Heritage Insurance HRTG is expected to witness an improvement in its top and bottom lines when it reports third-quarter 2024 results on Nov. 6, after the closing bell. 

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The Zacks Consensus Estimate for HRTG’s third-quarter revenues is pegged at $209.9 billion, indicating 12.7% growth from the year-ago reported figure.

The consensus estimate for earnings is pegged at 2 cents per share. The Zacks Consensus Estimate for HRTG’s third-quarter earnings has declined 87.5% in the past 30 days. The estimate suggests a year-over-year increase of 107.1%. 
 

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HRTG’s Decent Earnings Surprise History

Heritage Insurance’s earnings beat the Zacks Consensus Estimates in three of the trailing four quarters and missed in one, the average surprise being 49.15%. This is depicted in the following chart.
 

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What the Zacks Model Unveils for Heritage Insurance 

Our proven model does not conclusively predict an earnings beat for HRTG this time around. This is because a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which increases the chances of an earnings beat. This is not the case, as you can see below.

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Earnings ESP: HRTG has an Earnings ESP of 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 2 cents.

Heritage Insurance Holdings, Inc. Price and EPS Surprise

Heritage Insurance Holdings, Inc. price-eps-surprise | Heritage Insurance Holdings, Inc. Quote

Zacks Rank: HRTG currently has a Zacks Rank #4 (Sell). 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Likely to Shape HRTG’s Q3 Results

Gross premiums in the to-be-reported quarter are likely to have benefited from rate adequacy and organic growth in commercial residential lines . Its reinsurance program coupled with growing gross premiums is expected to have lowered ceded premiums favoring net written premiums.  The Zacks Consensus Estimate for net premiums earned is pegged at $196 million. 

Higher yields are likely to have favored net investment income. The Zacks Consensus Estimate for net premiums earned is pegged at $10.2 million. 

Strategic selective underwriting is likely to have lowered policy count, though premium in-force is expected to have increased. 

The top line likely is likely to have benefited from higher net premiums earned and a significant increase in net investment income.

Higher gross premiums written, higher general administrative expense from reduced ceding commission income  and higher technology spend are likely to have raised expense ratio. The Zacks Consensus Estimate for expense ratio is pegged at 35.3. 

The third-quarter results are likely to be affected by catastrophe losses stemming from Hurricanes Debbie and Helene. HRTG expects to incur about $48 million of net current accident quarter catastrophe losses, including underwriting loss. The Zacks Consensus Estimate for the combined ratio is pegged at 105. However, rate adequacy and underwriting discipline are likely to have limited the downside.

HRTG’s Price Performance & Valuation

The stock has outperformed the industry year to date. 
 

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The stock is trading at a price-to-book value of 1.23X, lower than the industry’s 1.59X. The stock remains attractively valued compared with NMI Holdings NMIH but expensive when compared with MGIC Investment Corporation MTG and Radian Group RDN.

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Investment Thesis

HRTG’s prudent move to stop writing new personal lines policies in Florida and the Northeast, given the waning profitability of the book of business, rate adequacy, limiting new business in over-concentrated markets or products and selective profit-oriented underwriting criteria, bodes well for growth.  HRTG also expects the headwind from declining policies to begin to moderate over the next few quarters.

The excess and supply business is another growth driver for Heritage, given its continued strong performance in California, Florida and South Carolina. HRTG stated that it will consider and evaluate growth opportunities in a greater number of states. 

Heritage Insurance has a solid reinsurance program that protects its balance sheet, particularly given its exposure to hurricanes and other severe weather events. Improvements in the reinsurance program from a cost and structure standpoint and growing gross premiums earned should help lower the ceded premium ratio as well. 

Heritage Insurance’s capital management seems prudent. While the insurer suspended dividend payments to strengthen its financial position and support long-term growth initiatives, it also diverted capital toward technology to segments that have the potential to yield more profits. 

What Should You Do With HRTG Stock Now?

HRTG’s focus on organically growing its commercial and residential business, ramping up E&S business, improving pricing, increasing top line, expanding margins and delivering strong earnings bodes well for growth. 

With catastrophe losses inducing underwriting loss in the third quarter, downward estimate movement for 2024 reflecting analysts’ pessimism and unfavorable return on equity, it is advisable to stay away from the stock for now.

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MGIC Investment Corporation (MTG) : Free Stock Analysis Report

Radian Group Inc. (RDN) : Free Stock Analysis Report

NMI Holdings Inc (NMIH) : Free Stock Analysis Report

Heritage Insurance Holdings, Inc. (HRTG) : Free Stock Analysis Report

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