Heritage Insurance (HRTG) Q3 2026 Earnings Call: EPS Rises as Reinsurance Costs Fall

Key Takeaways

• Heritage Insurance Holdings reported Q3 2026 net income of $51.1 million, versus $50.4 million a year earlier. Diluted EPS rose 5.5% to $1.72, aided by a 4% reduction in diluted shares outstanding.
• Net earned premiums increased 5.4% to $205.6 million as ceded premiums fell 11.8%. The ceded premium ratio declined 4.4 percentage points to 41.7%, reflecting the first full quarter of savings from the June reinsurance program.
• Pretax catastrophe losses totaled $15.8 million, while total current-quarter weather and catastrophe losses reached $33.6 million. Despite higher weather losses, the net combined ratio was broadly stable at 73.0%.
• Florida commercial residential premium in force fell about 16% year over year due to aggressive pricing, although policy count and insured values increased. Management said it will continue to prioritize underwriting returns over volume.
• Book value per share reached $20.22, up 42.9% year over year. Shareholders’ equity was $599.1 million, while the long-term debt-to-capital ratio improved to 10.5%.
• Management continues to expect personal lines policy count growth to resume in 2027, supported by reopened territories and expansion into markets including Texas.

Core Financial Data

For the first nine months of 2026, net income increased nearly 16% to $149.3 million. Diluted EPS rose 18.5% to $4.94, while annualized return on average equity was 36.1%.

Business and Operating Performance

The quarter included $33.6 million of current accident-quarter weather and catastrophe losses, up from $13.8 million a year earlier. This comprised $9.1 million from Hurricanes Lala and Lowell, $6.7 million from the September Nor’easter and $17.8 million of non-catastrophe weather losses. Heritage also recognized $14.0 million of favorable prior-year reserve development, compared with $5.0 million in Q3 2025.

The June reinsurance placement provided more than $2.2 billion of limit and approximately $63 million of annualized savings. Lower ceded premiums helped offset the decline in gross premiums earned and supported growth in net earned premiums.

Florida commercial residential remained the main pressure on the top line. Premium in force declined about 16% year over year as new capacity and aggressive pricing affected rates. The decline reflected pricing rather than reduced underlying activity, as policy count and insured values increased.

Outside Florida, commercial premium in force in New Jersey grew about 12% during 2026. Heritage also reported commercial growth in New York and Hawaii and recently launched in South Carolina. More than half of company premiums are written outside Florida across a 17-state footprint.

Personal residential trends improved. Heritage lost approximately 2,900 personal lines policies during the quarter, less than half the year-earlier decline. Premium in force increased slightly, and average premium per policy rose almost 5%.

Heritage wrote its first Texas excess and surplus lines policy in July and issued 86 policies during the quarter. Management expects the near-term contribution to remain modest but views Texas as a longer-term growth opportunity supported by existing agent relationships.

Management Outlook

Management continues to expect personal lines policy count to return to growth in 2027 as reopened territories and new markets scale.

For Florida commercial residential renewals, management said pricing could decline another 10% to 18% into 2027 based on current conditions. The company nevertheless described the business as profitable, noting that the loss ratio has recently leveled off despite price reductions.

Management views the current ceded premium ratio in the mid-41% range as an appropriate run rate. It sees the possibility of a further decline after the next reinsurance renewal, which could benefit the second half of 2027.

Based on early market discussions, management said reinsurance pricing could fall approximately 5% to 7% next year, potentially stabilizing in a 5% to 8% decline range. It cautioned that visibility should improve after January 1 renewals.

Overall premium growth is expected to remain relatively modest and in the single digits amid Florida commercial pricing pressure. Management said Texas could grow faster than Heritage’s earlier California expansion because an agent distribution network is already in place, but it did not expect a material near-term contribution.

Risks and Watch Items

• Florida commercial residential pricing remains under pressure from new capacity and aggressive competition.
• Florida personal lines competition could increase in 2027 as newer carriers expand from takeout activity into voluntary business.
• Weather volatility remains significant, as demonstrated by the increase in quarterly weather and catastrophe losses.
• Rising interest rates increased accumulated other comprehensive losses on the fixed-income portfolio, although management attributed the unrealized losses to rates rather than credit quality.
• Future reinsurance savings remain dependent on market capacity, storm activity and renewal pricing.

Analyst Q&A Highlights

Management said non-catastrophe weather losses mainly reflected smaller hail and wind events, including just under $6 million in the Northeast and slightly more than $12 million in the Southeast, predominantly Florida.

On Northeast expansion, the company highlighted commercial growth in New York, New Jersey and Hawaii, alongside the South Carolina launch. Personal residential growth outside Florida was led mainly by the Northeast, with some contribution from Hawaii.

Regarding NBIC’s year-end quota-share renewal, management said the ceded level has been reduced by roughly 5% to 7% in recent years and could see a comparable reduction depending on pricing.

Management expects limited losses from Hurricane Isaias because Heritage has relatively low exposure in the Pensacola and Destin areas.

Heritage ended the quarter with $58 million of nonregulated cash, $474.9 million of combined statutory surplus and $90 million of available borrowing capacity. Year-to-date share repurchases totaled approximately 1.1 million shares for $27.9 million, with $34.1 million remaining under the authorization through December 31, 2026.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good morning, and welcome to the Heritage Insurance Holdings Third 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. Please go ahead.

Kirk Lusk

Good morning, and thank you for joining us today. We invite you to visit the investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience.

Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make.

For a description of the forward-looking statements and the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of, and other information regarding these measures can be found in our press release.

With me on the call today is Ernie Garateix, our Chief Executive Officer.

I'll now turn the call over to Ernie.

Ernesto Garateix

Thanks, Kirk, and good morning, everyone. Over the last several years, we have taken deliberate steps to improve our profitability, reduce volatility and build a more diversified and resilient company. After a quiet storm season last year, the third quarter brought catastrophe activity, including 2 hurricanes in Hawaii and the Northeastern.

As a result, we absorbed $15.8 million of pretax catastrophe losses compared with none in the third quarter of last year and still grew diluted earnings per share to $1.72, up from $1.63 in the year ago quarter. Net income was $51.1 million, up slightly from last year's $50.4 million. Through the first 9 months of the year, we have generated net income of $149.3 million, up nearly 16%, while diluted earnings per share increased 18.5% to $4.94.

Our annualized return on average equity was 36.1% year-to-date and book value per share reached $20.22, up almost 43% from a year ago. Three elements of our strategy contributed to the quarter's results, underwriting discipline, diversification and our reinsurance program. First, our underwriting discipline. Excluding catastrophes, weather and prior year development, our loss ratio improved by nearly 4 points in the quarter. This improvement came despite significant pricing pressure in Florida's commercial residential market, which I'll discuss shortly. It reflects years of disciplined rate setting, risk selection and claims management as well as Florida's improved legal environment. Second, diversification.

Heritage is a super regional carrier with a diverse portfolio of policies across 17 states. We write business on a surplus lines basis in 5 states. More than half of our premium is written outside of Florida, including other states in the Southeast, the Northeast, the Mid-Atlantic, Hawaii and our excess and surplus line platforms. That diversification has made our earnings more durable while also providing more flexibility to allocate capital towards markets and products where we see the most attractive risk-adjusted returns.

Third, our reinsurance program. The program we placed in June with more than $2.2 billion of limit and approximately $63 million of annualized savings is working as intended. It lowered our cost of protection while keeping our net retention at a manageable level. The third quarter was the first full quarter of those savings, and our ceded premium ratio fell to 41.7% from 46.1% a year ago.

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

I believe our geographic reach, which provides us with numerous opportunities to grow our commercial and personal residential business in markets where pricing and returns remain attractive is undervalued. We are selectively adding new territories outside of Florida to expand our commercial product offering. This includes product offerings on an admitted as well as surplus lines basis. In New Jersey, for example, our commercial premium in-force has grown about 12% this year. Turning to the personal residential market. Trends continue to move in the right direction as the pace of policy count decline has slowed substantially.

In the third quarter, we lost roughly 2,900 personal lines policies, less than half the decline of a year ago. Premium in-force is up slightly and average premium per policy is up almost 5%. Nearly all of our territories are open for new business and agents in reopened markets continue to tell us they want to place more business with Heritage. Based on those trends, we continue to expect a return to personal lines policy count growth in 2027. We are also beginning to leverage our platform and capabilities in new markets. In Texas, we wrote our first excess and surplus lines policy in July and 86 policies written during the quarter.

While it is still early and the contribution will be modest this year, the reception from agents has been strong. We believe Texas represents another attractive long-term growth opportunity where we can leverage our underwriting expertise and existing agent relationships while continuing to expand our geographic reach. Turning to capital. Our position has never been stronger. We ended the third quarter with shareholders' equity of $599 million and a debt-to-capital ratio of 10.5% Year-to-date, we have repurchased about 1.1 million shares for $27.9 million, representing roughly 3.6% of shares outstanding at the start of the year, and we have $34.1 million remaining under our current authorization.

Looking forward, our priorities are unchanged. First, we will continue to invest in profitable organic growth as our reopened territories and new markets scale. Second, we will continue to repurchase shares when we believe our stock trades below intrinsic value. Third, we will maintain a strong balance sheet that allows us to absorb weather events without changing course. In closing, we delivered solid earnings and continued book value growth in the third quarter with weather activity returning to a level higher than last year. We are confident in the path ahead and remain focused on disciplined underwriting, smart capital allocation and building long-term value for our shareholders. I want to thank our employees, especially our claims team, who supported policyholders through this storm season, along with our agents, reinsurance partners and shareholders.

Kirk, back to you.

Kirk Lusk

Thank you, Ernie, and good morning, everyone. For the third quarter, Heritage reported net income of $51.1 million or $1.72 per diluted share compared with $50.4 million or $1.63 per diluted share in the prior year quarter. Despite the higher level of weather activity, as Ernie discussed, diluted earnings per share increased 5.5%, aided by a 4% reduction in diluted shares outstanding from our share repurchase program.

For the first 9 months of 2026, net income was $149.3 million or $4.94 per diluted share compared with $128.9 million or $4.17 per diluted share a year ago. The annualized return on average equity was 35.1% for the quarter and 36.1% year-to-date. The quarterly figure is lower than last year's 49.2% at the third quarter of 2025 because average equity is more than 40% higher, not because of a decline in earnings. Total revenue increased 3.2% to $219.2 million from an increase in net earned premiums and investment income.

Net realized gains and losses included a nonrecurring $2.7 million gain in the prior year quarter, which had a negative comparable impact on revenue in the current quarter. Gross premiums written were $322.8 million, down 3.1%, primarily reflecting lower Florida commercial residential premium, partially offset by growth in personal lines and non-Florida commercial markets. Gross premiums earned were $352.8 million compared with $362 million in the year ago quarter.

Ceded premiums declined 11.8% to $147.2 million, reflecting the first full quarter of savings from our June catastrophe excess of loss program and the reduction of our Northeast net quota share at year-end 2025. The ceded premium ratio was 41.7%, down 4.4 points from a year ago. As a result, net premiums earned increased 5.4% to $205.6 million. Net investment income rose 17.3% to $11.4 million, driven by a larger portfolio as average cash and invested assets were about $185 million higher than a year ago. Cash and invested assets totaled $1.4 billion at quarter end, and the fixed income portfolio has an average duration of 3.3 years and remains high quality.

Net losses and loss adjustment expense were $81.4 million compared with $74.8 million in the prior year quarter, and the net loss ratio was 39.6% compared with 38.3% in the prior year quarter. Current accident quarter weather and catastrophe losses totaled $33.6 million compared with $13.8 million a year ago. That included $9.1 million from Hurricanes Lala and Lowell and $6.7 million from the September Nor'easter, along with $17.8 million of non-catastrophe weather. Those losses were largely offset by favorable development. We recognized $14 million of net favorable prior year reserve development compared with $5 million a year ago in the third quarter.

The development is spread across several accident years and continues to reflect stable frequency, manageable severity and claims closing below our expectations. We consider that a strong result, especially given the pricing pressure in the Florida commercial residential market. The net expense ratio improved 1.2 points to 33.4%. Policy acquisition costs were essentially flat at $45.1 million as lower premium volume offset by $1.2 million of lower ceding commissions from the reduced net quota share. General and administrative expenses rose 5.2% to $23.5 million, reflecting higher comp and related expenses and temporary staffing, partially offset by a nonrecurring $1 million refund of corporate reinsurance premium.

The net combined ratio was relatively flat at 73% compared to 72.9% in the prior year quarter despite the higher net loss ratio of 1.3%. The effective tax rate was 24.5% compared to 26.2% in the prior year quarter, reflecting the level of pretax income and permanent items. Shareholders' equity was $599.1 million at September 30, and book value per share was $20.22, up 23.4% from year-end and up 42.9% from a year ago. The increase from year-end reflects strong earnings, partially offset by $27.9 million of share repurchases and $22.7 million increase in accumulated other comprehensive loss, net of tax, representing higher unrealized losses on the fixed income portfolio.

Those unrealized losses are driven by rising interest rates, not credit, and we expect them to reverse as securities mature since we do not anticipate selling investments prior to maturity. During the quarter, we purchased 100,000 shares for $3.3 million, bringing year-to-date repurchases to 1,101,508 shares for $27.9 million. We have $34.1 million remaining under our authorization, which runs through December 31, 2026. Long-term debt was $70.4 million, down $8 million since year-end. Our long-term debt-to-capital ratio improved to 10.5% from 15.3% a year ago. We also continue to have $75 million of undrawn delayed draw term loan capacity as well as $15 million available on our revolving credit facility.

Nonregulated cash at quarter end was $58 million and combined statutory surplus was $474.9 million compared with $439.4 million at June 30. To summarize, we delivered solid earnings in a quarter with more normal weather activity, grew book value per share, returned capital to shareholders and further strengthened the balance sheet. As we head into year-end, we are well capitalized. Our reinsurance program is in place through May of 2027, and we see attractive opportunities to continue our progress.

Operator, we are now ready to take questions.

Operator

[Operator Instructions] The first question comes from Karol Chmiel with Citizens.

Question-and-Answer Session

Karol Chmiel

I got 2 questions. First one regarding the weather losses, it was a total of $33.6 million, I believe, total and of which only $15.8 million were the actual cat losses in Hawaii and the Northeast. So I'm just wanting to know, can you give more color on the balance of the weather losses outside of the cats?

And then maybe you can help define those losses and how you define them internally?

Kirk Lusk

Yes. Those are just typically much smaller events. And we had about probably $6 million, just under $6 million in the Northeast and a little over like $12 million in the Southeast, predominantly in Florida. And so those are just smaller storms, either hail, wind, that stuff where we just have some smaller losses.

Karol Chmiel

Okay. So it's a compilation of different losses throughout the East Coast. Okay. And then just my second question would be just the growth comment that Ernie made regarding New Jersey. Is there any more that you want to maybe share about your growth in the Northeast?

Ernesto Garateix

Yes. So that comment was specifically to the commercial lines. We made the comment about where Florida is and the aggressive pricing and the competition there. So we've been growing with the commercial book in other regions such as New York, New Jersey, Hawaii and just launched South Carolina as well.

Karol Chmiel

Okay. And then just lastly, just in general, because I think there was a comment in the press release that personal residential is offsetting the pressures of the Florida commercial residential. Is there any particular region that you want to maybe mention that is contributing to that balance?

Kirk Lusk

I mean it's mostly the Northeast, but the Hawaii did have a little bit of impact there also.

Operator

The next question comes from Mitchell Rubin with Raymond James.

Mitchell Rubin

This is Mitch on for Greg. Congrats on the quarter. What rate changes are you achieving on Florida commercial residential today? And how does that compare with earlier in the year?

Kirk Lusk

The retention rates are in the mid-80s, and they're actually above where they were previously. So it's improved slightly. Although I must admit, when we look going forward, we are expecting it to not climb significantly from where it is just from a retention standpoint. Our new business has been strong, and we actually expect possibly that we can pick up a little bit more on the new business side.

Mitchell Rubin

I'm sorry, I was looking for the renewal rate, not retention.

Kirk Lusk

The renewal rate -- the price rate.

Mitchell Rubin

Yes.

Kirk Lusk

Yes. Okay. I mean we're expecting that to continue to decrease. I think that if we look kind of into next year, I think that you could be looking at another 10% to 18% based upon kind of what we're seeing right now. We're hoping it holds a little bit more.

One of the things that we are seeing, which is very favorable to that book of business is even with the price decreases, we are not seeing much of an increase in the loss ratio. It did creep up a little bit a couple of quarters, but it seems to be leveled off. And so therefore, even with the price decreases, it is a profitable book of business.

Mitchell Rubin

Makes sense. As you approach NBIC's year-end quota share renewal, how are you thinking about your target session level?

Kirk Lusk

We've been dropping that in the last couple of years by anywhere from 5% to 7%. And based upon pricing, I think that we probably look at something comparable.

Operator

The next question comes from Maxwell Fritscher with Truist.

Maxwell Fritscher

I am calling in for Mark Hughes. I'm sorry if I missed this in the prepared remarks, but are there any early indications on losses from Hurricane Isaias earlier this month?

Ernesto Garateix

Yes. So to begin with, we don't have a lot of exposures up there. Just to give you kind of a perspective, we did go up there in the Pensacola Destin area. We had a hurricane cat team there. They had 2 insurance villages. One was closed down. This destin was closed down within 3 days. Pensacola last a little bit longer, but we don't expect a lot of losses from that area just because we don't have a lot of exposures there.

Maxwell Fritscher

Great. And then what are your thoughts more broadly around top line trajectory, puts and takes with the Florida commercial pricing? Are you expecting that to inflect positively in gross premiums written in 4Q? And then should we expect any material contribution from the Texas product in '27?

Kirk Lusk

I hesitant to say it's going to be material, but I think it is going to be positive over a period of time. I think that when we look at it, it's -- historically speaking, it took us about 4 years to get to $40 million of premium in California. I would expect Texas has the potential to grow a little faster than that because we already had a distribution network there of existing agents.

So I think that, that could accelerate a little further. I think that when we look at some of the price decreases, some of the competitive pressures, that type stuff, I mean I think our growth is going to be relatively minor. So we're talking about into the single digits.

Maxwell Fritscher

And then on the ceded premium ratio, how do you expect that to trend as premiums grows mid-41s? Is that a good run rate? Or would you expect that to go any lower?

Kirk Lusk

I think that's a good run rate. I think that we'll see what the renewal looks like next year. I think that there's a good possibility it could be down a little further next year. So that would have a favorable impact towards the second half of next year.

Operator

The next question comes from Cam Bianchi with Piper Sandler.

Cameron Bianchi

This is Cam on for Paul. Congrats on the quarter. Curious if you could elaborate on any incremental competition in the Florida personal market, if any?

Ernesto Garateix

I'm sorry, it was competition on the personal lines market?

Cameron Bianchi

Yes, yes, in Florida.

Ernesto Garateix

Yes. So again, in Florida, we have seen more competition come in over 20 new companies over the last 2 years. Most of those companies have been focused on the takeout. We have not done a takeout since 2018. But what we do expect into '27 is some of those start to write new voluntary business out there.

So we're starting to see some of these new companies out there, which again is why our focus has been on the diversification launch into Texas and expanding our product lines through our geographic footprint.

Cameron Bianchi

Got it. And then on your footprint outside of Florida, what geographies do you find to be most attractive at this point in time? And where are you seeing the most growth outside of Florida?

Ernesto Garateix

Yes. So it is pretty spread, again, attractive in the Northeast where we are rate adequate. The Northeast, New York, New Jersey and Connecticut has been growing for us. Hawaii is rate adequate as well. They've seen some growth out there as well.

So we're pretty optimistic about the entire footprint and where we're at. The one thing is we will remain underwriters and make sure that, again, that we're getting pricing where it's attractive based on risk return.

Cameron Bianchi

Got it. Just one more for me. It looks like you're prioritizing profitability over growth in commercial residential. What would it take for the tides to change in that market from a growth perspective?

Ernesto Garateix

Yes. It's a great question in the sense that there are new entrants into that market. And again, there's going to be -- my opinion, would be some external market conditions that would change, whether that's an event, whether that's reinsurance pricing. But again, we remain disciplined and become underwriters first and foremost and understand what that risk return is going to be out there.

And I think the agents have valued that. Our PIP count is actually up even given some of the pricing being down.

Operator

The next question comes from Brendan McCarthy with Sidoti & Company.

Brendan Michael McCarthy

I just have a quick question on the reinsurance savings. I think you outlined about $63 million in reinsurance savings secured this year. What kind of runway for additional savings do you see in 2027 and beyond? And maybe kind of touch on what markets are driving those savings?

Kirk Lusk

Okay. I think that right now, what we're hearing is that because of the lack of storms, some additional capacity coming into the marketplace, I mean, I think we're hearing it could be down anywhere from a minus 5% to minus 7% next year. And based upon the trend, I mean, it's possible it could be higher than that. I think that most people are looking for -- hopefully, it's going to stabilize a little bit around that minus 5% to minus 8%, which would then help us again a little bit more next year.

To give you an idea, this year was -- the reduction was up around 20%. So therefore, that's why it was the larger number. So we would expect a decrease next year, but not to the same extent as this year.

Ernesto Garateix

Yes. And we would expect after the 1/1 renewals to get a better idea of that. So we're still a little early in the stages, but having discussions with reinsurers as we speak.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. Please go ahead.

Ernesto Garateix

Yes. We'd like to thank you for joining the call. I hope everyone has a great day.

Operator

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