Earnings call transcript: Heritage Insurance Q1 2025 beats EPS forecast

Heritage Insurance Holdings Inc. (HRTG) reported strong financial results for the first quarter of 2025, significantly surpassing earnings expectations with an EPS of $0.99 compared to the forecasted $0.33. The company’s revenue reached $211.5 million, just shy of the projected $214.88 million. Following the announcement, Heritage Insurance’s stock surged by 10.92%, closing at $22.00, reflecting investor optimism. According to InvestingPro data, the company’s impressive performance has contributed to a remarkable 146.64% return over the past year, with the stock now trading near its 52-week high. The current market capitalization stands at $659.9 million, with the stock showing slight overvaluation based on InvestingPro’s Fair Value analysis.

Key Takeaways

• Heritage Insurance’s EPS exceeded expectations by 200%.
• Revenue slightly missed forecasts but still showed a 10.6% year-over-year increase.
• The stock price jumped 10.92% in reaction to the earnings beat.
• Strong underwriting discipline and market adaptations contributed to profitability.
• The company anticipates accelerated growth and improved reinsurance pricing in 2026.

Company Performance

Heritage Insurance demonstrated robust performance in Q1 2025, with net income doubling from the previous year to $30.5 million. This growth was driven by a 3.6% increase in gross premiums earned and an 11.5% rise in net premiums earned. The company maintained a strong competitive position despite challenges in the commercial residential market, benefiting from legislative changes in Florida and a growing E&S market.

Financial Highlights

• Revenue: $211.5 million, up 10.6% year-over-year.
• Earnings per share: $0.99, up from $0.47 in Q1 2024.
• Gross premiums earned: $353.8 million, a 3.6% increase.
• Net premiums earned: $200 million, an 11.5% increase.

Earnings vs. Forecast

Heritage Insurance’s actual EPS of $0.99 significantly surpassed the forecasted $0.33, marking a 200% earnings surprise. Although revenue fell slightly short of expectations at $211.5 million against the forecasted $214.88 million, the strong earnings performance overshadowed this minor shortfall.

Market Reaction

Following the earnings announcement, Heritage Insurance’s stock price rose by 10.92%, closing at $22.00. This increase places the stock near its 52-week high of $22.25, indicating strong investor confidence. The market reaction reflects positive sentiment towards the company’s ability to exceed earnings expectations and manage its operations effectively.

Outlook & Guidance

Looking ahead, Heritage Insurance expects an increase in premium in-force during the latter half of 2025, with accelerated growth anticipated in 2026. The company is optimistic about potential reductions in reinsurance pricing next year, which could further enhance profitability. Management remains focused on maintaining rate adequacy and expanding its E&S business.

Executive Commentary

"We continue to believe that we have the foundation in place to deliver solid profitable growth in 2025 and future years," stated CEO Ernie Guerite, highlighting the company’s strategic positioning. CFO Kirk Lusk added, "The legislative impacts are having a favorable impact," underscoring the benefit of recent regulatory changes.

Risks and Challenges

• Market competition in the commercial residential space remains intense.
• Legislative changes, while currently favorable, could shift.
• The California market’s instability due to carrier exits poses risks.
• Maintaining rate adequacy amidst fluctuating market conditions.
• Potential macroeconomic pressures affecting the insurance sector.

Q&A

During the earnings call, analysts inquired about the company’s ceded premium expectations and rate trajectory. Management discussed the competitive landscape and market dynamics across different states, emphasizing the balance between admitted and non-admitted insurance markets.

Full transcript - Heritage Insurance Holdings Inc (HRTG) Q1 2025:

Conference Operator: Good morning and welcome to the Heritage Insurance Holdings First Quarter twenty twenty five 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.

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: 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 ks, 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 Guerite, our Chief Executive Officer. I will now turn the call over to Ernie.

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Thank you, Kirk. Good morning, everyone, and thank you for joining us today. I’m very pleased to be here this morning to discuss our first quarter results as they clearly demonstrate that Heritage is performing at a high level from both a financial and operational perspective. During the quarter, we achieved a net income of $30,500,000 or $0.99 per diluted share, which includes $31,800,000 of net pretax losses and loss adjustment expenses related to the California wildfires. This compares favorably to the first quarter last year where we delivered net income of $14,200,000 or $0.47 per diluted share with no major weather events.

Q1 represents the third consecutive quarter that we have been impacted by catastrophe losses and maintained our profitability. This is a direct result of the successful implementation of our strategic initiatives over several years designed to attain rate adequacy, manage exposure, and enhance our underwriting discipline. In fact, we have achieved rate adequacy across more than 90% of the regions where we do business, which positions us to return to growing our personal lines policies in force. I am also proud of the support that our heritage employees have provided to our insureds through such challenging times. We have worked diligently over the last several years to provide our insureds with quality customer service and an efficient and thorough claims handling experience, which can be seen in our response to Hurricanes Debbie, Helene, and Milton, as well as the wildfires in Hawaii and California.

Our dedicated staff have provided outstanding support to our policyholders as they recover from these tragic events, demonstrating our unwavering support to our customers. Looking at our first quarter results in more detail, our efforts to attain rate adequacy are having a positive effect on our financials and will continue to earn through our book through the balance of 2025. Our policy count from the fourth quarter of twenty twenty four is down 3%, primarily due to normal attrition and the seasonality of our business, partially offset by the early ramping up of our new personal lines business production. While we have had success in the commercial residential market, we are also seeing more competition in the space. That said, we will continue to ensure rate adequacy for this product and will not sacrifice the bottom line for top line growth.

Looking at the balance of this year, I expect our premiums in force to increase in the second half of the year. Over the last several years, we have carefully managed our exposure, worked to achieve rate adequacy, and diversify our business. This has positioned us to pivot our strategy to one that is focused on managed growth as we open territories for new personal lines business. To put this in perspective and based upon historical production, we only had 30% of our production capacity opened for new business last June. Since then, we have been slowly opening capacity for growth across our geographies and now have nearly 75% of our production capacity open at the April 2025, with the expectation that we will have the balance of our production open by the end of this year.

To prudently grow the top line, we are selectively writing new personal lines business, anchored by a continued focus on risk management and stringent underwriting. As a result, we expect the pace of new business production to slowly accelerate through the year. This new business growth will earn into our financials in 2025 and future years. Looking to 2026, we expect growth to accelerate as our new business production is fully ramped up across all geographies and the headwind from our exposure management initiatives is fully behind us. Additionally, the legislative changes in Florida are having a positive impact on the economics of writing new, profitable business and where we have seen a market decline in frivolous lawsuits.

We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. We expect the reinsurance market will see the tangible benefits of this legislation as Hurricane Milton claims mature through this year and into next year, which could reduce reinsurance pricing in 2026. Our E and S business provides us with options in our product offering as we continue to evaluate states and markets for E and S opportunities. What makes this business so attractive is that we can adjust our rates and coverages to the changing dynamics state by state to ensure we continue to earn appropriate risk adjusted returns while providing consumers in those states with needed insurance protection. Due to the current dislocation that exists in California, we expect more of the homeowners business to move from admitted carriers to E and S, which provides business opportunities for Heritage.

Turning to reinsurance, we have maintained a stable, indemnity based reinsurance program at manageable costs through our rate adequacy and exposure management initiatives, while also proactively engaging with our reinsurance partners. This can be seen in our sixone renewal, which we completed earlier than expected. Overall, we increased the amount of limit that we purchased by $285,000,000 while our overall cost increased by less than $8,000,000 I would like to thank our dedicated reinsurance partners who have supported our business through multiple catastrophic events over the last several years and look forward to their continued partnership as we work to further expand the company. To conclude, we continue to believe that we have the foundation in place to deliver solid profitable growth in 2025 and future years as we continue to execute our strategy aimed at generating shareholder value. I would also like to reiterate our dedication to navigating the complexities of our market with a strategic focus that prioritizes long term profitability, shareholder value, and customer service driven by our dedicated workforce.

Kirk, over to you.

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: Thank you, Ernie, and good morning, everyone. Starting with our financial highlights, we reported net income of $30,500,000 or $0.99 per diluted share in the first quarter, which generated an annualized rate on average equity of 39%. This compares to $14,200,000 or $0.47 per diluted share and a return on average equity of 25% in the prior year quarter. The increase in net income was primarily driven by an increase in net premiums earned and relatively flat expenses and loss adjustment expense, despite the pretax impact of $31,800,000 of California wildfires. Our first quarter results continued to demonstrate the successful execution of improving our portfolio and continuing to generate positive returns.

Gross premiums earned rose to $353,800,000 up 3.6% from $341,400,000 in the prior year quarter, reflecting higher gross premiums written over the last twelve months from business growth and rating actions. As we ramp up on recently opened geographies and open more geographies, we expect our growth to accelerate at a managed pace. Our new business for the first quarter is slightly above plan and bodes well for our expectations for the remainder of the year. Net premiums earned increased to 200,000,000 up 11.5% from $179,400,000 in the prior year quarter, reflecting growth in gross premiums earned as well as a reduction in ceded premiums for the quarter. The reductions in ceded premium was driven by an $8,700,000 reinstatement premium during the first quarter of twenty twenty four for Hurricane Ian, coupled with a reduction in previously accrued reinstatement premiums of $1,400,000 during the first quarter of twenty twenty five.

Our net investment income for the quarter was $8,600,000 flat from the prior year quarter. This reflects our continued actions to align the investments with the yield curve, while maintaining a high quality portfolio of short duration assets. Our total revenues for the quarter were $211,500,000 up 10.6% from $191,300,000 in the prior year quarter. This improvement was driven by the change in net premiums earned. Our loss ratio for the quarter improved 7.2 points to 49.7% as compared to 56.9% in the same quarter last year, reflecting higher net premiums earned, coupled with a 2.6% reduction in net losses and LAE, even with the California wildfires.

Net weather and cat losses for the first quarter were $43,500,000 an increase of 25,100,000.0 from $18,400,000 in the prior year quarter. Net losses in the current year quarter include non hurricane cat losses of 31,800,000 from the California wildfires, which was a $15,900,000 increase over the non hurricane cat losses of 15,900,000.0 incurred in the prior year quarter. Other weather losses totaled 11,700,000.0, an increase of 9,200,000.0 from the prior year quarter of $2,500,000 The higher cat and weather losses were more than offset by significantly lower attritional losses, reflecting the quality of our portfolio. In addition, we experienced favorable reserve development compared to the prior year quarter. Favorable net loss development was $7,800,000 in the current year quarter compared to adverse development of $6,700,000 in the prior year quarter.

Our net expense ratio for the quarter was 34.8%, a 2.3 improvement from 37.1% in the prior year quarter. This was driven primarily by growth in net premiums earned, coupled with higher ceding commission income, which decreased the net policy acquisition cost ratio by 3.3%. The reduction in policy acquisition ratio was partially offset by a 1% increase in net general and administrative expense ratio. The net combined ratio for the quarter was 84.5%, down 9.5 points from 94% in the prior year quarter, driven by a lower net loss ratio and lower net expense ratio as just described. Turning to our balance sheet.

We ended the quarter with total assets of $2,200,000,000 and shareholders’ equity of $329,000,000 Our book value per share increased to $10.62 at 03/31/2025, up 11.8% from the fourth quarter of twenty twenty four and up 38.5% from the first quarter of twenty twenty four. The increase from 12/31/2024 is primarily attributable to net income as well as a $6,500,000 net of tax reduction in unrealized losses on the company’s fixed income securities portfolio. Looking forward, we expect our unrealized losses in the portfolio to continue to roll off as investments mature. The average duration of the fixed income core portfolio was three point one years as the company has extended duration to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. 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 proactive approach to managing exposure, enhancing 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 to take your questions.

Conference Operator: We will now begin the question and answer session. Our first question will come from Mark Hughes with Truist. You may now go ahead.

Mark Hughes, Analyst, Truist: Yeah, thank you very much. Congratulations on the quarter. Kirk, the ceded premium dollars that we can expect in Q2 and Q3, do you have some thoughts on that, some guidance?

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: Yes. Yes. And looking at that, it’s kind

Carol Camel, Analyst, Citizens: of going forward and that type of stuff. It’s going

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: to be up slightly for the remainder of the year. The ratio probably go up a little bit, but not significantly for the rest of year.

Mark Hughes, Analyst, Truist: Okay. So ratio up a little bit, not significantly. Same on dollars, I guess?

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: Yes, correct.

Mark Hughes, Analyst, Truist: Okay. And then 39% ROE is pretty good stuff with the cat losses in the quarter. Ernie, how do you think rates are going to play out when we think over the next six months, year, two years, trajectory of rates given your strong returns and good profitability. What do you think this is going to mean in terms of pricing?

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Yes, I think good question, Mark. I think one of things is we’ve been working hard to be rate adequate and we are in 90% of our geography. So one of the things we’ll do is keep up with that and maintain with that. I think the regulatory environment in general realizes that keeping up with rate is good for everybody involved. So again, we’ll consistently look at where we’re at from a rate perspective and go to certain areas if we need more rate, we’ll go ahead and do that.

Mark Hughes, Analyst, Truist: Now, do you think what’s the risk because it goes the other direction? And obviously, even if rates were down a bit, return to profitability would still be excellent.

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Yeah, and we’ve said this. We’re okay if rates go down as long losses are going down correspondingly in those markets, right? And I think a testament to Florida last year, we filed for a 3% rate decrease, but we’ve also seen losses go down in Florida. So obviously keeping those margins in place is what’s key there.

Mark Hughes, Analyst, Truist: Yeah, okay. And then in personal lines, as you’re getting more active in opening up new distribution, How do you see the competition? Is there much competition out there? Are others following suit?

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Yeah, so one comment I’ll make. It’s really not new distribution, the existing distribution that we’ve had and then reopening with the agents so they know us. I think one thing we said is we’re gradually opening with the agents so they understand the underwriting discipline that we want to maintain. There are new companies that have come in. Obviously, that’s known to everybody out there.

I think most of the new companies are starting off with takeouts and then moving over to new business. But again, we’re ready to compete with folks out there as well as there’s responsible competition.

Mark Hughes, Analyst, Truist: Yeah. And then if you look at your underlying loss, take out the weather, take out the cats, that has continued to improve. Anything about this level that’s not sustainable? Is this a pretty good benchmark? I know you get a little more weather activity in other quarters, this level of loss, is that a reasonable baseline?

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: Yes. I think when you look at it, again, barring the major storms and that type of stuff, I mean, the loss trends are, I would say, very favorable. I will tell you that the legislative impacts that Ernie mentioned, that type of stuff are having a favorable impact. And if the trends continue, I think that you are going to see them flat for sure. So even with a little bit of claims inflation, I think just that the trends are looking very good right now.

Mark Hughes, Analyst, Truist: Yeah, very good. Thank you.

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: All right,

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: thank you.

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Thank you, Mark.

Conference Operator: Our next question will come from Carol Camel with Citizens. You may now go ahead.

Carol Camel, Analyst, Citizens: Yes, good morning and also congrats on the quarter. And I just have a question here. Yeah, I just have a question here about the supplemental information that you provided with the TIVs, the PIFs and the premiums. And I’m just trying to maybe have a better understanding of the Florida market in terms of PIFs going down, but PIFs are going down also in other states. TIVs basically flattish, but then the premiums are down.

Is this really because of the what you said earlier was the rate coming down in Florida? Or is this a different dynamic?

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: Yes, it’s really the premium is the rate increases are not as substantial as they have been in the past. And

Carol Camel, Analyst, Citizens: so there’s a

Kirk Lusk, Chief Financial Officer, Heritage Insurance Holdings: PIP decrease is decreasing that a little bit. Also, we are seeing a little bit of competition in the commercial markets, which is having a little bit of impact on our premiums. Again, one of the things, as Ernie mentioned, we’ve been closed in a lot of our territories that we’ve just started reopening. And so we’re anticipating that that’s going to start accelerating starting in the second half of this year.

Carol Camel, Analyst, Citizens: All right. Got it. Thank you. That’s it for me.

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: All right. Thank you. Thank you.

Conference Operator: Our next question will come from Paul Newsome with Piper Sandler. You may now go ahead.

Paul Newsome, Analyst, Piper Sandler: Good morning. Thanks for the call, guys.

Conference Operator: Good morning, Paul. Good morning, Paul.

Paul Newsome, Analyst, Piper Sandler: Could you give us maybe a little bit more color on the competitive environment by state? My sense is that Florida is very different than East Coast, different than California. What’s your view on the differences between the various states?

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Yeah, well, I mean, think everybody’s heard about all the new entrants coming As you mentioned, in other areas, we’re not seeing that level of new entrants coming into the other 15 states that we do business. California, like you said, is another exception where admitted carriers are more leaving the state. So there’s more opportunity there as we grow our ENS book. I would say the remaining states are pretty stable.

Again, with the existing agent distribution that we have there, they know us well, Narragansett Bay, SEFRA Insurance. Florida seems always to be where there’s new entrants coming in and then there’s a pause. But we have seen new entrants come in in the last year.

Paul Newsome, Analyst, Piper Sandler: Can you talk a little bit about admitted versus non admitted in some of these states as well? Clearly, you’ve seen at least a little bit in Florida where non admitted is there and a lot more in California. Think you’re you’re only not admitted in California. Can you talk about how that’s swinging back and forth?

Ernie Guerite, Chief Executive Officer, Heritage Insurance Holdings: Yeah. So where you’re seeing a lot of dislocation, you are seeing more not admitted or E and S carriers going in there because they have the flexibility to increase rates, which is why we use E and S as well. I will say that I think you’re seeing more E and S carriers throughout the footprint in general. Just again, as markets change pretty quickly and dynamically, E and S gives you the opportunity to kind of respond to that in a much quicker fashion than the admitted. More stable environments, I think the admitted is fine.

But I think in some of the larger states, you are seeing more E and S carriers enter into the market that we’ve seen. The E and S market in general has grown, but it is not your specialty E and S. You’re seeing kind of a bit of a switch for your typical homeowners under an E and S carrier.

Conference Operator: Appreciate the help as always. Thank Paul. You.

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