Good morning and welcome to the Heritage Insurance Holdings Third Quarter 2019 Financial Results Conference Call. My name is Brendan 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 this event is being recorded.I would now like to turn the conference over to Arash Soleimani, Executive Vice President at Heritage. Please go ahead.

Good morning and thanks for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience.Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.In our earnings press release and in our SEC filings, we detail material risks that may cause our future results to differ from expectation. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make.For a description of the forward-looking statements and 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, earnings release and other SEC filings.With us on the call today are Bruce Lucas, our Chairman and Chief Executive Officer, and Kirk Lusk, our Chief Financial Officer.I will now turn the call over to Bruce.

Thank you, Arash. I would like to welcome all of you to our third quarter 2019 earnings call. Before we begin the call, I'd like to thank all of our employees for their dedication to our company.Sales and earnings in the third quarter were strong and all of our key internal metrics were well above plan. We continue to execute on our industry leading diversification strategy that is focused on growing our footprint outside of Florida and across our entire platform, 66% of personal alliance new business premium was generated outside of FloridaSimilar to the second quarter, we are seeing strong sales across our footprint. In the Southeast ex-Florida, new business premium increased 87% year-over-year, and the Northeast new business premium increased 8% year-over-year and in Florida personal alliance new business premium increased 22% year-over-year, an acceleration from a 7% decline in the second quarter of 2019.We also launched our Virginia operations and new products in Hawaii that are fueling growth in future quarters. New business sales in the third quarter was a new third quarter record for the company. Our new business sales continued to grow faster than prior expectations, and I believe growth will continue to be solid. While we have used our exported growth to offset strategic non-renewals in the Tri-County that will continue, but will likely not be as pronounced as in prior quarters and years.This is largely because our Tri-County de-risking strategy has been very aggressive in the last three and a half years, and there is not nearly as much exposure to drop today. By way of example, at the end of the third quarter our Tri-County TIV was 6.8% versus approximately 43% at the beginning of 2016 when our de-risking plan was initiated. As a result, we had positive top line premium growth…

Thank you, Bruce. Good morning. Net income for the quarter was 8.1 million or $0.28 per diluted share and was up from 6 million or $0.23 per diluted share reported during the third quarter of 2018.Gross written premiums increased by 3.7 million from the third quarter of 2018. Reflecting strong growth outside Florida at 7.9% or 9.2 million have written premiums, with planned de-risking driving a decrease in Florida a 4.8% or 5.6 million. Year-over-year year-to-date growth outside of Florida was 24.4 million or 7.7%, partially offset by a decrease in Florida of 23.6 million or 6.1%.We continue to prudently evaluate our exposure in the Tri-County area. Based on underwriting and pricing actions taken since 2016, we expect the amount of de-risking to diminish in future quarters. Our growth strategy has been planned to position us for long-term growth, profitability and exposure management and.An example of our balanced approach to growth can be seen by our growth in the southern states outside of Florida. Where we're able to exceed our expected TIV by over 31%, while at the same time, improving our risk aggregations and decreasing our 100 year PML in that area.As experienced in 2019, we expect our growth outside of Florida to continue. Our retention has been strong at over 90% throughout our platform. Our Florida rate increases this year have averaged over 12% with rate increases in the mid-single digits for business outside of Florida.The ceded premium ratio was down for the third quarter of 2018 by 3 percentage points and down by 3.9 points from the second quarter of 2019. The decrease reflects the reinsurance synergies we described during the second quarter earnings call, along with the changes to the gross quarter share treaty.2019 Q3 net earned premiums are up 4.8% from the third quarter of…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Barnidge with Sandler O'Neill. Please go ahead.

Thanks. Congrats on the quarter. You talked on the 2Q '19 call that there might be a significant amount of reserve releases coming in the next few quarters from reserving for a surge in AoB claims if it didn't turn out to be the case. Can you please provide your revised thoughts on that?

Yeah, good question, John. And thanks for the comment. It's too early to tell right now what we're going to do with the surge in AoB claims that have come through. Obviously, we're fighting a lot of those claims. And that is really – a surge just happened a few months ago. So it's really early in the cycle, but I can tell you that as we look at our reserves, we feel that we are more than adequately reserved, we're reserved actually above the midpoint of our range. I think if you asked every other Florida company where they are, they wouldn't be that high. So we do feel pretty strong that we are adequately reserved and potentially have some cushion there. But as time develops, we'll know a little bit more about how those losses are maturing.

Okay. I know as we think – look back to 4Q '18, there was a benefit there from CAN, how should we be dimension in and thinking about comparables on a net loss basis and 4Q '19?

Yeah, I mean, the issue with CAN is we're not really getting the repair opportunities that we've gotten in the past. The biggest bang for the buck on CAN was really in the Tri-County. If you get a water claim there it's like 10 times higher than anywhere else, and we're having a lot of success penetrating those claims and reducing our exposures as we de-risk out of Tri-County, we're not getting that net-net benefit to the same extent that we've gotten in prior years. And so it's really a quite minimal impact at this point until things develop more in the northeast.

Okay. On the 2Q '19 call when you're talking about the claims environment broadly in the industry, not necessarily Heritage specific. You said it was getting worse and not better. Can you kind of provide your latest thoughts on fraud issues in Florida, please?

Yeah, another great question. I do think things are getting worse and you're seeing quite a bit of attorney, PA activity out there in the general market. AoB will be for us is down post legislation. But my concern is they're just going to go to the first party direct lawsuits. And well, time will tell us as to whether or not that happens, but I do think that the claims environment, especially in southeast Florida, in Orange County, in particular, I would call that the new quad County. I think that things there are particularly toxic and getting worse. And we are very grateful that we've dropped our TIV there to 6.8% versus 43% a few years ago, when we started the process, but I don't see it slowing down anytime soon.

Okay, my last question and I'll re-queue. Can you dimension weather losses in the quarter and catastrophe losses in Florida versus ex-Florida? Thank you.

Yeah, the bulk of those are going to be in Florida for the quarter about probably 90% in Florida.

Yeah, Dorian was a decent contributor as well, but it was a relatively small event, I think. That's somewhere, correct me if I'm wrong, somewhere in the 3 million range or so for Dorian. So we're taking a pretty conservative approach there. We haven't seen a lot of claims on Dorian. But overall, it's just a lot of rain events and some health events that you get throughout the state.

Our next question comes from Frederique Sleiffer with KBR. Please go ahead.

Good morning and firstly just wondering what your latest gross Michael and Irma losses and how much IBNR do you have left remaining for each storm right now?

Yeah, they really haven't changed much for us. I mean, we drew a lot of raised eyebrows when we put up some pretty decent numbers last year, but consistent with the way we reserve, we tend to reserve higher than those companies and our thoughts were that people would eventually catch up. I think we're starting to see that now both on daily reserves and on cat reserves. Irma, total reserves are probably around a couple hundred million or so with IBNR. I think it moved about 15 million in the quarter roughly, so not really that much of a move. Michael is the one that I'm a little bit more concerned about just seeing some of the claim activity up in the Panhandle. We're seeing a lot of PA activities, a lot of attorneys, a lot of AoBs are coming out of that event. Severities are very high up there. And there's been a lot of pressure put on Florida insurers to resolve all their Michael claims and pay them out well, it makes it very difficult for us in the negotiation process. And I think that loss is somewhere in the 16 million incurred range. So not a ton of movement, but we are seeing some increased claim activity there.

Okay, got it. And then just I know it's probably a little too early on the upcoming reinsurance renewal, but do you think the recent elevated Japanese wind activity could have an impact and also given that your peers have reported some Irma and Michael last creep recently. Do you think that could impact the renewal and pricing?

Not really. I can tell you I just got back from PCI where I met with 40 plus of our reinsurance panel. And the issue in the market is not loss creep on Florence. Michael Irma, Harvey, I think that stuff got priced in last year. No one's even talking about it this year. Same with the events in Japan have barely even mentioned in any of my meetings. The number one thing that we are hearing is the lack of capacity potentially in the retro market. And with the collapse of Capco things, which was a huge supplier of retro capacity. We're hearing that in every single meeting that there's a lot of concern around what retro capacity is going to look like? Fortunately for us, we've built a panel that is not very dependent upon retro, we think that helps us. That was an issue that we saw again in 2019 was, there were some retro squeezes that were taking place in the market. But we were still able to buy to the highest return period in the company's history and save 10 million because of the diversification of our footprint. We think that that diversification trend as it continues, will offset any potential hopefully, reinsurance increases that could take place in 2020. Kirk noted some interesting stats earlier in his portion of the call, Southeast ex-Florida, for example, we were massively over TIV projections in those states, but it actually reduced our PMLs. So the synergies we're seeing from the multi-state footprint we've been growing the last three years are really paying off on the reinsurance pricing.

Okay, and then just quickly, following up on some of the AoB comments you made. It sounds like Tri-County claims are down and I might have missed it. But what are you seeing in your non Tri-County claim counts are those down as much as Tri-County claims? And also are you expecting any impact on the loss ratio or not at all given your previous comments?

Yeah, that's really a good question as well. Yes, Tri-County claim counts and litigation counts are at once again new quarterly records and I think that's 12 quarters in a row. But that shouldn't shock anyone given the massive de-risking that we've done over the past three and a half years and Tri-County. As a result of growing the footprint outside of Tri County, the percentage of open claims and losses et cetera have been growing at ex-Tri-County because we've been growing our footprint ex-Tri-County. But I can tell you those losses are a lot easier to resolve than the ones in Tri-County. So we are seeing favorable reserve development, I mean five quarters in a row in the Florida market, it's pretty impressive if I could just add this team's back for a moment, we're not seeing that anywhere of any of the companies in Florida. A reason for that, as I mentioned in my earlier statements is the reduction in Tri-County.

Okay, and then just sticking with the core, the net core loss ratio a bit. It was elevated for us last year, should we be thinking about 51%, 52% are sort of a good run rate going forward and into 2020 given the minimal benefit from CAN right now?

Are you talking about net of gross loss ratio, you're talking about net?

Net core loss ratio.

Yeah, yeah, so right around that area, a little bit less.

Okay. And just lastly on capital management, it seems like share repurchases accelerated a bit this quote over last quarter, so how should we be thinking about the pace of those going forward?

Well we're going to continue to pound it and we believe that we are massively undervalued, it's pretty incredible. We're putting up great returns on equity. We're doing everything the right way on reserves, which I don't think a lot of people fully appreciate how meaningful that is to the financial world with all of the company. We're looking at great trends in reinsurance, top line growth across the board and we're $2 below book value. Yeah, we're going to be buying back a lot of stock.

Great, thanks for the answers.

Alright, thank you.

Our next question comes from Matthew Carletti with JMP Securities. Please go ahead.

Hey, thanks. Good morning. Most of mine have been answered in the past two lines of questioning, but I do have one left. Bruce, I hope you could update us on some of the partnerships that you have with other insurers specifically, I think last we spoke with National General; Alabama might have been in the works and Safeco had just launched I think, you just dip your toe in Connecticut. I was hoping you could update us with where those stands?

Yeah. Well, that’s a pretty legitimate question. And it is something that we spend a lot of time on is building the National relationships. We, we have them with Geico, Safeco, and National General, as you noted, I will not get into specifics on any one partner. We have an agreement with all of our partners not to disclose the amount of business that we're transacting together. We view that as something that's proprietary and they prefer not to have that data release. So we're going to respect that. I can tell you this. Top line sales are up significantly, especially outside of Florida. And the number one growth state in our portfolio right now in terms of percentage is Alabama and that is in book of business that's been doing very well. North Carolina continues to just sizzle. From our perspective, we're way ahead of expectations in every single state, across the southeast. Up in the northeast, we're a little behind plan in – yeah, it's more than made up by the additional business we've been riding across the southeast into Hawaii. So we're very happy with how the partnerships are progressing, but we can't give specific data about any one of them.

Alright, fair enough. Appreciate the color and best of luck.

Alright, thank you.

[Operator Instructions] Our next question is a follow up from John Barnidge with Sandler O'Neill. Please go ahead.

Thanks. Can you talk about your current thinking around the expense ratio it ticked down in the quarter sequentially third quarter in a row you did that?

Yeah, I think it's probably going to be – probably stabilize a little bit. I mean, we really don't want to give a lot of guys on other ratios. But overall, I mean, it's – I think we're starting to stabilize, I think some of the actions we've seen have come through the P&L and so going forward it's promising about where it's going to be.

Okay. Can you talk about other revenue and net investment income and kind of how we should be thinking about that going forward? Were the numbers we saw in 3Q '19 level that we could consider a run rate?

Yes. Yeah. I think that they're, they're somewhat consistent with what we've been saying.

Okay. And my last question, can you kind of talk about the M&A environment and your interest in Florida and outside of Florida? I know previously there's been commentary industry about troubled insurers in Florida. So I don't know if that's something that would be advantageous to you, but also outside Florida. Thanks.

Yeah, John, that's a really good question. Yes, there are a number of companies for sale right now that we're aware of. We'll never say no, but it has to be a really good fit for us to even consider it. A lot of what is out there is highly distressed. And there's no secret that there have been some failures in Florida. And I think all of those companies that have been placed into insolvency saved one followed into the market after us, timing is everything, they picked, maybe not the best policies out of citizens because there wasn't much left. Thankfully, we hit the break when we didn't see the credit quality. But there's some stuff out there that I think is struggling and there are some companies in Texas as well that have been on our radar from time to time. But we haven't seen any metrics out there that really justify an acquisition in Texas that we think it's a bad claim environment. And you don't get a lot of reinsurance synergies off that portfolio. So for now, we're not looking to do M&A. It's not even really on our radar at all. We're so focused on growing the book of business organically, we have record growth yet again, our top line is really going to start to move into 2020 and we're going to focus on that because there's a lower acquisition cost.

Okay, and then are you seeing any opportunities in the citizens book itself?

No.

Okay. Thanks for the answers.

Thank you.

This concludes our question-and-answer session. I would like to turn conference back over to Bruce Lucas for any closing remarks.

I would like to thank everyone for joining our third quarter 2019 earnings call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.