From Heritage Insurance, the ticker is HRTG. Joining us from the company, we have CEO Ernie Garateix and CFO Kirk Lusk. Before I hand it over, a quick reminder: the Q&A tab is located at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. With that said, Ernie, take it away.
Appreciate it. Thank you, Brandon. Thank you, everybody, for joining us today. As Brandon mentioned, Ernie Garateix, CEO, been with the company since we first founded the company in 2012. I was COO at the time, took over CEO in 2021. Also with us, Kirk Lusk, our CFO. Kirk came with us through the acquisition of Narragansett Bay Insurance Company, which we did in 2017. I'm going to give you a quick overview, and then we're going to get into some details here. Again, super regional company. We operate in 16 states. Yes, we are domiciled in Florida. Quick fact, if you take a look at our personal lines exposures, we have more exposures in the Northeast, predominantly in New York than we do in Florida from our personal lines. I do know we get bucketed in that Florida bucket.
Just to give you a bit on that, $1.43 billion in premiums in force, vertically integrated. I'm a big proponent of underwriting and claims, having those in the specific regions in which we operate. We have all our own people doing the work when it comes to that. As he mentioned, HRTG ticker, market cap $752 million and total equity $329 million, $2.2 billion. If we go to the next page here, I'm going to just quickly talk about some of the highlights here. We have an experienced management team. When I took over as CEO, we did change the management team. We changed the culture, and we changed the strategy. We saw the diversification as a competitive advantage in how we're doing business, just not being a single state carrier in Florida. We set out to do some profitability initiatives. A big proponent, everybody loves the growth.
I love it as well, but not at the expense of bottom line. So we right-sized the company, watched our concentration, had to non-renew where parts of the book were it wasn't profitable, reduce some agents that just weren't aligned with us. And we went through some of that in 2020, 2021, 2022. But we saw the fruits of those efforts come through in 2023, 2024, and into 2025. We'll talk about that in a second. We are not at a phase that we're going back to what I'll call controlled growth. We put a lot of work and effort into the underwriting side, claim handling side, the risk management side, and we're not going to undo it. But we see a lot of opportunities in the markets in which we serve, Florida being one, New York, California, Virginia, and other states. We do value the partnerships.
A big part of our business is the reinsurance program that we have in place. Just a quick highlight, I do not want to steal Kirk's thunder, but we did place our program. We were oversubscribed. We had more reinsurers providing capital than we knew what to do with, which is a good problem to have. As you can imagine, we have very large reinsurers, Swiss , Munich , Trans. We have RENRE on our programs. We are also a data-driven company, meaning our decisions are not made on how we come in and feel that day. They are based on the data that we receive. We have our own data warehouse. We monitor every single state's performance on a monthly basis and make adjustments as needed. That is what drives our strategic decisions.
On the next page here, I'm just going to highlight just real quick the management team, as you can see myself and Kirk. I mentioned I'm a big proponent of having our underwriting and claims in the markets we serve. On this slide, you'll see Tim Mora, who is President of Narragansett Bay Insurance Company. He sits in Johnston, Rhode Island, right outside of Providence and manages the Northeast. We have another Tim, Tim Johns, who's the President of Zephyr. He sits out in Honolulu, Hawaii, and manages a team of 18 folks. Each of these markets are different. New York is different than Hawaii, than California and Florida. We like to have our management team and our underwriting and claim handling folks in those markets because as they change, we understand what's going on and are able to adapt to it pretty quickly.
Next slide is just going to show you here just the states and where we do business. You can see predominantly Narragansett Bay in the Northeast. I'll mention California here in a second. You see the blue, which is Heritage Insurance, primarily from the Carolinas down to Florida and Mississippi. At the bottom in green is Hawaii. We do have California and Narragansett Bay because we saw an opportunity out there, but we did not go into that market as admitted. We went in under E&S. We do have a distinct advantage in which we have three insurance carriers. You cannot be E&S and admitted under the same carrier in the same state. We are able to adapt to different market conditions and bring in both an admitted and an E&S product under two different carriers in the same state. Case in point, Florida.
Under Florida, we operate admitted under Heritage Insurance, but we also have Narragansett Bay doing business in Florida as an E&S carrier. California is only E&S. We did not see the regulatory environment there as being opportunistic, so we went under E&S when it came to Narragansett Bay in California. You can see where we're not Midwest states, but we do see more opportunity and growth in states as we'll kind of look at 2026, 2027, 2028. Next page here. Let's see here. Kirk will turn it over. There you go. Strategic profitability initiatives. I'm going to turn it over to Kirk so we can get into a little more detail about what we're doing going forward.
Great. Thank you, Ernie. As Ernie mentioned, when he took over as CEO, we really launched these strategic profitability initiatives, which really had a three-pronged approach. One is generate underwriting profit, optimize our capital allocation, and manage portfolio diversification and make sure we stay diversified. With that, generating underwriting profit consisted of rate adequacy, eliminating agents that were either not producing or unprofitable, and then also offloading policies that we did not feel were profitable. Also, on top of that was optimizing capital allocation, where we saw opportunities we could go in and grow the portfolio in those areas. Two examples of that are the commercial residential book of business. The other is California, which he mentioned that we went in on an E&S basis.
The other aspect of that is since we operate in 16 states, really to maintain somewhat of a balance within the portfolio so that one state did not become too predominant for us, we could move in and out of states as we saw opportunities for profit. If we did not see the opportunity for profit, we could decrease that state. Really kind of a three-pronged approach. This page shows you kind of the evolution of the company, where we went from top-line focused, then to bottom-line focused. As he mentioned, now we are entering the managed growth phase. This page also gives you an example of the impact of that bottom-line focus strategy. For example, in 2020, you can see where our enforced premiums were, our policies, and our TIV, which is total insured value.
During that period of time, so for example, our policies in force decreased by 32%, while our premium in force increased by 34%. Therefore, we're getting a lot more premium per policy. On top of that, if you look at the TIV, TIV actually went down by 4%, which means you're also getting a lot more premium per unit of risk. Really, therefore, that was really kind of focusing on the bottom line and trying to drive profitability throughout the portfolio. When you look at what that has done from an earnings trajectory standpoint, this looks at the last couple of years and what really is happening. In 2022, again, that number does include $91 million worth of Goodwill write-offs. Again, that also had $40 million worth of retained losses from Hurricane Ian. Even with that, there was a loss there.
2023, we did have Hurricane Idalia and the Maui wildfires impacted us by $40 million pre-tax, but we're able to generate a profit. 2024, we had three events. We had Hurricanes Debby, Helene, and Milton, added up to $105 million, but we were able to generate $61 million worth of income. Also, to give you an idea, looking at the first quarter of this year, we generated $30 million of income, $0.99 per share, yet still had $31 million of California wildfires. When you look at the trajectory of what we've been able to do over the last three years, we think that our trajectory is really just starting. Therefore, we're very happy with the progress that's been made.
Again, the managed growth strategy, there are a couple of things I'd really like to highlight here. We've been closed in the majority of our territory since 2022. We started opening up the third quarter of last year. At the end of the year, we had about 40% of our producing capacity open. By the first quarter, it was closer to 75%. We'll get close to 95% probably by the third quarter of this year. What we did is we closed the territories because when the rates were not adequate, we did not want to write new business and compound the issue. Once that was fixed, now we're starting to open up areas where we are rate adequate. The other thing I would say is that we did have some stabilization of reinsurance pricing, which is also favorable to the markets at this point.
The other thing that I would emphasize here is we're leveraging our existing infrastructure, but also focusing on underwriting and the strategy that really improved the profitability of the underwriting portfolio. Ernie mentioned we have an extensive CAT XOL program. We have a very good panel of reinsurers that support us. He also mentioned the fact that we were overextended this year or over-participated this year from both the bonds and the private placement. To give you an idea of the extent of this, we placed $285 million of more limit this year at a total cost of $7.8 million. That was very favorable to us. One of the things I would also say about reinsurance, in many respects, it is a barrier to entry for some others entering the market.
For example, in Florida, with the increased rates, improved legislation, there's been a number of people that wanted to enter the market, but they were unable to obtain the reinsurance sufficient to enter the market. Again, it's because the reinsurance partners want to do business with who they understand and who they're comfortable with. Again, we've got a great slate of reinsurance partners, very happy with, and continue to look business with them over the next coming years. The investment highlights, we are entering a phase where we're going into managed growth. Our policies in force have dropped over the last several years. We're starting to write new policies in force, but we are going to maintain the discipline that's got us to where we are and to maintain that trajectory going forward. On some of that trajectory, just kind of looking at where we have been.
When you look at equity, for example, shareholders' equity is up 49% from 2022 to 2024. It's also up another $34 million in the first quarter of this year. Therefore, that gives us additional capacity to write. When you think about what the increased equity gives you, you can write about $3 of premium for every dollar of equity. Therefore, even a $39 million improvement in the first quarter of surplus gives us over $100 million that we can write this year just based upon the improvement in the first quarter. Book value, you can see there, it's almost doubled. By the first quarter of this year, that's at $10.62. That gives you an idea of the trajectory of the company that we're looking to sustain. Debt-to-capital ratio, just kind of highlight that. We could take that down from 50% down to 29%.
As of the first quarter of this year, that is down to 22%. From a leverage standpoint, that does give us some availability there also. Operating performance, again, this just kind of highlights where we've been and where we're going year over year. You can see our premiums in force is up year over year. Gross premiums written are up. The reinsurance, our ceded premiums have been relatively flat. Therefore, our net premiums earned are up almost 12% year over year. Net income, you'll see there, is up over 100%. Earnings per share doubled in the first quarter. Again, that is even with the California wildfires that we sustained almost $32 million worth of losses in the first quarter. Focusing on the investment portfolio, one of the things I would also highlight here is we take underwriting risk.
Therefore, from an enterprise risk management process, we try to reduce the amount of risk we are taking from an enterprise basis. Therefore, the investment portfolio is very conservative. When you look at the unrealized losses there, we still had $31 million of unrealized losses. We do have substantial cash reserves, and we do not anticipate selling any of those bonds. As those bonds mature, we anticipate that those unrealized losses are going to roll off the portfolio. Over the last couple of years, we did take advantage of the yield curve, and we did go shorter on the yield curve, taking advantage of that. As the yield curve changes, we will move out a little bit on the yield curve. However, anything over a duration of 3-3.5, we are very comfortable with.
That kind of opens it up for any type of questions that anyone may have.
Great. Thank you, Ernie. Thank you, Kirk. We can now open the floor for Q&A here. Quick reminder, the Q&A tab is located right at the bottom of your screen. Feel free to type in any questions. It looks like we have a couple of questions here. Our first question, when do you see a stabilization of the policy count taking place?
We anticipate that'll be the second half of this year and then starting to grow into next year.
Got it. Any specific geography insight that you can shed light onto with respect to policy growth?
Did you hear that, Kirk?
Yes. Yeah. We will continue to see growth in California because we think that that is a unique opportunity. And again, since we've started opening up, we are going to be open up in probably 95% of our producing areas. You will see most areas, particularly in the Northeast, probably New York, New Jersey, even in Florida, you will see some growth there. There are a few states that are going to be a little bit lagging. Alabama, Mississippi, and Georgia are probably going to be a little bit slower growth, but those other states are probably going to be picking up rather substantially.
Great. Great. Why do not we talk about distribution? Can you talk about the company's distribution strategy, how you work with agents, and maybe talk about the trend in agent count over the past couple of years?
Yeah. So we actually, when we started to right-size the company, right, we have value relationships with a lot of the agents, but there also needs to be some transparency with the agents. We had just some agents where we were not aligned, right? We're not for every agent. We don't take every single policyholder. That being said, the agents that we have now are valued agents. They understand our underwriting appetite. They understand the risks that we're looking at. It is a very strong force. Most of, we have a lot of our agents are in the top five of aggregators that we have out there, but they are 99% independent agents. They truly understand the business that we're after.
Yeah. One of the things I'd also highlight there is we have almost three distinct distribution channels. One is we have the independent agents, and then we have wholesalers, which basically kind of group a number of agents under them. We're able to write that. The other channel we have is what we consider direct, although it's not direct to consumer. It's companies, for example, like GEICO who want the auto business that then will give us the homeowners. Therefore, we have three distinct kind of channels where we're able to get business.
Got it. As a follow-up, do you have any major partnerships? I know you just mentioned GEICO. Any other significant partnerships or partnerships in the pipeline?
Yeah. We do have a partnership with Allstate through Advantage, Liberty Mutual. Those are kind of the majority, the bigger ones that we have.
Got it.
Yeah. AssuredPartners, and we have others as well.
Yeah. And then maybe we'll talk about pricing a little bit and rate adequacy. I guess maybe take a step back and what ultimately influences rates? How do you set your pricing? And I guess, how do you see pricing maybe trending going forward?
Yeah. Let's talk about that, right? What we're seeing is more stabilization in the pricing than what you've seen in the past, right? There was a phenomenon that was kind of going on throughout the regulatory market, which they were suppressing rates, right? There's a catch-up period. You saw that catch-up period. We saw that catch-up period happening here over the past three to four years. Case in point, Florida has been taking double-digit rates for the past three to four years. New York approved this for a 29% rate increase. Hawaii approved it for a 60% rate increase. Now, that sounds like a lot, but if you have to go back and you look historically, rates were basically being suppressed in that 3%-5%, 6%.
I think now what you're seeing is most states are realizing, regulatory environments are realizing they need to keep up with rate. It is tough on us. It's tough on the consumer. It's tough on the agent when they have to take these large double-digit rates. If you stay up with inflation and loss costs, I think you're going to see more single to lower double-digit rates. I think you're seeing a plateau of that over some environments. Now, case in point, California, right? I think that's a whole nother ball of wax, right? When you have a consumer advocacy group that's only going to approve 6%, you're seeing that market go the other way. That's why you're seeing an exit in California on the admitted side, right? Which is why we went into California on the E&S side.
That's an important note because we're not held to the regulatory environment there as far as when it comes to rate or product. If we need 15%-20% in California, it's a matter of programming it a week, two weeks, put it in the system. We do not need to get approval for that.
That's interesting. What ultimately drove that change in the legislative environment? I know you mentioned Florida enabling higher rates.
I think all those higher rates were basically coming on the loss, right? The losses that we were submitting. I think what you saw, particularly in Florida, is where the attorneys had found a loophole in the system. It's the one-way fee statute and the assignment of benefit. At the end of the day, right, we're providing those losses to the state and saying, "Here's our loss cost." Those were elevated higher. That's why they passed the legislation in 2022. We've always told folks, "It's going to take 2023 to get through the books, 2024 to see it come in through the numbers." Now what you're seeing in Florida is loss costs are coming down. Reinsurance has stabilized. Last year, we filed for a 3% rate decrease.
Most people are like, "Well, that's not good." Actually, it is good because losses have come down more than 3%. We're still protecting the margin. We're okay bringing down the rates as long as we can still protect the margin.
Great. That's really helpful insight. Do you see any other markets or states that have had similar regulatory or legislative changes where that can lead to potential opportunities to get your foot in the door there?
Yeah. I'll bring up California. Again, I think what most regulatory environments are seeing is what's happened in California. If you are too restrictive in these markets, the markets are going to leave. And if you really think about it, if those markets are leaving from the admitted perspective, what are they regulating, right? California is a market that I think for the foreseeable future, you're going to see mostly predominantly E&S in that market. Other states have kind of realized that. Now our understanding is we need to keep up with rate. Both New York, Hawaii, Florida, the Carolinas, there's a lot of states that are easier to deal with, right? They understand the insurance mechanism, and we need to keep up with those rates because they want a healthy, viable market where there's options for the consumers.
Whereas right now, you look in California, we're on an E&S basis. We're being asked to bring more capacity and more products because the admitted market is pretty much nonexistent.
Yeah. That makes sense. We can talk about reinsurance. I know that's such a big topic in recent years and the cost of reinsurance rising. How has that impacted your business, and what have your premiums ceded looked like over time? I guess, where do you think reinsurance pricing will ultimately trend going forward?
Go ahead, Kirk.
Yeah. I actually think reinsurance pricing is going to go down. I mean, particularly, I mean, you'll see a couple of years ago, it was going up in the Northeast, and that was actually starting to drive the rate increases in the Northeast. With the one-way attorney fees and AOB, that was driving the reinsurance rates up substantially in the Florida market. The issue is they have not seen the benefits of the legislative change. If there is ever a benefit to a hurricane, Hurricane Milton was large enough that the reinsurers are going to start seeing the impact of the legislative reforms. The issue is lawsuits do not happen right after a storm. They typically, you see them nine, 12 months after the storm occurred.
Hurricane Milton, they'll start seeing the benefits of the legislative reform to Hurricane Milton the second half of this year, which then will probably impact the 2026 renewal for reinsurance. Again, I think that what you're going to see is probably improvement in reinsurance rates going forward, which is then actually could drive insurance rates down further. Again, that doesn't mean that there's margin compression.
Got it. That makes sense. We have a question here on technology spend levels. Can you just discuss your technology spend levels as well as any advantages you think you have in the tech stack relative to competitors?
Sure. We've implemented a new system here. We're on the tail end of it, which is the Guidewire system, Guidewire software that we implemented. Now the claims went first, and then policy and billing has gone second. They're on the tail end. That's going to provide us with a technology. Again, we've always are tech-enabled, and we have that in our system, but now it will provide us to even get more efficiencies as we work through our agents where they're able to quote in literally 45 seconds. We pull more data. We provide more data. We do have more data on our side that is used throughout the insurance process, right?
From an inspection, when we send out an inspection and somebody goes, that's being supplied to our claim handlers as they go so they can see the condition of the home before and after a loss. We do see that as a competitive advantage as we get more efficient throughout our processes.
Got it. You mentioned your capital allocation framework being a key component to that turnaround they executed well on back in 2022 or 2022 to 2024. Can you talk about your capital allocation framework now? What do you see your usage of cash? Do you think acquisitions would make sense? How do you think about your capital allocation framework?
Go ahead, Kirk.
Yeah. I mean, I think we continue to look at opportunities, but it really has to fit from a strategic standpoint. I would say our capital is, when you look at the returns we're getting, really kind of utilize the capital we have for the organic growth. I mean, as I already mentioned, we've got a lot of opportunities throughout our footprint. Since we've just started recently reopening, we can deploy that capital to continue to grow our premiums and again, at good margins.
Great. We have a timely question here. Can you share your thoughts on the upcoming hurricane season?
Yep. So happy to share that. It is in our backyard. We get our friends from Colorado that give us the forecast every year. Look, one of the things that we say is we have that built into our plan, right? We expect the storm. If it happens, we are there for our policyholders. We pay the claim. The idea is we want them to rebuild. We want them to continue paying premiums. We continue, and it is a long-term play. We do not shy away from it. We understand. I think this year they are expecting slightly above average. I will say this. They revised their forecast six times, and then they got it right. Nice job to have. Again, we are a wind carrier. We understand. We have everything from our risk management, the underwriting, all the way to claims, folks that are dedicated to hurricane season.
That's what we operate. That's what we're here for, for our folks on that side.
Great. Great. One more question from the attendees here is recent commentary from the Trump administration has hinted at plans to reduce or eliminate FEMA. Do you anticipate this would have an impact on your business if this does happen?
Not really. I think it would hurt some of the, obviously, folks on the flood side when it comes to that, but really does not have really much of an impact on us with respect to that, maybe to the policyholders who do not have insurance or folks that are underinsured. That might be an issue, especially on the flood. Kirk, any comments on that when it comes to FEMA?
Yeah. No, I don't think there's going to be much impact. I think you're right.
Yep.
Got it. And one more question from me, actually. Can you talk about your underwriting strategy? I know that changed during the turnaround, but how do you anticipate your underwriting strategy going forward?
I think ours is a very disciplined approach, right? We're not for everybody. We are looking at risk, and we get down to a level that we're understanding who's in the home, right? How are they maintaining their home? Even, I take simple, we're able to tell if people are able to replace their roof. If you're able to replace your roof at the appropriate time, that's a good risk, right? There is a difference between somebody who replaces their roof because somebody's brother's uncle's cousin recommended and they did not pull a permit. We have access to pull permits. If somebody's replaced their roof and it's a permitted roof, which means it's been inspected and up to code, it doesn't matter if it's a 1960, 1970 home, right? That's a good roof.
Those are the kinds of things that we get into details from an underwriting perspective so that the risk is there. We understand it's going to be mitigated. If there is damage, we want them to rebuild appropriately and get back.
Fantastic. Ernie and Kirk, we really appreciate the overview. Found it very insightful. Congratulations on the strong execution on the turnaround. We'll conclude the presentation there. Thank you, everybody, for joining us today.
Thank you for joining us. Appreciate it. Have a great day.
Thanks, everybody.