Q1 2025 Heritage Insurance Holdings Inc Earnings Call

Speaker Change: Good morning and welcome to the Heritage Insurance Holdings 1st quarter 2025 burning conference call. Please note the days as long as being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go head sir.

Speaker Change: Today's call may contain forward-looking statements within the meaning of the Private Security's Litigation Reform Act of 1995. These statements are based upon management's current expectations in subject to uncertainty and changes in circumstances.

Speaker Change: 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.

Speaker Change: For a description of the four-looking statements and the risks that could cause our results to differ materially from those described in the four-looking statements, please refer to our annual report on Form 10K, Earnings Release, and other SEC filings.

Speaker Change: Our comments today will also include non-GAAP financial measures. The reconcilations of and other information regarding these measures can be found in our press release.

Speaker Change: With me on the call today is Ernie Garate, our chief executive officer. I'll now turn the call over to Ernie.

Ernie Garateix: Thank you, Kirk. Good morning, everyone, and thank you for joining us today.

Ernie Garateix: I am very pleased to be here this morning to discuss our first quota results as they clearly demonstrate that Heritage is performing at a high level from both a financial and operational perspective.

Ernie Garateix: which includes 31.8 million of net pre-tax losses and loss adjustment expenses related to the California wildfires.

Ernie Garateix: This compares favorably to the first quarter last year where we delivered net income of 14.2 million or 47 cents per diluted share with no major weather events.

Ernie Garateix: Q1 represents the third consecutive quarter that we have been impacted by catastrophe losses and maintained our profitability.

Ernie Garateix: This is the direct result of the successful implementation of our strategic initiatives over several years, designed to attain rate adequacy, manage exposure, and enhance our underwriting discipline.

Ernie Garateix: I am also proud of the support that our heritage employees have provided to our church through such challenging times.

Ernie Garateix: We have worked diligently over the last several years to provide our insurance with quality customer service and an efficient and thorough claims handling experience, which can be seen in our response to Hurricane Debbie, Colleen and Milton.

as well as the wildfires in Hawaii in California.

Ernie Garateix: Our dedicated staff have provided outstanding support to our palsy holders as they recover from these tragic events, demonstrating our unwavering support to our customers.

Ernie Garateix: While we have had success in the commercial residential market, we're also seeing more competition in space. That said, we will continue to ensure a rate adequacy for this product and will not sacrifice the bottom line for top-line

Ernie Garateix: Looking at the balance of this year, I expect our premiums in force to increase in the second half of the year. Over the last several years, we have carefully managed our exposure, work to achieve great adequacy and diversify our business.

Ernie Garateix: Business positioned us to pivot our strategy to one that is focused on managed growth, as we open territories for new personal lines business.

Ernie Garateix: To put this in perspective and face upon historical production, we only had 30% of our production capacity open for new business last June .

Ernie Garateix: Since then, we have been slowly opening capacity for growth across our geographies and now have nearly 75% of our production capacity open at the end of April 2025.

Ernie Garateix: with the expectation that we will have the balance of our production open by the end of this year.

Ernie Garateix: To prudently grow top the top line, we are selectively writing new personal lines business, anchored by a continued focus on risk management and stringent underwriting.

Ernie Garateix: As a result, we expect the pace of new business production to slowly accelerate through the year. This new business growth will earn into our financials in 2025 and future years.

Ernie Garateix: Looking at 2026, we expect growth to accelerate as our new business production is fully ramped up across all geographies and the headwind from our Exposure Management initiatives is fully behind us.

Ernie Garateix: Additionally, the legislative changes in Florida are having a positive impact on the economics of writing new, profitable business and where we have seen a market decline in frivolous lawsuits.

Ernie Garateix: We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance.

Ernie Garateix: We expect the reinsurance market will see the tangible benefits of this legislation as Hurricane Milton claims mature through this year and into next year, which could reduce re-insurance pricing in 2026.

Ernie Garateix: Our ENS business provides us with options in our product offering as we continue to evaluate states and markets for ENS opportunities.

Ernie Garateix: What makes this business so attractive is that we can adjust our rates and coverages to the changing dynamics state-by-state to ensure we continue to earn appropriate risk-adjusted returns while providing consumers in those states with needed insurance protection.

Ernie Garateix: Due to the current dislocation that exists in California, we expect more of the homeowners business to move from admitted carriers to EMS, which provides business opportunities for heritage.

Ernie Garateix: Turning to re-insurance, we have maintained a stable and dendee-based re-insurance program at manageable costs through our rate adequacy and exposure management initiatives.

Ernie Garateix: Overall, we increase the amount of limit that we purchase by $285 million while our overall cost increased by less than $8 million.

Ernie Garateix: I would like to thank our dedicated reinsurance partners who have supported our business through multiple catastrophic events over the last several years and look forward to their continued partnership as we work to further expand the company.

Ernie Garateix: To conclude, we continue to believe that we have a foundation in place to deliver solid, profitable growth in 2025 in future years as we continue to execute our strategy aimed at generating shareholder value.

Ernie Garateix: 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.

Kirk, over to you.

Thank you, Ernie, and good morning everyone.

Ernie Garateix: Starting with our financial highlights, we reported net income of 30.5 million or 99 cents per deluded share in the first quarter, which generated an annualized rate on average equity of 39 percent.

Ernie Garateix: This compares to 14.2 million or 47 cents per eluded share and are a turn on average equity of 25% in the prior year quarter.

Ernie Garateix: The increase in net income was primarily driven by an increase in net premiums earned and relatively flat expenses and loss of loss adjustment expense, despite the pretext impact of $31.8 million of California wildfires.

Ernie Garateix: Our first quarter results continue to demonstrate the successful execution of improving our portfolio and continuing to generate positive returns.

Ernie Garateix: Gross premiums earned rose to $353.8 million, up $3.6% from $341.4 million in the prior year quarter, reflecting higher gross premiums are written over the last 12 months from business growth and rating actions.

Ernie Garateix: As we ramp up on recently opened geographies and open more geographies, we expect our growth to accelerate at a managed pace. Our new business for the first quarter is slightly above plan and bodes well for our expectations for the remainder of the year.

Net premiums earned increased to $200 million.

Ernie Garateix: Up 11.5% from 179.4 million in the prior year quarter reflecting growth in growth premiums earned as well as a reduction in seeded premiums for the quarter.

Ernie Garateix: The reduction in seeded premium was driven by an 8.7 million reinstatement premium during the first quarter of 2024 for Hurricane Ian, coupled with the reduction in previously accrued reinstatement premiums of 1.4 million during the first quarter of 2025.

Ernie Garateix: Our net investment income for the quarter was $8.6 million flat from the prior year quarter. This reflects our continued actions to align the investments with the yield curve while maintaining a high-quality portfolio of short duration assets.

Ernie Garateix: Our total revenues for the quarter were 211.5 million, up 10.6% from 191.3 million in the prior year quarter. Its improvement was driven by the change in net premiums art.

Ernie Garateix: Our loss ratio for the quarter improved 7.2 points to 49.7% as compared to 56.9% in the same quarter last year, reflecting higher net premiums earned, coupled with a 2.6% reduction in net losses and LE, even with the California wildfires.

Ernie Garateix: Net Weather and Catlosses for the first quarter were 43.5 million.

Ernie Garateix: An increase of 25.1 million from 18.4 million in the prior quarter.

Ernie Garateix: Net losses in the current year quarter include non-Hercane Cat losses of 31.8 million from the California wildfires, which was a 15.9 million increase over the non-Hercane Cat losses of 15.9 million incurred in the prior quarter.

Ernie Garateix: Other weather losses total 11.7 million and increase of 9.2 million from the prior year quarter of 2.59.

Ernie Garateix: The higher cat and weather losses were more than offset by significantly lower attritional losses reflecting the quality of our portfolio.

Ernie Garateix: In addition, we experienced favorable reserve development compared to the prior year quarter. Favorable net loss development was 7.8 million in the current year quarter compared to adverse development of 6.7 million in the prior year quarter.

Ernie Garateix: Our net expense ratio for the quarter was 34.8%, a 2.3 point improvement from 37.1% in the prior quarter.

Ernie Garateix: This was driven primarily by growth in net premiums earned coupled with higher seeding commission income which decreased the net policy acquisition cost ratio by 3.3 percent.

Ernie Garateix: The reduction policy acquisition ratio was partially offset by a 1% increase in that general and administrative expense ratio.

Ernie Garateix: The net combined ratio for the quarter was 84.5%, down 9.5 points from 94% in the prior quarter driven by a lower net loss ratio and lower net expense ratio as just described.

Ernie Garateix: Turning to our balance sheet, we end of the quarter with total assets of 2.2 billion and shareholder's equity of 329 million.

Ernie Garateix: Our book value per share increased to $10.62 at March 31, 2025, up 11.8% from the fourth quarter of 2024, and up 38.5% from the first quarter of 2024.

Ernie Garateix: The increase in December 31, 2024 is primarily attributed to net income as well as a 6.5 million net of tax reduction in unrealized losses on the company's fixed income securities portfolio.

Ernie Garateix: Looking forward, we expect our unreal losses in the portfolio to continue to roll off as investments in sure.

Ernie Garateix: The average duration of the fixed income portfolio is 3.1 years as the company has extended duration taken advantage of higher yields further out on the old curve, while still maintaining a short duration high credit quality portfolio.

Ernie Garateix: Looking ahead, we remain focused on executing our strategic initiatives aimed at trying long-term shareholder value and providing our policy holders and agents with a service they deserve and expect.

Ernie Garateix: We believe that our proactive approach to managing exposure, enhancing rate adequacy, and investing in technology and infrastructure will position us well for continued success.

Ernie Garateix: Thank you for your time today. Operator, we are now ready to take your questions.

We will now begin the question and answer session.

Ernie Garateix: To ask the question you must start in one of your telephone keepers.

Ernie Garateix: If you're using a speaker phone, please pick up your hand to pre-foot press the keys. To a dry question, please press start in two. At this time, we'll pause momentarily to assemble our roster.

Mark Hughes: Our first question to come from Mark Hughes with Tewist. You may now go ahead.

Yeah, thank you very much.

Speaker Change: Congratulations on the quarter. Kirk, the seeded premium dollars that we can expect in Q2 and Q3. Do you have some thoughts on that? Some guidance?

Speaker Change: Yeah, and looking at that is kind of going forward and that stuff. It's going to be, you know, up slightly for the remainder of the year. The ratio probably go up, you know, a little bit but not significantly for the rest.

here.

Speaker Change: Okay. So, ratio up a little bit, not significantly, same on dollars, I guess? Yes, correct.

Okay.

Speaker Change: And then 39% ROE is pretty good stuff with the cat losses in the quarter.

Mark Hughes: How do you think rates are going to play out when we think over the next six months, year or two years?

Ernie Garateix: Yeah, I think good question, Mark. I think one of the things is we've been working hard to be rate addict with and we are 90% of all geography so one of the things we'll do is keep up with that and maintain with that. I think the regulatory environment in general realizes that keeping up with rate is good for everybody involved.

Ernie Garateix: So again, we'll consistently look at where we're out from a rate perspective and go to certain areas if we need more rate, we'll go ahead and do that.

Mark Hughes: Now, do you think what's the risk that it goes the other direction and obviously even afraid for down a bit, you'd?

thanks for attending.

Speaker Change: Yeah, and we've said this, okay, if rates go down, if on losses are going down, correspondingly in those markets, right? And I think a testament to Florida last year, we filed for a 3% rate decrease, but we've also seen losses go down in Florida, so obviously keeping those margins in place is what's key there.

Speaker Change: Yeah, okay. And then in personal lines as you're getting more active in opening up a new distribution.

Speaker Change: Yeah, so one comment I'll make. It's really not new distribution, the existing distribution that we've had, and then reopening with the agents so they know us.

Speaker Change: I think one thing we said is for gradually opening with the agents so they understand the underwriting discipline that we want to maintain. There are new companies that have come in. Obviously that's known to everybody out there. I think most of you know new companies are starting off with takeouts and then moving over to new business.

Speaker Change: But again, we're ready to compete, you know, with folks out there as well, and there's responsible competition.

Speaker Change: Yeah, and then if you look at your underlying loss, take out the weather, take out the...

Speaker Change: CABs that have continued to improve anything about this level that's not sustainable. Is this a pretty good...

Speaker Change: Benchmark, I know you get a little more weather activity in other quarters, but this is what we have lost. Is that a reasonable baseline?

Speaker Change: Yeah, I think when you look at it again, barring the major storms and that type of stuff, I mean the lost trends are, I would say, are very favorable.

Speaker Change: I will tell you that the legislative impacts or any mention of that type of stuff are having a favorable impact and if the trends continue I think that you are going to see a flap for sure. So even with a little bit of claims inflation I think just that the trends are looking very good right now.

Yeah, very good. Thank you. All right. Thank you, Mark.

Speaker Change: Our next question will come from Carol Camel with Citizens. You may not go ahead.

Carol Camille: and I'm just trying to maybe have a better understanding of the Florida market in terms of pits going down, but you know, pits are going down also in other states.

Speaker Change: TIVs basically flatish, but then the premiums are down. Is this really because of what you said earlier was the rate coming down in Florida or is this a different dynamic?

Speaker Change: and so there's a fifth decrease, you know, is decreasing that a little bit. Also, you know, we are seeing a little bit of, you know, competition in the commercial markets.

Ernie Garateix: which is having a little bit of impact on our premiums. Again, one of the things, as Ernie mentioned, we've been closed in a lot of our territories that we've just started reopening, and so we're anticipating that that's going to start accelerating starting in the second half of this year.

Ernie Garateix: All right. Got it. Thank you. That's it for me. All right. Thank you. Thank you.

Speaker Change: Our next question will come from Paul Newsome with Packer Sandler. You may now go ahead.

Good morning. Thanks for the call guys.

They might fall in fall.

Speaker Change: Could you give us a little bit more color on the competitive environment by state? My sense is that Ford is very different than East Coast, different in California. What's your view on?

The difference is between the various states.

Speaker Change: Yeah, well, I mean, I think everybody's heard about all the new entrance coming in to Florida, right? As you mentioned, in other areas, we're not seeing that level of new entrance coming into it, you know, the other 15 states that we do business.

Speaker Change: California, like you said, is another exception where mitigators are more leaving the state, so there's more opportunity there as we grow our UNS book. I would say the remaining states are pretty stable, again with the existing agent distribution that we have there. They know as well, Narragansett Bay, Separate Insurance.

Speaker Change: Florida seems always to be, you know, where there's new entrance coming in and then there's a pause, but we have seen new entrance come in in the last year.

C.A.B.

Speaker Change: It's kind of related to, can you talk a little bit about admitted versus non-admitted in some of these states as well, could you see a little bit with your own work?

Speaker Change: Not admitted this is there and a lot more in California, I think you're, I think you're correct that you're only not admitted in California, you talked about how that's swimming back and forth.

Speaker Change: Yeah, so where you're seeing a lot of dislocation, you are seeing more not admitted or ENS carriers going in there because they have the flexibility to increase rates, which is why we use ENS as well. I will say that I think you're seeing more ENS carriers throughout the footprint in general.

Speaker Change: just again for this markets change pretty quickly and dynamically. EMS gives you the opportunity to kind of respond to that in a much quicker fashion than the admitted. More stable environments I think the admitted is fine, but I think in some of the larger states.

Speaker Change: You are seeing more ENS carriers enter into the market that we see. The ENS market in general has grown, but it is not your specialty ENS. You're seeing kind of a bit of a switch for your typical homeowners under an ENS carrier.

Appreciate the help as always.

Thank you.

Speaker Change: This concludes your question and answer session. I'll let you turn the conference back over to Ernesto Garate for any closing remarks.

Speaker Change: The call for does not conclude. Thank you for today's presentation. You may now disconnect.