Heritage Insurance Holdings, Inc.

Good morning and welcome to the Heritage Insurance Holdings First Quarter 2025 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, .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 Guarite, 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 am very pleased to be here this morning to discuss our first quarter results as they clearly demonstrate that the Heritage is performing at a high level from both a financial and operational perspective. During the quarter, we achieved a net income of $30.5 million or 99 cents per diluted share, which includes $31.8 million of net pre-tax losses and loss adjustment expenses related to the California wildfires. This compares favorably to the first quarter last year where we delivered net income of $14.2 million or 47 cents per diluted share with no major weather events. Q1 represents the third consecutive quarter that we have been impacted by catastrophe losses and maintained our profitability. This is the direct result of the successful implementation of our strategic initiatives over several years designed to attain rate adequacy, manage exposure, and enhance our underwriting discipline. In fact, we have achieved rate adequacy across more than 90% of the regions where we do business, which positions us to return to growing our personal lines, policies, and force. I am also proud of the support that our Heritage employees have provided to

our

insurers through such challenging times. We have worked diligently over the last several years to provide our insurers with quality customer service and an efficient and thorough claims handling experience, which can be seen in our response to hurricanes Debbie, Helene, and Milton, as well as the wildfires in Hawaii and California. Our dedicated staff have provided outstanding support to our policyholders as they recover from these tragic events, demonstrating our unwavering support to our customers. Looking at our first quarter results in more detail, our efforts to attain rate adequacy are having a positive effect on our financials and will continue to earn through our book through the balance of 2025. Our policy count from the fourth quarter of 2024 is down 3% primarily due to normal attrition and the seasonality of our business, partially offset by the early ramping up of our new personal lines business production. While we have had success in the commercial residential market, we are also seeing more competition in space. That said, we will continue to ensure rate adequacy for this product and will not sacrifice the bottom line for top line growth. Looking at the balance of this year, I expect our premiums in force to increase in the second half of the year. Over the last several years, we have carefully managed our exposure, worked to achieve rate adequacy and diversify our business. This has positioned us to pivot our strategy to one that is focused on managed growth as we open territories for new personal lines business. To put this in perspective and based upon historical production, we only had 30% of our production capacity open for new business last June. Since then, we have been slowly opening capacity for growth across our geographies and now have nearly 75% of our production capacity open at the end of April 2025. With the expectation that we will have the balance of our production open by the end of this year. To prudently grow the top line, we are selectively writing new personal lines business, anchored by a continued focus on risk management and stringent underwriting. As a result, we expect the pace of new business production to slowly accelerate through the year. This new business growth will earn into our financials 2025 and future years. Looking at 2026, we expect growth to accelerate as our new business production is fully ramped up across all geographies and the headwind from our exposure management initiatives is fully behind us. Additionally, the legislative changes in Florida are having a positive impact on the economics of writing new profitable business and where we have seen a market decline in frivolous lawsuits. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. We expect the reinsurance market will see the tangible benefits of this legislation as Hurricane Milton claims mature through this year and into next year, which could reduce reinsurance pricing in 2026. Our ENS business provides us with options in our product offering as we continue to evaluate states and markets for ENS opportunities. What makes this business so attractive is that we can adjust our rates and coverages to the changing dynamics state by state to ensure we continue to earn appropriate risk-adjusted returns while providing consumers in those states with needed insurance protection. Due to the current dislocation that exists in California, we expect more of the homeowner's business to move from admitted carriers to ENS, which provides business opportunities for heritage. Turning to reinsurance, we have maintained a stable indemnity-based reinsurance program at manageable costs through our rate adequacy and exposure management initiatives while also proactively engaging with our reinsurance partners. This can be seen in our 6-1 renewal, which we completed earlier than expected. Overall, we increased the amount of limit that we purchased by $285 million, while our overall cost increased by less than $8 million. I would like to thank our dedicated reinsurance partners who have supported our business through multiple catastrophic events over the last several years and look forward to continue partnership as we work to further expand the company. To conclude, we continue to believe that we have a foundation in place to deliver solid, profitable growth in 2025 and future years as we continue to execute our strategy aimed at generating shareholder value. 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. Perp, over to you.

Thank you, Ernie. And good morning, everyone. Starting with our financial highlights, we reported net income of $30.5 million, or $0.99, per diluted share in the first quarter, which generated an annualized rate on average equity of 39%. This compares to $14.2 million, or $0.47, per diluted share and our return on average equity of 25% in the prior year quarter. The increase in net income was primarily driven by an increase in net premiums earned and relatively flat expenses and loss adjustment expense, despite the pre-tax impact of $31.8 million of California wildfires. Our first quarter results continue to demonstrate the successful execution of improving our portfolio and continuing to generate positive returns. Gross premiums earned rose to $353.8 million, up .6% from $341.4 million in the prior year quarter, reflecting higher gross premiums written over the last 12 months from business growth and rating actions. As we ramp up on recently opened geographies and open more geographies, we expect our growth to accelerate at a managed pace. Our new business for the first quarter is slightly above plan and bodes well for our expectations for the remainder of the year. Net premiums earned increased to $200 million, up .5% from $179.4 million in the prior year quarter, reflecting growth in gross premiums earned, as well as a reduction in seeded premiums for the quarter. The reductions in seeded premium was driven by an $8.7 million reinstatement premium during the first quarter of 2024 for Hurricane Ian, coupled with a reduction in previously accrued reinstatement premiums of $1.4 million during the first quarter of 2025. Our net investment income for the quarter was $8.6 million, flat from the prior year quarter. This reflects our continued actions to align the investments with the yield curve while maintaining a high-quality portfolio of short-duration assets. Our total revenues for the quarter were $211.5 million, up .6% from $191.3 million in the prior year quarter. This improvement was driven by the change in net premiums earned. Our loss ratio for the quarter improved 7.2 points to .7% as compared to .9% in the same quarter last year, reflecting higher net premiums earned, coupled with a .6% reduction in net losses in LAE, even with the California wildfires. Net weather and cat losses for the first quarter were $43.5 million, an increase of $25.1 million from $18.4 million in the prior year quarter. Net losses in the current year quarter include non-Hurricane cat losses of $31.8 million from the California wildfires, which was a $15.9 million increase over the non-Hurricane cat losses of $15.9 million incurred in the prior year quarter. Other weather losses totaled $11.7 million, an increase of $9.2 million from the prior year quarter of $2.5 million. The higher cat and weather losses were more than offset by significantly lower attritional losses, reflecting the quality of our portfolio. In addition, we experienced favorable reserve development compared to the prior year quarter. Favorable net loss development was $7.8 million in the current year quarter compared to adverse development of $6.7 million in the prior year quarter. Our net expense ratio for the quarter was 34.8%, a 2.3 point improvement from .1% in the prior year quarter. This was driven primarily by growth in net premiums earned coupled with higher seating commission income, which decreased the net policy acquisition cost ratio by 3.3%. The reduction in policy acquisition ratio was partially offset by a 1% increase in net general and administrative expense ratio. The net combined ratio for the quarter was 84.5%, down 9.5 points from 94% in the prior year quarter, driven by a lower net loss ratio and lower net expense ratio as just described. Turning to our balance sheet, we ended the quarter with total assets of $2.2 billion and shareholders' equity of $329 million. Our book value for share increased to $10.62 at March 31, 2025, up .8% from the fourth quarter of 2024 and up .5% from the first quarter of 2024. The increase from December 31, 2024 is primarily attributed to net income as well as a $6.5 million net of tax reduction in unrealized losses on the company's fixed income securities portfolio. Looking forward, we expect our unrealized losses in the portfolio to continue to roll off as investments ensure. The average duration of the fixed income portfolio is 3.1 years, as the company has extended duration to take advantage of higher yields further out on the economy. While still maintaining a short duration, high credit quality portfolio. Looking ahead, we remain focused on executing our strategic initiatives aimed at drawing long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our proactive approach to managing exposure, enhancing rate adequacy, and investing in technology and infrastructure will position us well for continued success. Thank you for your time today. Operator, we are now ready to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then one in a telephone keypad. If you're using a speakerphone, please pick up your hand before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to

assemble our roster. Our first question will come from Mark Hughes with Truist. You may now go

ahead.

Thank you very much. Congratulations on the quarter. Kirk, the seated premium dollars that we can expect in Q2 and Q3, do you have some thoughts on that, some guidance?

Yeah.

Looking

at that, going forward, it's going to be up slightly for the remainder of the year. The ratio will probably go up a little bit but not significantly for the rest

of

the

year. Okay. So ratio up a little bit, not significantly. Same on dollars, I guess? Yes, correct. Okay. And then 39% ROE is pretty good stuff with the cat losses in the quarter. Ernie, how do you think rates are going to play out when we think over the next six months, year or two years, the trajectory of rates given your strong returns and good profitability? What do you think this is going to mean in terms of pricing?

Yeah, I think, good question, Mark. I think one of the things is we've been working hard to be rate adequate and we are in 90% of all geographies. So one of the things we'll do is keep up with that and maintain with that. I think the regulatory environment in general realizes that keeping up with rates is good for everybody involved. So again, we'll consistently look at where we're at from a rate perspective and go to certain areas if we need more rates. We'll go ahead and do that.

Now, do you think what's the risk because it goes the other direction? And obviously even if rates were down a bit, your return to profitability would still be excellent?

Yeah, and we've said this. We're okay if rates go down as long as losses are going down correspondingly in those markets. I think a testament to Florida last year, we filed for a 3% rate decrease, but we've also seen losses go down in Florida. So obviously keeping those margins in place is what's key there.

Yeah, okay. And then in personal lines, as you're getting more active in opening up new distribution, how do you see the competition? Is there much competition out there or others following suit?

Yeah, so one comment I'll make, it's really not new distribution, the existing distribution that we've had and then reopening with the agents so they know us. I think one thing we said is we're gradually opening with the agents so they understand the underwriting discipline that we want to maintain. There are new companies that have come in. Obviously that's known to everybody out there. I think most of the new companies are starting off with takeouts and then moving over to new business. But again, we're ready to compete with folks out there as long as there's responsible competition.

Yeah, and then if you look at your underlying loss, take out the weather, take out the caps, that has continued to improve. Anything about this level that's not sustainable? Is this pretty good benchmark? I know you get a little more weather activity in other quarters, but this level of loss, is that a reasonable baseline?

Yeah, I think when you look at it, again, barring the major storms and that type of stuff, the loss trends are, I would say, are very favorable. I will tell you that the legislative impacts are, and you mentioned that type of stuff, are having a favorable impact. If the trends continue, I think that you are going to see them flat for sure. Even with a little bit of claims inflation, I think just that the trends are looking very good right now.

Yeah,

very good. Thank you. All right. Thank you, Mark. Our next question will come from Carol Camel with

Citizens. You may now go ahead.

Yes, good morning, and also congrats on the quarter. I just have a question here about the supplemental information that you provided with the TIBs, the PIFs, and the premiums. I'm just trying to maybe have a better understanding of the Florida market in terms of PIFs going down, but PIFs are going down also in other states. TIBs basically flash, but then the premiums are down. Is this really because of what you said earlier was the rates coming down in Florida, or is this a different dynamic?

Yeah, it's really the premium is the rate increases are not as substantial as they have been in the past. So the PIF decrease is decreasing that a little bit. Also, we are seeing a little bit of competition in the commercial markets, which is having a little bit of impact on our premiums. Again, one of the things, as Ernie mentioned, we've been closed in a lot of our territories that we've just started reopening. So we're anticipating that that's going to start accelerating starting in the second half of this year.

All right. Got it. Thank you. That's it

for All right. Thank you. Thank you. Our next question will come from Paul Newsome with Piper

Sandler. You may now go ahead.

Good morning. Thanks for the call,

guys. Good morning, Paul.

Could you give us maybe a little bit more color on the competitive environment by state? My sense is Florida is very different than East Coast, different than California. What's your view on the differences between the various states?

Yeah, well, I mean, I think everybody's heard about all the new entrants coming into Florida, right? As you mentioned, in other areas, we're not seeing that level of new entrants coming into, you know, the other 15 states that we do business. California, like you said, is another exception. Where Medicare is more leading state, so there's more opportunity there as we grow our EMS book. I would say the remaining states are pretty stable. Again, with the existing agent distribution that we have there, they know us well, Narragansett Bay, Cepha Insurance. Florida seems always to be, you know, where there's new entrants coming in and then there's a pause. But we have seen new entrants come in in the last year.

The kind of related to, could you talk a little bit about admitted versus not admitted in some of these states as well? Clearly, you see a little bit in Florida where not admitted is there and a lot more in California. I think you're, I think to correct you, you're only not admitted in California. Yeah. Can you talk about how that's swinging back and forth?

Yeah. So where you're seeing a lot of dislocation, you are seeing more not admitted or EMS carriers going in there because they have the flexibility to increase rates, which is why we use EMS as well. I will say that I think you're seeing more EMS carriers throughout the footprint in general. Just again, for those markets change pretty quickly and dynamically, EMS gives you the opportunity to kind of respond to that in a much quicker fashion than the admitted. More stable environments, I think the admitted is fine, but I think in some of the larger states, you are seeing more EMS carriers enter into the market that we've seen. The EMS market in general has grown, but it is not your specialty EMS. You're seeing kind of a bit of a switch for your typical homeowners under an EMS carrier.

Appreciate the help as always. Thank

you.