Heritage Insurance Holdings, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 13, 2023. Heritage is a property and casualty insurer focused on personal and commercial residential coverage, operating through insurance subsidiaries in coastal and other U.S. markets.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $662.5 million (+4.9%) | $631.6 million |
| Net premiums earned | $637.1 million (+4.3%) | $611.1 million |
| Net loss | $154.4 million; $(5.86) per diluted share | $74.7 million; $(2.69) per diluted share |
| Operating loss | $157.4 million | $68.1 million |
| Net combined ratio | 114.3% | 104.6% |
| Net loss and LAE ratio | 78.7% | 69.9% |
| Ceded premium ratio | 47.3% | 46.6% |
| Net cash from operating activities | $(34.3) million | $60.1 million |
Gross premiums written were $1.275 billion, up 9.5%. Average premium per policy increased 18.1%, while policies in force fell 7.2% to 529,907. Net investment income rose to $12.0 million from $5.7 million, principally reflecting higher interest rates.
Net losses and loss adjustment expenses were $501.2 million, up 17.3%; the year included retained losses from Hurricanes Ian and Nicole and $3.7 million of adverse prior-year reserve development, versus $3.5 million favorable development in 2021. A $92.0 million non-cash goodwill impairment was recorded in 2022, compared with $60.5 million in 2021. The 2022 impairment was mostly not tax-deductible.
Financial position and liquidity
At year-end, total assets were $2.393 billion, stockholders’ equity was $131.0 million (down from $343.1 million), cash and cash equivalents were $280.9 million, and investments were $653.6 million. Accumulated other comprehensive loss on investments was $53.6 million, largely reflecting interest-rate-related declines in fixed-maturity fair values.
Unpaid losses and LAE totaled $1.132 billion, including $759.7 million of reinsurance recoverables on unpaid losses; net reserves were $372.1 million. Reinsurance recoverables on paid and unpaid claims, net, were $805.1 million. Management said available liquidity was adequate for at least the next 12 months, while noting cash needs for claims, reinsurance installments, and collateral requirements.
Long-term debt had a carrying value of $128.9 million; principal outstanding was $130.4 million. Debt included $89.1 million under the term loan, $10.0 million under the revolving facility, and a $19.2 million FHLB loan. Credit-facility rates were approximately 7.32% and 7.42% at year-end. Insurance subsidiaries reported combined statutory surplus of $276.3 million and each had risk-based capital above 300%.
Material changes, outlook, and risks
- Underwriting and portfolio: Management shifted from premium growth to portfolio rebalancing, rate adequacy, and selective underwriting. Florida policies in force declined 15.1% year over year, while Florida premiums in force rose 7.0% to $599.6 million. Total premiums in force rose 9.6% to $1.284 billion.
- Reinsurance: Reinsurance expense increased; management expected further cost increases and constrained availability in the 2023 renewal season. The 2022–2023 program provided an aggregate $3.2 billion catastrophe limit, subject to event severity, frequency, and remaining coverage after prior events. Private reinsurance layers specific to Hurricane Irma were exhausted; 45% participation in the FHCF limit remained.
- Financing and capital allocation: A November 2022 credit amendment followed management’s concern about potential covenant noncompliance. It reduced revolving commitments, established an additional term facility, raised borrowing margins, and tightened covenants. The terms may constrain dividends, share repurchases, and capital contributions to certain insurance subsidiaries. The company reported covenant compliance as of the report date.
- Management commentary and outlook: The company is raising rates where permitted, narrowing underwriting criteria, reducing new business in selected geographies, and non-renewing unprofitable risks. It planned to assess the effect of Florida’s December 2022 legislative changes before expanding Florida personal-lines exposure. The filing provides no quantified earnings or revenue guidance.
- Principal risks: Catastrophe concentration in coastal markets; inflation in repair labor and materials; litigated and abusive claims, particularly in Florida; reserve-estimation uncertainty; reinsurance cost, availability, and collectability; rate-approval and regulatory constraints; interest-rate exposure; debt covenant limitations; and the potential effect of future losses on capital and liquidity.
- Unusual items and controls: Q4 2022 reported operating income of $14.9 million and net income of $12.5 million, following losses in the first three quarters; the annual goodwill charge was recorded in Q2. The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. Loss reserves were identified as a critical audit matter.
Most important facts for investors to verify
- Development of 2022 catastrophe claims, especially Ian and Nicole, and whether reserve estimates or reinsurance recoverables change.
- Actual 2023 reinsurance pricing, available limits, retentions, and recovery capacity, including FHCF exposure and remaining Irma coverage.
- Progress on rate adequacy and portfolio rebalancing, particularly Florida policy counts, premiums, and loss trends.
- Compliance with credit-facility covenants, borrowing costs, refinancing needs, and restrictions on dividends, repurchases, and insurer capital support.
- Ability to sustain liquidity and statutory capital amid catastrophe claims, negative operating cash flow, and investment valuation volatility.