Heritage Insurance Holdings, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 8, 2016. This is an annual report, not a standalone fourth-quarter filing. The company writes personal and commercial residential property insurance, with its insurance business concentrated in Florida at year-end.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Gross premiums written | $586.1 million | $436.4 million |
| Net premiums earned | $376.3 million | $223.6 million |
| Total revenue | $394.8 million | $233.8 million |
| Net income | $92.5 million | $47.1 million |
| Diluted EPS | $3.05 | $1.82 |
| Net cash from operating activities | $153.9 million | $194.2 million |
| Cash, cash equivalents and investments | $636.4 million | $491.6 million |
| Total assets | $837.4 million | $615.0 million |
| Total liabilities | $480.8 million | $359.9 million |
| Stockholders’ equity | $356.6 million | $255.1 million |
- Underwriting ratios improved: gross loss ratio was 26.9% versus 28.7%; gross combined ratio was 74.9% versus 79.4%; net combined ratio was 65.0% versus 71.4%. A combined ratio below 100% generally indicates underwriting profit.
- Year-end cash and cash equivalents were $236.3 million, with an additional $13.1 million in restricted cash. Operating cash flow remained positive but declined year over year.
- The filing reports no long-term debt obligations at the parent company. Insurance liabilities include $83.7 million of unpaid losses and loss-adjustment expenses, $302.5 million of unearned premiums and $60.2 million payable for reinsurance.
- Heritage P&C reported statutory surplus of $216.6 million and a risk-based capital ratio of 368%. The company’s Demotech financial stability rating was “A.”
Changes versus the prior comparable period
- Gross premiums written rose to $586.1 million from $436.4 million, reflecting policy renewals, new voluntary business and approximately 68,200 personal residential policies assumed from Citizens in 2015.
- Policy count reached 257,131, of which approximately 74.6% were assumed from Citizens, 9.8% from Sunshine State Insurance Company and 15.6% were voluntary policies.
- Net premiums earned and total revenue increased substantially as the portfolio expanded. Commercial residential gross earned premiums increased to $97.2 million from $18.9 million.
- Net income nearly doubled. Gross loss and expense ratios improved, though losses and LAE increased to $141.2 million from $89.6 million as the insured book grew.
- Net investment income and realized gains rose to $8.9 million from $4.2 million. The 2015 result did not include the $26.0 million one-time retroactive reinsurance income recognized in 2013.
- Fourth-quarter 2015 net income was $20.2 million, compared with $19.7 million in fourth-quarter 2014; diluted EPS was $0.66 versus $0.67.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to grow through selective Citizens assumptions, voluntary sales, commercial residential business, reinsurance optimization and expansion into additional states. It cautioned that Citizens’ shrinking policy count may limit future assumption volumes.
- North Carolina business began in January 2016; the company also reported authorization to write in South Carolina and described additional state approvals and applications. As of December 31, 2015, however, all insurance business was in Florida.
- A definitive agreement to acquire Hawaii insurer Zephyr for approximately $120 million was pending at year-end. Management expected closing in March 2016, subject to adjustment; the filing describes the transaction as a subsequent event. The company said year-end cash would help fund the acquisition and reinsurance payables of $60 million due in January and April 2016.
- The 2015–2016 catastrophe program provided up to $2.3 billion of potential coverage, including retentions, for multiple events. Modeled net loss estimates were $36.9 million after tax for a recurrence of Florida’s 2004 catastrophic year and $30.8 million for a recurrence of Hurricane Andrew; actual recoveries depend on event severity, frequency and contract terms.
- Major risks include Florida hurricane concentration, catastrophe losses exceeding reinsurance, reinsurance cost or availability and counterparty collectability, uncertain loss reserves, claims litigation and assignment-of-benefits trends, pricing and competition, and dependence on Citizens assumptions and renewals.
- Reserves are a significant estimate: recorded unpaid losses and LAE were $83.7 million, including approximately $46.8 million of IBNR. The actuary’s indicated range was $78.6 million to $91.7 million. Prior-year favorable reserve development of $5.3 million benefited 2015 results.
- The company acquired BRC restoration assets in 2015 for $8.0 million, paid with $6.0 million cash and $2.0 million in stock. The board authorized a $20 million share repurchase program, but no shares had been repurchased by the filing date. A $0.05 per-share dividend was declared in December 2015; future dividends are not assured.
- Management reported effective disclosure controls and effective internal control over financial reporting at year-end. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Whether the pending Zephyr acquisition closed, its final purchase price and the resulting capital, earnings and reinsurance effects.
- Actual 2016 growth from voluntary business and new states as Citizens assumption opportunities diminish; confirm state approvals and policy counts.
- Reserve development, including the adequacy of the $83.7 million loss reserve and the extent to which favorable prior-year development recurs.
- Catastrophe reinsurance limits, exclusions, retentions, reinstatement provisions and counterparty credit quality, especially under multiple-event scenarios.
- Liquidity after the Zephyr purchase and scheduled reinsurance payments, and the level of cash available for claims and operating needs.
- How commercial residential growth, claims trends and catastrophe exposure affect underwriting profitability and the combined ratio.