Heritage Insurance rallies on Wall Street as hurricane season fails to bite

Mild weather and a hard homeowners insurance market have been a recent boon to Heritage Insurance Holdings Inc.'s bottom line and its stock price, which has almost doubled in value since the start of the Atlantic hurricane season.

The Tampa, Fla.-based insurer's stock rose 90.1% to $16.16 from $8.50 between May 31 — the day before the official start of hurricane season — and market close on Sept. 19. This is also the highest the stock has been in over five years.

The journey to a healthy bottom line has taken longer than some would have liked, said Piper Sandler analyst Paul Newsome. But by reducing its Florida footprint and pushing for rate increases, he said Heritage has "gotten to the place they wanted to be."

"They're making adequate rates, even with the potential for normal weather volatility," Newsome said in an interview. "They needed rate pretty much every place and ... they largely got it. They have made money after many quarters of not making it."

A milder-than-predicted hurricane season has also helped, with only one named storm, Hurricane Debby, making landfall in Florida. Debby hit the state's Gulf Coast on Aug. 5 and caused an estimated $3.5 billion in economic losses, but insurers were expected to absorb most of the $121.5 million in estimated insured losses because of the size of their reinsurance attachment points.

Heritage's stock has outperformed Sunshine State peers Universal Insurance Holdings Inc., up 14%, and American Coastal Insurance Corp., down 2.37% since the start of the hurricane season, as well as the S&P 500, up 8.26%, and the S&P 500 Insurance Index, up 11.25%.

None of the companies responded to requests for comment.

Reshaping the company

Heritage's strategic changes started taking shape in the fourth quarter of 2022, when its stock price was at its lowest point, $1.43, on Oct. 19. CEO Ernie Garateix said during an earnings call that Heritage was strengthening its commitment to achieving rate adequacy, expanding its excess and surplus business and reducing its exposure in "products and geographies that we don't believe will generate long-term returns or have limited upside potential."

The results for the second quarter of 2024 showed how far Heritage had come, as it reported a 142.5% year-over-year increase in net income while reducing its policies-in-force by 14.1%

"They [did] all the right things," Citizens JMP analyst Matt Carletti said in an interview. "They were doing everything that they should do in what is a very, very difficult market."

Impactful upgrade

The second-quarter results were one of the factors Newsome cited in his Aug. 9 note in which he upgraded Heritage to "overweight" from "neutral" and increased his target price to $13 from $9. In the note, he cited the company's "renewed efforts to grow as a sign that [Heritage] has turned the corner fully to rate adequacy and the home insurance market is ready for earnings growth.

Heritage's share price rose 31.9% by Aug. 12, which Carletti said was the increase in "visibility" of the company to investors from Newsome's upgrade.

"I don't think Paul was pointing out anything that wasn't kind of on the table, but it was a real megaphone," Carletti said. "When an analyst like Paul puts it in print, it just gets a lot more eyes, and so it got kind of an audience."

Reforms to the rescue

Carletti and Newsome both said the big assist for Heritage and other Florida carriers was the tort reforms enacted in March 2023, which limited the assignment of benefits, eliminated one-way attorney's fees and reduced the statute of limitations on filing a claim against an insurer.

Newsome said the changes made the tort rules similar to what they are in other states and "got rid of some of the special things about the Florida legal environment."

"The reforms have turned out to be, by all measures, more impactful than expected," Carletti said.