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, New Jersey, New York, North Carolina, Rhode Island,
South Carolina, and Virginia and commercial residential insurance in Florida,
New Jersey, and New York. We provide personal residential insurance in Florida
on both an admitted and non-admitted basis and in California on a non-admitted
basis. As a vertically integrated insurer, we control or manage substantially
all aspects of risk management, underwriting, claims processing and adjusting,
actuarial rate making and reserving, customer service, and distribution. Our
financial strength ratings are important to us in establishing our competitive
position and can impact our ability to write policies.

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 13.6% for the quarter ended
September 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 can take up to twenty-four months for the
complete impact of a rate change to be fully earned in our financial statements.
For that reason, we account for inflation in our rate indications and filings
with our regulators.

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

We continue to experience rising inflation in the form of increased labor and
material costs, which drive up claim costs throughout all states in which we
conduct business. Our Florida personal lines market is also seeing claim costs
impacted by litigated claims, which substantially increases loss costs thereby
driving up rates for the insurance buying public. Our response to this
phenomenon is a combination of raising rates and reducing exposure. Since that
time the claims abuse has extended throughout much of Florida, generated from
assignment of benefits, excessive roof claims, and unwarranted litigated claims
which far exceeds levels experienced in other states. Correspondingly, our
exposure reduction plan expanded to personal lines business throughout the state
of Florida.

Our industry experienced higher reinsurance costs and more constrained
availability for catastrophe excess of loss reinsurance in the Spring 2022
renewals. We anticipate continued cost increases and availability constraints
for the 2023 renewal season. As described herein, we are carefully managing
exposure by reducing new business written in certain geographies, non-renewing
unprofitable business in compliance with regulatory requirements, increasing
rates, and narrowing our underwriting requirements.

While we see improvement in the geographic distribution of our business, which
is becoming more rate adequate, our Florida loss costs have continued to
increase from a combination of adverse weather and exacerbation of losses on
weather and other claims resultant from the litigated claims environment. Recent
legislative changes have been made in Florida in each of the last three years,
which we believe is making some progress toward reducing losses from abusive
claim reporting practices.

The table below shows reductions in Florida policy count and total insured value
("TIV") of 17.6% and 10.3%, respectively, from the prior year quarter. During
this period, Florida premium in force declined by only 2.6% as rate increases
dampened the impact of the reduction in policy count. For markets 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 September 30,
                             2022                  2021             % Change
Policies in force:
Florida                          188,383               228,572          -17.6 %
Other States                     352,989               352,714            0.1 %
Total                            541,372               581,286           -6.9 %

Premiums in force:
Florida              $       569,589,537   $       584,994,491           -2.6 %
Other States                 672,812,875           589,527,230           14.1 %
Total                $     1,242,402,412   $     1,174,521,721            5.8 %

Total Insured Value:

Florida              $   102,784,056,201   $   114,537,338,974          -10.3 %
Other States             304,657,398,158       284,498,624,168            7.1 %
Total                $   407,441,454,359   $   399,035,963,142            2.1 %

Strategic Profitability Initiatives

The following provides an update to the Company's strategic initiatives that we
expect will enable Heritage to achieve consistent long-term quarterly earnings
and drive shareholder value. The Supplemental Information table included in this
earnings release demonstrates progress made since third quarter 2021.

•

Generate underwriting profit though rate adequacy and more selective
underwriting.
o
Premiums-in-force of $1.24 billion are up 5.8% from the prior year quarter,
while policy count is down 6.9%, driven by higher rates.
o
Average premium per policy throughout the book increased 13.6% over the prior
year quarter.
o
Continued focus on tightening underwriting criteria while also restricting new
business written in over-concentrated markets or products.

•

Optimize capital allocation toward products and geographies that maximize
long-term returns.
o
Reduction of policy count for Florida personal lines product is a key focus and
will continue if meaningful legislation to reduce abusive claims practices does
not occur. Florida PRES policies in force intentionally declined by 18.8% as
compared to the prior year period.
o
Continued offering of Florida commercial lines product with 18.2% growth in
annual premium while value TIV increased only 4.2%.

•

Improve portfolio diversity.
o
Diversification efforts led to a premium in-force growth of 14.1% in other
States other than Florida.
o
Overall premium-in-force increase of 5.8%, despite an 8.5% reduction in Florida
admitted personal lines business.
o
TIV in other states improved to 74.8%, compared to 71.3% as of the third quarter
of 2021.

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market
conditions on our business. As a result of general supply chain disruptions and
inflationary pressures, we have experienced, and may continue to experience,
increased cost of materials and labor needed for repairs and to otherwise
remediate claims.

Goodwill Impairment Charge

We evaluate goodwill and other intangible assets for impairment annually, or
whenever events or changes in circumstances indicate that it is likely that the
carrying amount of goodwill and other intangible assets may exceed the implied
fair value. Any impairment is charged to operations in the period that the
impairment is identified. The evaluation of goodwill impairment requires
considerable management judgment and includes a review of a variety of factors
as described 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

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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.

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

•

Third quarter net loss of $48.2 million or $1.83 per diluted share, compared to
a net loss of $16.4 million or $0.59 per diluted share in the prior year
quarter, driven primarily by current accident year weather losses including a
$40 million net retention for Hurricane Ian. In addition the Company recorded a
$10.7 million valuation allowance against our net deferred tax asset related to
certain tax elections made by Osprey Re, our captive reinsurer domiciled in
Bermuda.

•

Gross premiums written of $304.5 million, up 11.1% from $274.2 million in the
prior year quarter, reflecting a 4.8% rate related increase in Florida, despite
a policy count reduction of approximately 40,000, and 15.4% growth in other
states primarily due to rate increases. Rate increases continued to meaningfully
benefit written premiums throughout the book of business.

•

Gross premiums written of $304.5 million, up 11.1% from $274.2 million in the
prior year quarter, reflecting a 4.8% rate related increase in Florida, despite
a policy count reduction of approximately 40,000, and 15.4% growth in other
states primarily due to rate increases. Rate increases continued to meaningfully
benefit written premiums throughout the book of business.

•

Gross premiums earned of $308.0 million, up 4.6% from $294.4 million in the
prior year quarter, reflecting higher gross premiums written over the last
twelve months driven by higher average premium per policy.

•

Net earned premiums of $159.7 million, down 1.7% from $162.4 million in the
prior year quarter, reflecting a 12.4% increase in contract year reinsurance
cost with higher ceded premium outpacing the increase in gross earned premiums
for the quarter.

•

Net current accident year weather losses of $63.8 million, up 24.2% from $51.4
million in the prior year quarter. Current accident year catastrophe weather
losses are $40.0 million up 150.5% from $16.0 million in the prior year quarter.
The catastrophe loss for the current quarter represents our $40.0 million
retention for Hurricane Ian. Current accident year other weather losses are
$23.8 million, down 32.8% from $35.4 million in the prior year quarter.

•

Ceded premium ratio of 48.1%, up 3.3 points from 44.8% in the prior year quarter
driven by a higher cost of the 2022-2023 catastrophe excess of loss program,
stemming from both higher costs and higher TIV.

•

Net loss ratio of 97.6%, 17.8 points higher than the prior year quarter of
79.8%, driven by higher losses incurred and slightly lower net earned premium
than the prior year quarter.

•

Net expense ratio of 35.7%, up 3.0 points from the prior year quarter amount of
32.7%, mostly driven by the reduction of net earned premium from the prior year
quarter, with a small portion of the increase related to higher underwriting
costs associated with an increase in gross premiums written.

•

Net combined ratio of 133.3%, up 20.8 points from 112.5% in the prior year
quarter, driven by a higher net loss ratio and net expense ratio as described
above.

•

Effective tax rate was 2.2% compared to 6.4% in the prior year quarter, driven
by the impact of permanent differences in relation to the pre-tax loss each
quarter, as well as a $10.7 million valuation allowance as described above in
the current period quarter.

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Results of Operations

Comparison of the three months ended September 30, 2022 and 2021

Revenue

                                            For the Three Months Ended September 30,
(Unaudited)                             2022            2021        $ Change       % Change
                                                         (in thousands)
REVENUE:
Gross premiums written              $    304,501     $  274,178     $  30,323           11.1 %
Change in gross unearned premiums          3,458         20,231       (16,773 )        (82.9 )%
Gross premiums earned                    307,959        294,409        13,550            4.6 %
Ceded premiums earned                   (148,266 )     (131,964 )     (16,302 )         12.4 %
Net premiums earned                      159,693        162,445        (2,752 )         (1.7 )%
Net investment income                      2,887          1,548         1,339           86.5 %
Net realized losses                           (3 )           (6 )           3          (50.0 )%
Other revenue                              2,916          3,421          (505 )        (14.8 )%
Total revenue                       $    165,493     $  167,408     $  (1,916 )         (1.1 )%




Total revenue

Total revenue was $165.5 million in the third quarter of 2022, down 1.1% from
$167.4 million in the prior year quarter. The decrease primarily stems from
lower net premiums earned, driven by higher reinsurance costs, partly offset by
an increase in investment income, as described in detail below.

Gross premiums written

Gross premiums written were $304.5 million, up 11.1% from $274.2 million the
prior year quarter, reflecting a 4.8% growth in Florida and 15.4% 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 $1.24 billion in the third quarter of 2022, up 5.8% from
third quarter 2021, while policies-in-force were down 6.9%. The increase in
premiums-in-force reflects the impact of rate increases more than offsetting the
premiums associated with the reduction in policies-in-force. The reduction in
policies-in-force from the third quarter of 2021 reflects our exposure
management initiatives.

Gross premiums earned

Gross premiums earned were $308.0 million in the third quarter of 2022, up 4.6%
from $294.4 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 $148.3 million in the third quarter of 2022, up 12.4%
from $132.0 million in the prior year quarter. The growth results primarily from
higher reinsurance costs due to market conditions and higher TIV, as well as
higher ceded premium for our net quota share reinsurance program, driven by
growth in our northeast business.

Net premiums earned

Net premiums earned were $159.7 million in the third quarter of 2022, down 1.7%
from $162.4 million in the prior year quarter, reflecting a 12.4% increase in
contract year reinsurance cost with higher ceded premium outpacing the increase
in gross earned premiums for the quarter.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized
gains on equity securities, was $2.9 million in the third quarter 2022, compared
to a net investment gain of $1.5 million in the prior year quarter. The increase
is driven by a higher interest rate environment compared to the prior year
quarter.

Other revenue

Other revenue was $2.9 million in the third quarter of 2022, down by 14.8% from
$3.4 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 September 30,
(Unaudited)                               2022              2021          $ Change        % Change
OPERATING EXPENSES:                                           (in thousands)

Losses and loss adjustment expenses $ 155,849 $ 129,632 $

   26,217            20.2 %
Policy acquisition costs                    39,194            35,984           3,210             8.9 %
General and administrative expenses         17,758            17,169             589             3.4 %
Total operating expenses                   212,801           182,785          30,017            16.4 %


Total operating expenses

Total operating expenses were up $30.0 million, or 16.4% in the third quarter of
2022. As described below, the driver was primarily from the increase in losses
and loss adjustment expenses as well as an increase in acquisition costs.

Losses and loss adjustment expenses

Losses and loss adjustment expenses ("LAE") were $155.8 million in the third
quarter of 2022, up from $129.6 million in the prior year quarter driven by
higher weather and attritional losses. Net current accident year weather losses
were $63.8 million, up 24.2% from $51.4 million in the prior year quarter.
Current accident year weather losses include $40.0 million of net current
accident quarter catastrophe losses from Hurricane Ian, up from $16.0 million in
the prior year quarter, and $23.8 million of other weather losses, down from
$35.4 million in the prior year quarter.

Policy acquisition costs

Policy acquisition costs were $39.2 million in the third quarter of 2022, up
8.9% from $36.0 million in the prior year quarter. The increase is primarily
attributable to growth of 11.1% in gross premiums written.

General and administrative expenses

General and administrative expenses were $17.8 million in the third quarter of
2022, up 3.4% from $17.2 million in the prior year quarter, driven primarily by
compensation related items.

                                                For the Three Months Ended September 30,
(Unaudited)                             2022                  2021          $ Change       % Change
                                           (in thousands, except per share and share amounts)
Operating loss                     $      (47,308 )       $    (15,377 )   $  (31,931 )         207.7 %
Interest expense, net                       2,027                2,150           (123 )          (5.7 )%
Loss before income taxes                  (49,335 )            (17,527 )      (31,809 )         181.5 %
Benefit for income taxes                   (1,095 )             (1,117 )           23            (2.0 )%
Net loss                           $      (48,240 )       $    (16,410 )   $  (31,831 )         194.0 %
Basic net loss per share           $        (1.83 )       $      (0.59 )   $    (1.24 )         210.2 %
Diluted net loss per share         $        (1.83 )       $      (0.59 )   $    (1.24 )         210.2 %


Net loss

Third quarter 2022 net loss was $48.2 million ($1.83 loss per share), down from
net loss of $16.4 million ($0.59 loss per share) in the prior year quarter,
driven primarily from the increase in net losses and loss adjustment expenses
incurred as described above and the relatively small benefit for income taxes as
described below.

Interest expense, net

Net interest expense was $2.0 million in the third quarter of 2022, slightly
down from $2.2 million in the prior year quarter mostly due to a reduction in
debt discount associated with the repurchase of convertible notes in the second
quarter of 2022.

Benefit for income taxes

Benefit for income taxes was $1.1 million in third quarter 2022 compared to $1.1
million in the prior year quarter. The effective tax rate in third quarter 2022
was impacted by the impact of permanent tax differences on projected results of
operations for the calendar year as well as impacts to the effective tax rate,
which can also fluctuate throughout the year as estimates used in the quarterly
tax provision are updated with additional information. The effective tax rate
was 2.2% compared to 6.4% in the prior year quarter, driven by the impact of
permanent differences in relation to the pre-tax loss each quarter, as well as a
$10.7 million valuation allowance in the current period quarter. The valuation
allowance was recorded against our deferred tax asset related to our captive

                                       33
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reinsurer, Osprey Re, for which net operating losses can only be used to offset
income at Osprey Re due to the 953(d) election made when Osprey Re was formed.
This was accounted for as an increase of income tax expense for the quarter.

Ratios

                            For the Three Months Ended September 30,
(Unaudited)                     2022                        2021
 Ceded premium ratio                    48.1 %                      44.8 %

Net loss and LAE ratio                  97.6 %                      79.8 %
Net expense ratio                       35.7 %                      32.7 %
Net combined ratio                     133.3 %                     112.5 %


Net combined ratio

The net combined ratio was 133.3% in the third quarter of 2022, up 20.8 points
from 112.5% in the prior year quarter. The increase stems primarily from the
increase in the net loss and LAE ratio, as described below.

Ceded premium ratio

The ceded premium ratio was 48.1% in the third quarter of 2022, up 3.3 points
from 44.8% in the prior year quarter, reflecting a higher cost of the 2022-2023
catastrophe excess of loss program, stemming from both higher costs and higher
TIV, driving the growth in ceded premiums earned to outpace the growth in gross
premiums earned described above.

Net loss and LAE ratio

The net loss and LAE ratio was 97.6% in the third quarter of 2022, up 17.8
points from 79.8% in the prior year quarter, driven by higher weather and
attritional losses. Net current accident year weather losses of $63.8 million,
up 24.2% from $51.4 million in the prior year quarter. Current accident year
weather losses include $40.0 million of net current accident quarter catastrophe
losses from Hurricane Ian, up from $16.0 million in the prior year quarter, and
$23.8 million of other weather losses, down from $35.4 million in the prior year
quarter.

Net expense ratio

The net expense ratio was 35.7% in the third quarter of 2022, up 3.0 points from
32.7% in the prior year quarter. This was driven by higher underwriting costs
associated with the growth in gross premiums written.

Results of Operations

Comparison of the Nine Months Ended September 30, 2022 and 2021

                                            For the Nine Months Ended September 30,
                                       2022            2021        $ Change       % Change
(Unaudited)                                             (in thousands)
REVENUE:
Gross premiums written              $   952,981     $  886,059     $  66,922            7.6 %
Change in gross unearned premiums       (61,442 )      (35,593 )     (25,849 )         72.6 %
Gross premiums earned                   891,539        850,466        41,073            4.8 %
Ceded premiums earned                  (420,645 )     (399,323 )     (21,322 )          5.3 %
Net premiums earned                     470,894        451,143        19,751            4.4 %
Net investment income                     7,050          3,797         3,253           85.7 %
Net realized losses                        (121 )         (926 )         805          (86.9 )%
Other revenue                            10,049         10,835          (786 )         (7.3 )%
Total revenue                       $   487,872     $  464,849     $  23,022            5.0 %


Total revenue

Total revenue was $487.9 million for the nine months ended September 30, 2022,
up 5.0% from $464.8 million in the prior year period. The increase primarily
stems from higher net premiums earned and investment income, as described below.

Gross premiums written

Gross premiums written were $953.0 million for the nine months ended September
30. 2022, up 7.6% from $886.1 million in the prior year period. We experienced
growth of 13.1% outside of Florida and 1.8% growth in Florida. Growth throughout
our book of business was largely driven by rate increases resulting in a higher
average premium per policy.

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Premiums-in-force were $1.24 billion in the third quarter of 2022, up 5.8% from
third quarter 2021, while policies-in-force were down 6.9%, with the difference
largely stemming from rate increases. The reduction in policies-in-force from
the third quarter of 2021 reflects our exposure management initiatives.

Gross premiums earned

Gross premiums earned were $891.5 million for the nine months ended September
30. 2022, up 7.0% from $850.5 million in the prior year period. The increase
reflects higher gross premiums written over the preceding twelve months, driven
primarily by higher rates.

Ceded premiums earned

Ceded premiums earned were $420.6 million for the nine months ended September
30, 2022, up 5.3% from $399.3 million in the prior year period. The increase is
attributable to the higher cost of the current year catastrophe excess of loss
contract for which the impact was partly offset by a $18 million ceded premium
on the severe convective storm contract included in the prior year amount.

Net premiums earned

Net premiums earned were $470.9 million for the nine months ended September 30,
2022, up 4.4% from $451.1 million in the prior year period. On a year-to-date
basis, growth in gross premiums earned exceeded the growth in ceded premiums
earned. However, on a quarter-to-date basis, the growth in ceded premiums earned
exceeded the growth in gross premiums earned. This relates primarily to the cost
of our severe convective storm reinsurance contract in 2021, which was fully
earned by the second quarter of 2021.

Net investment income

Net investment income, inclusive of realized investment gains and unrealized
gains on equity securities, was $6.9 million for the nine months ended September
30, 2022, compared to $2.9 million in the prior year period. The increase is
primarily due to higher balances in our fixed income portfolio than the prior
nine-month period, coupled with a higher interest rate environment.

Other revenue

Other revenue was $10.0 million for the nine months ended September 30, 2022,
down 7.3% from $10.8 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 Nine Months Ended September 30,
(Unaudited)                              2022              2021         $ Change       % Change
OPERATING EXPENSES:                                         (in thousands)

Losses and loss adjustment expenses $ 397,409 $ 328,376 $ 69,033

            21.0 %
Policy acquisition costs                  115,826          109,183          6,643             6.1 %
General and administrative expenses        54,947           52,490          2,457             4.7 %
Goodwill impairment                        91,959                -         91,959              NM
Total operating expenses                  660,141          490,049        170,092            34.7 %


NM -Not meaningful

Total operating expenses

Total operating expenses were $660.1 million for the nine months ended September
30, 2022, up 34.7% from $490.0 million in the prior year period, primarily due
to the $92.0 million pre-tax goodwill impairment charge taken in the second
quarter of 2022, and a $69.0 million increase in losses and loss adjustment
expenses detailed below.

Losses and loss adjustment expenses

Losses and LAE were $397.4 million for the nine months ended September 30, 2022,
up 21.0% from $328.4 million in the prior year period driven by higher weather
and attritional losses. Net current accident year weather losses were $165.7
million, up 40.1% from $118.3 million in the prior year period. Current accident
year catastrophe weather losses were $117.1 million, up from $55.8 million in
the prior year period, with current accident year other weather losses of $48.6
million, down from $62.5 million in the prior year period. Net current accident
year catastrophe weather losses include a $40.0 million retention for Hurricane
Ian.

Policy acquisition costs

Policy acquisition costs were $115.8 million for the nine months ended September
30, 2022, up 6.1% from $109.2 million in the prior year period. The increase is
primarily attributable to growth in gross premiums written.

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General and administrative expenses

General and administrative expenses were $54.7 million for the nine months ended
September 30, 2022, up 4.7% from $52.5 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 for goodwill impairment performed during the second
quarter of 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 Nine Months Ended September 30,
(Unaudited)                       2022                2021          $ Change       % Change
                                   (in thousands, except per share and share amounts)
Operating loss               $     (172,269 )     $    (25,200 )   $ (147,069 )           NM
Interest expense, net                 5,750              5,953           (203 )         (3.4 )%
Loss before income taxes           (178,019 )          (31,153 )     (146,866 )        471.4 %
Benefit for income taxes            (11,155 )           (5,644 )       (5,511 )         97.6 %
Net loss                     $     (166,864 )     $    (25,509 )   $ (141,355 )           NM
Basic net loss per share     $        (6.29 )     $      (0.91 )   $    (5.37 )           NM
Diluted net loss per share   $        (6.29 )     $      (0.91 )   $    (5.37 )           NM


NM -Not meaningful

Net loss

Net loss for the nine months ended September 30, 2022 was $166.9 million ($6.29
loss per share), compared to a net loss of $25.5 million ($0.91 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, as described above, coupled with an underwriting loss
generated for the nine-month period driven by higher weather and attritional
losses over the prior period, which includes a net retention of $40.0 million
related to Hurricane Ian, as described above. Additionally, the benefit for
income taxes was lower than our statutory rate, as described below.

Interest expense, net

Net interest expense was $5.8 million for the nine months ended September 30,
2022, slightly down from the prior year period.

Benefit for income taxes

Benefit for income taxes was $11.2 million for the nine months ended September
30, 2022 compared to $5.6 million in the prior year period. The effective tax
rate was 6.3% for the nine months ended September 30, 2022 compared to 18.1% for
the prior year period. The effective tax rate for the nine months ended
September 30, 2022 was impacted by the mostly non-deductible goodwill impairment
charge as described above as well as a valuation allowance of $10.7 million
recorded against our deferred tax asset, related to our captive reinsurer,
Osprey Re, related to the IRC Section 953(d) election made when Osprey Re was
formed. As a result of this election, net operating losses for Osprey Re may
only be used to offset taxable income at Osprey Re.

The impact of permanent tax differences on projected results of operations for
the calendar year also 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 Nine Months Ended September 30,
(Unaudited)                     2022                       2021
 Ceded premium ratio                   47.2 %                     47.0 %

Net loss and LAE ratio                 84.4 %                     72.8 %
Net expense ratio                      36.3 %                     35.8 %
Net combined ratio                    120.7 %                    108.6 %




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Net combined ratio

The net combined ratio was 120.7% for the nine-month period ended September 30,
2022, up 12.1 points from 108.6% in the prior year period. The increase
primarily stems from a higher net loss and LAE ratio as well as a small increase
in the net expense ratio, as described below.

Ceded premium ratio

The ceded premium ratio was 47.2% for the nine-month period ended September 30,
2022, relatively flat from 47.0% in the prior year period. The cost of the
current year catastrophe excess of loss contract was higher than the prior year
but the impact was partly offset by a $18 million ceded premium on the severe
convective storm contract included in the prior year amount.

Net loss and LAE ratio

The net loss and LAE ratio was 84.4% for the nine-month period ended September
30, 2022, up 11.6 points from 72.8% in the prior year period, driven by higher
weather and attritional losses, including the $40 million retention for
Hurricane Ian, compared to the prior year period, which was partly offset by the
4.4% increase in net premiums earned.

Net expense ratio

The net expense ratio was 36.3% for the nine-month period ended September 30,
2022, slightly up from 35.8% 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 September 30, 2022, we
had $297.5 million of cash and cash equivalents and $651.8 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 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 continued decline
in bond prices throughout 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 3.4 years at September 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.

As part of the Seventh Amendment to the Credit Agreement, discussed below, going
forward, dividends and stock repurchases may be limited or restricted entirely
and our ability to contribute capital to our insurance subsidiaries that are not
parties to the Credit Agreement may be limited.

Cash Flows

                                               For the Nine Months Ended September 30,
                                             2022                 2021             Change
                                                           (in thousands)
Net cash (used in) provided by:
Operating activities                    $      (15,480 )     $       72,772     $     (88,252 )
Investing activities                           (33,507 )           (112,927 )          79,420
Financing activities                           (11,952 )             (7,402 )          (4,550 )
Net (decrease) increase in cash and
cash equivalents                        $      (60,939 )     $      (47,557 )   $     (13,382 )




Operating Activities

Net cash used in operating activities was $15.5 million for the nine months
ended September 30, 2022 compared to net cash provided by operating activities
of $72.8 million for the comparable period in 2021. The decrease in cash from
operating activities

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relates primarily to timing of cash flows associated with claim and reinsurance
payments as well as reinsurance reimbursements during the first nine months of
2022 compared to the first nine months of 2021.

Investing Activities

Net cash used in investing activities for the nine months ended September 30,
2022 was $33.5 million as compared to net cash used in investing activities of
$112.9 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 for that period.

Financing Activities

Net cash used in financing activities for the nine months ended September 30,
2022 was $12.0 million, as compared to cash used in financing activities of $7.4
million for the comparable period in 2021. The increase in cash used for
financing activities was driven by draws from our Revolving Credit Facility
(defined below) totaling $25 million to purchase and retire $22.5 million of
Convertible Notes and a larger amount of treasury stock purchases during the
nine months ended September 30, 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").

Based on the Company's results for the third quarter of 2022, management
considered it likely at that time that the Company would be out of compliance
with certain financial covenants in the Credit Agreement. In order to avoid a
covenant violation, on November 7, 2022, the Company and its subsidiary
guarantors entered into an amendment to the Credit Agreement to, among other
things, (i) decrease the revolving credit facility from $75 million to $50
million, (ii) establish a new $25 million term loan facility to refinance loans
outstanding under the existing revolving credit facility and to pay fees, costs
and expenses related thereto, (iii) reduce, from $50 million to $25 million, the
aggregate amount of potential future increases to the revolving credit facility
commitments and/or term loan commitments, (iii) modify the amortization of the
existing term loan facility and new term loan facility to 10% per annum, paid
quarterly, and (iii) increase the applicable margin for loans under the Credit
Agreement to a range from 2.75% to 3.25% per annum for SOFR loans (plus a 0.10%
credit adjustment spread) and based on a leverage ratio (an increase from the
prior range of 2.50% to 3.00%). The Seventh Amendment also modified certain
financial covenants in the Credit Agreement which may limit the Company's
flexibility in connection with future financing transactions and in the
allocation of capital in the future, including the Company's ability to pay
dividends and make stock repurchases, and contribute capital to its insurance
subsidiaries that are not parties to the Credit Agreement. For additional
information regarding the changes to the financial covenants in the Credit
Agreement, refer to Part II, Item 5, "Other Information" in this Quarterly
Report on Form 10-Q.

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

Term Loan Facility. As amended by the Seventh Amendment, the principal amount of
the Term Loan Facility amortizes in quarterly installments, which began with the
close of the fiscal quarter ending March 31, 2019, in an amount equal to $1.9
million per quarter, payable quarterly, decreasing to $875,000 per quarter
commencing with the quarter ending December 31, 2021, and increasing to $2.4
million per quarter commencing with the quarter ending December 31, 2022, with
the remaining balance payable at maturity. The Term Loan Facility matures on
July 28, 2026. As of September 30, 2022, there was $66.5 million in aggregate
principal outstanding on the Term Loan Facility and as of November 7, 2022,
after giving effect to the additional term loan advance that was used to
refinance amounts outstanding under the Revolving Credit Facility and to pay
fees, costs and expenses related thereto, there was $73.9 million in aggregate
principal outstanding on the Term Loan Facility.

Revolving Credit Facility. The Revolving Credit Facility allows for borrowings
of up to $50 million inclusive of a sublimit for the issuance of letters of
credit equal to the unused amount of the Revolving Credit Facility and a
sublimit for swingline loans equal to the lesser of $25 million and the unused
amount of the Revolving Credit Facility. As of September 30, 2022, we had $25.0
million in borrowings and a $22.6 million letters of credit outstanding under
the Revolving Credit Facility. In connection with the incurrence of additional
amounts under the Term Loan Facility pursuant to the Seventh Amendment, the
borrowings under the Revolving Credit Facility were repaid in full.

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At our option, borrowings under the Credit Facilities bear interest at rates
equal to either (1) a rate determined by reference to SOFR, plus an applicable
margin (described below) and a credit adjustment spread equal to 0.10% or (2) a
base rate determined by reference to the highest of (a) the "prime rate" of
Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term
SOFR in effect on such day for an interest period of one month plus 1.00%, plus
an applicable margin (described below).

The applicable margin for loans under the Credit Facilities varies from 2.75%
per annum to 3.25% per annum (for SOFR loans) and 1.75% to 2.25% per annum (for
base rate loans) based on our consolidated leverage ratio ranging from 1.25-to-1
to greater than 2.25-to-1. Interest payments with respect to the Credit
Facilities are required either on a quarterly basis (for base rate loans) or at
the end of each interest period (for SOFR loans) or, if the duration of the
applicable interest period exceeds three months, then every three months. As of
September 30, 2022, the borrowing under our Credit Facilities were accruing
interest at a rate of 5.88% 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 SOFR
loans. In addition, we are required to prepay the loan under the Term Loan
Facility with the proceeds from certain financing transactions, involuntary
dispositions or asset sales (subject, in the case of asset sales, to
reinvestment rights).

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

The Company and the Guarantors are party to a Pledge and Security Agreement, (as
amended from time to time the "Security Agreement"), in favor of Regions Bank,
as collateral agent. Pursuant to the Security Agreement, amounts borrowed under
the Credit Facilities are secured on a first priority basis by a perfected
security interest in substantially all of the present and future assets of the
Company and each Guarantor (subject to certain exceptions), including all of the
capital stock of the Company's domestic subsidiaries, other than its regulated
insurance subsidiaries.

The Credit Agreement contains, among other things, covenants, representations
and warranties and events of default customary for facilities of this type. The
Company is required to maintain, as of each fiscal quarter (1) a maximum
consolidated leverage ratio of 2.50 to 1.00, stepping down to 2.25 to 1.00 as of
the second quarter of 2024 and 2.00 to 1.00 as of the second quarter of 2025,
(2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a
minimum consolidated net worth for the Company and its subsidiaries, which is
required to be not less than $100 million plus 50% of positive quarterly net
income (including its subsidiaries and regulated subsidiaries) plus the net cash
proceeds of any equity transactions. Events of default include, among other
events, (i) nonpayment of principal, interest, fees or other amounts; (ii)
failure to perform or observe certain covenants set forth in the Credit
Agreement; (iii) breach of any representation or warranty; (iv) cross-default to
other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary
judgment defaults and material nonmonetary judgment defaults; (vii) customary
ERISA defaults; (viii) a change of control of the Company; and (ix) failure to
maintain specified catastrophe retentions in each of the Company's regulated
insurance subsidiaries.

Convertible 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

                                       39
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liabilities incurred by the Company's subsidiaries other than the Notes
Guarantor, which fully and unconditionally guarantee the Convertible Notes on a
senior unsecured basis.

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

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

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

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

Upon the occurrence of a fundamental change (as defined in the Convertible Note
Indenture) (but not, at the Company's election, a public acquirer change of
control (as defined in the Convertible Note Indenture), holders of the
Convertible Notes may require the Company to repurchase for cash all or a
portion of their Convertible Notes at a fundamental change repurchase price
equal to 100% of the principal amount of the Convertible Notes to be
repurchased, plus accrued and unpaid interest to, but excluding, the fundamental
change repurchase date.

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

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

In January 2022, the Company repurchased $11.7 million principal amount of
outstanding Convertible Notes. As of September 30, 2022, there was $885,000
principal amount of outstanding Convertible Notes, net of $21.1 million of
Convertible Notes held by an insurance company subsidiary.

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

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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 $26.4 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. As of September
30, 2022, the common stock is value at $1.2 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. In September 2022, we assessed our deferred tax position and
recorded a $10.7 million valuation against our net deferred tax asset at
September 30, 2022. We intend to continue maintaining the valuation allowance on
our net deferred tax asset until there is sufficient evidence to support the
reversal of all or some portion of the allowance. We have made no other material
changes or additions with regard to those policies and estimates as disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2021.

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.

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.