HERITAGE INSURANCE HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our condensed
consolidated financial statements and related notes and other information
included elsewhere in this Quarterly Report on Form 10-Q and in our Annual
Report on Form 10-K for the year ended December 31, 2021 ("2021 Form 10-K").
Unless the context requires otherwise, as used in this Form 10-Q, the terms
"we", "us", "our", "the Company", "our Company", and similar references refer to
Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

Overview

We are a super-regional property and casualty insurance holding company that
primarily provides personal and commercial residential insurance products across
our multi-state footprint. We provide personal residential insurance in Alabama,
California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland,
Massachusetts, Mississippi, North Carolina, Rhode Island, South Carolina, New
Jersey, New York, North Carolina, and Virginia and commercial residential
insurance in Florida, New Jersey, and New York. As a vertically integrated
insurer, we control or manage substantially all aspects of risk management,
underwriting, claims processing and adjusting, actuarial rate making and
reserving, customer service, and distribution. Our financial strength ratings
are important to us in establishing our competitive position and can impact our
ability to write policies.


Trends

Inflation, Underwriting and Pricing

We continue to address rising reinsurance and loss costs in the property
insurance sector through continued implementation of increased rates, resulting
in an increase in the average premium per policy of 11.5% for the quarter ended
June 30, 2022 as compared to the prior year quarter. New rates, which are
subject to approval by our regulators, become effective when a policy is written
or renewed, and the premium is earned pro rata over the policy period of one
year. As a result of this timing, it takes an average of eighteen months for the
impact of a rate change to be fully recognized in our financial statements. For
that reason, we account for inflation in our rate indications and filings with
our regulators.

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

We continue to experience rising inflation in the form of increased labor and
material costs, which drive up claim costs throughout all states in which we
conduct business. Some of our markets are also seeing claim costs impacted by
litigated claims, which substantially increases loss costs. Our response to this
phenomenon is a combination of raising rates and reducing exposure, particularly
in the geographic regions which generate the highest number of litigated claims.
We initiated an exposure reduction plan for the tri-county area of Florida in
2016 due to claims abuse from water damage claims. We have since experienced a
claims surge throughout much of Florida, generated from assignment of benefits,
excessive roof claims, and unwarranted litigated claims which far exceeded
levels experienced in other states. Our exposure reduction plan then expanded to
the entire state of Florida. Our policy count and total insured value ("TIV") in
Florida declined by 22.2% and 13.5%%, respectively, since December 31, 2020.
While we see improvement in the geographic distribution of our business, which
is becoming more rate adequate, our Florida loss costs have continued to
increase from a combination of adverse weather and exacerbation of losses on
weather and other claims from the litigated claims environment. Recent
legislative changes have been made in Florida which we believe have helped to
make some progress toward reducing losses from abusive claim reporting
practices.

The following table, which provides policy count, in-force premium, and TIV,
demonstrates the results of our exposure management as relates to Florida.
Florida premiums-in-force declined 5.7% as of June 30, 2022 as compared to the
prior year quarter despite much larger reductions of our policies-in-force and
TIV, primarily due to rate increases. For states outside of Florida, the
premiums-in-force increased at a much larger rate than the increases in policies
in force and TIV, primarily due to rate increases.

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                                     At June 30,                   YOY % Change
                             2022                  2021
Policies in force:
Florida                          195,987               241,581             -18.9 %
Other States                     354,534               352,205               0.7 %
Total                            550,521               593,786              -7.3 %

Premiums in force:
Florida              $       564,814,121   $       598,869,936              -5.7 %
Other States                 648,621,713           574,888,835              12.8 %
Total                $     1,213,435,834   $     1,173,758,771               3.4 %

Total Insured Value:
Florida              $   103,200,520,845   $   121,256,973,834             -14.9 %
Other States             299,177,714,835       280,332,366,098               6.7 %
Total                $   402,378,235,680   $   401,589,339,932               0.2 %




Recent Developments

COVID-19 and Other Matters

We continue to monitor the short- and long-term impacts of the COVID-19 virus
and its variants. For the six months ended June 30, 2022, we saw negligible
impact to our business. As a residential property insurer, we view our business
as somewhat insulated because property owners and renters generally view our
products as a necessity. Most of our gross and net premiums written are from
renewals of expiring policies. New business, which accounts for a smaller
portion of our revenue, may be impacted if consumers are not buying as many new
homes in our geographies, but this could be partially or fully offset by
increased retention in our renewal portfolio. We could experience disruptions to
our independent agency distribution channel, which may have a negative impact on
our revenues and financial condition. Changes in the cost of materials for home
repairs resultant from COVID-19 related supply shortages can influence our loss
costs associated with claims.

While we acknowledge uncertainties associated with future economic conditions,
we do not expect a material impact to our business going forward relating to
COVID-19 other than supply chain related issues which may cause inflation to the
cost of building material. We will continue to monitor economic conditions and,
in the case of a prolonged economic slowdown as a result of COVID-19, will take
necessary actions to mitigate any negative impacts to our business, operations
or financial results.

Goodwill Impairment Charge

We evaluate goodwill and other intangible assets for impairment annually, or
whenever events or changes in circumstances indicate that it is likely that the
carrying amount of goodwill and other intangible assets may exceed the implied
fair value. Any impairment is charged to operations in the period that the
impairment is identified. The evaluation of goodwill impairment requires
considerable management judgment and includes a review of a variety of factors
as described below. Any adverse change in these factors could have a significant
impact on the recoverability of goodwill and could have a material impact on our
financial results. During the second quarter of 2022, we concluded it was
appropriate to perform an interim evaluation of goodwill for potential
impairment given a variety of market factors as described below. As a result of
the analysis, we impaired the entire amount of remaining goodwill, which reduced
our carrying value of goodwill from $92.0 million to $0 based on the following
factors: (i) disruptions in the equity markets, specifically for property and
casualty insurance companies, largely due to recent weather-related catastrophe
events; (ii) elevated loss ratios for property insurers in our markets; and
(iii) trading of our stock below book value. These factors reduced our
previously modeled fair value of the Company and resulted in a $92.0 million
non-cash goodwill impairment charge, most of which is not tax deductible.

Second Quarter 2022 Financial Results

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

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statements. This discussion should be read in conjunction with our consolidated
financial statements and the related notes that appear elsewhere in this
document.

•

Net loss of $87.9 million, or $3.32 per diluted share, down from a net loss of
$4.0 million or $0.14 per diluted share in the prior year quarter, with the
reduction stemming from a net $90.8 million, non-cash goodwill impairment charge
contributing a $3.43 loss per share, partly offset by underwriting income
generated in the quarter.

•

Book value per common share of $6.80, on June 30, 2022 was down 47.0% from
$12.82 on December 31, 2021, driven by the goodwill impairment charge, the
increase in accumulated other comprehensive loss, resultant from unrealized
losses on the Company's available-for-sale fixed income securities portfolio,
and underwriting losses from the first quarter of 2022. The unrealized losses
were unrelated to credit risk but were due to the sharp decline in bond prices
during 2022 caused by a higher interest rate environment.

•

Net combined ratio of 99.4%, down 5.8 points from 105.2% in the prior year
quarter, driven by lower net loss and expense ratios described below.

•

Net loss ratio of 64.1%, 4.7 points lower from the prior year quarter amount of
68.8%, driven by higher net earned premium.

•

Net current accident year weather losses of $38.1 million, up 7.3% from $35.5
million in the prior year quarter. Current accident year weather losses include
$32.1 million of net current accident quarter catastrophe losses, up from $24.5
million in the prior year quarter, and $6.0 million of other weather losses,
down from $11.0 million in the prior year quarter.

•

Net expense ratio of 35.3%, down 1.1 points from the prior year quarter amount
of 36.4%.

•

Exposure management highlights:

o

Premiums-in-force of $1.2 billion, up 3.4% year-over-year, with the increase
driven by higher average premium per policy of 11.5% over the prior year
quarter.

o
Policies-in-force declined 7.4%, driven by a planned reduction of approximately
46,000 property insurance policies in the state of Florida, a strategy designed
to improve underwriting results.

o
Our efforts to increasingly diversify business outside Florida and into markets
in the Northeast, Mid-Atlantic, West, and Pacific regions have resulted in the
following reductions in Florida: an 18.9% reduction in policies-in-force, and a
14.9% reduction of Total Insured Value ("TIV") resulting in only a 5.7%
reduction in premiums-in-force year-over-year, driven by higher policy rates.

o

Overall TIV increased by 0.2%, despite the total reduction in policy count of
approximately 43,000, due to higher average TIV for most states reflecting
continued selective underwriting.

•

Gross premiums earned of $296.2 million, up 3.7% from $285.6 million in the
prior year quarter, reflecting higher gross premiums written over preceding last
twelve months driven by the higher average premium per policy.

•

Gross premiums written of $365.3 million, up 8.2% from $337.7 million the prior
year quarter, driven by an increase in average premium per policy of 11.5%.
Higher rates resulted in a 4.6% gross written premium increase in Florida, and a
12.1% increase in gross written premium in other regions, which also experienced
a moderate increase in policy count.

•

Total capital returned to shareholders of $1.6 million, reflecting $0.06 per
share regular quarterly dividend.
•
Continued execution of our diversification strategy, with 74.4% of TIV outside
of Florida, up from 69.8% as of second quarter 2021.

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Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

Revenue

                                             For the Three Months Ended June 30,
(Unaudited)                            2022           2021        $ Change       % Change
                                                        (in thousands)
REVENUE:
Gross premiums written              $  365,284     $  337,700     $  27,584            8.2 %
Change in gross unearned premiums      (69,073 )      (52,054 )     (17,019 )         32.7 %
Gross premiums earned                  296,211        285,646        10,565            3.7 %
Ceded premiums earned                 (137,940 )     (139,147 )       1,207           (0.9 )%
Net premiums earned                    158,271        146,499        11,772            8.0 %
Net investment income                    2,163            956         1,207          126.3 %
Net realized losses                       (102 )       (1,000 )         898          (89.8 )%
Other revenue                            3,438          3,742          (304 )         (8.1 )%
Total revenue                       $  163,770     $  150,197     $  13,573            9.0 %




Total revenue

Total revenue was $163.8 million in second quarter 2022, up 9.0% from $150.2
million in the prior year quarter. The increase primarily stems from higher net
premiums earned and an increase in investment income, as described in detail
below.

Gross premiums written

Gross premiums written were $365.3 million, up 8.2% from $337.7 million the
prior year quarter, reflecting a 4.6% growth in Florida and 12.1% growth in
other states, primarily from increased rates as well as a small increase in
policy count in states outside of Florida. Rate increases continued to
meaningfully benefit written premiums throughout the book of business.

Premiums-in-force were $1.2 billion in second quarter 2022, up 3.4% from second
quarter 2021, while policies-in-force were down 7.3%, with the difference
largely stemming from rate increases. The reduction in policies-in-force from
the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $296.2 million in second quarter 2022, up 3.7% from
$285.6 million in the prior year quarter. The increase reflects higher gross
premiums written over the last twelve months, which is primarily related to
higher rates on a smaller book of business based on policy count.

Ceded premiums earned

Ceded premiums earned were $137.9 million in second quarter 2022, down 0.9% from
$139.1 million in the prior year quarter. The decrease is driven by higher ceded
premium for the second quarter of 2021 associated with our severe convective
storm reinsurance contract, partly offset by higher ceded premium on our net
quota share reinsurance program, which is driven by growth in our northeast
business, and higher ceded premium on our June 1, 2022 catastrophe excess of
loss program driven by higher TIV and higher reinsurance rates due to current
market conditions.

Net premiums earned

Net premiums earned were $158.3 million in second quarter 2022, up 8.0% from
$146.5 million in the prior year quarter. The increase primarily stems from
growth in gross premiums earned outpacing the increase in ceded premiums earned,
as described above.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized
gains on equity securities, was $2.1 million in second quarter 2022, compared to
a net investment loss of $44,000 in the prior year quarter. The increase is
driven by a realized loss recognized on an investment held outside our managed
portfolio in the prior year quarter as well as higher balances in our fixed
income portfolio than the prior year quarter.

Other revenue

Other revenue was $3.4 million in second quarter 2022, down by 8.1% from $3.7
million in the prior year quarter, driven primarily by a decline in policy fee
income associated with the reduction of policies in force.


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                                               For the Three Months Ended June 30,
(Unaudited)                              2022          2021        $ Change       % Change
OPERATING EXPENSES:                                      (in thousands)

Losses and loss adjustment expenses $ 101,522 $ 100,834 $ 688

            0.7 %
Policy acquisition costs                  38,375        37,833           542            1.4 %
General and administrative expenses       17,466        15,520         1,946           12.5 %
Goodwill impairment                       91,959             -        91,959             NM
Total operating expenses                 249,322       154,187        95,135           61.7 %


NM -Not meaningful

Total operating expenses

Total operating expenses were up $95.1 million, or 61.7% in the second quarter
2022, primarily due to the previously mentioned $92.0 million goodwill
impairment charge taken in the quarter.

Losses and loss adjustment expenses

Losses and loss adjustment expenses ("LAE") were $101.5 million in second
quarter 2022, slightly up from $100.8 million in the prior year quarter. Net
current accident year weather losses include $38.1 million, up 7.3% from $35.5
million in the prior year quarter. Current accident year weather losses include
$32.1 million of net current accident quarter catastrophe losses, up from $24.5
million in the prior year quarter, and $6.0 million of other weather losses,
down from $11.0 million in the prior year quarter. We experienced a 4.0% decline
in attritional losses from the prior year quarter, despite the increase in gross
earned premiums.

Policy acquisition costs

Policy acquisition costs were $38.4 million in second quarter 2022, up 1.4% from
$37.8 million in the prior year quarter. The increase is primarily attributable
to growth in gross premiums written.

General and administrative expenses

General and administrative expenses were $17.5 million in second quarter 2022,
up 12.5% from $15.5 million in the prior year quarter. The increase is primarily
attributable to a state tax credit of $1.5 million recorded in the prior year
quarter.

Goodwill impairment

As a result of our analysis, at June 30, 2022 we impaired the entire amount of
remaining goodwill, reducing our carrying value of goodwill from $92.0 million
to $0. See the section titled "Goodwill Impairment Charge" above for more detail
on our goodwill impairment charge.

                                                      For the Three Months Ended June 30,
(Unaudited)                                2022                2021            $ Change        % Change
                                               (in thousands, except per share and share amounts)
Operating income (loss)                $     (85,552 )     $     (3,990 )     $  (81,562 )             NM
Interest expense, net                          1,751              1,925             (174 )           (9.0 )%
Income (loss) before income taxes            (87,303 )           (5,915 )        (81,388 )             NM
Provision (benefit) for income taxes             563             (1,965 )          2,528           (128.7 )%
Net income (loss)                      $     (87,866 )     $     (3,950 )     $  (83,916 )             NM

Basic net income (loss) per share $ (3.32 ) $ (0.14 )

   $    (3.18 )             NM

Diluted net income (loss) per share $ (3.32 ) $ (0.14 )

  $    (3.18 )             NM


NM -Not meaningful

Net loss

Second quarter 2022 net loss was $87.9 million ($3.32 loss per share), down from
net loss of $4.0 million ($0.14 loss per share) in the prior year quarter, with
the reduction stemming primarily from a $90.8 million (net of a $1.2 million tax
deductible portion) non-cash goodwill impairment charge (contributing a $3.43
loss per share), partly offset by underwriting income for the quarter.

Interest expense, net

Net interest expense was $1.8 million in the second quarter of 2022, down due to
a reduction in debt discount associated with the repurchase of convertible notes
in the first quarter of 2022.

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Provision (benefit) for income taxes

Provision for income taxes was $563,000 in second quarter 2022 compared to a
benefit for income taxes of $2.0 million in the prior year quarter. The
effective tax rate in second quarter 2022 was impacted by the mostly
non-deductible goodwill impairment charge described above. The impact of
permanent tax differences on projected results of operations for the calendar
year impacts the effective tax rate, which can also fluctuate throughout the
year as estimates used in the quarterly tax provision are updated with
additional information.

Ratios


                            For the Three Months Ended June 30,
(Unaudited)                   2022                      2021
 Ceded premium ratio                46.6 %                     48.7 %

Net loss and LAE ratio              64.1 %                     68.8 %
Net expense ratio                   35.3 %                     36.4 %
Net combined ratio                  99.4 %                    105.2 %


Net combined ratio

The net combined ratio was 99.4% in second quarter 2022, down 5.8 points from
105.2% in the prior year quarter. The decrease stems from improvements in all
three of our key operating ratios, resultant from a focus on rate adequacy and
effective exposure management, as described above.

Ceded premium ratio

The ceded premium ratio was 46.6% in second quarter 2022, down 2.1 points from
48.7% in the prior year quarter, reflecting the growth in gross premiums earned
outpacing the growth in ceded premiums earned described above.

Net loss and LAE ratio

The net loss and LAE ratio was 64.1% in second quarter 2022, down 4.7 points
from 68.8% in the prior year quarter, driven by relatively flat losses and an
increase in net premiums earned as described above.

Net expense ratio

The net expense ratio was 35.3% in second quarter 2022, down 1.1 point from
36.4% in the prior year quarter, driven by a lower PAC ratio.

Results of Operations

Comparison of the Six Months Ended June 30, 2022 and 2021

                                              For the Six Months Ended June 30,
                                       2022           2021        $ Change       % Change
(Unaudited)                                             (in thousands)
REVENUE:
Gross premiums written              $  648,480     $  611,881     $  36,599            6.0 %
Change in gross unearned premiums      (64,901 )      (55,824 )      (9,077 )         16.3 %
Gross premiums earned                  583,579        556,057        27,522            4.9 %
Ceded premiums earned                 (272,379 )     (267,359 )      (5,020 )          1.9 %
Net premiums earned                    311,200        288,698        22,502            7.8 %
Net investment income                    4,163          2,249         1,914           85.1 %
Net realized losses                       (118 )         (920 )         802          (87.2 )%
Other revenue                            7,133          7,414          (281 )         (3.8 )%
Total revenue                       $  322,378     $  297,441     $  24,938            8.4 %




Total revenue

Total revenue was $322.4 million for the six months ended June 30, 2022, up 8.4%
from $297.4 million in the prior year period. The increase primarily stems from
higher net premiums earned and investment income, as described below.

Gross premiums written

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Gross premiums written were $648.5 million for the six months ended June 30.
2022, up 6.0% from $611.9 million in the prior year period. We experienced
growth of 11.8% outside of Florida and 0.7% growth in Florida. Growth throughout
our book of business was largely driven by rate increases resulting in a higher
average premium per policy as described above.

Premiums-in-force were $1.2 billion at second quarter 2022, up 3.4% from second
quarter 2021, while policies-in-force were down 7.3%, with the difference
largely stemming from rate increases. The reduction in policies in force from
the second quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $583.6 million for the six months ended June 30.
2022, up 4.9% from $556.1 million in the prior year period. The increase
reflects higher gross premiums written over the preceding twelve months.

Ceded premiums earned

Ceded premiums earned were $272.4 million for the six months ended June 30,
2022, up 1.9% from $267.4 million in the prior year period. The increase is
attributable to an increase in the cost of our catastrophe excess of loss
reinsurance program driven by an increase in TIV for the respective reinsurance
contract periods and higher rate-on-line, as well as higher premium ceded under
our net quota share program driven by growth in our northeast business, partly
offset by higher premium for the six months ended June 30, 2021 for our severe
convective storm reinsurance program.

Net premiums earned

Net premiums earned were $311.2 million for the six months ended June 30, 2022,
up 7.8% from $288.7 million in the prior year period. The increase primarily
stems from growth in gross premiums earned outpacing the increase in ceded
premiums earned, as described above.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized
gains on equity securities, was $4.0 million for the six months ended June 30,
2022, compared to $1.3 million in the prior year period. The increase is
primarily due to higher balances in our fixed income portfolio than the prior
six-month period, coupled with a realized loss recognized on an investment held
outside our managed portfolio in the prior year quarter.

Other revenue

Other revenue was $7.1 million for the six months ended June 30, 2022, down 3.8%
from $7.4 million in the prior year period, driven primarily by a decline in
policy fee income associated with the reduction of policies in force.

                                               For the Six Months Ended June 30,
(Unaudited)                             2022          2021        $ Change       % Change
OPERATING EXPENSES:                                      (in thousands)

Losses and loss adjustment expenses $ 241,560 $ 198,743 $ 42,817

           21.5 %
Policy acquisition costs                 76,632        73,199         3,433            4.7 %

General and administrative expenses 37,190 35,320 1,870

           5.3 %
Goodwill impairment                      91,959             -        91,959             NM
Total operating expenses                447,341       307,262       140,079           45.6 %


NM -Not meaningful

Total operating expenses

Total operating expenses were $447.3 million for the six months ended June 30,
2022, up 45.6% from $307.3 million in the prior year period, primarily due to
the previously mentioned $92.0 million goodwill impairment charge taken in the
quarter, and a $42.8 million increase in losses and loss adjustment expenses
detailed below.

Losses and loss adjustment expenses

Losses and LAE were $241.6 million for the six months ended June 30, 2022, up
21.5% from $198.7 million in the prior year period. Net current accident year
weather losses include $101.9 million, up 52.3% from $66.9 million in the prior
year period. Current accident year weather losses include $77.2 million of net
current accident year catastrophe losses, up from $39.8 million in the prior
year period, and $24.7 million of other weather losses, down from $27.1 million
in the prior year period. We experienced a 2.3% increase in attritional losses
from the prior year period.

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Policy acquisition costs

Policy acquisition costs were $76.6 million for the six months ended June 30,
2022, up 4.7% from $73.2 million in the prior year period. The increase is
primarily attributable to growth in gross premiums written.

General and administrative expenses

General and administrative expenses were $37.2 million for the six months ended
June 30, 2022, up 5.3% from $35.3 million in the prior year period. The increase
is primarily attributable to a $1.5 million state tax credit recorded in the
prior year period.

Goodwill impairment

As a result of our analysis on June 30, 2022, we impaired the entire amount of
remaining goodwill, reducing our carrying value of goodwill from $92.0 million
to $0. See the section titled "Goodwill Impairment Charge" above for more detail
on our goodwill impairment charge.

                                                      For the Six Months Ended June 30,
(Unaudited)                                2022                2021           $ Change       % Change
                                              (in thousands, except per share and share amounts)
Operating income (loss)                $    (124,963 )     $     (9,821 )    $ (115,142 )            NM
Interest expense, net                          3,723              3,803             (80 )          (2.1 )%
Income (loss) before income taxes           (128,686 )          (13,624 )      (115,062 )         844.5 %
Provision (benefit) for income taxes         (10,061 )           (4,527 )        (5,534 )         122.2 %
Net income (loss)                      $    (118,625 )     $     (9,097 )    $ (109,528 )            NM

Basic net income (loss) per share $ (4.46 ) $ (0.33 )

  $    (4.13 )            NM

Diluted net income (loss) per share $ (4.46 ) $ (0.33 )

 $    (4.13 )            NM


NM -Not meaningful

Net loss

Net loss for the six months ended June 30, 2022 was $118.6 million ($4.46 loss
per share), compared to a net loss of $9.1 million ($0.33 loss per share) in the
prior year period. The year-over-year change primarily stems from a $90.8
million (net of a $1.2 million tax deductible portion) non-cash goodwill
impairment charge (contributing a $3.41 loss per share), coupled with an
underwriting loss generated for the six-month period driven by higher weather
losses over the prior period, as described above.

Interest expense, net

Net interest expense was $3.7 million for the six months ended June 30, 2022,
slightly down from the prior year period.

Provision (benefit) for income taxes

Benefit for income taxes was $10.1 million for the six months ended June 30,
2022 compared to $4.5 million in the prior year period. The effective tax rate
was 7.8% for the six months ended June 30, 2022 compared to 33.2% for the prior
year period. The effective tax rate for the six months ended June 30, 2022 was
impacted by the mostly non-deductible goodwill impairment charge as described
above. The impact of permanent tax differences on projected results of
operations for the calendar year impacts the effective tax rate, which can also
fluctuate throughout the year as estimates used in the quarterly tax provision
are updated with additional information.

Ratios

                             For the Six Months Ended June 30,
(Unaudited)                    2022                     2021
 Ceded premium ratio                 46.7 %                   48.1 %

Net loss and LAE ratio               77.6 %                   68.8 %
Net expense ratio                    36.6 %                   37.6 %
Net combined ratio                  114.2 %                  106.4 %




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Net combined ratio

The net combined ratio was 114.2% for the six-month period ended June 30, 2022,
up 7.8 points from 106.4% in the prior year period. The increase primarily stems
from a higher net loss and LAE ratio, partly offset by a decrease in the net
expense ratio.

Ceded premium ratio

The ceded premium ratio was 46.7% for the six-month period ended June 30, 2022,
down 1.4 points from 48.1% in the prior year period, reflecting the growth in
gross premiums earned outpacing the growth in ceded premiums earned as described
above.

Net loss and LAE ratio

The net loss and LAE ratio was 77.6% for the six-month period ended June 30,
2022, up 8.8 points from 68.8% in the prior year period, driven by higher
weather losses compared to the prior year period, which was partly offset by the
7.8% increase in net premiums earned.

Net expense ratio

The net expense ratio was 36.6% for the six-month period ended June 30, 2022,
down 1.0 point from 37.6% in the prior year period, driven by a lower PAC ratio.

Liquidity and Capital Resources

Our principal sources of liquidity include cash flows generated from operations,
existing cash and cash equivalents, our marketable securities balances and
borrowings available under our credit facilities. As of June 30, 2022, we had
$290.9 million of cash and cash equivalents and $654.3 million in investments,
compared to $359.3 million and $694.7 million, respectively, as of December 31,
2021. The decrease in cash and cash equivalents was primarily due to the timing
of reinsurance payments for our catastrophe excess of loss ("XOL") program as
well as timing of reinsurance recoveries. The decrease in investments is due to
the unrealized losses on the Company's available-for-sale fixed income
securities portfolio. The unrealized losses resulted from the sharp decline in
bond prices during 2022 as a result of the higher interest rate environment. The
Company's fixed income portfolio average credit rating is A+ with a duration of
3.6 years at June 30, 2022.

We generally hold substantial cash balances to meet seasonal liquidity needs
including amounts to pay quarterly reinsurance installments as well as meet the
collateral requirements of Osprey, our captive reinsurance company, which is
required to maintain a collateral trust account equal to the risk that it
assumes from our insurance company affiliates.

We believe that our sources of liquidity are adequate to meet our cash
requirements for at least the next twelve months.

We may continue to pursue the acquisition of complementary businesses and make
strategic investments. We may increase capital expenditures consistent with our
investment plans and anticipated growth strategy. Cash and cash equivalents may
not be sufficient to fund such expenditures. As such, in addition to the use of
our existing Credit Facilities, we may need to utilize additional debt to secure
funds for such purposes.

Cash Flows

                                                For the Six Months Ended June 30,
                                           2022                2021              Change
                                                          (in thousands)
Net cash provided by (used in):
Operating activities                   $     (47,535 )     $     104,402     $     (151,937 )
Investing activities                         (14,046 )           (92,912 )           78,866
Financing activities                          (6,823 )            (5,503 )           (1,320 )
Net (decrease) increase in cash and
cash equivalents                       $     (68,404 )     $       5,987     $      (74,391 )




Operating Activities

Net cash used in operating activities was $47.5 million for the six months ended
June 30, 2022 compared to net cash provided by operating activities of $104.4
million for the comparable period in 2021. The decrease in cash from operating
activities relates primarily to timing of cash flows associated with claim and
reinsurance payments as well as reinsurance reimbursements during the first six
months of 2022 compared to the first six months of 2021.

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Investing Activities

Net cash used in investing activities for the six months ended June 30, 2022 was
$14.0 million as compared to net cash used in investing activities of $92.9
million for the comparable period in 2021. The change in cash used in investing
activities relates primarily to allocations of funds for investment in each
period. Strategic sales of investments to yield realized gains in 2020 produced
proceeds which were re-invested in 2021, driving up the cash used for investing
activities.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2022 was
$6.8 million, as compared to cash used in financing activities of $5.5 million
for the comparable period in 2021. The increase in cash used for financing
activities was driven by our $15 million draw from our Revolving Credit Facility
(defined below) to purchase and retire $11.7 million of Convertible Notes, and
our purchase of $5 million of treasury stock during the first half of 2022.

Credit Facilities

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

The Credit Agreement, as amended, provides for (1) a five-year senior secured
term loan facility in an aggregate principal amount of $75 million (the "Term
Loan Facility") and (2) a five-year senior secured revolving credit facility in
an aggregate principal amount of $75 million (inclusive of a $5 million sublimit
for the issuance of letters of credit and a $10 million sublimit for swingline
loans) (the "Revolving Credit Facility" and together with the Term Loan
Facility, the "Credit Facilities").

Term Loan Facility. The principal amount of the Term Loan Facility amortizes in
quarterly installments, which began with the close of the fiscal quarter ending
March 31, 2019, in an amount equal to $1.9 million per quarter, payable
quarterly, decreasing to $875,000 per quarter commencing with the quarter ending
December 31, 2021 and increasing to $1.3 million per quarter commencing with the
quarter ending December 31, 2024, with the remaining balance payable at
maturity. The Term Loan Facility matures on July 27, 2026. As of June 30, 2022,
there was $67.4 million in aggregate principal outstanding on the Term Loan
Facility.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings
of up to $75 million inclusive of a $5 million sublimit for the issuance of
letters of credit and a $10 million sublimit for swingline loans. As of June 30,
2022, we had $15 million in borrowings and a $7.5 million letters of credit
outstanding under the Revolving Credit Facility.

At our option, borrowings under the Credit Facilities bear interest at rates
equal to either (1) a rate determined by reference to LIBOR (based on one, two,
three or six-month interest periods), adjusted for statutory reserve
requirements, plus an applicable margin or (2) a base rate determined by
reference to the greatest of (a) the "prime rate" of Regions Bank, (b) the
federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an
interest period of one month plus 1.00%, plus an applicable margin. The Credit
Agreement provides for mechanisms for the transition away from LIBOR as a
benchmark interest rate and replacement of LIBOR with an alternative benchmark
rate.

The applicable margin for loans under the Credit Facilities varies from 2.5% per
annum to 3.0% per annum (for LIBOR loans) and 1.5% to 2.0% per annum (for base
rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1 to
greater than 2.25-to-1. Interest payments with respect to the Credit Facilities
are required either on a quarterly basis (for base rate loans) or at the end of
each interest period (for LIBOR loans) or, if the duration of the applicable
interest period exceeds three months, then every three months. As of June 30,
2022, the borrowing under our Credit Facilities were accruing interest at a rate
of 3.5625 % per annum.

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

We may prepay the loans under the Credit Facilities, in whole or in part, at any
time without premium or penalty, subject to certain conditions including minimum
amounts and reimbursement of certain costs in the case of prepayments of LIBOR
loans. In addition, we are required to prepay the loan under the Term Loan
Facility with the proceeds from certain financing transactions, involuntary
dispositions or asset sales (subject, in the case of asset sales, to
reinvestment rights).

All obligations under the Credit Facilities are or will be guaranteed by each
existing and future direct and indirect wholly owned domestic subsidiary of the
Company, other than all of the Company's current and future regulated insurance
subsidiaries (collectively, the "Guarantors").

The Company and the Guarantors are party to a Pledge and Security Agreement, (as
amended from time to time the "Security Agreement"), in favor of Regions Bank,
as collateral agent. Pursuant to the Security Agreement, amounts borrowed under
the Credit Facilities are secured on a first priority basis by a perfected
security interest in substantially all of the present and future assets of the

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Company and each Guarantor (subject to certain exceptions), including all of the
capital stock of the Company's domestic subsidiaries, other than its regulated
insurance subsidiaries.

The Credit Agreement contains, among other things, covenants, representations
and warranties and events of default customary for facilities of this type. The
Company is required to maintain, as of each fiscal quarter (1) a maximum
consolidated leverage ratio of 2.50 to 1.00 (2) a minimum consolidated fixed
charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth
for the Company and its subsidiaries. Events of default include, among other
events, (i) nonpayment of principal, interest, fees or other amounts; (ii)
failure to perform or observe certain covenants set forth in the Credit
Agreement; (iii) breach of any representation or warranty; (iv) cross-default to
other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary
judgment defaults and material nonmonetary judgment defaults; (vii) customary
ERISA defaults; (viii) a change of control of the Company; and (ix) failure to
maintain specified catastrophe retentions in each of the Company's regulated
insurance subsidiaries.

Convertible Notes

On August 10, 2017, the Company and Heritage MGA, LLC (the "Notes Guarantor")
entered into a purchase agreement (the "Purchase Agreement") with Citigroup
Global Markets Inc., as the initial purchaser (the "Initial Purchaser"),
pursuant to which the Company agreed to issue and sell, and the Initial
Purchaser agreed to purchase, $125.0 million aggregate principal amount of the
Company's 5.875% Convertible Senior Notes due 2037 (the "Convertible Notes") in
a private placement transaction pursuant to Rule 144A under the Securities Act,
as amended (the "Securities Act"). The Purchase Agreement contained customary
representations, warranties and agreements of the Company and the Notes
Guarantor and customary conditions to closing, indemnification rights and
obligations of the parties and termination provisions. The net proceeds from the
offering of the Convertible Notes, after deducting discounts and commissions and
estimated offering expenses payable by the Company, were approximately $120.5
million. The offering of the Convertible Notes was completed on August 16, 2017.

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

The Convertible Notes bear interest at a rate of 5.875% per year. Interest is
payable semi-annually in arrears, on February 1 and August 1 of each year. The
Convertible Notes are senior unsecured obligations of the Company that rank
senior in right of payment to the Company's future indebtedness that is
expressly subordinated in right of payment to the Convertible Notes; equal in
right of payment to the Company's unsecured indebtedness that is not so
subordinated; effectively junior to any of the Company's secured indebtedness to
the extent of the value of the assets securing such indebtedness; and
structurally junior to all indebtedness or other liabilities incurred by the
Company's subsidiaries other than the Notes Guarantor, which fully and
unconditionally guarantee the Convertible Notes on a senior unsecured basis.

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

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

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

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

Upon the occurrence of a fundamental change (as defined in the Convertible Note
Indenture) (but not, at the Company's election, a public acquirer change of
control (as defined in the Convertible Note Indenture), holders of the
Convertible Notes may

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require the Company to repurchase for cash all or a portion of their Convertible
Notes at a fundamental change repurchase price equal to 100% of the principal
amount of the Convertible Notes to be repurchased, plus accrued and unpaid
interest to, but excluding, the fundamental change repurchase date.

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

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

In January 2022, the Company repurchased $11.7 million principal amount of
outstanding Convertible Notes. As of June 30, 2022, there was $11.7 million
principal amount of outstanding Convertible Notes.

As discussed above, holders of the Convertible Notes issued by the Company had
an optional put right, pursuant to the indenture governing the Convertible
Notes, to require the Company to repurchase the aggregate principal amount of
Convertible Notes that are validly tendered. The Company has received notice
from the Depositary for the Convertible Notes that, on July 29, 2022,
$10,895,000 aggregate principal amount of the Convertible Notes has been validly
tendered in accordance with the terms of the indenture and the Company's notice
with respect to the optional put right of the Convertible Notes, and the Company
has requested that the trustee cancel the Convertible Notes tendered. The
outstanding balance as of June 30, 2022 of non-affiliated Notes was $11.8
million. On August 1, 2022, the Company made payments for the principal amount
of the Convertible Notes tendered and unpaid interest in the aggregate amounts
of $10.9 million and $320,041, respectively. The Company has drawn $10.0 million
from its revolver to replenish the cash used to pay the $10.9 million for the
purchase of the tendered Convertible Notes.

FHLB Loan Agreements

In December 2018, a subsidiary of the Company pledged U.S. government and agency
fixed maturity securities with an estimated fair value of $31.0 million as
collateral and received $19.2 million in a cash loan under an advance agreement
with the FHLB Atlanta. The loan originated on December 12, 2018 and bears a
fixed interest rate of 3.094% with interest payments due quarterly commencing in
March 2019. The principal balance on the loan has a maturity date of December
13, 2023. In connection with the agreement, the subsidiary became a member of
FHLB. Membership in the FHLB required an investment in FHLB's common stock which
was purchased on December 31, 2018 and valued at $1.4 million. The subsidiary is
permitted to withdraw any portion of the pledged collateral over the minimum
collateral requirement at any time, other than in the event of a default by the
subsidiary. The proceeds from the loan was used to prepay the Company's Senior
Secured Notes due 2023 in 2018.

Critical Accounting Policies and Estimates

When we prepare our condensed consolidated financial statements and accompanying
notes in conformity with U.S. generally accepted accounting principles (GAAP),
we must make estimates and assumptions about future events that affect the
amounts we report. Certain of these estimates result from judgments that can be
subjective and complex. As a result of that subjectivity and complexity, and
because we continuously evaluate these estimates and assumptions based on a
variety of factors, actual results could materially differ from our estimates
and assumptions if changes in one or more factors require us to make accounting
adjustments. During the six months ended June 30, 2022, we reassessed our
critical accounting policies and estimates as disclosed within our 2021 Annual
Report on Form 10-K.

Seasonality of our Business

Our insurance business is seasonal; hurricanes typically occur during the period
from June 1 through November 30 and winter storms generally impact the first and
fourth quarters each year. With our catastrophe reinsurance program effective on
June 1 each year, any variation in the cost of our reinsurance, whether due to
changes to reinsurance rates or changes in the total insured value of our policy
base will occur and be reflected in our financial results beginning June 1 of
each year, subject to certain adjustments.

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Recent Accounting Pronouncements

The information set forth under Note 1 to the condensed consolidated financial
statements under the caption "Basis of Presentation and Significant Accounting
Policies" is incorporated herein by reference. We do not expect any recently
issued accounting pronouncements to have a material effect on our condensed
consolidated financial statements.