Heritage Insurance Holdings, Inc.

of the company's total insured value. This strategic diversification helps mitigate risks and stabilize our earnings across various geographic regions. The decrease in our policies enforced has been intentional, driven by our strategic initiatives to get adequate rate, non-renew unprofitable policies to the extent permitted by individual state requirements, reduce concentrations, and fine-tune our distribution network. These activities achieve the intended impact and now puts us in a position that policy count is no longer expected to decline at the same rate we experienced over the past few years. We are pleased to announce that we have finalized our catastrophe XOL reinsurance program for 2024-2025 earlier than in previous years, reflecting our commitment to our reinsurance partners and their corresponding commitment to our strategy. This year's program includes a new southeast-only catastrophe bond, providing a limit of $100 million. The inclusion of catastrophe bonds is an important element of our risk transfer program because it includes the capital markets as a supplier of reinsurance. Contracts are multi-year, and the reinsurance we secure is fully collateralized. As we continue to navigate forward, our focus remains steadfast on enhancing shareholder value through disciplined capital management and strategic growth initiatives. The challenges of the litigated claims environment in Florida continue to be noteworthy. But with targeted underwriting and rate actions, as well as legislative actions taken to reduce the influence of claims abuse and one-way attorney fees, We believe we are positioned to successfully return to a policy count growth trajectory. Before I turn the call over to Kirk, I want to reaffirm our commitment to navigating the complexities of our market with a strategic focus that prioritizes long-term profitability and driving shareholder value. We are optimistic about the benefits of recent legislative changes in Florida and remain adaptable in our strategies to ensure sustained positive outcomes. Now let me turn things over to Kirk for a detailed review of our financial performance this quarter.

Thank you, Ernie. Good morning, everyone. As Ernie highlighted, we began 2024 on a strong note with first quarter net income of $14.2 million, or $0.47 per diluted share. This result represents an improvement in our net income over the prior year, driven by an 8% increase in net premiums earned and an unalienable rise in investment income. Additionally, it is important to note that the decrease in earnings per share was influenced by higher average weighted number of shares outstanding due to the equity issuance and stock grants net of forfeitures. Our gross premiums written this quarter were $356.7 million, a 14.9% increase from the prior year quarter, reflecting our strategic focus on enhancing our product offerings and expanding into profitable segments. Gross premiums earned followed suit, rising to $341.4 million of 7.7% from the prior year quarter. Net premiums earned increased by 8.1%, reflecting the increase in gross earned premiums outpacing the increase in seeded premiums. We expect an improvement in our seeded premium ratio going forward and for the growth in net premiums earned to accelerate throughout 2024. Total revenue for the quarter reached $191.3 million, marking an 8.1% increase compared to $176.9 million in the prior year quarter. This increase in revenue is bolstered by our hard net earned premiums and an increase in net investment income, which rose due to our positioning amidst current yield curve opportunities. Losses and loss adjustment expenses were $102 million for the quarter, compared to $97.5 million in the first quarter of 2023. The net loss ratio improved to 56.9%, down from 58.7% the prior year quarter, even with higher weather-related losses of 5.6 million and unfavorable loss development of 6.7 million compared to favorable development of 1.5 million in the prior quarter. The improvement in the loss ratio, which included a reduction of attritional losses, highlights the positive impact on our rate actions as well as what we believe is a better performing portfolio driven by the various strategic underwriting changes made over the past two years. The net expense ratio saw a slight increase to 37.1%, primarily due to a reduction in seeding commissions from our net quota share contract. This will have the most impact in the first quarter since it is the result of contracts that were run off in 2023. Our net combined ratio improves slightly to 94%, reflecting improvements in the loss ratio driven by the strategic initiatives Ernie and I have discussed. Turning to our balance sheet, the book value per share has risen to $7.67, an increase of 26.8% compared to the prior year quarter. This growth in book value is primarily driven by net income and a reduction in unrealized losses on our fixed income securities. Our financial strength is further evidenced by our cash reserves, which exceed $380 million in cash and cash equivalents, providing us with substantial liquidity to meet our operational needs. Importantly, As of the closing price on March 30, 2024, we have met the threshold necessary to qualify our inclusion in the Russell 2000 Index. While formal inclusion will be confirmed in the coming updates from the Index, meeting this threshold is a testament to our financial health and market valuation. The Board of Directors continues to evaluate our dividend distribution and stock repression strategies. As part of this prudent capital management approach, our Board has decided to continue the suspension of the quarterly dividend to further strengthen our financial position and support strategic growth initiatives. In conclusion, our financial results for the first quarter of 2024 demonstrate the effectiveness of our strategic initiatives and our ability to adapt to market conditions. We remain committed to driving shareholder value and ensuring the long-term sustainability of our operations.

Thank you. We are now ready for your questions.

Thank you.

And ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys.

And our first question will come from Maxwell Fritscher from Truist. Please go ahead. Hey, good morning.

Good morning, if this was answered. But different sources have been modeling more active storm season this year. What is your internal model saying? And do you think the rate and the rate adequacy in Florida is there?

Okay. Yeah, I mean, we are hearing that there is, you know, a slight uptick as far as the possibilities. I mean, there's always the issue as far as whether it's going to make landfall or not. I mean, our internal model is actually slow, like, you know, slight increase, not quite to the extent of some of the others. As far as the rate adequacy in Florida, that is looking, you know, extremely positive. I think that a lot of the rate actions that we've taken over the last several years, including the underwriting, you know, activities, I've really kind of fine-tuned the portfolio, the legislative changes that occurred. I would say we are, you know, cautiously optimistic, and I'm sure you've heard that term before, about kind of what we're seeing there. But right now, you know, it looks like it is having the desired effect. So, yeah, overall, it's looking pretty good.

Yeah, that's helpful. And then secondly, not big numbers here, but the policy acquisition cost picked up a bit in the quarter. It looks like it was running in the mid-20s.

12 percent in 24 what should we expect the run rate to be in 20 in or sorry that was in 23 uh what should we expect the run rate to be in 24 uh in in 24 uh policy acquisition costs i think you're going to see go back to the you know closer to the historic norm um simply from the standpoint of you know we had about uh three million dollars worth of reduced seating commissions in the first quarter That had to do with some runoff of the last year's quota share.

And so it'll actually go more into the norm going forward.

Got it. Thank you. That's all for me. Great. Thank you. Thank you. Thank you. And our next question comes from Mark Hughes from Truist.

Please go ahead.

Good morning, Mark.

Thank you.

Good morning. Good morning. I just jumped on the call, so I apologize. Did you make any commentary just regarding your kind of posture around top-line growth? You know, how do you view adequacy of pricing at this point? And is it – Are we at a juncture where you can feel better about adding to the top line? And of course, that takes into account capital considerations, but anything you might be able to, if you've already commented, leave that one go, but any elaboration would be appreciated.

No, no, we can make a comment on that. So I think, you know, we've been taking rate over the past two years. We're much more comfortable in specific geographic areas and where that rate adequacy is, and then looking to grow that top line very specifically. I would say since we are super regional care, there are other areas that we're still focusing on getting some more rates. But I would say overall, as you look into 24 and going forward, right, that the rate adequacy in specific regions that we are focusing on to grow that top line through policy counts, you'll see that coming through.

Yeah, in addition, one other comment, or two other comments. One is, you know, when you look at our non-regulated cash as far as, you know, how we're sitting for growth, we do have over $50 million worth of non-regulated cash in the entities that, you know, we can push down, you know, and utilize that for growth opportunities in the future where we see fits. The other comment I think we always make in that type of stuff is due to seasonality and the winter storms in the Northeast is typically, you know, the first quarter is our worst quarter.

Understood. And then did you touch on takeouts, whether takeouts would be of interest to you at all?

So we always do our due diligence and look at the takeout. I think right now we're pretty much optimistic with the rate adequacy we're seeing in certain regions that going through organic growth with our value partners and the agents is a better opportunity for us. But that doesn't mean we won't be considering the takeouts. It'll all be something that we do as part of our due diligence every quarter.

Understood. Thank you very much. All right, thank you.

Thank you. And as a reminder, if you wish to ask a question, please press start one.

Again, if you wish to ask a question, please press star one.

There are no further questions at this time. So ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to management team for final remarks.

Yeah, I'd like to take this opportunity to thank all our employees for their dedication as well as shareholders, our reinsurance partners, and agents for the continued support. I appreciate everybody joining the call today and hope everyone has a great day.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.