Heritage Insurance Holdings, Inc.

Good afternoon and welcome to the Heritage Insurance Holdings Third Quarter 2024 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. 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 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.

Thank you, Kirk. Good afternoon, everyone, and thank you for joining us today. To start, our thoughts and support are with the many people who were impacted by the devastating hurricanes that affected so many communities across the Southeast. This has been a difficult storm season that has left millions with significant damage and loss. At Heritage, we are working tirelessly to support our policyholders and communities to ensure they have the necessary resources to quickly rebuild. I am especially proud of our employees from across our company who have been providing a rapid response to our valued policyholders, as well as hundreds of adjusters and emergency service providers that we have in the field to support our customers daily. To ensure we are offering the support that our policyholders expect, we track a series of metrics to ensure our operational effectiveness. As an example, at 21 days following Hurricane Milton, we received 6,352 claims, with the average wait time for policyholders calling in their claims of under one minute. We had over 230 employees throughout our footprint taking first notice of lost calls, while we also have over 200 vendors ready and responding to emergency services. I would like to thank our employees, many of whom themselves were impacted by the hurricanes, for their incredible effort during this challenging time. Their commitment to our policyholders has been remarkable and a testament to the culture at Heritage. While I am proud of our support to our policyholders, I am also very proud of our financial results, which clearly demonstrate the successful execution of our strategic initiatives that I laid out when I was appointed CEO of Heritage three years ago. Our initiatives have been focused on achieving rate adequacy, enhancing our underwriting discipline, and allocating capital to drive growth and returns. as we strive to deliver solid financial results. Through these efforts, we have positioned Heritage to absorb a full retention loss while maintaining profitability and delivering results to our shareholders. Looking at our third quarter results in more detail, we have achieved net income of $8.2 million, or 27 cents per share, which is a sharp improvement from a year ago third quarter where our results produced a net loss of $7.4 million, or a 28% loss per share. Importantly, our current quarter results include approximately $48 million of hurricane losses from Debbie and Helene. On a year-to-date basis, we achieved net income of $41.2 million, or $1.35 per share. representing a strong increase from our 2023 net nine-month net income of $14.4 million, or 55 cents per share. Our ability to maintain profitability in the face of significant catastrophe losses is the result of a multi-year effort where we have focused on executing our underwriting and rate adequacy initiatives. From an underwriting perspective, we continue to strategically reduce our exposures in over-concentrated and unprofitable areas while increasing our presence in profitable geographies and products. This disciplined underwriting approach resulted in a further policy count reduction of just over 66,000 policies or 14.2% throughout our footprint compared to the third quarter of 2023. while our premium in force increased by $80.6 million, or 6%. As we have discussed on prior earnings calls, we expect declining policies to moderate over the next few quarters as we open territories for new business while maintaining our underwriting discipline. We have also maintained a stable indemnity-based reinsurance program at manageable costs through our policy count and exposure management initiatives, while also proactively engaging with our reinsurance partners. In fact, we met with 28 of our reinsurance partners just prior to Hurricane Milton making landfall, each of whom reiterated their continued support of heritage both near and long-term. Turning to our rate adequacy initiatives, These efforts have resulted in a significant rate increases which are earning through our portfolio in 2024, as evidenced by our growing unearned premium balance. Looking to 2025, we anticipate an even more meaningful amount of rate to earn through our portfolio, which we expect will provide a healthy tailwind to our financial results. More importantly, we have selectively started writing personal lines business throughout our footprint as we pivot our strategy to one of controlled growth, anchored by our continued focus on risk management and stringent underwriting. This is an important change in our strategy, given that we significantly curtailed writing personal lines new business beginning in 2022. Over this period of time, we have been growing our top line through organic growth in our commercial residential portfolio and our E&S products. combined with the rate action that we have taken in our personal lines portfolio. Additionally, recent legislative changes in Florida are having a positive impact on the economics of writing new profitable business in the state. In fact, we believe Hurricane Milton will further demonstrate that the legislative changes will mitigate frivolous lawsuits, shorten the claim closure cycle, and bring more reinsurers back to the market. Taking together, we expect our improved rate to continue to earn in through 2025, the headwind from our policy reduction efforts to mitigate through the first half of 2025, and our new business production to continue to ramp up through the year ahead. We believe we have the foundation in place to deliver solid, profitable growth in 2025 as we execute our controlled growth strategy. Our E&S business has been a growth lever for Heritage. as in-force premiums grew nearly $25 million, or 116%, as compared to the year-ago third quarter, as we continue to right this business in California, Florida, and South Carolina. What makes this business so attractive is that we can more nimbly adjust our rates and coverages to the changing dynamics state-by-state to ensure we continue to earn appropriate risk-adjusted returns. Looking forward, we plan to continue to evaluate more states for E&S opportunities as we focus on our controlled growth strategy. Importantly, we remain resolute in maintaining a balanced and diversified portfolio, as no single state represents over 30% of our total insured value. This selective diversification helps reduce performance volatility and ensures our long-term stability. which we believe will be reflected in the value of our company over time. We remain committed to maintaining our focus on disciplined growth, operational excellence, and effective capital management. Importantly, our strategic initiatives are yielding the positive results as evidenced by our ability to remain profitable through a challenging CAT season. Looking forward, I remain optimistic as we pivot to our controlled growth strategies designed to prudently accelerate premium growth while maintaining our margins. To conclude, I would like to reiterate our dedication to navigating the complexities of the market with a strategic focus that prioritizes long-term profitability and shareholder value, driven by our dedicated workforce.