Heritage Insurance Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company is a multi-state property and casualty insurer focused on personal and commercial residential coverage. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Gross premiums written | $365.3m | $337.7m | $648.5m | $611.9m |
| Net premiums earned | $158.3m | $146.5m | $311.2m | $288.7m |
| Total revenue | $163.8m | $150.2m | $322.4m | $297.4m |
| Net loss | $(87.9)m | $(4.0)m | $(118.6)m | $(9.1)m |
| Diluted loss per share | $(3.32) | $(0.14) | $(4.46) | $(0.33) |
| Net combined ratio | 99.4% | 105.2% | 114.2% | 106.4% |
| Net loss and LAE ratio | 64.1% | 68.8% | 77.6% | 68.8% |
| Net expense ratio | 35.3% | 36.4% | 36.6% | 37.6% |
- Q2 loss included a $92.0m non-cash goodwill impairment, recognized after management cited property-insurer market disruption, elevated sector loss ratios and the company’s market capitalization below book value. Management described the after-tax charge as approximately $90.8m.
- Q2 underwriting performance was profitable on a combined-ratio basis; the 99.4% ratio improved 5.8 points year over year. For the first half, underwriting results weakened: the 114.2% combined ratio was 7.8 points worse, principally due to higher weather losses.
- Q2 net current accident-year weather losses were $38.1m, including $32.1m catastrophe losses. First-half weather losses were $101.9m, including $77.2m catastrophe losses; first-half losses and LAE rose 21.5% to $241.6m.
- Average premium per policy rose 11.5% year over year in Q2. Premiums in force increased 3.4% to $1.2bn while policies in force fell 7.3%. Florida policies in force declined 18.9%; Florida premiums in force declined 5.7%, while other-state premiums in force increased 12.8%.
- Six-month operating cash flow was negative $47.5m, versus positive $104.4m in 2021, mainly reflecting timing of claims, reinsurance payments and recoveries. Investing cash flow was negative $14.0m; financing cash flow was negative $6.8m. Cash, cash equivalents and restricted cash declined $68.4m to $296.3m.
- At June 30, cash and cash equivalents were $290.9m and investments were $654.3m, versus $359.3m and $694.7m at year-end. Fixed-maturity fair value was $635.5m against $689.2m amortized cost; management attributed unrealized losses to rising interest rates, not credit losses. Portfolio average credit rating was A+ and duration 3.6 years.
- Total assets were $2.03bn; total liabilities $1.85bn; stockholders’ equity $180.5m, down from $343.1m at year-end. Book value per common share fell 47% to $6.80, reflecting impairment, investment-related accumulated other comprehensive losses and first-quarter underwriting losses.
- Debt at carrying value was $123.0m, including $67.4m term-loan principal, $15.0m revolver borrowings and $11.8m convertible notes. A further $7.5m letter of credit was outstanding under the revolver. The company reported compliance with debt covenants at the report date.
- Statutory surplus of regulated insurance subsidiaries totaled $296.8m, compared with $302.1m at year-end; subsidiaries met applicable state financial and regulatory requirements.
Material changes, outlook and risks
- Management said rate increases and exposure management address inflation, rising claim costs and more expensive reinsurance. Rate changes take an average of 18 months to be fully reflected in results. Retention remained around 90% despite rate increases.
- The 2022–2023 catastrophe excess-of-loss program, effective June 1, provides first-event limits of up to $1.3bn for Heritage P&C, $1.2bn for NBIC and $780m for Zephyr. Estimated net program cost is approximately $359.5m, subject to an exposure true-up. Coverage depends on event severity and frequency; the company remains responsible for losses above program limits.
- Management stated liquidity sources should meet cash requirements for at least the next 12 months. No specific earnings or revenue guidance was provided. The filing highlights catastrophe exposure, coastal concentration, inflation, litigation and claims trends, reinsurance cost and availability, reserve uncertainty, interest-rate effects, regulatory requirements and access to financing as risks.
- Subsequent to quarter-end, holders tendered $10.9m of convertible notes; the company paid principal and $0.32m interest on August 1 and drew $10.0m on its revolver to replenish cash. It also expected to use the revolver for a $31.8m standby letter of credit supporting an Osprey reinsurance agreement.
- On August 3, the board chose to direct the usual $0.06-per-share Q2 dividend allocation to share repurchases instead; future dividend decisions will be reassessed quarterly. The company repurchased $5.0m of stock in the first half and had $20.0m remaining under its $25.0m repurchase authorization at June 30.
- Management reported no material COVID-19 impact in the first half. The company stated pending ordinary-course legal proceedings were not expected to materially adversely affect financial position, results or cash flows. Disclosure controls were judged effective as of June 30.
Important facts for investors to verify
- Whether rate increases can offset claim-cost inflation, litigation-related losses and rising reinsurance costs, and whether policy retention and premiums-in-force trends persist.
- Catastrophe experience, remaining reinsurance protection, the final $359.5m program cost after true-up, and the collectability and timing of reinsurance recoveries.
- Reserve adequacy, especially IBNR: net unpaid losses were $318.7m, of which $236.3m was attributed to IBNR net of reinsurance.
- Liquidity and covenant headroom after the convertible-note repurchase, revolver draw and planned $31.8m letter of credit; monitor operating cash flow and statutory surplus.
- Further investment valuation effects from interest rates, and whether reported equity/book value and impairment assumptions change.
- Board decisions on dividends and repurchases, and the company’s capacity to fund them while maintaining insurance-subsidiary capital requirements.