Heritage Insurance Holdings (HRTG) Q2 FY26 earnings call: guidance and Q&A

What are the expectations for rate reductions in Florida given lower reinsurance costs, and what is the outlook for the ceded premium number for Q3 with the new reinsurance program?

Management expects Florida rate reductions to be in the 3% to 5% range, similar to the prior year. The ceded premium ratio is anticipated to drop by 1 to 2 points, potentially reaching the 41% range, due to the new reinsurance program.

“We're finalizing that mark, but if you take a look last year, we were down three to five percent. I would say it'd be in that range once we finalize it. ... I think that you can count on a ratio probably dropping, you know, one to two points with. with the new reinsurance program so it's been kind of 43-ish in the first half so maybe you. 42-ish? Yes, I'd pay maybe even a little better than that. 41-ish? But it's in the ish.”

asked by Mark Hewis · answered by Kirk Lusk

Will the new production in new states, presumably written at a higher combined ratio, have a meaningful impact on the loss pick?

Management stated that new business is being written according to existing underwriting guidelines and margins, so it is not expected to have a detrimental impact on loss ratios.

“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.”

asked by Mark Hewis · answered by Kirk Lusk

The Q2 operating cash flow of $166.5 million seems very strong. What is driving this, and is it a Q2 or first-half number?

The $166.5 million operating cash flow is for the first six months of the year, not just Q2. It is primarily driven by strong net income over the past year and ongoing balance sheet improvements related to expenses, debt, and investment income, translating into more free cash flow.

“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. ... Well, you know, we're working on our balance sheet. You know, have over the last, you know, several years as far as, you know, what our expenses, what our debt is, you know, 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.”

asked by Mark Hewis · answered by Kirk Lusk

Could you elaborate on the prior year reserve development, specifically which years or segments it relates to and what trends drove it?

The favorable prior year reserve development is spread across several years and predominantly relates to HPCIC and Narragansett Bay. It reflects stabilization of frequency and severity trends, with late reported claims leveling off and being lower than historically expected, indicating successful claim closures.

“Yes, it's spread, yes, it's spread throughout a number of years. It also is spread through, you. It's predominantly with HPCIC but also Narragansett Bay. 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 have really, you know, lower than what they have historically been, you know, and that's just related to us closing claims, you know, lower than what we had expected.”

asked by Mark Hewis · answered by Kirk Lusk

Is the company planning to continue paying down its debt throughout the year and into next year?

Management is happy with the current debt facility and does not necessarily plan to pay it off further. Recent payoffs were for smaller, higher-rate loans (e.g., Federal Home Loan Bank loan for Zephyr). They will prudently evaluate future payoffs but are content with the current debt structure and retain $75 million in deferred term loan capacity.

“No, not necessarily. We were pretty happy with the rate we had there. What we did is we had a couple 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 in the 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, you know, in the event we wanted to use it.”

asked by Carol Jamil · answered by Kirk Lusk

Will the loss ratio remain stable on a net basis, with accident year potentially rising due to lower Florida rates, offset by favorable prior period development?

Management expects the loss ratio to be stable excluding the prior period development. While they believe they are adequately reserved, prior period development is considered a one-time item, and backing it out reveals the underlying stabilization of the loss ratio.

“Yes, well, I'm saying, you know, flat excluding the development, you 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.”

asked by Carol Jamil · answered by Kirk Lusk

Commercial residential policy count grew 4.9%, but commercial premiums in force fell 12.7%. Could you explain this gap, whether it's due to rate/pricing pressure or a mix shift to smaller companies?

The gap is due to competitive pressure and rate decreases, leading the company to walk away from some accounts. However, they are writing new, smaller commercial accounts where pricing is favorable, which increases policy count despite overall premium contraction. This new business is underwritten with strict guidelines.

“Yes, it is competitive pressure on those accounts. You know, what we had to do is, you know, we are walking away from, you know, some accounts simply due to the extent of the rate decreases. We are able to write some even with the rate decreases. New business, you know, the policy count is up because, you know, 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.”

asked by Kim Bianchi · answered by Kirk Lusk

What is the underwriting appetite for the new Texas E&S platform, and how quickly is it expected to scale compared to the Florida commercial book?

The company is excited about the Texas launch in July, which has been well-received with initial policies written. While the contribution will be small this year, it is expected to grow over the next two to three years. The underwriting appetite aligns with their disciplined approach.

“Yes, so we're really excited about Texas. Just launched it in July, so early stages, but very well receptive. 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.”

asked by Kim Bianchi · answered by Unknown Speaker