferred tax liabilities 36,034 39,150 Net deferred tax assets $ 11,111 $ 16,841 The Company had no capital loss carryforward as of December 31, 2023. In assessing the net carrying amount of deferred tax assets, we consider whether it is more likely than not that we will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. 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. The Company may only realize those net deferred tax assets to the extent Osprey generates future taxable income. During 2023 the entire valuation allowance was removed due to operating income at Osprey resulting in full use of Osprey operating losses. As of December 31, 2023 and 2022, the Company has a gross operating loss carryforward for state income tax purposes of $ 10.0 million (FL State only) 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 2020 through 2022. There are currently no tax years under examination. Our reinsurance affiliate, Osprey, which is based in Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S. corporation. On December 27, 2023, the Government of Bermuda enacted the Corporate Income Tax Act 2023 (Bermuda CIT), which will apply a 15 % corporate income tax to certain Bermuda businesses in fiscal years beginning on or after January 1, 2025. The Company does not believe the Bermuda CIT would have a material impact to the Company. Prior to December 27, 2023, the Company had an undertaking from Bermuda that exempted it from any local profits, income or capital gains taxes until the year 2035. The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15 % intended to be effective on January 1, 2024. While the US has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation. As currently designed, Pillar Two will ultimately apply to the Company’s worldwide operations. Considering the Company does not have material operations in jurisdictions with tax rates lower than the Pillar Two minimum, these rules are not expected to materially impact the Company’s global tax costs. There remains uncertainty as to the 84 final Pillar Two model rules. Management will continue to monitor US and global legislative action related to Pillar Two for potential impacts. Note 16. Statutory Accounting and Regulations State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital; restrict insurers’ ability to pay dividends; restrict the allowable investment types and investment mixes and subject the Company’s insurers to assessments. The Company’s insurance subsidiaries are required to file with state insurance regulatory authorities an “Annual Statement” which report under the statutory-basis of accounting which differs from GAAP, among other items, net income and surplus as regards policyholders, which is called stockholder’s equity under GAAP. Combined results of the Company’s insurance subsidiaries reported statutory-basis net loss of $ 55.9 million a nd $ 33.3 million for the years ended December 31, 2023 and 2022, respectively. The Company’s insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. Heritage P&C is required to maintain statutory-basis capital and surplus equal to the greater of $ 15 million or 10 % of their respective liabilities. Zephyr is required to maintain a deposit of $ 750,000 in a federally insured financial institution. NBIC is required to maintain statutory-basis capital and surplus of $ 3.0 million. The combined statutory surplus for Heritage P&C, NBIC, and Zephyr w as $ 251.6 million at December 31, 2023. The combined statutory-basis surplus for Heritage P&C, NBIC, and Zephyr was $ 276.3 million at December 31, 2022. State laws also require the Company’s insurance subsidiaries to adhere to prescribed premium-to-capital surplus ratios, with which the Company’s insurance affiliates are complying. At December 31, 2023, our insurance subsidiaries met the financial and regulatory requirements of the states in which they do business. The legislatures of the states of domicile of our insurance affiliates have adopted the National Association of Insurance Commissioners (“NAIC”) recommendations with regard to expansion of the regulation of insurers to include non-insurance entity affiliates. Specifically, the law permits the state insurance regulators to examine affiliated entities within an insurance holding company system in order to ascertain the financial condition of the insurer. The law also provides for certain disclosures regarding enterprise risk, which are satisfied by the provision of related information filed with the SEC. The NAIC published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory-basis surplus provides for policy holders. Most states, including Florida, Hawaii, and Rhode Island, have enacted the NAIC guidelines as statutory requirements, and insurers having less statutory-basis surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital. State laws for Florida, Hawaii, and Rhode Island permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The applicable laws pertain to the state of domicile of each insurance company affiliate and provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or distributions that would require prior approval of the insurance regulatory authority. In the state of Florida, a dividend may be taken without regulatory approval if the dividend is equal to or less than the greater of 10 % of the insurer’s surplus or the insurer’s net income. In the state of Rhode Island, a dividend may be taken without regulatory approval if the dividend is equal to or less than the lesser of 10 % of the insurer’s surplus or the insurer’s net income excluding realized capital gains. The state of Hawaii restricts dividends without regulatory approval to the smaller of prior years’ net income or 10 % of prior year’s surplus. Heritage P&C and NBIC have no t paid dividends in any of the last three years. Zephyr paid dividends of $ 3.9 million and $ 4.3 million for the yea rs ended December 31, 2023 and 2022. Statutory risk-based capital requirements may further restrict our insurance subsidiaries ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory-basis surplus to fall below minimum risk-based capital requirements. State insurance laws limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. The Company’s insurance affiliates were in compliance with all investment restrictions at December 31, 2023 and 2022. Governmental agencies or certain quasi-governmental entities can levy assessments upon the Company in the states in which the Company writes policies. Refer to Note 1 “ Basis of Presentation, Nature of Business and Significant Accounting Policies and Practices” to 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 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 85 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’ assets, liabilities and results of operations in accordance with GAAP, which varies from statutory-basis accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The Company’s reinsurance subsidiary, Osprey, which was incorporated on April 23, 2013 , is licensed as a Class 3A Insurer under The Bermuda Insurance Act 1978 and related regulations. Osprey is required to meet and maintain certain minimum levels of solvency and liquidity. Each year Osprey is required to file with the Bermuda Monetary Authority (the “Authority”) a Capital and Solvency Return, Statutory Financial Return and Audited Financial Statements within four months of its relevant financial year end. Osprey maintains sufficient collateral to comply with regulatory requirements as of December 31, 2023. Bermuda’s standard for financial statement reporting is U.S. GAAP. Note 17. Commitments and Contingencies The Company is involved in claims-related legal actions arising in the ordinary course of business. The Company accrues amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that it determines an unfavorable outcome becomes probable and it can estimate the amounts. Management makes revisions to its estimates based on its analysis of subsequent information that the Company receives regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. The Company’s Florida insurance company affiliate is required to enter into a reinsurance contract with the FHCF for a portion of its catastrophe risk transfer each year. Since the Company’s inception in 2012, few catastrophic events have resulted in losses which pierced the FHCF layer and resulted in reimbursements from the FHCF. To date, losses from only Hurricane Irma, which struck in 2017, and Hurricane Ian, which struck in 2022, have triggered the Company’s FHCF coverage. The Company’s 2017 reinsurance agreement with the FHCF is consistent among Florida insurance companies and requires a commutation no later than 60 months after the end of the contract year, which the commutation process began in June 2023. This commutation represents an agreement between Heritage and the FHCF to terminate the 2017 reinsurance agreement and agree on the conditions under which all obligations for both parties are discharged and therefore a final determination of and payment for any claims related to Hurricane Irma. The terms of the 2017 reinsurance agreement with the FHCF provide for the commutation process as well as the process to settle any disagreements as to the present value of outstanding losses that served as the basis for determining the amount payable by FHCF upon termination of the reinsurance agreement. During the third quarter of 2023, the commutation process was completed and a final payment by the FHCF was received by the Company. Social inflation and the litigated claims environment in the State of Florida, which affected Hurricane Irma claims could result in adverse development of these claims, which creates uncertainty as to the ultimate cost to settle the remaining Hurricane Irma claims. Accordingly, the final amount paid by the FHCF could vary from the Company’s current or future estimation of losses to be recovered from the FHCF. Note 18. Accounts Payable and Other Liabilities Other liabilities consist of the following as of December 31, 2023 and 2022: Description December 31, 2023 December 31, 2022 (in thousands) Deferred ceding commission 33,627 $ 42,758 Accounts payable and other payables 16,185 17,660 Accrued dividends 54 72 Accrued interest and issuance costs 325 733 Other liabilities 275 229 Premium tax 1,486 1,001 Commission payables 17,714 17,558 Total other liabilities $ 69,666 $ 80,010 Note 19. Accrued Bonus Compensation For the year ended December 31, 2023, the Company recognized bonus expense of $ 5.3 million. At December 31, 2023, the Company has accrued bonus of $ 5.4 million, which is expected to be paid in the first quarter of 2024. For the year ended December 31, 2022, the Company recognized employee bonus compensation expense in aggregate of $ 2.1 million, of which $ 2.0 million was unpaid until 2023. 86 Note 20. Related Party Transactions In July 2020, the Board of Directors appointed Mark Berset to the Board of Directors of the Company. Mr. Berset is also the Chief Executive Officer of Comegys Insurance Agency, Inc. (“Comegys”), an independent insurance agency that writes policies for the Company. The Company pays commission to Comegys based upon standard industry rates consistent with those provided to the Company’s other insurance agencies. There are no arrangements or understandings between Mr. Berset and any other persons with respect to his appointment as a director. For the years ended December 31, 2023, 2022 and 2021, the Company paid agency commission to Comegys of approximately $ 195,830 , $ 572,600 and $ 843,180 , respectively. Note 21. Employee Benefit Plan . The Company provides a 401(k) plan for substantially all employees. The Company provides a matching contribution of 100 % on the first 3% of employees’ contribution and 50 % on the next 2% of the employees’ contribution to the plan. The maximum match is 4 %. For each of the years ended December 31, 2023, 2022 and 2021, the contributions made to the plan on behalf of the participating employees were approximately $ 1.3 million. Since September 1, 2021, the Company has been 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, 2023, 2022 and 2021, the Company's medical costs were $ 5.0 million, $ 4.9 million and $ 3.5 million, respectively. As of December 31, 2023 and 2022, the Company had $ 0 and $ 221,386 of liability from the Company’s legacy self-insured healthcare plan. The current healthcare plan is fully insured. Note 22. Equity The total amount of authorized capital stock consists of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of December 31, 2023, the Company had 30,218,938 shares of common stock outstanding, 12,231,674 treasury shares of common stock and 1,161,811 shares of unvested shares of restricted common stock issued reflecting total paid-in capital of $ 360.3 million as of such date. Common Stock Holders of common stock are entitled to one vote for each share held on all matters subject to a vote of stockholders, subject to the rights of holders of any outstanding preferred stock. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the rights of holders of any outstanding preferred stock. Holders of common stock will be entitled to receive ratably any dividends that the board of directors may declare out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to receive ratably its net assets available after the payment of all debts and other liabilities and subject to the prior rights of holders of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There is no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of the Company’s capital stock (excluding restricted stock) are fully paid and nonassessable. Stock Repurchase Program On August 1, 2019, the Company announced that its Board of Directors ratified a stock repurchase program authorizing the Company to repurchase up to $ 50.0 million of its common stock which had expired on December 31, 2020 . As of December 31, 2020, the Company repurchased in aggregate 2,065,042 shares of its common stock since authorizing the stock repurchase program for $ 26.2 million. On November 2, 2020, the Board of Directors extended the Company’s existing share repurchase program from December 31, 2020 to December 31, 2021 and increased the authorization under the program from the $ 23.8 million remaining to $ 50.0 million, which repurchases may be made under the Company’s current Rule 10b5-1 trading plan, which allows the Company to purchase shares below a predetermined price per share, or otherwise. For the year ended December 31, 2021, the Company repurchased in aggregate 1,256,898 shares of its common stock under its repurchase program for $ 8.2 million. For the year ended 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"). There were no shares repurchased for the year ended December 31, 2023. Public and Private Offering of shares of Common Stock On December 14, 2023, the Company completed a primary offering of 3,703,703 shares of its common stock at a public offer price of $ 6.75 per share. In a concurrent private placement, the Company issued 148,148 shares of its common stock to an investor at 87 the public offering price. Additionally, the Company completed the purchase by one of its independent Directors and the Company’s Director and CEO, of 40,871 and 27,247 , shares of common stock, respectively, at $ 7.34 , the closing price of common stock on December 14, 2023. The gross proceeds to Heritage from the public offering and private placement, before deducting underwriting discounts, commissions and other offering expenses, were approximately $ 26.5 million. The Company intends to use the net proceeds from the public offering and the private placement for general corporate and operations purposes and to provide capital for anticipated growth and expansion efforts. Dividends 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, overall capital and liquidity of the company and other factors to determine cash payment or buybacks. The Board of Directors elected not to declare any dividends during the 2023 calendar year. 88 Note 23. Stock-Based Compensation Restricted Stock The Company has adopted the Heritage Insurance Holdings, Inc., 2023 Omnibus Incentive Plan (the “2023 Plan”), which became effective on June 7, 2023. The 2023 Plan authorized 2,125,000 shares of common stock for issuance under the Plan for future grants. Upon effectiveness of the 2023 Plan, no new awards may be granted under the prior Omnibus Incentive Plan, which will continue to govern the terms of awards previously made under such plan. At December 31, 2023, there were 1,320,117 shares available for grant under the 2023 Plan. The Company recognizes compensation expense under ASC 718 for its stock-based payments based on the fair value of the awards. In November 2023, the Compensation Committee approved the cancelation 420,225 performance-based unvested awards. The Company determined the performance criteria for certain performance-based unvested awards would not be met and accordingly, reversed previously recorded stock based compensation of approximately $ 1.7 million associated with those awards. On July 11, 2023, the Company awarded 351,716 time-based restricted stock and 857,843 performance-based restricted stock, with a fair value at the time of gr ant of $ 4.08 per share under the Company’s 2023 Omnibus Incentive Plan to certain employees. The time-based restricted stock shall vest annually in three equal installments commencing on December 15, 2023. The performance based restricted stock has a three-year performance period beginning on January 1, 2023 and ending on December 31, 2025 and will vest following the end of the performance period but no later than March 30, 2026. 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 June 2023, the Company awarded to non-employee directors in aggregate 63,744 shares of restricted stock with a fair value at the time of grant of $ 5.02 per share. In August 2023, the awards were amended which resulted in an adjustment to the number of shares of restricted stock awarded from 63,744 to 77,296 shares of restricted stock. The restricted stock shall vest on the earlier of (i) the one-year anniversary of the date of issuance and (ii) the day immediately prior to the date of the following year's annual meeting of stockholders, provided the member remains on the Board until such date. 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 sh are. In August 2022, an award of 12,422 were forfeited due to the departure of a Board member. The awards vested on the next annual meeting of the Company's stockholders that occurred after the award date, provided the member remains on the Board until such date. The Company's annual shareholders meeting was held on June 7, 2023, at which time 86,954 shares of restricted stock were effectively vested. 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. For the performance-based restricted stock 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. The 2023 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. 89 Restricted stock activity for the three years ended December 31, 2023, 2022 and 2021 is as follows: Weighted-Average Grant-Date Fair Number of shares Value per Share Non-vested, at December 31, 2020 100,267 $ 15.37 Granted - Performance-based restricted stock 174,689 9.45 Granted - Time-based restricted stock 80,104 9.68 Vested ( 43,711 ) 9.61 Canceled and surrendered ( 28,257 ) 10.69 Non-vested, at December 31, 2021 283,092 $ 9.32 Granted - Performance-based restricted stock 256,445 6.67 Granted - Time-based restricted stock 240,107 5.18 Vested ( 90,458 ) 4.81 Canceled and surrendered ( 40,693 ) 4.40 Non-vested, at December 31, 2022 648,493 $ 7.38 Granted - Performance-based restricted stock 857,843 4.08 Granted - Time-based restricted stock 429,012 4.08 Vested ( 221,218 ) 3.51 Canceled and surrendered ( 552,319 ) 7.26 Non-vested, at December 31, 2023 1,161,811 $ 4.25 Awards are being amortized to expense over a one to three year vesting period. The Company recognized $ 1.3 million, $ 1.2 million and $ 4.7 million of compensation expense for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, the Company granted in aggregate 803,401 net of 483,454 canceled shares of time-based and performance-based restricted stock. During the year ended December 31, 2023, 221,218 shares of restricted stock were vested and released. Of the stock released to employees, 68,865 shares were withheld to cover withholding taxes of $ 429,000 . 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. During the year ended December 31, 2021, 71,968 shares of restricted stock were vested and released. Of the stock released to employees, 28,257 shares were withheld to cover withholding taxes of $ 231,000 . At December 31, 2023, there was approximately $ 1.1 million unrecognized expense related to time-based unvested restricted stock and an additional $ 2.4 million for performance-based restricted stock, which is expected to be recognized over the remaining restriction periods as described in the table below. For the comparable period in 2022, there was $ 2.0 million of unrecognized expense. Additional information regarding the Company’s outstanding non-vested time-based restricted stock and performance-based restricted stock at December 31, 2023 is as follows: Grant date Restricted shares unvested Share Value at Grant Date Per Share Remaining Restriction Period (Years) March 16, 2022 37,947 6.72 1.0 June 19, 2023 77,296 4.14 0.5 July 11, 2023 1,046,568 4.08 2.0 Total 1,161,811 90 Note 24. Selected Quarterly Financial Data (unaudited) The following table provides a summary of unaudited quarterly results for the periods presented (in thousands, except per share data): For the year ended December 31, 2023 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned $ 166,029 $ 176,804 $ 176,641 $ 177,711 Investment income $ 5,582 $ 6,599 $ 6,867 $ 6,708 Total revenues $ 176,921 $ 185,313 $ 186,300 $ 186,964 Total operating expenses $ 156,830 $ 168,922 $ 195,735 $ 150,796 Operating income (loss) $ 20,091 $ 16,391 $ ( 9,435 ) $ 36,168 Net income (loss) $ 14,008 $ 7,779 $ ( 7,424 ) $ 30,944 Basic net income (loss) per share $ 0.55 $ 0.30 $ ( 0.28 ) $ 1.15 Diluted net income (loss) per share $ 0.55 $ 0.30 $ ( 0.28 ) $ 1.15 For the year ended December 31, 2022 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned $ 152,929 $ 158,271 $ 159,693 $ 166,171 Investment income $ 2,000 $ 2,163 $ 2,887 $ 4,927 Total revenues $ 158,608 $ 163,770 $ 165,493 $ 174,589 Total operating expenses (1) $ 198,019 $ 249,322 $ 212,801 $ 159,679 Operating (loss) income $ ( 39,411 ) $ ( 85,552 ) $ ( 47,308 ) $ 14,908 Net (loss) income $ ( 30,759 ) $ ( 87,866 ) $ ( 48,240 ) $ 12,501 Basic net (loss) income per share $ ( 1.15 ) $ ( 3.32 ) $ ( 1.83 ) $ 0.49 Diluted net (loss) income per share $ ( 1.15 ) $ ( 3.32 ) $ ( 1.83 ) $ 0.48 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 second quarter of 2022 and the fourth quarter results include a $ 92.0 million impairment of goodwill, respectively. Refer to Note 3 “ Intangible Assets, net ” to these consolidated financial statements for further information on our 2022 goodwill impairment charge. Note 25. Subsequent Events In January 2024, an affiliated subsidiary pledged approximately $ 17.8 million of fixed securities to FHLB DM Bank as a requirement to withdrawal $ 5.5 million for a long term, 4.23 % fixed rate loan, with an initial maturity date of January 19, 2024. On January 19, 2024, the maturity was amended to be January 19, 2029 . On March 11, 2024, the Board of Directors established a new share repurchase program plan to commence upon December 31, 2023, 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, 2024 (the "New Share Repurchase Plan"). 91 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None