Heritage Insurance Holdings, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Heritage is a recently established property and casualty insurer operating solely in Florida, principally writing personal and commercial residential coverage through assumed Citizens and Sunshine State Insurance Company (SSIC) policies and voluntary sales.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Gross premiums written | $436.4 million | $218.5 million |
| Total revenue | $233.8 million | $124.8 million |
| Net premiums earned | $223.6 million | $95.2 million |
| Net income | $47.1 million | $34.2 million |
| Diluted earnings per share | $1.82 | $2.36 |
| Net combined ratio | 71.4% | 72.9% |
| Gross combined ratio | 79.4% | 81.6% (81.5% in MD&A) |
Fourth-quarter 2014 net premiums earned were $81.6 million, total revenue was $85.4 million, expenses were $54.2 million, and net income was $19.7 million, versus $0.8 million net income in fourth-quarter 2013.
At year-end, total assets were $615.0 million, liabilities $359.9 million, and stockholders’ equity $255.1 million. Cash and cash equivalents were $160.5 million; investments were $331.2 million; restricted cash was $4.3 million. Operating cash flow was $194.2 million, investing cash outflow $200.0 million, and financing cash inflow $101.3 million. The parent reported no long-term debt obligations; the filing does not provide a single consolidated debt figure.
Gross losses and loss adjustment expenses were $89.6 million, and year-end unpaid loss reserves were $51.5 million, including $30.1 million of IBNR. Management’s independent actuary indicated a reserve range of $45.3 million to $51.9 million. Heritage P&C statutory surplus was $172.7 million, and its risk-based capital ratio was 459%.
Changes versus the prior year
- Gross premiums written doubled, primarily from policy renewals, 2014 Citizens assumptions, the SSIC portfolio, and new voluntary and commercial residential business. Policies in force rose to approximately 209,400 from 85,100.
- Net income rose about 38%, but diluted EPS fell as weighted-average diluted shares increased to 25.8 million from 14.5 million following the IPO and warrant exercises.
- 2013 net income included $26.0 million of nonrecurring retroactive reinsurance income; management said similar arrangements were not expected in future assumptions.
- Ceded premiums increased with the larger portfolio, while the ceded premium ratio improved to 28.2% from 32.0%, which management attributed to favorable reinsurance pricing, catastrophe bonds, and improved geographic spread.
- The company completed its May 2014 IPO and concurrent private placement, receiving net proceeds of approximately $78.6 million, and raised a further $22.5 million from warrant exercises.
Outlook, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management intended to continue selective Citizens assumptions, grow voluntary and commercial residential sales, expand agent distribution, and explore additional states and product lines. It expected to begin writing homeowners policies through National General’s network in early 2015.
- In first-quarter 2015 Citizens transactions, Heritage expected to assume more than 18,000 personal and 300 commercial residential policies after opt-outs.
- The 2014–2015 catastrophe program provided up to $1.175 billion of potential coverage for multiple events, including $200 million of three-year catastrophe-bond protection. Management estimated a net after-tax loss of $21.4 million under a repeat of the 2004 Florida hurricane season, equal to 8.4% of year-end equity; coverage remains subject to event severity, frequency, and terms.
- Key exposures include Florida and catastrophe concentration, reliance on Citizens depopulation, uncertain loss reserves, reinsurance cost and collectability, competitive and regulatory pressures, and limited operating history. Allianz Global Corporate & Specialty supplied approximately 81% of third-party reinsurance coverage for the 2014–2015 program.
- Disclosure controls were concluded to be ineffective at year-end because material weaknesses in financial reporting controls remained, including matters involving stock compensation, equity transactions, and income taxes. Management described remediation efforts. The auditor audited the financial statements but did not express an opinion on internal control effectiveness.
- Dividend payments were restricted by regulatory consent orders; the company said it did not plan regular common-stock dividends for the foreseeable future. Routine legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether the material weaknesses are fully remediated and whether disclosure controls improve.
- Whether reserve development and IBNR estimates remain adequate as the company’s claims history matures.
- Actual policy retention, profitability, and growth from Citizens, SSIC, and voluntary business, including the expected 2015 assumptions.
- Reinsurance availability, cost, counterparty concentration, and recoverability after a major or repeated catastrophe.
- How dilution, statutory dividend restrictions, and insurance-subsidiary capital requirements affect per-share returns and parent-company liquidity.