Heritage Insurance Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company is a super-regional property and casualty insurer focused primarily on personal and commercial residential coverage across coastal and other U.S. markets.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gross premiums written | $278.2m | $237.3m | $797.8m | $702.5m |
| Net premiums earned | $138.2m | $123.9m | $393.3m | $347.6m |
| Total revenue | $165.1m | $131.7m | $433.8m | $372.8m |
| Net income (loss) | ($5.2m) | $8.1m | $6.5m | $15.8m |
| Diluted EPS | ($0.19) | $0.28 | $0.23 | $0.54 |
| Net combined ratio | 122.7% | 95.5% | 106.4% | 99.2% |
Q3 operating loss was $4.5m, compared with operating income of $13.5m a year earlier. For the nine-month period, operating income fell 46% to $15.2m. Net investment income declined to $2.8m in Q3 and $9.8m year to date. Net realized and unrealized gains were $20.4m in both Q3 and the nine-month period; management said opportunistic sales of fixed-income securities with unrealized gains drove the increase. These gains contributed approximately $15.6m after tax, or $0.56 per diluted share, in Q3.
Q3 net loss and LAE ratio rose to 86.6% from 56.6%, reflecting unusually high weather and other current-year losses. The Q3 net expense ratio improved to 36.1% from 38.9%. For the nine months, the loss ratio increased to 67.8% from 59.4%, while the expense ratio improved to 38.6% from 39.8%.
Cash, balance sheet and debt
- Cash and cash equivalents were $509.6m at September 30, 2020, up from $268.4m at year-end 2019; restricted cash was $5.4m. Total assets were $2.15bn and stockholders’ equity was $443.1m.
- Nine-month operating cash flow was $118.6m, versus $116.2m in 2019. Investing activities provided $136.6m, mainly reflecting fixed-maturity sales; financing activities used $23.2m. Cash, cash equivalents and restricted cash increased $232.0m.
- Long-term debt, net, was $122.6m, down from $129.2m at year-end. Principal debt totaled $126.4m, including $61.9m under the term loan and $10.0m drawn on the revolving facility. The company reported compliance with debt covenants.
- Combined statutory surplus at the insurance subsidiaries was $302.6m, compared with $351.8m at December 31, 2019. The subsidiaries met applicable regulatory and risk-based capital requirements.
- Book value per share was $15.97, up 3.9% year over year. The company declared a $0.06 quarterly dividend and repurchased $10.0m of shares during the first nine months.
Changes, operating developments and unusual items
- Gross premiums written increased 17.3% in Q3 and 13.6% year to date. Management attributed growth to expansion both inside and outside Florida, rate increases and higher policy counts; Delaware became the company’s fifteenth active state.
- Q3 current accident-quarter weather losses were $47.3m: $24.5m catastrophe and $22.8m other weather losses, substantially above $18.7m in the prior-year quarter. Nine-month weather losses included Hurricanes Isaias, Laura and Sally, as well as hail, tornado and wind events.
- Prior-year reserve development was favorable by $5.8m in Q3 and $14.9m for the nine months. Net unpaid losses and LAE were $245.7m; $185.5m, or 75.5%, was IBNR net of reinsurance recoverables.
- The 2020–2021 catastrophe program, effective June 1, provides first-event limits of up to $1.35bn for Heritage P&C, $965m for NBIC and $690m for Zephyr. Estimated net program cost is approximately $272.1m. Reinsurance reduces catastrophe exposure, but the company remains liable if reinsurers fail to pay and bears losses above available coverage.
- Cash proceeds from investment sales increased liquidity, while fixed-maturity investments fell to $445.5m from $587.3m at year-end. The company invested or converted $17.4m into preferred units of a private company, carrying an 8% preferred return and repayment terms beginning in 2021 or 2022.
Outlook, risks and contingencies
No specific earnings or premium guidance was provided. Management said it believed cash, revolving-credit availability and expected operating cash flows were sufficient for anticipated working-capital needs for at least 12 months, while cautioning that future results and liquidity could be affected by unforeseen events. It described the nine-month COVID-19 impact as limited, but noted potential future pressure on new sales, agency distribution, premium collections, investment values and yields, and claims handling. About half of personnel were working remotely.
Key risks include catastrophe and weather losses, reserve inadequacy, coastal-market concentration, reinsurance pricing and collectability, underwriting and pricing accuracy, competition, investment-market volatility and access to liquidity or financing. The company’s modeled sensitivity showed a 100-basis-point rise in interest rates would reduce fixed-maturity fair value by approximately $13.2m (3.0%). It also cited uncertainty around the transition from LIBOR after 2021. Management reported no material pending legal proceeding expected to adversely affect financial position, results or cash flows. The CARES Act was not expected to have a material financial or liquidity impact.
Subsequent to quarter-end, the board declared another $0.06 per-share dividend and extended the share-repurchase program through December 31, 2021, increasing its authorization to $50m. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated weather losses, the 122.7% Q3 combined ratio and the 106.4% year-to-date ratio persist or normalize.
- Whether reserve estimates and reinsurance recoverables remain adequate, including the collectability and availability of catastrophe coverage.
- How much of earnings and book value depends on investment gains, and how reinvestment of securities-sale proceeds affects recurring investment income and liquidity.
- Whether premium growth, retention, pricing and the new Delaware expansion can support underwriting profitability amid rising acquisition costs and reinsurance expense.
- How statutory surplus, debt covenants, catastrophe collateral requirements and shareholder returns evolve relative to claims obligations and potential catastrophe losses.