Heritage Insurance Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2021. Heritage is a multi-state property and casualty insurer focused primarily on personal and commercial residential coverage.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $162.4m | $138.2m | $451.1m | $393.3m |
| Total revenue | $167.4m | $165.1m | $464.8m | $433.8m |
| Net income (loss) | $(16.4)m | $(5.2)m | $(25.5)m | $6.5m |
| Diluted earnings (loss) per share | $(0.59) | $(0.19) | $(0.91) | $0.23 |
| Net combined ratio | 112.5% | 122.7% | 108.6% | 106.4% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $70.2m | $118.6m |
Q3 net loss and LAE were $129.6m, up 8.3%; nine-month losses and LAE were $328.4m, up 23.1%. Q3 net investment income plus realized and unrealized investment results was approximately $1.5m, versus $23.2m a year earlier. The comparable nine-month figure was approximately $2.9m, versus $30.2m. The filing attributes the decline mainly to sizable opportunistic fixed-income sales and realized gains in 2020, and lower yields.
At September 30, cash and cash equivalents were $393.4m, investments were $686.1m, total assets were $2.248bn, and stockholders’ equity was $405.0m. Long-term debt, net, was $121.5m; principal debt outstanding was $124.2m. The company had $70m outstanding under its term loan and no revolving-credit borrowings; the revolving facility was increased to $75m.
For the first nine months, operating cash flow was $70.2m, investing cash outflow $110.3m, and financing cash outflow $7.4m. Cash and restricted cash declined $47.6m to $398.8m. Management stated available sources should meet cash requirements for at least the next 12 months.
Changes versus comparable periods
- Q3 gross premiums written declined 1.5% year over year to $274.2m: Florida fell 12.4% under exposure-management actions, partly offset by 8.0% growth in other states. Nine-month gross premiums written rose 11.1% to $886.1m.
- Q3 net premiums earned increased 17.5%, but the net loss widened to $16.4m, primarily reflecting higher losses and much lower investment gains than in 2020. The nine-month result shifted from $6.5m income to a $25.5m loss, with elevated weather losses and lower investment returns among the drivers.
- The Q3 combined ratio improved to 112.5% from 122.7%, but remained above 100%, indicating underwriting losses. For nine months it worsened to 108.6% from 106.4% as the loss ratio rose to 72.8% from 67.8%.
- Book value per share was $14.57, down 4.1% from Q2 2021 and 8.8% year over year. Statutory surplus of insurance subsidiaries declined to $290.0m from $333.3m at year-end 2020.
Outlook, management commentary, and risks
- No quantified earnings or revenue guidance is provided. Management said COVID-19 had a negligible business impact through Q3, and described liquidity as adequate for at least 12 months.
- The 2021–2022 catastrophe reinsurance program provides first-event coverage up to $1.43bn for Heritage P&C, $1.1bn for NBIC, and $680m for Zephyr. Estimated net cost is approximately $312m. The company remains liable for losses exceeding coverage, and reinsurance recoveries depend on reinsurers’ ability to pay.
- Q3 net current accident-quarter weather losses were $51.4m, versus $47.3m a year earlier; this included $16.0m of catastrophe losses and $35.5m of other weather losses. Prior-year reserve development was favorable by $0.8m in Q3. Management notes reserve estimates, including IBNR, are uncertain.
- In July 2021, the company amended its credit agreement: increased the revolver to $75m, extended the term loan maturity to July 2026, reduced applicable interest margins, and revised covenants and LIBOR-transition provisions. The company reported covenant compliance at the filing date.
- Key risks include hurricane and other severe-weather exposure, reinsurance cost, availability and collectibility, claims inflation, reserve estimation, competition, regulation and capital requirements, and investment-market risk. Management cited rising repair-material and labor costs as a potential claims pressure. No material adverse impact from pending ordinary-course legal proceedings was expected by management.
- The company declared a $0.06-per-share quarterly dividend payable October 6, 2021; after quarter-end, it declared another $0.06 dividend payable January 6, 2022. Future dividends remain discretionary. It repurchased 148,109 shares for approximately $1.0m in Q3.
Important facts for investors to verify
- Subsequent catastrophe and non-catastrophe claims, reserve development, and the drivers of the combined ratio remaining above 100%.
- Reinsurance renewal pricing, actual protection available across multiple events, and reinsurer credit quality and recoverability.
- Statutory capital and surplus at each insurance subsidiary, including regulatory constraints on dividends or capital transfers.
- Liquidity and cash-flow needs as reinsurance premiums are paid and claims and recoveries settle; also verify compliance with debt covenants and terms of the amended facilities.
- Florida exposure-management effects on policy count and premium growth, and whether growth outside Florida can offset reductions.
- Investment income and portfolio sensitivity to interest rates; the filing reports fixed-maturity portfolio duration of 3.891 years and average credit quality of A+.