HERITAGE INSURANCE HOLDINGS INC 2026 Q3 Earnings Call

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 measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I'll now turn the call over to Ernie.

Thanks, Kirk, and good morning, everyone. Over the last several years, we have taken deliberate steps to improve our profitability, reduce volatility, and build a more diversified and resilient company. After a quiet storm season last year, the third quarter brought catastrophe activity, including two hurricanes in Hawaii and a nor'easter. As a result, we absorbed $15.8 million of pre-tax catastrophe losses, compared with none in the third quarter of last year, and still grew diluted earnings per share to $1.72, up from $1.63 in the year-ago quarter. Net income was $51.1 million, up slightly from last year's $50.4 million. Through the first nine months of the year, we have generated net income of $149.3 million, up nearly 16%, while diluted earnings per share increased 18.5% to $4.94.

Our annualized return on average equity was 36.1% year to date, and book value per share reached $20.22, up almost 43% from a year ago. Three elements of our strategy contributed to the quarter's results: underwriting discipline, diversification, and our reinsurance program. First, our underwriting discipline. Excluding catastrophes, weather, and prior year development, our loss ratio improved by nearly four points in the quarter. This improvement came despite significant pricing pressure in Florida's commercial residential market, which I'll discuss shortly. It reflects years of disciplined rate setting, risk selection, and claims management, as well as Florida's improved legal environment. Second, diversification. Heritage is a super regional carrier with a diverse portfolio of policies across 17 states. We write business on a surplus lines basis in five states.

More than half of our premium is written outside of Florida, including other states in the southeast, the northeast, the mid-Atlantic, Hawaii, and our excess and surplus line platforms. That diversification has made our earnings more durable while also providing more flexibility to allocate capital towards markets and products where we see the most attractive risk-adjusted returns. Third, our reinsurance program. The program we placed in June with more than $2.2 billion of limit and approximately $63 million of annualized savings is working as intended. It lowered our cost of protection while keeping our net retention at a manageable level. The third quarter was the first full quarter of those savings, and our ceded premium ratio fell to 41.7% from 46.1% a year ago.

Now let me turn to market conditions, starting with the Florida commercial residential market, because it is the biggest moving part of our top line this quarter. The market has become very competitive, with new capacity and aggressive pricing. This has pressured our commercial premium in force down about 16% from a year ago, even though our policy count and insured values are up. That tells you the decline in premium is being driven by price, not a reduction in the underlying business we are writing. We have been very clear on these earnings calls. We will not chase underpriced business, and that will not change. We have walked away from accounts where the price no longer supports an adequate return, and we will continue to do so.

I believe our geographic reach, which provides us with numerous opportunities to grow our commercial and personal residential business in markets where pricing and returns remain attractive, is undervalued. We are selectively adding new territories outside of Florida to expand our commercial product offering. This includes product offerings on an admitted as well as surplus lines basis. In New Jersey, for example, our commercial premium in force has grown about 12% this year. Turning to the personal residential market, trends continue to move in the right direction as the pace of policy count decline has slowed substantially. In the third quarter, we lost roughly 2,900 personal lines policies, less than half the decline of a year ago. Premium in force is up slightly, and average premium per policy is up almost 5%.

Nearly all of our territories are open for new business, and agents in reopened markets continue to tell us they want to place more business with Heritage. Based on those trends, we continue to expect a return to personal lines policy count growth in 2027. We are also beginning to leverage our platform and capabilities in new markets. In Texas, we wrote our first excess and surplus lines policy in July and 86 policies written during the quarter. While it is still early and the contribution will be modest this year, the reception from agents has been strong. We believe Texas represents another attractive long-term growth opportunity where we can leverage our underwriting expertise and existing agent relationships while continuing to expand our geographic reach. Turning to capital, our position has never been stronger.

We ended the third quarter with shareholders' equity of $599 million and a debt-to-capital ratio of 10.5%. Year to date, we have repurchased about 1.1 million shares for $27.9 million, representing roughly 3.6% of shares outstanding at the start of the year, and we have $34.1 million remaining under our current authorization. Looking forward, our priorities are unchanged. First, we will continue to invest in profitable organic growth as our reopened territories and new markets scale. Second, we will continue to repurchase shares when we believe our stock trades below intrinsic value. Third, we will maintain a strong balance sheet that allows us to absorb weather events without changing course. In closing, we delivered solid earnings and continued book value growth in the third quarter, with weather activity returning to a level higher than last year.

We are confident in the path ahead and remain focused on disciplined underwriting, smart capital allocation, and building long-term value for our shareholders. I want to thank our employees, especially our claims team, who supported policyholders through this storm season, along with our agents, reinsurance partners, and shareholders.

Kirk, back to you. Thank you, Ernie, and good morning, everyone.

For the third quarter, Heritage reported net income of $51.1 million, or $1.72 per diluted share, compared with $50.4 million, or $1.63 per diluted share in the prior year quarter. Despite the higher level of weather activity, as Ernie discussed, diluted earnings per share increased 5.5%, aided by a 4% reduction in diluted shares outstanding from our share repurchase program. For the first nine months of 2026, net income was $149.3 million, or $4.94 per diluted share, compared with $128.9 million or $4.17 per diluted share a year ago. The annualized return on average equity was 35.1% for the quarter and 36.1% year to date. The quarterly figure is lower than last year's 49.2% at the third quarter of 2025, because average equity is more than 40% higher, not because of a decline in earnings.