Heritage Insurance Holdings, Inc. (HRTG)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2025 (as amended“2025 Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “we”, “us”, “our”, “the Company”, “our Company”, and similar references refer to Heritage Insurance Holdings, Inc., a Delaware corporation, and its subsidiaries.

Overview

We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas, and Virginia and commercial residential insurance in Florida, Hawaii, New Jersey, and New York. We provide personal residential insurance in Florida, Hawaii, and South Carolina on both an admitted and non-admitted basis and in California on a non-admitted basis only. We also provide commercial insurance in the State of Texas on an excess and surplus lines basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. We mitigate the impact of inflation by implementation of rate increases and through the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and total insured value ("TIV"). Rising reinsurance costs may be mitigated through exposure management as well as recouping the cost of reinsurance in future rate filings.

Supplemental Information

The Supplemental Information table below provides insight on our personal lines, commercial lines, and other business by providing policy count, premiums-in-force and total insured value for those product lines.

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Strategic Profitability Initiatives

The Company has focused on three main strategic initiatives aimed at achieving consistent long-term quarterly earnings and driving shareholder value, which initiatives will remain in place while the Company also expands its strategy to include its 2026 initiatives:

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Generating underwriting profit through rate adequacy and more selective underwriting

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Allocating capital to products and geographies that maximize long-term returns

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Targeting a balanced and diversified portfolio

To continue its progress, the Company expects to also focus on the following profitability initiatives in 2026:

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Target geographies open for new business, while closely managing risk and exposure

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Continue persistent underwriting discipline and focus on rate adequacy while driving prudent top line growth

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Enhance data driven analytics using AI and other technology tools.

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Continue the refinement of customer service and claims capabilities.

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Leverage infrastructure and capabilities to foster further growth, which includes our entry to the State of Texas on an excess and surplus lines basis.

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Act as opportunities emerge which will continue our diversification and expansion over the next several years.

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Expand our relationship with reinsurance partners to expand capacity and manage volatility while pursuing growth.

Trends

Inflation, Underwriting and Pricing

We address reinsurance and loss cost trends in the property insurance sector through rates and inflation guard factors. Over the last several years, we have filed and been approved by state regulators for rate increases to achieve rate adequacy. Our rates are now adequate in over 90% of our territories, which are currently open for new business. We experienced intentional growth of our commercial residential business during 2025, with in-force premium in that line of business decreasing in 2026, driven primarily by competitive market conditions. To the extent that reinsurance and loss cost trends decline, our rates may be adjusted downward in the future. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned and impact our financial statements.

We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our policy retention has remained consistent in the upper 80’s to low 90’s. While we believe our rates are generally competitive with private market insurers operating in our space, we are focused on prudent growth in 2026 while managing exposure and ensuring rate adequacy throughout our book of business as well as providing high levels of customer service to our agents and policyholders.

We may experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. However, inflation is increasing at a lower rate than what we have experienced in the last several years. We adjust for changes in inflation by increasing or decreasing the inflation factor used in our pricing. Florida personal lines claim costs associated with litigated claims have decreased over the last several years due to favorable legislation aimed to curtail claims abuse and stabilize the Florida property insurance market. This has had the intended impact and has resulted in better margins for the Company and better rates for Florida policyholders. Accordingly, we have a positive outlook for Florida and the other rate adequate states.

We have a solid, consistent panel of reinsurance partners that provide reinsurance capacity at competitive pricing and sufficient levels to support our growth objectives. Additionally, we may leverage our captive reinsurer to assume risks from our insurance company affiliates.

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We successfully completed the placement of our catastrophe excess of loss reinsurance program with higher coverage levels than the prior-year while achieving a lower total and risk-adjusted cost. As operating and reinsurance costs improve, we expect policyholders to benefit through more competitive pricing while we continue to maintain appropriate underwriting margins. This should also favorably impact the ceded premium over the next four quarters.

Overview of Financial Results

In the following section, we discuss our financial condition and results of operations for the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

The discussion of our financial condition and results of operations that follows provides information that will assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, including certain key performance indicators such as net combined ratio, ceded premium ratio, net expense ratio and net loss ratio, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q.

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Second quarter 2026 net income increased to $61.7 million, or $2.05 per diluted share, compared with $48.0 million, or $1.55 per diluted share, in the prior-year quarter. The increase was primarily driven by lower losses and higher revenue. Revenue growth reflected lower ceded premiums, which increased net premiums earned, as well as higher investment income from a larger invested asset base. Losses decreased primarily due to favorable prior-year loss development and lower weather-related losses.

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Gross premiums written decreased 5.5% to $388.4 million from $411.0 million in the prior-year quarter, primarily reflecting lower commercial residential premiums, partially offset by growth in personal lines. The Florida commercial residential market remains highly competitive and management continues to emphasize underwriting discipline and adequate profitability by writing business that meets our pricing and risk standards. Commercial premiums are expected to level off in the second half of the year as we continue to grow this business outside of Florida where business conditions are more favorable while leveraging our strong Florida agency network.

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Gross premiums earned were $351.2 million, compared to $353.6 million earned in the prior year quarter, reflecting the decline in commercial residential business driven by the competitive market conditions described above.

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Net premiums earned increased 2.4% to $201.1 million from $196.3 million in the prior-year quarter, driven by lower ceded premiums. The reduction in ceded premiums reflected the decrease in the northeast net quota share program at year-end 2025 and one month of savings driven by the improved pricing of our June 2026 catastrophe excess of loss ("CAT XOL") program. The CAT XOL placement generated treaty-year expense savings of $63.2 million, of which seven-twelfths will be recognized in 2026.

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Losses and loss adjustments expenses were $61.1 million, down $14.6 million from $75.6 million in the prior-year quarter. The net loss ratio improved 8.1 points to 30.4% from 38.5% in the same quarter last year. Net weather losses for the current accident quarter were $11.5 million, compared with $12.5 million in the prior-year quarter. Net favorable prior-year loss development was $23.4 million in the second quarter of 2026, compared with $2.3 million in the prior-year quarter. The favorable reserve development recorded in the second quarter of 2026 reflects several positive trends that have become increasingly evident over the past several quarters. K

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a super-regional property and casualty insurance holding company that primarily provides personal and commercial residential insurance products across our multi-state footprint. We provide personal residential insurance in Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Virginia and commercial residential insurance in Florida, Hawaii, New Jersey, and New York. We provide personal residential insurance in Florida, Hawaii and South Carolina on both an admitted and non-admitted basis and in California on a non-admitted basis. As a vertically integrated insurer, we control or manage substantially all aspects of risk management, underwriting, claims processing and adjusting, actuarial rate making and reserving, customer service, and distribution. Our financial strength ratings are important to us in establishing our competitive position and can impact our ability to write policies.

Recent Developments

Economic and Market Factors

We continue to monitor the effects of general changes in economic and market conditions on our business. As a result of general inflationary pressures, we have experienced, and may continue to experience, increased cost of materials and labor needed for repairs and to otherwise remediate claims throughout all states in which we conduct business. We mitigate the impact of inflation by implementation of rate increases and the use of inflation guard, which ensures appropriate replacement cost values for our business to reflect the inflationary impact on costs to repair properties. Use of inflation guard impacts both premium and total insured value ("TIV"). To the extent that reinsurance costs rise, we may seek to recoup the cost of reinsurance in future rate filings as well as mitigate the cost through exposure management.

Supplemental Information

The Supplemental Information table below demonstrates progress on our initiatives by providing policy count, premiums-in-force, and total insured value for Florida and all other states as of December 31, 2025 and comparing those metrics to December 31, 2024. One of our strategies had been to reduce personal lines exposure in Florida, given historical abusive claims practices. Since 2022, several legislative changes have been implemented to positively impact the Florida property insurance market by curtailing assignment of benefits and litigated claims abuses. The positive impact of the legislative changes is reflected in our loss trends, which favorably impact the cost of insurance to our policyholders. Our strategy has been to obtain rate adequacy throughout our portfolio. Through various underwriting, rate making and other actions over the last several years, we believe we have achieved rate adequacy in over 90% of our portfolio, with each of those rate adequate territories being currently open for writing new business. During 2025, we concluded our exposure management initiatives from previous years and began deployment of our managed growth initiative. We anticipate growing our portfolio during 2026 while maintaining our disciplined underwriting standards.

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Policies-in-force decreased from the prior year, driven primarily by the final stages of our continued strategy to re-underwrite our existing personal lines book of business and gradually open territories for new business written where rates are adequate. At the same time, the policies-in-force specific to our commercial residential business grew during 2025, which drove an increase in our Florida TIV. As rates for our personal lines business became more adequate during 2025, the Company embarked upon a managed growth strategy. New business premium production for the fourth quarter of 2025 increased over 60% compared to new business production for the fourth quarter of 2024. Premiums in force for our personal lines business grew year over year but was offset by a larger decline in premiums in force for our commercial residential business. The decline in premium in force for commercial residential business was driven mostly by the current competitive market in Florida for this product. We have a substantial book of commercial business at December 31, 2025 with $265.0 million of in-force premium and will maintain our established pricing and underwriting discipline.

Florida policies-in-force declined from the prior year by 7.7% and Florida premiums-in-force decreased by 4.0%, while Florida TIV increased over the prior year. The decrease in Florida premiums-in-force was driven mostly by a reduction in premium for commercial residential business related to the current competitive market in the state. However the in-force policies for the commercial residential product grew resulting in higher Florida TIV. Compared to the year ended December 31, 2024, the policy count for markets outside of Florida decreased 8.5% due to underwriting actions and intentional exposure management, resulting in a TIV decrease of 2.8% while premiums-in-force increased by 3.7% due to rating actions.

Strategic Profitability Initiatives

The Company has focused on three main strategic initiatives aimed at achieving consistent long-term quarterly earnings and driving shareholder value including:

•
Generating underwriting profit through rate adequacy and more selective underwriting.

•
Allocating capital to products and geographies that maximize long-term returns.

•
Targeting a balanced and diversified portfolio

Fulfilled Strategic Profitability Initiatives in 2025

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Re-opened profitable geographies and allocated capital to sustain profits and margin on a measured basis

•
Persistent underwriting discipline and focus on rate adequacy

•
Continued data driven analytics

•
Enhanced customer service and claims capabilities

•
Leveraged infrastructure and capabilities to foster future growth

Strategic Profitability Initiatives for 2026

•
Target geographies open for new business, while closely managing risk and exposure

•
Continue persistent underwriting discipline and focus on rate adequacy while driving prudent growth of the top line

•
Enhance data driven analytics using AI and other technology tools

•
Continue the refinement of customer service and claims capabilities

•
Leverage infrastructure and capabilities to foster future growth, which includes our plan to enter the State of Texas to offer products on an excess and surplus lines basis

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Trends

Inflation, Underwriting and Pricing

We address reinsurance and loss costs trends in the property insurance sector through rates and inflation guard factors which resulted in an increase in the average premium per policy of 8.9% at December 31, 2025, as compared to the prior year . The higher average premium is driven by rate changes, inclusion of inflation guard, and by the mix of business written. We experienced intentional growth of our commercial residential business during 2024, with in-force premium in that line of business decreasing during 2025, driven primarily by competitive market conditions as described above. New rates, which are subject to approval by our regulators, become effective when a policy is written or renewed, and the premium is earned pro rata over the policy period of one year. As a result of this timing, it can take up to twenty-four months for the complete impact of a rate change to be fully earned in our financial statements. For that reason, we account for inflation in our rate indications and filings with our regulators.

We invest in data analytics, using software and experienced personnel, to continuously evaluate our underwriting criteria and manage exposure to catastrophe and other losses. Our policy retention has remained steadily in the range of 90.0%. While we believe our rates are generally competitive with private market insurers operating in our space, we are focused on managing exposure and achieving rate adequacy throughout our book of business as well as providing high levels of customer service to our agents and policyholders.

We experience rising inflation in the form of increased labor and material costs, which drive up claim costs throughout all states in which we conduct business. However, inflation is increasing at a lower rate than what we have experienced in the last several years. We adjust for changes in inflation by increasing or decreasing the inflation factor used in our pricing. Florida personal lines claim costs associated with litigated claims have decreased over the last several years due to favorable legislation aimed to curtail claims abuse and stabilizing the Florida property insurance market. This is reflected in our rates and as the legislation appears to have achieved its intended impact, our outlook on conducting business in Florida has improved.

We have experienced a sufficient supply of catastrophe excess of loss reinsurance and believe our cost of reinsurance to be competitive. In contrast, our industry had experienced significantly higher reinsurance costs and more constrained availability for catastrophe excess of loss reinsurance in 2022 and 2023.

Key Components of our Results of Operations

Revenue

Gross premiums written represent, with respect to a period, the sum of direct premiums written (premiums from policies written during the period, net of any midterm cancellations and renewals of voluntary policies) and assumed premiums written (primarily premiums from state fair plan policies), in each case prior to ceding premiums to reinsurers.

Gross premiums earned represent the total premiums earned during a period from policies written. Premiums associated with new and renewal policies are earned ratably over the twelve-month term of the policy and premiums associated with assumed policies are earned ratably over the remaining term of the policy.

Ceded premiums represent the cost of our reinsurance during a period. We recognize the cost of our reinsurance program ratably over term of the arrangement, which is typically twelve months. Our catastrophe excess of loss reinsurance generally commences on June 1 and runs through May 31 of the following year. Our net quota share treaty commences on December 31. Our other reinsurance programs may be purchased on a calendar or fiscal year basis.

Net premiums earned reflect gross premiums earned less ceded premiums during the period.

Net investment income represents interest earned on fixed maturity securities, short term securities and other investments, dividends on equity securities.

Net realized and unrealized gains or losses represent gains or losses on investment sales and unrealized gains or losses on equity securities.

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Other revenue is primarily comprised of policy and pay-plan fees and also includes rental income due under non-cancelable leases for space at the Company’s commercial property in Clearwater, Flo

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