Heritage Insurance Holdings, Inc.

Good morning and welcome to the Heritage Insurance Holdings second quarter 2025 earnings conference call. Please note, today's event is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And at this time, I would like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. 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. 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. 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 morning, everyone, and thank you for joining us today. We delivered strong second quarter results, having achieved net income of $48 million, up from $18.9 million second quarter a year ago, and maintain the positive trajectory of our earnings. As we have been discussing on our earning calls over the last year, we continue to see the tangible results from the successful implementation of our strategic initiatives designed to generate positive and consistent shareholder returns by attaining rate adequacy, managing exposure, and enhancing our underwriting discipline. This has created a significant level of earnings power within Heritage, which has fully shown through this quarter. As part of that strategy, we re-underwrote our Personal Minds book while taking needed rate increases to achieve adequate rates. This led to a steady contraction in our policies in force over the last four years of over 200,000 policies. During the same timeframe, our in-force premium has increased from approximately $1.1 billion to $1.4 billion, and the diversity of our book has improved. In the second quarter, our policies in force decreased by just over 7,700 policies. which was the smallest decrease since we started the initiative in June of 2021. As previously mentioned, we are at an inflection point in our business where we expect our personal lines policies enforced to slowly increase through the second half of this year as our new business production continues to ramp up. New business is up 46% over the second quarter of 2024 and is at the highest level since the second quarter of 2022. Looking to 2026, we expect growth to accelerate as our new business production is fully ramped up across all of our geographies and our exposure management initiatives are fully behind us. The catalyst has been achieving rate adequacy across the majority of our markets and correspondingly opening those areas up for new business. There are a few select areas that are still closed, but nearly all of our producing capacity is open for new business. While it takes time to open our territories and onboard agents, we are seeing good new business momentum across our regions in the Northeast, particularly in New York, as well as the Mid-Atlantic, where Virginia is seeing strong new business trends. Florida is also a standout market for heritage. given the recent legislative reforms which are having a positive impact on the economics of writing new profitable business and where we have seen a marked decline in frivolous lawsuits. Looking forward, we see significant room for growth and expansions as we continue to build our market share across the Northeast, Mid-Atlantic, Southeast, West, and Pacific regions. Additionally, we see opportunities to expand in new regions of the country as we deliver new products to our insurers over time. Taken together, this presents an open-ended growth opportunity to heritage in our shareholders. All that said, we will maintain our disciplined underwriting processes as we open new territories and embark on managed growth strategy, which also resulted in a lower net loss ratio this quarter. As we grow, we're also continuing to invest in and enhance customer service claims and claims quality management, as well as technology resources. We are in our third year of an IT conversion to a Guidewire platform. Our conversion has been going well and is expected to be completed next year. Once we are fully on the Guidewire platform, we will be able to scale the business more efficiently, as well as increase our speed of execution. Turning to reinsurance, we have maintained a stable, indemnity-based reinsurance program at manageable cost, with an excellent panel of highly rated and collateralized reinsurers. Overall, we increased the amount of limit that we purchased by $285 million, while our overall costs increased by less than $8 million. Looking forward, we expect the reinsurance market to see the positive impact of the legislative changes in Florida as Hurricane Milton's claims mature through this year and into next year. This could have a favorable impact on reinsurance pricing in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. The strength of our results and momentum in our business can also be seen in our recent refinancing of our senior credit facilities, which Kurt will comment on. We had strong support from our banking partners and upsized our facility while simultaneously achieving more attractive terms, given the demand, which exceeded our expectations. As we look to the second half of the year, we also expect to build capital, which will not only position us for accelerating organic growth, but also to consider our capital allocation strategy. To conclude, our business is at an inflection point. as we pivot to manage growth strategy, which will return our policies in force to moderate growth through the back half of this year before accelerating in 2026. We are excited with the many opportunities that we see to grow the value of our business. 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 all driven by our dedicated workforce. Kirk, over to you.

Thank you, Ernie, and good morning, everyone. Starting with our financial highlights, we reported net income of $48.0 million, or $1.55 per diluted share in the second quarter. This represents a sharp increase from the $18.9 million, or $0.61 per diluted share, a year ago second quarter. The increase is primarily driven by decreases in losses and other operating expenses and an increase in net premiums earned. Gross premiums earned rose to $353.6 million, up 1% from $350.1 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, we expect our growth to accelerate at a managed pace. Net premiums earned increased to $196.3 million, up 3.2%, from $190.3 million in the prior quarter, reflecting higher gross premiums earned, as well as a reduction in seeded premiums from the prior year quarter. The reduction in seeded premiums was driven primarily by $10 million reinstatement premiums for Hurricane Ian for the prior year quarter, and which was partially offset by higher seeded premiums in 2025 on our net quota share reinsurance program. Our net investment income for the quarter was $9 million, an $800,000 decrease from the $9.8 million in the prior year quarter, primarily driven by a lower interest rate environment for our sweep accounts and money market funds. We continue to manage our investment portfolio while maintaining a conservative, high-quality investment with duration liability matched. Our total revenues for the quarter were $208 million, up 2.2%, from $203.6 million in the prior year quarter. This improvement was driven by higher net premiums earned. Our net loss ratio for the quarter improved 17.2 points to 38.5% as compared to 55.7% in the same quarter last year, reflecting significantly lower net losses in LAE coupled with higher net premiums earned. Net weather and catastrophe losses for the current year quarter for $12.5 million, a decrease of $7.2 million from $19.7 million in the prior year quarter. There were no catastrophe losses in the current quarter or prior year quarters. The reduction in weather losses was coupled with a reduction in attritional losses. Our attritional losses have been trending favorably, which we believe is associated with the enhanced underwriting strategy over the last several years. the quarter benefited from favorable reserve development compared to the prior year quarter. Favorable net loss development was $2.3 million in the current year quarter compared to adverse development or $8.7 million in the prior year quarter. Our net expense ratio for the quarter was 34.4%, a 2.4 point improvement from 36.8% in the prior year quarter. This was driven primarily by growth in net premiums earned coupled with higher seed and commission income, which decreased the net policy acquisition costs. Higher seed and commission income was associated with both a large amount of premium seeded and a higher seed and commission rate driven by favorable loss experience for the net quota share program. This offset a one-half point increase in the net G&A expense ratio. The net combined ratio for the quarter was 72.9%. and improvement of 19.6 points from 92.5% in the prior year quarter, driven by a lower net loss ratio and lower net expense ratio as described. Turning to our balance sheet, we ended the quarter with total assets of $2.5 billion and shareholders' equity of $383.3 million. Our book value per share increased at $12.36 at June 30th, 2025. up 30.1% from the fourth quarter of 2024, and up 48.6% from the second quarter of 2024. Increase from December 31st, 2024 is primarily attributable to the net income for the year to date, as well as a $11.1 million net of tax benefit associated with a $14.6 million reduction in unrealized losses on the company's fixed income securities portfolio. The average duration of the fixed income portfolio is 3.04 years, as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve, while still maintaining a short-duration, high-quality portfolio. Turning to our senior credit facilities, we refinance the facility on favorable terms, having upsized the facility to $200 million from the previous $150 million facility, while extending the maturity to July 2030 from July 2026. Additionally, our new facilities are at a lower cost and provide more flexibility than our previous facility. I would like to thank our bank partners who are supporting Heritage as we return to growth. Non-regulated cash at the quarter end was $46.3 million. In addition, statutory capital at quarter end was $329.6 million. which is up $76.6 million from the second quarter of 2024. The increase in statutory surplus provides additional growth capacity as we open more territories for new business. Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe our proactive approach to managing exposures, 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 for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster. And the first question will be from Mark Hughes with Truist.

Please go ahead.

Yeah, thank you. Good morning. Hey, Mark. Morning. I wonder if you could talk about kind of the attritional loss trajectory as you've seen it develop over the last year and through the second quarter. If we look at your loss ratio, taking out the cats and other weather, um, A little bit of an uptick this quarter. I don't know that we can read much into that given all the other moving parts, but I'm just sort of curious from an attritional loss perspective, where do we stand now? Is it still trending downward from your perspective? Is it stabilized? Have we kind of achieved the benefits of some of these regulatory reforms in your underwriting actions, or is there still potentially more to come? How would you describe it?

Yeah, I'd say it's somewhat stabilizing now. And again, I mean, we received rate adequacy. And when you look at it, I mean, frequency has continued to be down. And then, you know, our severity is running at a relatively modest rate, which you would expect with inflation. But, you know, a lot of this has been frequency driven, and frequency has been down. Yeah, but I think that that probably is going to start leveling off, and so I think that we're probably running into a point where you're getting into some stabilization.

Yeah, I guess I should have started out saying $1.55 is a big quarter, and so stabilization at $1.55 would be pretty good. But I know you're targeting growth, and on that point, how do you see the competition? There's been some kind of public equity offering activity in Florida. Obviously, losses have improved substantially. You're opening up for growth. What are you finding in terms of agent enthusiasm, level of competition, anything that you're seeing as you're going out in the market and looking for new businesses?

Yeah, what I'd start to say is the agents are enthusiastic that we've opened up. I think we've said we've been closed for quite a bit, and now we're about 90% open, 90, 95% open in our geographic areas. As far as competition is concerned, we've always said we welcome, you know, responsible competition. I think everyone is aware that there are new carriers in the state, which is good for the public. But that being said, most of those carriers are focusing on the Citizens Takeout, the depopulation program. And we see that and still focusing on that at least for the next year.

Yeah. How do you see your rates trending kind of the next – for the balance of this year? And if you think about next year, I know you made some comments about you expect the reinsurance market to more fully factor the reform, and that's you know, positive for 2026 rates potentially. But how do you think the primary rates, either yours or if you want to broaden it up and say kind of across the state, and here I'm thinking Florida, you know, but you can talk nationally as well, how you think that'll trend?

Yeah, I think the trend there is going to be, it's going to be up in most geographies, although not to the extent it has been in the past, simply from the standpoint of You know, with us starting to hit rate adequacy, you know, we really don't need the substantial rates to catch up. I would say, you know, almost across the board, the regulators have been very good as far as, you know, us getting adequate rates. And now that that's occurred, I mean, I think that, you know, the rate increases are going to be moderated. You know, there are a few areas here and there where we're still needed to catch up a little bit. But I would say that even in those geographies that, you know, the discussions there have been very positive and we're getting there very quickly. So from that standpoint, I think it's very positive. You know, we do have a fair amount of rates still earning through the portfolio, obviously this year, you know, in the next year, but I do think it is going to moderate.

Yeah. Then one more, if I might. The Northeast, New York, I think Virginia, where you're seeing policy growth. How has the loss experience been in those markets? If you see a little more growth oriented to the northeast, what will that do for the overall loss ratio?

Yeah, actually, that will be positive from the perspective of that is an area where we're still getting probably a little bit more rate than in the southeast. So it's a little bit of catch up in the northeast. But, you know, we're nearly there. I would say we recently got some rates approved in the Northeast, which are really going to kind of help that process quite a bit and accelerate it. So the Northeast is probably getting a little bit more rates than Southeast, but, you know, that's going to help us into next year.

Appreciate it. Thank you. Thank you. Thanks, Mark.

And our next question is from Carol Chimmel from Citizens.

Please go ahead. Yes, hi, good morning and congrats on the great quarter. Thank you. And my first question is regarding the catastrophe and weather losses. I'm just curious if you can maybe compare it to the prior year's quarter and maybe the quarter from two years ago. Are you seeing any change for that quarter? I know that quarter is a lot of southeast convective storms, you know, historically, but can you maybe explain the difference between the past two years?

Yeah. Well, you know, so for example, year over year, you know, our non-cap weather for the quarter was down about, you know, $7 million. A lot of that, you know, we do think has to do with the underwriting of the portfolio where we do think we have better risks, you know, newer roofs, you know, and just the, you know, we've been inspecting. And so therefore, from that perspective, You know, we think it is a better performing book, so therefore it is not as susceptible to some of the severe convective storms. I think that they, you know, have been a little bit lighter, but I also think that some of it has been just indicative of the underwriting performance of the portfolio.

Great. Thank you. And then the second question is regarding the prior period development. Can you go into detail if this was from the strengthening of the reserves from last year?

Yeah, some of it is from that strengthening from last year. And again, we did look at strengthening reserves last year, wanted to make sure that we were adequate at year-end, that type of stuff. And again, we don't mind slight movements here in our reserves, up or down, that's kind of expected. But we want to be as close, I think, that when we look at the favorable development now, For the core, I think that is very positive and actually we're favorable for the full year to date also. So, yeah, that's the trend we like to see. And again, I think some of it is reflective of the strengthening we took last year.

Understood. Thank you very much. Thank you. Thank you.

And as a reminder, if you'd like to ask a question, please press star then 1. The next question is from Paul Newsome from Piper Sandler. Please go ahead. Good morning. Good morning, Paul.

Good morning, Paul. Maybe you could just unpack a little bit more some of the expected growth by region and where you think opportunistically will get better from a policy perspective. Florida versus New York versus other states. Let's start with that.

Yeah, so let's start with the mid-Atlantic, right? Virginia is the state we entered a couple years ago. That's been performing pretty well, and we do see PIF growth coming from Virginia. As well as we opened up in New York, again, we received some rate there that put us at rate adequacy. We've opened that up, and the agency Really going on to writing new business there. So the Northeast will see growth in PIF, as well as the Mid-Atlantic. In Florida, as we mentioned, we are reopened. And we're seeing the decline in the policy count there leveling off. But we expect that to be a positive number growing up here in the next quarter. Again, California is growing from a PIF count. NY has also opened up again. again, since we're rate adequate. So, we do see the total PIV count coming from various sectors of the different regions that we're in.

Great. That's helpful.

Any thought on underlying property claim trends that just from a claim trend perspective, is it fairly stable at this point?

Yeah, I would say it definitely is. So, looking at our three-year frequency trend, it's actually down about 0.9%. So, I mean, that's almost pretty flat. Severity on a three-year basis is up about 5.4%. If you look at a five-year basis, it's up about 4.4%. So, really, those are, I would say, you know, numbers that are, you know, very solid and very manageable, as opposed to, you know, some of the COVID years, which were clicking up rather substantially. So, it's really started to moderate and look very positive at this point.

Great. Thanks.

Appreciate it. Thank you, Paul. Thank you.

And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back to Ernie Garite for any closing remarks.

We appreciate everybody joining me on the call today, and I hope everyone has a great day.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.