Heritage Insurance Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 6, 2015. Amounts below are in U.S. dollars. The financial statements are unaudited.
Business context and reporting period
Heritage writes personal and commercial residential property insurance in Florida through one business segment. At September 30, it reported approximately 240,557 policies in force: 74% assumed from Citizens, 11% assumed from SSIC, and 15% from voluntary sales. Results reflect substantial policy growth and the addition of commercial residential business.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross premiums written | $149.0m | $86.8m | $418.6m | $254.9m |
| Net premiums earned | $82.4m | $55.5m | $278.7m | $142.1m |
| Total revenue | $89.2m | $58.0m | $293.5m | $148.4m |
| Net income | $16.8m | $10.0m | $72.3m | $27.4m |
| Diluted EPS | $0.55 | $0.33 | $2.39 | $1.12 |
| Combined ratio, gross basis | 83.8% | 82.9% | 73.2% | 82.1% |
| Combined ratio, net basis | 74.8% | 75.5% | 63.3% | 74.2%* |
Year-to-date gross premiums written rose about 64%, and revenue more than doubled, primarily from policy growth, Citizens renewals and the expansion of commercial residential coverage. Net income increased about 164%. Q3 net premiums earned grew about 48%, while net income grew about 69%.
For the first nine months, losses and loss adjustment expenses were $102.2m, policy acquisition costs $40.9m, and general and administrative expenses $33.4m. The company recorded $1.8m of net realized investment gains for the period. Management attributed improved year-to-date combined ratios to favorable prior-year loss development, a lower ceded premium ratio, commercial residential mix, and expense leverage. Q3’s gross combined ratio rose slightly; its net ratio improved modestly.
For the nine months, net cash provided by operating activities was $117.5m, investing cash outflow was $83.1m, and financing cash inflow was $6.4m; cash and cash equivalents increased $40.8m. At September 30, cash and cash equivalents were $201.3m, restricted cash $12.8m, and investments $395.7m. Total assets were $855.0m, liabilities $522.6m, and stockholders’ equity $332.4m. No corporate debt balance is reported in the balance sheet.
Material changes versus the prior comparable period
- Nine-month gross premiums earned increased to $381.3m from $204.9m; ceded premiums also rose, to $102.6m from $62.8m, reflecting expanded business and reinsurance needs.
- Nine-month losses and loss adjustment expenses increased to $102.2m from $62.1m, mainly with policy growth. Prior-year reserve development was favorable by $6.8m in 2015.
- Cash and investments were $597.0m at quarter-end, compared with $490.8m at September 30, 2014, based on the filing’s stated cash-and-investments figure for 2015 and comparative investment/cash balances.
- Available-for-sale investments increased overall from year-end 2014; the portfolio included $380.3m of fixed maturities and $15.4m of equity securities. Accumulated other comprehensive loss was $3.5m, versus income of $1.7m at year-end 2014.
Guidance, outlook, risks and unusual items
- Outlook and liquidity: Management said current capital resources and operating cash flow should be sufficient for anticipated working-capital needs for at least 12 months, while noting this is not assured. Cash was being held for hurricane-season liquidity, Osprey collateral needs, and the planned Zephyr acquisition.
- Acquisitions and capital allocation: Heritage completed its acquisition of BRC Restoration Specialists in July for $6.0m cash and $2.0m in restricted shares. It agreed to acquire Hawaii-based Zephyr for approximately $120m cash, subject to regulatory and customary conditions, with closing expected in Q4 2015. The board also authorized a $20m share repurchase program through December 31, 2016.
- Catastrophe protection: The June 2015–May 2016 reinsurance program provides approximately $1.77bn of catastrophe-loss coverage, including retention, and was described as exceeding rating-agency and regulatory requirements. Availability, pricing, collectability, exhaustion of coverage, and losses beyond limits remain material considerations.
- Claims and reserves: Unpaid losses and LAE were $74.4m, including $40.5m of IBNR reserves (54%). Management reported a $2.5m Q3 prior-year reserve redundancy and $4.5m of favorable development in Q1; it cited greater claims experience in setting reserves. Reserve estimates remain uncertain, particularly given catastrophe exposure.
- Other risks: The company identifies hurricanes and other catastrophes, reinsurance cost and availability, Citizens depopulation-program changes, investment-income generation, financial-strength ratings, and emerging legal or coverage issues. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $14.6m, or 4%; equity holdings were concentrated in energy (73% of equity portfolio fair value).
- Legal and controls: Ordinary-course claims-related litigation was not expected by management to materially affect financial position, results, or cash flow. Management said disclosure controls were effective and prior material weaknesses in financial reporting controls had been remediated; the filing reports no other material quarterly control changes.
Important facts for investors to verify
- Whether the planned Zephyr purchase closed, its final price and financing, and the effect on liquidity and capital.
- Policy growth and mix, especially Citizens-assumed business, voluntary renewals, and commercial residential exposure.
- Loss development, IBNR adequacy, catastrophe claims, and the amount of reinsurance recoveries actually collectible after any event.
- Reinsurance cost and coverage changes at renewal, including the impact of aggregate limits and potential coverage exhaustion.
- Investment portfolio exposure: the filing reports significant energy concentration in equities and meaningful sensitivity to interest-rate changes.
- The filing’s nine-month 2014 net combined ratio is 74.2% in the comparison table but 74.1% in the narrative; confirm the intended comparative figure.
- Execution and financial impact of the $20m repurchase authorization and the BRC integration.
*The narrative elsewhere states the nine-month 2014 net combined ratio as 74.1%; the table shows 74.2%.