Heritage Insurance Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; financial statements are unaudited. Heritage is a multi-state property and casualty insurer focused on personal and commercial residential coverage.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Gross premiums written | $309.5 million | $304.5 million | $1,016.4 million | $953.0 million |
| Net premiums earned | $176.6 million | $159.7 million | $519.5 million | $470.9 million |
| Total revenue | $186.3 million | $165.5 million | $548.5 million | $487.9 million |
| Operating income (loss) | $(9.4) million | $(47.3) million | $27.0 million | $(172.3) million |
| Net income (loss) | $(7.4) million | $(48.2) million | $14.4 million | $(166.9) million |
| Diluted earnings (loss) per share | $(0.28) | $(1.83) | $0.55 | $(6.29) |
| Net combined ratio | 110.8% | 133.3% | 100.2% | 120.7% |
Q3 net investment income rose to $6.9 million from $2.9 million; nine-month investment income was $19.0 million versus $7.1 million, reflecting higher yields. Q3 losses and loss adjustment expenses fell 15.7% to $131.4 million. Nine-month losses declined 15.6% to $335.5 million. The Q3 net loss ratio was 74.4% and expense ratio 36.4%; nine-month ratios were 64.6% and 35.7%, respectively. Combined ratios above 100% indicate underwriting losses for both periods.
Cash flow and balance sheet: Net cash used in operations was $29.3 million for the first nine months, compared with $15.5 million used in the prior-year period. Cash, cash equivalents and restricted cash declined to $238.6 million at September 30 from $287.6 million at year-end 2022. Investments were $665.0 million. Total assets were $2.369 billion, liabilities $2.217 billion, and stockholders’ equity $151.4 million. Long-term debt, net, was $122.1 million; principal outstanding was $123.2 million, including $82.0 million on the term loan and $10.0 million on the revolver. Credit-facility interest rates were approximately 8.2%. The company reported compliance with debt covenants and insurance regulatory capital requirements.
Material changes and management commentary
- Year-over-year results improved with higher earned premiums and investment income and lower net losses. The 2022 nine-month comparison also included a $92.0 million goodwill impairment charge; 2023 included a $0.8 million impairment of restoration-services intangibles.
- Premiums-in-force grew 8.4% year over year to approximately $1.3 billion while policies in force fell 13.6% to 467,597. Florida policies declined 15.6%, while Florida premiums-in-force rose 19.6%, reflecting rate increases and commercial residential growth. Management attributed policy reductions to deliberate exposure management and tighter underwriting.
- Q3 net current accident-year weather losses were $51.6 million, including $40.1 million of catastrophe losses; catastrophe retentions included Maui wildfires and Hurricane Idalia. Q3 2022 included a $40.0 million Hurricane Ian retention. Nine-month net current accident-year weather losses decreased to $98.2 million from $165.7 million.
- Ceded premiums increased 8.1% in Q3 and 10.4% year to date, with management citing higher reinsurance costs. The 2023–2024 catastrophe program provides first-event coverage up to $1.1 billion for Heritage P&C, $1.3 billion for NBIC, and $870.0 million for Zephyr; coverage and remaining limits for subsequent events depend on prior losses.
- The company finalized and received the agreed FHCF payment in September for commutation of its 2017 reinsurance agreement related to Hurricane Irma. Management noted social inflation and Florida litigation could affect remaining Irma claims and reserve estimates.
- General and administrative expenses rose, partly due to implementation of a new claims system. Its claims component entered service in June 2023; remaining system components were expected to enter service in early 2024.
Outlook, liquidity and risks
No specific earnings or revenue guidance is provided. Management stated that available liquidity is expected to meet cash requirements for at least the next 12 months, while noting cash may not cover planned capital expenditures and additional debt could be needed. It cited inflation in repair costs and continued increases and constrained availability of catastrophe reinsurance. Other material risks include catastrophe exposure, reserve uncertainty, reinsurance collectability and cost, underwriting and pricing adequacy, litigation and claims trends, regulatory capital requirements, debt covenants, and access to liquidity. Management reported effective disclosure controls as of September 30, 2023; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track whether rate adequacy and underwriting changes can bring combined ratios sustainably below 100%, particularly after catastrophe losses.
- Review reserve development, including the $449.0 million net unpaid-loss reserve and its $291.0 million IBNR component, as well as the effect of the Irma commutation on remaining claims.
- Assess reinsurance pricing, terms, available coverage after multiple events, and the timing and collectability of reinsurance recoverables.
- Monitor operating cash use, liquidity, debt service and covenant headroom; confirm how much of the revolver is available after $39.3 million of letters of credit.
- Separate recurring earnings from the impact of the Osprey Re tax valuation-allowance reduction and compare results with the prior-year goodwill impairment.