Good morning, everyone, and welcome to the Heritage Insurance Holdings Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. And at this time, I'd like to turn the floor over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead, sir.

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 reconciliation 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 thank you all for joining us today. I will provide some highlights of our second quarter performance, discuss our progress in achieving key objectives and offer insights into our strategic initiatives. Following my remarks, Kirk will provide details on key financial performance metrics, after which we will open the call for Q&A. I am pleased to report another consecutive quarter of solid financial results, with net income for the second quarter of $7.8 million. The improvement from last year reflects the progress we are making with our strategic profitability initiatives as well as the benefit of favorable weather this quarter. As I described last quarter, our strategic profitability initiatives include rate adequacy, selective underwriting, capital allocation, providing the appropriate coverage for the market and a balanced and diversified portfolio. We believe that the combination of these initiatives will enable Heritage to achieve consistent long-term quarterly earnings and shareholder value. Our continued rating actions throughout our book resulted in achieving our highest in-force premium, while decreasing policy count by 11.1% as compared to the second quarter of last year. We are also maintaining our underwriting discipline, including tightening underwriting criteria within regulatory guidelines and restricting new business for policies written in over concentrated markets or products. We are allocating capital to products and geographies that maximize long-term returns. During the quarter, we selectively grew our Florida commercial residential in-force premiums by 75.5% over the prior year quarter, while total insured value, or TIV, for that product increased 35.3% and policies in-force increased by only 12.7%. We intentionally reduced the policy count for our Florida personal lines product by 15.8% from Q2 2022 and 3.9% from the first quarter of 2023. Reducing Florida personal lines exposure remains a key focus, and we will continue until the positive impact…

Thank you, Ernie. Good morning, everyone. As Ernie mentioned, Heritage had its third consecutive positive quarter with $7.8 million of net income or $0.30 per diluted share for the second quarter of 2023. This result reflects an improvement from the net loss of $87.9 million or a loss of $3.32 per diluted share in the second quarter of 2022. The improved financial results can primarily be attributed to higher net premiums earned and investment income, partially offset by higher operating expenses. The net loss in the prior year quarter was due to $90.8 million net of tax or $3.43 per diluted share noncash goodwill impairment charge. The net income for the quarter resulted in an annualized ROE of 19.7%. On a year-to-date basis, the net income for the company is $21.8 million which returns an annualized ROE of 29.9%. Premiums in-force exceeded $1.3 billion this quarter, representing a 10.5% increase from the second quarter of 2022, while policy count was down 11.1%. The increase in premiums was driven by rate increases across the portfolio as well as selective growth in the company's commercial residential business and the use of inflation guard. These actions resulted in the average premium per policy increasing 24.3% from the second quarter of 2022 and 6.8% from the first quarter of 2023. In the second quarter of 2023, our gross premiums written increased 8.6% to $396.6 million, up from $365.3 million in the same period of 2022. Gross premiums earned increased to $330 million in the second quarter of 2023, an increase of 11.4% compared to $296.2 million in the second quarter of 2022. Similar to the in-force premiums, the growth in earned premiums can be attributed to our strategic efforts to selectively expand our commercial residential business, higher average premium per policy route the book…

[Operator Instructions] And our first question today comes from Maxwell Fritscher from Truist Securities.

I'm calling in today for Mark Hughes. I was wondering if you all will be participating in the Citizens Takeout process.

So we are exploring the Citizens Takeout process, but we're doing that in conjunction with other opportunities that we have in front of us. And as long as they align with our strategic profitability initiatives, it will be something we'll consider in the future.

Okay. And for the regulatory reform in Florida, have you seen any impact of that flowing through the P&L? I know it's still early.

Sure. And it is. It is early. We are seeing some optimistic signs and metrics that are coming in. But since it's still early, we are kind of optimistic that, that will continue and then kind of see the long-term effects of that in the P&L.

And then finally, how has the trajectory in lawsuits been this quarter?

So the trajectory has been on the decline on that piece of it. But again, it's still a little bit early. We are seeing some decline in the number of lawsuits that we're getting on -- from a total perspective on that, but we are kind of really focusing on making sure it's a long-term trend.

And our next question comes from Paul Newsome from Piper Sandler.

Congratulations on the quarter. I wanted to ask about any impact of increased costs from the reinsurance. I assume it's costed more this quarter, but then the RAP probably helped that. What's the net of all of that?

Yes, the costs did go up. And again, it did impact the quarter a little bit. However, because it incepted in June, it only impacted one month for the entire quarter. So going forward, it will impact it far more. I think you can expect our probably ceded ratio will probably go up a couple of points from kind of where it is right now.

Great. The transformation system that your -- system transformation you mentioned, is that going to have a measurable impact on the expense ratio?

Yes, I think it should have favorability on the efficiency of the overall operations than speed. One of the biggest things also is the ability to put in rates and get those in as opposed to relying upon an outside programming department to basically do that, it's a bit more table driven. So therefore, we'll also be able to expedite some efficiencies as far as getting things into the system, which, again, leads to some economic benefit.

That's good. But no initial costs as you're investing in the system that's on that basis?

Yes, it's capitalized, and there won't be any initial -- expense savings would probably over a period of time.

Great. And then sort of thinking about the dividend as mentioned. Are there any targets from a financial perspective in capital levels or debt that may be tied to your thinking about when the dividend might resume? Are you looking to put debt at a certain level? Or are we seeing ratios at a certain level before you recommend resumption in the dividend?

Yes. I think the Board is evaluating a number of different factors and looking at that. They're looking at the future opportunities, how to deploy capital in the future, is it better to return that capital now or keep it internally for those future opportunities? So it's a merit of items that they're looking at as far as determining when and if there will be a dividend.

But any thoughts, I guess, related to that on capital levels and where you want to be prospectively?

Not specific on the capital. I mean it is one of the factors that they look at, but it's not the sole one. And they don't have a target. It's also more or less based upon, hey, what is the best use of the capital going forward for the growth and the opportunities that the company is looking at?

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Ernie Garateix for closing remarks.

We'd like to thank everybody for joining the call today, and hope everyone has a great day.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.