Heritage Insurance Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Heritage is a multi-state property and casualty insurer focused primarily on personal and commercial residential insurance.
Financial results
Amounts in millions, except per-share data and ratios.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Gross premiums written | $337.7 | $290.4 | $611.9 | $519.5 |
| Net premiums earned | $146.5 | $129.1 | $288.7 | $255.1 |
| Total revenue | $150.2 | $136.0 | $297.4 | $268.7 |
| Net investment income | $1.0 | $3.3 | $2.2 | $7.0 |
| Net income (loss) | $(4.0) | $4.1 | $(9.1) | $11.8 |
| Diluted EPS | $(0.14) | $0.15 | $(0.33) | $0.42 |
| Net loss and LAE ratio | 68.8% | 61.1% | 68.8% | 57.7% |
| Net expense ratio | 36.4% | 38.9% | 37.6% | 40.0% |
| Net combined ratio | 105.2% | 100.0% | 106.4% | 97.7% |
The company reported a $1.0 million Q2 net realized and unrealized investment loss and a $0.9 million loss for the first half. The filing’s MD&A also describes investment-income figures on an inclusive basis that do not clearly reconcile to the statement line items; the table above uses the financial statements’ separately reported amounts.
Liquidity, balance sheet and debt
- At June 30, cash and cash equivalents were $447.0 million, investments were $669.8 million, total assets were $2.35 billion, total liabilities were $1.93 billion and stockholders’ equity was $424.9 million. Book value per share was $15.20, down 0.8% from Q1 2021.
- First-half operating cash flow was $102.9 million, versus $131.8 million in 2020; investing cash outflow was $91.4 million and financing cash outflow was $5.5 million. Cash, cash equivalents and restricted cash ended the period at $452.4 million.
- Long-term debt was $119.8 million net of issuance costs; principal outstanding totaled $122.4 million. The company had $10 million drawn on its $50 million revolver at quarter-end and reported no letters of credit outstanding.
- Combined statutory surplus at the insurance subsidiaries was $312.8 million, compared with $333.3 million at December 31, 2020. The company said its subsidiaries met applicable financial and regulatory requirements and that it was in compliance with debt covenants.
Material changes and operating drivers
- Q2 gross premiums written rose 16.3% year over year; first-half growth was 17.8%. Management attributed growth to rate increases, business growth across states and distribution through independent agents and strategic partnerships. Premiums in force were $1.2 billion; policies in force were 593,786.
- Net premiums earned increased, but claims costs and ceded premiums rose faster. Q2 losses and loss adjustment expenses were $100.8 million, up 27.8%; first-half losses were $198.7 million, up 35.2%.
- Q2 net current accident-quarter weather losses were $35.5 million, including $24.5 million of catastrophe losses, versus $26.8 million and $17.6 million, respectively, a year earlier. Q2 included $0.6 million of favorable prior-year reserve development.
- Reinsurance costs increased, including a $9.4 million Q2 reinstatement premium for severe convective storm coverage. Lower investment income also weighed on results; management cited low yields and a loss on an investment outside the managed portfolio.
- General and administrative expense declined, primarily due to a state tax credit, lower executive compensation and lower health-plan costs. The net expense ratio improved, but the higher loss ratio drove the combined ratio above 100%.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said available liquidity should meet cash requirements for at least the next 12 months, while noting possible future acquisitions, strategic investments and capital expenditures could require additional borrowing.
- The 2021–2022 catastrophe reinsurance program, effective June 1, provides first-event coverage limits of up to $1.43 billion for Heritage P&C, $1.1 billion for NBIC and $680 million for Zephyr. Estimated net program cost is approximately $312 million. Coverage for later events depends on losses and remaining limits; the company remains responsible for losses beyond program coverage.
- Key risks include hurricane and other catastrophe exposure, reserve estimation uncertainty, reinsurance cost and counterparty risk, underwriting and pricing, regulatory capital requirements, litigation, and seasonal volatility. Management said COVID-19 had had virtually no business impact through Q2 2021. The business is seasonal, with hurricane season generally June through November.
- On July 28, 2021, after quarter-end, the company amended its credit agreement: the revolver increased to $75 million; a $13.75 million term-loan advance increased term-loan principal to $70 million; term-loan maturity was extended to July 2026; and pricing and certain covenants were revised. A $0.06-per-share quarterly dividend was subsequently declared on August 5, payable October 6, 2021. Future dividends remain discretionary.
- Management did not expect pending ordinary-course legal proceedings to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth and rate increases can offset rising weather losses, reinsurance costs and the reported combined ratio above 100%.
- The adequacy, cost, terms and collectability of reinsurance, particularly under multiple catastrophe events and the new program’s reinstatement provisions.
- Reserve development and the assumptions underlying the substantial IBNR component of net unpaid loss reserves.
- The post-quarter credit amendment’s effect on borrowing capacity, debt service, covenant headroom and future liquidity.
- The apparent difference between MD&A investment-income descriptions and the financial-statement line items.