Heritage Insurance Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Heritage is a property and casualty insurer with significant coastal-state and catastrophe exposure. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Gross premiums written | $210.3 | $204.4 | Up 2.9%; growth was 6.6% outside Florida and 0.1% in Florida. |
| Net premiums earned | $109.7 | $106.1 | Up 3.4%. |
| Total revenue | $118.3 | $112.0 | Up 5.6%. |
| Losses and loss adjustment expenses | $62.1 | $53.1 | Up 17%. |
| Operating income | $11.5 | $24.8 | Down 54%. |
| Net income | $7.0 | $14.8 | Down 53%; diluted EPS was $0.24 versus $0.55. |
| Operating cash flow | $85.3 | $(12.1) | Improved, primarily with reinsurance collections and working-capital movements. |
Insurance ratios: Net loss and LAE ratio was 56.6% versus 50.0%; net operating expense ratio was 40.7% versus 32.2%; and net combined ratio was 97.3% versus 82.2%. The gross ceded premium ratio declined to 52.0% from 53.3%.
Margins and earnings drivers: Higher current-period losses and higher policy acquisition costs weighed on results. Acquisition costs increased to $26.0 million from $12.2 million, in part because Q1 2018 benefited from NBIC purchase accounting and Q1 2019 had lower ceding commission income. General and administrative expense fell to $18.6 million from $21.9 million. Net interest expense declined to $2.1 million from $4.8 million, mainly reflecting lower debt and a lower blended rate. Investment-related gains supported Q1 2019 earnings; the filing reports $1.0 million of realized gains and describes approximately $0.8 million of investment gains contributing to net income.
Financial position, cash flow and capital
- At March 31, 2019, total assets were $1,677.0 million, total liabilities $1,241.9 million and stockholders’ equity $435.1 million. Equity increased from $425.3 million at year-end 2018.
- Cash and cash equivalents were $279.7 million, with $12.3 million of restricted cash; combined cash was $292.0 million. Management stated it believed liquidity and capital resources, together with operating cash flow, would meet anticipated working-capital needs for at least 12 months.
- Investments totaled $567.0 million, including $527.9 million of available-for-sale fixed maturities and $21.7 million of limited partnership interests. Q1 comprehensive income was $12.9 million, including an after-tax $6.0 million benefit from other comprehensive income, principally unrealized investment changes.
- Long-term debt had a $138.1 million principal balance and a $132.2 million carrying value, down from $155.8 million and $148.8 million, respectively, at December 31, 2018. Debt-to-capital was 24.1%, according to management, down 10.7 percentage points year over year and 2.7 points sequentially.
- The $50 million revolving facility had $10 million drawn and no letters of credit outstanding at quarter-end. The company reported compliance with applicable debt covenants. Its quarterly cash dividend was $0.06 per share; it also repurchased 347,740 shares for $5.0 million.
- Combined statutory surplus of Heritage P&C, Zephyr and NBIC was $366.6 million, compared with $376.3 million at December 31, 2018.
Material changes and management commentary
- Premiums-in-force were $930.1 million, up 0.7% year over year; the filing reports 4.7% growth outside Florida and a 2.4% decline in Florida.
- Heritage began writing personal residential business in Virginia and launched a commercial residential product in New Jersey. It was actively writing personal residential business in 12 states and licensed in 15.
- Q1 net current-accident-year catastrophe losses were $15.0 million, including $10.2 million from a Brevard County, Florida hailstorm. Prior-year reserve development was favorable by $0.6 million, the third consecutive quarter of favorable development.
- Reinsurance ceded premiums earned declined to $118.9 million from $121.1 million. Management attributed the change primarily to NBIC reinsurance synergies and changes in its quota-share arrangements.
- Operating cash flow was positive versus cash use in the prior-year quarter. The filing attributes the improvement primarily to reinsurance collections and changes in unpaid losses and other operating balances; investing cash flow was negative as invested assets increased.
- The company adopted the new lease standard in Q1 2019, recording approximately $2.8 million at adoption in right-of-use assets and lease liabilities; management reported no material effect on results or cash flows.
Outlook, risks and contingencies
The filing gives no specific earnings or premium guidance. Management said it believed its reinsurance program was adequate to diversify risk and protect its financial position, while providing no assurance. The catastrophe reinsurance program renews effective June 1, and the business is seasonal, with hurricane activity generally from June through November. Reinsurance cost, availability and recoverability, catastrophe losses, and the timing and severity of claims can affect results and liquidity.
Loss reserves include an estimated $143.1 million of net incurred-but-not-reported losses, stated as 75% of net reserves. Reserve estimates and reinsurance recoveries may change materially as claims develop. The company also identified risks from coastal concentration, pricing and catastrophe-model uncertainty, competition, litigation and claims trends, regulation, and investment-market movements. It reported no material changes to the risk factors in its 2018 Form 10-K.
The company said pending ordinary-course legal proceedings were not expected to have a material adverse effect. In April 2019, it was notified that federal income tax returns for 2015–2017 would be examined; management did not believe the examination would adversely affect the financial statements. The filing reported no material subsequent events requiring adjustment or additional disclosure; a $0.06-per-share dividend for July 2019 was declared after quarter-end.
Most important facts for investors to verify
- Whether the $15.0 million of current-year catastrophe losses, including the Brevard County hailstorm, and the reserve assumptions remain consistent with later claim development.
- Whether reinsurance recoverables are collectible and the June 1 renewal maintains adequate coverage at affordable cost, including protection against multiple events.
- What drove the increase in the combined ratio to 97.3%, especially acquisition costs, ceding commissions, and the comparison with Q1 2018 purchase-accounting benefits.
- Whether premiums-in-force growth outside Florida can continue while Florida exposure and policy counts evolve, and how new-state and product expansion affects underwriting results.
- Debt repayment, revolving-facility availability, covenant compliance, and the capacity to sustain dividends and share repurchases while maintaining insurance-subsidiary statutory capital.
- Investment valuation and liquidity, including the $21.7 million limited partnership holding and the effect of interest-rate or equity-market changes.