Heritage Insurance Holdings, Inc.

Good morning and welcome to the Heritage Insurance Holdings First Quarter 2026 Earnings Conference Call. Please note today's event is being recorded. 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 a touch-tone phone. To withdraw your question, please press star and then two. 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, and good morning, everyone. I want to start by putting this quarter in the proper context because it's the direct result of the strategy we've been executing for several years now. When I became the CEO, our focus was very clear. We needed to achieve rate adequacy, tight underwriting, reduce volatility, and protect the balance sheet. What you're seeing today is a result of that work and the beginning of the next phase of our strategy, which is opening for new business to prudently grow and further diversify our business while maintaining acceptable margins. Our first quarter was strong and in line with our expectations. We earned $36.5 million, or $1.19 per share. making this the most profitable first quarter that the company has delivered since becoming public in 2014. We also reported the lowest first quarter net loss ratio since 2015. These results reflect steady underwriting execution, the full impact of our prior rate action, and disciplined expense management. The improvement in the net loss ratio was driven by favorable attritional loss performance, lower weather-related losses, higher favorable loss development, and the continued positive impacts of the underwriting and pricing actions we have taken over the past several years. Retention is strong and rate adequacy is firmly in place throughout our book of business. Our personal residential in-force premium grew 1.4% over the prior year quarter, while our commercial residential in-force premium declined 7.8% as we continue to see competitive pricing pressure in the Florida commercial market. Heritage has been in the commercial residential market for over 10 years and has built a well-performing portfolio managed by a deep bench of experienced underwriters and claim adjusters for that product. However, we will not waiver from our commitment to achieve adequate margins. To the extent competitors offer commercial residential products which are inadequately priced, we will not follow suit. Instead, we are leveraging the expertise of our commercial residential team to expand this product into other states, most recently Hawaii, where we can achieve appropriate risk-adjusted returns. We achieved rate adequacy across 90% of our geographies and continue our efforts to ramp up new business and prudently grow our book of business while maintaining underwriting discipline, maintaining profitability, and managing risk. Over the last five years, we deliberately took actions designed to improve the quality of our book of business and charge adequate rates, which ultimately reduced our policy count. This trade-off benefited our shareholders and stabilized our results. Given our current position, we are in the process of expanding our product offering and identifying new opportunities for Heritage to meet the needs of our policyholders and agents. As we enter this next phase of responsible growth, we continue to evaluate our markets to meet our customers' needs for coverage at competitive pricing. Lost costs have fallen and we expect the cost of reinsurance to also decline, which will benefit our policyholders through premium reductions while we maintain margins. At the same time, we continue to cultivate agent relationships in our reopened territories. The early results are encouraging with new business written up 62.7% from the first quarter of 2025. and over 30% from the fourth quarter of 2025. We are encouraged by our results this quarter and remain optimistic that our initiatives will result in growth throughout the year. Importantly, our policy count trends continue to improve sequentially. While we are seeing a few states with double-digit policy count growth, others are beginning to ramp up, and we are overall seeing positive growth rates. The management-driven policy count reduction over the last several years continue to moderate and points to a growth inflection in the coming quarters. Retention also remains strong at approximately 88%, reinforcing our confidence that we are on a solid path towards sustainable growth in our policy count. As we discussed last quarter, we are exploring additional strategic growth opportunities including our planned entry into Texas on an excess and surplus lines basis. Our significant market research indicates this addition to our product line, which we expect will be modest in the first year, and nicely aligns with our strategic initiatives. Production will focus primarily on Tier 1 and select Tier 2 geographies, which are closer regions within our risk tolerance. We will leverage both existing agent relationships and new distribution partners. Consistent with our approach of delivering regional expertise, we intend to have underwriting, claims, and marketing professionals located in Texas to remain closely aligned with local market dynamics. This provides us with the speed, flexibility, and market knowledge of a regional company with the economies of scale of a super regional company. As always, we will maintain a strong focus on underwriting discipline, exposure management, and rate adequacy. Heritage is now performing well with a diversified book of business, a strong balance sheet, significant cash from operation, and flexibility to take advantage of emerging opportunities. We have built a culture and infrastructure that generates a sustainable competitive advantage by focusing on and discipline processes. Our focus is on opportunities that are strategically aligned with our core capabilities and provide solutions in challenging or dislocated insurance markets. Any potential business opportunity must meet our strict financial and risk-based criteria. We require a deep understanding of the target market, including loss history, regulatory environment, reinsurance implication, and key risk drivers, and we will only pursue opportunities that are expected to generate returns in excess of our cost of capital. Importantly, we are focused on maintaining prudent exposure management and ensuring that any transaction does not introduce undue enterprise or reputational risk. While competition has increased, our view is that not all of the operators in our space will be able to effectively manage the complexities of the market cycles. To the extent that consolidation opportunities emerge, we believe our scale, balance sheet strength, experienced workforce, and local expertise positions us well to selectively evaluate opportunities that meet our discipline criteria. Before I wrap up, I want to briefly touch on technology and artificial intelligence, which are important enablers of our strategy. We are actively deploying AI tools across the organization to improve efficiency and customer service, as well as provide better tools for decision-making while maintaining appropriate controls and oversight. AI will continue to reduce manual effort, improve accuracy, assist with better quality control, and provide analytics that will assist us in aligning staffing needs to customer demands. We expect that we will continue to enhance these capabilities for improved quality and customer service. Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily falling. 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 in our markets during 2025, and the reinsurance capacity entering the traditional and insurance-linked security markets, we remain optimistic that reinsurance pricing will continue to improve in 2026. We believe that favorable reinsurance terms will benefit the consumer with respect to the cost of insurance. To conclude, this quarter reflects the steady execution of a strategy we put in place several years ago. We delivered strong results, maintained underwriting discipline, and have firmly positioned the company to pursue controlled, profitable growth going forward. 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 to you.