Heritage Insurance Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; comparisons are to the corresponding 2022 periods unless stated otherwise. Amounts are in millions except per-share data, ratios, and policy statistics.
Business context
Heritage is a property and casualty insurer focused on personal and commercial residential coverage across multiple states. Management is reducing personal-lines exposure in Florida and other markets while selectively growing commercial residential business, raising rates, and diversifying geographically.
Financial results and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross premiums written | $396.6 | $365.3 | $706.9 | $648.5 |
| Net premiums earned | $176.8 | $158.3 | $342.8 | $311.2 |
| Total revenue | $185.3 | $163.8 | $362.2 | $322.4 |
| Net income (loss) | $7.8 | $(87.9) | $21.8 | $(118.6) |
| Diluted EPS | $0.30 | $(3.32) | $0.85 | $(4.46) |
| Net combined ratio | 95.1% | 99.4% | 94.8% | 114.2% |
| Net loss and LAE ratio | 60.3% | 64.1% | 59.5% | 77.6% |
| Net expense ratio | 34.8% | 35.3% | 35.3% | 36.6% |
- Q2 operating performance: Losses and loss adjustment expenses (LAE) were $106.6 million, up 5.0%. Management attributed the increase to higher attritional losses, partly offset by lower weather losses. There were no catastrophe losses in the quarter, versus $32.1 million in Q2 2022. Prior-year reserve development was favorable by $2.7 million.
- Six-month loss experience: Losses and LAE declined 15.5% to $204.1 million. Net current-accident-year weather losses were $46.9 million, including $5.0 million of catastrophe losses, compared with $101.9 million of weather losses and $77.2 million of catastrophe losses in the 2022 period. Prior-year development was favorable by $4.2 million.
- Investment income and unusual items: Net investment income was $6.6 million in Q2 and $12.2 million for six months, up from $2.2 million and $4.2 million. Higher yields contributed; Q2 also included a $1.6 million impairment of other investments. The 2022 comparison included a $92.0 million goodwill impairment charge; Q2 2023 included a $0.8 million impairment of restoration-service brand and customer-relationship intangibles after discontinuation of those services.
- Balance sheet at June 30, 2023: Total assets were $2.36 billion and stockholders’ equity was $160.6 million, versus $2.39 billion and $131.0 million at December 31, 2022. Cash and cash equivalents were $247.1 million, restricted cash $9.7 million, and investments $708.3 million. Fixed maturities had $60.9 million of gross unrealized losses; management attributed these primarily to market interest rates and reported an average A+ rating.
- Reserves and reinsurance: Unpaid losses and LAE were $817.9 million gross, including $442.3 million of reinsurance recoverable; net reserves were $375.6 million, of which $257.2 million was net IBNR. Reinsurance recoverables on paid and unpaid claims totaled $544.0 million on the balance sheet.
- Debt and liquidity: Long-term debt, net, was $124.4 million; principal outstanding was $125.6 million. Term-loan and revolver rates were approximately 7.9%. The company had $10.0 million drawn on a $50 million revolving facility and a $10.0 million letter of credit. It reported compliance with debt covenants. Six-month operating cash flow was $24.1 million, compared with cash used of $47.5 million in 2022; investing and financing cash flows used $50.1 million and $4.8 million, respectively.
- Insurance exposure: Policies in force fell 11.1% year over year to 489,390, while premiums in force rose 10.5% to $1.34 billion and total insured value increased 0.3% to $403.7 billion. Florida policies declined 15.4%, while Florida premiums in force rose 17.8%. Florida commercial residential premiums in force grew 75.5% year over year, according to management.
Material changes and management commentary
- Revenue growth reflected higher average premiums, rate actions, inflation guard, and commercial residential growth. Gross premiums written increased 8.6% in Q2 and 9.0% for the first six months.
- Ceded premiums rose 11.1% in Q2 and 11.7% for the six-month period. Management cited increased catastrophe reinsurance costs and higher quota-share cessions. The six-month ceded premium ratio was 47.0%, versus 46.7%.
- Management said it expects continued inflation-related repair costs and rising, constrained catastrophe reinsurance availability. It is responding through exposure management, rate increases, inflation guard, and selective underwriting.
- The company began commutation of its 2017 Florida Hurricane Catastrophe Fund (FHCF) reinsurance agreement in June 2023, relating to Hurricane Irma losses. Completion was expected in Q3 2023, but the final settlement amount was uncertain and could differ from the recorded recovery. Florida social inflation and litigation trends add uncertainty to remaining Irma claims.
- Management stated that available liquidity should meet cash requirements for at least the next 12 months, while noting that planned capital expenditures may require additional borrowing. No quantified earnings or revenue guidance was provided.
Risks, contingencies, and other disclosures
- Key risks include catastrophe losses, reserve-estimate uncertainty, Florida litigation and social inflation, reinsurance cost and availability, reinsurer collectability, inflation in repair costs, and rate or regulatory constraints.
- State regulators require minimum capital, surplus, and risk-based capital levels. Combined statutory surplus for Heritage P&C, Zephyr, and NBIC was $262.0 million at June 30, 2023, down from $276.3 million at year-end; subsidiaries reported regulatory compliance.
- The Q2 tax provision was $5.9 million, with a 43.0% effective tax rate. Management cited a valuation allowance related to tax elections by captive reinsurer Osprey Re; the allowance increased $2.5 million from Q1.
- The company reported ordinary-course claims-related litigation and did not believe pending proceedings would materially adversely affect its financial position, results, or cash flows. It reported no material changes to its previously disclosed risk factors and concluded disclosure controls were effective.
Investor verification priorities
- Track the final FHCF commutation settlement and subsequent development of Hurricane Irma recoveries and reserves.
- Assess whether rate increases and underwriting actions offset loss-cost inflation, higher reinsurance expense, and continuing attritional claims.
- Review catastrophe reinsurance coverage, retentions, pricing, and counterparty credit exposure for the 2023–2024 program.
- Monitor statutory surplus, debt covenant headroom, borrowing costs, and liquidity as debt payments and technology investment continue.
- Check the sustainability of underwriting profitability, including the impact of weather losses, favorable prior-year reserve development, and investment yields.