Good morning, everyone, and welcome to Heritage Insurance Holdings' Fourth Quarter 2021 Financial Results Conference Call. My name is Jamie, and I will be the operator today. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the conference call over to Kirk Lusk, Chief Financial Officer at Heritage. 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. Good morning, everyone, and thank you for joining us today. I would like to thank our employees and our Board for their continued hard work and dedication. I also would like to thank our shareholders for their continued support as we work towards delivering improving profitability and strong shareholder value for years to come. Despite the challenges the industry faced in 2021, we returned to positive adjusted net income in the fourth quarter with strong results driven by a solid 93.2% net combined ratio, representing our first sub-100% combined ratio since the first quarter of 2020. Weather losses normalized this quarter, and the impact of rate increases, and underwriting enhancements has started to benefit results. While we're not pleased to take the goodwill impairment charge in the quarter, it's important to note that it's a noncash charge with no economic impact to our business and no relation to our core underwriting and investing operations. It will not distract our team from the continued execution of our well-defined strategy to reduce volatility and generate sustainable returns on equity. Our focus over the past year has been on improving profitability by implementing meaningful rate increases, re-underwriting our existing business and being more selective when we consider and accept new business. We also made meaningful form changes, vetted out agent network to ensure that we're writing new business through our most profitable partnership and intensified our focus on expense management. We also continue to diversify away from Florida to reduce the volatility of our book. As of the fourth quarter, Florida total insured value only accounted for 26.9% of total TIV, down from 31.3% last year. As I mentioned, rate increases benefited fourth quarter results, and we expect higher rate to continue to increase our earned premiums throughout the year.…

Thank you, Ernie. Good morning. Let me begin by providing some additional detail on the driver of the net loss of $49.5 million reported for the quarter. The primary driver was a $60.5 million noncash goodwill impairment that was mostly nontax deductible and negatively impacted earnings per share by $2.20. Adjusted net income, which excludes the impact of goodwill was $11.3 million or $0.41 per share. Management firmly believes our stock is undervalued and that the last several years of weather-related catastrophes has had an adverse impact on our stock price. With our stock trading below tangible book value at the time of the annual goodwill impairment analysis and the overall market disruption and estimated valuation multiples in the property insurance market, we determined that an impairment of a portion of our goodwill was appropriate. Importantly, we believe the fundamental performance of the business in the fourth quarter and the earnings potential for Heritage in 2022 and beyond is better reflected by our fourth quarter adjusted net income and combined ratio. Adjusted net income of $11.3 million for the fourth quarter of 2021 was up $8.5 million from the $2.8 million in the prior year quarter. The year-over-year change primarily stems from current accident year weather and attritional losses and lower general and administrative expenses partially offset by lower favorable prior year reserve development. We instituted a number of underwriting initiatives during 2021. Those efforts allowed us to achieve a net combined ratio under 100 in the fourth quarter of 2021, but more importantly, we expect our efforts to continue benefiting underwriting results in '22 and beyond. With the current market disruption in both the Southeast and Northeast regions, we will be even more selective in our underwriting as we continue our focus on a diversified, profitable and balanced portfolio.…

[Operator Instructions] And our first question today comes from Marla Backer from Sidoti.

So I'm just looking for a little bit more color here in terms of seeing how these trends continue in future quarters. Can you give us a little bit more color on the diversification? Obviously, as you pointed out in your prepared remarks, Florida policies as a percent of the total insured value that's down. Do you have a target number of where you want that to be? And in terms of -- you did comment on growth being driven primarily by rate increases, but I think embedded in that is also new business writing in states outside of Florida. Can you give us a little bit of color whether you're thinking of opening new states?

Okay. At this point, no, we are not contemplating opening new states, although we continue to evaluate that based upon current needs in the market. When you look at our PIF growth and where our kind of where we position ourselves going forward, the Florida market, when we look at the percentage that we have there, we're actually comfortable with that. I think the -- when you look at the growth, it's predominantly going to be in the Mid-Atlantic states and the Northeast. Hawaii is also starting to tick up well for us due to the implementation of an HO3 product out there. So I think that the balance of the portfolio, we're pretty comfortable with. And I would be surprised if it moves more than a couple of points, if anything, probably the Northeast and the Mid-Atlantic will grow faster than Florida. Florida, if it does grow, it will be through rate increases as opposed to PIF growth.

Got it. And just could you remind us of when you generally implement rate increases in Florida each year and what the process there is?

It's typically done very early in the year. For the HO3 product, we do continue to evaluate. We do quarterly reserve reviews and indications. And so we continually look at that and take rate whenever needed and wherever it's available. But typically, those are slated more towards the early part of the year.

[Operator Instructions] And we do have an additional question. This comes from Matt Carletti from JMP.

I had a couple of questions. First one is just a quick numbers one. What was the favorable development in the quarter? The press release referenced just a lower level of favorable, but can you provide the number?

Yes. It's just under $600,000. It's about $500,000 for the quarter.

Okay. Great. And then can you just talk a little bit about, particularly in the growth outside of Florida, kind of how the partnerships, some of the partnerships you've announced over the past couple of years, are going and contributing to that?

Yes. So this is Ernie. So those partnerships continue to provide benefits for us. We're very happy with those partnerships. We've been very upfront with the partners and planning out the growth together with them. So that is a mutual win-win for both sides. So we're very happy about those. And obviously, those have been focused outside of Florida, the Northeast and other than Florida and the Southeast states.

And ladies and gentlemen, showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

We'd like to thank everybody for joining the call today and wish everyone a great day. Thank you.

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