Good morning, and welcome to the Heritage Insurance Holdings Q1 2021 Financial Results conference call. My name is Ian, and I'll be your operator today. At this time, all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. Please note this event is being recorded. I'd now like to turn the conference over to Arash Soleimani, Executive Vice President at Heritage. Please go ahead, sir.
Good morning, and thanks for joining us today. We invite you to visit the investor 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 on management's current expectations and are subject to uncertainty and changes in circumstances. In our earnings press release and in 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 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. With us on the call today are Ernie Garateix, our Chief Executive Officer, and Kirk Lusk, our Chief Financial Officer. I will now turn the call over to Ernie.
Thank you, Arash. Good morning, everyone, and thank you for joining us today. First, let me start by thanking our employees for their hard work and dedication over the past few months. Our employees continue to provide superior customer service to our agents and policyholders and demonstrate Heritage's ability to serve in its markets as a super-regional carrier. While we were disappointed with the loss in the quarter, I'm encouraged by the underlying signs of improvement that I expect will continue next quarter and throughout 2022. Excluding realized capital gains, pre-tax income improved by about $10 million year-over-year, which was largely driven by a 10-point improvement in the net combined ratio, including almost 7 points of net loss ratio improvement.
Even though current accident quarter weather losses were up about $4 million year-over-year, the corresponding current accident quarter weather loss net loss ratio actually improved by almost 3 points. These improvements are driven by our focus on rate adequacy and underwriting optimization. For example, as of quarter end, premiums in force were up 13%, while policies in force were only up by 3%, resulting in premium growth outpacing policy growth by over 10 points. This was even more pronounced in our Florida homeowners book, where quarter end premiums in force were up 7.5%, while policies in force were down 5.4%, with premium growth outpacing policy growth by 13 points.
I'm confident in our business plan, and the underlying improvements that have started to emerge should become even more visible next quarter, and particularly in 2022. I will now turn the call over to Kirk to provide more details on our financials.
Thank you, Ernie. Good morning. The net loss for the quarter was $16.2 million, compared to a net loss of $5.2 million during the prior year quarter. The primary drivers of the variance relates to significant realized gains in the prior year. For reference, in Q3 of 2020, we realized $20.4 million of realized gains compared to none this year. The high level of severe weather and storms continue to be a major driver of losses and the losses for the quarter. Net catastrophe weather losses of $51.4 million are $4.1 million higher than the same quarter in 2020.
The 2021 Q3 losses are also $32.7 million higher than the Q3 of 2019, and $27.8 million higher than the Q3 of 2018. To put the 2021 year-to-date net weather losses into perspective, the 2021 year-to-date net weather losses are $118.3 million, compared to $95.3 million in 2020, $60.6 million in 2019, and $50.4 million in 2018. With the recurring severe weather events, we are factoring these losses as well as the experienced social inflation into our rate indications as soon as possible. Despite the weather events and the loss for the quarter, we're seeing favorable trends that we believe will lead to continued improvements in subsequent quarters as we return to consistent profitability.
As Ernie mentioned, premiums in force were up 13% year-over-year, while policies in force were up only 3% over the same time frame, representing premium growth outpacing policy growth by 10 points. In Florida, where our personal lines business represents nearly 37% of our policies in force, in-force premium growth outpaced policies in-force growth by 13 points. Our emphasis on rate increases over policy growth is consistent with our focus on margin expansion and rate adequacy. We anticipate that we will continue to have substantial rates earning through the portfolio this year, in 2022, and 2023. We are undergoing detailed reviews of our business and curtailing the volume of new business we will accept as well as business we will renew while we focus on rate adequacy.
Additionally, we are implementing a number of underwriting changes to improve the quality of our book of business. This includes minimum Coverage A amounts, shutting down certain zip codes, making changes to our agency force, implementing minimum roof age in certain geographic areas, among other things. Ceded premiums are up 13% year-over-year, but were outpaced by the gross earned premium increase of 15.5%. As a result, the ceded premium ratio dropped from 45.8% in Q3 2020 to 44.8% in Q3 2021. The ratio was also down from 48.7% in the Q2 of 2021, which was negatively impacted by a $9.4 million reinstatement premium associated with severe convective storm reinsurance agreement. The 79.8% net loss ratio was down 6.8 points year-over-year.
The improvement reflects lower attritional current accident year loss ratio, which partially stemmed from improving rate adequacy and was partially offset by lower favorable prior year development. Our net expense ratio decreased by 3.4 points, reflecting our focus on expenses and economies of scale associated with rate-driven premium growth. The net combined ratio for the quarter was 112.5 and down 10.2 points from Q3 of 2020 of 122.7. Although we are not pleased with the loss in the quarter, the amount of rate earning through the portfolio, the lower attritional loss ratio, and the expense ratio are indicators of improvements in future quarters. We are now available to take your questions.
At this time, we'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Looks like our first question here comes from Matt Carletti of JMP. Please go ahead.
Hey. Thanks. Good morning.
Good morning.
Kirk, you mentioned a few times, I think, substantial rate working its way through the portfolio. Can you give us an idea of the ballpark on average? I know it'll vary by state and territory and so forth, but is it kind of mid-single digit, high single digit, or what sort of rate are we talking about?
We're talking about, you know, mid to high single digits, in, you know, most jurisdictions. However, there are going to be several that are gonna be in the double digits.
Okay, great. You guys have, you know, over the past several years, really grown, particularly outside of Florida, through a number of partnerships with, you know, large national companies. You know, can you just comment on kind of how those are going, you know, in general and about what portion of the book today is kind of that represents?
Yeah. We are very pleased with the growth that we've had outside of Florida with our national partners, but we continue to kind of refine where those growth areas are. Obviously, those areas that are profitable or is where the focus is gonna be. The overall book that we have with them probably accounts for about 25% of the portfolio.
Okay, great. I guess my last question, just a broad question, I guess probably for you, Kirk, centering around capital. Kind of how do you feel about Heritage's capital position currently, particularly given kind of the little moderation and exposure currently? You know, just how should we think about it as we go into 2022?
Yeah. No, I think we're you know, positioned well from a capital standpoint. I mean, one of the things we did do is you know, we did refinance you know our debt in the Q2 with our core syndicate banks, you know, which was led by you know, Regions and BMO, which were very you know, great to work with. We were able to lower our costs, get more flexibility, and increased our revolver by 50% there. So I feel pretty good about that. You know, when we look at deploying capital in the future, I mean, really the focus is on profitability.
I think that there are some areas where we are going to see our PIF count decrease, much like we have, you know, this year, but the premiums are going to increase due to the rate increases. You know, we do have some areas also, particularly up north, where we think that we are gonna have a positive PIF growth and premium growth on top of that.
Great. As you look forward, it sounds like you clearly believe capital's at a minimum adequate. Do you foresee an excess capital position? Should investors be thinking about the potential for share repurchases at some point, or are we getting ahead of ourselves?
Well, you know, we have about $26 million worth of cash, non-regulated cash right now. We did do some, you know, minor stock buybacks in the Q3 , and that is something that we will evaluate, you know, going forward.
Great. Thanks very much for the answers.
Thanks.
Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Hey, good morning. I was hoping you could talk a little bit more about what you're seeing from a claim cost inflation perspective. Other companies have been reporting, depending upon their businesses, pretty high rates of severity. You know, I guess the concern would be, you know, maybe a mid single digit increase in rate isn't actually sufficient to overcome both the severity from sort of underlying costs of repairing things, plus whatever you think may or may not be happening from a weather type deterioration perspective.
Yeah, no. I would say that, you know, that inflation is very real. I think that we're seeing it also. I mean, one of the things we did with our portfolio starting June of 2020, we increased our inflation guard factor in the Southeast to 8%, except for North Carolina, which was then 6%. You know, the Northeast has been a little lower at 4%. When we look at the inflation guard factor plus the rate increases that we've contemplated, we think that that is going to be, you know, sufficient for that. You know, you are correct. You know, we actually have increased what we consider our, you know, loss cost factor, you know, substantially over the last, you know, couple of years.
Fair enough. You know, Progressive was talking about pulling back in Florida, in the Gulf regions. Any further updates on the competitive environment? Are there people getting out? Are they getting in, or is it pretty similar to what you saw the last couple of quarters.
Regarding the Gulf as far as other states in the Gulf area?
Well, the example I use, Progressive said their home insurance business that they're going to try to essentially de-emphasize the Gulf areas, Florida and actually expand elsewhere outside of those regions. They're only one, but they're a decent sized Florida writer, I think.
Yeah. Our current approach is to stay where we're at. We're not really kind of increasing our Gulf exposure. We do not have plans to expand into all the Gulf states, i.e., Texas and Louisiana, at this time. You know, we'll see what the future holds down the road there. But we're very happy with our current exposures in the Gulf. Really, our focus has been in the Carolinas and up north.
Now I'm sorry, was it clear? I was just asking to see if you see, you know, your peers be more or less competitive in your markets.
We have not seen more competitors in the market. I think everyone is taking a pause with some of the exposures from, and what they've seen on the latest storms that have hit the Gulf. We have not seen more competitors come in.
Great. Thanks.
Got it. Thank you.
As a reminder, if you have a question, please press star then one. Next question is going to come from Mark Hughes of Truist. Please go ahead.
Thank you. Good morning.
Morning, Mark.
Morning.
When you put together some of those pluses and minuses around the top line, more rate, maybe some tapering in PIF counts in certain markets, what do you think the top line looks like overall next year? Do you think it's up a bit? Flat?
Yeah. No, we think it's going to be up next year because of the amount of rates that we have. I mean, we took some substantial rates this year, which continue to earn into the portfolio next year, and we're anticipating taking even more rate next year. With that, even in those jurisdictions where we have PIF count going down, we anticipate premiums are going to be going up because of that rate increases.
You know, as far as like the, you know, the bottom line improvements, I would say, you know, we are not only addressing it from a rate standpoint, we're also addressing it from an underwriting standpoint, looking at, you know, where we write, how we write, what policies, what is the roof age, you know. We're actually trying to address it from not only the rate but also from underwriting perspective.
What's your latest take on some of those regulatory reforms in Florida that kicked in earlier this year? Are they having much of an impact?
What I would say is this, we've seen a slight decrease in new litigation coming through. We're still cautiously optimistic as we're still a couple months into it to see. Hopefully that trend continues.
How about any maybe some provisions around roof issues? Were there any real changes there and is that helping?
No, again, I don't think there were many changes on that perspective. Again, we're kind of seeing what's going to happen there, going forward on that piece, but we are working actively with the OIR to see if there are improvements we can make going forward.
Okay. I think that was it. I appreciate it.
Thank you.
As a final reminder, if you have a question, please press star then one. At this time, it looks like we have no further questions. I'll now turn it back over to the team for any closing remarks.
Thank you for attending today. We hope everyone has a great weekend.
Great. Thank you. Conference now concluded. Thank you for coming to today's presentation. You may now disconnect.