Heritage Insurance Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparison with Q1 2015. Financial amounts below are in millions of dollars unless stated otherwise. The company writes residential property insurance, primarily in Florida, and also operates in North Carolina and Hawaii.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Gross premiums written | $147.3 | $134.0 |
| Net premiums earned | $106.3 | $101.5 |
| Total revenue | $111.6 | $105.1 |
| Losses and loss adjustment expenses | $67.0 | $32.5 |
| Net income | $7.4 | $30.1 |
| Diluted earnings per share | $0.24 | $1.00 |
| Combined ratio, gross / net | 95.5% / 93.6% | 64.6% / 56.0% |
| Operating cash flow | $57.0 | $72.4 |
| Cash and cash equivalents, March 31 | $168.9 | $236.3 at Dec. 31, 2015 |
| Investments, March 31 | $481.2 | $400.1 at Dec. 31, 2015 |
| Total assets / total liabilities, March 31 | $879.0 / $522.8 | $837.4 / $480.8 at Dec. 31, 2015 |
| Stockholders’ equity, March 31 | $356.2 | $356.6 at Dec. 31, 2015 |
Premium growth reflected policy renewals, SSIC policy assumptions, and growth in voluntary business. Revenue increased about 6%, while net income fell about 75%. Management attributed the earnings decline chiefly to higher reinsurance costs relative to premiums and increased losses. The filing does not list borrowings as a balance-sheet line item; it does not provide a separate debt metric.
Material changes and notable items
- Losses and LAE rose to $67.0 million, including $14.5 million of unfavorable prior-year reserve development; Q1 2015 had $4.5 million of favorable development. Most adverse development related to personal lines, recent 2015 accident quarters, litigation and Assignment of Benefits claims, and Florida’s Miami-Dade, Broward and Palm Beach counties.
- Management cited tornado-related losses as adding 6.7 percentage points to the gross loss ratio. Prior-year reserve development added 9.5 percentage points. The estimated 2015 personal-lines ultimate loss ratio was revised from 34.5% to 38.2%.
- The ceded premium ratio increased to 30.0% from 19.5%; management noted that Q1 2015 benefited from Citizens take-outs before the next reinsurance program’s costs began. The gross loss ratio increased to 44.1% from 25.8%.
- On March 21, the company acquired Zephyr Acquisition Company and Zephyr Insurance Company, a Hawaii residential wind insurer, to diversify geographically and pursue reinsurance synergies. The filing includes ten days of Zephyr results: approximately $1.0 million revenue and $0.4 million net income. Purchase-price allocation is preliminary.
- Investing cash outflow was $113.2 million, including $110.3 million for the acquisition, net of cash acquired. Cash decreased $67.4 million during the quarter. The company repurchased 612,300 shares for $9.6 million and declared a $0.05-per-share dividend.
Liquidity, outlook and risks
Management said approximately $65 million of cash was used in April for reinsurance premium deposits, tax deposits and dividends, and that it intended to maintain substantial cash during hurricane season. It stated that available capital and operating cash flows should meet anticipated working-capital needs for at least 12 months, while acknowledging there can be no assurance. Cash includes restricted cash of $18.6 million; the company also reported $6.6 million in Osprey’s collateral trust and a $10 million letter of credit.
The filing provides no quantitative earnings or revenue guidance. The current reinsurance program provides up to $1.8 billion of coverage for a first catastrophe, including retention, and up to $2.3 billion of potential coverage including retention for multiple events, subject to exhaustion, event severity and frequency. Management cautioned that catastrophe losses, reinsurance availability, cost and collectability, reserve estimates, litigation trends, and Citizens depopulation activity could affect results. The business is seasonal, with hurricane season generally June through November.
The company reported ordinary-course claims-related legal actions but did not expect pending proceedings to materially adversely affect consolidated financial position, results or cash flow. Management reported disclosure controls effective as of March 31, 2016 and no material change in internal control over financial reporting during the quarter. The board later authorized an additional $50 million share-repurchase authorization, extending the program through December 31, 2017, and declared a $0.06-per-share second-quarter dividend.
Important facts for investors to verify
- Whether the unfavorable reserve development, especially litigation and Assignment of Benefits claims in South Florida, persists or requires further reserve strengthening.
- How catastrophe losses and the renewal or cost of reinsurance affect earnings, liquidity and available protection after June 1.
- The final Zephyr purchase-price allocation, acquired liabilities and the contribution of the Hawaii business beyond the brief period included in Q1.
- Cash availability after the April payments, collateral requirements, and the insurer’s statutory capital position; statutory surplus was $211.3 million at March 31, versus $216.6 million at year-end.
- The pace and capital impact of the expanded share-repurchase authorization and declared dividends.