Okay. Welcome everybody, and thank you for joining us today at the Sidoti March Small Cap Conference. My name is Brendan McCarthy. I'm an analyst here at Sidoti, and I'm very pleased to welcome Heritage Insurance, the ticker is HRTG. Leading the discussion from the firm will be CEO Ernie Garateix, as well as CFO Kirk Lusk. Ernie will be joining us momentarily here. But before I hand it over, a quick reminder that the Q&A tab is located at the bottom of the 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, I'll pass it over to Kirk.
Great. Thank you, Brendan, and really appreciate everyone taking the time today. Let me give you just a quick overview of the company, and then we'll kind of proceed to the financials. First of all, you know, we are a super regional company. We operate in 16 states, and we've got a good diversification across our footprint. When you look at our exposures, you know, we've got the Northeast at 47%, Southeast, which is 29.3%, Mid-Atlantic, and then Western Pacific. The Western Pacific consists of California and Hawaii. So we are a geographically diverse portfolio. When you look at our market cap, about $257 million, we're now at $1.43 billion of premium, with a book value per share of $16.39. We do have two Kroll rate...
two ratings, both Kroll and Demotech. Kroll rates the holding company. Demotech is the insurance companies, and Kroll also does the insurance companies. When you look at our investment highlights, and again, I'll go through this quickly, we have an experienced management team, vertically integrated from claims, underwriting, policy servicing, customer service, finance. I mentioned the geographic diversification. You know, I'll review our strategic profitability initiatives, and we're returning to growth, and then our reinsurance program, and then technology. Our team, you know, and I won't spend any time on this. I'll review it a little bit later. This is our entity structure. One of the keys we have is three insurance companies. We have Heritage Property & Casualty, Narragansett Bay, Zephyr. Osprey is a Bermuda entity, which is a captive we utilize for internal purposes.
When you look at our geography, our geography is positioned where Narragansett Bay writes in the Northeast and then also in California. California is exclusively an E&S policy. We've got Heritage Insurance in the Southeast and then Zephyr out in Hawaii. One of the things that we did and also announced in our first quarter earnings release is that we also will be entering the state of Texas, Tier 1 and Tier 2, which is along the coast. One of the advantages we have is we have the economies of scale of a super regional company, but the nimbleness and the flexibility and the speed of execution of regional companies. With our insurance companies, you know, spread out the way they are, we have management in each one of those entities with underwriting there also.
We're staying in tune with what's going on in the market and can respond accordingly. Similarly, we also have underwriting and marketing in California, and also as we enter Texas, we will have marketing and underwriting in that state as well. You know, strategic profitability initiatives. We launched this in 2021, where really up to that point, we'd been a very rapidly growing company, and with the new CEO, Ernie Garateix, the focus was in moving into long-term profitability and viability. With that, the strategic initiatives are really focusing on rate adequacy, maintaining the diversification, really optimizing our capital structure. At that time, we also, you know, did increase our commercial book of business by about $150 million, where we saw an opportunity there. We did close a lot of our geographies for new business.
We terminated a number of agents. We also went through state by state and eliminated the bottom 10, in some respects, 20% of the non-performing policies to basically get the trajectory of the profitability that we were looking for. When you look at that evolution, this graph really kind of exemplifies what we were able to accomplish over this period of time. Over the period of time, in-force premiums increased by over $500 million, while our policy count went down by almost $200,000. At the same time, which is the gray line at the bottom was our exposures, were relatively flat. What this relates to is really we're getting more premium per policy and more premium per unit of risk, which you can also correlate that to increasing in margins. The result of that was also the income trajectory.
In 2022, did have a substantial loss, and a big part of that was the writing off of goodwill. You know, when you look at that $94 million of goodwill, we also had $40 million in cats that year. 2023 also included cats that included the Maui wildfires and then Hurricane Idalia. 2024, very proud of that year. You know, the income did increase a little bit over 2023, but also that year had three hurricanes. Had Hurricane Debby, Hurricane Helene, and Hurricane Milton. We paid out over $105 million in cat losses in that year and still made $61 million. To us, that was kind of an inflection point of kind of what we were trying to aim for, is be able to withstand the events, still make money.
2025, you know, record year for us at $195 million, almost $196 million of net income. However, that still included a very large loss at the beginning of the year, which was the California wildfires, which, you know, we paid out $32 million on that. It does show the positive trajectory of the earnings of the company and kind of what we were setting out to accomplish. From that, we're now instituting a controlled growth strategy. From that we mean we've opened up for personal lines. We're rate adequate in a little over 90% of our geographies. We're open for new business in those geographies.
There are still a couple areas where the regulator's not allowing us to get rate or it's difficult to get rate, which will remain closed until we're rate adequate and we think the environment is ready to grow there. We have also during this period of time, taking substantial rates, you know, in many states, double digit, you know, increases. One of the things you will see going forward is those rates are going to mitigate simply from the standpoint of now that we're rate adequate, you're going to be seeing rates comparable to whatever claims inflation is, so we can maintain margins and keep up with rates. The other aspect you'll see is that our PIF count, our policies in force will also start to level off and increase.
Unlike the previous page where you saw our policies in force continue to decrease, we are going to start increasing our policy count, you know, this year. You know, one big aspect, you know, that we've also focused on is mitigating the losses from major cat events and therefore controlling some of our volatility. Part of that is our reinsurance program. Our largest spend on the reinsurance program is our Cat XOL program, which covers all our insurance entities. Our retention last year was $50 million for a first event, and as far as us where we buy our reinsurance to, for the Southeast, we buy to a 1 in a 130-year event, and for the Northeast and Hawaii, we buy to a 1 in a 100-year event.
We also augment our reinsurance program with cat bonds, and we just announced this year we went out with two new cat bonds to replace two other bonds. We went out with a $100 million Northeast bond and a $150 million Northeast Hawaii bond. Both of those have been closed fairly recently. Again, the reinsurance is a big part of our program. We are seeing reinsurance rates drop this year, particularly on the Cat XOL program. The 1/1 renewals were anywhere from 5%-15% rate decreases. I think that we're anticipating that for the 6/1 renewals for our Cat XOL program, you know, we think that could be in the 10%-20% range, you know, barring any, you know, major events between now and then.
There is a lot of capacity now available in the reinsurance market, which not only was last year a loss or low loss year, but then also with the increased capacity that's putting the pressure on the pricing. Also, as far as mitigating our losses, we do buy an extensive amount of other reinsurance. We buy per risk. We buy a net quota share program in the Northeast, which we've had for a number of years. We buy facultative, and both the per risk and the facultative reduce our losses on any loss to one particular risk. That's another way where we try to mitigate our losses for large losses and control the volatilities to a certain extent. The other thing I would highlight on this page is our reinsurers.
We have an excellent slate of reinsurers that have been doing business with us for a number of years. Those are either A-rated or better or collateralized. I would say that the relationships with our reinsurers have been very positive. They've grown with us when we wanted to grow, and that is no exception this year, that basically they've indicated to us that the capacity is there as we need it. We're very fortunate with the reinsurance partners we have, and it's one of those things we built up over the last several years with meeting with them, understanding our strategy, understanding what we were going to do from a rate standpoint, what we were doing from an underwriting standpoint, and so at this point, we're positioned very well for that. Technology. We consider ourselves a data-driven company.
We want to make data-driven decisions that are going to impact the profitability, and therefore we rely heavily on the technology. We have recently converted our system over to Guidewire, which gives us additional capabilities that we previously didn't have. It gives us ability to then do things with more mobile applications. It also gives us ability to layer in AI capabilities, predictive modeling capabilities, and also some of the even customer service aspects which we can layer into the system. I think it's a system that's going to, you know, be able to give us competitive advantages going forward, even as AI continues to expand. Investment highlights, again, we're a super-regional company. The strategic initiatives have given us what we wanted.
They've given us the results we anticipated, you know, and now we're going to be entering the controlled growth phase. Couple of financial highlights here. I would indicate, you know, when you look at, again, the premiums in force over a period of time have increased steadily as our policy counts have decreased. We've done that. That was by plan. Again, now we're looking to grow our PIF count as we've reached a rate adequacy. Financial trajectory. This is just a few of the financial metrics we have. The success we've had has not only been on the income statement, it's also been on the balance sheet. I just here's a few highlights here. For example, shareholders' equity is averaging almost 60% increase year-over-year since 2022.
You know, our book value per share, as I mentioned, is $16.39. You know, it's almost at 15% per year. Cash invested assets is up over 10%. Our debt-to-capital ratio is down to 13% now. We did refinance our debt facility last year. That consists of a $75 million term loan, a $50 million revolver, and a $75 million deferred term loan, which was deferred for up to two years. That gives us plenty of access to the, you know, market, the debt market, in the event that we want to leverage it. It's available to us, and particularly with a debt-to-cap ratio of 13, you know, that is definitely available to us. You know, operating performance. This is just the fourth quarter.
The only thing I'd highlight here is, again, fourth quarter was an excellent quarter with us. We did not have any major CAT events in the quarter. You know, we did have net income of $66 million, which was $2.15 for the quarter. Frequently, the fourth quarter is our best quarter. This year, that was no exception with the $66 million. Capital management. As far as what our capital management strategy is, we have it in three buckets. The first one is we will use capital for growth. Where we can use capital to grow, maintain our margins, and show solid ROEs, that is what we'll be using the capital for. We also think that our stock is undervalued, so our board did approve a $25 million stock buyback in December of last year.
We've already started executing on that, and we do think that stock buybacks are a good return for our shareholders, given the fact that we think that our shares are undervalued. Thirdly is dividends. At this point, our dividends are suspended. They've been suspended for about three years. Again, we'll look at the first two priorities. We do see the advantage of dividends by being able to expand our investor base. At this point, given the priorities of the capital growth and then also our stock buybacks, that is being remaining suspended, at least at this point. The board of directors does look at that on a quarterly basis. The other aspect is our investment portfolio. As we indicated, you know, we have over $1.1 billion of cash and cash and investments. It is a very conservative investment portfolio.
We take substantial underwriting risk. We try to mitigate that. With that, we also, from an enterprise risk management standpoint, limit the risk we're taking elsewhere. That does include our investment portfolio, which is conservative. The duration is over three y ears now. For a while, our duration did dip under three years simply from the standpoint of with the inverted yield curve, we were taking advantage of the yields shorter on the yield curve. Since that has subsequently changed, we've gone out and laddered our portfolio a little bit longer on the yield curve. You know, you will see that, you know, still remain within the three to probably 3.5 range for a duration. Again, we'll take advantage of the yield curve as it provides opportunities for us. With that, I'll turn it over for any questions you may have.
Great. Thank you, Kirk, for the overview. We have a couple questions here from our attendees. What do you view as a normal or baseline level of payouts, or CAT losses due to hurricanes or any other CAT events?
We assume typically about one event and then one SCS event. So when you look at last year, you know, the California wildfires would be comparable to an SCS event and then one event. So that would be probably about $50 million of retention for us, would be one event. Again, that would be events going from, you know, $50 million up to $1.8 billion would just cost us the $50 million.
Got it. You've, you know, taken up rates in most geographies. I think you mentioned 90% of geographies, you're rate adequate. Where do you stand today in terms of rate adequacy and compared to loss expectations across the different geographies?
I would say there's really only one area where we are not rate adequate right now, and that is in Georgia. Simply from the standpoint, the legal environment has changed in Georgia and, you know, we did file for a fairly substantial rate increase a couple years ago. They were not going to give us what we felt we needed, so therefore, we felt like we were gonna be writing policies, you know, that for each policy would be underwater. We discontinued writing new business. However, we are looking at the state again. I know they are going through tort reform right now, and I know that they are looking at possibly looking at giving people rates. We will be in discussion with the Department of Insurance in the very near future.
I wouldn't rule Georgia out at this point. It just up to this point, it hasn't been an area where we've been rate adequate. Other than that, we're rate adequate across the board. I would say Long Island, New York is an area where we just became recently rate adequate, which we've just opened up for new business in the last few months.
Understood. As you think about the Florida market, you know, just your strong results there given the you know lower number of weather events in the past year, and then also kind of factor in the rate increases that you've put into place, are you seeing any signs of policyholder churn or any competitive threats there in that market?
We've seen competitive pressure on the commercial book. So the commercial residential, and again, we write the four stories and down, so it's referred to as a garden style. We have seen a lot of more pressure on the commercial side. We haven't seen that much pressure on the personal side. You know, and I think with the number of companies that have come into the market, almost all of them are going to do takeouts. I would say that based upon where we're seeing the policies at Citizens now, it's under 400,000. I think the takeouts are probably going to dry out, and some of that business, they could be looking for the voluntary markets. With that, I mean, we did take a 3% rate decrease in Florida each of the last two years.
Again, that is because the loss trends are negative. I wouldn't be surprised if there is a further rate decrease in Florida simply from the standpoint, you know, and that's really not competitive driven, that's loss driven. Therefore, the legislative reforms that the Florida state put in a couple of years ago is having a very positive impact. I mean, our loss trends are coming down, and I'm sure that, you know, many other companies, their loss trends are coming down also. I would say that the losses, the premiums coming down in Florida is a result of the loss trend instead of competition at this point.
That makes sense. That's helpful insight. Let's talk about your entrance into the Texas market. Why is now the right time for Heritage to enter that market?
We've been looking at Texas for quite some time now. Again, we'll be along the coast, Tier 1, t tiers. We won't be moving inland where there's more severe convective storms. We had a national agents convention here where we had all our agents, our base, our national heads of agents coming in here. A lot of them have locations in Texas. What they were saying is that they're riding a fair amount, Tier 1, on an E&S basis, and they're riding it through Lloyd's vehicles, and also the capital is very limited. Therefore, they're looking at a fairly substantial opportunity for us to go into Texas, particularly with where we have agents we know, we automatically have an initial distribution network, which gives us the capabilities to kind of go in, understand the market.
We are going in on an E&S basis, so we can adjust our rates very quickly if we need to, and then also our coverages. It's one of those things I think that our agent force would like just to go there. We've been looking at it for a period of time thinking it was a good opportunity, and so therefore it's kind of an alignment there where now is the time to basically enter the market.
Got it. Can you talk about the rate environment there, any regulatory pressure?
They did tort reform years ago, actually even before Florida. If there is any competitive pressure, it probably comes from TWIA, which is their wind pool. You know, they bought a little bit less reinsurance this year. When we look at their pricing, you know, we do think that they are underpriced in some areas, so therefore that is going to limit growth in some areas. We do think that there's still opportunities from looking at agents and looking at pricing across that entire footprint, that there is gonna be opportunities for us for basically a long, steady growth trajectory.
Got it. Are you eyeing any other markets or geographies that look attractive to enter?
We're looking at some. Right now, none of them have raised to the point where I could, I'd say it was imminent. We're continuing to look at markets that are either, you know, distressed or we think we can fill a market need with either admitted or E&S products.
Got it. Looking at this past year, you know, record net income in 2025, you have a massive increase in book value per share. I guess maybe it's tough to quantify, but how much of that do you attribute to, you know, just kind of a more benign weather environment in places like Florida, versus, you know, your structural turnaround initiatives that you've executed quite well on?
Yeah. Again, I mean, I think you know, the thing. One of the things a lot of people say, "Hey, we didn't have hurricanes this year." There were a lot of hurricanes. They just made right turns and went across Bermuda, which, Bermuda, you know, we were actually out there last week, and everyone was more than happy to go ahead and take those instead of us. The wind still blew here. I would say it was probably one event. Therefore, when you look at probably a typical year, there might have been one event which would have cost us $50 million, which would be more on an ongoing, consistent basis.
Because when you look at the California wildfires, that would have been comparable to a, you know, a fairly severe convective storm or winter storm type event.
Understood. We have a question here on distribution. Can you talk about your current agent level or agent count, and do you anticipate any meaningful changes in the near term?
The agency count is several thousand agents. We have more in the Southeast than in the Northeast. You know, Hawaii has a relatively confined population where it's less than 100 agents out there. As far as us expanding our agency distribution in Texas, yes. In the rest of our footprint, probably not a lot. Simply from the standpoint, we value the agent relationships we've had. They've stuck with us through the tough times. They were the preferred agents that, you know, obviously had good profitable business, were writing ample business with us. Therefore, as we open up in new territories, you know, we have a tendency to favor them as opposed to, you know, opening it up to a bunch of new agents.
Again, it's the partnership that we've developed there, and so therefore, I would say that there's probably not going to be a massive amount of new agents there. We do have some, what I would consider, direct writers, and it's not true direct. It would be like GEICO, where GEICO does write the auto and then gives us the homeowners. That's another channel that we have.
Great. That's helpful. I think you mentioned you initiated a $25 million buyback authorization.
Yep.
How can we kinda think about your allocation towards the buyback, you know, as it relates to where your stock price is compared to book value? Is there a certain threshold of, you know, book value or multiple that you'll, you know, lean into the buyback? Is that, you know, authorization that you'll consider taking up if, you know, or relative to where the stock price is?
Yeah. We'll always look at the stock price and kinda where it is. I mean, you know, we did buy back an additional $3 million in the first quarter alone. That was actually even before, I would say, before we really got the program going full speed, where we did, you know, buy back the first quarter. We'll continue to look at that throughout the year. Again, I think that, you know, when we look at it from an earnings per share multiple standpoint, I mean, you know, we're below 5, you know, and we think 6 or 7 is probably, maybe even 8 is a more appropriate number for that, you know, EPS multiple.
Great. Well, Kirk, we really appreciate the detailed overview. I'll pass it back over to you, for any closing remarks or maybe just summarize what investors are really missing here.
Yeah. No, I think a couple things. One is the turnaround that we've had over the last several years, the focus, the underwriting, you know, our ability to basically control the volatility to a certain extent. And then really, I think, you know, we're here for the long term. Other than that, really appreciate everyone's, you know, time today, and thank you, and feel free to, you know, reach out to us any time.
Fantastic. Thank you, Kirk. Thanks, everybody, for joining us.