Heritage Insurance Holdings, Inc. ($HRTG)

Good morning, and welcome to the Heritage Insurance Holdings First Quarter 2026 Earnings Conference Call. Please note today's event is being recorded. [Operator Instructions] 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. 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 good morning, everyone. I want to start by putting this quarter in the proper context because it's the direct result of the strategy we've been executing for several years now. When I became the CEO, our focus was very clear. we needed to achieve rate adequacy, time underwriting, reduce volatility and protect the balance sheet. What you're seeing today is a result of that work. and the beginning of the next phase of our strategy, which is opening for new business to prudently grow and further diversify our business while maintaining acceptable margins. Our first quarter was strong and in line with our expectations. We earned $36.5 million or $1.19 per share. making this the most profitable first quarter that the company has delivered since becoming public in 2014. We also reported the lowest first quarter net loss ratio since 2015. These results reflect steady underwriting execution, the full impact of our prior rate action and disciplined expense management. The improvement in the net loss ratio was driven by favorable attritional loss performance, lower weather-related losses, higher favorable loss development and the continued positive impacts of the underwriting and pricing actions we have taken over the past several years. Retention is strong and rate adequacy is firmly in place throughout our book of business. Our personal residential in-force premium grew 1.4% over the prior year quarter, while our commercial residential in-force premium declined 7.8% as we continue to see competitive pricing pressure in the Florida commercial market. Heritage has been in the commercial residential market for over 10 years and has built a well-performing portfolio managed by a deep bench of experienced underwriters and claim adjusters for that product. However, we will not waver from our commitment to achieve adequate margins. To the extent competitors offer commercial residential products, which are inadequately priced, we will not follow soon. Instead, we are leveraging the expertise of our commercial residential team to expand this product in 2 other states, most recently, Hawaii, where we can achieve appropriate risk-adjusted returns. We achieved great adequacy across 90% of our geographies and continue our efforts to ramp up new business and prudently grow our book of business while maintaining underwriting discipline, maintaining profitability and managing risk. Over the last 5 years, we deliberately took actions designed to improve the quality of our book of business and charge adequate rates, which ultimately reduced our policy count. This trade-off benefited our shareholders and stabilized our results. Given our current position, we are in the process of expanding our product offering and identifying new opportunities for Heritage to meet the needs of our policyholders and agents. As we enter this next phase of responsible growth, we continue to evaluate our markets to meet our customers' needs for coverage at competitive pricing. Loss costs have fallen, and we expect the cost of reinsurance to also decline, which will benefit our policyholders through premium reductions while we maintain margins. At the same time, we continue to cultivate agent relationships in our reopened territories. The early results are encouraging. with new business written up 62.7% from the first quarter of 2025 and over 30% from the fourth quarter of 2025. We are encouraged by our results this quarter and remain optimistic that our initiatives will result in growth throughout the year. Importantly, our policy count trends continue to improve sequentially. while we are seeing a few states with double-digit policy count growth, others are beginning to ramp up, and we are overall seeing positive growth rates. The management-driven policy count reduction over the last several years continued to moderate and points to a growth inflection in the coming quarters. Retention also remained strong at approximately 88%. Reinforcing our confidence that we are on a solid path towards sustainable growth in our policy count. As we discussed last quarter, we are exploring additional strategic growth opportunities including our planned entry into Texas on an excess and surplus lines basis. Our significant market research indicates this addition to our product line, which we expect will be modest in the first year and nicely aligns with our strategic initiatives. Production will focused primarily on Tier 1 and select Tier 2 geographies, which are coastal regions within our risk tolerance. We will leverage both existing agent relationships and new distribution partners. Consistent with our approach of delivering regional expertise, we intend to have underwriting, claims and marketing professionals located in Texas to remain closely aligned with local market dynamics. This provides us with the speed, flexibility and market knowledge of a regional company with the economies of scale of a super regional company. As always, we will maintain a strong focus on underwriting discipline, exposure management and rate adequacy. Heritage is now performing well with a diversified book of business, a strong balance sheet, significant cash from operations and flexibility to take advantage of emerging opportunities. We have built a culture and infrastructure that generates a sustainable competitive advantage by focusing on data-driven decisions, execution and disciplined processes. Our focus is on opportunities that are strategically aligned with our core capabilities and provide solutions in challenging or dislocated insurance markets. Any potential business opportunity must meet our strict financial and risk-based criteria. We require a deep understanding of the target market, including loss history, regulatory environment, reinsurance implication and key risk drivers, and we will only pursue opportunities that are expected to generate returns in excess of our cost of capital. Importantly, we are focused on maintaining prudent exposure management and ensuring that any transaction does not introduce undue enterprise or reputational risk. While competition has increased, our view is that not all of the operators in our space will be able to effectively manage the complexities of the market cycles. To the extent that consolidation opportunities emerge, we believe our scale, balance sheet strength, experienced workforce and local expertise positions us well to selectively evaluate opportunities that meet our disciplined criteria. Before I wrap up, I want to briefly touch on technology and artificial intelligence, which are important enablers of our strategy. We are actively deploying AI tools across the organization to improve efficiency and customer service as well as provide better tools for decision-making while maintaining appropriate controls and oversight. AI will continue to reduce manual effort, improve accuracy, assist with better quality control and provide analytics that will assist us in aligning staffing needs to customer demands. We expect that we will continue to enhance these capabilities for improved quality and customer service. Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily falling. largely due to reduced litigation, which benefits not only us, but our panel reinsurers. Given the improved litigation environment in Florida, the lack of catastrophe losses in our markets during 2025, and the reinsurance capacity entering the traditional and insurance-linked security markets, we remain optimistic that reinsurance pricing will continue to improve in 2026. We believe that favorable reinsurance terms will benefit the consumer with respect to the cost of insurance. To conclude, this quarter reflects the steady execution of the strategy we put in place several years ago. We delivered strong results, maintained underwriting discipline and have firmly positioned the company to pursue controlled profitable growth going forward. I would also like to reiterate our dedication to navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value and customer service, driven by our dedicated workforce, who I would like to personally thank for their efforts. Kirk, over to you.

Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $36.5 million or $1.19 per diluted share for the first quarter of 2016 compared to $30.5 million or $0.99 per diluted share in the first quarter of last year. This is a great start to the year, considering that this is the highest first quarter earnings in our history despite weather losses in the Northeast combined with the seasonality of our earnings. Since we gained profitability footing in 2023, the first quarter has made up 23% of our annual earnings. This bodes well for the rest of the year. The increase in our first quarter earnings was primarily driven by lower net losses incurred and higher investment income, partially offset by higher operating expenses. The earnings generated an ROE of 28.5%, while average shareholder equity increased by 65.5% from the prior year quarter. Premiums in force totaled $1.427 billion, down 0.4% from $1.432 billion in the prior year quarter. The decline continues to be primarily driven by competitive market conditions in the Florida commercial residential market, where we remain disciplined and focused on rate adequacy and adequate margins, as Ernie noted. While we continue to see opportunities, we will only write policies that meet our pricing and underwriting standards. Gross premiums earned were $353.6 million, essentially flat with $353.8 million in the prior year quarter. Lower commercial residential activity was largely offset by growth in the personal residential lines. Net premiums earned totaled $199.7 million, also consistent with the prior year as ceded premiums were relatively flat. Gross premiums written were $346.7 million, down 2.6% quarter-over-quarter primarily reflecting the reduction in Florida commercial residential business. Our net loss ratio improved to 45.9%, a 3.8 point improvement from 49.7% in the prior year quarter. The improvement was driven by lower net losses and loss adjustment expenses, including lower weather losses and continued favorable attritional loss performance. Additionally, we experienced higher favorable prior year loss development this quarter. These results reflect the positive impact of sustained underwriting and rate actions taken over the past several years. The net expense ratio increased modestly to 35.2% from 34.8% in the prior year quarter, driven primarily by higher human capital-related costs with net premiums earned remained relatively flat. As a result, the net combined ratio improved to 81% to a 3.5 point improvement from 84.5% in the first quarter of last year. reflecting the improvement in loss ratio, partially offset by higher expense ratio. Net investment income increased to $9.9 million, up 15.1% from $8.6 million in the prior year quarter, driven by higher invested assets with relatively stable return. We continue to maintain a high-quality conservative position investment portfolio that is well matched to our liabilities. The effective tax rate for the quarter was 25.6% compared to 23.8% in the prior year quarter. As a reminder, we calculate income tax expense during interim periods based on estimates, which can fluctuate as assumptions are updated throughout the year. Turning to the balance sheet. We ended the quarter with total assets of $2 billion and cash and invested assets of $1.27 billion and stockholders' equity of $520.4 million. Book value per share increased to $17.15 as of March 31, 2026, representing an increase of 4.6% from December 31, 2025, and 61.5% from the first quarter of 2025. The increase from year-end 2025 was driven primarily by net income, partially offset by a $3.4 million net of tax increase in unrealized losses in the fixed income portfolio and the repurchase of $10 million of common stock during the quarter. Nonregulated cash at quarter end was $65.8 million. Cash flow from operations was $24.9 million and combined statutory surplus was up $15.1 million to $407.6 million from year-end 2025. Importantly, our debt-to-capital ratio has been steadily declining as earnings power and case generating -- generation of the company has improved. That is now 13% at the end of the first quarter, which is a remarkable improvement and a testament to the successful implementation of our strategic initiatives. Additionally, we now have significant nonrelated cash, solid cash flow from operations, adequate room for leverage and increased statutory capital, which together position us well to support growth as our open territories continue to scale new business production. As the earnings power of the company has increased, we have continued to build capital which we are prioritizing for organic growth or other growth and opportunistic share repurchases when we believe our shares are undervalued relative to our financial performance and future earnings potential. Year-to-date through today, we have repurchased 446,884 shares of our common stock for $12 million under the Board authorized $25 million share repurchase program. Yesterday, the Board of Directors approved a new $50 million share repurchase plan replacing the current plan. The new plan is effective immediately through December 31, 2026. Looking ahead, we remain focused on executing our 2026 strategic initiatives centered on underwriting discipline, capital allocation, data-driven analytics and exposure management. Additionally, we expect to leverage tools to allow our workforce to be more efficient. We believe these efforts position Heritage well to continue generating profitable, controlled growth and deliver long-term value to shareholders, agents and policyholders. Thank you for your time today. Operator, we are now ready for questions.

[Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.

Happy Friday. Could you give us a little bit more detail about the Florida competition press release just is basically competition. But the comments on the call sound it's more like it's pretty concentrated in commercial property. But is the broader property market just as competitive as the commercial business?

So broader speaking on the personalized side, there are new entrants into the market. Most of those entrants have started and are doing takeouts. We've not quite seen all of them in the voluntary market as of yet. And my assumption would be they would be taking on those policies or take out policies here for the next year or 2. So I think it's a down the road, we'll have to kind of see. I think the competition we were referring to mostly is on the commercial side right now.

And then maybe some thoughts as we try to model the company in the future about the seasonality of the business and the cat load in the quarter as we go through the quarters -- the earnings this really was driven, I think, entirely by cat losses, at least in my model. Just any thoughts on how you think about the seasonality and whether or not the cat load in the first quarter was kind of a normal cat load or if we should think of that as being a little bit a normal senior direction.

Yes. Good question, Paul. And yes, the first quarter was more moving back to a more normal year for winter weather losses in the Northeast. Last year was very low, but we didn't have the California wildfires, which kind of gave us almost the same number. So when you look at the seasonality, I mean, 1 of the things typically barring a hurricane ethic stuff is the first quarter is the worst quarter for us from an earnings standpoint, and it has to do with those winter storms. And so typically, we've looked at less than 1/4 of our annualized earnings being in the first quarter.

Is the cat load in the first quarter higher than the normalized cat load in the third given the hurricane?

Well, we actually loaded the third quarter with a little bit more of a cat load in the third quarter. So second and fourth quarters typically are a pretty good quarter for us. And then historically speaking, the fourth quarter is by far our best quarter.

And the next question comes from Mark Hughes with Truist.

When you take into account the Commercial Residential and then maybe a little more favorable trends on the personal lines side, what -- and it sounds like new business is ramping up. How should we think about the written premium growth this year, you've been slightly negative in the last couple of quarters. Does that inflect positively at some point here?

Yes. We think it will -- and again, I mean, when we look at kind of the quarter-over-quarter reductions. It has been decreasing, but it's been decreasing at a decreasing amount. So therefore, we actually think probably second, third quarter, that is going to reverse itself, and we actually anticipate being positive for the full year.

Very good. How about the underlying loss ratio, if you take out the weather and then the favorable development, was it up a little bit in Q1? And if so, was that mix pricing.

Considering the prior year development, that type of stuff, we actually have it down very slightly. So for example, if you back out the weather losses and the prior year development, last year, you're going to be about at 31.8%. This year, you're going to be 31.6%, so a slight decrease. And therefore, when we look at that attritional loss ratio, it's actually been fairly stable over the quarters for a couple of years now.

Okay. What was it in the attritional loss in the fourth quarter?

Attritional loss in the fourth quarter, let me get that for you real quick. It was 26.7%.

Yes. And then when you think about the growth on a go-forward basis, I think you're providing the commercial versus personal lines, but not necessarily the geographic breakout like previously. Do you think that your growth will be more oriented Florida or non-Florida?

It's a combination, Mark. So from commercial, you won't see as much growth obviously on the commercial and the Florida area. But we have expanded commercial residential growing in New York, New Jersey, as we mentioned as well in the earnings call in Hawaii. And then all other states are growing as well, Virginia, New York from a personal lines perspective.

The next question comes from Carol chime with Citizens.

I've got 2 questions. Two questions. One is -- the first 1 is regarding the cat weather losses. And can you just confirm that all of those are from the Northeast winter storms? Or is there more to it?

No, those are all the Northeast winter storms, right? Armando, Giana, fern those are all related to that.

Is there a particular state that was hit to harness?

It's mostly mix between New York and New Jersey, a little bit in Rhode Island as well.

And then my second question is regarding the new repurchase agreement authorization. So you had the $25 prior, you used about $12 million of the year-to-date and now you have a new $50 stalled the net increase in your authorization is about 38%. Is that correct?

No. No. The increase. In other words, the $25 million is terminated, we have a new authorization for $50 million. So the authorization between now and the end of the year is $50 million.

Okay. But the 25% was fully.

No, we use $12 of the $25, but that $12 is separate because it was before the new authorization. So the $50 -- so the $12 million would be in addition to the new $50 million.

Got you. And then can you comment on how much was repurchased so far in Q2?

Would have been about -- well, it was just after the first we did $10 million in the -- at the beginning of the year, and then it was like an additional $2 million -- of the new authorization, we have not purchased any.

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

Thank you for joining the call, and we hope everyone has a great weekend.

The call has now been concluded. You may now disconnect.