Heritage Insurance Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2022; filed November 9, 2022. Heritage is a super-regional property and casualty insurer focused on personal and commercial residential coverage across multiple states, with significant Florida exposure.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $165.5 million | $167.4 million | $487.9 million | $464.8 million |
| Net premiums earned | $159.7 million | $162.4 million | $470.9 million | $451.1 million |
| Net loss | $48.2 million | $16.4 million | $166.9 million | $25.5 million |
| Diluted loss per share | $1.83 | $0.59 | $6.29 | $0.91 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(15.5) million | $72.8 million |
- Premiums and growth: Q3 gross premiums written rose 11.1% to $304.5 million; nine-month gross premiums written rose 7.6% to $953.0 million. Premiums in force increased 5.8% year over year to $1.24 billion, while policies in force declined 6.9%.
- Underwriting ratios: Q3 net loss and LAE ratio was 97.6% (79.8% prior year), net expense ratio 35.7% (32.7%), and combined ratio 133.3% (112.5%). For nine months, the combined ratio was 120.7%, versus 108.6%.
- Balance sheet at September 30: Cash and cash equivalents were $297.5 million; investments were $651.8 million; total assets were $2.52 billion; long-term debt, net, was $121.3 million; and stockholders’ equity was $117.7 million. Cash plus restricted cash totaled $303.8 million.
- Investment values: Available-for-sale fixed maturities had $633.2 million fair value versus $704.4 million amortized cost. Nine-month other comprehensive loss was $50.0 million after tax, primarily reflecting unrealized investment losses as interest rates rose.
Material changes and drivers
- Q3 net loss widened by $31.8 million year over year, primarily because of higher weather and attritional claims, including Hurricane Ian. The company estimated Ian gross catastrophe losses of $655.4 million and net retained losses of $40.0 million.
- Nine-month results included a $92.0 million non-cash goodwill impairment recorded in Q2. Management cited catastrophe-related market disruption, elevated sector loss ratios, and the company’s market capitalization being below book value.
- Q3 net premiums earned decreased 1.7% despite higher gross earned premiums, as ceded premiums earned increased 12.4%. The Q3 ceded premium ratio rose to 48.1% from 44.8%, reflecting higher reinsurance costs and insured values.
- Florida policies in force declined 17.6% year over year and Florida total insured value fell 10.3%; Florida premiums in force declined 2.6%. Other-state premiums in force grew 14.1%. Management attributed the changes to rate increases, diversification, and exposure-management actions.
- Operating cash flow shifted to a use of $15.5 million from a source of $72.8 million in the prior-year nine-month period. Management cited the timing of claims payments, reinsurance payments, and recoveries. Cash and cash equivalents fell from $359.3 million at year-end 2021.
Outlook, risks, contingencies, and unusual items
- Management described ongoing rate increases, tighter underwriting, selective reductions in new and unprofitable business, and geographic diversification as profitability initiatives. Average premium per policy increased 13.6% year over year in Q3. Rate changes require regulatory approval and may take up to 24 months to be fully earned.
- Management anticipates continued reinsurance cost increases and constrained availability for the 2023 renewal season. It also cited inflation-driven labor and material costs, Florida litigated and abusive claims, catastrophe exposure, and potential reserve and reinsurance-collectability uncertainty. No specific earnings or revenue guidance was provided.
- The 2022–2023 catastrophe program provided first-event coverage of up to $1.3 billion for Heritage P&C, $1.2 billion for NBIC, and $780.0 million for Zephyr. Estimated net cost was approximately $359.5 million; actual remaining coverage for subsequent events depends on event severity and frequency.
- On November 7, 2022, after management considered a covenant breach likely based on Q3 results, the company amended its credit agreement. The amendment reduced the revolving facility from $75 million to $50 million, added a $25 million term-loan facility, increased borrowing margins, and tightened covenants. Revolver borrowings were repaid using the additional term borrowing. The amendment may restrict dividends, share repurchases, and capital contributions to certain insurance subsidiaries.
- The company recorded a $10.7 million valuation allowance against deferred tax assets associated with captive reinsurer Osprey Re, citing insufficient expected taxable income there to realize the assets. Management said liquidity sources were adequate for anticipated requirements over at least the next 12 months; this is a forward-looking assessment.
- Legal proceedings arise in the ordinary course of business; management did not believe pending matters would materially adversely affect results or financial position. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Ian claim development, the adequacy of the $40.0 million net retention estimate, and the timing and collectability of reinsurance recoveries.
- Reinsurance renewal pricing, availability, and the company’s net catastrophe exposure, especially for multiple events in a season.
- Loss trends, reserve development, litigation and inflation impacts, and whether rate increases earn through sufficiently to improve combined ratios.
- Compliance with amended debt covenants, borrowing costs, available liquidity, and any restrictions on dividends, buybacks, or insurance-subsidiary capital support.
- Realizability of Osprey Re deferred tax assets and the potential for further investment valuation changes or goodwill/intangible impairment.