Q3 2019 Earnings Call

My name is Brandon and I will be the operator today.

All participants or listen only mode. A brief question and answer session will follow the formal presentation. Please note. This event is being recorded.

I would now like turn the conference over to wash money Executive Vice President at Heritage. Please go ahead.

Good morning, and thanks for joining US today, we invite you to visit the Investor section of our website investors not here, that's PCR dot com, where the earnings release earnings call will be archived.

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Today's call May contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Statements are based on management's current expectations.

The next uncertainty and changes in circumstances.

Our earnings press release, and the North Sea filings, we detailed material risks that may cause our future results to differ from expectations.

Statements or I live today, and we have no obligation to update any forward looking statements we make.

Hi description of the forward looking statements and risks that could cause results to differ materially from those described in the forward looking statements. Please refer to our annual report on Form 10-K earnings release other FCC filings.

With us on the call today, our Bruce Lucas, our chairman and Chief Executive Officer, and Kirk left our Chief Financial Officer.

I'll now turn the call over to Bruce.

Thank you arrive.

I'd like to welcome all of your third quarter 2019 earnings call.

Before we begin the call I'd like to thank all of our employees for their dedication to our company.

Sales and earnings in the third quarter were strong and oligarchy internal metrics were well above plan.

We continue to execute on our industry, leading diversification strategy that is focused on growing our footprint outside of Florida and across our entire platform, 66% a personal lines new business premium was generated outside of Florida.

Similar to the second quarter, we are seeing strong sales across our footprint.

In the Southeast X, Florida.

New business premium increased 87% year over year in the northeast new business premium increased 8% year over year.

And in Florida personal lines, new business premium increased 22% year over year and acceleration from a 7% decline in the second quarter 2019.

We also launched or Virginia operations, and new product in Hawaii that are fueling growth.

Is your orders.

New business sales in the third quarter was a new third quarter record for the company or new business sales continued to grow faster than prior expectations and I believe growth will continue to be solved.

We have used or xplore to grow to offset strategic non renewals in the Tri County that will continue but will likely not be as pronounced as in prior quarters. In years. This is largely because our Tri County de risking strategy has been very aggressive in the last three and a half years and there is not nearly as much exposure to drop today.

By way of example at the ended the third quarter, our Tri County, T.I.V. was 6.8% versus approximately 43% at the beginning of 2016, when our de risking plan was initiated.

As a result, we had positive topline premium growth in the third quarter and expect this trend to continue.

Claims and reserves are always Paramount issues I strongly believe that aggregation in Florida in in the Tri County will continue to cause higher loss ratios in adverse prior year reserve development across our sector.

However, happy to report that we have favorable prior year reserve development for the best consecutive quarter, which continues to be the exception animal Florida market.

Our favorable reserve development is largely the product two factors first we're known for being one of the best reserve companies in our sector. We are typically the first company to report and reserve for a large weather losses, and typically have more loss reserves in any other company in the peer group the stock despite being small.

<unk> and less concentrated in Florida, and the Tri County.

Second.

We have led the industry and de risking from the Tri County, or go after and a half years since that time, we have dropped approximately 22 billion in T.I.V. from the Tri County.

As we have dropped T.I.V. the percentage of new Tri County claims the lawsuits has dropped significantly.

Third quarter is the 12 consecutive quarterly drop and the percentage of litigated claims related to the Tri County.

The percentage of litigated claims related to the Tri County set yet another record low for the company.

Litigated claims are a major contributor to reserve development, having less of them helps our development.

Favorably.

In light of a very strong third quarter, a book value increased to $15.37. This.

This represents an 8.8% compound annual growth rates since the end of 2018.

And 10.5% in the third quarter.

Despite some severe weather losses this year, our book value per share has increased significantly.

Our operating results have been very strong and we intend to continue our share repurchase program.

And the third quarter, we repurchased $4.5 million of common stock at a 6% discount to third quarter book value and we intend to continue retiring share as long as we are trading below our fair value.

I will now turn the call over to occur to do provide more details on our financials.

Thank you Bruce Good morning, net income for the quarter was 8.1 million or 28 cents per diluted share and was up from 6 million or 23 cents per diluted share reported during the third quarter of 2018.

Gross written premiums increased by 3.7 million from the third quarter of 2018, reflecting strong growth outside Florida at 7.9% or 9.2 million of written premiums with planned risking driving a decrease in Florida of 4.8% or 5.6 million.

Year over year year to date growth outside of Florida was 24.4 million or 7.7%, partially offset by a decrease in Florida of 23.6 million or 6.1%.

We continue to prudently evaluate our exposure in the Tri County area, you start on underwriting and pricing actions taken since 2016, we expect the amount of de risking to diminish in future quarters. Our growth strategy has been plan to position us for long term growth property liability exposure management and exam.

All of our balanced approach to growth can be seen by our growth in the southern states outside of Florida, where we're able to exceed our expected T.I.V. by over 31% while at the same time, improving our risk aggregations and decreasing our 100 year PML in that area.

As experienced in 2019, we expect our growth outside of Florida to continue.

Our retention has been strong it over 90% throughout our platform, our Florida rate increases this year have averaged over 12% with rate increases in the mid single digits for business outside of Florida.

The ceded premium ratio was down from the third 40 of 2018 by three percentage points and down by 3.9 points from the second quarter 2019. The decrease reflects the reinsurance synergies. We described during the second quarter earnings call along with the changes the gross quota share treaty.

2019, Q3 net earned premiums are up 4.8% from the third quarter of 2018 reflected the changes noted earlier.

Losses, and L. AG were up 11.4 million from the prior year quarter. The net loss ratio was 56.6% for the third quarter of 2019 compared to 49.6% for the third quarter 2018.

Not a hurricane weather related losses for multiple events impacted the net loss ratio for the quarter by 12.7 points and increase the quarter over quarter loss ratio by seven points.

Our loss reserves remain in a solid position as we record the fifth consecutive quarter of favorable prior year development.

Policy acquisition costs are virtually flat in the third quarter 2018, and slightly down from a ratio standpoint.

General and administrative costs are down 4.3 million from 25.8 million Q3, 2018 to 21.5 million at Q3 2019, the reduction from the prior year quarter is predominantly due to non core business acquisition related items, but during the third quarter of 2000.

An 18, which were partially offset by a decrease in ceding Commission income a point 8 million from the change in reinsurance structure.

The combined ratio for the quarter as a percentage of net premiums earned was 95.5% which is up from 93.9% as of Q3 2018.

The increase reflects the increase in loss ratio being partially offset by a lower net expense ratio.

Due to the financing completed during the fourth quarter last year interest expense for the third quarter 2019 is 2.8 million lower than in 2018, and lower by 8.9 million year to date compared to year to date third quarter of 2018.

Shareholders' equity increased from year end 2018 by 19.9 million or 4.7% to 445.2 million at September Thirtyth 2019.

Book value per share increased by 6.5% year to date and 2.5% from the second quarter of 2019. In addition year to date the company paid 5.4 million to shareholders in dividends and also repurchased over 821000 shares of stock at an average cost of $14.47.

Which is 5.9% below the September Thirtyth 2019 book value per share.

Oh, the 50 million of stock buybacks authorized by the board of directors in August of 2018, just over $38 million of authorization remains available for the purchase of stock.

As of September Thirtyth. The company has over 23 million of cash in nonregulated companies and also has $40 million available on the loan revolver.

Retire analogy able to take your questions.

We will now begin the question answer session.

Last question Press Star then one on your telephone keypad fewer using a speakerphone. Please pick up your handset before press in the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble a roster.

Our first question comes from John Barnidge with Sandler O'neil. Please go ahead.

Thanks, Congrats on the quarter you talked on the Q Q1 9 call that there might be a significant amount of reserve releases coming in the next few quarters from reserving for a surge in a ob claims if it didn't turn out to be the case can you. Please provide revised thoughts on that.

Yeah. Good question, John and thanks for the for the comment.

It's it's too early to tell right now what we're going to do what the surgeon. They will be claims that have come through obviously, we're fighting a lot of those claims and you know that is really a surge just happened a few months ago. So it's really early in the cycle, but I can tell you that as we look at our reserves.

We feel that we are more than adequately reserved were reserved actually above the midpoint of our range I think if he asked every other Florida company, where they are they wouldn't be that high.

So we do feel pretty strong that we are adequately reserved and potentially have some cushion there, but as time develops we'll know a little bit more about how those losses are maturing.

Okay.

I know as we think look back to Fourq. You 18, there was a benefit there from can how how should we be dimensioning and thinking about comparables on a net loss basis in Four Q1 9.

Yeah, I mean, the issue of Canada's weren't we're not really getting the repair opportunities that we've gotten in the past the biggest bang for the Buck on can was really in the Tri County, you know if you get a water claim there like 10 times higher than anywhere else and yeah, we were having a.

A lot of success penetrating those claims and read reducing our exposures as we've de risked daughter Tri County, we're not getting that net net benefit to the same extent that we've gotten in prior years and so it's really quite minimal impact at this point don't things develop more in the northeast.

Okay.

And I can call when you're talking about the claims environment broadly in the industry not necessarily heritage specific you said it was getting worse not better can you kind of provide your latest thoughts on fraud issues in Florida. Please yeah.

Another great question I do think things are getting worse in your you are seeing quite a bit of attorney P.A. activity out there and the general market eight will be for US is down post legislation, but my concern is there just gonna go to the first party direct lawsuits and.

And well time will tell us as to whether or not that happens, but I do think that the claims environment, especially in southeast, Florida in Orange County in particular, I would call that called out the new Quad County.

I think that things, there are particularly toxic and getting worse.

We are very grateful that we've dropped our T.I.V. there to 6.8% versus 43% a few years ago. When we started the process, but I don't see as loan down anytime soon.

Okay. My last question and I'll re queue can you did mentioned weather losses in the quarter and catastrophe losses in Florida versus that Florida. Thank you.

[noise] yeah, the bulk of those that were going to be in Florida for the quarter, Yeah, a about probably 90% in Florida.

Dorian was a a decent contributor as well, but it was relatively small van I think that's somewhere correct me, if I'm wrong and one of the 3 million range or so for Dorian.

So we're taking a pretty conservative approach there we haven't seen a lot of claims on Dorian, but overall, it's just a lot of rain events and some hail events that you get throughout the state.

[noise]. Our next question comes from Freddie Slifer with KBR. Please go ahead.

Good morning. Unfortunately, just wondering why your latest gross Mike on M. losses, and how much I be an idea has left remaining based on right now yeah. They really haven't changed much for us I mean, we drew a lot of raised eyebrows, when we put up some pretty decent numbers last year, but consistent with the way review.

Reserve, we tend to reserve higher than most companies in our thoughts where that people would eventually catch up I think we're starting to see that now both on daily reserves sand on cat reserves.

I'm a total reserves are probably around a couple hundred million or so with IB in our I think it moved about 15 million in the quarter roughly so not really that much of a move my goal is the one that I'm a little bit more concerned about just seeing.

Some of the claim activity up in the Panhandle.

We're seeing a lot of P.A. activities, a lot of attorneys a lot of they obese or coming out of that event severities are very high up there and there has been a lot of pressure put on Florida insurers to resolve all here, Michael claims and pay them out well it makes it very difficult for.

For us in the negotiation process.

And I think that losses somewhere in the 60 million incurred range. So.

Not a ton of movement, but we are seeing some increased claim activity there.

Okay got it and then just I know, it's probably a little too early on the upcoming reinsurance renewals, but do you think that recent holiday the Japanese wind activity could have an impact and also given that your peers.

It's an eye Michael lost Creek recently, do you think that could impact the renewal and pricing not really I can tell you I just got back from PC eyewear I met with.

40, plus of our reinsurance panel.

And you know the issue in the market is not.

Last creep on warrants my goal aroma Harvey I think that stuff got price than last year, no one's even talking about it this year.

Same with a the events in Japan. It was barely even mentioned in any of my meetings. The number one thing that we are hearing is the lack of capacity potentially in the retro market.

And you know what the collapse of Catco, a things you know, which was a huge supplier of retro capacity.

We're hearing that in every single meeting that there's a lot of concern around what retro capacity is going to look like.

Fortunately for US we've built a panel that is not very dependent upon retro we think that helps us.

That was an issue that we saw again in 2019 was there were some retro squeezes that we're taking place in the market, but we were still able to bite at the highest return period in the company's history, and save 10 million because of the diversification of our footprint.

We think that that diversification trend as it continues well offset any potential hopefully reinsurance increases that could take place in 2020.

Kurt noted some interesting stats earlier in his portion of the call.

Southeast ex Florida for example, we were a massively over T. Ivy projections.

In those states, but it actually reduced RPM outs. So the synergies we're seeing from the multi state footprint, we've been growing for the last three years really paying off on the reinsurance pricing.

Okay, and then just quickly following up on some of the air be comments you made it sounds like Tri County claims are down and I might've missed it but what are you seeing in your non Tri County claim counts are those down as not just take on T. claims.

Are you expecting any impact on the loss ratio.

Not at all given previous comment.

Yeah, that's really good question as well, yes, Tri County claim counts and litigation counts are at once again, new quarterly record as I think that's 12 quarters in a row.

But actually in shock anyone given the massive de risking that we've done over the past three and a half years and Tri County.

As a result of growing the footprint outside of Tri County, the percentage of open claims and lawsuits et cetera have been growing X Tri County, because growing our footprint X dry county.

But I can tell you those losses are a lot easier to resolve than the ones and Tri County.

So we are seeing favorable reserve development five quarters in a row and the Florida market.

It's pretty pretty impressive if I could just passed this team's back for a moment, we're not seeing that anywhere.

Any other companies in Florida, a big Port a reason for that as I mentioned in my earlier statements is the reduction in Tri County.

Okay, just sticking with the core net loss ratio, but it was elevated.

And last year should we be thinking about 51, 52%. It's one of a good run rate going forward and into 2020 given.

Minimal.

If that from can right now.

Oh, you're talking about net or gross loss ratios I got that.

That core loss ratio.

Yes.

Yeah, Yeah, I'd say right right around that area, but little bit less.

Okay, and just lastly, I'd have to mapping it seems like sorry pets is accelerated a bit this quarter over last quarter. So how should we be thinking about the pace as going forward.

What we're going to continue to pound it and we believe that we are massively undervalued.

It's pretty incredible we're putting up great returns on equity.

We're doing everything the right way on reserves, which I don't think a lot of people fully appreciate how how meaningful that is to the financial wherewithal of the of the company.

We're looking at great trends in reinsurance topline growth across the board and were $2 below book value, Yeah, we're going to be buying back a lot of stock.

Great. Thanks Nancy.

Right. Thank you.

Our next question comes from Matthew Carletti with JMP Securities. Please go ahead.

Hey, Thanks, good morning warning, but most of them most it might have been answered a of the past two.

Lines of questioning, but I do have one left Bruce hoping you could update us on some of the partnerships that you have with other insurers specifically I think last we spoke you know with National General, Alabama Might've been in the works and Safeco had just launched I think I'm just dip your toe in Connecticut, I was hoping you could.

That's what with where those stand.

Well.

That's a that's a pretty legitimate question you know it is something that we spend a lot of time on is building the national relationships. We we have them with Geico Safeco and National General as you noted.

I will not get into specifics on any one partner, we have an agreement with all of our partners not to disclose the amount of business that we are transacting together with review that is something that's proprietary and they prefer not to have that data released the we're going to respect that.

I can tell you this.

Topline sales are up significantly, especially outside of Florida, and the number one gross state in our portfolio right now in terms of percentages, Alabama.

And that has an inland book of business, that's been doing very well.

North Carolina continues to just sizzle from our perspective, we're way ahead of expectations in every single state across the southeast.

Up in the northeast were a little behind plan in yet it's more than made up by the additional.

Yes, we have been writing across the southeast and into Hawaii. So we're very happy with how the partnerships are progressing but we can't give specific data about any one of them.

Alright fair enough appreciate the color and best of luck I.

Hi, Thank you.

As a reminder, if you would like to ask a question. Please press Star then one.

Our next question as a follow up from John Barnidge with Sandler O'neil. Please go ahead.

Thanks can you talk about your current thinking around the expense ratio ticked down in the quarter sequentially, a third quarter in row did that.

Yeah, I think it's probably going to be you probably stabilizing a little bit we really don't give a lot of guidance on other ratios, but overall I mean, it's I think we're starting to stabilize I think some of the actions we've seen.

I have come through the the PNM and so you're going forward, we're probably seeing you about whereas Wendy.

Okay.

Can you talk about other revenue and net investment income and kind of how we should be thinking about that going forward, where the numbers. We saw in Three Q1 9 a.

A level that we consider run rate.

Yes.

I think that their fair at somewhat consistent with what we've been saying.

Okay.

In my last question can you kind of talk about the M&A environment and your interest in Florida.

Hi to Florida.

I know previously you know there's been commentary.

The industry about troubled insurers in Florida. So I didn't know if that's something that would be advantageous to you, but also outside Florida. Thanks.

Yeah, John Thats, a really good question, yes, there there are a number of companies for sale right now that we're aware of.

We'll never say no, but it has to be a a really good fit for us to even consider it a lot of what out what is out there is highly distressed and theres no secret the Durbin some failures in Florida, and I think all of those companies have been play.

Just into insolvency save one.

Followed into the market after us timing is everything they picked maybe not the best policies out of citizens because there wasn't much left thankfully we had the break when we didn't see the credit quality.

But there's there's some stuff out there that I think is you know a struggling and there are some companies in Texas as well that have been on our radar from time to time, but.

We haven't seen any metrics out there that really justify an acquisition in Texas that we think it's a bad claim environment and you don't get a lottery in certain synergies off that portfolio. So for now we're not looking to do M&A, it's not even on really on our radar at all.

We're so focused on growing the book of business organically, we have record growth yet again topline is really going to start to move into 2020, and we're going to focus on that because as a lower acquisition cost.

Okay, and then are you seeing any opportunities in the citizens book itself.

No.

Okay. Thanks Anthony.

Thank you.

This concludes our question answer session.

I'd like turn conference back over to Bruce Lucas for any closing remarks.

Well I'd like to thank everyone for joining our third quarter 2019 earnings call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.