Heritage Insurance. The ticker is HRTG. Joining us from the company are CEO Ernie Garateix, as well as CFO Kirk Lusk. And b efore I pass it over, a quick reminder: the Q&A tab is located at the bottom of the screen. Feel free to type in any questions, and we can save time for a Q&A at the end. But with that said, I'll hand it over to Ernie.
Appreciate it. Thank you, Brendan. Thank you, folks, for being here. We're going to jump right into this. Then at any point in time, if there are any questions, please use that tab, and we'll talk about that either during the presentation or afterwards. First chart here, we're just going to show you real quick a little bit about us. Obviously, we're in 16 different markets. Yes, we're based out of Tampa, Florida, but we have 15 additional markets in which we serve, and each of those are very important to us. They operate under Narragansett Bay Insurance Company up in the Northeast, based out of Johnston, Rhode Island, does mostly Northeast business. Shaded in yellow there, Heritage Insurance basically does insurance down in the Southeast. The Carolinas down to Florida over to Mississippi.
And then we also have Zephyr Insurance based out of Honolulu, Hawaii, wind and HO3 coverage that we have. And then you'll also see California E&S under Narragansett Bay, and we can talk a little bit about that. Next slide here is going to show you some of the initiatives that we set out to do a couple of years ago. Really, just to sum it up, it was focusing on profitability. First and foremost, we're an underwriting company. We need to have an underwriting profit. So it was take rate, terminate a number of agents that were not profitable for us, and business as well, policies that just didn't meet our guidelines, and make sure that we have proper pricing. And some of that is inflation guard.
Also, optimize our capital allocation, disciplined underwriting, understanding where we were going to write and what areas we needed to shut down because we could not get rate at that point in time. And throughout all this is managing the portfolio and the diversity of that. So if you take a look, you sum it up as we were taking rate over that period of time, re-underwriting the book. That took about three years. We are a CAC company, so we know the business that we're in. Fast forward to where we're at now. It is now that is behind us. We like the book. We like the agents. We are rate adequate in 95% of our geographies. The remaining 5% by design, we'll keep closed. Those are just areas in which we do not like the risks that are in there, and we'll keep those closed.
That is now the new message. The message that we have going forward is manage controlled growth. We have plenty of opportunities there. On the next page, we'll just give you a quick little kind of synopsis of the evolution. You can kind of see we were pretty top-line focused, and we understand that piece. But many years of business school tells me that profitability still is one of the most important drivers there. That was the shift in from 2021 to 2024, as I mentioned. Going forward, it is that manage growth. The one thing I will say before I turn it over to Kirk is that will mean that we will continue with our core discipline of underwriting in our selective regions. Florida is different than New York. New York is different than Hawaii. Hawaii is different than California.
We are very big about having underwriters and claim folks in those areas. We do have a commercial residential book, about $273 million in premium. That is commercial habitational, not the high-rises. Those are garden-style villas, three floors and down on that. So the chart is just going to show you during that period of time, especially you can see from 2020 to 2021 and 2022, our PIF count was decreasing. You can kind of see those numbers there at a high of 581,000 to where we're at 363. But the premium was going up, and the TIV was relatively flat. This was all by design as we saw opportunity to take rate and make sure that we underwrite. So with that, I'm going to turn it over to Kirk. If there are no questions, I'll turn it over to Kirk.
He'll talk through a couple of pages here.
Great. Thank you, Ernie. And this page just kind of emphasizes the result of all those actions we take as far as underwriting and the rating actions. So one of the objectives we had was, first of all, become profitable before we start accelerating growth. But one of the other ones was really to start making a profit even in the event that we had a catastrophe. This chart kind of shows 2022 where we did have some goodwill write-off, about $94 million, had a $40 million retention, but still had a loss that year. Look into 2023, we did have a $40 million retained loss, but then started making money. So we were happy with the progress there, but we're still pushing. 2024, we actually have had about $105 million worth of losses and retained premium that impacted that year and still made a really good profit.
However, in 2025, really, we're starting to get the full impact of the rate increases and the underwriting actions, so in 2025, you can see that is year- to- date, so that includes only three quarters where the other years are four full quarters, and we're at almost $129 million worth of net income so far this year. The other thing I would still highlight about 2025 is that still does include the California wildfires, which impacted us by $33 million of retained loss. So even in 2025, we're showing considerable trajectory as far as our earnings, but that still even does include one cat event with the California wildfires. Looking at then, based upon where we're going, and as Ernie mentioned, is we're instituting a controlled growth strategy.
What that involves is in 2022, because of where we had to reposition the portfolio, we had to eliminate some non-producing, non-profitable agents, get rid of some non-profitable business. We actually stopped writing personal lines business in almost the bulk of our territories. We started opening once we became rate adequate, we would start opening up. We started really only opening up the third quarter of 2024. It's been a gradual opening since that time where now, as of the second quarter of this year, we've opened up kind of the last couple areas which we think were rate adequate. Now, that doesn't mean we're rate adequate everywhere. Unfortunately, for example, in Georgia, we still think we need rate. So therefore, we haven't opened up much in Georgia. That's still an area where we're going to look at if we can get the rate in the future, we consider there.
But the rest of our territories, as Ernie has mentioned, we're rate adequate in 95% of our territories. So we're looking at opening up those areas. And now we're starting to move forward. One of the other things I think that's been really favorable for us is our insurance agents. We do a great deal of business through independent agents. And we've been communicating with them over this entire time frame what we were doing, that we're in for the long haul. We want to be a long-term company with them. So they understood our strategy, what we were doing, how we were going to go about it. And we even had a national agent council meeting here recently where we've been talking to them. And so therefore, the receptiveness of us then starting to open up these various markets has been very positive.
And so therefore, we think that is going to lead to our trajectory as far as that controlled growth going forward. So with that, I mean, I'll open it up for questions or anything else that Ernie would like to add on the controlled growth.
Great. We can open the floor for Q&A here. I'll start off with a question. It seems like the rate increase has played a big part in the turnaround, a very successful turnaround. How do you expect competition and the regulatory environment to play into future rate increases? What's your outlook there as it relates to the rate increases?
Go ahead, Kirk.
Yeah. I think that one of the things is it really varies by geography. So for example, in the Northeast, we still got a fair amount of rate this year. Going forward, you're going to see rates be about what claims inflation is, and that's because we're rate adequate. So we're seeing claims inflation run about 4%-8% in most of our geographies. So that's what you're going to see. There is an outlier there, and that outlier is Florida, where we are seeing negative loss trends. And that has to do with a significant amount due to the legislative reforms, the AOB, and the one-way attorney fees. So that is positive. For example, we actually put in a -3% rate increase into Florida this last year. And with the negative loss trends, we think that that could continue into the future.
Got it.
Yeah. One other thing I would add, though, on top of that, we do have Inflation Guard, which we will get an additional amount of premium uptick because of the Inflation Guard factor we do put on policies.
Now, we have a question from the attendees here. Can you share your view on industry consolidation activity? What do you expect your role might play in that activity?
Yeah. Look, we look at the opportunities. We are seeing a little bit of consolidation. But I think what we take a look is it's got to match what our strategic objectives are. We're not out there just to grow the top line for the sake of growing the top line. It's got to add to the bottom line. So we've seen a couple of opportunities. I would just say is that we're selective in the sense of if they've underwritten the book and there's an opportunity there, we're happy to take a look at it. But typically, what we've seen at this point is opportunities come where there are various problems. And I think for us, there's plenty of opportunity organically to grow the company. We're looking at some state expansions, some product expansions as well.
As Kirk mentioned, we have a very strong agency force that are now asking us to bring this model into some other areas, so I think there's plenty of opportunities there as well.
Got it. And shifting to your underwriting and expenses as well, can you talk about your Combined Ratio, where it sits among peers, and also how that's trended over time?
Yeah. Well, it's trended quite favorably over a period of time, kind of reflecting the underwriting actions. And I think we're at a point where it's going to stabilize because of the rate increases we are going to be getting are going to be comparable to the claims inflation. I mean, there could be a cat in a given year which will impact that. But again, since there were no hurricanes this year, but we did have the California wildfires. So that was just slightly less than our typical retention of $50 million for a normal cat. So therefore, it's somewhat of a normal year for us. We think that that's probably going to continue. One of the things we do think that is going to give us some more headwinds is reinsurance pricing. And we can talk about that in a little bit more detail.
But I think when you look at the capacity of the reinsurance, they've had a loss-free year. They're making a substantial amount of money. We're seeing the 101s come in at -5% to -10%. So therefore, we're actually thinking that's going to translate into our portfolio when we renew our cat program on 6 1, where we would expect that to be down about 5%- 10% also.
Got it. Can you give a little bit more detail on reinsurance rates? What's your outlook for rates going forward?
Ernie was just there last week actually talking to one of our reinsurers, so.
Yeah. So I'll mention that. So right now, as Kirk mentioned, we're 61, and 101s are getting ready for the 101s. If you take a look at what's happening in the market, and Kirk mentioned the reforms, there's more capital coming in. The ILS cat bond market continues to grow and be attractive. That is putting pressure on reinsurers to go ahead and deploy more capital out there. What we're seeing reinsurers say is, "Look, we're going to go first with our valued partners." So that's going to drive some pricing down. So I would expect, and the one thing to always remember is Milton is a very good example that happened last year. That was a loss to the market. Obviously, the reinsurers picked up on that. But what they're seeing are expected losses, not the unexpected losses that we saw from Irma and a couple of other storms.
So that is lining up with the models, with the pricing, and what they see from an expected loss standpoint, which means they're happy to bring more capital into the market. So you'll see that you should expect those to go down.
Got it. And geographically, what states are really driving the best ROE at this point in time? And maybe what geographies are you looking at potentially stepping out of or shrinking?
So I think Kirk will give you this number. But I mean, Florida right now probably has the highest ROE. And again, if you take the combination of all the litigation reform and the losses we saw, you take all the rate that Florida market has taken in excess of 30%-40%, 50% rate, and now reinsurance being stable for the last year and probably coming down, I think that's where you're seeing the greatest. Kirk mentioned Georgia. Georgia is just a state where we've taken that down. Interesting enough, Georgia is introducing this year legislatively a bill that looks much like the Florida reform. So states are catching on to this that could be a driver that drives insurance companies away. So they're looking to add some reform.
Yeah. So as far as that, so Ernie is correct, absolutely. Florida has our highest ROEs. The other ones that I would rather have notable mention is Massachusetts and California. And again, California, we're there only on an E&S basis. So therefore, we can control the rates. We can control the form when we write, where we don't write. And so therefore, that's been a big advantage for us. We think that there's also continued growth potential for us in California.
Got it. Any other new markets that you think you might look to grow into in the near term?
So Virginia is a new state for us that we've been growing. We've been very happy about that. We're also looking at some other state expansions, something like a Texas Tier 1. We've got a number of reinsurers and agents that are looking to support us on that. And again, it's a similar play. We understand the wind risk. We understand the reinsurance play. To Kirk's point, we would probably go E&S there so that we can control the rate as we first come into a market.
Got it. And can you share retention levels and your near-term goals on that front?
Yeah. As far as our retentions on cats or loss retention or policy retention?
Policy retention.
Policy retentions have been in the mid- to upper 80s, and that is when we were taking fairly substantial rate increases. We do a price elasticity on a monthly basis kind of to see what the impact that is. With us now, the rates going closer to what claims inflation is. Therefore, they're going to be probably on average between the 4%-8%. We would expect that retention to start picking up even into the upper 80s, low 90s.
Great. That's helpful, and looking at capital allocation, I think you mentioned you recently resumed share buybacks. What are your capital allocation priorities, and at what levels does it make sense for you to start buying back stock?
Yeah. From our standpoint, we've set our priority as, first of all, use capital for growth. When you look at our ROEs, ROE this year year-to-date is a little over 40%. We're obviously very pleased with that. And as long as we can generate extremely positive ROEs, we're going to use that capital to deploy it for continued growth. Second one is stock buybacks. We think from a shareholder standpoint, that is a very good return. It's a good use of the capital. And then thirdly is we have dividends that we can return to shareholders in the event that we think that our ROEs are not sufficient and stock buybacks are not going to be that beneficial, then we would be looking at dividends. And that is looked at every quarter by our board as far as whether we do a dividend or not.
As far as where we look at that, we think that our stock price is still undervalued. Despite the increase we've had this year, we're happy with the increase, but we don't think we're still being valued correctly. So therefore, we look at when we think we're undervalued, we will look at, hey, where we have excess capital, we would use that for stock buybacks.
That makes sense, and can you talk about the competitive dynamics just with your success on the rate increase front? Have you started to see a lot of other players step into the market, or what's the competition like?
Yeah. So we have seen new players come into the Florida market. I'll use that as an example. But there's two camps here. There are existing companies that put in reciprocals, new reciprocals, and then there's new companies that have come in. The business plan is pretty much the same. They will come in. They will do a Citizens' takeout. And then in the next foreseeable futures, they go and do a voluntary program and run out there. We've not done a takeout since 2018, am I right, Kirk? We've been focusing on the organic growth. The one thing to kind of consider there is Citizens have now, I think they're projected by the end of the year to be under 500,000 policies as a residual market.
Based on the size of Florida and the population growth it's seen over the last couple of years, it's probably about the right size that it should be, but here's what we've always said. We are all for and support responsible competition. That being said, some folks will do some things that we will not follow and we will not chase. It's why we like the diversification throughout our portfolio into different states, and if we see things in a particular state that just doesn't make sense, we can hit the pause button. We can hit the brakes. We can turn the dials down and continue to grow in the other states.
What's your market share in Florida at the moment?
Do you have that handy, Kirk?
It's probably just a little less than 3%.
Percent. Yeah. I think it's right under.
Yeah. Because before we started, some of the decreases, we were right at about 3%, 3.4%.
Got it. Got it. Maybe as a closing question here, what can investors really take away? What's the market misunderstanding about your story at the moment in the stock price?
I think the biggest misunderstanding is that when there's a storm, things are always going to be bad. Our business plan has always been, we understand the markets in which we serve. Our business plan counts for events that are in there. And I think what Kirk showed can't be just minimized, the fact that we've had events and the plan is we will make some money continuing forward. It's a long-term plan. And when we don't control the weather, we understand that. But when the weather is good and there's ways to mitigate some of that with reinsurance and other things, that we can turn a very sizable profit for the organization and continue to build that. We know who we are. We're not running into the middle of the country. That is a volume game on low price. That is not us.
I think understanding the model that we have, being underwriters, being claim folks, different regions, and how that diversification comes into the portfolio and plays out, is an important aspect for us.
Absolutely. And on the expected loss front, do you disclose what your expected net loss might look like in a one in 100 kind of event?
A one in 100 year event would basically be what our retention is. We do disclose that. We actually put out a document as far as what our towers look like. We buy to one in 100 year event on all our entities except for HBCIC, which is Southeast. We buy to 1 in 130 year event. Our retention on that is $50 million.
Got it. That makes sense.
Yeah. And that's up this year. As we grew a little bit this last year, that type of stuff, previously it was $40 million. This year it's $50 million.
That makes sense. One attendee question here. I'm just asking about management stock sales as of late. I'm not sure if you have any comment there, but any comments on that front?
Yeah. Look, I'm very transparent. So our comp for the last couple of years has been heavily on the comp side, on the equity side, on the stock side. And I talk here to folks and say, "Diversification, diversification." When my entire portfolio is 78% on one stock, which is Heritage, I'm very proud of. But as a financial advisor, someone said, "You're not doing a great job." So we are, at least I am, and Kirk as well is taking a little bit off the table given where the stock price is.
That makes sense. Great. Well, it looks like we're showing no further questions from the attendees here. We can conclude there. I'll pass it back to you for any closing comments.
Yeah. Look, we do appreciate everyone attending. And if there's any follow-up questions, I'm sure Brendan and the Sidoti team is happy to answer any of those.
Absolutely. If anybody has any follow-up questions, feel free to contact Sidoti. Ernie and Kirk, really appreciate the time and the overview today.
All right. Thank you, Brendan. Thank you, everybody.
Thanks, everybody.