Good morning and welcome to the Heritage Insurance Holdings' Second Quarter 2024 Earnings Call. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the conference 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. 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. Good morning, everyone, and thank you for joining us today. Before I discuss the second quarter, I and the entire Heritage family wish a swift and complete recovery to all those impacted by Hurricane Debbie. Our team has been responding to policyholder needs and remains ready to provide outstanding claims service. With regard to the second quarter, we achieved another period of strong performance for Heritage, as we continued to execute on our strategic initiatives focused on achieving rate adequacy, maintaining our underwriting discipline, and allocating capital to drive growth and returns as we strive to deliver solid financial results. As part of our strategic initiatives, we significantly curtailed writing personal new business in most of the Northeast and in the majority of the states in the Southeast starting in 2022. Over the last two years, we have grown our top line through organic growth in our state in our commercial residential portfolio and our E&S products, combined with rate actions across our personal lines portfolio. At the same time, we undertook significant underwriting initiatives, aimed at improving the quality of our portfolio. These efforts have significantly improved both our underwriting results and profitability in 2023, and through the first six months of 2024. Our results this quarter are indicative of these actions, with our top line gross written premium growing $28 million or 7.1%, while our second quarter net income grew by $11 million or 143%, both as compared to the second quarter of 2023. A key highlight of the quarter, is the continued execution of our underwriting and rate adequacy initiatives, which have had meaningfully benefited our bottom line. From an underwriting perspective, we continue to strategically reduce our exposure in over-concentrated and unprofitable areas, while selectively increasing our presence in profitable geographies and products.…

Thank you, Ernie, and good morning everyone. As Ernie highlighted, the second quarter of 2024 was reflective of our efforts and an indication of the earnings we expect to deliver in the future. Our results this quarter reflect the success of our strategic initiatives and the positive impact of our disciplined underwriting, rate adequacy efforts, and prudent capital management. Starting with our financial highlights, we reported net income at $18.9 million or $0.61 per diluted share, compared to $7.8 million or $0.30 per diluted share in the prior year quarter. This substantial increase in net income, was driven primarily by higher net premiums earned, and a significant increase in net investment income, which was partially offset by higher operating expenses. Our total revenues for the quarter were $203.6 million, up 9.9% from $185.3 million in the prior year quarter. This increase was driven by several factors. Growth premiums earned rose to $350 million, up 6.1% from $330 million in the prior year quarter, reflecting our strategic focus on rate adequacy and organic growth in our commercial residential lines. Net premiums earned increased to $190.3 million, up 7.6% from $176.8 million in the prior year quarter as the growth in gross premiums earned outpaced the increase in ceded premiums. Our strategic focus on organic growth of our commercial residential business had paid off with substantial premium in the segment contributing positively to our overall profitability. The commercial residential business, which tended to have lower attritional loss ratio, saw its in-force premium grow by 29.4%, compared to the second quarter of 2023, while the total insured value only increased by 9.9%. This segment now accounts for 21.3% of our in-force premiums, up from 17.5% in the prior year period. Due to improvements in our reinsurance program from a cost and structure standpoint,…

[Operator Instructions] The first question is from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Congratulations on your quarter.

Thank you, Paul.

Good morning.

A couple few questions here. I want to ask a little bit more about the new growth effort. There are obviously multiple levers, one of which is - just allowing new business to happen. The other is a whole host of non-rate actions that companies often do. So could you talk a little bit about sort of where you are from, do you essentially start from you weren't actually writing any at all, and then where you are from a non-rate action perspective in terms of turning on the spigot?

Yes, I could talk a little bit about that. So obviously we've taken some action over the past couple of years on our underwriting appetite, and where we're writing, especially in geographic areas, right where we can see profitability. So as we mentioned is, we will selectively be writing in those areas, anchored again by the underwriting criteria that we have. Some of it will be rate, some of it will not be rate, and those portions of it. So, we'll continue kind of doing that because that's proven to us that we can kind of make profit in those areas in the long-term. So it is very selective and strategic of what we're writing the new business.

Right. So you're not turning this spigot on completely at this point…?

No, no, no. We are very directive and focused on where we're writing and making sure that again, from a long-term perspective, we are very focused on underwriting profitability. So we understand that as you take rate in some areas we can write there quickly, others take a little bit longer, so it is not turning on the fire hydrant.

That's great. Could you talk a little bit about the reserve development in the quarter and the sources and pieces and what drove it?

Yes, we actually, yes, there were, basically that was due to Hurricane Irma. Yes, we still have, a few claims out there on that. We're about 99.2% closed on that one, but there still are a few outstanding claims that were resolving, and it really had to do with those claims.

So those are essentially case reserves that were, due to be larger than we expected?

Correct.

Fantastic. And then just a final question, I'll let some other people ask. Hurricane Debbie, obviously not the worst hurricane, thank God, but is there anything similar to, an event in the past that you found that was similar to Hurricane Debbie?

Yes, so if you remember last year, Hurricane Idalia, it kind of took a similar path, stronger hurricane, but similar path is where it made landfall. But again, in that area is pretty rural, less populated. We don't have a large book in that area very early right now. Now the difference between Debbie, as Debbie seems to be larger, slower, less powerful, but a lot of rain. So we expect more flooding type claims, not covered by us, but we still are taking those calls and helping people where we can.

Makes sense. Do you recall how big Idalia was just in general? Obviously the rough comparison, right?

Yes, our ultimate on Idalia ended up being just a little over $7 million.

Fantastic. I'll let some other folks ask questions, but I appreciate it.

Thank you, Paul.

Thanks, Paul.

Next question is from Mark Hughes with Truist. Please go ahead.

Yes, thank you. Good morning.

Good morning, Paul.

Good morning.

Could you talk about the growth in the E&S? I think you've highlighted that's been a good, strong growth vector for you. I guess I'm thinking if you're seeing maybe more adequate rates in the admitted market, are you still seeing as much momentum in E&S? How are you seeing the interplay between the two different markets and maybe a function of different states? But if you could expand on that, that'd be great?

Sure. So we have seen growth in the E&S market. As we're in 16 different markets and each of those markets are quite different. So, we look at it as another tool in the tool set to address not just rate, there's coverage issues and other things that we can address. So we still see that E&S market continuing to grow, particularly in California, Florida and South Carolina. So as you're right in some admitted markets, we're getting the rate that's [rate- adequate] with it, but we still see the E&S market growing for us in selective areas.

Yes. And what do you think the general trend is going to be in terms of rate increases? You're getting to a better spot. But as we think about, say, over the next 12 months across your book of business, what would you anticipate? And I might ask Florida specifically, then maybe overall just kind of rough sense of how much rate you think you'll be pursuing?

Okay. Well, yes, first of all, let me address the Northeast where I think that we are still going to be seeing fairly substantial rate increases, due to lost trends and also re-insurance costs. I would say in the Florida market that is starting to moderate substantially, due to the legislative changes and some of the other loss costs decreases we've seen. So from that standpoint, we think it's going to moderate, but I think - there still is some lost cost inflation that will probably be pushing rates modestly higher, but not significantly and probably not to the level we've seen in the past several years.

Yes. I mean the…

Those rates are indicative of the lost costs that we're seeing. And again, because the trends right now are very favorable.

Yes. And I think your initial take on the legislative changes was kind of wait and see. If I'm interpreting correctly, you seem more upbeat here. Is that a fair reading? Is there, as you look at the events over the last quarter, two, three, have you seen a real meaningful change and how that, you've experienced that?

Yes, Mark. I mean, we've always said, I'll use the words right. You've heard me say cautiously optimistic and that was, because early on there wasn't really any data as we've now been through a couple months, a couple quarters here. We've actually seen the data coming through the numbers. So, we have said that, those legislative reforms have made an impact. We can see it in the actual numbers, whereas a year ago I would use the term cautiously optimistic. So I would now say that we're looking forwardly optimistic, right, to those trends continuing through the data that we've seen.

Yes, yes. Very good. Thank you. Appreciate it.

Thank you.

Next question is from Karol Chmiel with JMP. Please go ahead.

Yes, hi. Good morning. I got one question here, yes hi - regarding the investment income for the quarter. It was a nice beat. And I read that it was mainly, because of the higher yields on the on the shorter side of the yield curve that you utilize. And I'm wondering is this yield a run rate for the projections, or do you think you will go longer duration assets going forward?

Well, we are anticipating interest rates to drop. We are starting to go, we actually already started that, at the beginning of the quarter to start going out longer on the yield curve, in anticipation of rates dropping. So yes, we are, we are starting to go a little bit longer. I mean, our duration is still short. It is still under three years, like 2.69 years, A plus rated, but, we are trying to go a little bit out on the yield curve anticipating that the rates are going to drop.

Okay. But do you think an investment income of $9 million to $10 million per quarter would be a good run rate?

Yes.

Okay. Great. And then - just another question, just a random question. I mean, I know you said that you're being cautious with Florida. And then in the past, you guys were always very cautious with Tri-County and trying to get out of Tri-County. But do you think the Florida dynamic has slowly changed in the favor of maybe looking into the possibility of Tri-County again?

So what I would say to that is, yes, there's a size for us right in the state, and we do believe that Tri-County, there's a certain amount of concentration that we're comfortable with. As I mentioned earlier to Paul, we're not turning on the fire hydrant and writing everything that comes across, but we will be selected including into the Tri-County area.

Great. Thank you. That's all from me.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks.

We appreciate everyone joining the call today, and we wish everyone a great day. Thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.