Form 8-K/A Heritage Insurance Holdi For: Nov 30

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Form 8-K/A Heritage Insurance Holdi For: Nov 30

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February 1, 2018 6:14 AM

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 30, 2017

HERITAGE INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

001-36462

45-5338504

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

Heritage Insurance Holdings, Inc.

2600 McCormick Drive, Suite 300

Clearwater, Florida

33759

(Address of principal executive offices)

(Zip Code)

(727) 362-7202

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☒

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

This Current Report on Form 8-K/A amends and supplements the current report on Form 8-K of Heritage Insurance Holdings, Inc. (the “Company”) filed with the Securities and Exchange Commission (the “SEC”) on December 6, 2017 (the “Form 8-K”), which reported under Item 2.01 the completion of the Company’s acquisition of all of the outstanding capital stock of NBIC Holdings, Inc. (“NBIC”), the parent company of Narragansett Bay Insurance Company, resulting in NBIC becoming a wholly-owned subsidiary of the Company (the “NBIC Acquisition”). This amendment to the Form 8-K is filed to provide the financial statements of NBIC and the pro forma financial information of the Company as required by Item 9.01.

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

Unaudited interim consolidated financial statements of NBIC Holdings, Inc. and its subsidiaries, comprised of the consolidated balance sheets as of September 30, 2017 and 2016, the related consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the nine months ended September 30, 2017 and 2016, and the related notes to the unaudited interim consolidated financial statements, are attached hereto as Exhibit 99.2.

(b) Pro forma financial information.

The unaudited pro forma condensed combined financial information of Heritage Insurance Holdings, Inc. as of and for the nine months ended September 30, 2017, giving effect to the NBIC Acquisition, is attached hereto as Exhibit 99.4.

(d) Exhibits:


Exhibit No.		Description

23.1		Consent of Johnson Lambert LLP (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2017).

99.1		Consolidated financial statements of NBIC Holdings, Inc. and Subsidiaries as of December 31, 2016, 2015 and 2014 and for the years then ended (incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2017).

99.2		Consolidated unaudited financial statements of NBIC Holdings, Inc. and Subsidiaries as of September 30, 2017 and 2016 and for the nine months then ended.

99.3		Unaudited pro forma condensed combined financial information of Heritage Insurance Holdings, Inc. for the year ended December 31, 2016 and as of and for the six months ended June 30, 2017, giving effect to the NBIC Acquisition (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 9, 2017).

99.4		Unaudited pro forma condensed combined financial information of Heritage Insurance Holdings, Inc. as of and for the nine months ended September 30, 2017, giving effect to the NBIC Acquisition.

SIGNATURES

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

Exhibit 99.2

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Financial Statements (Unaudited)

September 30, 2017 and 2016

with Independent Accountant’s Review Report

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Financial Statements

September 30, 2017 and 2016

Contents


Independent Accountant’s Review Report			1

Interim Consolidated Financial Statements (Unaudited):

Interim Consolidated Balance Sheets			2
Interim Consolidated Statements of Comprehensive Income			3
Interim Consolidated Statements of Changes in Shareholders’ Equity			4
Interim Consolidated Statements of Cash Flows			5
Notes to the Consolidated Financial Statements			6 - 28

LOGO

Independent Accountant’s Review Report

Board of Directors and Shareholders

NBIC Holdings, Inc. and Subsidiaries

Report on the Financial Statements

We have reviewed the accompanying interim consolidated financial statements of NBIC Holdings, Inc. and Subsidiaries (the Company), which comprise the interim consolidated balance sheets as of September 30, 2017 and 2016, and the related interim consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the nine-month periods then ended.

Management’s Responsibility

Management is responsible for the preparation and fair presentation of the interim consolidated financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim consolidated financial information in accordance with accounting principles generally accepted in the United States of America.

Auditor’s Responsibility

Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial information for it to be in accordance with accounting principles generally accepted in the United States of America.

LOGO

Burlington, Vermont

January 30, 2018

Firm Registration: 092-0000267

LOGO

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Balance Sheets (Unaudited)


	At September 30,
	2017			2016
Assets
Fixed maturity securities, available for sale, at fair value	$	98,263,248		$	100,523,693
Cash and cash equivalents		84,148,487			62,890,245
Land and buildings (net of accumulated depreciation of $406,479 and $363,076, respectively)		1,859,332			1,902,740
Premiums receivable		30,773,684			29,033,106
Deferred acquisition costs		33,005,113			31,510,056
Investment income due and accrued		494,949			469,850
Reinsurance recoverable on paid losses		34,433,121			46,134,916
Reinsurance recoverable on unpaid losses		69,270,105			65,454,188
Ceded unearned premium reserves		137,730,017			113,279,675
Furniture, equipment and software (net of accumulated depreciation of $7,881,836 and $7,760,296, respectively)		970,302			1,070,689
Net deferred tax asset		14,679,250			19,944,218
Equity from pools and associations		3,700,672			3,244,027
Other assets		3,137,163			2,500,939

Total assets	$	512,465,443		$	477,958,342

Liabilities and Shareholders’ Equity:
Liabilities
Reserves for loss and loss adjustment expenses	$	87,486,937		$	86,217,229
Unearned premiums		175,492,729			161,241,988
Unearned ceding commission		57,953,476			48,718,207
Commissions payable		9,085,034			8,521,571
Advance premiums		7,122,346			7,522,041
Reinsurance balances payable		52,994,003			65,456,750
Funds held		15,890			54,468
Accrued expenses and accounts payable		8,561,619			9,211,831
Accrued retirement plan		3,510,405			4,529,585
Payable for securities		—			500,000

Total liabilities		402,222,439			391,973,670

Shareholders’ Equity
Series 1 Class A Common Stock ($.001 par value; 120,000 shares authorized; 108,344 shares issued and outstanding)		108			108
Series 2 Class A Common Stock ($.001 par value; 380,000 shares authorized; 37,822 shares issued and outstanding)		38			38
Series 1 Class B Common Stock ($.001 par value; 460,000 shares authorized; 22,049 shares issued and outstanding)		25			22
Additional paid-in capital		122,842,667			122,726,588
Accumulated other comprehensive loss, net of tax		(2,387,845	)		(1,951,557	)
Accumulated deficit		(10,211,989	)		(34,790,527	)

Total Shareholders’ Equity		110,243,004			85,984,672

Total Liabilities and Shareholders’ Equity	$	512,465,443		$	477,958,342

The accompanying notes are an integral part of these interim consolidated financial statements.

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Statements of Comprehensive Income (Unaudited)


	Nine Months ended September 30,
	2017			2016
Revenues
Net premiums earned	$	36,164,381		$	49,911,839
Net investment income		1,937,195			1,642,828
Ceding commission earned		61,323,073			50,194,995
Other income		3,620,332			3,917,750

Total revenues		103,044,981			105,667,412
Expenses
Incurred losses and loss adjustment expenses		15,787,887			30,654,394
Acquisition costs		44,698,926			41,991,852
General underwriting, administrative and other expenses		17,072,365			14,770,375

Total expenses		77,559,178			87,416,621
Net Income Before Taxes		25,485,804			18,250,791
State income tax expense		(400,500	)		—
Federal income tax expense		(8,862,564	)		(6,420,564	)

Net income after taxes	$	16,222,740		$	11,830,227
Other comprehensive income, net of tax:
Net pension adjustments:
Unrealized pension losses arising during period (net of tax of $84,645 and $198,960, respectively)		(157,199	)		(369,497	)
Reclassification adjustment for amortization of defined benefit pension items included in general underwriting and administrative expenses (net of tax of $35,999 and $37,268, respectively)		66,112			69,212

Net pension adjustments		(91,087	)		(300,285	)
Net unrealized gains (losses) on securities:
Unrealized holding gain (losses) arising during period (net of tax of $321,521 and $927,205, respectively)		597,110			1,721,953
Less: reclassification adjustment for net realized losses (gains) included in net investment income (net of tax of $86 and $4,232, respectively)		160			(7,859	)

Net unrealized gain on securities		597,270			1,714,094

Other comprehensive income, net of tax		506,183			1,413,809

Comprehensive income	$	16,728,923		$	13,244,036

The accompanying notes are an integral part of these interim consolidated financial statements.

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine months ended September 30, 2017 and 2016


	Series 1 Class A Common Stock		Series 2 Class A Common Stock		Series 1 Class B Common Stock		Additional paid in Capital		Accumulated Other Comprehensive Loss Net of Tax			Accumulated Deficit			Total Shareholders’ Equity
Balance at December 31, 2015	$	108	$	38	$	22	$	122,709,217	$	(3,365,365	)	$	(46,620,754	)	$	72,723,266
Issue of common stock		—		—		—		—		—			—			—
Management incentive plan - amortization		—		—		—		17,371		—			—			17,371
Net income		—		—		—		—		—			11,830,227			11,830,227
Net pension adjustments, net of tax		—		—		—		—		(300,286	)		—			(300,286	)
Unrealized gain on securities, net of tax		—		—		—		—		1,714,094			—			1,714,094

Balance at September 30, 2016	$	108	$	38	$	22	$	122,726,588	$	(1,951,557	)	$	(34,790,527	)	$	85,984,672

Balance at December 31, 2016	$	108	$	38	$	22	$	122,732,178	$	(2,894,028	)	$	(26,434,729	)	$	93,403,589
Issue of common stock		—		—		3		—		—			—			3
Management incentive plan - amortization		—		—		—		110,489		—			—			110,489
Net income		—		—		—		—		—			16,222,740			16,222,740
Net pension adjustments, net of tax		—		—		—		—		(91,087	)		—			(91,087	)
Unrealized gain on securities, net of tax		—		—		—		—		597,270			—			597,270

Balance at September 30, 2017	$	108	$	38	$	25	$	122,842,667	$	(2,387,845	)	$	(10,211,989	)	$	110,243,004

The accompanying notes are an integral part of these interim consolidated financial statements.

NBIC Holdings, Inc. and Subsidiaries

Interim Consolidated Statements of Cash Flows (Unaudited)


	Nine Months ended September 30,
	2017			2016
Cash Flows From Operating Activities:
Premiums collected, net of reinsurance	$	31,359,798		$	77,654,329
Net investment income collected		1,471,074			(703,677	)
Loss and loss adjustment expenses paid		(16,804,758	)		(47,763,355	)
Commissions and expenses, net		1,221,960			3,337,075

Net cash provided by operating activities		17,248,074			32,524,372
Cash Flows From Investing Activities:
Purchase of fixed maturities		(13,659,114	)		(41,414,294	)
Proceeds from fixed maturities sold and matured		15,029,987			10,138,074
Investment in fixed assets		(383,570	)		(638,715	)

Net cash provided by (used in) investing activities		987,303			(31,914,935	)
Cash Flows From Financing Activities:
Capital contributions/repurchases		3			—

Net cash provided by financing activities		3			—
Increase in cash and cash equivalents		18,235,380			609,437
Cash and cash equivalents, beginning of year		65,913,107			62,280,808

Cash and cash equivalents, end of period	$	84,148,487		$	62,890,245

Supplemental cash flow information:
Income tax payments, net	$	7,550,000		$	325,000

The accompanying notes are an integral part of these interim consolidated financial statements.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note A - Organization

Organization: NBIC Holdings, Inc., (“NBICHI” or the “Company”) a Delaware domiciled holding company was organized on January 23, 2008 with subsidiaries engaged in the property and casualty insurance business. On formation, the Company, in a private transaction, issued 30,000 shares of Series 1 Class A Common Stock in exchange for $30.0 million of cash from BFG Intermediate LP, SSP Offshore LLC and RenaissanceRe Ventures Ltd. An additional 65,000 shares of Series 1 Class A Common Stock have been subsequently issued in exchange for $65.0 million of cash from BFG Intermediate LP and SSP Offshore LLC. During 2011, 14,516 shares held by RenaissanceRe Ventures Ltd. and certain minority shareholders were purchased by BFG Intermediate LP and SSP Offshore LLC.

On the date of organization the Company purchased 100% of the issued and outstanding shares of NBIC Financial Holdings, Inc. (“NBICFHI”) (formerly known as Blackstone Financial Group, Inc.) in a private transaction. In exchange of the shares of NBICFHI the existing owners received 13,148 shares of Series 1 Class A Common Stock valued at $13,148,201. NBICFHI is a Delaware domiciled holding company that was organized in 2005 offering property and casualty insurance through its wholly-owned subsidiary, Narragansett Bay Insurance Company (“NBIC”).

The Company through NBIC is providing homeowners insurance to its policyholders in Rhode Island, Massachusetts, New York, New Jersey and Connecticut. NBIC distributes its product through a network of independent agents located in these states.

Pawtucket Insurance Company (“PIC”) a wholly-owned subsidiary of NBIC is in voluntary liquidation and is running off property and casualty business written prior to 2004 in New England and certain Mid-Atlantic states. PIC emerged from state controlled rehabilitation in December of 2005.

In January 2010, the Company’s wholly-owned subsidiary, NBIC Service Company (“Service”), entered into an administrative services and employee leasing agreement (“Agreement”) to provide administrative services to NBIC and PIC.

Both NBIC and PIC are Rhode Island domiciled companies that are subject to the regulations of the Rhode Island Department of Business Regulation (the “Department” or “RIDBR”) and the regulations of each state in which they operate. These property and casualty insurance companies undergo periodic financial examination by insurance regulatory agencies.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies

Basis of Preparation and Consolidation: These consolidated financial statements include the accounts of the Company and all its subsidiaries. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as promulgated by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). All significant intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the consolidated financial statements reflect the Company’s best estimates and assumptions, actual results could differ from these estimates.

Investments: The Company classifies its investments in fixed maturity securities as available-for-sale. Fixed maturity securities are reported at their estimated fair values (see Note C). Realized investment gains and losses and certain declines in value considered to be other-than-temporary are determined on the basis of specific identification and are included as a component of net investment income. Interest income is accrued as earned and includes amortization of premiums and discounts relating to the fixed maturity securities acquired. The Company uses the scientific method to amortize premiums and discounts relating to the fixed maturity securities, which closely approximates the effective interest method. Mortgage-backed securities (“MBS”) are amortized using the interest method considering anticipated prepayments at the date of purchase. Unrealized investment gains and losses including declines in value considered to be temporary, are determined on the basis of specific identification and are included, after adjustment for deferred income taxes, in other comprehensive income on the consolidated statements of comprehensive income.

Fair Value Measurements: The Company’s estimates of fair value for financial assets are based on the framework established in the fair value measurements and disclosures accounting guidance. The framework is based on the inputs used in valuation and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance includes a hierarchy based on whether significant valuation inputs are observable. The highest priority in the hierarchy is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

The three levels of the hierarchy for measuring fair value are as follows:

Level 1: Inputs to the valuation methodology are quoted prices for identical assets traded in active markets.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset and market corroborated inputs.

Level 3: Valuations are based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

Fair values are based on quoted market prices when available (Level 1). The Company receives quoted market prices from a third party, nationally recognized pricing service.

When market prices are not available, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly used for its fixed maturity investments. The fair value is generally estimated using current market inputs for similar financial instruments with comparable terms and credit quality, commonly referred to as matrix pricing (Level 2).

In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair value using methods, models and assumptions that management believes are relevant to the particular asset. This may include discounted cash flow analysis or other income based approaches (Level 3).

These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels in the fair value hierarchy at the end of the reporting period.

Other Than Temporary Impairments: Impairment losses, other than those considered temporary, result in a permanent reduction of the cost basis of the underlying investment and are reflected as a realized loss. In evaluating potential other than temporary impairment (“OTTI”) of investments, management considers, among other criteria: (1) for fixed maturity investments, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value; (2) the likelihood of the recoverability of principal and interest for fixed maturity securities (i.e., whether there is a credit loss); (3) the length of time and extent to which the fair value has been less than amortized cost for fixed maturity securities; and (4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.

OTTI for fixed maturity securities are recognized when the Company has the intent to sell or when it is more likely than not that the Company will be required to sell the security before its anticipated recovery in value. For fixed maturity investments that the Company does not intend to sell and for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as a component of realized losses. The impairment related to all other factors is reported in accumulated other comprehensive loss. For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included as a component of net investment income.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

Upon recognizing an OTTI, the new cost basis of the investment is the previous amortized cost basis less the OTTI recognized realized losses on investments. The new cost basis is not adjusted for any subsequent recoveries in fair value; however, for fixed maturity investments the difference between the new cost basis and the expected cash flows is accreted over the remaining expected life of the investment.

Cash and Cash Equivalents: Cash and cash equivalents are presented at cost which approximates fair value and consists of cash deposited at financial institutions and investments in short-term, highly liquid securities, which have original maturities of less than three months from the purchase date. The Federal Deposit Insurance Corporation (“FDIC”) insures amounts on deposit with financial institutions up to limits as prescribed by law. The Company maintains certain cash and short-term investment balances that exceed FDIC insurance thresholds or are not FDIC insured; however, the Company has not experienced any losses in such accounts. Management does not believe these balances represent a significant credit risk to the Company.

Premiums and Acquisition Costs: Premiums written and assumed are recorded in accordance with the terms of the underlying policies and are reported net of premiums ceded to reinsurers. Premiums are earned on a pro-rata basis over the period the coverage is provided. Unearned premium represents the portion of premiums written applicable to the unexpired terms of policies in force. Advance premium represents premium payments received prior to the effective date of underlying policies. No provision for uncollectible premiums receivable has been recorded at September 30, 2017 and 2016. Premium balances written off during the nine months ended September 30, 2017 and 2016 amounted to $531,840 and $460,895, respectively.

The Company recognizes premium deficiencies when there is a probable loss on an insurance contract. Premium deficiencies are recognized if the sum of the expected losses and loss adjustment expenses and unamortized deferred acquisition costs exceed unearned premiums and anticipated investment income. No premium deficiency reserve has been recorded as of September 30, 2017 and 2016.

Acquisition costs, which vary with and are directly related to the successful acquisition or renewal of policies, consist primarily of commission paid to agents, premium taxes and certain underwriting costs. These costs are deferred and amortized over the period that the premiums are earned. Future earned premiums, the anticipated losses and other costs (and in the case of premium deficiency, investment income) related to those premiums, are also considered in determining the level of acquisition cost to be deferred (See Note F).

Reinsurance: In the normal course of business, the Company seeks to reduce the potential amount of loss arising from claim events by reinsuring certain levels of risk. Prospective reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The portion of ceded premium applicable to the unexpired terms of the reinsurance agreements are recorded as ceded unearned premium reserves. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. No allowance for uncollectible reinsurance was recorded as of September 30, 2017 and 2016. No reinsurance balances were written off during the nine months ended September 30, 2017 or 2016.

The Company purchases quota share reinsurance from unaffiliated reinsurance partners, as more fully described in Note E.

The Company also purchases general excess of loss, catastrophe reinsurance coverage, reinstatement premium protection coverage, umbrella, coverage on named storms and facultative reinsurance which limit the Company’s exposure to large losses.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

Ceding commissions are deferred as unearned ceding commissions and earned over the terms of the reinsurance agreements to which they relate. Ceding commissions on the quota share agreements call for a provisional ceding commission rate, subject to a sliding scale adjustment based on the loss experience of the reinsurers. As adjustments to the ceding commission become necessary, such adjustments are reflected in current operations.

Due to the terms and December 31st effective date of the renewed net retained lines quota share reinsurance contract a quarter of the ceded premium and ceding commission balance relative to this contract is unearned as of September 30 in the current year and earned in the remainder of the reporting period (See Note F).

Property, Equipment and Software: The Company recorded land and buildings at their estimated fair value at acquisition as a result of the purchase described in Note A. Depreciation expense on buildings is computed using the straight line method over an estimated 40-year life. Equipment and software over $25,000 are reported at cost less accumulated depreciation, capitalized and depreciated on the straight line basis over the estimated useful life (generally three to five years).

The Company accounts for costs incurred to develop computer software for internal use in accordance with the applicable guidance. As required by this guidance, the Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized over various periods up to three years. Costs incurred to maintain existing product offerings are expensed as incurred.

The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. No impairment losses have been recognized on long lived assets for the nine months ended September 30, 2017 or 2016. Repair and maintenance costs are charged to operating expense as incurred.

Intangible Assets: The Company has recorded acquired identifiable intangible assets as a result of the purchase described in Note A. In accounting for such assets the Company follows guidance on financial accounting and reporting related to goodwill and other intangible assets at acquisition. The cost of a group of assets acquired in a transaction is allocated to the individual assets including identifiable intangible assets based on their relative fair values. Identifiable assets with a finite useful life are amortized over the period that the asset is expected to contribute directly or indirectly to the future cash flows of the Company.

All identifiable intangible assets are tested for recoverability at least annually or whenever events or changes in circumstances indicate that a carrying amount may not be recoverable. An impairment loss is recognized if the carrying value of an intangible asset is not recoverable and its carrying amount exceeds its fair value. If impairment exists, the impairment is charged to expense in the period in which it is determined. No impairment losses were recognized in the nine months ending September 30, 2017 or 2016.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

Loss and Loss Adjustment Expenses (“LAE”): Unpaid losses and loss adjustment expenses include reserves for reported unpaid losses and loss expenses and for losses and loss expenses incurred but not reported and are net of salvage and subrogation. The reserve for reported unpaid losses and loss expenses is established by management based on information reported from insureds, pools and agents, and represents the estimated ultimate cost of events or conditions that have been reported to or identified by the Company.

The reserve for losses and loss expenses incurred but not reported is estimated by management based on loss development patterns determined by reference to the Company’s underwriting practices, historical trends and industry data for homeowners insurance. Reinsurance recoveries on unpaid losses and loss adjustment expenses have been estimated using assumptions consistent with those used to estimate the related liability for unpaid losses and loss adjustment expenses. In developing its estimate, the Company utilizes both in-house and independent external consulting actuaries.

Management believes that the reserves for unpaid losses and loss adjustment expenses are sufficient to cover the ultimate cost of losses. However, there can be no assurance that losses will not exceed or be less than the Company’s total reserves. Accordingly, the ultimate liability could be in excess of or less than the amount indicated in the consolidated financial statements. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and if any adjustments to these estimates become necessary, such adjustments are reflected in current operations (see Note D).

Income Taxes: The Company and its subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period in which such change is enacted. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. No valuation allowance was recorded for the nine months ending September 30, 2017 or 2016.

Stock Based Compensation: The Company’s share-based management incentive plan authorizes the granting of Series 1 Class B restricted stock to certain employees. The compensation expense for these restricted stock shares was based on their estimated fair value at date of grant and amortized over the vesting period. The fair value of the restricted stock award is estimated on the date of grant based on the Black Scholes pricing model that includes assumptions such as the risk free rate on the seven year Treasury note and the expected life of award. The Company used historical and industry information to determine the assumptions and if these assumptions change significantly for future grants, compensation expense will fluctuate in future periods. The Company obtains an appraisal from a third party business valuation specialist to determine the current market value of all newly granted Series 1 Class B common stock of the Company (see Note H).

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

Supplemental Cash Flow Information:


	Nine Months ended September 30,
	2017			2016
Reconciliation of net income to cash provided by operating activities:
Net income	$	16,222,741		$	11,830,227
Adjustments to reconcile net income to cash:
Amortization of fixed maturities		(368,182	)		(386,504	)
Depreciation and amortization		268,470			227,281
Realized losses (gains) on investments		246			(12,090	)
Deferred income tax		(87,456	)		4,893,933
Write-off of premiums receivable		531,840			460,895
Changes in assets and liabilities:
Premiums receivable		(2,789,953	)		(3,160,586	)
Deferred acquisition costs		(2,611,430	)		(3,145,757	)
Reinsurance recoverable on paid and unpaid losses		(5,679,827	)		(29,536,073	)
Ceded unearned premium reserves		(18,216,548	)		(21,932,325	)
Loss and loss adjustment expenses		4,662,955			8,187,645
Unearned premiums		15,012,689			14,660,875
Unearned ceding commission		8,205,331			9,493,295
Commissions payable		1,626,808			2,240,460
Advance premiums		2,451,592			3,195,111
Reinsurance balances payable		(1,262,363	)		34,979,414
Accrued expenses and accounts payable		(639,545	)		370,395
Payable for securities		—			500,000
Accrued retirement plan expense		(246,977	)		327,115
Funds held		(38,578	)		—
Other, net		206,261			(668,939	)

Cash provided by operating activities	$	17,248,074		$	32,524,372

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

Recent Accounting Pronouncements: 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 2016, the FASB issued ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides guidance on the accounting for credit losses of financial instruments that are measured at amortized cost, including held to maturity securities and reinsurance recoverables, by applying an approach based on the current expected credit losses. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset in order to present the net carrying value at the amount expected to be collected on the financial asset on the consolidated balance sheet. The guidance also amends the current accounting for other-than-temporary impairment model by requiring an estimate of the expected credit loss only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a potential credit loss exists. The available for sale debt security model will also require the use of a valuation allowance as compared to the current practice of writing down the asset. The standard is effective for the Company in 2021. The Company has not yet evaluated the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires recognition of the excess tax benefits or deficiencies of share-based awards through net income rather than through additional paid in capital. Additionally, the guidance allows for an election to account for forfeitures related to share-based payments either as they occur or through an estimation method. The Company will adopt this guidance in 2018 and will recognize the excess tax benefits (deficiencies) within our results of operations. The calculation of the excess tax benefits and deficiencies is based on the difference between the market value of a stock award at the date of vesting, or at the time of exercise for a stock option, compared to the grant date fair value recognized as compensation expense in the consolidated statements of operations. The Company has determined that the financial statements in future periods will be affected by this new guidance principally when excess tax benefit or deficiencies occur, given that all such future items will be recognized as income tax benefits or expense in the consolidated statements of income and comprehensive income. The value of such transactions is not currently determinable because such amounts will vary based upon the value of the Company’s common stock on the date of vesting of restricted stock or exercise of stock options. Additionally, the amounts recognized will be presented as operating activities in the consolidated statement of cash flows, whereas such amounts are currently classified as financing activities.

In January 2016, the FASB issued ASU Topic 2016-1, Financial Statements—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that affects the recognition, measurement, presentation, and disclosure of financial instruments. The guidance requires an assessment of a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The standard is effective for the Company in the first quarter of 2019. The Company has not yet evaluated the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In May 2015, the FASB issued Accounting Standards Update (ASU) 2015-09, Disclosures about Short-Duration Contracts. The guidance in ASU 2015-09 requires additional disclosures for the purpose of providing better insight into an insurer’s initial claim estimates and subsequent adjustments and to help financial statement users understand the frequency, severity, and timing of future cash flows related to the estimated claim costs. ASU 2015-09 will be effective for the Company as of and for the year ended December 31, 2017. Other than requiring additional disclosures, ASU 2015-09 is not expected to have a material impact on the consolidated financial statements.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note B - Significant Accounting Policies (Continued)

No other new accounting pronouncement issued or effective during the period had or is expected to have a material impact on our interim consolidated financial statements or disclosures.

Note C - Investments

Net investment income for the nine months ended September 30, 2017 and 2016 is derived from the following sources:


	Nine Months ended September 30,
	2017			2016
Interest income, net of amortization	$	2,125,036		$	1,804,390
Net realized investment (losses) gains		(246	)		12,090

Total gross investment income		2,124,790			1,816,480
Less: Investment expenses		(187,595	)		(173,652	)

Net investment income	$	1,937,195		$	1,642,828

The following represents an analysis of net realized gains on investments for the nine months ended September 30, 2017 and 2016:


	Nine Months ended September 30,
	2017			2016
Investment (losses) gains:
Gross realized gains	$	18,605		$	12,090
Gross realized losses		(18,851	)		—

Net realized investment (losses) gains	$	(246	)	$	12,090

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note C – Investments (Continued)

The following tables present the levels within the fair value hierarchy at which the Company’s financial assets are measured on a recurring basis as of September 30, 2017 and 2016:


	Estimated Fair Value as of September 30, 2017		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Government bonds	$	243,613		243,613		—		—
Corporate bonds		34,360,204		—		34,360,204		—
Municipal bonds		12,167,289		—		12,167,289		—
Residential mortgage backed securities (“MBS”)		28,465,266		—		28,465,266		—
Commercial MBS		12,701,262		—		12,701,262		—
Asset backed securities		10,325,614		—		10,325,614		—

Total fixed maturities		98,263,248		243,613		98,019,635		—
Cash and cash equivalents		84,148,487	$	84,148,487	$	—	$	—

Total	$	182,411,735	$	84,392,100	$	98,019,635	$	—


	Estimated Fair Value as of September 30, 2016		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Government bonds	$	—	$	—	$	—	$	—
Corporate bonds		35,664,187		—		35,664,187		—
Municipal bonds		10,785,103		—		10,785,103		—
Residential mortgage backed securities (“MBS”)		32,664,059		—		32,664,059		—
Commercial MBS		13,706,676		—		13,706,676		—
Asset backed securities		7,703,668		—		7,703,668		—

Total fixed maturities		100,523,693		—		100,523,693		—
Cash and cash equivalents		62,890,245		62,890,245		—		—

Total	$	163,413,938	$	62,890,245	$	100,523,693	$	—

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note C – Investments (Continued)

All investments are classified as available for sale. The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investments, by major security type, at September 30, 2017 and 2016 are as follows:


	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Fixed maturities:
U.S. Government bonds	$	245,460	$	—	$	(1,847	)	$	243,613
Corporate bonds		33,869,524		505,628		(14,948	)		34,360,204
Municipal bonds		12,089,249		153,978		(75,938	)		12,167,289
Residential MBS		28,612,342		72,496		(219,572	)		28,465,266
Commercial MBS		12,684,774		113,407		(96,919	)		12,701,262
Asset backed securities		10,337,186		6,314		(17,886	)		10,325,614

Total fixed maturities	$	97,838,535	$	851,823	$	(427,110	)	$	98,263,248


	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Fixed maturities:
U.S. Government bonds	$	—		—		—		$	—
Corporate bonds		34,798,478		888,180		(22,471	)		35,664,187
Municipal bonds		10,481,584		310,135		(6,616	)		10,785,103
Residential MBS		32,244,808		495,482		(76,230	)		32,664,059
Commercial MBS		13,336,314		433,000		(62,639	)		13,706,676
Asset backed securities		7,649,347		54,321		—			7,703,668

Total fixed maturities	$	98,510,531	$	2,181,118	$	(167,956	)	$	100,523,693

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note C – Investments (Continued)

The unrealized losses as of September 30, 2017 and 2016 are considered to be temporary impairments. Individual security positions comprising this balance have been evaluated by management, based on specific criteria to determine if these impairments should be considered other than temporary. The Company has concluded that the value of the investments for which it reports unrealized losses at September 30, 2017 and 2016 are not other than temporarily impaired.


	September 30, 2017
			Less than 12 months							12 months or more							Total
	# of		Estimated		Unrealized			# of		Estimated		Unrealized			# of		Estimated		Unrealized
	Securitie		Fair value		loss			Securities		Fair value		loss			Securities		Fair value		loss
U.S. Government bonds		1		243,613		(1,847	)		0		—		—			1		243,613		(1,847	)
Corporate bonds		10		5,532,849		(13,407	)		1		297,906		(1,541	)		11		5,830,755		(14,948	)
Municipal bonds		11		3,498,021		(45,796	)		5		1,091,935		(30,142	)		16		4,589,956		(75,938	)
Residential MBS		20		16,835,413		(128,697	)		7		4,012,165		(90,875	)		27		20,847,578		(219,572	)
Commercial MBS		2		1,753,252		(4,167	)		3		2,021,045		(92,752	)		5		3,774,297		(96,919	)
Asset backed securities		8		4,517,527		(17,886	)		0		—		—			8		4,517,527		(17,886	)

		52	$	32,380,675	$	(211,800	)		16	$	7,423,051	$	(215,310	)		68	$	39,803,726	$	(427,110	)


September 30, 2016:	September 30, 2016
			Less than 12 months							12 months or more							Total
	# of		Estimated		Unrealized			# of		Estimated		Unrealized			# of		Estimated		Unrealized
	Securitie		Fair value		loss			Securities		Fair value		loss			Securities		Fair value		loss
U.S. Government bonds		0	$	—	$	—			0	$	—	$	—			0	$	—	$	—
Corporate bonds		4	$	1,253,618	$	(7,976	)		1	$	284,892	$	(14,495	)		5	$	1,538,510	$	(22,471	)
Municipal bonds		10	$	2,364,396	$	(6,616	)		0	$	—	$	—			10	$	2,364,396	$	(6,616	)
Residential MBS		3	$	3,231,700	$	(2,957	)		6	$	2,810,340	$	(73,273	)		9	$	6,042,040	$	(76,230	)
Commercial MBS		2	$	1,098,360	$	(4,374	)		2	$	3,052,781	$	(58,265	)		4	$	4,151,141	$	(62,639	)
Asset backed securities		0	$	—	$	—			0	$	—	$	—			0	$	—	$	—

		19	$	7,948,074	$	(21,923	)		9	$	6,148,013	$	(146,033	)		28	$	14,096,087	$	(167,956	)

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note C – Investments (Continued)

Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations without penalties. The scheduled maturities of fixed-maturity securities at September 30, 2017 are as follows:


	Amortized Cost		Estimated Fair Value
Years to maturity:
One year or less	$	1,001,416	$	1,003,557
Over one through five years		26,918,794		27,116,800
Over five through ten years		13,281,146		13,536,977
Over ten years		5,002,878		5,113,772
Residential MBS		28,612,342		28,465,266
Commercial MBS		12,684,774		12,701,262
Asset backed securities		10,337,186		10,325,614

Total	$	97,838,535	$	98,263,248

Note D - Loss and Loss Adjustment Expenses

Components of the liability for unpaid losses and loss adjustment expenses and related reinsurance recoverable at September 30, 2017 and 2016, are as follows:


	2017			2016
Reserve for reported losses and loss adjustment expenses	$	42,878,152		$	38,686,031
Reserve for losses incurred but not reported		44,608,785			47,531,198

Total reserve for losses and loss adjustment expenses		87,486,937			86,217,229
Reinsurance recoverable on unpaid losses		(69,270,105	)		(65,454,188	)

Net reserve for losses and loss adjustment expenses	$	18,216,832		$	20,763,041

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note D – Loss and Loss Adjustment Expenses (Continued)

Following is a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance recoverables, for the nine months ended September 30, 2017 and 2016:

For the nine months ended September 30, 2017, loss and loss expenses incurred includes net favorable development of prior year estimated liabilities of $554,978. The favorable development was primarily related to better than expected loss experience on the 2016 accident year.

For the nine months ended September 30, 2016, loss and loss expenses incurred includes net favorable development of prior year estimated liabilities of $320,538. The favorable development was primarily related to better than expected loss experience on the 2012 through 2015 accident years.


	2017			2016
Unpaid losses and loss expense at beginning of year	$	82,823,981		$	78,029,584
Less: Unpaid losses and loss expenses recoverable		(59,454,597	)		(55,685,673	)

Net unpaid losses and loss expense at beginning of year		23,369,384			22,343,911

Incurred related to:
Current year		16,342,865			30,974,932
Prior years		(554,978	)		(320,538	)

Total net incurred losses and loss expenses		15,787,887			30,654,394

Paid related to:
Current year		13,516,500			25,788,470
Prior years		7,423,939			6,446,794

Total net paid losses and loss expenses		20,940,439			32,235,264

Net unpaid losses and loss expense at end of period		18,216,832			20,763,041
Plus: Unpaid losses and loss expenses recoverable		69,270,105			65,454,188

Unpaid losses and loss expense at end of period	$	87,486,937		$	86,217,229

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note E - Reinsurance

The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company.

The amounts for net premiums written and net premiums earned in the consolidated financial statements are net of reinsurance. Direct and ceded premiums for the nine months ended September 30, 2017 and 2016 are as follows:


	2017						2016
	Premiums Written			Premiums Earned			Premiums Written			Premiums Earned
Direct	$	251,629,683		$	236,616,993		$	230,933,650		$	216,272,775
Ceded		(218,669,160	)		(200,452,612	)		(188,293,260	)		(166,360,936	)

Net	$	32,960,523		$	36,164,381		$	42,640,390		$	49,911,839

Effective June 1, 2017, the Company entered into a gross quota share reinsurance contract whereby the Company ceded 18.75% share of all homeowners business insured to four reinsurers.

Effective December 31, 2016, the Company renewed and increased the cession amount of its net retained lines quota share reinsurance contract. The Company cedes 60% of all homeowners business insured, net of reinsurance agreements that inure to the benefit of the contract. The reinsurer’s maximum limits for any occurrence is $12.0 million (60% of $20 million) for property business. The 60% is placed across nine reinsurer partners.

Effective June 1, 2016, the Company entered into a gross quota share reinsurance contract whereby the Company ceded 15% share of all homeowners business insured to four reinsurers. Effective June 1, 2015, the Company entered into a gross quota share reinsurance contract whereby the Company ceded 7.5% share of all homeowners business insured to two reinsurers.

As the effective dates of the net quota share contracts were December 31, 2016 and 2015, respectively, approximately three months of the balance of ceding commissions related to the current year has been deferred as unearned ceding commission on the interim consolidated balance sheet as of September 30, 2017 and 2016, based on the earning of the underlying policies. Ceding commission earned during the nine months ended September 30, 2017 and 2016 amounted to $61,323,073 and $50,194,995, respectively.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note F - Deferred Policy Acquisition Costs and Unearned Ceding Commission

The following summary reflects the Company’s deferred policy acquisition costs and unearned ceding commission deferred for amortization against future earned premiums for the nine months ended September 30, 2017 and 2016, respectively:


	2017			2016
Deferred acquisition costs, beginning of year	$	30,393,683		$	28,364,299
Costs incurred and deferred during period:
Commissions and brokerage costs		40,773,398			38,016,595
Other underwriting and acquisition costs		1,442,273			1,408,797
Premium taxes		5,094,685			5,712,217

Acquisition costs incurred and deferred during the period		77,704,039			73,501,908
Amortization		(44,698,926	)		(41,991,852	)

Deferred acquisition costs, end of year	$	33,005,113		$	31,510,056


	2017			2016
Unearned ceding commission, beginning of year	$	49,748,145		$	39,224,912
Commissions ceded and deferred during period:
Commissions and brokerage costs		69,528,404			59,688,290
Ceding commission earned		(61,323,073	)		(50,194,995	)

Unearned ceding commission, end of period	$	57,953,476		$	48,718,207

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note G - Employee Benefit Plans

The Company sponsors a qualified defined benefit pension plan (“Plan”) covering its current and former employees. Effective July 27, 2003, benefits accumulated under the Plan were frozen and no further benefits are accumulating for employees. The measurement date used to determine the net periodic pension cost is December 31, 2017 and 2016, respectively.

The composition of net periodic benefit cost is as follows for the nine months ended September 30:


	2017			2016
Net periodic cost
Interest cost	$	243,866		$	294,474
Expected return on plan assets		(194,361	)		(243,738	)
Amortization of net loss		101,711			106,480
Recognized settlement loss		—			—

Total net periodic benefit cost	$	151,216		$	157,216

The following assumptions were used in determining the net periodic pension cost for the plan nine months ending September 30:


	2017			2016
Weighted average assumptions
Discount rate		3.75	%		4.00	%*
Expected long term rate of return on assets		5.00	%		5.50	%
Rates of increase in compensation levels		N/A Plan is frozen			N/A Plan is frozen

*	(Liability re-measured at 3.75% on December 31, 2016 due to certain lump sum settlement events.

Contributions to the Plan during 2017 are estimated to be $437,551. Due to the relatively small number of plan participants, actual payouts over the ten year period could vary significantly from the estimates shown, depending on the retirement decisions made by the individual participants and other factors.

The Company also has a non-qualified supplemental executive retirement plan (“SERP”) covering four former employees. At September 30, 2017 and 2016, assets at an estimated fair value of $1,213,253 and $1,213,022, respectively, were held in a Rabbi Trust for two of the former employees for an original period of five years (“allocated assets”). In December 2003, the two former employees assigned their rights under the SERP to American International Specialty Life Insurance Company (“AISLIC”). At December 31, 2011, the allocated assets were $720,972 and a related liability recorded as a component of accrued retirement plan expense on the consolidated balance sheets. The Superior Court order provides for the payment of losses and loss adjustment expense reserves, net of reinsurance (“loss reserves”) from the allocated assets in the event loss reserves develop adversely above $28,450,000, which was actuarially determined in connection with the closing of the sale of the Company. Under the terms of the order on December 5, 2011, the Company was due to pay out the allocated assets to AISLIC. In November 2011 the Company filed a motion with the Rhode Island Superior Court to further delay the payment of assets. The motion to delay payment was approved for an additional three years by the Rhode Island Superior Court. The Company is currently in settlement negotiations with AISLIC. While the final resolution of the settlement is uncertain, based upon currently available information, management believes the amount will not exceed $50,000. Accordingly, the Company reduced the SERP liability to $50,000 in 2012.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note G - Employee Benefit Plans (Continued)

The Company sponsors a 401(K) savings plan which employees can elect to participate in following six months of service. Commencing in 2011, the Company matches 401(K) contributions dollar for dollar for the first $1,000 contributed per year, and fifty cents on the dollar, thereafter, up to a maximum of 3%. Employer contributions vest 20% each year until fully vested after 5 years. The Company does not offer any post-employment benefits. For the nine months ended September 30, 2017 and 2016, the Company’s contributions to the plan on behalf of the participating employees were $237,638 and $284,439, respectively.

Note H - Common Stock and Stock Based Employee Compensation

The holders of Series 1 Class A common stock and Series 2 Class A common stock (collectively the “Class A shareholders”) are each entitled to three votes per share and the holders of Series 1 Class B common stock (“Class B shareholders”) are entitled to one vote per share. In the event of a liquidation, dissolution or winding up of the Company, the holders of Series 2 Class A common stock shall be entitled to receive, prior and in preference to the holders of Series 1 Class A common stock and the holders of Class B common stock any distribution of assets of the Company. Only after full payment has been made to the holders of Series 2 Class A common stock, the holders of Series 1 Class A common stock shall be entitled to receive, prior and in preference to the holders of Class B common stock.

The Company’s Management Incentive Program (“the Plan”) provides for grants of restricted stock and is administered by the Board of Directors and the Compensation Committee of the Board of Directors. The restricted stock awards issued vest as set forth in the applicable award agreements. These shares contain certain restrictions, prior to vesting, related to, among other things, forfeiture in the event of termination of employment, voting restrictions and subordinate to Series 1 Class A Common Stock. The recipients are not entitled to receive delivery of a stock certificate prior to vesting, nor may any restricted stock be sold, transferred, pledged, or otherwise disposed of by the holder.

During 2014, there were 21,920 Class B shares of restricted stock granted to certain employees. Of the 21,920 Class B shares granted, 7,475 vested during 2014. The remaining shares are subject to vesting restrictions that incorporate an element of time through 2019. During the nine months ended September 30, 2017 and 2016, the Company amortized $110,489 and $17,371, respectively, to compensation expense for the vesting of restricted stock grants.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note I - Accumulated Changes in Other Comprehensive Income

A summary of the net changes in after-tax accumulated other comprehensive income for each of the nine month periods ending September 30, 2017 and 2016 and significant amounts reclassified out of accumulated other comprehensive income for each of the nine months ended September 30, 2017 and 2016 are as follows:


	Net Unrealized (Losses) Gains on Securities			Net Pension Adjustments			Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2015	$	(405,747	)	$	(2,959,618	)	$	(3,365,365	)
Other comprehensive income, net before reclassifications		1,721,952			(369,526	)		1,352,426
Reclassifications from accumulated other comprehensive income		(7,859	)		69,212			61,353

Balance at September 30, 2016	$	1,308,346		$	(3,259,932	)	$	(1,951,586	)


Balance at December 31, 2016	$	(321,207	)	$	(2,572,821	)	$	(2,894,028	)
Other comprehensive income, net before reclassifications		597,110			(157,199	)		439,911
Reclassification from accumulated other comprehensive income		160			66,112			66,272

Balance at September 30, 2017	$	276,063		$	(2,663,908	)	$	(2,387,845	)

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note I – Accumulated Changes in Other Comprehensive Income (Continued)

Reclassifications from other comprehensive income into net earnings during the nine months ended September 30, 2017 and 2016 are as follows:


	Net Unrealized (Losses) Gains on Securities			Net Pension Adjustments			Accumulated Other Comprehensive (Loss) Income
Balance at September 30, 2016
Net investment income	$	(12,090	)					(12,090	)
General underwriting and administrative expenses		—			106,480			106,480

Reclassification before income taxes		(12,090	)		106,480			94,390
Applicable income tax expense		4,232			(37,268	)		(33,036	)

Reclassification net of tax	$	(7,859	)	$	69,212		$	61,353

Balance at September 30, 2017
Net investment income		246						246
General underwriting and administrative expenses		—			101,711			101,711

Reclassification before income taxes		246			101,711			101,957
Applicable income tax expense		(86	)		(35,599	)		(35,685	)

Reclassification net of tax	$	160		$	66,112		$	66,272

Note J - Statutory Financial Data

PIC and NBIC statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Department. Currently, “prescribed” statutory accounting practices are interspersed throughout state insurance law and regulations, the National Association of Insurance Commissioners (the “NAIC”) Accounting Practices and Procedures Manual and a variety of other NAIC publications. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state and may differ across companies within a state and may change in the future.

The statutory capital and surplus and net income, based on unaudited filings for the principal operating subsidiaries of the Company for the nine months ended September 30, 2017 and 2016 are as follows:


	NBIC				PIC
	2017		2016		2017		2016
Statutory capital and surplus	$	105,463,075	$	78,064,095	$	3,227,146	$	2,137,843
Statutory net income	$	15,924,770	$	17,488,994	$	285,770	$	212,421

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note J - Statutory Financial Data (Continued)

The primary differences between statutory financial statements and statements prepared in accordance with GAAP are that statutory financial statements do not reflect deferred policy acquisition costs, unearned ceding commissions, unrealized gains (losses) on certain investments, and other adjustments. Additionally, reported deferred income tax assets are calculated in a different manner for statutory financial reporting purposes.

PIC, with the explicit permission of the Department, records the value of its buildings and land at fair market value in the statutory financial statements. If buildings and land were carried at depreciated cost, property and statutory surplus would be decreased by $1,370,963 and $1,428,463 at September 30, 2017 and 2016, respectively. Net income would increase by $32,344 for both the nine months ending September 30, 2017 and 2016.

The Department requires PIC and NBIC to maintain a minimum of $3,000,000 in statutory capital and surplus. Property and casualty insurance companies are subject to certain Risk-Based Capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risk factors related to it. At September 30, 2017 and 2016 both NBIC and PIC met their respective RBC requirements. Since 2005, PIC has been working with the Department in managing its run-off plan. Accordingly, PIC ceased writing new business in 2005 and has settled 565 of the 570 open occurrences. The Company’s run-off plan is intended to honor all of its policy holder obligations while safeguarding its assets through effective claims management and sound investment practices. The Company has the appropriate staffing and other resources to handle all aspects of run-off, including claims, finance and corporate governance.

During 2011, PIC issued a surplus note to Service in the amount of $650,000. Interest on the surplus note is to be paid at a rate equal to LIBOR. The principal amount of the surplus note is payable upon the earlier of 1) PIC being reimbursed for net operating losses utilized in the NBICHI consolidated tax return or 2) December 31, 2017. On December 28, 2016 an allonge was attached to the surplus note extending the payable date from December 31, 2016 to December 31, 2017. In 2012, the Company issued an additional surplus note to Service in the amount of $500,000. Interest on the surplus note is to be paid at a rate equal to LIBOR. The principal amount of the surplus note is payable upon the earlier of 1) PIC being reimbursed for net operating losses utilized in the NBICHI consolidated tax return or 2) December 31, 2017. Principal and interest payments on the surplus notes are subject to approval from the Department. As of September 30, 2017, no interest or principal has been paid or accrued to date on either surplus note.

As of September 30, 2017 and 2016, PIC is in the position of being reimbursed for net operating losses utilized in the NBICHI consolidated tax return. Management notified the Department of this change and the Department indicated that the trigger of repayment of the surplus notes would be disallowed until at time in the future when the solvency status of PIC had improved significantly. At such time the Superintendent of Insurance of Rhode Island would re-visit PIC’s solvency status to ensure the result of such payment would not adversely affect such status in the present and near future.

In the event that PIC is subject to delinquency proceeding pursuant to the Rhode Island Insurers’ Rehabilitation and Liquidation Act, RIGL 27-14.3-1, then each of the surplus notes would be satisfied in accordance with the priority distribution set forth in RIGL 27-14.3-46.

NBIC may pay dividends from earnings without prior approval of the Department except as required under Rhode Island law. However, the RIDBR requires notification of such dividends prior to payment. PIC may not pay dividends without prior approval from the RIDBR. Neither NBIC nor PIC declared or paid any dividends during the nine months ended September 30, 2017 and 2016.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note K - Related Party Transactions

The Treiber Group LLC (“Treiber”) is an independent agent that distributes NBIC insurance products and is paid commissions in accordance with the terms of an agency contract. The commission paid during the nine months ended September 30, 2017 and 2016 was $5,363,921 and $5,291,250, respectively. An affiliate of Treiber, Treiber Acquisition Group, LLC is a shareholder of the Company.

Note L - Contingent Liabilities and Commitments

The Company is named as a defendant in various legal actions arising primarily from claims made under its insurance policies and contracts. Those actions are considered by the Company in estimating its unpaid loss and loss adjustment expense reserves. The Company’s management believes that the resolution of those actions will not have a material effect on the Company’s financial position or results of operations.

As of September 30, 2017 and 2016, the Company has $1,022,465 and $1,026,172 respectively, on deposit with government authorities as required by law.

The Company is assessed amounts by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies and other state special purpose assessments. At September 30, 2017 and 2016, the Company had accrued liabilities for taxes, licenses, fees and guaranty fund assessments of $350,302 and $630,279, respectively.

Note M - Subsequent Events

The Company has evaluated subsequent events for disclosure and recognition through January 30, 2018, the date on which these financial statements were available to be issued, and has considered any relevant matters in the preparation of the financial statements and footnotes.

On August 8, 2017, the Company entered into a definitive sale agreement with Heritage Insurance Holdings, Inc. (“Heritage”), a property and casualty insurance holding company, with a purchase price of $250 million in exchange for 100% of the issued and outstanding shares of NBIC Holdings, Inc. The acquisition was completed by Heritage on November 30, 2017.

On November 28, 2017, the Company reached an agreement with AIG Specialty Insurance Company (“AIGSIC”, formerly AISLIC) to settle the assigned rights under the Company’s SERP plan, whereby the Company will remit payment of $325,000 to AIGSIC, releasing the Company of liability in this matter.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. We are in the process of analyzing the Act and its potential impact on NBIC. The Act changes the corporate tax rate structure from 15% to 35% on graduated scale, to a 21% flat tax, among other changes. The Act may also require us to remeasure our deferred tax items for the change in the tax rate, which would have an impact on the Company’s net income during the first quarter of calendar year 2018. We cannot determine at this time the amount of any such remeasurements, or the full effects of the Act on NBICHI’s business and financial results.

The State of Rhode Island Department of Business Regulation – Insurance Division (the “Department”) approved the repayment of both PIC’s surplus notes to Service dated December 28, 2011 (“2011”) and December 28, 2012 (“2012”) in the amount of $650,000 and $500,000, respectively. Interest has been calculated at 1.19 percent and .84 percent on the 2011 and 2012 surplus notes, respectively, in accordance with the Department’s approval notice. The total remit from PIC to Service effective December 29, 2017 was $697,119 and $521,315, for the 2011 and 2012 notes, respectively.

NBIC Holdings, Inc. and Subsidiaries

Notes to the Interim Consolidated Financial Statements (Unaudited)

Note M - Subsequent Events (Continued)

The Company is in the process of terminating its defined benefit pension plan (the “Plan”) through a combination of

lump-sum distributions and annuitizing participant benefits. The Company anticipates the termination to occur in the first quarter of 2018.

EXHIBIT 99.4

HERITAGE INSURANCE HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On November 30, 2017, Heritage Insurance Holdings, Inc. (“Heritage” or the “Company”) completed the acquisition of all of the outstanding capital stock of NBIC Holdings, Inc. (“NBIC”), the parent company of Narragansett Bay Insurance Company, a leading specialty underwriter of personal residential insurance products and services in several states along the Eastern seaboard. The acquisition resulted in NBIC becoming a wholly-owned subsidiary of the Company (the “Acquisition”). The Company completed the NBIC Acquisition pursuant to the previously disclosed Agreement and Plan of Merger, dated as of August 8, 2017, by and among the Company, Gator Acquisition Merger Sub, Inc., NBIC and PBRA, LLC, in its capacity as Stockholder Representative (the “Merger Agreement”).

The purchase price for the Acquisition was $250 million, including $210 million in cash, plus 2,222,215 shares of the Company’s common stock (the “Stock Consideration”) with an aggregate value of $40 million, subject to a post-closing book value adjustment. The Stock Consideration was issued at closing in an exempt private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. In accordance with the Merger Agreement, 687,802 shares from the Stock Consideration were placed into an escrow account to secure any amounts payable pursuant to the post-closing book value adjustment provisions.

The cash portion of the purchase price for the Acquisition was financed in part through the proceeds of the Company’s offering of its 5.875% Convertible Senior Notes due 2037 (the “Convertible Notes”), which was completed on August 16, 2017. In connection with the issuance of the Convertible Notes, the Company repurchased $40 million of its common stock.

The underlying historical financial information of Heritage and NBIC presented below was derived from the Company’s historical financial statements and NBIC’s historical financial statements filed herewith on this Form 8-K/A, as well as adjustments which management believes are reasonable to account for the Acquisition.

The pro forma condensed combined statements of income for the nine months ended September 30, 2017 and for the year ended December 31, 2016 assume that the Acquisition occurred on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of September 30, 2017 assumes the Acquisition occurred on September 30, 2017. The Company presents these pro forma condensed combined financial results for informational purposes only, and the pro forma financial statements are not necessarily indicative of what the combined company’s results of operations or financial position would actually have been had the Acquisition been completed on the dates indicated. In addition, the pro forma condensed combined statements of income do not purport to project the future operating results of the combined company.

The tax rate used for these pro forma combined condensed financial statements is an estimated statutory tax rate. As a result, it will likely vary from the actual effective rate in periods subsequent to the completion of the Acquisition.

The unaudited pro forma condensed combined financial information should be read in conjunction with the following:

•

The accompanying notes to the unaudited pro forma condensed consolidated financial information;

•

NBIC’s consolidated financial statements and related notes thereto contained in Exhibits 99.1 and 99.2 of this Form 8-K/A;

•

Heritage’s audited consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the years ended December 31, 2016; and

•

Heritage’s condensed consolidated financial statements and related notes thereto contained in its Quarterly Report on Form 10-Q for the period ended September 30, 2017

HERITAGE INSURANCE HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2017

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


	Heritage As Reported			NBIC			Pro Forma Adjustments			Notes			Heritage Pro Forma
Revenues:
Gross premiums written		455,845			251,630			—						707,475
Change in gross unearned premiums		4,180			(15,013	)		—						(10,833	)

Gross premiums earned		460,025			236,617			—						696,642
Ceded premiums		(182,189	)		(197,590	)		—						(379,779	)

Net premiums earned		277,836			39,027			—						316,863
Net investment income		8,210			1,771			—						9,981
Ceding commission earned		—			61,323			—						61,323
Net realized gains		1,011			—			—						1,011
Other revenue		10,948			935			—						11,883

Total revenue		298,005			103,056			—						401,061
Operating Expenses:
Loss and loss adjustment expenses		156,728			15,788			—						172,516
Policy acquisition costs		66,086			45,833			—						111,919
General and administrative expenses		48,826			15,949			2,043			(a	)		66,818

Total operating expenses		271,640			77,570			2,043						351,253

Operating income (expense)		26,365			25,486			(2,043	)					49,808
Interest expense, net		7,010			—			6,128			(b	)		13,138
Amortization of debt issuance costs		1,153			—			715			(b	)		1,868
Other non-operating expenses		6,883			—									6,883

Income before income taxes		11,319			25,486			(8,886	)					27,919
Provision for income taxes		7,390			9,263			(3,396	)		(c	)		13,257

Net income		3,929			16,223			(5,490	)					14,662

Weighted average shares outstanding
Basic		27,647,146									(d	)		29,869,361
Diluted		27,647,146									(d	)		29,869,361
Earnings per share:
Basic		0.14									(d	)		0.49
Diluted		0.14									(d	)		0.49

See notes to unaudited condensed consolidated financial statements

HERITAGE INSURANCE HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2016

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


	Heritage As Reported			NBIC			Pro Forma Adjustments			Notes			Heritage Pro Forma
Revenues:
Gross premiums written		626,704			306,622			—						933,326
Change in gross unearned premiums		13,814			(13,899	)		—						(85	)

Gross premiums earned		640,518			292,723			—						933,241
Ceded premiums		(228,797	)		(223,291	)		—						(452,088	)

Net premiums earned		411,721			69,432			—						481,153
Net investment income		9,181			2,136			—						11,317
Ceding commission earned		—			69,921			—						69,921
Net realized gains		1,733			—			—						1,733
Other revenue		16,323			1,137			—						17,460

Total revenue		438,958			142,626			—						581,584
Operating Expenses:
Loss and loss adjustment expenses		238,862			29,102			—						267,964
Policy acquisition costs		84,421			56,999			—						141,420
General and administrative expenses		58,910			25,452			7,207			(a	)		91,569

Total operating expenses		382,193			111,553			7,207						500,953

Operating income (expense)		56,765			31,073			(7,207	)					80,631
Interest expense, net		321			—			9,927			(b	)		10,248
Amortization of debt issuance costs		41			—			1,116			(b	)		1,157

Income before income taxes		56,403			31,073			(18,250	)					69,226
Provision for income taxes		22,538			10,887			(6,596	)		(c	)		26,829

Net income		33,865			20,186			(11,654	)					42,397

Weighted average shares outstanding
Basic		29,632,171									(d	)		31,854,386
Diluted		29,634,349									(d	)		31,856,564
Earnings per share
Basic		1.14									(d	)		1.33
Diluted		1.14									(d	)		1.33

See notes to unaudited condensed consolidated financial statements

HERITAGE INSURANCE HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2017

(Amounts in thousands)


	Heritage As Reported			NBIC			Pro Forma Adjustments			Notes			Heritage Pro Forma
ASSETS
Fixed maturity securities, available for sale, at fair value		494,484			101,257			—						595,741
Equity securities, available for sale, at fair value		25,396			—			—						25,396

Total investments		519,880			101,257			—						621,137
Cash and cash equivalents		352,321			81,154			(210,000	)		(e	)		223,475
Restricted cash		19,853			—			—						19,853
Accrued Investment income		4,635			495			—						5,130
Premiums receivable, net		35,326			30,774			—						66,100
Reinsurance recoverable on paid and unpaid claims		370,751			103,703			—						474,454
Prepaid reinsurance premiums		153,955			137,730			—						291,685
Income taxes receivable		1,649			—			1,591			(i	)		3,240
Deferred income taxes		—			14,679			(14,679	)		(f	)		—
Deferred policy acquisition costs, net		41,888			33,005			(33,005	)		(g	)		41,888
Property and equipment, net		16,198			2,830			—						19,028
Intangibles, net		22,967			435			80,805			(a	)		104,207
Goodwill		46,454			—			109,072			(h	)		155,526
Other assets		13,107			6,403									19,510

Total Assets		1,598,984			512,465			(66,216	)					2,045,233

LIABILITIES AND STOCKHOLDERS’ EQUITY
Unpaid losses and loss adjustment expenses		489,580			87,487			—						577,067
Unearned premiums		313,843			175,493			—						489,336
Reinsurance payable		158,122			52,994			—						211,116
Note payable, net of issuance costs		188,634			—			—						188,634
Deferred income taxes		4,493			—			2,013			(f	)		6,506
Advance premiums		20,397			7,122			—						27,519
Accrued compensation		6,955			2,969			—						9,924
Other liabilities		53,547			76,141			4,718			(i	)		134,406
Funds held by companies under reinsurance treaties		61,732			16			—						61,748

Total Liabilities		1,297,303			402,222			6,731						1,706,256
Stockholders’ Equity
Common stock		2			—			2			(j	)		4
Additional paid-in capital		209,338			123,070			(83,072	)		(j	)		249,336
Accumulated other comprehensive loss		(422	)		(2,615	)		2,615			(j	)		(422	)
Treasury stock		(87,185	)		—			—			j			(87,185	)
Retained earnings		179,948			(10,212	)		7,508			(j	)		177,244

Total Stockholders’ Equity		301,681			110,243			(72,947	)					338,977

Total Liabilities and Stockholders’ Equity		1,598,984			512,465			(66,216	)					2,045,233

See notes to unaudited condensed consolidated financial statements

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1 – Basis of Preparation

The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results.

The Company prepared the pro forma condensed combined statements of income under the acquisition method of accounting in accordance with existing U.S. generally accepted accounting principles (“U.S. GAAP”) – Accounting Standard Codification (“ASC”) 805, Business Combinations. Under the acquisition method of accounting, the Company measured the total purchase price (consideration transferred) as described in Note 2, “Consideration Transferred.” The Company based the value of the underlying tangible and intangible assets acquired and liabilities assumed on their respective estimated fair market values as of the balance sheet date, with any excess purchase price allocated to goodwill. The determination of the fair value of NBIC’s assets and liabilities requires extensive use of estimates and management’s judgment. The Company will continue to evaluate information obtained up to and following the closing of the NBIC Acquisition, including during the measurement period, to update the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates.

The pro forma condensed combined statements of income are preliminary and have been prepared solely for the purpose of providing pro forma financial information prepared in accordance with the rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). Differences between these preliminary estimates and the final acquisition accounting will occur, and these differences could have a material impact on the pro forma condensed combined financial information and the Company’s future consolidated results of operations.

Acquisition-related transaction costs (e.g., investment banking, advisory, legal, valuation, and other professional fees) and certain merger-related costs and charges have not been included as a component of consideration transferred, as they must be expensed as incurred. Total transaction costs incurred for the year ended December 31, 2016 and the nine months ended September 30, 2017 are approximately $0 and $2.2 million, respectively. The Company estimates that it will incur transaction costs totaling approximately $6.5 million in connection with the Acquisition. The costs that the Company may ultimately incur could differ materially from this amount.

In order to prepare the pro forma condensed combined statements of income, the Company performed a preliminary review of NBIC’s accounting policies to identify significant differences. During the preparation of the unaudited pro forma condensed combined financial statements, the Company did not become aware of any material differences, other than presentation of certain line items in the condensed combined statements of income and balance sheet, between the accounting policies of the Company and NBIC. The Company is currently conducting a detailed review of NBIC’s accounting policies to determine if differences in accounting policies require further adjustment or reclassification of NBIC’s presented results of operations, assets or liabilities to conform to the Company’s accounting policies and classifications. As a result of that review, the Company may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the pro forma condensed combined financial statements. For the purpose of aligning NBIC’s presentation of certain line items in the pro forma condensed combined statements of income and balance sheet to Heritage’s presentation, reclassification adjustments have been made to NBIC’s historical financial statements, as detailed below.

The following reclassifications have been made to conform NBIC’s historical financial statements to Heritage’s presentation of the unaudited pro forma condensed combined statements of income:


					For the Nine Months Ended September 30, 2017
(in thousands)			Gross premiums written		Change in gross unearned premiums			Ceded premiums			Net investment income		Net realized gains		Other revenue		Policy acquisition costs			General and admin expenses

Net premiums earned	36,164			251,630		(15,013	)		(200,453	)		—		—		—		—			—
Net investment income	1,938			—		—			—			1,771		—		167		—			—
Other Income	3,620			—		—			2,863			—		—		768		—			(11	)

Net Total	41,722			251,630		(15,013	)		(197,590	)		1,771		—		935		—			(11	)

Policy acquisition costs	(44,699	)		—		—			—			—		—		—		(44,699	)		—
General and administrative expenses	(17,072	)		—		—			—			—		—		—		(1,134	)		(15,938	)

Net Total	(20,049	)		251,630		(15,013	)		(197,590	)		1,771		—		935		(45,833	)		(15,949	)


					For the Year Ended December 31, 2016
(in thousands)			Gross premiums written		Change in gross unearned premiums			Ceded premiums			Net investment income		Net realized gains		Other revenue		Policy acquisition costs			General and admin expenses

Net premiums earned	65,622			306,622		(13,899	)		(227,101	)		—		—		—		—			—
Net investment income	2,209			—		—			—			2,136		—		73		—			—
Other Income	4,874			—		—			3,810					—		1,064		—			—

Net Total	72,705			306,622		(13,899	)		(223,291	)		2,136		—		1,137		—			—

Policy acquisition costs	(56,048	)		—		—			—			—		—		—		(56,048	)		—
General and administrative expenses	(26,403	)		—		—			—			—		—		—		(951	)		(25,452	)

Net Total	(9,746	)		306,622		(13,899	)		(223,291	)		2,136		—		1,137		(56,999	)		(25,452	)

The following reclassifications have been made to conform NBIC’s historical financial statements to Heritage’s presentation of the unaudited pro forma condensed combined balance sheet:


	As of September 30, 2017
(in thousands)			Fixed maturity securities, available for sale, at fair value		Cash and cash equivalents		Reinsurance recoverable on paid and unpaid claims		Prepaid re- insurance premiums		Property and equipment, net		Intangibles, net		Other assets

Fixed maturity securities, available for sale, at fair value	$	98,263	$	98,263		—		—		—		—		—		—
Cash and cash equivalents		84,148		2,994		81,154		—		—		—		—		—
Land and buildings		1,860		—		—		—		—		1,860		—		—
Reinsurance recoverable on paid losses		34,433		—		—		34,433		—		—		—		—
Reinsurance recoverable on unpaid losses		69,270		—		—		69,270		—		—		—		—
Ceded unearned premium reserves		137,730		—		—		—		137,730		—		—		—
Furniture, equipment and software		970				—		—		—		970		—		—
Equity from pools and associations		3,701		—		—		—		—		—		—		3,701
Other assets		3,137		—		—		—		—		—		435		2,702

Net total		433,512		101,257		81,154		103,703		137,730		2,830		435		6,403


			As of September 30, 2017
(in thousands)			Accrued compensation		Other liabilities

Unearned ceding commission	$	57,953		—	$	57,953
Commissions payable		9,085		—		9,085
Accrued expenses and accounts payable		8,562		—		8,562
Accrued retirement plan		3,510		2,969		541

Net total		79,110		2,969		76,141

The pro forma condensed combined statements of income do not reflect the realization of any expected reinsurance or operational synergies from the Acquisition following the completion of the business combination. The pro forma condensed combined statements of income also do not include any adjustment for costs that may result from integration activities, as management has not completed its assessment of the costs, if any, associated with such activities. Significant costs may ultimately be recorded for other exit and integration activities.

Note 2 – Consideration Transferred

In accordance with the terms of the Merger Agreement governing the Acquisition, total consideration for the Acquisition consisted of (i) approximately $210.0 million in cash and (ii) shares of Heritage common stock with an aggregate value of approximately $40.0 million, subject to a post-closing book value related adjustment.

The following table summarizes the components of the consideration transferred:


(in thousands, except per share and share amounts)
Shares of Heritage common stock issued (1)		2,222,215
Share price		18.00
Stock consideration to NBIC stakeholders		40,000
Cash consideration to NBIC stakeholders		210,000

Total purchase price	$	250,000

(1) The value of each share of the Company’s common stock was based on the volume-weighted average price of the Company’s common stock during the five business-day period ending on November 29, 2017.

Note 3 – Preliminary Purchase Price Allocation

The total purchase price as summarized above was allocated to NBIC’s tangible and intangible assets acquired and liabilities assumed for purposes of the pro forma condensed combined financial information, based on their estimated relative fair values assuming the Acquisition was completed as of the pro forma balance sheet date presented.

The following table presents the Company’s preliminary estimates of the fair values of NBIC’s tangible and intangible assets acquired and liabilities assumed. These preliminary estimates are based on the information available as of the balance sheet date and have been made solely for the purpose of providing the pro forma condensed combined financial statements.

The Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change following the closing of the Acquisition, including during the measurement period.

The following table summarizes the allocation of the preliminary purchase price as of the balance sheet date:


(in thousands)	Amount
Cash and cash equivalents	$	81,154
Investments		101,258
Premiums receivable		30,774
Reinsurance recoverable on paid and unpaid claims		103,703
Prepaid reinsurance premiums		137,730
Intangible assets		81,240
Other assets		9,728

Total assets acquired	$	545,587
Unpaid losses and loss adjustment expenses		87,487
Unearned premiums		175,493
Reinsurance payable		52,994
Other liabilities assumed		88,685

Total liabilities assumed	$	404,659
Total net assets acquired	$	140,928
Goodwill		109,072
Total purchase price	$	250,000

Note 4 – Pro Forma Adjustments

Reflects an adjustment to the NBIC’s amortization expense of $4.3 million and $7.2 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively, related to acquired intangible assets partially offset by the related amortization reversal and acquisition transaction costs incurred to date. In addition, included in the adjustment is the reversal of amortization expense for the nine months ended September 30, 2017 and the year ended December 31, 2016 related to NBIC’s historical intangible assets eliminated for the purpose of the pro forma condensed combined financial statements.

The following table presents the preliminary fair values that the Company has assigned to the identifiable intangible assets, the average estimated useful lives, and the estimated amortization expense related to these identifiable intangible assets:


	Estimated Fair Value (in thousands)		Average Estimated Useful Life (in years)			Amortization for the Nine Months Ended September 30, 2017 (in thousands)			Amortization for the Year Ended December 31, 2016 (in thousands)
Agent Relationships		10,700		10		$	803		$	1,070
Trade Name		7,000		10			525			700
Insurance Licenses		1,140		Indefinite			—			—
Non-Compete Agreements		4,000		1-2			941			2,745
Renewal Rights		40,600		15			2,030			2,707
Business Acquired “VOBA” (1)		17,800		(1	)		—			—

Total	$	81,240				$	4,299		$	7,222


(in thousands)
NBIC’s amortization of historical intangibles							(11	)		(15	)
Transaction costs							(2,245	)		—

Net general and administrative expense adjustments						$	2,043		$	7,207

(1)

NBIC’s historical amortization of deferred policy acquisition costs reflects the estimated continuing impact on the statements of income of the combined entity. As such, a pro forma adjustment for the amortization of VOBA over an estimated 12 month period has not been reflected in the unaudited pro forma condensed combined statements of income presented.

In addition, reflected in this adjustment is the derecognition of NBIC’s intangible assets of $0.4 million, which reflects the assets’ values as of September 30, 2017.

This adjustment also reflects the derecognition of transaction costs related to the Acquisition. Heritage estimates total transaction costs for the Acquisition will be approximately $6.5 million. The costs that Heritage may ultimately incur could differ materially from this amount. Transaction costs include fees for investment banking, advisory, legal, valuation, and other professional services. As the transaction costs will not have a continuing impact, Heritage has not shown the transaction costs in the pro forma statements of income. The pro forma statements of income remove $2.2 million in nonrecurring transaction costs from General & Administrative Expenses for the nine months ended September 30, 2017. Heritage reflects the remaining transaction costs in the pro forma balance sheet as of September 30, 2017 as an increase to Other Liabilities and a decrease to Retained Earnings.

b)	In connection with the Acquisition, the Company issued $136.8 million aggregate principal amount of Convertible Notes to finance a portion of the cash component of the consideration paid to NBIC stakeholders.

The interest expense adjustment reflects interest expense of $6.1 million and $9.9 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively, related to the Convertible Notes issued in connection with the Acquisition. The Company’s historical financial statements for the nine months ended September 30, 2017 include interest expense of $1.3 million related to the Convertible Notes.

The amortization adjustment of $0.7 million and $1.1 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively, is to reflect amortization of capitalized costs incurred in connection with the issuance of the Convertible Notes. The Company’s historical financial statements as at September 30, 2017 include amortization of $0.1 million related to the Convertible Notes.

c)	Reflects the federal and state tax impact for combination income adjustments and the impact of recording state taxes on historical results for the business combination.

d)	The following table shows the Company’s calculation of pro forma combined basic and diluted earnings per share for the nine months ended September 30, 2017 and the year ended December 31, 2016:

Earnings per share


(in thousands, except per share and share data)	Nine Months Ended September 30, 2017		Year Ended December 31, 2016
Pro forma net income from continuing operations	$	14,662	$	42,397
Basic weighted average Heritage shares outstanding		27,647,146		29,632,171
Heritage shares issued as Acquisition consideration		2,222,215		2,222,215

Pro forma basic weighted average shares outstanding		29,869,361		31,854,386
Heritage historical dilutive shares outstanding		—		2,178

Pro forma diluted weighted average shares outstanding		29,869,361		31,856,564
Pro forma basic earnings per share from continuing operations	$	0.49	$	1.33
Pro forma diluted earnings per share from continuing operations	$	0.49	$	1.33

As described in Note 2, total purchase price consideration included 2,222,215 shares of the Company’s common stock, subject to post-closing book value adjustments that may impact the number of shares issued in connection with the Acquisition.

e)	Reflects cash consideration of $210 million, in accordance with the terms of the Merger Agreement governing the Acquisition.

Reflects the federal and state impact for combination balance sheet adjustments. Furthermore, reflects the impact of recording state taxes on historical results for the business combination. In addition, reflects an adjustment to reclassify deferred income taxes in order to present a net deferred taxes asset or liability on the balance sheet in accordance with U.S. GAAP.

Deferred income taxes


(in thousands)	As of 9/30/2017
Adjustment to reclassify NBIC’s deferred income taxes asset position	$	(14,679	)
Net deferred income taxes liability adjustments resulting from the Acquisition		16,692

Net deferred income taxes adjustments	$	2,013

g)	Reflects elimination of NBIC’s historical deferred policy acquisition costs asset of $33.0 million for the nine months ended September 30, 2017 as a result of the Acquisition.

h)	Reflects recognition of goodwill of $109.1 million resulting from the Acquisition, as further detailed in Note 3.

Adjustments to Other liabilities reflects a fair value adjustment of $0.4 million related to NBIC’s accrued retirement plan, as well as the remaining estimated transaction costs of $4.3 million in connection with the Acquisition, for which a corresponding Income tax receivable of $1.6 million has been recognized.

j)	Reflect adjustments to eliminate NBIC’s historical equity and impacts of other adjustments resulting from the Acquisition.

Adjustments to Additional paid-in capital reflects (1) elimination of NBIC’s historical additional paid-in capital balance and (2) issuance of Heritage’s stock to NBIC stockholders as part of total consideration.


(in thousands)	As of 9/30/2017
Elimination of NBIC’s historical additional paid-in capital as of September 30, 2017	$	(123,070	)
Issuance of common stock (consideration transferred)		39,998

Net additional paid-in capital adjustments	$	(83,072	)

Adjustments to Accumulated other comprehensive loss reflect the elimination of NBIC’s historical accumulated other comprehensive loss balance for the nine months ended September 30, 2017.

Adjustments to Retained earnings reflect (1) elimination of NBIC’s historical retained earnings balance $10.2 million and (2) additional transaction costs, net of $2.7 million resulting from the Acquisition for the nine months ended September 30, 2017.

Note 5 – Subsequent Debt Financing Considerations

The Company held a Special Meeting of Stockholders on December 1, 2017, at which the Company’s stockholders’ approved, as required by Rule 312 of the New York Stock Exchange Listed Company Manual, on the issuance of the Company’s common stock upon conversion of the Convertible Notes. Pursuant to the approval, the Company will have the ability to settle the conversion option in shares of common stock, cash or a combination thereof. Upon conversion of the Convertible Notes, the Company intends to pay cash in respect of only the principal amount of the Convertible Notes being converted or (if lower) the conversion value thereof, and to settle any amounts in excess thereof in cash, shares of common stock or a combination thereof, at the Company’s election.

Prior to receipt of stockholder approval, the Company recorded the fair value of the derivative liability on its balance sheet at fair value with changes in the fair values reflected in the consolidated statement of operations. As of September 30, 2017, the derivative liability was marked to fair value with a corresponding adjustment in the condensed consolidated statement of operations. For the nine months ended September 30, 2017, the Company recognized a loss on change in the fair value totaling $6.9 million. The Company may recognize additional loss on a change in the fair value of the derivative liability as a result of fluctuations in the Company’s stock price between September 30, 2017 and December 1, 2017, the date on which Stockholder approval was obtained, and such additional loss may be material.

Beginning December 1, 2017, the conversion option of the Convertible Notes qualifies for equity classification and will no longer be accounted for as a separate derivative instrument liability in accordance with applicable U.S. GAAP guidance. The following table reflects the impact of the stockholder approval on the pro forma condensed combined balance sheet as of September 30, 2017, reclassifying the conversion option into shareholder equity.


ASSETS	Heritage Pro Forma (as stated)			Note 5 Adjustments			Heritage Pro Forma (as adjusted)
Fixed maturity securities, available for sale, at fair value		595,741						595,741
Equity securities, available for sale, at fair value		25,396						25,397

Total investments		621,137						621,138
Cash and cash equivalents		223,475						223,475
Restricted cash		19,853						19,853
Accrued Investment income		5,130						5,130
Premiums receivable, net		66,100						66,100
Reinsurance recoverable on paid and unpaid claims		474,454						474,454
Prepaid reinsurance premiums		291,685						291,685
Income taxes receivable		3,240						3,240
Deferred income taxes		—						—
Deferred policy acquisition costs, net		41,888						41,888
Property and equipment, net		19,028						19,028
Intangibles, net		104,207						104,207
Goodwill		155,526						155,526
Other assets		19,510						19,510

Total Assets		2,045,233			—			2,045,233

LIABILITIES AND STOCKHOLDERS’ EQUITY
Unpaid losses and loss adjustment expenses		577,067						577,067
Unearned premiums		489,336						489,336
Reinsurance payable		211,116						211,116
Note payable, net of issuance costs		188,634						188,634
Deferred income taxes		6,506						6,506
Advance premiums		27,519						27,519
Accrued compensation		9,924						9,924
Other liabilities		134,406			(23,721	)		110,685
Funds held by companies under reinsurance treaties		61,748						61,748

Total Liabilities		1,706,256			(23,721	)		1,682,535

Stockholders’ Equity
Common stock		4						4
Additional paid-in capital		249,336			23,721			273,057
Accumulated other comprehensive loss		(422	)					(422	)
Treasury stock		(87,185	)					(87,185	)
Retained earnings		177,244						177,244

Total Stockholders’ Equity		338,977			23,721			362,698

Total Liabilities and Stockholders’ Equity		2,045,233			—			2,045,233

HERITAGE INSURANCE HOLDINGS, INC.

Date: February 1, 2018

/s/ Bruce Lucas

Bruce Lucas

Chairman & Chief Executive Officer