Heritage Insurance Holdings, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 14, 2022. Heritage is a super-regional property and casualty insurer focused on personal and commercial residential coverage, operating through insurance subsidiaries in a single reportable segment.
Financial results and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Gross premiums written | $1.165 billion | $1.080 billion |
| Net premiums earned | $611.1 million | $544.7 million |
| Total revenue | $631.6 million | $593.4 million |
| Operating income (loss) | ($68.1 million) | $10.2 million |
| Net income (loss) | ($74.7 million), or ($2.69) per diluted share | $9.3 million, or $0.33 per diluted share |
| Net combined ratio | 104.6% | 107.0% |
| Operating cash flow | $60.1 million | $170.2 million |
| Total assets / stockholders’ equity | $1.981 billion / $343.1 million | $2.089 billion / $442.3 million |
Net investment income was $5.7 million, versus $12.3 million in 2020; realized and unrealized investment results were a loss of $16,000, compared with gains of $22.4 million. Losses and loss adjustment expenses (LAE) were $427.4 million. Current accident-year weather losses, net of reinsurance, totaled $148.1 million, including $67.5 million of catastrophe losses and $80.7 million of other weather losses. Prior-year reserve development was favorable by $3.5 million.
At year-end, cash and cash equivalents were $359.3 million and restricted cash was $5.4 million; investments totaled $694.7 million. Long-term debt was $120.8 million net of debt issuance costs (principal of $123.3 million). The $75 million revolving facility had no borrowings at year-end. The filing states that liquidity sources were expected to cover requirements for at least the next 12 months. Insurance subsidiaries’ combined statutory surplus was $302.1 million, and each subsidiary’s risk-based capital ratio exceeded 300%.
Material changes versus 2020
- Gross premiums written increased 7.8%; growth outside Florida was 16.2%, while Florida premiums declined 0.1%. Average premium per policy increased 10.1% across the book.
- Net premiums earned rose 12.2%, but ceded premiums increased 17.9% to $533.1 million as the company bought more reinsurance for a larger portfolio.
- The net combined ratio improved 2.4 percentage points to 104.6%, but remained above 100%, indicating an underwriting loss. The loss ratio rose to 69.9% from 68.5%; the expense ratio fell to 34.7% from 38.5%.
- Net loss replaced 2020 net income. The main unusual item was a non-cash, non-tax-deductible goodwill impairment of $60.5 million in the fourth quarter, reducing goodwill to $92.0 million. Excluding the charge, the reported operating loss would have been materially lower; the filing does not present an adjusted net-income measure.
- Operating cash flow fell to $60.1 million from $170.2 million. Cash and cash equivalents declined, while investments rose to $694.7 million, primarily reflecting reinvestment of proceeds from 2020 fixed-income sales.
- Stockholders’ equity fell by $99.3 million, reflecting the net loss, investment-related other comprehensive loss, dividends, and share repurchases. Book value per share declined 19.6% to $12.82.
Outlook, risks and other notable items
- Strategy and outlook: Management emphasized disciplined underwriting, rate adequacy, geographic diversification, and reinsurance. It described growth as selective, including no pursuit of growth in certain Florida regions until economics improve. No specific financial guidance or quantified earnings outlook was provided.
- Catastrophe and reinsurance exposure: Nearly all premiums in force related to coastal states. The June 2021–May 2022 program provided up to approximately $2.8 billion of aggregate catastrophe limits, with an estimated net cost of $312 million. Coverage and recovery depend on event severity, remaining limits, and reinsurer and Florida Hurricane Catastrophe Fund (FHCF) performance; Heritage remains liable for losses beyond its program.
- Reserves: Gross unpaid losses and LAE were $590.2 million, including $293.2 million of IBNR. Reserve estimates are inherently uncertain; reserve adequacy was a critical audit matter. The external actuaries concluded the reserves were reasonable under applicable standards, but actual development may differ.
- Debt and liquidity developments: The term loan had $70 million principal outstanding and an effective rate of 2.9375% at year-end; about 59% of total debt was fixed-rate. In January 2022, the company drew $15 million on its revolver and used cash to reacquire $11.7 million principal of convertible notes. Management identified LIBOR transition and variable-rate borrowing as risks.
- Capital returns: The company repurchased 1.26 million shares for $8.2 million during 2021 and authorized a new $25 million repurchase program through December 31, 2022. It paid quarterly dividends of $0.06 per share; a further $0.06 dividend was declared in March 2022.
- Other risks and events: Management reported negligible business impact from COVID-19 in 2021. The filing identifies severe weather, inflation in repair costs, Florida litigation and assignment-of-benefits trends, rate regulation, reinsurance availability and collectability, competition, and reserve uncertainty as significant risks. It also disclosed a cyber intrusion in the first quarter of 2021; the supplied filing text does not clearly quantify its impact. Routine legal proceedings were not expected to have a material adverse effect.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The audit identified loss reserves and goodwill impairment as critical audit matters.
Important facts for investors to verify
- Whether rate increases and portfolio actions improve underwriting profitability, given the 104.6% combined ratio and higher non-catastrophe weather losses.
- Reserve development and claims-cost trends, especially Florida litigation, repair-cost inflation, and IBNR estimates.
- The cost, terms, available limits, and collectability of reinsurance, including exposure to multiple catastrophe events and FHCF performance.
- Post-year-end debt changes, covenant headroom, interest-rate exposure, and the effect of the January 2022 convertible-note repurchase and revolver draw.
- Whether liquidity, statutory surplus, and capital remain adequate while funding claims, reinsurance, dividends, and share repurchases.
- The circumstances and consequences of the first-quarter 2021 cyber intrusion, which are not clearly quantified in the filing text.