HERITAGE INSURANCE HOLDINGS INC 2026 Q2 Earnings Call

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 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. 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, an 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 while 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 inflection 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 to policy count growth in the coming quarters. Equally important is what we're hearing directly from our agent partners.

Across reopened 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. 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 excess 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. Reinsurers now have the benefit of real-world claims experience following Hurricane Milton. As claims have developed, the results have continued to validate many of the reforms 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 one 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.