Heritage Insurance Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Heritage is a property insurer with significant coastal exposure and catastrophe-reinsurance needs. This unaudited filing covers the quarter and nine months ended September 30, 2019, compared with the same 2018 periods. Unless noted otherwise, financial amounts below are in millions.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Gross premiums written | $237.3 | $233.6 | $702.5 | $701.6 |
| Net premiums earned | $123.9 | $118.2 | $347.6 | $335.6 |
| Total revenue | $131.7 | $125.3 | $372.8 | $355.3 |
| Net income | $8.1 | $6.0 | $15.8 | $23.2 |
| Diluted EPS | $0.28 | $0.23 | $0.54 | $0.88 |
| Net combined ratio | 95.5% | 93.9% | 99.2% | 91.8% |
- Underwriting and margins: Q3 operating income was $13.5 million versus $14.2 million. The Q3 net loss and LAE ratio rose to 56.6% from 49.6%, while the net expense ratio improved to 38.9% from 44.3%. For the nine months, the loss ratio rose to 59.4% from 53.0% and the expense ratio to 39.8% from 38.8%.
- Cash flow: Operating cash flow was $116.2 million for the first nine months, up from $60.3 million. Investing activities used $100.6 million and financing activities used $34.1 million; cash, cash equivalents and restricted cash fell by $18.6 million to $243.8 million.
- Liquidity and balance sheet: At September 30, cash and cash equivalents were $230.0 million and restricted cash was $13.8 million. Total assets were $1.843 billion and stockholders’ equity was $445.2 million. Management said it believes liquidity and capital resources, including revolving-credit availability, are sufficient for anticipated working-capital needs for at least 12 months.
- Debt: Long-term debt carrying value was $130.8 million, down from $148.8 million at year-end; total principal outstanding was $136.1 million. The company had $10.0 million drawn on its $50.0 million revolving facility and reported compliance with debt covenants.
- Capital and returns: The company repurchased 316,383 shares for $4.5 million in Q3. It declared a $0.06-per-share quarterly dividend, including a subsequent declaration for payment in January 2020.
Changes versus comparable periods
- Q3 gross written premiums increased 1.6%; growth outside Florida was partly offset by Florida exposure-management reductions. Management reported 7.9% growth outside Florida and a 4.8% decline in Florida. Nine-month gross written premiums were essentially flat.
- Net premiums earned rose in both comparisons, mainly because ceded premiums were lower amid NBIC reinsurance changes and related reinsurance synergies.
- Q3 net income increased 36%, helped by higher net premiums earned, lower interest expense and a lower expense ratio. However, higher losses offset some of those gains.
- Nine-month net income declined 32%, reflecting higher loss costs and the prior-year benefit of NBIC purchase accounting, partly offset by higher net premiums earned and investment income and lower interest expense.
- Net investment income was $11.2 million for nine months, compared with $9.7 million. Net realized and unrealized gains were $3.1 million versus a $1.2 million loss in 2018.
- Favorable prior-year reserve development was $0.4 million in Q3 and $2.3 million for nine months, compared with $3.2 million and unfavorable $14.7 million, respectively, in the 2018 periods.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management described Q3 as a return to positive consolidated organic premium growth and cited continued growth outside Florida.
- Q3 net current accident-quarter weather losses were $18.7 million, including $6.7 million of catastrophe losses; the comparable 2018 figures were $23.6 million and $17.3 million. Management attributed the higher total loss expense primarily to non-catastrophe weather losses, lower savings from vertically integrated operations and less favorable reserve development, partly offset by lower catastrophe losses.
- The 2019–2020 catastrophe program provides first-event coverage up to $1.5 billion for Heritage P&C, $708.0 million for Zephyr and $936.0 million for NBIC, with stated first-event retentions of $20.0 million, $20.0 million and $13.8 million, respectively. Estimated net program cost is approximately $249.2 million. The company remains responsible for losses exceeding available coverage, and reinsurance recoverables depend on reinsurer performance.
- Key risks include coastal concentration and catastrophe losses, reserve-estimate uncertainty, reinsurance availability, cost and collectability, pricing and claims-management risks, investment-market risk, competition, regulation and seasonal volatility. Management noted hurricane season generally runs June through November.
- The company reported combined statutory surplus of $337.3 million at September 30, 2019, down from $376.3 million at December 31, 2018; subsidiaries met applicable regulatory requirements. Management said pending ordinary-course legal proceedings were not expected to have a material adverse effect. No material risk-factor changes were reported, and disclosure controls were assessed as effective.
- The company adopted lease accounting in 2019, recording approximately $2.8 million of lease assets and liabilities at adoption, with no material effect on reported operations or cash flows. Management expected adoption of the new expected-credit-loss standard to be immaterial; implementation remained in process.
Important facts for investors to verify
- Whether loss-reserve assumptions remain adequate, particularly given that $158.2 million of net unpaid losses and LAE was IBNR at quarter-end.
- The quality, timing and collectability of the $274.1 million reinsurance recoverable balance, and the extent of available coverage after multiple catastrophe events.
- Whether Florida exposure management and growth outside Florida sustain premium growth without weakening underwriting results.
- How weather losses, the 99.2% nine-month combined ratio and reinsurance costs affect future profitability and capital.
- Liquidity and capital flexibility, including restricted cash, revolving-facility availability, debt maturities and the decline in statutory surplus.
- Valuation and liquidity risks associated with the company’s newer limited-partnership and LLC investments, valued at approximately $27.4 million in total.