Good morning and welcome to the Heritage Insurance Holdings Second Quarter 2017 Financial Results Conference Call. My name is Case, and I will be the operator today. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note that this event is being recorded. I would now like to turn the conference over to Joe Peiso. Please go ahead.

Good morning. The second quarter earnings release can be found in the Investors section of heritagepci.com. The earnings call will be archived and available for replay. Today's call may contain forward-looking statements. These statements which we undertake no obligation to update, represent our current judgment and are subject to risks, assumptions, and uncertainties. For a description of the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our Annual Report on Form 10-K and other filings made with the SEC. With us on the call today are Bruce Lucas, Chairman and CEO and Steve Martindale, Chief Financial Officer. Also on the call is Steve Rohde, Financial Consultant to the company. I will now turn the call over to Bruce.

Thank you, Joe. I would like to welcome all of you to our second quarter 2017 earnings call. Before we begin the call I would like to thank all of our employees for their dedication to our company. I will first address the second quarter and then discuss our pending acquisition of Narragansett Bay Insurance. The second quarter continued to reflect significant improvements in several key metrics. For example claims and loss ratios continued to trend favorably and our year-over-year non-catastrophe loss ratio improved 1.4 points during the second quarter. The Tri-County continues to lead Florida an assignment of benefits or AOB and other abusive claims practices. However, we have implemented underwriting initiatives in the past year that we believe are yielding positive results. We completed our 2017 and 2018 reinsurance treaty which resulted in more favorable terms and conditions as well as a reduction of approximately 20 million in premiums compared to the 2016, 2017 treaty. In addition, voluntary policies written in the second quarter set another new record for the company as we continued to grow new business in Florida and production in the Carolina's and Georgia increases. The company continued its multistate expansion and wrote its first new business policy in Alabama. Notable highlights for the second quarter are as follows; non-catastrophe loss ratio improved 1.4 points to 28.4% in the second quarter of 2017 compared to the second quarter of 2016. Net income of 6.6 million for the quarter, book value increased by 2% to $12.97 when compared to June 30, 2016. Shareholders’ equity was 365.3 million at June 30, 2017. Capital return to stockholders through a dividend of $0.06 a share coupled with a stock repurchase of 322,811 shares for a total of 4.1 million during the second quarter. New business production increased 48% compared…

Thank you Bruce, good morning. Gross premiums written for the quarter were 159.3 million compared to 177.3 million a year ago. Approximately 13% of gross premiums were written outside of Florida with 9% coming from Hawaii and 4% from the Carolinas and Georgia. For the quarter we wrote approximately 23% of our new business premiums in the Carolinas and Georgia and approximately 2% in Hawaii. Our total in-force policy count at June 30, 2017 was approximately 3,16,400. Our personal lines policy count was approximately 3,11,300 and our commercial residential count was 3,433. Personalized policy count by state were approximately 226,000 in Florida, 72,300 in Hawaii, and 13,000 in the Carolinas and Georgia. All commercial residential policies were written in Florida. Gross premiums earned for the second quarter were 152.4 million compared to 163.6 million a year ago. The change is due primarily to actions we've taken to manage catastrophe and attritional risk exposure which included writing no personal lines business in the Tri-County area and assuming no policies from citizens in more than a year. Our ceded premium ratio as merged [ph] against gross premiums earned was 40.6% for the second quarter of 2017 compared to 33.5% for the second quarter of 2016. The ceded premium ratio for the second quarter of 2016 was 3.3 percentage points lower due to the benefits of assuming policies from Citizens during the fourth quarter of 2015 and the first quarter of 2016. The second quarter of 2017 ceded premium ratio was approximately two percentage points higher due to the decline in our growth premiums earned noted previously. In addition reinstatement premiums associated with our per risk reinsurance program added 0.6 points to the second quarter 2017 ratio. On June 1st we renewed our catastrophe reassurance program. This year's program provides for up to…

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from John Barnidge with Sandler O Neil.

Great, thank you and congrats on the transaction. That $70 million number you stated for net income for 2018 was that after tax?

Yes.

Okay and should we assume that buybacks are going to be suspended for the foreseeable future?

No.

Unless to offset dilution or no?

No, I would not make that assumption. I mean part of what we're going to do John is more than likely issue a convertible bond offering. If that is the route that we take there will be a substantial buyback in connection with the bond which will counteract any short interest from hedge funds. And it will also retire stock in the gate dilution caused by financing a small portion of the transactions through equity.

Okay, and then part of the transaction is stock related, have you locked in right now how many shares you will be issuing or not yet?

Not yet. We are -- pursuant to the purchase agreement we use the average of the five trading days prior to the closing date. So whatever that price is it is. We did not want to lock in, stop the share account now because we believe that we are massively undervalued outside of Narragansett Bay acquisition. But with the Narragansett Bay acquisition we feel like the equity price will perform extremely well. And so we thought it would be better to lock in share price towards the end of the transaction rather than the front to minimize dilution.

Got it. How much equity the Narragansett Bay has of 2Q 2017 because at least what I could find on S&L implied as of 1Q it was roughly 95 million?

Yeah, so you can remember our purchase price is based on the targeted book value of Narragansett Bay at year-end. And so at year-end the GAAP book value is estimated to be approximately 118 million. On a multiple basis it's about 2.1 times year-end book value and on an earnings basis we're buying the company for about 3.5 times gross earnings, and then roughly six times net earnings.

Okay, and then my last question and I will requeue. At least according to S&L Narragansett Bay had a 9% expense ratio in FY 2016, is that correct? And possibly more importantly should we expect the expense ratio decline on a consolidated basis in 2018 for Heritage?

Okay, John this is Steve Rhode. Narragansett uses a lot of quota share reinsurance and so their expense ratio is understated if you look at it from like a gross basis. The expense ratio on a gross -- to gross earned premium is about 20%, almost 25%, 24.8% in that range. I think the way to look at Narragansett because of the use of their quota share is that on a gross basis their combined ratio right now is running about 88% to 89% range and then we expect the synergies to have about an 8 point impact on that. So bringing their run rate combined ratio down into the low 80s, 81% to 82%.

Great, that is very helpful. Thank you very much.

Thanks.

Thank you and the next question comes from Arash Soleimani with KBW.

Hi, this is Anthony in for Arash. Thank you for taking my questions.

Certainly, good morning.

So, I guess you were talking about a multiple of 2.1 and that seems a bit still modest premium in the current environment and what they are paying for, can you talk a little bit about that context?

Yeah, so I think first and foremost you cannot look at an acquisition just based on a multiple of book value. I think that this entire seductor [ph] and the way we look at acquisitions is a little bit outdated, antiquated I would say. You cannot look at it on that basis. You have to look at it on the return on your investment. So for example Narragansett Bay, we are paying 2.1 times expected year-end book value. We paid 1.7 times book value for Zephyr that has been an absolute homerun for the company. Another recent acquisition was UPC of American Coastal, roughly 1.7 times book value. We look at this and say okay, it's not that far outside of the range on a book value basis but when you look at it on a return basis and what your upside potential is, this is a great buy for us. We're essentially buying the company for three and half times forward gross earnings. And net of income tax only six times earnings. The synergies are off the chart on this transaction. We are literally expecting to increase EPS by 50% year-over-year and increase top line 50% year-over-year with little to no dilution to our common stock shareholders. We believe that Narragansett Bay has a lot of opportunity to expand its product offerings, increase the top line, and the more expansion that we have from Narragansett Bay the more synergies we're going to generate on the transaction which means more upside for the company. This is a strategically important company. As I mentioned in my prerecorded statements, when we look at M&A in 2014 we really thought that there were only two insurers outside of Florida that had any real merit to them and really hard to replicate and have big upside potential. Those two are Zephyr and Narragansett Bay. It has been a company that we've been at various points of time talking to over the past three years about acquiring them because we saw the upside potential. So we're pretty excited about it and we think that we bought this company at a very good price.

Great, thanks, that's really helpful. And just a follow-up on that, how much of the purchase price reflected goodwill?

Goodwill was roughly 130 million.

Which includes the intangible assets. So some will be after we do a purchase accounting some will be in -- recorded as intangible assets and some will be recorded as goodwill obviously. Overall excluding any reclassification of deferred acquisition costs which also gets rolled into intangible assets it will be about 130 million of regular goodwill.

Got it, and then I guess lastly it looks like NBIC is on an incoming combined ratio has been improving a lot but the improvements seems to be quite unusual in 2016, what's the actual run rate amounts for this?

Well, I think if you look at them it is $327 million of expected written premium, gross written premium for 2017 and they have been growing, expect to grow in at 6% to 7% range going forward. And as mentioned earlier I think you going to gross combined ratio, gives gross written premium the combined ratio is running around 88% right now but, with synergies they create [ph] about 80%, 81% gross combined ratio. And we expect that to you know continue to go forward.

Got it and then lastly can you talk about the thought process behind the convertible bond, the repurchases, and the debt issuance. Why not just use all debt to finance this transaction rather than -- just rather than just going through all that trouble for market condition or is there something more than that?

Well, I guess I'm not really sure I understand the trouble of issuing on the 40 million in equity. We wanted the sellers to have some skin in the game and that's important for me. And so on an acquisition of this size we wanted them to have a common alignment with our Heritage common stock shareholders. So issuing 40 million really made a lot of sense to us given that the probability of doing a convertible bond with a big share buyback will result in negligible dilution to shareholders and there's a chance that there could be zero. I like the prospect of increasing top line and net operating income 50% year-over-year without diluting our shareholders. So debt on this transaction certainly makes a lot of sense. I can tell you that the markets have been pretty receptive to what we're doing here. So I think this is a good way to go in terms of the mix of cash and stock given minimum shareholder dilution and it is extremely high accretion to EPS and top line earnings.

Thank you, I will turn back in the queue.

Thanks.

Thank you and the next question comes from Mark Hughes with SunTrust.

Yeah, thank you, good morning. I might have missed this earlier -- with the synergies 80% to 81%, how much of that is a reinsurance, is there any expense synergies you think you'll get?

Yeah, there are expense synergies and obviously reinsurance synergies. We are more comfortable just staying in total between all synergies we're expecting about 25 million without giving the breakdown but that's a ballpark number of what we're expecting on a run rate basis.

And then you had suggested that they've been growing or the expectations of growth 6% to 7% going forward, is that what they've been growing historically and you had mentioned kind of the opportunities for product expansion, geographic expansion, can you talk a little bit more about that?

Yes, so I mean in 2014 the written premiums were 240 million, in 2015 it was to 278 million, last year was 307 million and we are well above that number now in terms of 2017. So 327 is where we think we're going to be at by or they will be at by the end of this year and that number continues to ramp higher as we move forward. One of the issues that you run into with any reinsurer is aggregation of risk. And as you continue to aggregate policies on top of one another it could really send your reinsurance costs exponentially higher. So we believe that having a combined reinsurance program similar to what we do now with Zephyr and the Carolinas for example will help to diversify the spread of that risk which means you can actually grow the top line in Narragansett Bay a lot more in the future without getting the same punitive reinsurance prices. So we do believe that that's a big factor and we also believe there are a lot of products and bundled opportunities that we're going to roll out once we close on this acquisition that will meaningfully impact the top and bottom line.

And then in your core Florida business, did you mention any weather impact in the quarter?

We did not have any, this is Steve Martindale, we did not have any weather, non-hurricane weather impact. We did have a little bit of development on Matthew.

It was small, maybe a million dollars or so.

And then you may have touched on this, sorry I apologize, but where Narragansett has seen success, what's driven that, is that another dislocated cat market kind of similar to Florida or what's the kind of fundamental reason why they’ve prospered as much as they have?

Well, I mean they are a coastal insurer like Heritage and so their play is predominantly coastal exposures. That's where a lot of the bigger companies, the all states of the world, etc. don't really play that much. So there's a huge opportunity. Eastern seaboard coastal exposure all the way through the Gulf Coast of United States. I mean that’s kind of the -- that's the sweet spot for companies like Heritage and other Florida insurers and Narragansett Bay. The company has really built a solid reputation in terms of their underwriting. Their targeted growth has been exceptional. They've been able to execute on their business plan year-in and year-out. They've got great relationships with agents, GEICO is a big producer for them. They've really built a first class organization, they inspect every property that they underwrite inside and out. That's a pretty rare thing to see in this business. So we know it's a extremely high quality book of business. Basically they've really built an exceptional management team with a great business plan and it's translated into pretty impressive growth over the past four or five years and they've really become a very profitable insurer and we think it's going to be a great diversification hedge upon our existing portfolio.

Are you able to say how much is GEICO and are there any other meaningful relationships like that, that our producers will help them get to policyholders?

Yeah, I would rather not give out market share data like that just because we view that as proprietary. But it is pretty meaningful in terms of the GEICO relationship and we see some pretty good upside potential there as well.

Thank you.

Thank you Mark.

Thank you and the next question is a follow up from John Barnidge with Sandler O'Neill.

Great, thanks. You're obviously buying scale in New England, what are your thoughts on bringing the vertical integration of claims management that you have in Florida to Bay area as well?

Yeah, that's a really good question because that has saved us tens of millions since our inception. We believe in that model and I can tell you that Narragansett Bay in some of their areas they do have preferred vendor networks and pricing. And they are in those instances where they're used, they are saving money versus not using their network. So with the concentration that we see in New England we believe that we can start to roll out a similar repair program and increase the bottom line and increase customer satisfaction with a client experience.

You guys in Florida had acquired kind of like a contractor, would you think there'd be some interest in doing something similar New England as well?

Possibly, I think it's difficult to find the right contractor. You need to find a company that has scale and has quality people and they have to know the insurance industry. Those are three very hard things to find. We've been lucky with our acquisitions so far and that they've ticked all the right boxes and have been highly accretive to us. But, it is something that we will look at in the Northeast as well.

And then, sorry to go back to that 70 million after tax number. That was 50% growth on an absolute basis as well as EPS, is that correct?

That's right. We're projecting next year well over 900 million in gross written premium and we are projecting over 70 million of net operating income.

So, then would that imply 45 million for net income for this year?

I don't think we're giving that level of guidance right now. Yeah, we're looking at 2018 earnings as the increase, 50% of 2018 earnings.

Okay and then you said total share value from the AOB Miami Tri-County will be 7% going forward, what was it as of the most recently completed quarter?

It would have been somewhere around mid teens.

Great, thank you very much.

Thank you.

Thank you. And as there are no more questions this concludes the question-and-answer session, as well as the call. Thank you so much for attending today's presentation. You may now disconnect.