Q2 2020 Heritage Insurance Holdings Inc Earnings Call
Good morning, and welcome to the Heritage Insurance Holdings second quarter 2020 financial results Conference call.
My name is Andrea and I will be the operator for today.
Tell him all participants are in listen only mode a.
A brief question and answer session will follow the formal presentation.
Please note. This event is being recorded I would now like to turn the conference over to a rush. So all the 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, but here, that's PCR dot com, where the earnings relief and our earnings call will be archived.
These 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.
Statements are as of today, and we have no obligation to update any forward looking statements we 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 arrived I wouldn't like to welcome all of you to our second quarter 2020 earnings call before we begin the call I'd like to thank all of our employees for their dedication to our company.
The core fundamentals are the company continue to improve year over year quarter over quarter, New business revenue is an important metric that contributes to future profitability.
Organic multi state growth has been steadily accelerating in the third quarter 2019, we returned to positive organic growth is our Tri County, non renewal process reached its conclusion.
Starting in that quarter, our growth rate began to accelerate.
And set new quarterly records, the third quarter or 2019, your ROE 27.5 million of new business.
Followed by 36.1 million in the fourth quarter 37.4 million in the first quarter 2020, and we set yet another record up 56.7 million in the second quarter of this year.
Our gross premiums written increased by an impressive 14% year over year.
We have been remarkably resilient during the economic slowdown related to covert 19, while there is no guarantee that we will continue to maintain this level of production, it's worth noting that new business sales in July set a new monthly record as we entered the third quarter.
That's a ended the second quarter enforce premium was 994.6 million and we'll surpassed 1 billion in the third quarter or national partnerships and diversified footprint, our key factors and our continued growth and expansion during the quarter, We announced our most recent partnership with aging it and I look forward to working with our partners it.
AG insseco going forward.
Despite our tremendous growth the second quarter was marked by higher than normal severe convective storm activity.
During the quarter, we had 13 piece, yes weather events.
Virtually all of them more minor losses, but when aggregated was a few larger events pretty is 26.8 million in weather losses that negatively impacted the quarter.
Despite the elevated weather losses, we were able to post a profit in the quarter.
Additionally, we close the second quarter with favorable prior year Reserve development. This marks the eighth consecutive quarter, a favorable reserve development and to my knowledge, we were the only Florida based carrier to achieve this result.
Our increasing sales and favorable reserve development have resulted in solid games to our book value per share, which was up 11.2% year over year end grew at a 12.9% annualized growth rate since year end 2019, I will now turn the call over to Kirk to provide more details on our financials.
Thank you Bruce good morning.
First given the challenging times I'd like to once again mentioned our employees, we have been very diligent in providing a safe workplace with a focus on our employees health safety and productivity.
Greatly appreciate our employees response with their continued flexibility dedication and customer focus we continue to operate well and provider customers and distribution partners with the service they have come to expect from heritage So to our employees. Thank you.
Net income for the quarter was 4.1 million or 15 cents per diluted share up from 700000 or two cents per diluted share reported during the second quarter 2019. Overall, we're pleased with the result, given the extended the weather related losses I will cover shortly.
Gross written premiums for the quarter were 290.4 million up 35.6 million or 14% year over year made up of 12% growth outside Florida, and 16% growth in Florida.
The bulk of the Florida growth related to commercial residential business.
At quarter end, we had 994.6 million of gross premiums in force, which was an increase of 36.5 million during the second quarter of 2020 compared to a decrease of 7.6 million during the second quarter 2019.
With the increased growth, we continue to evaluate our portfolio to ensure that we're getting the type of policies that will contribute to our long term profitability gross premiums earned 241.8 million are up 5.1% year over year, reflecting growth in gross premiums written over the past 12 months.
The ceded premium ratio of 46.6% in the second quarter is down 3.8 points year over year end up slightly from the first quarters, 46.3%.
The decrease year over year reflects a combination of a decrease in our T.A.B. year over year in the Florida Tri County area of 12.4% the elimination of the gross quota share and the use of our internal captive osprey, which was partially offset by an increase in TV in the rest of Florida 17.2.
Percent and increase outside Florida, 8.8% and an increase in the rate of our new 2020 to 2021 Cat Xol program.
2020, Q2, net premiums earned our up 15 million or 13.1%, reflecting higher gross premiums earned and the lower ceded premium ratio just mentioned.
Our investment portfolio continues to perform as expected with minimum volatility due to our conservative investment policy.
Net losses for the quarter reflected an unusually high number a piece, yes cat events, which contributed 17.6 million of cat losses to the quarter up from 13.4 million in the prior year quarter.
Other weather losses during the quarter were 9.2 million up 1.1 million year over year with both years weather losses being higher than historic trends.
Net losses benefited from 4.9 million a favorable prior year reserve development compared to 1.3 million a favorable prior year development. During the second quarter of 2019 reported net loss ratio, 61.1% for the quarter was down from 65.1 during the second quarter of 2019.
Policy acquisition costs were 30.2 million in the second quarter of 2020 up 11.6% from 27.1 million in the prior year quarter. The increase is primarily attributable to higher acquisition costs associated with growth in gross premiums written and a reduction in ceding Commission.
In income.
Ceding commissions decreased in the current year due to the elimination of the growth quota share reinsurance program, which is partially offset by an increase in the net quota share.
General and administrative expenses were 19.9 million in the second quarter 2020.
8.5% from 18.4 million in the prior year quarter.
The increase is primarily attributable to an increase in headcount associated with premium growth and lower ceding Commission income associated with a reduction in the overall quota share reinsurance program just mentioned.
The net expense ratio was 38.9% and down from 39.9% during the second quarter 2019, the ratio reflects increasing the net earned premiums of 13.1% year over year why expenses only increased by 10.4%.
The net combined ratio for the second quarter of 2020 was 100%, which is down from 105 in the prior year period. The decrease reflects the four point decrease in loss ratio and the one point decrease in expense ratio.
Interest expense is down slightly reflecting a decrease in LIBOR rates relative to last year.
During the second quarter 2020, we continued our stock buyback program and repurchased 163456 shares at an average price of $12.31, which is 26% below second quarter 2020 book value per share of $16 in 67 cents.
Shareholders' equity at 462.5 million increase from 449.3 million at the ended the first quarter of 2020 book value per share increased to $16.67 up a $1.68 or 11.2% year over year.
The dollar 68 increase in book value 24 cents is attributable to the stock buyback program, which as of the ended the second quarter has over 23 million available.
We're pleased with the results of the second quarter as wells as the production and operations of the company.
Last quarter I mentioned that we are positioned for solid organic growth and the current quarter as a reflection of that trend. In addition rates continue to favourably impact the piano and a reserve position remains strong.
Bruce and I are not able to take your questions.
We will now begin the question and answer session to asking question you May Press Star then one on your Touchtone phone.
You are using speakerphone, please pick up the handset before pressing the key.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
Again Star then one to ask a question.
This time, we will pause momentarily to assemble our roster.
Hello.
And our first question will come from Bill Bramble Dowling and partners. Please go ahead.
Great. Thank you.
If I could start on <unk> growth side.
Uh huh.
More color.
Commercial residential growth pretty strong this quarter I'm just wondering what you saw in the market.
I'm allowed for that strong growth.
Yeah, Bill or bank. That's a great question. So commercial residential has been an area that we've been pretty active in since 2015 and that portfolio for us is unrelated with market conditions. When we thought rates were a little soft we were pulling out of the commercial residential space dropped our in force premium from about 130.
Hi, Andrew about 70 million.
Now we can take a look at where we are commercial residential rates are significantly higher we're able to get what we believe is a good rate for the company in terms of adequacy and just responding to market conditions. We saw some some excellent opportunities that were outside of the Tri County and.
Pulled the trigger because the rates made a lot of sense to us I don't know if that's going to be sustainable moving forward.
But it was as you indicated a a pretty big growth jump for us in Twoq you.
We are still not really writing anything in Miami Dade County, we have limited availability in Broward, we're focused on other areas of the state, but it's worth noting that we are seeing more opportunities and see raz at a at rate adequacy and as long as that's there we intend to continue the the growth trajectory.
Hi.
Competitor landscape change at all.
Generating opportunities too so yeah.
Yes, that's exactly so it's a we've seen a pull back in DNS carriers in the space no. They came in pretty hard and aggressive they were they were underwriting at rates that we looked at and said it's completely inadequate you're going to lose money on it go ahead and take the rest and we'll we'll see that policy again in 24 months, that's what's happen.
So a lot of N.S. carriers were coming in and the getting very aggressive on commercial residential in Florida.
Now kind of learned our lesson that those rates don't really work and as their rates have gone up the and capacity is dried up somewhat we've seen an increased opportunity in commercial residential.
Yes.
And if I could just switchover.
I think you mentioned July new business was the strongest on record.
As I think about Q3 gross.
Is it safe to assume that.
With storm water that.
You will stop writing new business, maybe in early August and that I just store path.
Got it turn it back on.
I guess part of my question is it really depends on geography. So you see a storm approaching Florida, you might reduce your new writings in Florida.
And then kind of that move as it moves up the code you will.
Turn on and off you business growth as that storm come through.
Thats exactly what we do.
You see in Hawaii, when Hurricane Douglas passed by we shut down all new business growth in Hawaii them. Once the storm pass will open up again.
For the most recent hurricane that was out there we did shutdown, Florida. So our July record sales actually we're not of a binding restriction that we put in that at the end of July.
As that storm moves up these goes there sequential binding restrictions that are put in place and as the storm moves fast. We'll go ahead and opened up new business. So it will affect you for a few days, but it's not going to be a material impact on quarter.
All right, that's what I was trying to get it. Thank you for that.
With that storm kind of being I can't even can pronounce your name.
[laughter] do you have the same problem, we had [laughter] his.
I'm trying to compare Laurie.
It feels like that's the most recent one are there yeah differences versus this event.
In terms of maybe your footprint, where the storm sitting for.
The storm.
Any characteristics that are you finding difference between this event for it.
Well, yes, and no I mean, I think first and most obvious Florence wasn't more powerful storm. It was much more well organized we had a high peak level win in areas of concentration. So that produced a loss on our books right now that is kind of around $30 million ish.
You know since warrants as Ed we have continued our coastal de risking strategy across the southeast of North Carolina is no exception to that if you look at a record production that we've had on North Carolina, It's mainly of the inland portfolio. That's that's generating the new business. So our pip concentrations are more concentrated.
Inland versus the coast today than they were under foreign so that's a good thing for us.
I think.
Yes. He say, yes is much more disorganized not as powerful as hitting in areas now where there are lower concentrations, but the key difference between the current storm in Florence is that it's moving all the way up the east coast and so we don't know what those impacts are going to be I personally don't think this is.
Going to be some major event, but we'll have to see what comes out of the storm and the next I'd say five business days, we'll know for sure, but it's worth noting that in Florida, We have had zero reported claims.
And I think as of this morning, we have like two claims reported.
So you got to give a little bit of time to the stronger roll through and then people start to report claims, but I don't think this is going to be as big as warrants.
Great. Thanks.
And then.
You are correct.
You'd mentioned this in your prepared remarks about cross screen Reid.
I just.
Elaborating on how you might have used osprey read this year in your reinsurance program and.
In your press release disclosing the reinsurance program details.
The retention.
Does that include the participation that you might have to actually we.
Ah yes. It does the stack here as I think we indicated that you HPC IC and separate were 20, and then it'd be idea thirteenthree that does not include the osprey piece, which you know in a one in 100, you're a bad could be is as much as a 41 higher than that number.
And again, what we did as we looked at the rate on lines.
Across each one of the layers in a particular like layer for that that that rate on line with very high and we thought it like that would be a good level of which where we needed to play yes, and our strategy on osprey was not to add a lot of low and retention at all.
Below and Retentions, there with the stack Irrs, our focus was blank high in the tower I'm talking about losses in excess of a billion dollars massive storms, that's really where our focus was us where the big wines really came in so we view that as a as a good balance.
The low end retentions are going to be fairly minor if it's a much more larger storm develops over time, then obviously would be a higher retention but.
We feel like that was an appropriate balance given where the rate environment was at six one.
Got it so ospreys <unk> the higher end, Okay got yes.
And.
In the just to clarify.
Yes release from a couple of weeks ago.
It talks about automatic reinstatements on your private layer couple of what's your prepaid is there any way to.
Better understand.
Where.
Layers are like RPP layers are versus non RTP layers.
Well.
Yeah, I mean, all of our you know we only have one single shot layer in the entire tower and next layer for outside of that everything has a prepaid RPP.
So the only difference between all of the other layers and layer for is that we had to buy and RPP.
Contract in order to reinstate towers, so that rate online kinda is what it is but obviously layer for to be a little bit cheaper because there is no RPV there, but the other layers, having an RPP load on their there that as an expense that we had to see down to the market.
Okay. So there is a.
Last one for me.
On the.
How are you thinking about rate filings.
Going forward.
Well you know we are and have been four years very aggressive on the rate you know for years, we watched Florida carriers come in and they were taking rate reductions or.
Less than 5% rate increases and we consistently hit our portfolio of 15% rate increases, which is right at the maximum in Florida, you can get before you have to ever rate hearing.
And as a result, our numbers have been significantly better than pretty much everyone else over the past four or five years or started operating profit every single year I.
I don't think thatll be any different this year barring weather.
And so we're going to make sure that we are maintaining rate adequacy, we did file our reinsurance rate increases those have been approved they will start kicking in right around we've October onest.
So those are those are done and then we'll look at our regular rate filings and to the extent that we need rate anywhere in our portfolio, we intend to take that rate.
Just to confirm that homeowners rate filing for the region was 5.7.
Yes.
Yeah, so far for one of our products was actually when you look at for that reinsurance filing it actually go about from a 5.7 up to about a little over 11, yes.
A penny and at the mid three dependent upon the product the blend is probably closer to eight or nine I'd say.
Across all products.
That's true that's really help thank you very much. Thank you.
Our next question comes from Matt Carletti of JMP. Please go ahead.
Hey, Thanks, Good morning, good morning, Matt.
Covered a lot of brand I got a couple of in with the storm I was just hoping you could remind us make sure I'm thinking about it right. This how that it looked like you'll have impact in both the southeast and the northeast potentially and how those two different deductibles, what kind of work together as as attractive coast.
It's funny asked that question without asking that question as the storm approach and the answer is it net net it's a 20 million dollar retention.
[noise] been up perfect.
Maybe one and the my only other question just Bruce I was hoping you could you made alluded to it in the press release, how some of the auto partnerships that you've added in recent periods of it really begun to contribute I was hoping you could any further color you can give there and kind of what you're seeing and also you get the press release out and maybe a month ago now on bed.
Gee Safeco announcement.
And just.
Any color you can give there. Thanks, yes, thanks, Matt and an unfortunate I can't give a ton of color just that's our agreement with all of our major partners is evident we won't disclose numbers Oh I can tell you is as we've been developing these relationships for years. They are meaningful to the company. It is very symbiotic in nature, we're seeing tremendous growth.
Opportunity come out of these partnerships you see it in our topline numbers. We ended July with over a billion of enforce premium for the first time in the company's history. It's fueled by these partnerships a we've got several other transactions that are little smaller in nature behind the scenes, but you aggregate them up and it's going to be a nice source.
As a premium growth as we move over the next 12 months.
The AI Jie deal in particular was very appealing to us that was more of a higher value transaction.
But it fits our sweet spot that kind of one to 5 million dollar house.
It's a great footprint almost all of that premium is outside of Florida. So the reinsurance synergies are working in our favor.
It's a real testament to the strength of the company and what we've built to have partnerships with companies like AI Jie Safeco National General et cetera.
Geico being another and we're very grateful for those relationships and I do look forward as we look at premium growth in the company I do expect an upward trend continuing as we move forward.
Don't know if it's going to be at this pace, but July set yet another record with a binding restriction in place.
So we're just excited about what we're seeing on the on the topline growth and we're probably targeting an upper single digit maybe even the double digit growth rate as we move forward, so really good spot to be in.
Great appreciate the answers and walk.
Thank you.
Again, if you would like to ask a question. Please press Star then one.
This concludes my question.
<unk> answer session I would like to turn the conference back over to Bruce Lucas for any closing remarks.
I would just like to thank everyone for participating on our second quarter conference call.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.