Heritage Insurance Holdings, Inc. (HRTG) Earnings Call Transcript & Summary

Thank you. Good morning and welcome to the Heritage Insurance Holdings second quarter 2026 earnings conference call. 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. Sir, 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. 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 Garite, our Chief Executive Officer. I will now turn the call over to Ernie.

Thanks Kurt and good morning everyone. Before discussing our second quarter results I want to step back and frame where Heritage stands today and how meaningfully the business has evolved over the last several years. When we began executing our strategic initiatives, our objectives were clear. improve profitability, achieve rate adequacy, strengthen the balance sheet, reduce volatility, and position heritage for sustainable long-term growth. Delivering on those objectives require difficult but necessary decisions. We re-underwrote portions of the portfolio, reduced exposure where returns did not justify the risk, implemented meaningful rate actions, strengthened our reserving position, and continued investing in technology and operating infrastructure. The results of those efforts are increasingly visible in our financial performance. In the second quarter, Heritage generated record net income of $61.7 million, record diluted earnings per share of $2.05, an annualized return on equity in excess of 45%, substantial operating cash flow of $166.5 million. Importantly, these results were achieved while maintaining the underwriting discipline that has guided our strategy. We continue to believe long-term shareholder value is created through profitable underwriting and disciplined capital allocation, not by pursuing premium growth at any cost. We also believe the market continues to underappreciate the extent of our geographic diversification and the reduction in earnings volatility that has resulted from that diversification. Heritage has historically been viewed primarily as a Florida-focused property insurer. While Florida remains an important market for us, Heritage Today operates as a super-regional insurance platform with business spread across multiple geographies, products, and distribution channels. That diversification improves both the quality and durability of our earnings. It gives us the flexibility to allocate capital towards markets and products where we see the strongest risk-adjusted returns, while reducing exposure in areas where competition is excessive or pricing falls. does not support acceptable margins. As market conditions evolve, we can shift our focus and capital towards opportunities that we believe will create the best long-term returns for shareholders, while maintaining compliance with insurance regulatory requirements. We are seeing that flexibility play out today. While commercial residential pricing in portions of Florida has become highly competitive, we continue to see attractive opportunities across many of the personal residential markets throughout our footprint. This flexibility is important because it allows us to remain disciplined. We do not need to chase underpriced business or force growth in any single geography. Instead, we can allocate capital where underwriting conditions are most favorable and where we believe we can generate attractive long-term returns. As a result, Heritage's earning profile today is significantly more durable and resilient than it was just a few years ago. Over the last several years, policy count declines were largely the result of deliberate actions taken to improve profitability, achieve rate adequacy, and reposition the portfolio. Those actions have been successful, and we believe the vast majority of that work is not behind us. Today, nearly all of our territories are open for new business, our agency relationships remain strong, and production trends continue moving in the right direction. importantly, the pace of policy comp decline continues to moderate. As a result, we believe our personal residential business is approaching an important inflection point. New business production continues to strengthen, retention remains healthy, and we are seeing encouraging trends across a number of our reopened territories. As those territories mature and production continues to build, we believe the foundation is in place for a return to policy count growth. Our transition back to growth has been temporary slowed by the rollout of Guidewire. The implementation creates a short-term learning curve for agents and can result in several months of slower production. And most importantly, we have consistently seen activity improve meaningfully once agents become familiar with the platform. Agent feedback has been overwhelmingly positive. Agents consistently tell us that Guidewire is easier to use, more automated, and significantly more efficient than our legacy system. As implementation progresses across our footprint and the temporary transition effects begin to fade, we believe production will continue to improve, positioning us for a return to policy count growth in the coming quarters. Equally important is what we're hearing directly from our agent partners. Across reopened territories, agents continue to express a desire to place more business with heritage. We worked hard to maintain these relationships during the years in which we prioritize profitability and portfolio repositioning. communicated transparently about our strategy, the reasons behind our decisions, and our long-term intentions. As a result, agents have welcomed us back into markets where production was previously restricted and are actively looking to grow with us. We also wrote our first policy in Texas through our excess and surplus lines platform. the initial contribution will be modest. Texas represents another attractive market where we can leverage our underwriting expertise and agency relationships. We view Texas as another step in the continued diversification of our business and another opportunity to allocate capital towards attractive long-term growth. We are also evaluating additional opportunities across both personal and commercial lines. Every opportunity must meet the same underwriting, profitability, and return standards that have guided the transformation of heritage over the last several years. Growth remains important, but profitable growth remains the priority. The transformation of our business is also reflected in the support we continue to receive from our reinsurance partners, remain willing to provide capacity to support our growth. During the second quarter, we successfully completed our 2026-2027 Catastrophe Excess of Loss Program, securing greater protection while reducing our overall reinsurance cost. We placed more than $2.2 billion of limit, expanded our use of multi-year coverage and catastrophe bonds, and generated approximately $63 million of annualized savings compared to the prior year program. We believe this outcome reflects both the strength of our franchise and the continued improvement in the underlying fundamentals of the Florida market as the positive impact of legislative reform becomes more evident. litigation activity remains dramatically lower than it was before reform, and reinsurers now have the benefit of real-world claims experience following Hurricane Milton. As claims have developed, the results have continued to validate many other forms enacted in Florida and support a more favorable view of the market's long-term risk profile. Before turning the call back to Kirk, I want to spend a few moments on capital allocation. As I noted earlier, we generated significant operating cash flow during the quarter, further strengthening our balance sheet and enhancing our flexibility to invest in organic growth while also returning capital to shareholders. Year to date, we have repurchased more than 1 million shares of common stock at a cost of approximately $24.6 million. representing roughly 3% of shares outstanding. We believe these repurchases have been highly accretive and reflect our confidence in the current earnings power of the company and the opportunities ahead. Simply put, we do not believe our current valuation fully reflects the strength of our operating performance, the consistency of our earnings, or the durability of the business we have built. As long as that disconnect exists, share repurchases will remain an important part of our capital allocation toolkit. At the same time, we retain the flexibility to invest in attractive growth opportunities as they emerge. We believe this balanced approach best supports long-term value creation for shareholders. In closing, we believe heritage is entering a new chapter in its evolution. We are generating record earnings, producing substantial excess capital, and prudently positioning the business for growth. The consistency and durability of our earnings profile are stronger than at any other point in our history as a public company, and we are excited about the opportunities ahead to create long-term value for shareholders. I want to thank our employees, agents, policyholders, reinsurers, and shareholders for their continued support and partnership. Kirk, I'll turn the call back over to you. Thank you, Ernie, and good morning, everyone. Turning to our financial highlights, Heritage reported record second quarter net income of $61.7 million or $2.05 per diluted share compared to $48 million or $1.55 per diluted share in the prior year quarter. Through the first six months of 2026, we generated $98.2 million of net income. of 25% from the same period last year. These results demonstrate the continued strength of our underwriting platform, the benefits of our strategic initiatives, and the improved profitability of the business. We also generated $166.5 million of operating cash flow during the quarter, providing substantial financial flexibility as we continue to invest for growth while returning capital to shareholders. The increase in second quarter earnings was primarily driven by lower net losses and loss adjustment expenses, reflecting favorable prior year reserve development and lower weather related losses, as well as higher net premiums earned and increased investment income. These benefits were partially offset by higher policy acquisition costs. Our strong profitability generated an annualized return on average equity of 45.4% during the quarter, while shareholders' equity increased 48.1% compared with a prior year period. Premiums in force totaled $1.41 billion at quarter end, down 1.4% from $1.43 billion in the prior year quarter. The decline was primarily driven by lower commercial residential premiums due to competitive pricing pressure, particularly in Florida. As Ernie noted, we remain disciplined and will not sacrifice profitability for volume. Encouragingly, personal residential premiums increased 1.2% year-over-year, reflecting improving trends in that business. Gross premiums earned were $351.2 million compared with $353.6 million in the prior year quarter. Net premiums earned increased 2.4% to $201.1 million compared to $196.3 million in the prior year quarter, reflecting lower seeded premiums and the continued benefits of we have taken to optimize our reinsurance program. Gross premiums written were $380.4 million, down 5.5% from the prior quarter, primarily reflecting the reduction in floor to commercial residential business. Underwriting performance remained exceptionally strong. The net loss ratio improved to 30.4% compared to 38.5% in the prior year quarter, while the combined ratio improved to 64.9% from 72.9%. The improvement was driven by favorable prior year reserve development, lower weather losses, and continued strong underlying claims performance. During the quarter, we recognized 23.4 million of favorable prior year reserve development compared with 2.3 million favorable in the prior year period. More importantly, we continue to see stable frequency trends, manageable severity trends, and favorable claims outcomes across the portfolio. We We believe these results reflect the benefit of our underwriting, pricing, and claims management actions over the last several years, along with a positive impact on recent legislative reforms in Florida. The net expense ratio was 34.5%, essentially flat from the prior year quarter. Policy acquisition costs increased modestly quarter over quarter, primarily due to lower seating commissions following the reduction of our Northeast Quota Share Program at year-end 2025. This was partially offset by lower general and administrative expenses reflecting continued expense discipline across the organization. Net investment income increased 17.3% to $10.6 million from $9 million in the prior quarter driven by growth in invested assets. continue to maintain a conservatively positioned investment portfolio focused on high-quality fixed income securities with asset durations closely matched to our liabilities. The effective tax rate of the quarter was 24.9% compared to 23.8% in the prior year quarter. The increase was primarily driven by changes in pre-tax income and certain permanent tax items. As a reminder, our effective tax rate can fluctuate throughout the year as earnings levels change and estimates are refined. Turning to the balance sheet, We ended the quarter with total assets of $2.45 billion, including $1.39 billion of cash and invested assets, and shareholders' equity of $567.7 million. value per share increased to $19.09 as of June 30, 2026, up 16.5% from December 31, 2025, and up 54.5% from June 30, 2025. The increase from year-end 2025 was driven primarily by Strong's earning generation, partially offset by a $4.9 million net of tax increase in unrealized losses within the fixed income portfolio and the repurchase of $24.6 million of common stock during the first six months of 2026. Despite these capital deployment activities, VOOC value per share continues to grow meaningfully, reflecting the strength of our operating performance. performance and capital generation. Non-regulated cash at quarter end was $47.8 million. Cash flow from operations was $166.5 million and combined statutory surplus increased $47 million from year end 2025 to $439.5 million. Importantly, our debt to capital ratio has continued to decline earnings power and cash generation have improved. At the end of the second quarter, our debt to capital ratio was 11%, reflecting the successful implementation of our strategic initiatives. are significant non-regulated cash, strong operating cash flow, available leverage capacity, and increased statutory capital position. position us well to support growth as open territories continue to scale new business production. As the company's earnings power has increased, we have continued to build capital, which we are prioritizing for organic growth and other growth opportunities, along with opportunistic share repurchases when we believe our shares are undervalued relative to our financial performance and future earnings potential. Year to date, we have repurchased more than 1 million shares of common stock for 24.6 million. Of that amount, 12.6 million was repurchased under the Board-authorized 50 million share repurchase program announced in the first quarter and available through December 31, 2026, leaving 37.4 million of remaining authorization. As we enter the second half of the year, we believe Heritage is exceptionally well positioned. We are generating record earnings, producing substantial excess capital, and seeing encouraging signs of return to growth. Importantly, we see meaningful opportunities to profitably expand the business and continue developing long-term value for our shareholders, agents, and partners. policyholders. Thank you for your time today. Operator, you're now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. speakerphone, please pick up your hands up before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Hewis with Truist. Please go ahead. Yes, thank you. Good morning. Good morning, Mark.

Ernie Kirk, the rate expectations, when we think about Florida, obviously there's been really good benefits from reform, you're seeing in the loss ratio, what does that kind of translate into when you look at the Your rate filings over the next six, 12 months, and same question for the book as a whole, including other states. Okay.

Yes, well, I mean, we're evaluating that now simply from the standpoint of the reinsurance went down rather substantially. We think that is going to translate into, you know, rate reductions in Florida. Outside of Florida, I would say that we're probably going to see modest rate increases. From the standpoint, we're rate adequate almost across the board. So you're going to see rate increases comparable with claims inflation that kind of keep the margins flat with where they are.

Yes. With the decline in reinsurance costs, what do you think it means for Florida? What's the range of potential outcomes?.

We're finalizing that mark, but if you take a look last year, we were down three to five percent. I would say it'd be in that range once we finalize it.

Okay. And, Kirk, what's a good seeded premium number for the third quarter with the new program? Yes.

Yes, well, I think that you can count on a ratio probably dropping, you know, one to two points with.

with the new reinsurance program so it's been kind of 43-ish in the first half so maybe you.

42-ish? Yes, I'd pay maybe even a little better than that. 41-ish? But it's in the ish.

Okay. The new production kind of starting to grow again in new states. Is that going to have a meaningful impact on the loss pick? Presumably that business is being written at a higher combined ratio. How should we think about that?.

Yes, no, we're actually sticking to our underwriting guidelines and margins. I mean, I don't think it's going to have much detrimental impact to the loss ratios. Yes, okay. The cash from operations, the 166.5%.

If there's some quarterly dynamic that I'm not familiar with, let me know. But that seems like a really strong number.

What's driving that? Basically, a lot of it is just the net income that we've had over the last year, that type of stuff. So that's one of the big factors there.

Yes, the 166.5 is 2Q alone, is that correct? Or is that first half? 2Q. Okay. Seems a lot stronger than your net income. But just good financials or is there some working cap or is something else going on in the cash flow?.

Well, you know, we're working on our balance sheet. You know, have over the last, you know, several years as far as, you know, what our expenses, what our debt is, you know, the investment income. So it's just a myriad of things we've been kind of working on on the overall balance sheet also, which is starting to translate a little bit more into free cash flow.

development. Could you talk about that? Was that 2025 stuff, even older? What, what, it seems like a nice, nice number. Yes, it's spread, yes, it's spread throughout a number of years. It also is spread through, you.