Heritage Insurance Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Heritage is a multi-state property and casualty insurer, primarily serving personal and commercial residential markets.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Gross premiums written | $274.2 million | $229.1 million |
| Net premiums earned | $142.2 million | $126.0 million |
| Total revenue | $147.2 million | $132.7 million |
| Losses and loss adjustment expenses | $97.9 million | $68.2 million |
| Operating income (loss) | $(5.8) million | $12.8 million |
| Net income (loss) | $(5.1) million; $(0.19) per diluted share | $7.6 million; $0.27 per diluted share |
| Cash provided by operating activities | $39.2 million | $85.7 million |
- Gross premiums written rose 19.7% year over year, with reported growth of 21.9% outside Florida and 17.7% in Florida. Premiums in force were $1.1 billion, up $167.4 million from year-end 2020; policies in force were 591,924, up 10% year over year.
- The net loss and LAE ratio increased to 68.9% from 54.1%; the net expense ratio improved to 38.8% from 41.1%. The filing reports the Q1 combined ratio as 107.7% in its ratio table and 107.6% in the discussion.
- Net investment income fell 64.8% to $1.3 million, primarily reflecting lower yields. Total comprehensive loss was $13.4 million, including an $8.2 million after-tax unrealized investment loss.
- At March 31, cash and cash equivalents were $402.8 million, investments were $650.7 million, total assets were $2.015 billion, and stockholders’ equity was $427.4 million. Book value per share was $15.32, down 3.9% from year-end 2020.
- Long-term debt was $119.5 million net of discounts and issuance costs; principal outstanding was $122.5 million. The $50 million revolving facility had $10 million drawn. The company reported compliance with applicable debt covenants.
Material changes and management commentary
- Net loss increased from the prior-year profit, primarily due to higher current-year attritional and weather losses and lower favorable prior-year reserve development. Prior-year reserve development was favorable by $1.6 million, versus $4.2 million in Q1 2020.
- Net current accident-year weather losses were $31.4 million, versus $21.2 million a year earlier. This included $15.4 million of catastrophe losses and $16.1 million of other weather losses.
- Ceded premiums rose 17.9%, reflecting higher catastrophe excess-of-loss reinsurance costs and growth in insured value. The ceded premium ratio increased to 47.4% from 46.3%.
- Operating cash flow decreased year over year, which management attributed mainly to the timing of claim payments and reinsurance reimbursements. Investing activities used $73.7 million, largely reflecting purchases of fixed-maturity securities.
- Management said cash, the revolving facility, and expected earnings were adequate for at least the next 12 months. No quantified earnings or premium guidance was provided. The company anticipated moving to its Tampa headquarters in the second half of 2021.
Outlook, risks and contingencies
- Insurance results are seasonal: hurricanes typically occur June through November, and winter storms can affect the first and fourth quarters. Catastrophe losses, catastrophe-model uncertainty, pricing, and reinsurance availability and cost are significant risks.
- Reinsurance does not eliminate the company’s exposure if reinsurers fail to meet obligations. Net unpaid losses and LAE were $271.5 million; $205.0 million, or 75.5%, was IBNR net of reinsurance recoverables.
- Management reported minimal business impact from COVID-19 to date, but cited possible effects on demand, agency distribution, premium collections, markets, and access to financing if economic conditions deteriorate.
- The company reported that its insurance subsidiaries met applicable state financial and regulatory requirements. Combined statutory surplus was $305.6 million, down from $333.3 million at December 31, 2020.
- Ordinary-course claims and legal actions are ongoing; management did not expect pending proceedings to have a material adverse effect. The company also disclosed a non-cancellable Tampa office lease with approximately $29.7 million of commitments through 2031.
Important facts for investors to verify
- Whether elevated weather and attritional losses persist, and how reserve development and IBNR estimates evolve.
- Renewal and new-business growth, rate adequacy, and the effect of higher reinsurance costs on net premiums and underwriting results.
- Liquidity and capital adequacy after claim payments, seasonal reinsurance installments, and any catastrophe losses; also monitor debt covenant compliance.
- The combined ratio is stated as both 107.7% and 107.6% in the filing; confirm the intended reported figure.
- Future dividends are discretionary. The board declared a $0.06-per-share quarterly dividend payable in July 2021; the filing provides no assurance of future payments.