Heritage Insurance Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017. Heritage writes personal and commercial residential property insurance across coastal and other states. The November 2017 acquisition of NBIC expanded the company’s northeastern U.S. business, making year-over-year comparisons materially affected by the acquisition. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Gross premiums written | $204.4 | $142.2 |
| Net premiums earned | $106.1 | $92.2 |
| Total revenue | $112.0 | $99.3 |
| Operating income | $24.8 | $11.9 |
| Net income | $14.8 | $6.0 |
| Diluted earnings per share | $0.55 | $0.21 |
| Net combined ratio | 82.2% | 94.8% |
| Operating cash flow | $(12.1) | $4.0 |
| Cash and cash equivalents | $193.6 | $153.7 at Dec. 31, 2017 |
| Investments at fair value | $502.9 | $567.0 at Dec. 31, 2017 |
| Total assets | $1,866.4 | $1,771.2 at Dec. 31, 2017 |
| Long-term debt, net | $185.1 | $184.4 at Dec. 31, 2017 |
| Stockholders’ equity | $388.9 | $379.8 at Dec. 31, 2017 |
Gross premiums written increased 44%, largely from NBIC, partly offset by reduced Heritage P&C premium associated with exposure management. Net premiums earned rose 15%. Net income more than doubled; management attributed improvement to NBIC, lower losses and a lower effective tax rate, partly offset by higher debt interest. The net combined ratio improved to 82.2% from 94.8%; the net loss ratio was 50.0% versus 50.6%, and the net expense ratio was 32.2% versus 44.2%. The expense-ratio improvement principally reflected $19.0 million of NBIC ceding commissions. The gross combined ratio was 91.7%, compared with 96.9%.
Q1 operating cash use reflected payment of Hurricane Irma claims pending reinsurance recoveries and northeastern winter-storm claims. Investing activities provided $55.7 million, primarily from investment sales to fund Irma claims. Cash, cash equivalents and restricted cash totaled $214.5 million at quarter-end. Management stated it believed liquidity and capital resources, together with operating cash, would meet anticipated working-capital needs for at least 12 months, while noting it could not provide assurance.
Material changes, risks and management commentary
- Acquisition and growth: NBIC contributed approximately $70.5 million of the year-over-year increase in written premium; reported Q1 2018 premium in force was about $923 million, across approximately 522,000 policies. NBIC represented about $331 million and 196,000 policies.
- Claims and reserves: Q1 incurred losses included $1.7 million of adverse prior-year development, including approximately $3.0 million unfavorable development on Hurricane Matthew partly offset by favorable non-catastrophe development. NBIC reported about $56 million of gross winter-storm losses, or about $9 million net of reinsurance. Net unpaid losses and LAE were $162.3 million, including $98.8 million of IBNR net of reinsurance.
- Reinsurance and catastrophe exposure: The 2017–2018 program provided first-event coverage, including retention, up to $1.75 billion in Florida and $731 million in Hawaii, and up to $2.6 billion for multiple events. Management anticipated Hurricane Irma would exhaust the 2017-2 notes and portions of certain 2016 and 2015 catastrophe-bond layers; those layers do not reinstate, and the filing says any resulting 2018-season gap would be addressed in the 2018–2019 program. Actual access to aggregate and multiple-event coverage depends on event severity and frequency. Reinsurance collectability and availability remain risks.
- Debt and capital returns: Debt principal was $207.7 million, versus $185.1 million reported net of discounts and issuance costs. The company repurchased 115,200 shares for $2.0 million during the quarter and declared a $0.06-per-share dividend payable in April. In April 2018, it repurchased $10.6 million face value of convertible notes for $13.4 million. Contractual-obligation disclosures include interest and scheduled payments.
- Investments and taxes: Available-for-sale investments had $11.6 million of gross unrealized losses at March 31, 2018, and accumulated other comprehensive loss increased to $7.6 million. The filing links the quarter’s investment-value changes to market movements; a 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by 4%. The Q1 effective tax rate was 25.8%, versus 38.3% in 2017, reflecting the Tax Act’s reduction of the federal corporate rate to 21% and other factors.
- Outlook, legal matters and controls: The filing provides no specific earnings or revenue guidance. Results are seasonal and exposed to hurricanes, winter storms, reserve estimation, pricing, reinsurance costs and recoveries, competition, regulation and investment-market fluctuations. Management reported no material change in risk factors, no pending legal proceeding expected to have a material adverse effect, and effective disclosure controls as of March 31, 2018.
Key facts for investors to verify
- How much reported growth and improved combined ratios reflect NBIC and its quota-share ceding commissions, versus underlying trends in Heritage’s existing businesses.
- Whether anticipated Irma-related catastrophe-bond exhaustion, recoveries and any 2018–2019 reinsurance replacement affect earnings, liquidity or catastrophe protection.
- Whether reserve development, particularly Hurricane Matthew and winter-storm claims, changes as claims mature; reported reserves rely on management estimates.
- Whether operating cash flow normalizes as reinsurance recoveries are collected, and how cash needs compare with debt service and contractual obligations.
- How the April convertible-note repurchase and future share repurchases or dividends affect debt, liquidity and per-share results.
- The filing’s reported investment-income figures differ between the statements and portions of MD&A; confirm the appropriate comparison in the underlying financial statements.