Heritage Insurance Holdings, Inc.

Good morning and welcome to the Heritage Insurance Holdings Second Quarter 2026 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. Sir, 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. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these majors can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie.

Thanks, Kirk, and good morning, everyone. Before discussing our second quarter results, I want to step back and frame where Heritage stands today and how meaningfully the business has evolved over the last several years. When we began executing our strategic initiatives, our objectives were clear. Improve profitability, achieve rate adequacy, strengthen the balance sheet, reduce volatility, and position heritage for sustainable long-term growth. Delivering on those objectives required difficult but necessary decisions. We re-underwrote portions of the portfolio, reduced exposure where returns did not justify the risk, implemented meaningful rate actions, strengthened our reserving position, and continued investing in technology and operating infrastructure. The results of those efforts are increasingly visible in our financial performance. In the second quarter, Heritage generated record net income of $61.7 million, record diluted earnings per share of $2.05, and annualized return on equity in excess of 45% and substantial operating cash flow of $166.5 million. Importantly, these results were achieved while maintaining the underwriting discipline that has guided our strategy. We continue to believe long-term shareholder value is created through profitable underwriting and disciplined capital allocation. not by pursuing premium growth at any cost. We also believe the market continues to underappreciate the extent of our geographic diversification and the reduction in earnings volatility that has resulted from that diversification. Heritage has historically been viewed primarily as a Florida-focused property insurer. While Florida remains an important market for us, Heritage Today operates as a super regional insurance platform with business spread across multiple geographies, products, and distribution channels. That diversification improves both the quality and durability of our earnings. It gives us the flexibility to allocate capital towards markets and products where we see the strongest risk-adjusted returns are reducing exposure in areas where competition is excessive or pricing does not support acceptable margins. As market conditions evolve, we can shift our focus and capital towards opportunities that we believe will create the best long-term returns for shareholders while maintaining compliance with insurance regulatory requirements. We are seeing that flexibility play out today. While commercial residential pricing in portions of Florida has become highly competitive, we continue to see attractive opportunities across many of the personal residential markets throughout our footprint. This flexibility is important because it allows us to remain disciplined. We do not need to chase underpriced business or force growth in any single geography. Instead, we can allocate capital where underwriting conditions are most favorable and where we believe we can generate attractive long-term returns. As a result, Heritage's earning profile today is significantly more durable and resilient than it was just a few years ago. Over the last several years, policy count declines were largely the result of deliberate actions taken to improve profitability, achieve rate adequacy, and reposition the portfolio. Those actions have been successful, and we believe the vast majority of that work is now behind us. Today, nearly all of our territories are open for new business, our agency relationships remain strong, and production trends continue moving in the right direction. Most importantly, the pace of policy count decline continues to moderate. As a result, we believe our personal residential business is approaching an important and question point. New business production continues to strengthen, retention remains healthy, and we are seeing encouraging trends across a number of our reopened territories. As those territories mature and production continues to build, we believe the foundation is in place for a return to policy count growth. Our transition back to growth has been temporarily slowed by the rollout of Guidewire. as the implementation creates a short-term learning curve for agents and can result in several months of slower production. Importantly, we have consistently seen activity improve meaningfully once agents become familiar with the platform. Agent feedback has been overwhelmingly positive. Agents consistently tell us that Guidewire is easier to use, more automated, and significantly more efficient than our legacy system. As implementation progresses across our footprint and the temporary transition effects begin to fade, we believe production will continue to improve, positioning us for a return of policy count growth in the coming quarters. Equally important is what we're hearing directly from our agent partners. Across OAK reopen territories, agents continue to express a desire to place more business with Heritage. We worked hard to maintain these relationships during the years in which we prioritized profitability and portfolio repositioning. We communicated transparently about our strategy, the reasons behind our decisions, and our long-term intentions. As a result, agents have welcomed us back into markets where production was previously restricted and are actively looking to grow with us. We also wrote our first policy in Texas through our excess and surplus lines platform. While the initial contribution will be modest, Texas represents another attractive market where we can leverage our underwriting expertise and agency relationships. We view Texas as another step in the continued diversification of our business and another opportunity to allocate capital towards attractive long-term growth. We are also evaluating additional opportunities across both personal and commercial lines. Every opportunity must meet the same underwriting, profitability, and return standards that have guided the transformation of Heritage over the last several years. Growth remains important, but profitable growth remains the priority. The transformation of our business is also reflected in the support we continue to receive from our reinsurance partners. who remain willing to provide capacity to support our growth. During the second quarter, we successfully completed our 2026-2027 Catastrophe Exits of Loss program, securing greater protection while reducing our overall reinsurance cost. We placed more than $2.2 billion of limit expanded our use of multi-year coverage and catastrophe bonds and generated approximately $63 million of annualized savings compared to the prior year program. We believe this outcome reflects both the strength of our franchise and the continued improvement in the underlying fundamentals of the Florida market as the positive impact of legislative reform becomes more evident. Litigation activity remains dramatically lower than it was before reform. and reinsurers now have the benefit of real-world claims experience following Hurricane Milton. As claims have developed, the results have continued to validate many other forms enacted in Florida and support a more favorable view of the market's long-term risk profile. Before turning the call back to Kirk, I want to spend a few moments on capital allocation. As I noted earlier, we generated significant operating cash flow during the quarter. Further strengthening our balance sheet and enhancing our flexibility to invest in organic growth while also returning capital to shareholders. Year to date, we have repurchased more than 1 million shares of common stock at a cost of approximately $24.6 million, representing roughly 3% of shares outstanding. We believe these repurchases have been highly accretive and reflect our confidence in the current earnings power of the company and the opportunities ahead. Simply put, we do not believe our current valuation fully reflects the strength of our operating performance, the consistency of our earnings, or the durability of the business we have built. As long as that disconnect exists, share repurchases will remain an important part of our capital allocation toolkit. At the same time, we retain the flexibility to invest in attractive growth opportunities as they emerge. We believe this balanced approach best supports long-term value creation for shareholders. In closing, we believe Heritage is entering a new chapter in its evolution. We are generating record earnings, producing substantial excess capital, and prudently positioning the business for growth. The consistency and durability of our earnings profile are stronger than at any other point in our history as a public company, and we are excited about the opportunities ahead to create long-term value for shareholders. I want to thank our employees, agents, policyholders, reinsurers, and shareholders for their continued support and partnership. Kirk, I'll turn the call back over to you. Thank you, Ernie, and good morning, everyone.

Turning to our financial highlights, Heritage reported record second quarter net income of $61.7 million, or $2.05 per diluted share, compared to $48 million, or $1.55 per diluted share in the prior year quarter. Through the first six months of 2026, we generated $98.2 million of net income, up 25% from the same period last year. These results demonstrate the continued strength of our underwriting platform, the benefits of our strategic initiatives, and the improved profitability of the business. We also generated $166.5 million of operating cash flow during the quarter, providing substantial financial flexibility as we continue to invest for growth by returning capital to shareholders. The increase in second quarter earnings was primarily driven by lower net losses and loss adjustment expenses, reflecting favorable prior year reserve development and lower weather related losses, as well as higher net premiums earned and increased investment income. These benefits were partially offset by higher policy acquisition costs. Our strong profitability generated an annualized return on average equity of 45.4% during the quarter, while shareholders' equity increased 48.1% compared with the prior year period. Premiums in force totaled $1.41 billion at quarter end, down 1.4% from $1.43 billion in the prior year quarter. The decline was primarily driven by lower commercial residential premiums due to competitive pricing pressure, particularly in Florida. As Ernie noted, we remain disciplined and will not sacrifice profitability for volume. Encouragingly, personal residential premiums increased 1.2% year-over-year, reflecting improving trends in that business. Most premiums earned were $351.2 million, compared with $353.6 million in the prior year quarter. Net premiums earned increased 2.4% to $201.1 million compared to $196.3 million in the prior year quarter, reflecting lower-seeded premiums and the continued benefits of actions we have taken to optimize our reinsurance program. Gross premiums written were $380.4 million, down 5.5% from the prior year quarter, primarily reflecting the reduction in floor-to-commercial residential business. Underwriting performance remained exceptionally strong. The net loss ratio improved to 30.4% compared to 38.5% in the prior year quarter, while the combined ratio improved to 64.9% from 72.9%. The improvement was driven by favorable prior year reserve development, lower weather losses, and continued strong underlying claims performance. During the quarter, we recognized $23.4 million of favorable prior year reserve development compared with $2.3 million Thank you for joining us today. Policy acquisition costs increased modestly quarter over quarter, primarily due to lower seating commissions following the reduction of our Northeast Quarter Share Program at year-end 2025. This was partially offset by lower general and administrative expenses, reflecting continued expense discipline across the organization. Net investment income increased 17.3% to $10.6 million from $9 million in the prior year quarter, driven by growth in invested assets. We continue to maintain a conservatively positioned investment portfolio focused on high-quality fixed-income securities with asset durations closely matched to our liabilities. The effective tax rate of the quarter was 24.9% compared with 23.8% in the prior quarter. The increase was primarily driven by changes in pre-tax income and certain permanent tax items. As a reminder, our effective tax rate can fluctuate throughout the year as earnings levels change and estimates are refined. Turning to the balance sheet, we ended the quarter with total assets of $2.45 billion, including $1.39 billion of cash and invested assets, and shareholders' equity of $567.7 million. Book value per share increased to $19.09 as of June 30, 2026, up 16.5% from December 31, 2025, and up 54.5% from June 30, 2025. The increase from year-end 2025 was driven primarily by Strong's earnings generation, partially offset by a $4.9 million net of tax increase in unrealized losses within the fixed income portfolio and the repurchase of $24.6 million of common stock during the first six months of 2026. Despite these capital deployment activities, book value per share continues to grow meaningfully, reflecting the strength of our operating performance and capital generation. Non-regulated cash at quarter end was $47.8 million. Cash flow from operations was $166.5 million, and combined statutory surplus increased $47 million from year end 2025 to $439.5 million. Importantly, our debt-to-capital ratio has continued to decline as the company's earnings power and cash generation have improved. At the end of the second quarter, our debt-to-capital ratio was 11%, reflecting the successful implementation of our strategic initiatives. Our significant non-regulated cash, strong operating cash flow, available leverage capacity, and increased statutory capital position position us well to support growth as open territories continue to scale new business production. As the company's earning power has increased, we have continued to build capital, which we are prioritizing for organic growth and other growth opportunities, along with opportunistic share repurchases, When we believe our shares are undervalued relative to our financial performance and future earnings potential. Year-to-date, we have repurchased more than 1 million shares of common stock for $24.6 million. Of that amount, $12.6 million was repurchased under the board-authorized $50 million share repurchase program announced in the first quarter and available through December 31, 2026, leaving $37.4 million of remaining authorizations. As we enter the second half of the year, we believe Heritage is exceptionally well positioned. We are generating record earnings, producing substantial excess capital, and seeing encouraging signs of return to growth. Importantly, we see meaningful opportunities to possibly expand the business and continue developing long-term value for our shareholders, agents, and policyholders. Thank you for your time today. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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. The first question comes from Mark Hewis with Truist. Please go ahead.

Thank you. Good morning. Good morning, Mark. Ernie Kirk, the rate expectations, when you think about Florida, obviously there's been really good benefits from reform. You're seeing in the loss ratio. What does that kind of translate into when you look at your rate filings there over the next six, 12 months? And same question for the book as a whole, including other states.

Yeah, well, I mean, we're evaluating that now simply from the standpoint of the reinsurance went down rather substantially. We think that is going to translate into, you know, rate reductions in Florida. Outside of Florida, I would say that, you know, we're probably going to see modest rate increases. From the standpoint, you know, we're rate adequate, you know, almost across the board. So you're going to see rate increases comparable with claims inflation that kind of keep the margins flat with where they are. Yeah.

With the decline in reinsurance costs, what do you think it means for Florida? What's the range of potential outcomes?

So we're finalizing that mark, but if you take a look last year, we were down 3% to 5%, so I would say it'd be in that range once we finalize it. Okay.

And, Kirk, what's a good seeded premium number for the third quarter with the new program?

Yeah, well, I think that you can count on the ratio probably dropping, you know, one to two points with the new re-interns program.

So it's been kind of 43-ish in the first half, so... Maybe 42-ish? Yeah, I'd say maybe even a little better than that. 41? But it's in the years. Yeah. Okay. The new production kind of starting to grow again in new states, is that going to have a meaningful impact on the lost pick? presumably that business is being written at a higher combined ratio. How should we think about that?

Yeah, no, we're actually sticking to our underwriting guidelines and margins. I mean, I don't think it's going to have much detrimental impact to the loss ratio.

Yeah, okay. The cash from operations, the 166.5% If there's some quarterly dynamic that I'm not familiar with, let me know. But that seems like a really strong number. What's driving that?

Basically, yeah, a lot of it is just the dynamic income that we've had, you know, over the last year, that type of stuff. I mean, so that's one of the big factors there.

Yeah. If the 166.5 is 2Q alone, is that correct, or is that first half? It's 2Q. Okay. Seems a lot stronger than your net income. But just good financials or is there some working cap or is something else going on in the cash flow?

Well, you know, we're working on our balance sheet. You know, have over the last, you know, several years as far as, you know, what our expenses, what our debt is, you know, the investment income. So it's just a myriad of things we've been kind of working on on the overall, you know, balance sheet also, which is starting to translate a little bit more into, you know, pre-cash flow.

Yeah. And then the $23.4 million is a favorable development. Could you talk about that? Was that 2025 stuff even older? What – this seems like a nice number. Yeah.

It's – Yeah, it's spread throughout a number of years. It also is spread through, you know, it's predominantly in the HBCIC, but also Narragansett Bay. You know, and really what it reflects, it's several positive trends that basically have come evident, you know, even more over the last several quarters. You know, key drivers are the stabilization of, you know, frequency, severity, also being within a manageable range. I would say the late reported claims have leveled off and have really, you know, lower than what they have historically been, you know, and that's just related to us closing claims, you know, lower than what we had expected. So, it's accumulation and what we did is we kind of, you know, held on to those for a while just to make sure that those trends were consistent and were stabilizing before we realized the development on it.

Okay. I might ask another one. The commercial residential, you talked about prices under pressure there. It's more competitive. Where do you think that stands in the cycle here? How close are we to the bottom? Is there any sign that those are stabilizing at all? How do you think about that?

So as we look at that, Mark, right, we know there's more competition out there. We're sticking to our underwriting guidelines. We know there's new entrants into the market. You know, there have been a number of accounts, just to be frank, that we've walked away from because it's priced inadequate, but we've seen that leveling off. The good news is commercial has also expanded into other areas, including Hawaii, New York, and New Jersey have increased for us as well. So that's kind of, you know, lessening it. in Florida. And again, we will be competitive, but we'll be responsibly competitive. Okay.

So maybe some signs of leveling off in Florida?

Yep. And also, by the way, one thing is that a caseload operation is for the first six months.

For the first six months, okay. For the first six months, yes. So it's still quite a strong number. Yes. Yeah. Okay. Thank you very much. Thank you. Okay. Thanks, Mark.

The next question comes from Carol Janiel of Citizens. Please go ahead.

Hi. Yeah, Mark just went into the prior period development that I was going to ask about, so that was great. I'll just follow up with just one other question. It's regarding your debt level, the fact that you're paying it off. Is it something you want to continue to pay off? Thank you very much.

This year, we actually did have a little bit of loan at Federal Home Loan Bank in Des Moines for Zephyr. We paid off simply from the standpoint the rate on that was higher than what we were getting from a return standpoint. So, we'll prudently, you know, look at paying down this stuff. But right now, we're pretty happy with the debt facility. And so, therefore, we'll probably kind of maintain that. We also, at this point, still have $75 million left as a deferred term loan. on that facility, you know, in the event we wanted to use it. Okay.

And then just last one here since I'm on the call already. You said the loss ratios should be stable, but if you were just to, you know, break it apart into the components, you know, accident year versus prior period, are you thinking that on a net basis it will be stable, but accident year might, you know, Thank you very much. Thank you.

You know, we do think that we're, you know, definitely adequately reserved, but again, it's like, you know, that is more of a one-time item, so therefore, you know, backing that out would be the stabilization of the loss ratio.

Gotcha. Thank you very much. Thank you, Kirk.

The next question comes from Cam Bianchi with Piper Sandler. Please go ahead.

Hi, good morning. This is Cam. I'm with Paul. My first question is on I'm just wondering if you could unpack the gap between policy down growth and premium contractions. Is this more pure rate or pricing pressure or is it also a mixed shift towards maybe smaller accounts? Thanks.

Yeah, it is competitive pressure on those accounts. You know, what we have to do is, you know, we are walking away from, you know, some accounts simply due to the extent of the rate decreases. We are able to write some even with the rate decreases. New business, you know, the policy count is up because, you know, we are writing some smaller commercial accounts from a new business perspective. So, therefore, that is increasing our policy count. And again, that has a lot to do with where we see the pricing favorability on those accounts. We also have, you know, our dedicated commercial agents which do an absolutely great job of evaluating the risks. And so, therefore, from an underwriting standpoint and from a pricing standpoint, you know, we're very comfortable writing, you know, that new business that we've been getting.

Awesome. Got it. And then just one more for me. You started writing in Texas, you mentioned. What's the underwriting aspect there and How quickly do you see that scale relative to the Florida commercial book? Yeah.

Yeah, so we're really excited about Texas. Just launched it in July, so early stages, but very well receptive. We've got a couple policies already and meeting with several agents out there. So there is, you know, appetite for us, but as we said, it'll be a small contribution this year, and we expect it to grow over the next two to three years.

Thank you.

Yep, appreciate it. Thank you.

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

Yes, we'd like to thank everybody for joining the conference. I should thank our employees for all their hard work.

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