Heritage Insurance Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company writes residential and commercial property insurance, principally in Florida and Hawaii, and reports as one segment. Results include Hurricane Irma impacts and, from September 1, the Sawgrass policy arrangement.
Financial results
Amounts are in millions except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross premiums written | $154.4 | $147.2 | $455.8 | $471.8 |
| Net premiums earned | $95.2 | $101.6 | $277.8 | $316.8 |
| Total revenue | $101.8 | $109.3 | $298.0 | $336.2 |
| Operating income | $1.4 | $18.6 | $26.4 | $60.4 |
| Net income (loss) | $(8.7) | $10.9 | $3.9 | $36.7 |
| Diluted earnings (loss) per share | $(0.34) | $0.37 | $0.14 | $1.23 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $98.7 | $99.6 |
- Combined ratios: Q3 gross 103.4% and net 105.5%, versus 93.4% and 89.3%. Nine-month gross 98.7% and net 97.8%, versus 91.4% and 87.0%. Ratios above 100% indicate underwriting losses on the corresponding basis.
- Balance sheet at September 30: Total assets $1.599 billion; total investments $519.9 million; cash and cash equivalents $352.3 million; total liabilities $1.297 billion; long-term debt carrying value $188.6 million; stockholders’ equity $301.7 million. Debt principal totaled $216.3 million before unamortized discount and issuance costs.
- Cash flow and liquidity: Nine-month operating cash flow was $98.7 million. Cash, cash equivalents and restricted cash increased by $246.5 million, to $352.3 million as reported in the cash-flow statement. Management said cash included funds for Irma claims and the planned NBIC acquisition; it also reported approximately $61 million in reinsurer advances for Irma claims.
- Shareholder metrics: Book value per share was $12.84, down 1.2% as reported. The company repurchased $61.6 million of stock during the nine months and declared quarterly dividends of $0.06 per share.
Material changes versus comparable periods
- Q3 revenue fell 6.9% year over year and net premiums earned fell 6.2%. Nine-month revenue declined 11.4% and net premiums earned declined 12.3%, reflecting lower premium volume and higher ceded premiums.
- Q3 losses and loss-adjustment expenses rose to $64.0 million from $53.9 million, principally due to Irma. The company reported approximately $20 million of current-period catastrophe losses net of reinsurance for Irma; it expected substantial recovery of projected gross losses from reinsurers.
- Nine-month losses and LAE decreased to $156.7 million from $169.7 million. Prior-year reserve development was unfavorable by $1.5 million in 2017, compared with $17.3 million in 2016; 2017 included unfavorable Hurricane Matthew development partly offset by favorable non-catastrophe development.
- Q3 net loss included a $6.9 million non-cash charge from revaluing the convertible-note conversion feature, plus debt interest and issuance-cost amortization. The company had no interest expense in the comparable 2016 periods.
- Cash from operations was broadly similar year over year. Investing cash flow shifted to a $84.6 million source in 2017, versus a $179.2 million use in 2016, which included the $110.3 million Zephyr acquisition.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said existing capital and operating cash flows were expected to be sufficient for anticipated working capital needs for at least the next 12 months, while noting this was not assured.
- The pending NBIC acquisition was expected to close in Q4 2017. Consideration was $210 million cash plus approximately $40 million in stock, subject to adjustment and closing conditions. The convertible-note terms also provide a redemption mechanism if the acquisition is not completed by the specified deadline.
- The 2017–18 catastrophe reinsurance program provides, including company retention, first-event coverage of up to $1.75 billion in Florida and $731 million in Hawaii, and up to $2.6 billion for multiple events. Management reported reinsurance cost of approximately $225 million for the 2017 season, compared with $247 million for 2016. Recovery depends on event severity, treaty terms and reinsurer performance; losses above coverage limits remain with the company.
- Convertible notes issued in August and September totaled $136.75 million principal at 5.875%, due 2037. The conversion feature was carried as a derivative liability pending stockholder approval to settle conversions in shares; a vote was scheduled for later in Q4. The company flagged dilution/settlement uncertainty and non-deductible charges affecting taxes.
- Nine-month effective tax rate was 65.2%, primarily due to non-deductible convertible-note-related charges and the write-off of a deferred tax asset tied to expired stock options. Management estimated the rate excluding convertible-note items at 41.1%.
- Key exposures include hurricane and catastrophe frequency and severity, Florida and Hawaii concentration, reserve estimation, reinsurance availability and collectability, litigation and assignment-of-benefits claims, pricing/model risk, and the planned acquisition. Management reported no material changes to previously disclosed risk factors, no material non-claims legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Irma gross incurred losses, amounts recoverable from reinsurers, collections to date, and the final net retained loss; also verify adequacy of loss reserves and subsequent development.
- NBIC closing status, final purchase price and book-value adjustment, financing and integration costs, and whether the transaction closes on the expected timetable.
- Outcome of the shareholder vote on conversion settlement, resulting accounting treatment, potential share dilution or cash settlement, and any related debt redemption rights.
- Actual catastrophe-reinsurance costs, remaining aggregate and reinstatement limits, and reinsurer creditworthiness and recoverability.
- Liquidity and statutory capital after catastrophe claims, debt service, acquisition funding, and repurchases. The filing reports restricted cash differently in the balance sheet and MD&A; confirm the amount and availability.
- Impact of elevated underwriting ratios, premium contraction and reserve development on future profitability and book value.