Heritage Insurance Holdings, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Heritage is a property and casualty insurer focused primarily on personal and commercial residential coverage across multiple states. This unaudited filing covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Gross premiums written | $283.2 million | $274.2 million; up 3.3% |
| Net premiums earned | $152.9 million | $142.2 million; up 7.5% |
| Total revenue | $158.6 million | $147.2 million; up 7.7% |
| Net loss | $30.8 million; $1.15 per diluted share | $5.1 million; $0.19 per diluted share |
| Net combined ratio | 129.5% | 107.7% |
| Net cash from operating activities | $(39.2) million | $39.2 million provided |
| Cash and cash equivalents | $286.2 million | $359.3 million at December 31, 2021 |
| Total investments | $689.5 million | $694.7 million at December 31, 2021 |
| Long-term debt, net | $123.7 million | $120.8 million at December 31, 2021 |
| Stockholders’ equity | $281.8 million | $343.1 million at December 31, 2021 |
Losses and loss adjustment expenses rose 43.0% to $140.0 million. The net loss and LAE ratio increased to 91.6% from 68.9%; the net expense ratio was 37.9% versus 38.8%. The resulting combined ratio above 100% indicates an underwriting loss. Net investment income was $2.0 million, compared with $1.3 million.
Net current accident-year weather losses were $63.8 million, including $45.0 million of net catastrophe losses and $18.8 million of other weather losses; the comparable total was $31.4 million. The available-for-sale fixed-income portfolio recorded a $24.3 million after-tax unrealized loss in other comprehensive income. Management attributed the decline in bond values to higher market interest rates, not credit losses. Book value per share was $10.65, down 16.9% from year-end 2021.
Material changes and management commentary
- Gross premiums earned increased 6.3%, while ceded premiums rose 4.9%, reflecting higher catastrophe reinsurance costs and increased insured values. Gross premiums written grew 3.3%; Florida business was reduced 4.0% as part of exposure management, partly offset by 11.4% growth in other regions.
- Premiums in force increased 4.7% year over year to $1.2 billion, while policies in force fell 5.5% to 559,496. Management attributed the difference largely to rate increases.
- Operating cash flow turned negative year over year, which management attributed primarily to the timing of claim and reinsurance payments and reimbursements. Cash and cash equivalents declined by $73.2 million from year-end; management cited the timing of catastrophe reinsurance payments.
- During Q1, Heritage drew $15.0 million on its revolving facility and repurchased and retired $11.7 million of convertible notes. At March 31, it had $15.0 million drawn and a $7.5 million letter of credit outstanding under the $75 million revolver.
- The company returned approximately $6.7 million to shareholders through $5.0 million of share repurchases and a $0.06 per-share quarterly dividend. The dividend was declared during Q1 and paid April 6.
- Management stated that available liquidity was adequate for at least the next 12 months. Insurance subsidiaries reported combined statutory surplus of $294.5 million and met applicable state financial and regulatory requirements at March 31.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management reported negligible Q1 impact from COVID-19 and did not expect a material business impact going forward, while noting continued monitoring of economic conditions. Insurance results are seasonal, with hurricane season generally running June through November; winter storms can affect the first and fourth quarters.
Key risks include catastrophe and weather losses, reserve estimation uncertainty, reinsurance cost, availability and collectibility, inflation in home-repair costs, and legal or claims trends. Higher interest rates can reduce the fair value of fixed-income investments; the portfolio’s weighted-average credit rating was A+. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, and reported no material changes to the risk factors in its 2021 Form 10-K.
After quarter-end, on May 4, 2022, the company amended its credit agreement so the fixed-charge coverage covenant would be calculated using consolidated tangible net worth rather than consolidated net worth. The amendment established a minimum tangible-net-worth formula effective March 31, 2022; other material credit-agreement terms were unchanged. The company reported compliance with applicable debt covenants as of the report date.
Important facts for investors to verify
- Whether elevated weather losses and a 129.5% combined ratio persist, and how rate actions and exposure reductions affect underwriting results.
- The renewal terms, pricing and coverage of the reinsurance program beginning June 1, and the company’s exposure to multiple catastrophe events and reinsurer recoveries.
- Operating cash-flow trends and liquidity needs, particularly the timing of claims, reinsurance installments and collateral requirements.
- Compliance with the amended tangible-net-worth covenant and other debt terms, including the capacity and cost of future borrowing.
- Whether interest-rate-driven investment losses remain unrealized or affect capital, liquidity or earnings, and whether any credit impairment emerges.
- Reserve development, especially given the company’s reliance on estimates for incurred-but-not-reported claims.