Good morning and welcome to the Heritage Insurance Holdings, Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kirk Lusk. Please go ahead.

Good morning, and thank you 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 upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release, and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. 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 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 earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie.

Thank you Kirk, and I would like to thank everyone for joining the call today. To start, I would like to express my appreciation for our team at Heritage and for their hard work and dedication to the company, the commitment of our employees, policyholders, and value partners continues to drive growth across our 16 state footprint. We especially appreciate the solid relationships we have built with our reinsurance partners. During the call today, I will provide a brief overview of our second quarter 2022 performance. Kirk will then provide an update on our key financial performance metrics, and then we’ll open up the call for Q&A. First of all, I’d like to highlight the positive underwriting income for the quarter. Despite the many challenges we face in our markets, our rate, underwriting, and exposure management initiatives are having the desired impact on our results. Our net combined ratio of 99.4, the positive impact our strategic initiatives, which resulted in underwriting income for the quarter. Overall, I'm very pleased with our second quarter results. Excluding the impact of a goodwill write-down, second quarter net income was $2.9 million or $0.11 per diluted share, up from a net loss of $4 million in the prior year quarter. This improvement was primarily driven by higher net earned premium, which outpaced the increase in losses. Net current accident year weather losses increased to $38.1 million, up 7.34% from the prior year quarter. However, our net loss ratio of 64.1% was down nearly 5 points from the prior year amount. The rate and form changes strategically implemented throughout the book of business over the last year and a half along with our geographic diversification intentional exposure management and selective underwriting for new and renewal business has begun to positively impact our portfolio. These initiatives…

Thank you, Ernie. Good morning. As Ernie stated, we are pleased with the underwriting results for the second quarter. Our focus on rate adequacy, underwriting and profitability in all our geographies has started to gain momentum and resulted in an adjusted net income, a non-GAAP measure of $2.9 million or $0.11 per diluted share, when excluding the impact of the goodwill write down. Despite the underwriting gain in the quarter, management determined that it was appropriate to write down the remaining goodwill at this time. The determination primarily reflects the decline in economic conditions, which impacted the current stock price and the volatility of the property insurance market caused by the impact of inflation, higher reinsurance costs, and litigated claims in some of our markets. At this point, the company does not have any goodwill remaining on the balance sheet. There was no write-off of intangibles. Driven by the non-cash goodwill write down of $92 million or $90.8 million after tax, the net loss for the quarter was $87.9 million or $3.32 per diluted share. In-force premiums grew by 3% from Q1 this year to just over $1.2 billion, while policies in-force decreased by 1.6% from Q1. The in-force premiums are at the highest level with average personal lines property policy premiums for the first time is just under $2,000. Year-over-year premium in-force was up 3.4%, while policies in-force were down by 7.3%. The decrease in policies was most pronounced in Florida where our personal lines policy in-force was down nearly 19% year-over-year. We are committed to the Florida market, but recognize the challenges with conducting business in Florida. Abusive litigated claims practices are our primary concern and we have taken underwriting actions and reducing the adverse impact of these market challenges. We anticipate rate increases in all our geographies…

And our first question will come from Mark Hughes of Truist. Please go ahead.

Yes. Thanks. Good morning.

Hey, good morning, Mark.

Good morning, Mark.

Did you all disclose, kind of your typical rate hike in Florida and then in other markets? And we would be curious to get that versus how you see loss cost trends now?

Yes. The rate increases in the Florida market have been in the mid-teens. Outside of that, it varies from low-single-digits to double-digits. In a few states, it is higher than that. It actually exceeding the teams in some locations where we just had the ability to get more rate. On top of that, we do have an inflation guard factor, which is 10% in the Southeast in Hawaii and 7.5% in the Northeast. So, combining those two rate increases are across the board definitely in the mid-teens to higher.

Right. So, the inflation curve would be on top of the mid-teens in Florida or is that the…?

Yes, it would be on top.

Okay. So premium increases would be 20% plus presumably in Florida? With the inflation ?

Yeah, that’s correct.

And then how do you see loss cost trends at this point? What's the rate of increase there?

Yes. Loss costs, we have been seeing those to get that type of stuff. I mean, we look at a 3, 5, and 10 year timeframe, and it's been right around 11%, 12%.

How about the lately, I guess it seems like some of the material prices have been coming down. So, maybe it's too volatile at this point, but just curious to get your sense of how it's running as we sit here today?

Yes, it is down. I mean, it's clicked down a point or two over the last couple of quarters. So, it is trending favorably, but it still is right around .

Then what is the total statutory capital and maybe both in Florida and then in the Northeast at near ?

Yes. The statutory capital and then also, I know one other question that always comes up is what is our non-regulated cash that is about $30 million? The stat equity across the group, Heritage has about 106, Zephyr 78, NBIC 92, total 275.

And then what kind of position are you in to the extent that you – there is a large storm in Florida it's a full . You've got 40 million on a 106 million in capital, what's happens then?

Well, there is backstop also by Osprey, which is our captive So, the hit to the insurance company isn’t near that extreme. It's actually in the low numbers. It's like $5 million, $10 million as opposed to the $40 million, which would be absorbed by Osprey and Osprey is already fully collateralized for that.

Okay. So, in the event of the storm, not a capital situation? Okay. And then depending on the size of the storm, I guess with, you know, the contracting subsidiary, got the opportunity to…

Yeah, to get something .

Yeah. Right. The total Ceded premium or Ceded premium ratio when we think about full Q3, Q4, what kind of numbers are we looking at?

Despite the increase in reinsurance this year, which has been very substantial. When we look at the increase in the premiums and the rates we're getting and that type of stuff, it actually is going to be relatively flat for the first half of the year. I mean, third quarter will be – third quarter is going to be slightly elevated, but then fourth quarter will be down. So, for the second half of the year, it will be very comparable to the first half.

Kind of Ceded premium to growth?

Yes.

Gross premiums earned. Okay. And you said the hotel capital was 30 million.

Correct.

Okay. All right. Thank you very much.

Thank you.

Thank you.

The next question comes from Paul Newsome of Piper Sandler. Please go ahead.

Hi, good morning, Paul.

Good morning. Nice to see an underwriting profit. That's just fantastic. Kind of actually some follow-up questions. On the , what are your RBC ratios looking like of late?

You would be looking at probably the Heritage Company in excess of 300, I'm sorry, probably in excess of 320, Zephyr would be in excess of 400, and NBIC would be in excess of 370.

So, well in excess of what cares about?

Correct.

And then on the goodwill write down, was there a specific trigger for the second quarter versus say the first quarter, a lot of the things you talked about like the declining economy and share price have been true for a while. And I was wondering if there was a specific trigger, whether it be reinsurance or something else that caused the write down other than say like an annual engineering when we accept it?

Right. No, it was actually a combination of things. And then one of the things I would comment on though, first of all is that, it was not due to the performance of the underlying assets. The underlying assets are performing well, and it really comes down to the stock price. There's two parts of the analysis. One is your discounted cash flow. The other part is, what is your stock price multiply times a control premium that gives you an idea of what it is and then you take the difference between that and goodwill. And so, it's really – the main driver as far as the math is concerned is the stock price. The drivers are the combination of those items over a period of time. So, when we look at the first quarter, some of those were trending that way as far as drops in stock price, poor economic performance overall, dislocation in the property market and some of the markets we operated. And I think that it's in looking at all those factors and so therefore being consistent for a couple of quarters. That's why we evaluated on an interim basis as opposed to typically on .

Okay. Thank you. That's what I had to ask. Appreciate it.

Thank you.

Thank you.

And the next question comes from Marla Backer of Sidoti. Please go ahead.

Thank you. Can you talk a little bit about what kind of – what your expectations might be potential regulatory changes in the Florida market. I mean given that this is a topic that's been under just discussion for quite some time?

So, yes. So, first I'll say that the reform and the changes that we did get out special session, we're very grateful and appreciative of. But as we stated, we do believe there's more that needs to be done and we think that what came out of special session is more discussions around what those specifics are. So, we are actively working and providing feedback, but I don't think there's anything just quite yet. But I think the overall goal is to limit the litigious nature of what we have here in the State of Florida. So, I do think that momentum will continue going forward into the next session.

Okay. And given where you are right now in the process of de-risking and improving profitability. Do you feel that at this point you are getting close to looking for a new market to – in which to do business potentially in order to grow your book of business?

So, I think we're always looking at some new markets and we do the due diligence around that. So, we'll continue with the current objectives that we have, which is limiting what we have in Florida, but we're always constantly looking at those other markets and seeing where there's opportunities as they arise.

Thank you.

Thank you.

Thank you.

The next question is a follow-up from Mark Hughes of Truist. Please go ahead.

Just curious, when you think about the losses in the quarter, your weather losses as you laid them out were still pretty high, but the underlying losses it looks like improved pretty meaningfully, is that entirely kind of the rate underwriting actions? Was there some other aspects of the weather that maybe was just a little more favorable this quarter? I'm just kind of curious whether this is just – and again, I had the numbers in front of me. And it looks like there's still a lot of weather losses, but I'm just sort of curious whether there's any other dynamic that one might attribute the improvement to other than that?

Yes. And when you look at the weather losses from a ratio standpoint, last year, second quarter weather losses made up 24.2 points of the loss ratio this year, this year 24.1. So, even though you could say, hey, the losses are elevated, they're very consistent from a ratio standpoint, year-over-year.

And Mark, what I will say is, we've mentioned several times the underwriting initiatives that we've taken on given the market conditions, we've had been more selective on the policies and better quality of risk that we're taking. I think you're seeing that come through.

And then your in Florida at this point, you're obviously getting nice rate increases. You been important to reduce your total insured value. Would you anticipate though that that stabilizes and maybe you get some growth in Florida? What's the now still trimming in Florida, just ?

At this point, we're very confident about the initiatives we're continuing to take. Should the market conditions change and there's an opportunity for growth in the State of Florida, we will consider that, but at this point in time, we're very pleased with the initiatives we're taking. We'll keep down that same path at this time.

Maybe characterize the – if we look at the loss ratio in Florida versus outside of Florida, are they comparable different, a lot different?

Yes. No, they have been higher and I think because the lot of the rate and the underwriting actions that type of stuff is starting to turn. But it'll take a little while before it gets more consistent. And of course, the environment in Florida does elevate that substantially.

Yes. Okay. Thank you very much.

All right. Thank you, Mark.

Thank you, Mark.

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

We'd like to thank everyone for joining the call today and wish everyone a great weekend.

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