Q1 2020 Earnings Call
[music] good morning, and welcome to Heritage Insurance Holdings.
First quarter 2020 financial results Conference call. My name is Ivy and I will be the operator today.
This time, all participants are in listen only mode a.
A brief question answer session will follow the formal presentation.
Please note this event is being recorded.
I would now like turn the conference over to a rock solid money executive Vice President of Heritage. Please go ahead.
Good morning, and thanks for joining US today, we invite you to visit the Investor section of our website investors, but here. It is PCR dot com, where the earnings release and our earnings call will be archived.
Materials are available for replay or review at your convenience.
Today's call May contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are based on management's current expectations.
Subject uncertainty and changes in circumstances.
And our earnings press release, and the North Sea filings, we detailed material risks that may cause our future results to differ from expectations.
Our statements are as of today and we have no obligation to update any forward looking statements we may make.
A 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 and other FCC filings.
With us on the call today, our Bruce Lucas, our chairman and Chief Executive Officer, and Kirk Lusk, Our Chief Financial Officer, I will now turn the call over to Bruce.
Thank you arrive we'd like to welcome all of you do our first quarter 2020 earnings call.
Before we begin the call I'd like to thank all of our employees for their dedication to our company I'd also like to thank all healthcare workers and the other east central personnel for their service during these unprecedented times.
The company has had tremendous momentum over the past year. The core components of the company continued to improve and this improvement accelerated again in the first quarter.
Book value per share is up 9% year over year and that a 12% compound annual growth rate since yearend.
Topline revenue continues to trend higher gross premiums written increased 8.9% year over year.
Both new business production in gross premiums written had a new record for the company in the first quarter.
Our higher growth rate outside Florida reflects our continued shift to more stable in diversified markets and further solidifies our standing as a premier Super regional insurer.
At the ended the first quarter approximately 30% of our consolidated T.I.B. was in Florida with only 6% of consolidated T.I.V. and the volatile Tri County region, and I'm unaware of any pure carrier that house this market advantage.
Heritage continues to be unique among peers as evidenced by reporting our seventh consecutive quarter of favorable prior year Reserve development.
During that same period, our peers have more often reported adverse reserve development.
We believe our diversification solid underwriting prudent reserving process will continue to drive outperformance.
Well covered 19 remains an issue for the macro economy, the homeowners insurance sector. Our core focus continues to be highly resilient.
Our products are essentially a must have for all homeowners renters and landlords regardless of economic conditions.
We did not see a drop off in sales in March and new business sales in April set a new monthly record for the company.
There's no guarantee that these trends continue, particularly in an uncertain and volatile macroeconomic environments, but we have weathered the storm incredibly well so far.
We do not write business interruption insurance and we don't have material exposure to other economically sensitive winds of insurance.
Given our confidence in the resilience of our business through economic cycles, we took advantage of stock market conditions and aggressively repurchasing our shares in the first quarter.
We repurchased 766900 shares at an average price of $10.41.
35.4% below first quarter book value of $60, an 11 cents.
We have every intention of continuing our share repurchase program as long as our share price does not reflect fair value.
I will now turn the call over to occur to provide more details on our financials.
Thank you Bruce good morning.
I'd like to Echo bruises, thank you to healthcare workers essential personnel, and especially to our employees all facets of the company are performing well during this challenging time, our employees have delivered and we greatly appreciate their flexibility in working remotely and to their dedication to maintaining the high service levels, our customers and distribution partners expect I'm very proud.
Our employees has stepped up and dealt with the situation.
Net income for the quarter was 7.6 million or 27 cents per diluted share up from $7 million or 24 cents per diluted share reported during the first quarter 2019 of the three cents improvement year over year. Two cents was due to increased earnings and one cent was due to lower share count during the.
First quarter 2020, we continued our buyback program and repurchased over 766000 shares at an average price of $10.41, which is 35% below first quarter 2020 book value per share.
Gross premiums written for the quarter were 229.1 million up 18.8 million or 8.9% year over year.
At quarter end, we had 950.1 million of gross premiums in force.
Gross premiums earned were up 2.7% year over year, reflecting overall gross premiums written growth over the last 12 months.
The ceded premium ratio was 46.3% in the first quarter down 5.7 points year over year, reflecting an overall reduction to our quota share reinsurance coverage and reinsurance synergies, partially offset by additional exit well coverage.
2020, Q1, net premiums earned were up 14.9%, reflecting higher gross premiums earned and lower ceded premiums just mentioned.
The net loss ratio was down 250 basis points to 54.1% for the first quarter of 2020 compared to 56.6% for the first quarter 2019.
The improvement reflects lower attritional, and whether net loss ratios and better prior year favorable reserve development, partially offset by lower income from vertically integrated operations.
The net expense ratio was 41.1%.
Only 40 basis points year over year, reflecting a modestly higher DNA ratio.
The net combined ratio for the first quarter of 2020 was 95.2%, which is down from 97.3% in the prior year period. The decrease reflects a decrease in the net loss ratio, partially offset by the increase in the net expense ratio.
Interest expense is down slightly reflecting a decrease in labor rates relative to last year.
Fixed income investment portfolio has performed well this quarter and benefited by about 2 million of unrealized gains. We believe our concerted investment philosophy provides our portfolio with resilience during volatile economic times.
Shareholders' equity was 449.3 million at the end of the first quarter 2020 book value per share increased to $16.11 up 9% year over year of the 50 million of stock buyback authorized by our board in August of 2018 over 25 million remains available.
March 30, Onest the company had over 20 million location nonregulated companies and also has $40 million available under its revolver.
We're pleased with results of the first quarter and even more pleased with how the company is positioned for 2020, we're positioned for solid organic growth rates are continuing to favorably impact the piano and our reserve position is strong.
Bruce started out able to take your questions.
Well now be Nick question.
Oh requesting the press Star then one on your Touchtone phone. If you are they using a speakerphone. Please pick up your hands that before pressure.
Well sell your question. Please press Star then killed.
Our first question today comes from Matt Carletti with J M.
Thanks, Good morning.
Hey, Matt.
First I was hoping you give us an update on some of the export a growth in particular anything color you can get generally on on some of the partnerships, which seems to be evolving and also you mentioned in the press release going into California on it you know that's basis and hopefully I'm, hoping you can give us some color there in terms of.
The thought process behind that and the opportunity that you're saying.
Absolutely. So ex Florida is ABS is completely leaving our growth factor right now and we're out producing outside of Florida by a margin to over two to one so.
Thats been the focus of the company has been underwriting the non Florida States and were in license in 16 States now so the focus has really been in the other 15 very very happy with what we're seeing the ramp up in production that we've been building over the past year, just keeps getting better and better.
I mentioned, a couple of quarters ago, I didn't really see anything on the horizon that would stop that growth rate and so far the numbers.
With that out.
We actually started second quarter with a record month and a lot of that production was ex Florida.
And Didnt just break the monthly record of shattered it. So we're in a good position outside of Florida with respect to partnerships, yes, we have.
National partnerships with some pretty notable auto carriers, but it's our policy and out of respect to them that we don't disclose details about the extent of the business that we're doing together, but I can tell you that those relationships have picked up a lot of steam in the past six to nine months and work.
Incredibly happy with them with respect to California. This was a an opportunity that we've been looking out now for well over a year.
Very dislocated market in California, there are a lot of areas it simply cannot find coverage.
Our philosophy in California is to use surplus lines paper and and not going in with an admitted product because of all the rules that are being.
Being in instituted in California. This gives us some underwriting flexibility it gives us form and rate flexibility.
We are limiting our concentrations in any specific area to X million in T. Ivy per grid.
We just launched its picking up a lot of steam now we've only written a couple hundred thousand dollars in premium out there, but we're definitely seeing an increase in production quotes and we think it's a good arbitrage opportunity for us because the rates certainly makes sense along with some of the reinsurance synergies.
Okay, Great and then my other question was just I know its little early yet near here in the midst of discussion, but any any thoughts surrounding this year's reinsurance renewal in terms of up how you're looking at it yeah now for a it's a fair question and you're right. We are in the middle in negotiations, so I can't get too far into the weeds math, but.
I can tell you the placements gone really well.
We've been in from order now for about a week and just rounding out the placement, we're pretty comfortable with where we are on a risk adjusted basis.
We've seen the vast majority of our reinsurance partners actually increase lines and take capacity from from other carriers and deploy them on our program, which has really helped us on the placement.
We do think it'll get done here in the next week or so and as soon as it's done we'll put out a press release.
Turning to terms.
Great all right well. Thank you for the color on congrats and my thoughts there.
Thanks, Matt.
Yeah, I think we have a question. Please press star then one.
Our next question will come from Thompson with Piper standpoint.
Hi, Good morning, guys good morning, Tom.
Just staying on reinsurance I just had a quick question. There's there's a lot of talk about rising reinsurance prices in Florida, but is it fair to say that you guys should be less expose due to where where you're right in Florida as compared to your peers.
Absolutely and yes. It does their hard market. This year and rates are moving up I think everybody knows that and was the same kind of last year as well.
Where we are differentiated is really three areas.
First and foremost only 30% back just under 30% of our T. ideas in Florida, 70% is in 15 other states that helps us a lot.
We also have approximately 6% of Archie Ivy and Tri County, there isn't a public company in our sector that can that can boast. These types of numbers. So when reinsurers look at the risk profile of all of the Florida scenes ours really does stand out because it's the most diversified program.
Our business plan has been to balance southeast area with England growth versus coastal to have a bit of a hedge against the coastal exposures that we have in Florida, and so that really applies to the Gulf coast in the South East coast in the Carolinas in Georgia and those are resolved. If you look at events like Hurricane My goal, we have one of.
Lowest seated losses of anybody in the state.
It's just ended the first layer reinsurance. So this is not a huge loss and on Hurricane Florence Ah Argh Ah I think are lost there is roughly 30 million with I.B. and aren't.
And that's not even in the first layer of reinsurance so lower seated losses, better diversification lower Tri County risk is definitely working in our favor and we see it in terms of the increase capacity that we're getting out of our reinsurance partners.
And we we do think once again this year, we're gonna fared better than than than the rest of the market.
Okay, great. Thanks for that answer and then for Hurricane <unk>, you guys seeing any ramp up and the amount of claims filed as we get closer to the three year anniversary.
No.
In fact claims claims in general across our footprint or down.
Okay and then.
Shifting a covert 19 is is there anything you're singing the on the impact on the legal environment in Florida, such that you know it's possible that the the lawyers are shifting the focus away from from home homeowners insurance.
Yeah, I mean, that's a that's a good question I mean, there's there's gonna be a lot of covert related lawsuits that stem out of Florida without a question and you know, it's really going to be a lot of business interruption policies is is what we think is most at risk.
Hard to say, if that's going to cause a shift you know and the next six to nine months or so or 12 months.
Into those areas versus just doing regular property claims, but it's it's something that I think are going to see a lot of now we're pretty confident we just don't have exposures here, we don't write the I as as Jane alone policy. So.
We we know it's not a covered barrel with us and we're not concerned about it.
Okay, Great and then my last question just on the Pharaoh development. It was it was quite strong and the first quarter.
You provide more color there and what what accident years had the development and what factors were driving that.
Yeah that was predominantly a 2018 in 2019 was where the favorite belt Favorables element occurred we did have a little bit adverse in in 17, but you know again, the 18 and 19 were so strong yeah and that's when we did kind of like the reserves you study wasn't 18 and kind of the and looked at a reserve, but that that's really the the bulk of.
Those two years and when we look at it you know there is a you know a little bit in the northeast portfolio, probably about a fourth of that development is is in a you know the northeast and the rest of it is actually in in the southeast portfolio.
I'd like to note as well timed I'm glad you raise that.
We are known for being very conservative on our I'd be narcotics and you see at seven consecutive favorable.
Borders in a row, there isn't anyone in Fort I can say anything remotely close to that we we are more conservative we maybe have overshot it a little bit if you look at seven straight quarters of favorable that would probably bear that out but despite the favor ability in our development, we are still booked where.
Well above the midpoint of our range.
And that's important for investors to understand that we still have a lot of conservative law specs.
Enter I'd be in our numbers right now in or at least looking at the trends today, We're we're pretty optimistic on where we stand in terms of reserve development going forward.
Alright, great. Congrats on the strong first quarter. Thank you Tim.
Oh, <unk> punks from Bell promo <unk> Oh.
Thank you just to follow up on that last question on development <unk> M- several development for cancer non yeah.
Well, it's it's for a tour attritional losses in that would include some of the you know the mini cats that we've had I'm sure that there were some of that baked in there to whether it's on a hail event or a tornado event or winter storm you then.
So you say cat, it's pretty broad, but this would be just normal attritional losses.
Perfect. Okay. Thank you.
And then going back to the Mets question in California, just to to get a little more.
Standing.
Are you growing in certain parts of the date.
And how does your reinsurance work with providing protection because there's a different risk profile.
Of California verse.
So you're right.
Yeah. The really good question, though and we are growing everywhere in California, there's not one particular area of concentration for US we're writing business in southern California in urban areas that have a zero wildfire exposure, we're writing some policies and the the we the interface that we see out there.
Between a wildlife in urban areas. It's it's a really good spread of premium we've done a few high value policies that are in Los Angeles that are really not fire exposed at all it's it's it's just a hodgepodge. There's no one particular area that we're looking at the first and form.
Most for US is just limiting our concentration in any one geographic area and so we're we're using pretty thorough daily underwriting metric as we look at new business applications coming in to make sure that we avoid concentration of risk in any particular pocket.
That was the problem that plagued a lot of the California writers in 2017 and 18.
With respect to reinsurance we have had very robust discussions with our reinsures in advance of launching the product we have reinsurance in place both per S. facultative axle well, it's a full you're injured portfolio and there are some retentions associated with California, I'm just like there are with.
Hurricane Retentions on the East coast, but the Retentions are are pretty modest and given the spread of risk. It's unlikely at this point in time that we would go anywhere near a full retention event. We just don't have the exposures and we don't have a concentration of risk.
Got it.
And how would the reception been with the ancient in California are they.
Looking for.
More.
Paper.
Yeah.
It's been it's been strong out there, though because you know you you've got a lot of the primary riders that just are not open for new business.
Throughout the state and what we have found when we were doing are due diligence and we probably talk to <unk>.
A couple of hundred agents.
There are areas that are not wildfire exposed at all to have capacity problems and the reason for that as there are plenty of primary carriers out in California that are just d. risking concentration loads everywhere.
And so that makes it pretty tough for the agents to plays the capacity and that's why the fair plan out there is growing.
So robustly that exposure is going into the fair plan, but that's a kind of little watered down policy. It doesn't really cover everything commission structure is not favorable to the agents. They they do not want to put their clients and the fair plan, so markets such as heritage coming in on a knee and ask basis.
No depp here in in some mothers are are out there as well writing on an <unk> basis. So the the the response from the agency has been incredibly strong and growing and the request for appointments or frankly more than we can handle at this time you want to do this in a measured way.
Where we rolled out our select agents in in sequence and start to build our footprint in the California market, but I'm pretty happy with the response that we've gotten this far.
Perfect.
Switching back to Florida.
Heard from a macro level.
You know for.
Others, it could be a challenging renewal.
Just maybe given some changes in capacity how do you think about positioning heritage.
Given what could possibly happen.
<unk>.
<unk> for others in the market you know is there an opportunity to grow is here an opportunity to maybe.
Looks a business just any thoughts that you might have yeah. You know bill I mean were positioned a lot differently than the the the Florida writers of traditional Florida, right or simply because of the the lack of Florida and Tri County concentration and so ours is is radically different program from from the other carriers that helps us a lot.
But I hear your point and it kind of comes down to things that I've been saying was the past year that I believe that there. There are some companies that are right for insolvency certainly wouldn't name them, but I think everybody in this business knows who they are.
And if rates go up in a in a pretty meaningful way with respect to their program. This year I I really question, how somebody scares can even pay for it and we already saw two companies go out of business one fourth quarter one in the first quarter in Florida in those Reinsures did not get paid their installment pre.
<unk> your real credit risk on some of these guys and <unk>, they're gonna surcharge and that makes their market even that more difficult. So while I do think that there are some underlying issues in Florida with respect to getting your tower place and getting at the right price I can tell you that because of our size scale diversification.
Lower seated losses and strong relationships that you know, we're gonna get our program place without a problem and you know from motorist filling up pretty nicely right. Now. So we we feel like we're in a really good spot.
But we will yeah, we will look at some of these companies to answer your question.
That do find themselves and then insolvency situation, but it's got to be a really really strong fit for us and it's got to be policies that makes sense for us we've done a an excellent job kind of cleaning up the Florida portfolio, while everybody else kind of just wrote business as usual, we're not looking to reload.
Code and on do all the hard work that we've put in for the past four years, but if there is a good strategic opportunity and the policy premium location makes sense, then we'll certainly take a look at it.
Because that's the recent takes your credit agreement help facilitate that.
<unk>, yes on.
It helps us to use those funds for both emanate opportunities and in Australia, which is our captive range or.
Got it.
You can use so you can use the credit to study for.
By for US right, Okay, Yeah, and one last one and then I'm done is any change you type of Mike on Florence, but did you mentioned are mind any change in your own pick nah irma's really not changed at all I mean, we're still getting some new claims and and you know you're encouraged go up a little but all in all its been pretty stable.
Great. Thank you very much great. Thank you bill.
<unk> comes from Mark here.
<unk>.
No. Thank you good morning morning, Mark.
And I'm, sorry, I missed the early part of the call, but the California business is there any appreciable fraud in in the same.
Yeah. There are some pockets that are known for water fraud.
Similar to what you see and Tri County, we just don't underwrite those pockets.
And then what did say about the impact on seated premium ratio and acquisition costs, you know on the margin to grow in California.
Yeah, I mean, the agent Commission out there is pretty standard. It's 15 15, which is what we're essentially paying in every state except Florida, It's a pretty low acquisition costs for us, it's a lot cheaper than buying business or buying a going concern.
And we're we we had the benefit mark of of pricing out the premium where we know that we're making a a good expected marginal whose policies. So that's that's the real benefit of the N.S.. We can we can move our rate up and down depending on the risk and profile and.
You know the underwriting characteristics of the home.
Did you say you get a better combined ratio return in California are more in line with your.
A book of business definitely better.
Great. Thank you.
Thank you Mark.
<unk>.
<unk> okay.
Okay.
I'd like to thank everyone for participating in our first quarter conference call.
Yeah.
Okay.
Okay <unk>.