Q3 2020 Heritage Insurance Holdings Inc Earnings Call

Good morning, and welcome to the Heritage Insurance Holdings third quarter 2020 financial results Conference call. My name is cold I will be the operator for today at this.

Time, all participants are in a listen only mode.

Brief question and answer session will follow the formal presentation. Please.

Please note. This event is being recorded and I would like to turn the conference over to your rational and 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 thought here, that's PCR dot com, where the earnings release and our earnings call will be archived these.

These materials are available for replay 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 managements current expectations.

Subject to uncertainty and changes in circumstances.

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

With us on the call today are Bruce Lucas, our chairman and Chief Executive Officer, and Kirk lost our Chief Financial Officer, I will now turn the call over to Bruce.

Thank you a rush I would like to welcome all of you to work third quarter 2020 earnings call.

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

The third quarter was challenging only because we experienced record catastrophe losses related to hurricane easiest Sally in addition to elevated non cat weather losses. Despite.

Despite elevated weather losses, the core fundamentals of the company continued to improve year over year quarter over quarter.

Over the past year I've commented that new business has and will continue to accelerate as we launch new states new partnerships and develop additional revenue channels in our existing states. This trend has been remarkably strong and has continued in the third quarter as new business sales set a fifth consecutive quarterly record gross premiums written increased seven.

18% year over year.

During the quarter, we launched operations in Delaware and anticipate launching Maryland in the fourth quarter, which will add additional revenue growth in 2021.

I've been very focused on growing our national partnerships, which I believe sets us apart from our peers and will continue to add to our record growth.

There are several more partnerships and expansions of existing partnerships that I believe will be announced in the near future. This is truly an exciting time for the company and I don't see any material impediments to our growth for the foreseeable future.

Equally important is that our loss reserves continue to develop favorably.

The third quarter marks the ninth consecutive quarter of favorable reserve development.

This is an incredible achievement given <unk> recent market conditions and is a testament to our conservative approach toward lost reserves.

Our increasing sales and favorable reserve development have resulted in meaningful gains to our book value per share, which had solid growth year over year. Despite the weather losses in the third quarter.

Additionally, the employment contracts for me are president, Richard where to calm and our Chief operating Officer, Ernie Garrett day expire on November four.

The board of directors offered new contracts for all of US. The I believe are fair and strike an appropriate balance for shareholders.

After a lot of consideration I have decided to retire from heritage by the end of November and promote Ernie Garrett Jay to Chief Executive Officer.

Ernie has been an integral part of Heritage's executive team since the company's inception. It has tremendous experience across product management underwriting claims analytics and systems as the founder of the company. It was important for me to pick the next CEO and I'm pleased to name Ernie as my successor.

Our co founder Richard would've Colm will continue to serve as president and chairman of the board.

Even though I'm retiring from heritage all continue to serve the company as an executive consultant through 2021 and shareholder should expect a seamless transition new.

New agreements, reflecting these changes will be filed as soon as they are completed and I'm confident that our executive compensation expenses will be significantly lower in 2021 and will provide a meaningful boost to our earnings per share.

As many of you know I'm, a serial entrepreneur and loved the challenge of creating new companies from the ground up.

I have started several companies over the years with heritage, bringing my most successful venture to date.

It was important to me to stay with the company until the business plan I developed was fully implemented.

Since inception, we grew from a single state homeowners insurer in Florida to a top 20 homeowner writer in the United States. That's actively writing in 15 states with over a billion of in force premium.

We have developed an impressive double digit organic growth engine, including a vast independent agency network and multiple national partnerships with some of the top insurance companies in the U.S.

Over the past five years or so weve de risk roughly 23 billion of Tri County, Florida, T. IB diversify the companys footprint and reduce Florida T.I.B. from 100% of the total company to just 31%.

Our enforced premiums have nearly doubled and our growing at record levels. Our reserving has significantly improved and is arguably the strongest in the peer group as demonstrated by our ninth consecutive quarter of favorable prior year Reserve development.

We've been profitable every four years of our existence, even during the toughest periods of the assignment of benefits crisis in Florida and through extremely active storm years, which is the exception among our peers since.

Since inception, we have grown book value at an impressive 22% compounded annual growth rate and we've returned almost $150 million to shareholders through dividends and share repurchases.

Our new business sales have set new records each of the past five quarters.

And are up over 100% year over year.

I'm extremely proud of our operating results during my tenure as CEO and the timing of my retirement don't right.

As I believe we successfully navigated through some very difficult times established ourselves as a meaningful competitor in the property insurance sector and are in a position of strength relative to our peers.

I Trust journeys judgment and ability to execute a very successful business plan and I look forward to supporting or any guess he makes a seamless transition into his new role.

I'd like to close by thanking our employees directors partners and shareholders for their support over the past eight years I did not build this company alone. It was a team effort and I am forever Grateful for your contributions to our company. Thank you for all the amazing memories and for making heritage of best in Class Company.

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

Thank you Bruce good morning.

We have been very fortunate that COVID-19 has had virtually no impact on our business and much of that has to do with the efforts of our employees.

Activity remains high and we continue to provide our policyholders and distribution partners with the service. They have come to expect from heritage I would like to thank our employees once again for their continued flexibility dedication and customer focus.

The weather has been a challenge in 2020, starting in the second quarter and continuing into the third despite the second quarter, having an unprecedented 13, tcs events and net weather losses of 26.8 million the weather losses of $47.3 million in the third quarter surpassed the second quarter weather losses by over time.

Many million on a net basis. The net loss ratio of 86.6 was significantly impacted by hurricane and non hurricane cat losses of 24.5 million, which added 17.8 points to the net loss ratio and non cat weather losses of 22.8 million, which added another 16.5 points to the net loss ratio.

The x., whether net loss ratio was also impacted by higher current accident year losses, which we believe to be an anomaly.

Despite having favorable prior year development of $5.8 million in the quarter with the weather losses, just mentioned the company had a net loss for the quarter of 5.2 million or 19 cents per diluted share.

Gross premiums written for the quarter were 278.2 million up $40.9 million or 17.3% from the prior year quarter.

Increase reflects growth outside of Florida at 18.1% and growth in Florida at 16.3% compared to the third quarter of 2019. The company has added written premium in the states of California, Delaware in Mississippi with the increased growth. We continue to evaluate our portfolio to ensure that we are getting the type of policies.

It will contribute to our long term profitability.

Along with the premium growth, we are focused on making an underwriting profit and obtaining adequate rates.

17.3% year over year, written premium increase outpaced our policy in force growth of 7.6%.

The ceded premium ratio was 45.8% in the third quarter down 0.7 points year over year and down from the second quarter of 46.6%.

The decrease year over year reflects the increase in ceded premiums of 8.3%, which was more than offset by the increase in gross earned premium of 10.1%.

2023rd quarter net premiums earned were up 14.4 million were 11.6%, reflecting higher gross premiums earned and partially offset by an increase in ceded premiums.

Regarding our investment portfolio during the third quarter, we experienced stable to slightly positive market spreads and strong demand in the secondary markets, allowing us to take 20.4 million of investment gains during the quarter.

This will impact future yields in the short term, but was opportunistic for insurance companies and we remain committed to maintaining a low duration portfolio. So that we can benefit when yields rise.

The net expense ratio was 36.1% and down from 38.9% during the third quarter of 2019, the ratio reflects reduced compensation expense technology equipment and travel labor related costs.

The net combined ratio for the third quarter of 2020 was 122.6, which is up from 94.5% in the prior year period, reflecting higher net loss ratio.

Interest expenses down slightly reflecting a decrease LIBOR rate relative to last year. Despite the loss in the quarter book value per share is up by over 30 cents for the year.

In closing I'd like to comment on our focus going forward in 2019, we focused on our capital structure and continuing to refine our exposures in Florida and expanding our footprint into other states in 2020 the growth of the topline was result of those efforts and now we are focused on getting the bottom line to expand in line with the increase in the top line.

As mentioned, we are focused on writing business, where we think we can make a profit and obtain adequate rates, we will take the rates needed to achieve adequate margin boost.

Bruce and I are now available to take your questions.

And at this time, we will begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset for pressing the keys.

To withdraw your question. Please press Star then two what's.

Once again that is star then one to ask your question.

Our first question today will come from Paul Newsome with Piper Sandler. Please go ahead.

Good morning, graduations to everyone on the change in the decision.

I was hoping to ask a little bit about the the capital position and how you feel from a capital perspective, as well as maybe an update as to.

How you are thinking.

Think about capital allocation perspective.

Yeah, I mean, I'll take a stab at that Kurt jump in.

You know, we think we have a very strong capital position right now we've got plenty of cash on the balance sheet.

We are in a position of strength with respect to capital and we're happy with where we are in this position in terms of capital allocation going forward. Obviously, we keep some dry powder back to participate in reinsurance contracts and maintain appropriate RBC ratios et cetera, but we do.

Feel like the balance sheet has a lot of capital on it right now that we could use and the the number one target for us for use of that would be share repurchases. So we look at where we are trading right now and the discount to book value and then I kind of compare that to the fundamentals of the company when you have the exceptional.

Sales that we've shown and you have the favorable reserve trends for over two years now that's a that's a great combination for profitability are forward book value projections are significantly higher than where they are now in a good read use of that capital is to return to shareholders via share repurchases.

Right.

Yeah, obviously the this let's review the balance sheet reserves had been a huge focus for you guys. The last several years.

They looked like it was a little.

I've mentioned have a little injury.

Year Reserve changes in development can you maybe talk about what that was just so we have a sense of how.

Well the pieces are moving.

Yeah, I mean, a lot of that had to do with the number of Tcs events, we had the first and second quarter and just the weather events. We did have a number of you know kind of companion claims that were associated with the cat claims.

This point yeah, we haven't really you know determined that those are you know covert related or have any relationship to that but it did spike a little bit in the third quarter and that's why when you. We do consider to be somewhat of an anomaly. We just haven't seen that type of ramp up before and that really was that was the cause of that and Paul you know, we take a very conservative approach.

EPS do loss reserves, obviously with nine consecutive favorable orders. So whenever we see any type of trend we err on the side of caution we brought up the additional capital and what usually happens is we end up releasing it and that we think that give shareholders a lot of confidence that we are reserving appropriately and there aren't good.

Any surprises on the horizon and trend in terms of adverse development, we think that's very important.

Fantastic I'll, let some other folks ask questions appreciate the answers and congrats.

Congratulations everybody great. Thank you Paul.

And once again, if youd like to ask a question. Please press Star then one.

Next question will come from well Marla backer with the duty. Please go ahead.

Thank you.

No I I'm I'm wondering.

Right.

The geographic diversification efforts.

<unk>.

Delaware.

To further.

But in the past we've also seen you take away.

From the East Coast, California, Hawaii any other potential.

More far flung.

Exemption.

Looking at or thinking about right now.

Yeah. It's a great question. So we did launch Delaware in the fourth quarter or in the third quarter and fourth quarter. We plan to launch, Maryland. We are currently evaluating approximately 15 to 20 additional states for licensure. So we're still in the due diligence process there.

We can tell you more importantly, where we won't be we will not be in Louisiana, and we will not be in Texas that is not.

In our business plan, we have we have never really been bullish on those two markets and the big difference maker for us in the third quarter reviews of your peer groups that have significantly elevated catastrophe losses. The US is the fact that we don't have a presence in those two Gulf Coast States. So we're going to hold the line there we like our port.

Leo we have such tremendous runway ahead of US we're growing top line at an incredible cliff right now up 17% year over year.

And we have signed multiple deals to acquire tens of millions of dollars of additional premium haven't even blown through our topline numbers yet so I do think that you're going to see some pretty expansive growth than the company at profitable rates, but mainly within the existing footprint that we have today.

Okay, Thanks and.

And then.

The partnership obviously, you know that.

Part of the strategy the bundling opportunities.

You spoke to this I apologize I jumped on a couple of minutes late.

Can you give us at least directionally some sense.

That had an impact.

Gross.

Yeah, I mean partnerships are very critical for us and we've got multiple national partners in our portfolio right now that is truly unique among our peer group I'm not aware of anyone that has the breadth of partnerships that we have here at heritage and we've got several more on the horizon that I believe will be announced.

In the near term.

We cannot and comment on what those numbers are for a partner we have a very clear agreements with all of them that we will not disclose financials and and what that premium volume looks like but is it safe to say that our biggest producers are the national partners that we have so it is.

Impacting our growth rate, but you know I'd say, 90% of what we're producing right now is coming from independent agents and probably 10% of that is coming from the national partnerships, but I do expect those numbers at the national level to start growing just because weve signed all of these other deals to acquire tens.

Millions of premium that haven't even run through the topline enforced premium numbers yet.

Thank you.

Thank you.

And our next question will come from Bill Rumo with Dell.

Selling and partner please go.

Go ahead.

Great. Thank you very much.

If I could just switch to for that have you seen any run up in Irma claims coming up on the three year statute any trends kind of observe.

Yes, that's a great question, but not not really I mean, we saw a little bit of elevation and some claims that kind of came in the last call. It 30 days or so but nothing that wasn't already fully accounted for plus some in our I mean, our number so we didn't see anything in fact I was very surprised that.

The run off was as low as it was.

I know other insurance carriers, and Florida have had significantly worse run up numbers as you approach the deadline, but that's mainly because they have a big footprint in Tri County, where you see a lot of the.

Logs called social inflation claims, we just don't have that book of business and so it's a little different for us vis-a-vis them.

We think we're in a pretty good spot and we didn't really get any surprises out of ERM as we approach attached statutory deadline.

Great. Thank you.

You know, we know, Florida, there's a lot of companies under stress you talked about being in a position of strength is there any interest on your part and maybe participating if there is some dislocation in Florida.

Potentially picking up policies in Philly and where other companies might be stopped writing and state because they have RBC issues and you can step in it Uh huh.

Be a more appropriate rate and not just Tri county, but maybe other.

Parts of the state as well is that.

Interest you at all.

Yes, there's always there's always opportunities. They are doing I think you really touched upon the hot topic in Florida right now there's I think there's a fair number of players right now wonder are under pretty severe financial distress.

And whenever there was chaos like that in the market usually there's some really wonderful opportunities that come out of that we're going to be opportunistic we're not really looking to grow the Florida footprint right now, but if there is an opportunistic play within Florida that will generate huge returns for the company, we're absolutely going to take a look at it and I can tell you that.

Were usually the first company that these guys call just based on our track record of M&A activity, both inside and outside of Florida, Yeah, I'd say one of the things you did mentioned a very key aspect of that though is at the right rate. So you know are we willing to just kind of go in and then take portfolio is that we think are underpriced no, but you know at the right price right.

Great definitely we would look at it.

Perfect.

Helpful. Thank you and.

I.

The cash on your balance sheet is definitely growing pretty significantly is.

Is there any way maybe help us think about what kind of cash you have at the Holdco.

We have a little over $40 million at the Holdco as of third quarter.

Did you downstream any capital to the subs to support.

The growth that you've been seeing.

Not at this point.

That's great. Thanks, and then maybe the last one.

Bruce hopefully you might be able to help.

Think about the topic of we've seen some press reports talking about the away are looking at MGH relationships and affiliated partnership.

Yeah internally affiliated kind of relationship.

Can you just help us maybe frame out what's going on I don't know if I kind of fully appreciate all the issues.

Yes.

The empty a structure and Florida has his unique views to be a lot of other states and and that's really a structure that was designed and has been maintained to attract capital before a marketplace.

But the way to generate some type of yield to the investors.

You I've heard this topic come up multiple times over the years and I'm not really sure what the breadth of that review is right now I can tell you that I'm I haven't seen anything negative or contrary to the current MGH structure at all.

I think it would probably be something if I'm going to guess something that probably happens to some of the more financially strapped to companies that are having a hard time meeting minimum RBC et cetera, I can see that as being a pressure point for them, but for the companies who have good solvency and good underwriting portfolios et cetera.

People like us.

I'd be very surprised to see any pushback on it.

Great.

Thank you very much think that's all I have and congratulations everyone.

Thank you.

And once again, if you would like to ask a question. Please press Star then one.

And this will conclude our question and answer session I'd like to turn the conference back over to Bruce Lu.

Good for any closing remarks.

I would just like to thank everyone for participating in our third quarter 2020 earnings call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.