Heritage Insurance Holdings, Inc. quarterly report, Q3 FY2021

Heritage Insurance Holdings, Inc. — Q3 2021 Form 10-Q

Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2021. Heritage is a multi-state property and casualty insurer focused primarily on personal and commercial residential coverage.

Financial results and position

MetricQ3 2021Q3 2020Nine months 2021Nine months 2020
Net premiums earned$162.4m$138.2m$451.1m$393.3m
Total revenue$167.4m$165.1m$464.8m$433.8m
Net income (loss)$(16.4)m$(5.2)m$(25.5)m$6.5m
Diluted earnings (loss) per share$(0.59)$(0.19)$(0.91)$0.23
Net combined ratio112.5%122.7%108.6%106.4%
Operating cash flowNot provided for quarterNot provided for quarter$70.2m$118.6m

Q3 net loss and LAE were $129.6m, up 8.3%; nine-month losses and LAE were $328.4m, up 23.1%. Q3 net investment income plus realized and unrealized investment results was approximately $1.5m, versus $23.2m a year earlier. The comparable nine-month figure was approximately $2.9m, versus $30.2m. The filing attributes the decline mainly to sizable opportunistic fixed-income sales and realized gains in 2020, and lower yields.

At September 30, cash and cash equivalents were $393.4m, investments were $686.1m, total assets were $2.248bn, and stockholders’ equity was $405.0m. Long-term debt, net, was $121.5m; principal debt outstanding was $124.2m. The company had $70m outstanding under its term loan and no revolving-credit borrowings; the revolving facility was increased to $75m.

For the first nine months, operating cash flow was $70.2m, investing cash outflow $110.3m, and financing cash outflow $7.4m. Cash and restricted cash declined $47.6m to $398.8m. Management stated available sources should meet cash requirements for at least the next 12 months.

Changes versus comparable periods

  • Q3 gross premiums written declined 1.5% year over year to $274.2m: Florida fell 12.4% under exposure-management actions, partly offset by 8.0% growth in other states. Nine-month gross premiums written rose 11.1% to $886.1m.
  • Q3 net premiums earned increased 17.5%, but the net loss widened to $16.4m, primarily reflecting higher losses and much lower investment gains than in 2020. The nine-month result shifted from $6.5m income to a $25.5m loss, with elevated weather losses and lower investment returns among the drivers.
  • The Q3 combined ratio improved to 112.5% from 122.7%, but remained above 100%, indicating underwriting losses. For nine months it worsened to 108.6% from 106.4% as the loss ratio rose to 72.8% from 67.8%.
  • Book value per share was $14.57, down 4.1% from Q2 2021 and 8.8% year over year. Statutory surplus of insurance subsidiaries declined to $290.0m from $333.3m at year-end 2020.

Outlook, management commentary, and risks

  • No quantified earnings or revenue guidance is provided. Management said COVID-19 had a negligible business impact through Q3, and described liquidity as adequate for at least 12 months.
  • The 2021–2022 catastrophe reinsurance program provides first-event coverage up to $1.43bn for Heritage P&C, $1.1bn for NBIC, and $680m for Zephyr. Estimated net cost is approximately $312m. The company remains liable for losses exceeding coverage, and reinsurance recoveries depend on reinsurers’ ability to pay.
  • Q3 net current accident-quarter weather losses were $51.4m, versus $47.3m a year earlier; this included $16.0m of catastrophe losses and $35.5m of other weather losses. Prior-year reserve development was favorable by $0.8m in Q3. Management notes reserve estimates, including IBNR, are uncertain.
  • In July 2021, the company amended its credit agreement: increased the revolver to $75m, extended the term loan maturity to July 2026, reduced applicable interest margins, and revised covenants and LIBOR-transition provisions. The company reported covenant compliance at the filing date.
  • Key risks include hurricane and other severe-weather exposure, reinsurance cost, availability and collectibility, claims inflation, reserve estimation, competition, regulation and capital requirements, and investment-market risk. Management cited rising repair-material and labor costs as a potential claims pressure. No material adverse impact from pending ordinary-course legal proceedings was expected by management.
  • The company declared a $0.06-per-share quarterly dividend payable October 6, 2021; after quarter-end, it declared another $0.06 dividend payable January 6, 2022. Future dividends remain discretionary. It repurchased 148,109 shares for approximately $1.0m in Q3.

Important facts for investors to verify

  • Subsequent catastrophe and non-catastrophe claims, reserve development, and the drivers of the combined ratio remaining above 100%.
  • Reinsurance renewal pricing, actual protection available across multiple events, and reinsurer credit quality and recoverability.
  • Statutory capital and surplus at each insurance subsidiary, including regulatory constraints on dividends or capital transfers.
  • Liquidity and cash-flow needs as reinsurance premiums are paid and claims and recoveries settle; also verify compliance with debt covenants and terms of the amended facilities.
  • Florida exposure-management effects on policy count and premium growth, and whether growth outside Florida can offset reductions.
  • Investment income and portfolio sensitivity to interest rates; the filing reports fixed-maturity portfolio duration of 3.891 years and average credit quality of A+.