Good morning, and welcome to the Heritage Insurance Holdings First Quarter 2026 earnings conference call. Please note today's event is being recorded. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on a touch-tone phone. To withdraw your question, please press Star and then 2. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead, sir.
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.
Thank you, Kirk, and good morning, everyone. I want to start by putting this quarter in the proper context because it's the direct result of the strategy we've been executing for several years now. When I became the CEO, our focus was very clear. We needed to achieve great adequacy, tight underwriting, reduce volatility, and protect the balance sheet. What you're seeing today is a result of that work and the beginning of the next phase of our strategy, which is opening for new business to prudently grow and further diversify our business while maintaining acceptable margins. Our first quarter was strong and in line with our expectations. We earned $36.5 million or $1.19 per share, making this the most profitable first quarter that the company has delivered since becoming public in 2014.
We also reported the lowest first quarter net loss ratio since 2015. These results reflect steady underwriting execution, the full impact of our prior rate action, and disciplined expense management. The improvement in the net loss ratio was driven by favorable attritional loss performance, lower weather-related losses, higher favorable loss development, and the continued positive impacts of the underwriting and pricing actions we have taken over the past several years. Retention is strong, rate adequacy is firmly in place throughout our book of business. Our personal residential in-force premium grew 1.4% over the prior year quarter, while our commercial residential in-force premium declined 7.8% as we continue to see competitive pricing pressure in the Florida commercial market.
Heritage has been in the commercial residential market for over 10 years and has built a well-performing portfolio managed by a deep bench of experienced underwriters and claim adjusters for that product. We will not waver from our commitment to achieve adequate margins. To the extent competitors offer commercial residential products which are inadequately priced, we will not follow suit. Instead, we are leveraging the expertise of our commercial residential team to expand this product into other states, most recently Hawaii, where we can achieve appropriate risk-adjusted returns. We achieved great adequacy across 90% of our geographies and continue our efforts to ramp up new business and prudently grow our book of business while maintaining underwriting discipline, maintaining profitability, and managing risk.
Over the last 5 years, we deliberately took actions designed to improve the quality of our book of business and charge adequate rates, which ultimately reduced our policy count. This trade-off benefited our shareholders and stabilized our results. Given our current position, we are in the process of expanding our product offering and identifying new opportunities for Heritage to meet the needs of our policyholders and agents. As we enter this next phase of responsible growth, we continue to evaluate our markets to meet our customers' needs for coverage at competitive pricing. Loss costs have fallen, and we expect the cost of reinsurance to also decline, which will benefit our policyholders through premium reductions while we maintain margins. At the same time, we continue to cultivate agent relationships in our reopened territories.
The early results are encouraging, with new business written up 62.7% from the first quarter of 2025 and over 30% from the fourth quarter of 2025. We are encouraged by our results this quarter and remain optimistic that our initiatives will result in growth throughout the year. Importantly, our policy count trends continue to improve sequentially. While we are seeing a few states with double-digit policy count growth, others are beginning to ramp up, and we are overall seeing positive growth rates. The management-driven policy count reduction over the last several years continue to moderate and points to a growth inflection in the coming quarters. Retention also remains strong at approximately 88%, reinforcing our confidence that we are on a solid path towards sustainable growth in our policy count.
As we discussed last quarter, we are exploring additional strategic growth opportunities, including our planned entry into Texas on an excess and surplus lines basis. Our significant market research indicates this addition to our product line, which we expect will be modest in the first year and nicely aligns with our strategic initiatives. Production will focus primarily on tier 1 and select tier 2 geographies, which are closer regions within our risk tolerance. We will leverage both existing agent relationships and new distribution partners. Consistent with our approach of delivering regional expertise, we intend to have underwriting, claims, and marketing professionals located in Texas to remain closely aligned with local market dynamics. This provides us with the speed, flexibility, and market knowledge of a regional company with the economies of scale of a super-regional company.
As always, we will maintain a strong focus on underwriting discipline, exposure management, and rate adequacy. Heritage is now performing well with a diversified book of business, a strong balance sheet, significant cash from operations, and flexibility to take advantage of emerging opportunities. We have built a culture and infrastructure that generates a sustainable competitive advantage by focusing on data-driven decisions, execution, and disciplined processes. Our focus is on opportunities that are strategically aligned with our core capabilities and provide solutions in challenging or dislocated insurance markets. Any potential business opportunity must meet our strict financial and risk-based criteria. We require a deep understanding of the target market, including loss history, regulatory environment, reinsurance implication, and key risk drivers, and we will only pursue opportunities that are expected to generate returns in excess of our cost of capital.
Importantly, we are focused on maintaining prudent exposure management and ensuring that any transaction does not introduce undue enterprise or reputational risk. While competition has increased, our view is that not all of the operators in our space will be able to effectively manage the complexities of the market cycles. To the extent that consolidation opportunities emerge, we believe our scale, balance sheet strength, experienced workforce, and local expertise positions us well to selectively evaluate opportunities that meet our discipline criteria. Before I wrap up, I want to briefly touch on technology and artificial intelligence, which are important enablers of our strategy. We are actively deploying AI tools across the organization to improve efficiency and customer service, as well as provide better tools for decision-making while maintaining appropriate controls and oversight.
AI will continue to reduce manual effort, improve accuracy, assist with better quality control, and provide analytics that will assist us in aligning staffing needs to customer demands. We expect that we will continue to enhance these capabilities for improved quality and customer service. Additionally, we continue to see the benefits of tort reform as industry loss expectations for Hurricane Ian have been steadily falling, largely due to reduced litigation, which benefits not only us but our panel of reinsurers. Given the improved litigation environment in Florida, the lack of catastrophe losses in our markets during 2025, and the reinsurance capacity entering the traditional and insurance security markets, we remain optimistic that reinsurance pricing will continue to improve in 2026. We believe that favorable reinsurance terms will benefit the consumer with respect to the cost of insurance.
To conclude, this quarter reflects the steady execution of a strategy we put in place several years ago. We delivered strong results, maintained underwriting discipline, and have firmly positioned the company to pursue controlled, profitable growth going forward. I would also like to reiterate our dedication to navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value, and customer service driven by our dedicated workforce, who I would like to personally thank for their efforts. Sir, over to you.
Thank you, Ernie, and good morning, everyone. Starting with our financial highlights, we reported net income of $36.5 million or $1.19 per diluted share for the first quarter of 2026. Compared to $30.5 million or $0.99 per diluted share in the first quarter of last year. This is a great start to the year considering that this is the highest first-quarter earnings in our history despite weather losses in the Northeast, combined with the seasonality of our earnings. Since we regained profitability footing in 2023, the first quarter has made up 23% of our annual earnings. This bodes well for the rest of the year. The increase in our first-quarter earnings was primarily driven by lower net losses incurred and higher investment income, partially offset by higher operating expenses.
The earnings generated an ROE of 28.5%, while average shareholder equity increased by 65.5% from the prior year quarter. Premiums in force totaled $1.427 billion, down 0.4% from $1.432 billion in the prior year quarter. The decline continues to be primarily driven by competitive market conditions in the Florida commercial residential market, where we remain disciplined and focused on rate adequacy and adequate margins, as already noted. While we continue to see opportunities, we will only write policies that meet our pricing and underwriting standards. Gross premiums earned were $353.6 million, essentially flat with $353.8 million in the prior year quarter. Lower commercial residential activity was largely offset by growth in the personal residential lines.
Net premiums earned totaled $199.7 million, also consistent with the prior year as ceded premiums were relatively flat. Gross premiums written were $346.7 million, down 2.6% quarter-over-quarter, primarily reflecting the reduction in Florida commercial residential business. Our net loss ratio improved to 45.9%, a 3.8 point improvement from 49.7% in the prior year quarter. The improvement was driven by lower net losses and loss adjustment expenses, including lower weather losses and continued favorable attritional loss performance. Additionally, we experienced higher favorable prior year loss development this quarter. These results reflect the positive impact of sustained underwriting and rate actions taken over the past several years.
The net expense ratio increased modestly to 35.2% from 34.8% in the prior quarter, driven primarily by higher human capital related costs, with net premiums earned remained relatively flat. As a result, the net combined ratio improved to 81%, a 3.5 point improvement from 84.5% in the first quarter of last year, reflecting the improvement in loss ratio, partially offset by higher expense ratio. Net investment income increased to $9.9 million, up 15.1% from $8.6 million in the prior year quarter, driven by higher invested assets with relatively stable return. We continue to maintain a high-quality conservative position investment portfolio that is well-matched to our liabilities. The effective tax rate for the quarter was 25.6%, compared to 23.8% in the prior year quarter.
As a reminder, we calculate income tax expense during interim periods based on estimates which can fluctuate as assumptions are updated throughout the year. Turning to the balance sheet, we ended the quarter with total assets of $2 billion and cash and invested assets of $1.27 billion and stockholders' equity of $520.4 million. Book value per share increased to $17.15 as of March 31, 2026, representing an increase of 4.6% from December 31, 2025, and 61.5% from the first quarter of 2025.
The increase from year-end 2025 was driven primarily by net income, partially offset by a $3.4 million net of tax increase in unrealized losses in the fixed income portfolio and the repurchase of $10 million of common stock during the quarter. Non-regulated cash at quarter end was $65.8 million. Cash flow from operations was $24.9 million, and combined statutory surplus was up $15.1 million to $407.6 million from year-end 2025. Importantly, our debt to capital ratio has been steadily declining as earnings power and cash generation of the company has improved. That is now 13% at the end of the first quarter, which is a remarkable improvement and a testament to the successful implementation of our strategic initiatives.
Additionally, we now have significant non-related cash, solid cash flow from operations, adequate room for leverage and increased statutory capital, which together position us well to support growth as our open territories continue to scale new business production. As the earnings power of the company has increased, we have continued to build capital, which we are prioritizing for organic growth or other growth and opportunistic share repurchases when we believe our shares are undervalued relative to our financial performance and future earnings potential. Year to date through today, we have repurchased 446,884 shares of our common stock for $12 million under the Board-authorized $25 million share repurchase program. Yesterday, the Board of Directors approved a new $50 million share repurchase plan, replacing the current plan. The new plan is effective immediately through December 31st, 2026.
Looking ahead, we remain focused on executing our 2026 strategic initiatives centered on underwriting discipline, capital allocation, data-driven analytics, and exposure management. Additionally, we expect to leverage tools to allow our workforce to be more efficient.
We believe these efforts position Heritage well to continue generating profitable controlled growth and deliver long-term value to shareholders, agents, and policyholders. Thank you for your time today. Operator, we are now ready for questions.
Our first question comes from Paul Newsome with Piper Sandler. Please go ahead.
Morning, Paul. Morning.
Good morning. Happy Friday. Could you give us a little bit more detail about the Florida competition? You know, press release just says basically competition. But, you know, the comments on the call sounds more like it's pretty concentrated in commercial property, but, you know, is the broader property market just as competitive as the commercial business?
Broader speaking on the personal line side, there are new entrants into the market. Most of those entrants have started and are doing takeouts. We've not quite seen all of them in the voluntary market as of yet. My assumption would be they would be, you know, taking on those policies or takeout policies here for the next year or 2. I think it's a down the road we'll have to kind of see. I think the competition we were referring to mostly is on the commercial side right now.
Then maybe some thoughts, as we try to model the company in the future about the seasonality of the business and the cat load in the quarters, as we go through the quarters. You know, the earnings miss really was driven, I think, entirely by cat losses, at least in my model. Just any thoughts on how you think about the seasonality and whether or not the cat load in the first quarter was kind of a normal cat load or if we should think of that as being a little bit anomalous in a direction?
Yeah, yeah. Good question, Paul. Yeah, the first quarter was more moving back to a more normal year for winter weather losses in the Northeast. Last year was very low, we did have the California wildfires which kind of, you know, gave us almost the same number. When you look at the seasonality, I mean, one of the things typically, you know, barring a hurricane and that type of stuff, is the first quarter is the worst quarter for us from an earnings standpoint, it has to do with those winter storms. Typically, you know, we've looked at less than, you know, a quarter of our annualized earnings being, you know, in the first quarter.
Is the cat load in the first quarter, higher than the normalized cat load in the third, given hurricanes?
Well, we actually load the third quarter, you know, with a little bit more of a cat load in the third quarter. You know, second and fourth quarters, you know, typically are pretty good quarters for that. You know, historically speaking, the fourth quarter is by far our best quarter.
Great. Well, appreciate the help.
Thank you, Paul. Thank you, Paul.
The next question comes from Mark Hughes with Truist. Please go ahead.
Yeah, thank you. Good morning.
Good morning, Mark.
When you take into account, commercial residential and then, maybe a little more favorable trends on the personal line side, what it sounds like new business is ramping up. How should we think about written premium growth this year? You've been slightly negative the last couple quarters. Does that inflect positively at some point here?
Yes. We think it will. And again, when we look at, kind of the, quarter-over-quarter reductions, it is, it has been decreasing, but it's been decreasing at a decreasing amount. Therefore, we actually think, probably second, third quarter, that is going to reverse itself and we actually anticipate being positive for the full year.
Very good. How about the underlying loss ratio if you take out the weather and then the favorable development? Was it up a little bit in Q1? If so, was that mix, pricing?
Actually, yeah, actually, you know, you know, considering the prior development and that type of stuff, we actually have it down very slightly. For example, if you, if you back out the weather losses and the prior year development, you know, last year you're gonna be about at a 31.8%. This year you're gonna be at 31.6%. Slight decrease, and therefore, when we look at that attritional loss ratio, it's actually been fairly stable over the quarters for a couple years now.
Okay. What was it in the attritional loss in the fourth quarter?
Attritional loss in the fourth quarter, let me get that for you real quick. It was $26.7.
26.7. Okay.
Yep.
When we think about the growth on a go-forward basis, I think you're providing the commercial versus personal lines, but not necessarily the geographic breakout like previously. You think that your growth would be more oriented to Florida or non-Florida?
It's a combination, Mark. From commercial, you won't see as much growth, obviously, on the commercial in the Florida area. We have expanded commercial residentially to growing in New York, New Jersey, as we mentioned as well in the earnings call, in Hawaii. All other states are growing as well, Virginia, New York, from a personal lines perspective.
Okay, great. Thank you very much.
Thank you.
Appreciate it.
The next question comes from Karol Chmiel with Citizens. Please go ahead.
Yes. Thank you. Good morning.
Good morning.
I got two questions. Good morning again. Two questions. The first one is regarding the cat weather losses. Can you just confirm that all of those are from the, you know, Northeast winter storms, or is there more to it?
No, those are all the Northeast winter storms, right. Hernando, Gianna, Fern.
Fern. Yep.
Yeah. Those are all related to that.
Is there a particular state that was hit the hardest?
It's mostly mixed between New York and New Jersey, a little bit in Rhode Island as well.
Yeah, a little bit of Connecticut.
Yep.
Okay, great. Thank you. My second question is regarding the new repurchase agreement authorization. You had the 25 prior, you used about $12 million of it year to date, and now you have a new 50. The net increase in your authorization is about 38. Is that correct?
No, no. The increase, in other words, the $25 million is terminated. We have a new authorization for $50 million.
Correct.
The authorization between now and the end of the year is $50 million.
Okay. The 25 was fully.
No. We used 12 of the 25.
Yeah.
That 12 is a separate because it was before the new authorization.
Okay.
The 12 would be in addition to the new 50.
Gotcha. Can you just comment on how much was repurchased so far in Q2?
It would have been about, you know Well, it was just after the first. We did $10 million in the beginning of the year, and then it was, like, an additional $2 million.
Okay, perfect. Thank you so much.
Of the new authorization, we have not purchased any.
Gotcha. Understand.
Sure.
Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Ernie Garateix for any final remarks.
Thank you for joining the call, and we hope everyone has a great weekend.
Call has now been concluded. You may now disconnect.