Heritage Insurance Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Heritage is a super-regional property and casualty insurer focused primarily on residential property coverage across multiple U.S. states and Hawaii.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $132.7 million | $118.3 million; up 12.2% |
| Net premiums earned | $126.0 million | $109.7 million; up 14.9% |
| Gross premiums written | $229.1 million | $210.3 million; up 8.9% |
| Operating income | $12.8 million | $11.5 million |
| Net income / diluted EPS | $7.6 million / $0.27 | $7.0 million / $0.24 |
| Net cash from operating activities | $85.7 million | $85.3 million |
| Net combined ratio | 95.2% | 97.3% |
The net loss and LAE ratio improved to 54.1% from 56.6%; the net expense ratio increased to 41.1% from 40.7%. Net investment income was $3.7 million, essentially unchanged. Net realized gains were $0.1 million, versus $1.0 million a year earlier. The effective tax rate rose to 29.4% from 25.4%.
Financial position and capital
- At March 31, cash and cash equivalents were $313.4 million; restricted cash was $16.1 million. Total cash, cash equivalents and restricted cash were $329.4 million.
- Total investments were $621.3 million, primarily available-for-sale fixed maturities. Total assets were $1.88 billion and stockholders’ equity was $449.3 million; book value per share was $16.11.
- Long-term debt, net of discount and issuance costs, was $125.8 million; principal outstanding was $130.3 million. The company had $10.0 million drawn on its $50.0 million revolving facility and reported compliance with debt covenants.
- Cash flow was $85.7 million from operating activities, $25.5 million used in investing and $13.8 million used in financing. Cash and restricted cash increased $46.4 million during the quarter.
- Combined statutory surplus of the insurance subsidiaries was $350.8 million. The filing states the subsidiaries met applicable financial and regulatory requirements.
Material changes and notable items
- Premium growth and lower ceded premiums lifted net premiums earned. Gross premiums written grew in Florida and outside Florida; premiums in force were $958.1 million, with a 7.4% annualized increase from year-end 2019.
- Ceded premiums fell 8.6% year over year, and the ceded premium ratio declined to 46.3% from 52.0%. Management attributed this mainly to lower Florida insured values, reinsurance synergies and reduced quota-share coverage, partly offset by additional catastrophe excess-of-loss protection.
- Prior-year reserve development was favorable by $4.1 million, the seventh consecutive quarter of favorable development. Current-quarter net weather losses were $21.2 million, including $17.0 million of catastrophe losses, compared with $20.5 million and $15.0 million, respectively, in Q1 2019.
- The company repurchased 766,900 shares for $8.0 million at an average $10.41 per share and paid a $0.06-per-share quarterly dividend. It reported $25.8 million remaining under its repurchase authorization.
- The company adopted the expected credit loss standard (CECL) on January 1, 2020; management said adoption had no material financial-statement impact. Management performed an interim goodwill and indefinite-lived asset review considering COVID-19 and reported no impairment.
Outlook, risks and contingencies
The filing gives no quantified earnings or premium guidance. Management said COVID-19 had virtually no effect on Q1 operations and viewed property insurance as relatively resilient, but warned that weaker home sales could reduce new business, restrictions could disrupt independent-agent distribution, and premium-payment relief or economic stress could delay or impair collections. Market volatility, lower interest rates and potential asset-value declines could also affect results. Management believed available cash, the revolver and expected operating earnings would fund anticipated needs for at least 12 months.
Key ongoing exposures include hurricanes and other catastrophe losses, reserve estimation and potential losses exceeding reserves, reinsurance cost and availability, and reinsurer collectability. The company reported $219.5 million of net unpaid losses and LAE at quarter-end, including $169.2 million of net IBNR. It cautioned that estimated reinsurance recoveries on unpaid losses may change significantly. Ordinary-course claims and legal actions were not expected by management to have a material adverse effect.
After quarter-end, the company declared a further $0.06-per-share dividend and amended its credit agreement to provide more flexibility for acquisitions and investments, subject to specified liquidity or leverage conditions. Management stated disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Whether favorable reserve development continues and how actual claims experience compares with the $219.5 million net reserve balance and IBNR estimates.
- Catastrophe exposure, reinsurance renewal terms and limits, and the ability to collect recoverables from reinsurers.
- Whether premium growth and lower ceded premiums are sustainable without increasing retained-loss volatility or operating costs.
- COVID-19 effects on new sales, renewals, premium collections, claims, investment values and liquidity.
- Debt covenant headroom, liquidity available to the holding company versus regulated insurers, and the capital impact of dividends and repurchases.