Participants

Kirk Lusk; Chief Financial Officer; Heritage Insurance Holdings Inc

Ernie Garateix; Chief Executive Officer, Director; Heritage Insurance Holdings Inc

Karol Chmiel; Analyst; Citizens Capital Markets

Maxwell Fritscher; Analyst; Truist Securities

Presentation

Operator

Good morning, and welcome to the Heritage Insurance Holdings fourth quarter 2024 earnings conference call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead, sir.

Kirk Lusk

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 will now turn the call over to Ernie.

Ernie Garateix

Thank you, Kirk. Good morning, everyone, and thank you for joining us today. Over the course of 2024, we experienced numerous destructive hurricanes that impacted communities across the Southeastern United States. And in 2025, we've seen devastating wildfires affecting residents of California and now New York. Our thoughts continue to be with those impacted by these devastating catastrophes that have left millions with significant damage and loss.
In this time of crisis, our employees have worked tirelessly to provide support for our policyholders as they recover from these catastrophic events. I am proud and appreciate our talented and dedicated employees and the resilience that our company has demonstrated after these catastrophic events.
The company is performing well, which is not only evident in our support of our customers and communities, but also our financial performance. Our fourth quarter results clearly demonstrate the results of our strategic efforts over the last several years to attain rate adequacy, manage exposures and enhance our underwriting discipline. Our ability to generate profits in each of the last two quarters, where we incurred significant losses associated with three hurricanes, demonstrates the transformation that has occurred at Heritage.
For the full year 2024, we achieved net income of $61.5 million or $2.01 per share. representing a strong increase from the full year 2023 net income of $45.3 million or $1.73 per share. Additionally, we grew our tangible book value per share 30% to $9.50 at December 31, 2024, as compared to year-end 2023 while achieving an ROE of 24.1%. These are notable results, given that we were impacted by $105 million pretax from 2024 hurricanes.
Our ability to not only maintain our profitability, but also deliver healthy earnings and returns in the face of significant catastrophic losses is a result of a multiyear effort where we have focused on executing our underwriting and rate adequacy initiatives.
From an underwriting perspective, we continued to strategically reduce our exposures in over-concentrated and unprofitable areas while increasing our presence in profitable geographies and products. As we have discussed in prior earnings call, we expect a declining policy count to moderate over the next few quarters as we open territories for new business given the improvements in the quality of our book of business.
We have also maintained a stable indemnity-based reinsurance program at manageable costs through our policy count and exposure management initiatives while also proactively engaging with our reinsurance partners. In fact, I was in Bermuda, Europe and the US in February meeting with many of our reinsurance partners who all expressed their support for Heritage and were encouraged by our improved performance.
I would like to thank our dedicated reinsurance partners who have supported our business throughout multiple catastrophic events over the last several years and look forward to their continued partnership as we work to further expand the company.
Our rate adequacy initiative has resulted in significant and appropriate rate increases, which are earning through our portfolio in 2024. Looking to 2025, we anticipate an even more meaningful amount of rate to earn through our portfolio, which we expect will provide a healthy tailwind to our financial results.
Additionally, we have selectively started writing new personal lines business anchored by a continued focus on risk management and stringent underwriting. Our expectation is that our new business growth will be controlled but will begin to accelerate through 2025.
As we discussed last quarter, recent legislative changes in Florida are having a positive impact on the economics of writing new profitable business in the state of Florida. In fact, we have seen a market decline in frivolous lawsuits. We believe that the impact of this necessary legislation will be favorable to the consumer. We expect the reinsurance market will see the tangible benefits of the legislation as Hurricane Milton claims mature through this year and into next year, which may reduce reinsurance pricing.
Our E&S business continues to provide options for our product offerings as we continue to write this business in California, Florida and South Carolina. We also plan to continue to evaluate more states for E&S opportunities as we focus on our controlled growth strategy. What makes this business so attractive is that we can adjust our rates and coverages to the changing dynamics state by state to ensure we continue to earn appropriate risk-adjusted returns while providing consumers in those states with needed insurance protection.
Looking forward, we remain resolute in maintaining a balanced and diversified portfolio as no single state represents over 30% of our total insured value. We believe this selective diversification will help reduce performance volatility and ensure our long-term stability, which we believe will be reflected in the value of our company over time. We believe we have the foundation in place to deliver solid profitable growth in 2025 as we continue to execute our strategy aimed at fostering shareholder value.
To conclude, I would like to reiterate our dedication to navigating the complexities of our market with a strategic focus that prioritizes long-term profitability and shareholder value, driven by our dedicated workforce.
Kirk, I will now turn the call over to you.

Kirk Lusk

Thank you, Ernie, and good morning, everyone.
Starting with our financial highlights. We reported net income of $20.3 million or $0.66 per diluted share in the fourth quarter compared to $30.9 million or $1.15 per diluted share in the prior year quarter. The decrease in net income was primarily driven by higher catastrophe losses in the quarter. Additionally, a higher effective tax rate caused the provision for income taxes in the current year quarter to be proportionally higher compared to the prior year quarter.
Our fourth quarter results continued to demonstrate our successful efforts to improve our portfolio as we remain profitable despite having incurred $57 million pretax of catastrophe losses, which includes reinstatement premiums. One objective of our strategic initiatives has been to remain profitable in a quarter with a significant catastrophe. We have now delivered on that goal two quarters in a row, which is a real validation of the successful execution of our plan and provides optimism for the earnings power of the company moving forward.
Gross premiums earned rose to $360.5 million, up 6.1% from $339.6 million in the prior year quarter, reflecting our strategic focus on rate adequacy and organic growth in our commercial residential and surplus lines business. Net premiums earned increased to $199.3 million, up 12.2% from $177.7 million in the prior year quarter, reflecting growth in gross premiums while ceded premiums were relatively flat.
Our strategic focus on expanding profitable products and markets includes the organic growth of our commercial residential business for which we selectively increased the premiums in-force by 13% compared to the fourth quarter of 2023 while total insured value only increased by 8.7%.
The commercial residential business tends to have a lower attritional loss ratio while generating material higher average premium. This segment now accounts for 20% of our in-force premiums compared to 18.8% in the prior year period.
Our net investment income for the quarter was $8.5 million, an increase of 27% from $6.7 million in the prior year quarter. The increase reflects our actions to align the investment with the yield curve while maintaining high-quality portfolio of short-duration assets. Our total revenues for the quarter were $210.3 million, up 12.5% from $187 million in the prior year quarter. This improvement was driven by the increase in net earned premiums and investment income.
Our net loss ratio for the quarter increased to 54.7%, a 3.7 point increase from 51% in the same quarter last year, reflecting higher net losses and LAE driven by Hurricane Milton in the current year quarter. The impact of higher net losses and LAE from Hurricane Milton was partially offset by lower attritional losses and higher net earned premiums.
Additionally, the net loss ratio was impacted by net unfavorable loss development of $3.8 million during the quarter of 2024 compared to net unfavorable loss development of $1.8 million in the fourth quarter of 2023. Other weather losses were $5.6 million in the fourth quarter compared to $11 million from the prior year quarter.
As Ernie touched on, we have continued to see favorable trends in the current year loss costs attributable to the legislative changes made in Florida and the improvements in our underlying portfolio. We continue to evaluate each state on an ongoing basis to make adjustments as necessary to maintain rate adequacy and improve our underwriting results.
We continue to maintain a robust level of reinsurance coverage as noted by our $1.3 billion reinsurance tower in the Southeast, $1.1 billion in the Northeast and $750 million in Hawaii. This, combined with our strategic actions that we have taken over the last three years to mitigate losses from significant events, places us in a strong financial position.
Our net expense ratio for the quarter was 35% and a 1.1 point increase from 33.9% in the prior year's quarter. This was driven primarily by the increase in higher policy acquisition costs and general and administrative expenses outpacing increase in net premiums earned. The net combined ratio for the quarter was 89.7%, up 4.8 points from 84.9% in the prior year quarter, driven by higher net loss ratio and higher net expense ratio just described.
Turning to our balance sheet. We ended the quarter with total assets of $2.5 billion and shareholders' equity of $290.8 million. Our book value per share increased to $9.50 at December 31, 2024, up 30.3% from the fourth quarter of 2023 and up 85.2% from the fourth quarter 2022. The increase from December 31, 2023, is primarily attributable to net income as well as $8.7 million reduction in unrealized losses on the company's fixed income securities portfolio.
The unrealized losses are unrelated to credit risk, but instead attributable to rising interest rates with the reduction in unrealized losses driven by lower interest rates during 2024. Heritage does not anticipate a need to sell investments in advance of maturity. As such, the company expects unrealized losses to continue to roll off the portfolio as investments mature.
The average duration of the fixed income portfolio is 3.1 years as the company has extended duration to take advantage of higher yields further out on the yield curve while maintaining short-duration, high-quality portfolio. Our annualized return on equity for the quarter was 28.5% and 24.1% for the full year of 2024.
Turning to the first quarter of 2025. We continue to monitor the effects of California wildfires and anticipate that we will incur approximately $35 million to $40 million of pretax net current accident quarter catastrophe losses. In 2025, we expect our rate increases to continue to earn through our book of business, which will provide a continued tailwind for growth.
I would also like to highlight that we absorbed catastrophe losses and associated reinstatement premiums in 2024 of $105 million pretax or $80.6 million after tax, which equates to $2.63 for earnings per share. I point this out to highlight the earnings trend of the company.
Looking ahead, we remain focused on executing our strategic initiatives aimed at driving shareholder value. We believe that our proactive approach to managing exposures, enhancing rate adequacy and investing in technology infrastructure will position us well for continued success.
Thank you for your time today. Operator, we are now ready for questions.

Question and Answer Session

Operator

(Operator Instructions)
Karol Chmiel, Citizens.

Karol Chmiel

Yeah, hi. Good morning. I just have a question regarding your LA fire claims. Can you describe the profile of the claims? Are they mostly straightforward total loss claims? Or are there more complex smoke damage claims? And then also if you can maybe give a mix of the percentage of claims out of the Eaton fire versus the Palisades fire.

Ernie Garateix

So for total claims, we had 15 that are total and then the remaining 20 or so have some kind of smoke damage to that event. And most of those claims we have, a couple in the Eaton fire and then the remaining being in Palisades.

Karol Chmiel

Okay. Great. Thank you. And then just one follow-up. Regarding the prior period development for the quarter, can you just provide more detail as to that?

Kirk Lusk

Yeah. The bulk of that has to do with Hurricane Irma, where we're actually getting towards the tail end of it and have really wound that down and have a few claims remaining.

Karol Chmiel

Got it. Thank you very much.

Operator

Maxwell Fritscher, Truist.

Maxwell Fritscher

Hey, good morning. I'm on for Mark Hughes. As you continue to achieve rate adequacy in most of your markets in the admitted market, how are you looking at growth in E&S? Do you continue to see the same momentum there as previously?

Ernie Garateix

So we do. But I think for the E&S, we're using that in very distinct markets that gives us the ability to adapt to those market dynamics state by state. So obviously, we look at what's going on in those markets, the regulatory environment, the ability to get rate, the ability to change coverages. I think we look at each of those markets individually and make a decision whether the admitted product or the E&S product is the best fit for that market.

Kirk Lusk

On top of that, I mean, all the business we write in California is E&S and really that's been the bulk of the growth in the E&S product.

Maxwell Fritscher

Got it. Thank you. And then you had noted how you plan to reopen profitable territories. Does this just include Florida? Or which geographies are you finding most attractive at this point?

Kirk Lusk

No. This is including our entire footprint, Northeast, Southeast. So it's just everywhere.

Maxwell Fritscher

Got it. Thank you.

Operator

(Operator Instructions)
Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Ernie Garateix, CEO, for any closing remarks.

Ernie Garateix

Yeah. We would like to thank everybody for joining the call today and wish everyone a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.