Q4 2023 Heritage Insurance Holdings Inc Earnings Call

Operator: www.heritageinsurance.com Good morning, and welcome to the Heritage Insurance Holdings conference call. All participants will be in listen-only mode.

Good morning, and welcome to the Heritage Insurance Holdings Conference call.

All participants will be in listen only mode.

Operator: For immediate assistance, please signal a conference specialist by pressing the star key, followed by zero. At the end of today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then 1.

Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

Operator: To withdraw your question, please press star 3. This event is being recorded. I would now like to turn the conference over to Kirk Lusk, Heritage's Chief Financial Officer. Okay. 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. Statements made during today's call may be 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.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I'd now like to turn the conference over to Kirk Lusk Heritage Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us today, and we invite you to visit the investors section of our web site investors Dot heritage PCI Dot com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience.

<unk> 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 <unk>.

Spectation.

Operator: 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 Garateix, our Chief Executive Officer. I will now turn the call over to you.

Our statements are as of today and we have no obligation to update any forward looking statements we may make for.

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 as Ernie guarantee our Chief Executive Officer, I will now turn the call over to Ernie.

Kirk Howard Lusk: Thank you, Kirk, and good morning to everyone. As we review our fourth quarter and full year 2023, I'm pleased to reflect on a period of achievement and strategic advancement for our company. Our efforts over the past two years include Deliberate Action, culminating in improved financial outcomes and a strengthened market position. Our financial results for the fourth quarter demonstrate the positive impact of our efforts toward tightening underwriting, working towards rate adequacy, diversifying our portfolio, and managing our reinsurance. Our net income for Q4 2023 was $30.9 million, marking a substantial improvement from $12.5 million in the same quarter last year.

Thank you Kurt and good morning to everyone.

As we review our fourth quarter and full year 2023 results I'm pleased to reflect on a period of achievement and strategic advancement for our company.

Our efforts over the past two years include deliberate actions and focused execution, culminating in improved financial outcomes and they strengthened market position.

Our financial results for the fourth quarter demonstrate the positive impact of our efforts towards tightening underwriting working towards rate adequacy, diversifying our portfolio and managing our reinsurance costs.

Our net income for Q4, 2023 was $30 9 million, marking a substantial improvement from $12 5 million in the same quarter last year.

Ernesto Jose Garateix: Over the last two years, the actions we have implemented are now being realized and reflected in our financial statements as premium from rate increases is earned over the policy period. A cornerstone of our strategy has been our disciplined approach to exposure management, our strategy to reduce the Florida Personalized Book of Business, and Obtain Adequate Rates to Significantly Improve the Florida Personalized Book of Business. We have extended the strategy to all states within our 16-state platform. We intentionally reduced our multi-state personal lines policies in Enforce by 15% and total insured value by $6.9 billion to not only manage our reinsurance costs, but more importantly, but also improve the overall quality of our book. This strategic reduction led to only a slight decline in in-force premium from our overall personal lines business of 2.3%.

Over the last two years the actions we have implemented are now being realized and reflected in our financial statements as premium from rate increases earn the policy period.

A cornerstone of our strategy has been our disciplined approach to exposure management.

Our strategy to reduce the Florida personal lines book of business and obtain adequate rates significantly improved the book of business.

We have extended this strategy to all states within our 16 state platform.

We intentionally reduced our multistate personal lines policies in force by 15% and total insured value by six 9% to not only manage our reinsurance costs, but more effectively but also improve the overall quality of our book of business.

This strategic reduction led to only a slight decline in in force premium from our overall personal lines business up two 3%.

Ernesto Jose Garateix: A move we deem necessary to align with our long-term vision of rate adequacy and selective geographic expansion, commercial residential has seen a remarkable increase in premiums in force by 63.9% year over year. This growth, set against a backdrop of market opportunity, underscores our ability to allocate capital to products and regions with the potential for improved margins. Our exposure management strategy has been particularly effective, resulting in a deliberate decrease in our policy's in-force, while in-force premiums once again hit an all-time high at $1.4 billion and up 5.6% year over year. These moves were made to manage our reinsurance costs efficiently and ensure that we maintain a portfolio where the premium is adequately reflective of the risk. We continue to foster our relationships with our reinsurance partners, who provide critical support to our core strategy.

He moved we deem necessary to align with our long term vision of rate adequacy in selected geographic expansion.

The commercial residential segment has seen a remarkable increase in premiums enforced by 63, 9% year over year.

This growth set against a backdrop of market opportunity underscores our ability to allocate capital to products and regions with the potential for improved margins.

Our exposure management strategy has been particularly effective.

Resulting in a deliberate decrease in our policies in force while in force premiums once again hit an all time high at one 4 billion and up five 6% year over year.

These moves were made to manage our reinsurance cost efficiently and ensure that we maintain a portfolio where the Permian is adequately reflective of the risk.

We continue to foster our relationships with our reinsurance partners that provide critical support to our core strategy.

Ernesto Jose Garateix: Looking ahead, our strategy remains clear, and, With a successful equity raise recently completed, we are well positioned to pursue selective growth opportunities, especially in geographies where our rate adequacy meets our stringent criteria. Our commitment to operational excellence, coupled with strategic clarity, provides a solid foundation for sustained growth and value creation for our shareholders. In conclusion, the achievements of 2023 reflect our team's dedication, strategic insight, and operational efficiency. As we move forward, I am confident in our ability to maintain the, driven by our solid foundation and the unyielding dedication of our team across our 16 state classes. Let me turn things over to Kurt for a review of the results for the quarter and key financial performance metrics. Thank you, Ernie. Good morning, everyone.

Looking ahead, our strategy remains clear and focused with a successful equity raise recently completed we are well positioned to pursue selective growth opportunities, especially in geographies, where our rate adequacy meets our stringent criteria.

Our commitment to operational excellence, coupled with strategic clarity provides a solid foundation for sustained growth and value creation for our shareholders.

In conclusion, the achievements of 2023 reflect our team's dedication strategic insight and operational discipline.

As we move forward I am confident in our ability to maintain this momentum driven by our solid foundation and the unyielding dedication of our team across our 16 state platform.

Let me turn things over to Kirk for a review of the results in the quarter and key financial performance metrics.

Thank you Ernie and good morning, everyone in the fourth quarter of 2023 Heritage insurance holdings demonstrated that the execution of our strategic decisions over the past few years are starting to produce the results we were anticipating we.

Kirk Howard Lusk: In the fourth quarter of 2023, Heritage Insurance Holdings demonstrated that the execution of our strategic decisions over the past two years is starting to produce the results we were anticipating. We had advised that improving the rate adequacy and overall quality of our book of business was a multi-year process, and we are pleased with the progress we have made, and we will continue to focus on these strategic initiatives going forward. We remain committed to generating an underwriting profit in all our geographies through rate adequacy, selective underwriting, providing products appropriate for the market, and diligent claims handling. The progress we have made with those objectives is demonstrated by the favorable fourth-quarter results and reflects our ability to adapt in a dynamic insurance landscape. With net income of $30.9 million, or $1.15 per diluted share, we achieved a solid improvement from $12.5 million, or $0.48 per diluted share, in the same quarter of the previous year.

We had advised at improving the rate adequacy and overall quality of our book of business was a multiyear process and we are pleased with the progress we have made and we will continue to focus on the strategic initiatives going forward.

We remain committed to generating an underwriting profit in all our geographies to rate adequacy selective underwriting providing products appropriate for the market and diligent claims handling the.

The progress we have made with those that objective as demonstrated by the favorable fourth quarter results and reflects our ability to adapt in a dynamic insurance landscape.

With net income of $30 9 million or $1 15 per diluted share we achieved a solid improvement from $12 5 million or <unk> 48 per diluted share in the same quarter of the previous year.

Kirk Howard Lusk: The 147.5% increase in net income is primarily attributable to our premium increases nearly keeping pace with the increase in year-end insurance costs, improved investment income, and an improved loss rate. Our growth premiums earned increased 7% to $339.6 million, while net premiums earned rose by 6.9% to $177.7 million, underscoring the effectiveness of our pricing strategy and underwriting standards. In addition, these actions led to an increase in the average premium per policy of 24.2% over the prior year. The net loss ratio for the quarter was 51%, which is an 11.4 point improvement from the prior year. Losses from weather were $11 million this year compared to $27.5 million in the prior year quarter, an improvement of $16.5 million.

Third 47, 5% increase in net income is primarily attributable to our premium increases nearly keeping pace with the increase in your reinsurance costs improved investment income and an improved loss ratio.

Our gross premiums earned increased 7% to $339 6 million, while net premiums earned rose by six 9% to 177.7 underscoring the effectiveness of our pricing strategy and underwriting standards. In addition, these actions led to an increase.

And the average premium per policy of 24, 2% over the prior year quarter.

The net loss ratio for the quarter was 51%, which is an 11 four point improvement from the prior year losses from weather were $11 million this year compared to $27 5 million in the prior year quarter and improvement of $16 5 million.

Kirk Howard Lusk: The improvement is attributable to favorable weather and also what we believe is an improved portfolio which is able to mitigate some of the weather events. The net expense ratio remained relatively stable at 33.9%, and our combined ratio improved to 84.9%. These metrics are a statement of our focused underwriting discipline and effective cost management. Our net investment income for the quarter increased by 36.1% to $6.7 million, reflecting our proactive management and investment decisions. The diversification of our investment portfolio and alignment with the yield curve position us well to capitalize on market opportunities while managing risk. Capital management remains the priority. We have continued the suspension of the quarterly dividend as we focus on reinvesting in our core operations and exploring strategic growth opportunities, such as the strategic actions taken regarding the commercial portfolio in 2022.

The improvement is attributable to favorable weather and also what we believe is an improved portfolio, which was able to mitigate some of the weather events.

The net expense ratio remained relatively stable at 33, 9% and our combined ratio improved to 84, 9%.

These metrics are a statement to our focused underwriting discipline and effective cost management.

Our net investment income for the quarter increased by 36, 1% to $6 7 million, reflecting our proactive management and investment decisions the diversification of our investment portfolio and alignment with the yield curve and position us well to capitalize on market opportunities while managing risk.

Capital management remains a priority.

<unk> continued the suspension of the quarterly dividend as we focus on reinvesting in our core operations and exploring strategic growth opportunities such as the strategic actions taken regarding the commercial portfolio in 2023.

Kirk Howard Lusk: Our approach to capital allocation is geared towards maximizing long-term returns and shareholder value. We will continue to actively manage underperforming areas of our business and seek opportunities that position the company for long-term profitability and shareholder return. As we move into 2024, our strategy remains centered on selective growth in geographies where rate adequacy aligns with our underwriting standards and product design. Our disciplined approach to exposure management, combined with our strategic investments in technology and process improvement, position us to navigate the involving market dynamics and capitalize on growth opportunities. In closing, the fourth quarter results reflect the strategic discipline we have executed over the past few years. We have a highly dedicated and talented team throughout the organization that provides the analysis, insights, and execution in their respective roles that has driven the results and positioned us well to continue our trajectory of profitable growth. Thank you for your continued support.

Our approach to capital allocation is geared towards maximizing long term returns and shareholder value. We will continue to actively manage underperforming areas of our business and seek opportunities to position the company for long term profitability and shareholder returns.

As we move into 2024, our strategy remains centered on selective growth in geographies, where rate adequacy aligns with our underwriting standards and product design.

Our disciplined approach to exposure management combined with our strategic investments in technology and process improvements position us to navigate the evolving market dynamics and capitalizing on growth opportunities.

In closing the fourth quarter results reflect the strategic discipline, we have executed over the past few years, we have a highly dedicated and talented team throughout the organization to provide the analysis insight and execution in their respective roles that has driven the results and positioned us well to continue our trajectory of profitable growth.

Thank you for your continued support we look forward to updating you on our progress in coming quarters, we are now ready to take questions.

Operator: We look forward to updating you on our progress in the coming quarters. 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.

We will now begin the question and answer session to.

To ask a question you May press Star then one on your telephone keypad.

Operator: If you are using a speaker phone, please pick up your handset before pressing. To withdraw your question, please press. At this time, we will pause momentarily to assemble the roster, and our first question will come from Paul Newsome of Piper Sandler. Please go ahead.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And our first question will come from Paul Newsome of Piper Sandler. Please go ahead.

Jon Paul Newsome: Good morning. Congratulations on the quarter. Thank you, Paul. Thank you, Paul. I want to ask a little bit more about the capital management question.

Good morning, congratulations on the quarter.

Thank you Paul.

Right.

Wanted to ask a little bit more on the capital.

Management.

Question.

Jon Paul Newsome: The recent offering suggests maybe you're a little bit light on capital coming into the year, but you also kept the dividend off, so I'm guessing you're still in a capital accumulation phase, if that's right. So that's the question. And then, in terms of select growth, does that include the potential for M&A or maybe even takeouts as well? So I'll start with that.

The recent offerings suggests maybe you were a little bit light on capital coming into that.

Year.

But you also kept the dividend off so I'm guessing.

But you were still in a capital the capital accumulation phase if that's right. So that's the question.

And then in terms of select growth I mean does that include the potential for M&A or maybe even take outs as well.

I'll start with there.

Kirk Howard Lusk: Yeah, well, first of all, the capital raise. We just looked at that as being opportunistic. And the other thing is, we think that there are a lot of opportunities within our market space for other opportunities to take advantage of. So really, the capital raise was to do that as opposed to a shortage of capital position. And so that's kind of the way we're looking at that. I mean, we do think that there are a number of opportunities.

Yeah, well I mean first of all the capital raise we just looked at that as being opportunistic.

And the other thing is we think that there is a lot of opportunities within our market space.

For other opportunities to take advantage of so really the capital raise was to do that as opposed to a shortage of capital position.

So that's kind of way we're looking at that I mean, we do think that there are a number of opportunities.

Kirk Howard Lusk: You know, takeouts, you know, we continually have looked at takeouts. Sometimes, because of the pricing of our products versus citizens, we don't think it would be, you know, incrementally beneficial to us. But you know, it's one of the things we continue to look at.

Takeouts, we continually look to take out.

I do sometimes because of the pricing of our products versus that isn't we don't think it would be yellow.

Incrementally beneficial to us, but it's one of the things we continue to look at.

Great.

Jon Paul Newsome: My other question is, I wanted to ask about your sense of the cat load as we go forward. Obviously, there have been a number of moving parts. And maybe we could look at this maybe not so much on a quarterly basis but on an annual basis. What do you think is the right cat load, and how has it changed over time as we look forward? Yeah, I mean, I think the cat load has definitely changed, you know, as has the cost of reinsurance, reflecting that. And, you know, from that perspective, that's why, you know, we've been diligent in our exposure management process, and then also with, you know, taking the rates that we think we need to keep up with that pace. Has the cat load gone down or up? I guess we'll start with that. And by cat load, let me just make sure I understand what you're referring to as cat load.

My other question is I wanted to ask about sort of your sense of the cat load.

As we go forward, obviously there've been a number of moving parts.

And maybe you could look at this maybe not so much on a quarterly basis or annual basis.

What do you think is the right cat load and how has it changed over time.

You know as we look forward.

Yeah, I mean, I think the cat load has definitely changed you know as has the the cost of reinsurance are reflecting that.

And from that perspective, I mean, that's why we've been diligent in our exposure management process and then also with taking the rates that we think we need to keep up with that pace.

Yeah.

Has the catalog.

Down.

Sure.

I guess I'll start with that.

[laughter], Yeah, and my Cat Cat load.

Just make sure I understand what you're referring to is cash flow.

Kirk Howard Lusk: Cat load is the amount of catastrophe losses that would be normal for a year relative to premium. Yeah, and what we do, we've expected that to increase. However, our premium has been keeping pace with that. So, therefore, net-net, you know, we've been positive from that perspective. The other aspect of that, though, is the underwriting that we've undertaken over the last several years to improve our underlying portfolio, which we think has the ability to withstand some of the weather events and, therefore, has a tendency to mitigate some of those weather losses. So, I think cat loads, in general, have gone up, but with the premiums that we've taken and the underwriting action that we've taken, we think that we're outpaced. Okay, and I guess my last question I'll let somebody else ask.

Cat load is the amount of catastrophe losses.

Yes, it would be normal for a year relative to premium.

Yes, and what we do we have expected that to increase however, our premium has been keeping pace with that.

So they're there therefore net net we'd been positive from that perspective, the other aspect of that though is the underwriting that we've undertaken over the last several years to improve our underlying portfolio, which we think has the ability to withstand some of the weather events and so therefore, it has a tendency to mitigate some of those weather losses.

So I think cat loads in general have gone up but with the premiums that we've taken and the underwriting actions. We've taken we think that we're outpacing that.

Okay and.

And I guess my last question and I'll, let somebody else ask any any.

Kirk Howard Lusk: Any thoughts on tort reform in Florida so far? Yeah, so we continue to monitor that we do see some positive trends in the data that we're receiving regarding litigated losses. As we've always said, we do believe that it's going to take 18 to 24 months to grow through the system, but we're very optimistic that the Florida market is improving when it comes to litigated losses. Great, thanks, appreciate the help.

So that's on tort reform in Florida, so far.

Yes, so we continue to monitor that we do see some positive trends in the data that we're receiving regarding litigated losses.

As we've always said, we do believe that's going to take 18 to 24 months to grow through the system, but we're very optimistic that the Florida market is improving when it comes to litigated losses.

Great. Thanks, I appreciate the help.

Operator: Thank you, Paul. Thank you, Paul. Thank you, Paul. The next question comes from Maxwell Fritscher of Truist. Please go ahead.

Thank you Paul.

Okay.

The next question comes from Maxwell Fisher of Truest. Please go ahead.

Maxwell Fritscher: Hi, good morning. I'm calling in from Mark Hughes. I guess going off of Florida, toward reform questions, the loss ratio for the quarter was very good. I was just wondering how durable that is. I guess a better way to put it is, how much of that was due to the better portfolio set up versus and the better regulatory environment versus more mild weather in the quarter? Yeah, well, and that is actually something that we've been trying to analyze and understand just because it's very difficult to, you know, compare, you know, what the exact driver of that is.

Hi, good morning, I'm, calling in for Mark Hughes.

I guess going off of the Florida.

Tort reform question.

Loss ratio this.

This quarter was very good I was just wondering how durable is that.

I guess, the better way to put it is how much of that was due to better portfolio set up versus and better regulatory environment versus a more mild weather in the quarter.

Yeah, well and that is actually.

Something that we've been trying to analyze and understand just because it's very difficult to you know.

Compare what what is the exact driver of that I mean weather losses for us have been lower but they've also been lower throughout the season and I would say you know, particularly when we look at some of the severe convective storms that occurred throughout the year I think.

Kirk Howard Lusk: I mean, weather losses for us have been lower, but they've also been lower throughout the season. And I would say, you know, particularly when we look at some of the severe convective storms that occurred throughout the year, I think a number of people had fairly large losses associated with those severe convective storms. And we did not, you know, have the same type of loss. So I think from that standpoint, that gives us an indication that our portfolio is performing better. But, you know, some of it definitely has to do with a little bit lower weather.

A number of people had fairly large losses associated with those severe convective storms and we did not have the same type of loss. So I think from that standpoint that gives us an indication that our portfolio is performing better but some of it does have to do definitely with a little bit lower weather and I think that the.

Kirk Howard Lusk: And I think that the, you know, as Ernie mentioned, the torque reform, I think is probably having some positive impacts, but it's just hard to quantify. Yeah, that's helpful. And then on the expense ratio, pretty much the same for the full year, a little down. Can we expect this to be steady in 2024? How do you see that looking for this year?

Ernie mentioned that tort reform I think is probably having some positive impact, but it's just hard to quantify.

Yeah. That's helpful and then on the expense ratio pretty much the same for the full year a little down can we expect this to be steady in 2024, how do you see that looking for for this year.

Kirk Howard Lusk: Yeah, I think the, you know, looking forward, expense ratio overall will probably be fairly flat. We are doing some continuing investments in IT and productivity, which I think is going to allow us to grow, you know, in the future. I think we will have some continuing investments in 2020.

Yes, I think the.

Looking forward our expense ratio overall, probably be fairly flat, we are doing some continuing investments in <unk> and productivity, which I think is going to allow us to grow in.

In the future I think we do have some continuing investments in 'twenty four.

Maxwell Fritscher: That's all for me. Congratulations on a good quarter. Thank you. Hey, great. Hey, thank you.

That's all for me and congrats on a good quarter. Thank you.

Hey, Thank you.

This concludes our question and answer session I would like to turn the conference back over to Ernie Gary <unk> for any closing remarks.

Ernesto Jose Garateix: This concludes our question and answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. We want to thank everybody for joining the call today and hope everyone has a great day. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.

We want to thank everybody for joining the call today and hope everyone has a great day.

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

Yeah.

[music].