Heritage Insurance Holdings, Inc.

Good morning and welcome to the Heritage Insurance Holdings Fourth Quarter and Full Year 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, 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 morning, everyone, and thank you for joining us today. On this morning's call, I am going to review the successful execution of our strategic initiatives in 2025 and our full year results. review the competitive advantages that Herridge has built over the years, which positions us for success looking out over the medium term, and conclude with our strategic priorities for the year ahead. Kirk will then discuss our fourth quarter results, and we will open the call for your questions. As we have been discussing over the past several years, we have been intentional and disciplined in reshaping the foundation of our business. As an organization, we set out to transform our business with the goal of developing a model that delivers consistent earnings and sustainable shareholder value even in a challenging and dynamic market. To do that, we anchored our strategy around three initiatives that continue to guide every major decision that we make. First, we committed to generating true underwriting profit, not through reliance on market cycles, but through rate adequacy and more selective discipline underwriting, as well as a solid distribution network. We have made hard choices, re-underwriting our book where necessary, ensuring that every policy we write meets our profitability standards and aligning ourselves with the profitable and professional agents. Second, we focused on strategically allocating capital towards the products and geographies that offer the strongest returns, while being deliberate about where we pause, where we reinvest, and where we expand. This capital discipline has positioned us for thoughtful, measured growth with a focus on underwriting discipline and risk management. And third, we prioritized targeting a balanced and diversified portfolio. By expanding across multiple states and product lines, we strengthened the stability of our earnings, reduced our exposure to regional volatility, and fortified the company against the risks that define our industry. I'm proud to say that in 2025, we executed on these initiatives with precision and measurable success. We reopened profitable geographies, deploying capital in a thoughtful way designed to sustain long-term profitability. We maintained persistent underwriting discipline, supported by an ongoing focus on achieving and maintaining rate adequacy. We deepened our use of data-driven analytics, further strengthening the quality of our decision-making. We enhanced our customer service and claim capabilities, ensuring that the experience we deliver continues to improve. And importantly, we leveraged our infrastructure and operational capabilities, building a scalable platform that positions us for responsible, profitable growth in the years ahead. These initiatives and the consistent execution behind them are what continue to strengthen Heritage's earnings power, which can further be seen in our full year 2025 results, where we delivered net income of $195.6 million, or $6.32 per share, representing a strong increase from the full year 2024's net income of $61.5 million or $2.01 per share. Of note, our full-year results included $31.8 million of net pre-tax losses and loss adjustment expenses related to the California wildfires in the first quarter of 2025, which further highlights the significant earnings power within Heritage in which we remain focused on growing further. We also grew our tangible book value per share 72.5% to $16.39 at December 31, 2025, from $9.50 at December 31, 2024, while achieving an ROE of 49% for the year ending December 31, 2025. As we look ahead to 2026, our strategy continues to build on the strong foundation that we have created. First and foremost, we have achieved great adequacy in more than 90% of the geographies where we operate, and they are currently open for new business. In fact, new business premium production increased over 60% in the fourth quarter as compared to the fourth quarter last year. We have continued to evaluate new geographies and products that will advance our diversification and expansion efforts. As a result of that rigorous evaluation process, I would like to mention that we plan to enter Texas later this year on an excess and surplus lines basis. Our production will focus predominantly on Tier 1 and some Tier 2 geographies and will leverage our existing relationships as well as some new distribution partners. As we have done in California, which is also ENS, we will have underwriting and marketing employees in the state of Texas to stay abreast of the changing market needs and issues. As expected, we will maintain our focus on underwriting discipline, exposure management, and rate adequacy in our existing and new geographies. we have a long runway ahead to profitably grow our business and deliver value to our shareholders. A major emphasis in 2026 will also be the continued enhancement of our data-driven analytics, including deeper integration of AI and advanced technology tools. These capabilities will sharpen our risk selection, improve operational efficiency, and help us identify opportunities across regions with greater precision while being compliant with regulatory requirements for AI use. At the same time, we remain committed to refining our customer service and claim capabilities, building on the improvements already underway to deliver a more streamlined, transparent experience for agents and policyholders. And throughout 2026, we will continue leveraging the scale and flexibility of our infrastructure, our systems, processes, and regional operating model to support sustainable future growth. Fortunately, we have ample room to grow our business and can choose to be selective across our geographic footprint. Lastly, reinsurance remains a critical component of our business. and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers. We regularly meet with our reinsurance and ILS partners who continue to support our growth and whom we anticipate will offer incremental capacity as we look to our June 1st renewal. Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which benefits not only us, but our panel of reinsurers. Given the improved litigation environment in Florida, the lack of catastrophe losses, and the reinsurance capacity entering the traditional NILS markets, We are optimistic that reinsurance pricing will continue to improve in 2026. We also believe that favorable reinsurance will benefit the consumer in the terms of cost of insurance. To conclude, we have strong momentum as we enter 2026 with a positive outlook for both our growth and profitability. That said, we are not complacent with our results and strive to improve our organization and operations. 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, who I would like to personally thank for their efforts over the last year.

Over to you. Thank you, Ernie. Good morning.

Turning to our financial highlights, we reported net income of $66.7 million, or $2.15 per diluted share in the fourth quarter, compared with net income of $20.3 million, or $0.66 per diluted share in the fourth quarter of the prior year. The period over period increase primarily reflected higher net premiums earned and net investment income, lower losses and loss adjustment expense, and lower policy acquisition costs. In-force premiums of $1.432 billion, a decrease of 0.1% from $1.433 billion in the prior year quarter, primarily driven by competitive market conditions, reducing our commercial residential business while our personalized business increased. Although we think many opportunities for controlled growth exist, We will not write policies that we believe are underpriced or do not meet our underwriting standards. Gross premiums earned were $361.7 million, up 0.4% from $360.4 in the prior year quarter, reflecting higher gross premiums written over the last year. We continue to focus on new business initiatives across existing and new geographies subject to market conditions and our underwriting and pricing disciplines. Seeded premiums decreased by $2.1 million, predominantly reflecting a catastrophe excess of loss premium reduction true-up, as well as reinstatement premium during 2024 that did not recur in 2025. Net premiums earned were $202.7 million, up 1.7% from $199.3 million, reflecting the reduction in seeded premiums. Net investment income for the quarter was $9.8 million, up $1.3 million, or 15.9%, from $8.5 million in the prior year quarter, reflecting higher invested asset balances, coupled with actions to align the investments with the yield curve. The average duration of the fixed income portfolio is 3.2 years, as the company has extended duration from the prior year to take advantage of higher yields further out on the yield curve, while still maintaining a short duration high credit quality portfolio. Our total revenues for the quarter were $215.3 million, up 2.4% from the fourth quarter of 2024. As discussed, we expect our revenue growth to accelerate through 2026 as we ramp up our new business efforts. The net loss ratio was 31.3 for the quarter, compared to 54.7 in the prior year quarter, reflecting lower net losses and loss adjustment expense. both attritional and weather-related losses were lower than in the prior year quarter. Net weather-related losses for the quarter were 7.7 million compared to 45.6 million in the prior year quarter. There were no catastrophe losses in the current quarter compared with 40 million in the prior year quarter. The decrease in weather-related losses was accompanied by lower attritional losses and a reduction in unfavorable reserve development versus the prior year quarter. Our traditional losses have been trending favorable, which we believe is associated with the underwriting strategy over the last several years. The net expense ratio for the quarter was 30.7 compared to 35 in the prior year quarter. The change primarily reflected higher seating commission income, relatively flat general and administrative expenses, and higher net premiums earned. Policy acquisition costs were lower primarily due to higher seating commission income associated with both a larger amount of premiums seeded under the net quota share program and a higher seed and commission rate due to favorable loss experience within that program. The net combined ratio for the quarter was 62, an improvement of 27.7 points from 89.7 in the prior quarter, driven by the lower net loss ratio and the lower net expense ratio. Turning to the balance sheet. We ended the quarter with total assets of $2.2 billion and shareholders' equity of $505.3 million. Book value per share was $16.39 at December 31st, 2025, up 72% from the fourth quarter of 2024 and up 125% from the fourth quarter of 2023. The increase from December 2024 primarily reflected net income for the year and an 18 million net of tax reduction in unrealized losses on the company's fixed income securities portfolio. Unrealized losses related to a decline in interest rates during the year. Non-regulated cash at quarter end was $57.9 million. In addition, combined statutory surplus of our insurance company affiliates at quarter end was 392.6 million, an increase of 106.9 from year end 2024. The increase in statutory surplus provides for additional growth capacity as open and new territories get up to full capacity for new business. As the earnings power of the company has grown, we have built capital. We have prioritized the use of capital for organic growth and share repurchases when we believe our shares are undervalued. Considering our financial performance demonstrated earnings resilience and future earnings potential, we believe our stock is undervalued. Under our $10 million share repurchase plan, we repurchased 106,135 shares in 2025 at a cost of $2.3 million. In November of 2025, our Board of Directors established a new $25 million share repurchase plan that will expire on December 31st, 2026. We will continue to be opportunistic with share repurchases and purchased 112,858 shares at a cost of $3 million during the first quarter of 2026. 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 that our DIRF's certified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, 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.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Mark Hughes with Truist. Please go ahead.

Yeah, thanks. Good morning. Good morning, Mark. Good morning, Mark.

Top-line growth outlook, you talked about the impact of commercial residential being a headwind. Your underlying residential book is growing. That dynamic, has it already worked through your P&L? Is there a little bit more headwind to go?

We have seen some more competition in commercial residential in Florida. Um, so we'll see what 26 brings, but that's also, we've pivoted to commercial residential as well out of New York, New Jersey, as well as Hawaii. Uh, but we think, uh, we've seen most of that competition in 25.

Okay. And then when you look at the profitability in the business, can you give us a sense of a kind of Florida, Northeast, other markets, um, as you grow, uh, you know, maybe in the markets that you see more opportunity, is that going to mean anything for the P&L or for the overall loss ratio?

Sure. Great question. So as we've said is we're rate adequate in 90% of our geography. So if you take the Southeast Florida, obviously the book with the tort reform and what we're seeing, right, without, you know, minimal caps this year, Florida is very profitable. The Northeast has taken rates, so we're seeing profitability up in the Northeast. We go all the way out to Zephyr Insurance. They have taken rate, and we're seeing an uptake there from the profitability side. So we'll continue to get the remaining, let's just say, 5% to 10% of the geographies rate adequate, but we're really excited about 90% of rate adequacy throughout geographies, which opens up all business will, and those areas will be opened up throughout 26.

Very good.

Kirk, the 392, 393 million in surplus, is that sufficient for 2026? Do you think you'll have to add any more?

No, we think that that actually is pretty adequate. I mean, it's up about $106 million from last year, so a really nice increase in the statutory surplus, which really positions us well for the growth we're anticipating. And particularly given the combined ratios we've been running, that actually has been adding to the capital also. So we're in good shape there.

Yeah. And assuming you maintain decent profitability, that $25 million share repurchase authorization seems – seems low, I mean, just relative to your net income this quarter, for instance, $25 million seems low. Could there be more action on that front in the near term, picking that up a little bit, perhaps?

Yeah, I mean, our board, you know, would authorize, you know, we can go back to them at any point for reauthorization on that. And, again, we did buy a little bit back in the first quarter, and so, you know, we'll be looking at that going forward.

Yeah. Is there any target kind of a run rate combined ratio that you have in mind when you think about the overall book? You know, where should it settle in?

Well, I mean, I think that, you know, right now we have some pretty good headwinds looking at, you know, even, you know, into next year, you know, with particularly I think that we're looking at some reinsurance rate decreases. which is going to be favorably impacting that. So I think it's going to continue to be, you know, rather favorable for the next couple of years. And I think that, you know, over a longer period of time, I think that, you know, it could start tweaking up a little bit simply from the standpoint of, you know, as a rate starts stabilizing. I think it could start going up, but I think for the next couple of years, I think it could be, you know, comparable to where we are.

So combined ratio is, Absent storms on an underlying basis, you would say reasonably steady the next couple of years, help by reinsurance, and then maybe some normalization in rates starts to move that up a little bit.

Correct. Yeah. Okay. All right. Thank you very much. Thank you, Mark.

The next question comes from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Maybe unpack a little bit of the gross premium thoughts and outlook and, you know, the results to date. Just a little bit more color on what's going on with commercial residential and how that's, you know, is that the... Two relative declines, just the commercial auto, or is there other pieces there that we should be thinking about when we're thinking about the gross written premium? Oh, okay.

Yeah, so on the commercial residential, as we mentioned, we saw some increased competition coming in. But that being said, from a P&L and the profitability, it is still very profitable. Again, there are some competition where we decided to walk away just because it was that the rate was not there. But overall, we're still very satisfied from the profitability standpoint on the commercial residential. But we do expect to grow that in 2026. So, Kirk, I don't know if you want to add a little bit more on overall.

Yeah, and I think, Paul, it's, yeah, we did see a lot of competition there. But, I mean, one thing to keep in mind, I mean, we have a dedicated team, dedicated president, dedicated underwriters, dedicated claims handling folks for those. So that really kind of gives us a little bit of competitive advantage when you think about that commercial business. And I would think that, you know, we're able to kind of work through the market inflows and outflows. And so I think that you're going to see that that stabilize possibly increase this year.

Great. Not a huge number, but can you talk a little bit about the reserve development?

Oh, yeah, absolutely. Yeah, that really stems from, you know, when we look back at, you know, overall we've had a fair amount of favorable development this year for the full year. When we look back at the storms that are still outstanding, you know, there's a few lingering claims out there. And what we did is we just felt that it was prudent to then boost the reserves to make sure that those are, you know, adequate for anything that we could foresee on those last few remaining claims.

So all the development would be in the CAT, under the CAT category? Correct. Correct. Okay. Thank you. Appreciate the help as always.

All right. Thank you. Thanks, Paul.

The next question comes from Carol Camille with Citizens. Please go ahead.

Thank you. Good morning. Just to follow up on the top line questions and specifically Florida, can you just comment on the Florida residential market and if there is stopping going around?

So on the Florida residential market, a lot of the new competition that you're seeing is still going through basically the assumption process, the takeout process. So we would probably anticipate more of the voluntary competition coming in at the later half of 26, more into 27, since their initial focus is mostly on the takeout business. Thank you.

That's all. All right. Thank you, Carol.

We have a follow-up from Mark Hughes with Truist. Please go ahead.

Yeah, thanks. Kirk, anything on the policy acquisition front in terms of just the ratio? Is that going to move up a little bit as you pursue new business?

It will slightly. Also, you know, we did have the net quota share program at NBIC, and we reduced that at year end. You know, when we look at the seeding commission that we were getting from that program, that will reduce a little bit. So, therefore, our acquisition costs will go up a little bit. But then also, so will our net earned premium by reducing that net quarter share.

Yeah. And then net investment income, nothing unusual.

It looks like it was just up a bit sequentially. Do you think that'll keep moving up? Just sort of like a new money yield, the duration? Yeah. Is that still on an upward trajectory?

Yeah. Despite kind of like the drop in interest rates, I mean, we've been actually able to kind of, because we were so short before, we were able to move out on the yield curve, which gives us a little bit more yield there. And then also because of the increasing cash flow, we're anticipating that that's going to actually give us a little bit of boost on the investment income.

Very good. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you for joining us today.

I would like to thank our employees for all their efforts, and we wish everyone a great week.

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