Heritage Insurance Holdings, Inc. Stock

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 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 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. 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 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, 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 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 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 while returning capital to shareholders.

The increase in second quarter earnings was primarily driven by lower net losses and loss adjustment expenses, reflecting favorable prior period 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 in force increased 1.2% year-over-year, reflecting improving trends in that business. Gross 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 ceded 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 quarter, primarily reflecting the reduction in Florida 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 favorable in the prior year period. More importantly, we continue to see stable frequency trends, manageable severity trends, and favorable claims outcomes across the portfolio.

We believe these results reflect the benefit of our underwriting, pricing, and claims management actions over the last several years, along with a positive impact on recent legislative reforms in Florida. The net expense ratio was 34.5%, essentially flat from the prior year quarter. Policy acquisition costs increased modestly quarter-over-quarter, primarily due to lower ceding commissions following the reduction of our Northeast Quota 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 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 to 23.8% in the prior year 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 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 us well to support growth as open territories continue to scale new business production.

As the company's earnings 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 authorization.

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 profitably expand the business and continue developing long-term value for our shareholders, agents, and policyholders. Thank you for your time today. Operator, we're now ready to take questions.

[Operator Instructions] The first question comes from Mark Hughes with Truist. Please go ahead.

Ernie, Kirk, the rate expectations, when we 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 over the next 6, 12 months, and same question for the book as a whole, including other states.

Yes. 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 rate reductions in Florida. Outside of Florida, I would say that we're probably going to see modest rate increases. From the standpoint, we're rate adequate 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.

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

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 ceded premium number for the third quarter with the new program?

Yes, well, I think that you can count on a ratio probably dropping, you know, 1 to 2 points, with the new reinsurance program.

So it's been kind of 43-ish in the first half, so maybe 42-ish?

Yes, I'd say maybe even a little better than that.

41-ish? But it's in the ish.

Yes.

Okay. The new production kind of starting to grow again in new states. Is that going to have a meaningful impact on the loss pick? Presumably that business is being written at a higher combined ratio. How should we think about that?

Yes, 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 ratios.

Yes, okay. The cash from operations, the $166.5 million. 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, a lot of it is just the net income that we've had over the last year, that type of stuff. So that's one of the big factors there.

Yes, the $166.5 million is 2Q alone, is that correct? Or is that first half?

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

Yes. And then the $23.4 million, the favorable development, could you talk about that? Was that 2025 stuff, even older? What -- it seems like a nice number...

Yes, it's spread throughout a number of years. It also is spread through -- it's predominantly with HPCIC but also Narragansett Bay. And really, what it reflects, it's several positive trends that basically have come evident even more over the last several quarters. Key drivers are the stabilization of frequency, severity also being within a manageable range. I would say the late reported claims have leveled off and are really lower than what they have historically been.

And that's just related to us closing claims lower than what we had expected. So it's accumulation. And what we did is we kind of 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.

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. There have been a number of accounts, just to be frank, that we walked away from because it's priced inadequate, but we see 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 lessening in Florida. And again, we will be competitive, but we'll be responsibly competitive.

Okay. So maybe some signs of a leveling off in Florida?

And Mark, also, by the way, one more thing is that the [Technical Difficulty] operation is for the first 6 months.

For 6 months, okay -- even so, it's still quite a strong number.

Yes.

The next question comes from Karol Chmiel of Citizens. Please go ahead.

Hi, yes, Mark just asked 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 throughout the year and into next year?

No, not necessarily. We were pretty happy with the rate we had there. And what we did is we had a couple of other smaller loans. For example, we had a mortgage on a building last year that we sold. This year we actually did have a little bit of loan at Federal Home Loan Bank Des Moines for Zephyr, which 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 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, in the event we wanted to use it.

Okay. And then just the last one here since I'm on the call already. You said the loss ratios could be stable, but if you were just to, break it apart into the components, accident year versus prior period. Are you thinking that on a net basis, it will be stable, but accident year might, rise over time with the lower rates in Florida, but then your prior period development would be favorable. And as a net, it would just be more of a flat loss ratio?

Yes, well, I'm saying, you know, flat excluding the development. We do think that we're definitely adequately reserved, but again, it's like that is more of a one-time item, so therefore backing that out would be the stabilization of the loss ratio.

The next question comes from Cam Bianchi with Piper Sandler.

Good morning. This is Cam on for Paul. My first question is on commercial residential. This grew 4.9%, but commercial premiums in force fell 12.7%. I'm just wondering if you could unpack the gap between policy count growth and premium contractions, more pure rate or pricing pressure, or is it also a mixed shift towards maybe smaller accounts?

Yes. It is competitive pressure on those accounts. What we had to do is we are walking away from some accounts simply due to the extent of the rate decreases. We are able to write some even with the rate decreases. New business, the policy count is up because 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 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, we're very comfortable writing the new business that we've been getting.

Awesome. Got it. And then, just one more from me. You started writing in Texas, you mentioned. What's the underwriting appetite there and how quickly do we see that scale relative to maybe like the Florida commercial book?

Yes. Yes, so we're really excited about Texas. Just launched it in July, so early stages, but very well received. 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 will be a small contribution this year, and we expect it to grow over the next two to three years.

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

We'd like to thank everybody for joining the call and especially thank our employees for all their hard work.

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

Good morning, and welcome to the Heritage Insurance Holdings First Quarter 2026 Earnings Conference Call. Please note today's event is being recorded. [Operator Instructions]

I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead, sir.

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 reconciliation 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 Ernie.

Thank you, Kirk, and good morning, everyone. I want to start by putting this quarter in the proper context because it's the direct result of the strategy we've been executing for several years now. When I became the CEO, our focus was very clear. we needed to achieve rate adequacy, time underwriting, reduce volatility and protect the balance sheet. What you're seeing today is a result of that work. and the beginning of the next phase of our strategy, which is opening for new business to prudently grow and further diversify our business while maintaining acceptable margins.

Our first quarter was strong and in line with our expectations. We earned $36.5 million or $1.19 per share. making this the most profitable first quarter that the company has delivered since becoming public in 2014. We also reported the lowest first quarter net loss ratio since 2015. These results reflect steady underwriting execution, the full impact of our prior rate action and disciplined expense management. The improvement in the net loss ratio was driven by favorable attritional loss performance, lower weather-related losses, higher favorable loss development and the continued positive impacts of the underwriting and pricing actions we have taken over the past several years.

Retention is strong and rate adequacy is firmly in place throughout our book of business. Our personal residential in-force premium grew 1.4% over the prior year quarter, while our commercial residential in-force premium declined 7.8% as we continue to see competitive pricing pressure in the Florida commercial market. Heritage has been in the commercial residential market for over 10 years and has built a well-performing portfolio managed by a deep bench of experienced underwriters and claim adjusters for that product. However, we will not waver from our commitment to achieve adequate margins.

To the extent competitors offer commercial residential products, which are inadequately priced, we will not follow soon. Instead, we are leveraging the expertise of our commercial residential team to expand this product in 2 other states, most recently, Hawaii, where we can achieve appropriate risk-adjusted returns. We achieved great adequacy across 90% of our geographies and continue our efforts to ramp up new business and prudently grow our book of business while maintaining underwriting discipline, maintaining profitability and managing risk.

Over the last 5 years, we deliberately took actions designed to improve the quality of our book of business and charge adequate rates, which ultimately reduced our policy count. This trade-off benefited our shareholders and stabilized our results. Given our current position, we are in the process of expanding our product offering and identifying new opportunities for Heritage to meet the needs of our policyholders and agents. As we enter this next phase of responsible growth, we continue to evaluate our markets to meet our customers' needs for coverage at competitive pricing. Loss costs have fallen, and we expect the cost of reinsurance to also decline, which will benefit our policyholders through premium reductions while we maintain margins.

At the same time, we continue to cultivate agent relationships in our reopened territories. The early results are encouraging. with new business written up 62.7% from the first quarter of 2025 and over 30% from the fourth quarter of 2025. We are encouraged by our results this quarter and remain optimistic that our initiatives will result in growth throughout the year. Importantly, our policy count trends continue to improve sequentially. while we are seeing a few states with double-digit policy count growth, others are beginning to ramp up, and we are overall seeing positive growth rates.

The management-driven policy count reduction over the last several years continued to moderate and points to a growth inflection in the coming quarters. Retention also remained strong at approximately 88%. Reinforcing our confidence that we are on a solid path towards sustainable growth in our policy count. As we discussed last quarter, we are exploring additional strategic growth opportunities including our planned entry into Texas on an excess and surplus lines basis. Our significant market research indicates this addition to our product line, which we expect will be modest in the first year and nicely aligns with our strategic initiatives.

Production will focused primarily on Tier 1 and select Tier 2 geographies, which are coastal regions within our risk tolerance. We will leverage both existing agent relationships and new distribution partners. Consistent with our approach of delivering regional expertise, we intend to have underwriting, claims and marketing professionals located in Texas to remain closely aligned with local market dynamics. This provides us with the speed, flexibility and market knowledge of a regional company with the economies of scale of a super regional company.

As always, we will maintain a strong focus on underwriting discipline, exposure management and rate adequacy. Heritage is now performing well with a diversified book of business, a strong balance sheet, significant cash from operations and flexibility to take advantage of emerging opportunities. We have built a culture and infrastructure that generates a sustainable competitive advantage by focusing on data-driven decisions, execution and disciplined processes. Our focus is on opportunities that are strategically aligned with our core capabilities and provide solutions in challenging or dislocated insurance markets.

Any potential business opportunity must meet our strict financial and risk-based criteria. We require a deep understanding of the target market, including loss history, regulatory environment, reinsurance implication and key risk drivers, and we will only pursue opportunities that are expected to generate returns in excess of our cost of capital. Importantly, we are focused on maintaining prudent exposure management and ensuring that any transaction does not introduce undue enterprise or reputational risk. While competition has increased, our view is that not all of the operators in our space will be able to effectively manage the complexities of the market cycles.

To the extent that consolidation opportunities emerge, we believe our scale, balance sheet strength, experienced workforce and local expertise positions us well to selectively evaluate opportunities that meet our disciplined criteria. Before I wrap up, I want to briefly touch on technology and artificial intelligence, which are important enablers of our strategy. We are actively deploying AI tools across the organization to improve efficiency and customer service as well as provide better tools for decision-making while maintaining appropriate controls and oversight. AI will continue to reduce manual effort, improve accuracy, assist with better quality control and provide analytics that will assist us in aligning staffing needs to customer demands.

We expect that we will continue to enhance these capabilities for improved quality and customer service. Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily falling. largely due to reduced litigation, which benefits not only us, but our panel reinsurers. Given the improved litigation environment in Florida, the lack of catastrophe losses in our markets during 2025, and the reinsurance capacity entering the traditional and insurance-linked security markets, we remain optimistic that reinsurance pricing will continue to improve in 2026. We believe that favorable reinsurance terms will benefit the consumer with respect to the cost of insurance.

To conclude, this quarter reflects the steady execution of the strategy we put in place several years ago. We delivered strong results, maintained underwriting discipline and have firmly positioned the company to pursue controlled profitable growth going forward. 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, who I would like to personally thank for their efforts.

Kirk, over to you.

Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $36.5 million or $1.19 per diluted share for the first quarter of 2016 compared to $30.5 million or $0.99 per diluted share in the first quarter of last year. This is a great start to the year, considering that this is the highest first quarter earnings in our history despite weather losses in the Northeast combined with the seasonality of our earnings. Since we gained profitability footing in 2023, the first quarter has made up 23% of our annual earnings. This bodes well for the rest of the year. The increase in our first quarter earnings was primarily driven by lower net losses incurred and higher investment income, partially offset by higher operating expenses. The earnings generated an ROE of 28.5%, while average shareholder equity increased by 65.5% from the prior year quarter.

Premiums in force totaled $1.427 billion, down 0.4% from $1.432 billion in the prior year quarter. The decline continues to be primarily driven by competitive market conditions in the Florida commercial residential market, where we remain disciplined and focused on rate adequacy and adequate margins, as Ernie noted. While we continue to see opportunities, we will only write policies that meet our pricing and underwriting standards. Gross premiums earned were $353.6 million, essentially flat with $353.8 million in the prior year quarter. Lower commercial residential activity was largely offset by growth in the personal residential lines. Net premiums earned totaled $199.7 million, also consistent with the prior year as ceded premiums were relatively flat.

Gross premiums written were $346.7 million, down 2.6% quarter-over-quarter primarily reflecting the reduction in Florida commercial residential business. Our net loss ratio improved to 45.9%, a 3.8 point improvement from 49.7% in the prior year quarter. The improvement was driven by lower net losses and loss adjustment expenses, including lower weather losses and continued favorable attritional loss performance. Additionally, we experienced higher favorable prior year loss development this quarter. These results reflect the positive impact of sustained underwriting and rate actions taken over the past several years. The net expense ratio increased modestly to 35.2% from 34.8% in the prior year quarter, driven primarily by higher human capital-related costs with net premiums earned remained relatively flat.

As a result, the net combined ratio improved to 81% to a 3.5 point improvement from 84.5% in the first quarter of last year. reflecting the improvement in loss ratio, partially offset by higher expense ratio. Net investment income increased to $9.9 million, up 15.1% from $8.6 million in the prior year quarter, driven by higher invested assets with relatively stable return. We continue to maintain a high-quality conservative position investment portfolio that is well matched to our liabilities. The effective tax rate for the quarter was 25.6% compared to 23.8% in the prior year quarter. As a reminder, we calculate income tax expense during interim periods based on estimates, which can fluctuate as assumptions are updated throughout the year.

Turning to the balance sheet. We ended the quarter with total assets of $2 billion and cash and invested assets of $1.27 billion and stockholders' equity of $520.4 million. Book value per share increased to $17.15 as of March 31, 2026, representing an increase of 4.6% from December 31, 2025, and 61.5% from the first quarter of 2025. The increase from year-end 2025 was driven primarily by net income, partially offset by a $3.4 million net of tax increase in unrealized losses in the fixed income portfolio and the repurchase of $10 million of common stock during the quarter. Nonregulated cash at quarter end was $65.8 million. Cash flow from operations was $24.9 million and combined statutory surplus was up $15.1 million to $407.6 million from year-end 2025.

Importantly, our debt-to-capital ratio has been steadily declining as earnings power and case generating -- generation of the company has improved. That is now 13% at the end of the first quarter, which is a remarkable improvement and a testament to the successful implementation of our strategic initiatives. Additionally, we now have significant nonrelated cash, solid cash flow from operations, adequate room for leverage and increased statutory capital, which together position us well to support growth as our open territories continue to scale new business production. As the earnings power of the company has increased, we have continued to build capital which we are prioritizing for organic growth or other growth and opportunistic share repurchases when we believe our shares are undervalued relative to our financial performance and future earnings potential.

Year-to-date through today, we have repurchased 446,884 shares of our common stock for $12 million under the Board authorized $25 million share repurchase program. Yesterday, the Board of Directors approved a new $50 million share repurchase plan replacing the current plan. The new plan is effective immediately through December 31, 2026. Looking ahead, we remain focused on executing our 2026 strategic initiatives centered on underwriting discipline, capital allocation, data-driven analytics and exposure management. Additionally, we expect to leverage tools to allow our workforce to be more efficient. We believe these efforts position Heritage well to continue generating profitable, controlled growth and deliver long-term value to shareholders, agents and policyholders.

Thank you for your time today. Operator, we are now ready for questions.

[Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.

Happy Friday. Could you give us a little bit more detail about the Florida competition press release just is basically competition. But the comments on the call sound it's more like it's pretty concentrated in commercial property. But is the broader property market just as competitive as the commercial business?

So broader speaking on the personalized side, there are new entrants into the market. Most of those entrants have started and are doing takeouts. We've not quite seen all of them in the voluntary market as of yet. And my assumption would be they would be taking on those policies or take out policies here for the next year or 2. So I think it's a down the road, we'll have to kind of see. I think the competition we were referring to mostly is on the commercial side right now.

And then maybe some thoughts as we try to model the company in the future about the seasonality of the business and the cat load in the quarter as we go through the quarters -- the earnings this really was driven, I think, entirely by cat losses, at least in my model. Just any thoughts on how you think about the seasonality and whether or not the cat load in the first quarter was kind of a normal cat load or if we should think of that as being a little bit a normal senior direction.

Yes. Good question, Paul. And yes, the first quarter was more moving back to a more normal year for winter weather losses in the Northeast. Last year was very low, but we didn't have the California wildfires, which kind of gave us almost the same number. So when you look at the seasonality, I mean, 1 of the things typically barring a hurricane ethic stuff is the first quarter is the worst quarter for us from an earnings standpoint, and it has to do with those winter storms. And so typically, we've looked at less than 1/4 of our annualized earnings being in the first quarter.

Is the cat load in the first quarter higher than the normalized cat load in the third given the hurricane?

Well, we actually loaded the third quarter with a little bit more of a cat load in the third quarter. So second and fourth quarters typically are a pretty good quarter for us. And then historically speaking, the fourth quarter is by far our best quarter.

And the next question comes from Mark Hughes with Truist.

When you take into account the Commercial Residential and then maybe a little more favorable trends on the personal lines side, what -- and it sounds like new business is ramping up. How should we think about the written premium growth this year, you've been slightly negative in the last couple of quarters. Does that inflect positively at some point here?

Yes. We think it will -- and again, I mean, when we look at kind of the quarter-over-quarter reductions. It has been decreasing, but it's been decreasing at a decreasing amount. So therefore, we actually think probably second, third quarter, that is going to reverse itself, and we actually anticipate being positive for the full year.

Very good. How about the underlying loss ratio, if you take out the weather and then the favorable development, was it up a little bit in Q1? And if so, was that mix pricing.

Considering the prior year development, that type of stuff, we actually have it down very slightly. So for example, if you back out the weather losses and the prior year development, last year, you're going to be about at 31.8%. This year, you're going to be 31.6%, so a slight decrease. And therefore, when we look at that attritional loss ratio, it's actually been fairly stable over the quarters for a couple of years now.

Okay. What was it in the attritional loss in the fourth quarter?

Attritional loss in the fourth quarter, let me get that for you real quick. It was 26.7%.

Yes. And then when you think about the growth on a go-forward basis, I think you're providing the commercial versus personal lines, but not necessarily the geographic breakout like previously. Do you think that your growth will be more oriented Florida or non-Florida?

It's a combination, Mark. So from commercial, you won't see as much growth obviously on the commercial and the Florida area. But we have expanded commercial residential growing in New York, New Jersey, as we mentioned as well in the earnings call in Hawaii. And then all other states are growing as well, Virginia, New York from a personal lines perspective.

The next question comes from Carol chime with Citizens.

I've got 2 questions. Two questions. One is -- the first 1 is regarding the cat weather losses. And can you just confirm that all of those are from the Northeast winter storms? Or is there more to it?

No, those are all the Northeast winter storms, right? Armando, Giana, fern those are all related to that.

Is there a particular state that was hit to harness?

It's mostly mix between New York and New Jersey, a little bit in Rhode Island as well.

And then my second question is regarding the new repurchase agreement authorization. So you had the $25 prior, you used about $12 million of the year-to-date and now you have a new $50 stalled the net increase in your authorization is about 38%. Is that correct?

No. No. The increase. In other words, the $25 million is terminated, we have a new authorization for $50 million. So the authorization between now and the end of the year is $50 million.

Okay. But the 25% was fully.

No, we use $12 of the $25, but that $12 is separate because it was before the new authorization. So the $50 -- so the $12 million would be in addition to the new $50 million.

Got you. And then can you comment on how much was repurchased so far in Q2?

Would have been about -- well, it was just after the first we did $10 million in the -- at the beginning of the year, and then it was like an additional $2 million -- of the new authorization, we have not purchased any.

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

Thank you for joining the call, and we hope everyone has a great weekend.

The call has now been concluded. You may now disconnect.

Good morning, and welcome to the Heritage Insurance Holdings' Fourth Quarter and Full Year 2025 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. Please go ahead, sir.

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 will now turn the call over to Ernie.

Thank you, Kirk. Good morning, everyone, and thank you for joining us today. On this morning's call, I am going to review the successful execution of our strategic initiatives in 2025 and our full year results, review the competitive advantages that Heritage has built over the years, which positions us for success looking out over the medium term and conclude with our strategic priorities for the year ahead. Kirk will then discuss our fourth quarter results, and we will open the call for your questions.

As we have been discussing over the past several years, we have been intentional and disciplined in reshaping the foundation of our business. As an organization, we set out to transform our business with the goal of developing a model that delivers consistent earnings and sustainable shareholder value, even in a challenging and dynamic market.

To do that, we anchored our strategy around 3 initiatives that continue to guide every major decisions that we make. First, we committed to generating true underwriting profit, not through reliance on market cycles, but through rate adequacy and more selective disciplined underwriting as well as a solid distribution network. We have made hard choices, re-underwriting our book where necessary, ensuring that every policy we write meets our profitability standards and aligning ourselves with the profitable and professional agents.

Second, we focused on strategically allocating capital towards the products and geographies that offer the strongest returns, while being deliberate about where we pause, where we reinvest and where we expand. This capital discipline has positioned us for thoughtful, measured growth with a focus on underwriting discipline and risk management.

And third, we prioritized targeting a balanced and diversified portfolio. By expanding across multiple states and product lines, we strengthened the stability of our earnings, reduced our exposure to regional volatility and fortified the company against the risk that define our industry. I'm proud to say that in 2025, we executed on these initiatives with precision and measurable success.

We reopened profitable geographies, deploying capital in a thoughtful way designed to sustain long-term profitability. We maintained persistent underwriting discipline, supported by an ongoing focus on achieving and maintaining rate adequacy. We deepened our use of data-driven analytics, further strengthening the quality of our decision-making.

We enhanced our customer service and claim capabilities, ensuring that the experience we deliver continues to improve. And importantly, we leveraged our infrastructure and operational capabilities, building a scalable platform that positions us for responsible, profitable growth in the years ahead.

These initiatives and the consistent execution behind them are what continue to strengthen Heritage's earnings power, which can further be seen in our full year 2025 results, where we delivered net income of $195.6 million or $6.32 per share, representing a strong increase from the full year 2024's net income of $61.5 million or $2.01 per share.

Of note, our full year results included $31.8 million of net pretax losses and loss adjustment expenses related to the California wildfires in the first quarter of 2025, which further highlights the significant earnings power within Heritage and which we remain focused on growing further.

We also grew our tangible book value per share, 72.5% to $16.39 at December 31, 2025, from $9.50 at December 31, 2024, while achieving an ROE of 49% for the year ending December 31, 2025.

As we look ahead to 2026, our strategy continues to build on the strong foundation that we have created. First and foremost, we have achieved rate adequacy and more than 90% of the geographies where we operate, and they are currently open for new business. In fact, new business premium production increased over 60% in the fourth quarter as compared to the fourth quarter last year.

We have continued to evaluate new geographies and products that will advance our diversification and expansion efforts. As a result of that rigorous evaluation process, I would like to mention that we plan to enter Texas later this year on an excess and surplus lines basis. Our production will focus predominantly on Tier 1 and some Tier 2 geographies and will leverage our existing relationships as well as some new distribution partners.

As we have done in California, which is also E&S, we will have underwriting and marketing employees in the state of Texas to stay abreast of the changing market needs and issues. As expected, we will maintain our focus on underwriting discipline, exposure management and rate adequacy in our existing and new geographies. We have a long runway ahead to profitably grow our business and deliver value to our shareholders.

A major emphasis in 2026 will also be the continued enhancement of our data-driven analytics, including deeper integration of AI and advanced technology tools. These capabilities will sharpen our risk selection, improve operational efficiency and help us identify opportunities across regions with greater precision while being compliant with regulatory requirements for AI use. At the same time, we remain committed to refining our customer service and claim capabilities, building on the improvements already underway to deliver a more streamlined, transparent experience for agents and policyholders.

And throughout 2026, we will continue leveraging the scale and flexibility of our infrastructure, our systems, processes and regional operating model to support sustainable future growth. Fortunately, we have ample room to grow our business and can choose to be selective across our geographic footprint.

Lastly, reinsurance remains a critical component of our business and we have maintained a stable indemnity-based reinsurance program at manageable costs, with an excellent panel of highly rated and collateralized reinsurers. We regularly meet with our reinsurance and ILS partners who continue to support our growth and who we anticipate will offer incremental capacity as we look to our June 1 renewal.

Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation which benefits not only us, but our panel of reinsurers. Given the improved litigation environment in Florida, the lack of catastrophe losses and the reinsurance capacity entering the traditional and ILS markets, we are optimistic that reinsurance pricing will continue to improve in 2026. We also believe that favorable reinsurance will benefit the consumer in the terms of cost of insurance.

To conclude, we have strong momentum as we enter 2026 with a positive outlook for both our growth and profitability. That said, we are not complacent with our results and strive to improve our organization and operations. 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 who I would like to personally thank for their efforts over the last year.

Kirk, over to you.

Thank you, Ernie. Good morning. Turning to our financial highlights. We reported net income of $66.7 million or $2.15 per diluted share in the fourth quarter compared with net income of $20.3 million or $0.66 per diluted share in the fourth quarter of the prior year. The period-over-period increase primarily reflected higher net premiums earned and net investment income, lower losses and loss adjustment expense and lower policy acquisition costs.

In-force premiums of $1.432 billion, a decrease of 0.1% from $1.433 billion in the prior year quarter, primarily driven by competitive market conditions reducing our commercial residential business, while our personal lines business increased. Although we think many opportunities for controlled growth exist, we will not write policies that we believe are underpriced or do not meet our underwriting standards.

Gross premiums earned were $361.7 million, up 0.4% from $360.4 million in the prior year quarter, reflecting higher gross premiums written over the last year. We continue to focus on new business initiatives across existing and new geographies, subject to market conditions and our underwriting and pricing discipline.

Ceded premiums decreased by $2.1 million, predominantly reflecting a catastrophe excess of loss premium reduction true-up as well as reinstatement premium during 2024 that did not recur in 2025.

Net premiums earned were $202.7 million, up 1.7% from $199.3 million, reflecting the reduction in ceded premiums. Net investment income for the quarter was $9.8 million, up $1.3 million or 15.9% from $8.5 million in the prior year quarter, reflecting higher invested asset balances, coupled with actions to align the investments with the yield curve.

The average duration of the fixed income portfolio is 3.2 years as the company has extended duration from the prior year to take advantage of higher yields further out on the yield curve, while still maintaining a short-duration, high credit quality portfolio.

Our total revenues for the quarter were $215.3 million, up 2.4% from the fourth quarter of 2024. As discussed, we expect our revenue growth to accelerate through 2026 as we ramp up our new business efforts. The net loss ratio was 31.3% for the quarter compared to 54.7% in the prior year quarter, reflecting lower net losses and loss adjustment expense. Both attritional and weather-related losses were lower than in the prior year quarter.

Net weather-related losses for the quarter were $7.7 million compared to $45.6 million in the prior year quarter. There were no catastrophe losses in the current quarter compared with $40 million in the prior year quarter. The decrease in weather-related losses was accompanied by lower attritional losses and a reduction in unfavorable reserve development versus the prior year quarter. Our attritional losses have been trending favorable which we believe is associated with the underwriting strategy over the last several years.

The net expense ratio for the quarter was 30.7% compared to 35% in the prior year quarter. The change primarily reflected higher ceding commission income, relatively flat general and administrative expenses and higher net premiums earned. Policy acquisition costs were lower primarily due to higher ceding commission income associated with both a larger amount of premiums ceded under the net quota share program and a higher ceding commission rate due to favorable loss experience within that program.

The net combined ratio for the quarter was 62%, an improvement of 27.7 points from 89.7% in the prior year quarter, driven by the lower net loss ratio and the lower net expense ratio.

Turning to the balance sheet. We ended the quarter with total assets of $2.2 billion and shareholders' equity of $505.3 million. Book value per share was $16.39 at December 31, 2025, up 72% from the fourth quarter of 2024 and up 125% from the fourth quarter of 2023. The increase from December 2024 primarily reflected net income for the year and an $18 million net of tax reduction in unrealized losses on the company's fixed income securities portfolio. Unrealized losses related to a decline in interest rates during the year.

Nonregulated cash at quarter end was $57.9 million. In addition, combined statutory surplus of our insurance company affiliates at quarter end was $392.6 million, an increase of $106.9 million from year-end 2024. The increase in statutory surplus provides for additional growth capacity as opened and new territories get up to full capacity for new business.

As the earnings power of the company has grown, we have built capital. We have prioritized the use of capital for organic growth and share repurchases when we believe our shares are undervalued. Considering our financial performance, demonstrated earnings resilience and future earnings potential, we believe our stock is undervalued. Under our $10 million share repurchase plan, we repurchased 106,135 shares in 2025 at a cost of $2.3 million.

In November of 2025, our Board of Directors established a new $25 million share repurchase plan that will expire on December 31, 2026. We will continue to be opportunistic with share repurchases and purchased 112,858 shares at a cost of $3 million during the first quarter of 2026.

Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities along with our overall proactive management approach to exposures, rate adequacy and investing in technology and infrastructure will position us well for continued success.

Thank you for your time today. Operator, we are now ready for questions.

[Operator Instructions] Our first question today comes from Mark Hughes with Truist.

The top line growth outlook, you talked about the impact of commercial residential being a headwind, your underlying residential book is growing. That dynamic, has it already worked through your P&L? Is there a little bit more headwind to go?

So we are seeing -- we have seen some more competition in commercial residential in Florida. So we'll see what '26 brings, but that's also we've pivoted to commercial residential as well out of New York, New Jersey as well as Hawaii. But we think we've seen most of that competition in '25.

Okay. And then when you look at the profitability in the business, can you give us a sense of kind of Florida, Northeast, other markets, as you grow maybe in the markets that you see more opportunity, is that going to mean anything for the P&L or for the overall loss ratio?

Sure. Great question. So as we've said is we're rate adequate in 90% of our geographies. So if you take the Southeast, Florida, obviously, the book with the tort reform and what we're seeing, right, without minimal cats this year, Florida is very profitable. The Northeast has taken rate. So we're seeing profitability up in the Northeast. We go all the way out to Zephyr Insurance that they have taken rate, and we're seeing an uptick there from the profitability side. So we'll continue to get the remaining, let's just say, 5% to 10% of the geographies rate adequate, but we're really excited about 90% of rate adequacy throughout geographies, which opens up all business will -- and those areas will be opened up throughout '26.

Very good. Kirk, the $392 million -- $393 million in surplus, is that sufficient for 2026? Is -- do you think you'll have to add any more...

No. We think that, that actually is pretty adequate. I mean it's up about $106 million from last year. So a really nice increase in the statutory surplus, which really positions us well for the growth we're anticipating. And particularly given the combined ratios we've been running, that actually has been adding to the capital also. So we're in good shape there.

Yes. And assuming you maintain decent profitability, that $25 million share repurchase authorization seems low. I mean, just relative to your net income this quarter, for instance, that $25 million seems low. Could there be more action on that front in the near term, picking that up a little bit perhaps?

Yes. I mean our Board would authorize -- we can go back to them at any point for reauthorization on that. And again, we did buy a little bit back in the first quarter. And so we'll be looking at that going forward.

Yes. Is there any target kind of a run rate combined ratio that you have in mind when you think about the overall book, where should it settle in?

Well, I mean, I think that right now, we have some pretty good headwinds looking at even into next year with -- particularly, I think that we're looking at some reinsurance rate decreases, which is going to be favorably impacting that. So I think it's going to continue to be rather favorable for the next couple of years. And I think that over a longer period of time, I think that it could start tweaking up a little bit simply from the standpoint of -- as rates start stabilizing, I think it could start going up. But I think for the next couple of years, I think it can be comparable to where we are.

So combined ratio, absent the storms on an underlying basis, you would say, reasonably steady in the next couple of years, helped by reinsurance and then maybe some normalization in rates starts to move that up a little bit?

Correct. Yes.

The next question comes from Paul Newsome with Piper Sandler.

Maybe unpack a little bit of the gross premium thoughts and outlook and the results to date. Just a little bit more color on what's going on with commercial residential and how that's -- is that the relative decline just the commercial auto? Or is there other pieces there that we should be thinking about when we're thinking about the gross written premium outlook?

Yes. So on the commercial residential, as we mentioned, we saw some increased competition coming in. But that being said, from a P&L and the profitability, it is still very profitable. Again, there are some competition where we decided to walk away just because it was -- the rate was not there. But overall, we're still very satisfied from the profitability standpoint on the commercial residential, but we do expect to grow that in 2026.

So Kirk, I don't know if you want to add a little bit more on overall.

Yes. And I think, Paul, it's -- yes, we did see a lot of competition there. But I mean, one thing to keep in mind, I mean, we have a dedicated team, dedicated President, dedicated underwriters, dedicated claims handling folks for those. So that really kind of gives us a little bit of competitive advantage when you think about that commercial business. And I would think that we're able to kind of work through the market inflows and outflows. And so I think that you're going to see that stabilize possibly increase this year.

Right. Not a huge number, but can you talk a little bit about the reserve development...

Absolutely. Yes. That really stems from -- when we look back at -- overall, we've had a fair amount of favorable development this year for the full year. When we look back at the storms that are still outstanding, there's a few lingering claims out there. And what we did is we just felt that it was prudent to then boost the reserves to make sure that those are adequate for anything that we could foresee on those last few remaining claims.

So all the development would be under the cat category?

Correct, correct.

The next question comes from Karol Chmiel with Citizens.

Just a follow up on the top line questions and specifically Florida. Can you just comment on the Florida residential market? And if there is stopping going around?

So on the Florida residential market, a lot of the new competition that you're seeing is still going through basically the assumption process, the takeout process. So we would probably anticipate more of the voluntary competition coming in at the latter half of '26 more into '27 since their initial focus is mostly on the takeout business.

We have a follow-up from Mark Hughes with Truist.

Kirk, anything on the policy acquisition front in terms of just the ratio? Is that going to move up a little bit as you pursue new business?

It will up slightly. Also, we did have the net quota share program at NBIC, and we are looking -- we reduced that at year-end. When we look at the ceding commission that we were getting from that program, that will reduce a little bit. So therefore, our acquisition costs will go up a little bit, but then also so will our net earned premium by reducing that net quota share.

Yes. And then net investment income, nothing unusual. It looks like it was just up a bit sequentially. Do you think that will keep moving up? Yes, just something like the new money yield, the duration, is that still on an upward trajectory?

Yes. Yes. Despite kind of like the drop in interest rates, I mean, we've been actually able to kind of -- because we were so short before, we were able to move out on the yield curve, which gives us a little bit more yield there. And then also because of the increasing cash flow, we're anticipating that, that's going to actually give us a little bit of boost on the investment income.

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

Thank you for joining us today. I would like to thank our employees for all their efforts, and we wish everyone a great week.

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

Good morning, and welcome to the Heritage Insurance Holdings Third Quarter 2025 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. 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 will now turn the call over to Ernie.

Thank you, Kirk. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results, having achieved net income of $50.4 million, up significantly from a year ago and maintaining the positive trajectory of our earnings. As Kirk and I have been discussing on our earnings calls over the last year, we continue to see tangible results from the successful implementation of our strategic initiatives, which were designed to generate positive and consistent shareholder returns by attaining and maintaining rate adequacy, managing exposure, enhancing our underwriting discipline and improving claims and customer service levels.

This has created a significant amount of earnings power within Heritage, which continues to show through. As part of that strategy, we re-underwrote our personal lines book while taking needed rate increases to achieve adequate rates. This has led to a steady contraction in our policies in-force over the last 4 years, while our in-force premium increased from approximately $1.1 billion to an all-time record in the third quarter of $1.44 billion. At the same time, we improved both the quality and the diversification of our book of business.

Looking out over the next 6 months, we expect our personal lines policy count to return to growth as we have now opened nearly all of our geographies to new business as compared to only 30% a year ago. We are already seeing our new business production ramp up with new business premium written for the third quarter of $36 million, representing an increase of 166% as compared to $13.7 million of new business written in the third quarter of last year.

The decline in our policy count continues to moderate, having decreased by 6,800 policies in the third quarter as compared to a decrease of over 19,000 policies in the third quarter of 2024. In fact, our third quarter PIV count reduction was the smallest decrease that we have experienced since we deployed these strategic initiatives in June of 2021.

While it takes time to open our territories, we are seeing good new business momentum continue across our regions. Based upon these factors, I believe that we are on a firm path to deliver full year policy growth in 2026.

Importantly, we have long-standing relationships with agents and brokers across our geographies that we have maintained over the last 4 years despite slowing new business growth and re-underwriting our book of personal lines business. In the Northeast and portions of the Mid-Atlantic, we predominantly produce business through Narragansett Bay Insurance Company domiciled in and operated out of Rhode Island.

Over the years, we have built a successful homeowners insurance business, which has expanded across the coastal regions of the Northeast and Mid-Atlantic. The company has strong relationships with independent agents based upon a trusted brand. Likewise, Zephyr Insurance operates in and serves the Hawaiian market. Although Zephyr initially focused on exclusively on Hawaiian hurricane wind risk, we subsequently expanded Zephyr's product offering to meet the needs of our customers in the overall Hawaiian market.

Our organization benefits from the agility and the rapid market responsiveness typical of a regional enterprise, while also leveraging the economies of scale found in larger super regional companies. We have consolidated many functions to gain efficiency but retained the underwriting, marketing and customer service functions in each region to better address the unique needs of each market.

Every region has its own unique dynamics and operating the business locally allows us to quickly adapt to changing conditions as well as provide outstanding customer service to our policyholders and agent partners. As we grow, our robust infrastructure allows us to write new personal lines business without adding significant administrative expense.

We understand each of our markets and have built relationships with hundreds of master agencies, which represent thousands of agents throughout our geographic footprint. Our long-standing agency partners have expressed a willingness and desire to grow with us, which in turn provides confidence in our outlook for improved growth in the year ahead.

We also remain focused on making decisions based on our data and analytics. This has been the cornerstone of our disciplined underwriting process across all of our geographies, which we will maintain as we grow and which contributed to the lower net loss ratio this quarter. As we grow, we will maintain our disciplined underwriting processes as well as rate adequacy and managing exposures.

An example of our disciplined approach can be seen in the commercial residential business, which we reduced in the third quarter due to more competitive market conditions. I believe this further demonstrates the discipline of our management team. Fortunately, we have ample room to grow our personal lines business and can choose to be selective across the 16 states where we do business.

We are also exploring expansion opportunities into new regions of the country as well as the delivery of new products to our existing markets. We have a long runway ahead of profitable growth of our business and deliver value to our shareholders. Reinsurance is a critical component of our business, and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers.

Over the course of the third quarter, we continue to meet with our reinsurance partners who continue to support our growth and from whom we anticipate will offer incremental capacity as we look to our 6/1 renewal next year. Additionally, we are seeing the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which our reinsurers should begin seeing in the coming months.

Given the improved litigation environment in Florida, the lack of reinsured losses and the capacity entering the reinsurance market, we are optimistic that reinsurance pricing will continue to improve looking ahead in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance.

To conclude, our business continues to gain momentum and the earnings power of the company is building. We are also growing capital, which will support our managed growth strategy as we expect to begin to deliver policy count growth in the quarters ahead. We are also now in a capital position to review our capital allocation strategy and believe our shares are trading below intrinsic value and do not reflect the many opportunities that we have to further grow the company.

As a result, we restarted our share repurchase program in the third quarter, having repurchased 106,000 shares for a total cost of $2.3 million. I would also like to reiterate our dedication in 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?

Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $50.4 million or $1.63 per diluted share in the third quarter, which compares very favorable to the $8.2 million of net income or $0.27 per diluted share that we reported in the third quarter last year. The increase was primarily driven by a significant reduction in losses and loss adjustment expenses, combined with a decrease in other operating expenses.

For the 9 months ended September 30, we reported net income of $129 million or $4.17 per diluted share, which is a substantial increase from the $41 million of net income or $1.35 per diluted share that we reported for the first 9 months of 2024. Gross premiums earned rose to $362 million, up 2.2% from $354.2 million in the prior year quarter, reflecting the rate actions that we have taken, combined with organic growth in selected geographies as we open more regions for new business.

This was partially offset by a decline in commercial residential business due to competitive market conditions. As Ernie touched on, we expect our growth to accelerate at a managed pace through 2026 as we ramp our new business efforts across our recently opened geographies. Net premiums earned were $195.1 million, down 1.9% from $198.8 million, resulting from increased ceded premiums. The increase in ceded premiums was driven primarily by a $4 million reinstatement premium for Hurricane Ian and an increase in the Northeast quota share program as written premiums from that program grew from the prior year quarter.

The result was an increase in ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the previous year third quarter. Our net investment income for the quarter was $9.7 million, relatively flat due to a higher portfolio value, offset by a lower interest rate environment. We continue to manage our investment portfolio while maintaining a conservative portfolio with high-quality investments that are durations liability matched.

Our total revenues for the quarter were $212.5 million, relatively unchanged from our prior year quarter. As discussed, we expect our revenues to return to growth through 2026 as we ramp our new business efforts. Our net loss ratio for the quarter improved 27.1 points to 38.3% as compared to 65.4% in the same quarter last year, reflecting significantly lower net loss in LAE.

Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63 million in the prior year quarter. There were no catastrophe losses in the current quarter as compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development as compared to the prior year. Our attritional losses continue to remain fairly stable as we believe is associated with the enhanced underwriting strategy over the last several years.

Additionally, favorable net loss development was $5 million in the third quarter compared to adverse development of $6.3 million in the prior year quarter. Our net expense ratio for the quarter was 34.6%, a 60 basis point improvement from 35.2% in the prior year quarter, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceded commission income associated with both a larger amount of ceded premium under the net quota share program and a higher ceding commission rate due to favorable loss experience for that program.

This resulted in a 1.2% reduction in policy acquisition costs, which was partially offset by a 60 basis point increase in the net general and administrative expense ratio. The net combined ratio for the quarter was 72.9%, an improvement of 19.6 points from 100.6% in the prior year quarter, driven primarily by the lower net loss ratio as well as the lower net expense ratio just highlighted.

Turning to our balance sheet. We ended the quarter with total assets of $2.4 billion and shareholders' equity of $437.3 million. Our book value per share increased to $14.15 at September 30, 2025, up 49% from the fourth quarter of 2024 and up 56% from the third quarter of 2024. The increase from December 31, 2024, is primarily attributable to year-to-date net income as well as a $15.7 million net of tax benefit associated with the reduction in unrealized losses.

The unrealized losses are related to a decline in interest rates that occurred through the third quarter. The average duration of our fixed income portfolio is 3.13 years as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. Nonregulated cash at quarter end was $50.1 million. In addition, combined statutory surplus at our insurance companies affiliates at quarter end was $352.2 million, which is up $93.4 million from the third quarter of 2024. The increase in statutory surplus provides for additional growth capacity as we open territories to get up to full capacity.

Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, rate adequacy and investing in technology will position us well for continued success.

Thank you for your time today. Operator, we are now ready for questions.

[Operator Instructions] The first question is from Mark Hughes with Truist.

The growth prospects, you talked about the PIV growth in 2026. How do you evaluate the opportunity in Florida versus outside of Florida?

Sure. So there's still plenty of opportunity for us in Florida. If you kind of go back to a couple of years, we derisked a bit in Florida, especially in some of the Tri-County areas. So there's plenty of runway for us in Florida. We understand there's more new markets in Florida, but our name has still been predominant with the agents, and that's why we talked quite a bit about our agency relationships, which remain strong. And the agents have been -- we've been working with the agents. They have reached out to us about continuing to write. So as we mentioned on the call there, $30-plus million of new business premium is something that is only gaining more momentum in Florida.

Okay. Of that new business momentum, I think you talked about $36 million was -- how much of that was Florida?

We have that number here. I'll get that for you.

In the meantime, I'll ask, how do we think about the pricing or competitive environment in Florida? It looks like commercial property is really a tremendous amount of pressure. I know in homeowners, the pricing cycle is a whole lot slower. But what's your current anticipation in terms of pricing? I think you've talked about filing for maybe low mid-single-digit rate decreases in 2026. Is that still a fair assessment? And is that...

That's still a fair assessment, right, we have a current filing with the -- pending with the OIR for a rate decrease. And the plan would be as well in '26, we've also planned for a single-digit rate decrease. Regarding commercial, you're right, there is more pressure, but I also remind people where the beginning point is when you're talking about CRs in the 70s, yes, they have pushed up slightly to 80%, but an 80% CR is still very profitable in the commercial lines arena.

About $17 million of that new business was Florida.

Okay. So kind of consistent with your current mix. And then ceded premiums in absolute dollars, is this a good starting point when we think about the fourth quarter, the $166 million, $167 million?

Yes. It's probably going to be a little high. We had about a $4 million onetime adjustment in there due to reinstatement premium. So yes, I think if you look at backing off some of that, then you're going to be about where the number needs to be.

So low $160s million. Is just reinstatement premium from Ian?

Yes, Ian and Milton -- sorry, it was Ian.

Okay. So it shows up a couple of years later?

Yes.

Okay. How much growth can you support with the surplus that you've got, the $352 million up pretty substantially? Will that be good enough for kind of what you're seeing in 2026?

Yes. Well, I think if you look at kind of where our change in statutory surplus is for the year, it's up about $66 million. And then if you assume that, that is 3:1 ratio, that type of stuff, that gives us over $180 million of net earned premium to write. And again, that's net written. So then you actually figure that, that number is going to be a little higher because of the ceded. And so therefore, I mean, you're looking at roughly well over $225 million, $250 million of premium that we can write based upon that increase in surplus. And then again, that doesn't include any improvements in that number in the fourth quarter.

Yes. Yes, which I guess leads to the question, with your level of earnings and your strong capital position already, I think you talked about $2 million in buybacks in the quarter, but it seems like there's going to be a lot of excess capital floating around in pretty short order. What are the priorities there? Is that something you could act sooner rather than later on maybe further buybacks?

And again, one of the things we also mentioned is that the Board did authorize an additional $25 million worth of stock buybacks. And again, I think if you look at our capital priorities, again, it's one, it's using capital for growth because of the ROEs we're able to generate. Second of all is we do look at where our stock is trading. We still think it's undervalued. So therefore, stock buybacks is our second priority and then dividends after that with the ROEs, if we can't generate what we think are substantial ROEs. So that's kind of like the priority of our capital utilization.

Yes. Yes, I hear you. Yes, your net income relative to your market cap relative to your capital requirements is pretty striking when you put all that together.

Yes. Yes, it is.

The next question is from Karol Chmiel with Citizens.

I just have a follow-up question to Mark's question about the new business. So if $17 million of the $36 million was Florida, roughly $19 million was outside of Florida. Can you just maybe comment on where you're seeing the most momentum of those territories outside of Florida?

Yes. So Virginia is a new growing state for us as well as growth in Hawaii. New York is also ramping up. And the one reminder there is that we did take additional 9%, which made us rate adequate in New York. So that started midyear. So that is only beginning and will kind of roll into '26. So additional states as California on an E&S basis also is another positive momentum growing for us.

Okay. Great. And just a quick question on this favorable development of $5 million. Is this still due to the reserve strengthening of last year?

Yes. It has partially to do with that, and it just also has to do with just kind of what we're seeing in the underlying portfolio. So again, we think that we're adequately reserved for sure. So yes, it does have to do a little bit with that where we did take a hard look at last year.

At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks.

We'd like to thank everyone for joining the call and thank especially our workforce and our employees for all their hard work this year.

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