Q4 2020 Heritage Insurance Holdings Inc Earnings Call

Good morning, and welcome to Heritage Insurance Holdings fourth quarter, 2020 financial results Conference call. My name is Kate and I will be your operator today at this time all participants are in a 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 to turn the conference over to Iraq for the money Executive Vice President and Heritage. Please go ahead.

The conference is now being recorded.

[music].

Yeah.

Good morning, and thanks for joining us today.

Got you to visit the investors section of our website investors about heritage GCI Dot com for the earnings release, and our earnings call will be archived.

These materials are available for replay of review of 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 and are subject to uncertainty and changes in circumstances.

And our earnings press release and in our SEC filings with the.

Detailed material risks that may cause our future results to differ from our expectation for.

The statements are as of today and we have no obligation to update any forward looking statements we may make.

For a description of the forward looking statements and risks that could cause our results to differ materially from those described and the forward looking statements. Please refer to more of annual report on form 10-K earnings release and other SEC filings.

With us on the call today are already got Arete, our Chief Executive Officer, and Kirk Lusk, Our Chief Financial Officer, I will now for you on the call over to Ernie.

Thank you of rush and good morning, everyone and thank you for joining us today.

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

Productivity remains high and we continue to provide our policyholders and distribution partners with the service they have come to expect from heritage I would've liked the thank our employees for their hard work and dedication to the organization.

Net income and book value per share growth were positive and the fourth quarter, despite an unprecedented level of weather losses.

We were also pleased to report our 10th consecutive quarter of favorable prior year Reserve development.

While our topline growth was solid at almost 20 per se and the quarter. Our main focus in 2020, one will be on the bottom line as we continue to raise rates across our footprint, including double digit compounded rate increases in Florida.

We are also taking underwriting actions where necessary the further boost profitability.

As mentioned and the earnings release, we recently launched a partnership with the Nutmeg agency.

Subsidiary of the Hartford to offer home policies and select coastal markets.

We look forward to working with it and don't make agency and I appreciate their partnership.

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

Thank you Ernie and good morning.

Gross premiums written for the quarter were $282 3 million up $46 9 million or 19, 9% from the prior year quarter.

We started writing and Maryland during the fourth quarter, bringing the total number of active states to 16 for the full year written premiums were up $142 2 million, which is and an increase of 15, 2% versus policies in force growth of nine 2% over the same period as I mentioned last quarter, we are.

<unk> focused on making an underwriting profit and obtaining adequate rates.

As we look forward I expect our growth to slow as we focus on margin expansion.

The ceded premium ratio was 42, 9% and the fourth quarter down 1.1 points year over year and down from the third quarter of Bureau of 45, 8%. The decrease year over year largely reflects of fourth quarter true up the benefit of the ceded premium ratio.

Both of the yearend and fourth quarter were significantly impacted by weather events for the full year. The company had $134 2 million of current accident year weather losses, $58 3 million higher than 2019, $75 9 million and totaled.

For the fourth quarter current accident quarter weather losses were $38 9 million, which was $23 7 million higher than for Q2 thousand 19.

The net loss ratio of 74 per cent is higher than the prior year quarter net loss ratio of 51 per cent. The increase is mostly attributable to cat losses and other weather events.

There are regional differences, but overall personal lines non cat peer premium trends are up between 4% to 6% driven by long term loss severity trend of 4% to 6% with long term frequency relatively flat our personal lines overall rate increases were over 10% in 2020 and of anticipated it would.

Just over 9% for 2020 one.

Overall personal lines rate increases for Florida across the all personal lines of products was over 16% in 2020 and anticipated to be over 10% in 2020, one excluding any expedited filing for reinsurance rates.

These numbers exclude the impact of inflation guard, which adds approximately 3% to 6% more rate depending upon geography.

The net combined ratio for the fourth quarter of 2020 was $108 seven which is up from 89, three and the prior year period, reflecting a higher net loss ratio.

And the fourth quarter, we generated a tax loss for the year, which due to the cares Act, we were able to carry back and deduct at the pre tax reform 35 per cent corporate income tax rate.

In 2019, we focused on our capital structure and continue to refine our exposures and Florida and expanding our footprint into other states in 2020 the growth of the top line was the result of those efforts. We are now focused on increasing our margins.

We're now available to take your questions.

Yeah.

Okay.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on you touched on the phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time of a pause momentarily tourists.

And Bill I roster.

Okay.

Our first question is from Marla backer from Sidoti go ahead.

Thank you.

Thank you.

Talk a little bit with the new partnership with the subsidiary of the Hartford can you talk us through a little bit about.

This has been a part of your strategy it seems to be working well can you talk us through you know what.

What portion of the new business historically has been generated by these partnerships and where you see that figure going.

Thank you Mark So yeah, you know it is the strategy. We've had for the last couple of years will continue to value of those partnerships with the large carriers that we've had a we don't necessarily comment on the specifics of those partnerships as we value them going forward, so with the and not make agency that is a new relationship.

And ship and again as we stated you know we are working with them on the select coastal markets that is a new relationship. We just started but that continues to be a part of our strategy and we'll move that forward with that goal and as we grow the company.

Okay. Thanks, and then.

One more question, which is you know as you start to think now about the 2021 'twenty two reinsurance season is your strategy.

Are you tweaking of strategy in any way as you get closer to some of those negotiations.

What I would say that we're refining the strategy. We continue to stay on course with the diversification geographically you know if that helps us and we've seen at work and the past we continue to believe that that will work going forward we.

We've seen the savings we've seen where we have not received the same.

Rates as the others.

We know the reinsurance market rates are going up but we believe our strategy has continued to provide a reinsurance savings to us and we'll continue with that.

Thank you.

Thank you.

Our next question is from Mark Hughes from Truest go ahead.

Yeah, Thank you and good morning.

One of them work.

Already you mentioned the underwriting changes youre, making and Kirk you pointed out that will probably lead to some deceleration in growth could you give a.

A little more detail on that or is there any particular geography or the type of property that you're.

Gonna be a little more.

Oh, the strict and your underwriting.

Sure. Good question Mark So what we're doing is looking at the underwriting our bottom line and at the end of the day you know its refining the strategy and ensuring that the margins are expanding so as we look across our geographic footprint are there are some areas, where we believe right. The profitability is not there. So we're caught.

The closing that down slowing the growth there.

That will still allow us to grow and other areas, where obviously you know profitability is better and that way to increase the bottom line margins.

Yeah and on top of that.

Issues and we're really looking at is our concentration of risk and how of that is driving our P&L and really trying to look at and geography to make sure. The you know we are diversified you know.

Geographically, which means that you know there are areas, where we could probably right the significant amount of business, but we don't want to just from a concentration standpoint.

Yeah on the.

Net topic.

What's your sense of the Florida market are you do you have much appetite and Florida, and how do you see the competitive environment, there and it seems like.

There's a lot of the pain going through the the system is there opportunity to grow profitably there.

And I would classify as selective growth right. It is not and growth at the expense of the bottom line and we've got a pretty good sized book that we're comfortable with we will continue to evaluate opportunities and growth there, but it has to make sense to the bottom line and as you know the competitive market here is there are a number of.

The carriers that have shut down have shed some policies. So we are and the position now where we're holding to our underwriting discipline and making sure that at the end of the day you know it is providing an underwriting profit.

Is the I wonder from a day of the Aro <unk> standpoint, or your target combined ratio I Wonder if you could.

Give us some thoughts on that is your pricing do you think with the 9% rate increase and the inflation guard is the adequate to get the target.

Combined ratio of our ROE you would like or do you need another year or two and if you do.

Do have both of them a target number that you know notionally you'd like the share it I'd be did the here yeah well.

And again, when we look at all of our Tygart combined margins of that type of stuff, it's really and it's a timing issue. So you know we are pricing the rate adequacy. However, you know it does take a period of time for that premium to earn through so when we look at the the ROE targets and getting to the combined ratio targets, we do think that the rate increases.

And do get us to where we need to go it's just the timing issue as far as you know how that earns in over the period of time.

And what is the target either combine or ROA.

Yeah, well I think our long term target Roe.

Yeah as you know in the low double digits, and non cat years, and and cat years, we wanted to be and the high single digits. We do think that you know we're not going to have some of the the very high Roe or some of the very low roe's because of the amount of retention that we taken the.

The reinsurance program and the amount of reinsurance we purchased so the idea is you know, we're actually aiming to be a little bit more stable on the ROE in the long term.

Thank you.

Yeah.

Our next question is from Paul Newsome from Piper Sandler go ahead.

Hello, and good morning.

Would you talk a little bit about the components of that 20% growth and the quarter and.

And.

Maybe just start there.

Yes.

Paul of the growth of this as are all of the growth was higher outside Florida and.

And a bit lower in Florida, and right as the bigger contributor to growth and Florida.

The fair enough.

And that's really all and thank you appreciate it.

Alright, thank you.

Okay.

Again, if you have a question. Please press Star then one.

At this time, we have no more questions and so this concludes our question and answer session I would like to turn it back to Ernie go right there.

For closing remarks.

Well, we have two more questions I'm, sorry will go on with the question. So we have Mark Hughes from tourists go ahead.

Thank you the weather losses, this year of the 134 million versus $75 million last year.

There are you kind of our expected level of.

I'm just sort of curious whether.

Our 2019 with the Goodyear in 'twenty, and 'twenty was the bad year or how.

How are how you think about the about the.

<unk>.

Yes.

That's a very good question and.

I think that the.

The question is you know there are some of the weather losses, we're seeing now the new norm or are they abnormalities. When you look at the last several year weather losses have been up since about 2017 and generally speaking we look at 2019 as not being a good year, either and so therefore too.

'twenty was extraordinarily high however, as we look at our rates going forward. Yeah. We are looking to contemplate as much of the weather losses, we can and.

As we look at our own results.

Andy and including in that in the indications so and again I think that it was probably high for 19, but and then that just even gives you an idea of how much higher 2020 years, but the the question is is that the new norm or not and where I think hoping for the best but planning for this being maybe a new norm and mark keep in mind.

2020 had record 30 named storms. This year. So just keep that in mind as we go forward will that be the norm as Kirk mentioned going forward.

And hopefully not but we're preparing the nevertheless.

Yeah understood how about from a.

The rate perspective, and Florida, I think you'd described 9% overall.

Raj pointed out most of the girls and Florida was right. What do you think of what are you requesting and Florida and.

What do you think the.

Average is when you look across the industry for rate increases.

Well, what I would say is I mean across the industry, everyone is taking rate, obviously and you're seeing double digit rates being taken in Florida.

We have always held steady debt, we continue to take rate when rate is needed and not just when theres, a bad year and storms. So we constantly are looking at that and making sure of Actuarially sound rates are in our portfolio. So we will continue to do that going forward. We have taken some rate and that's those have been smaller increases over time that's been happening.

Turning versus number of years now and we will continue to do that looking forward.

The industry up double digits.

Yes, it definitely is.

Thank you very much thank.

Thank you Margaret.

Our next question is from Matt <unk> from J M. P. Go ahead.

Hey, Thanks, Good morning, and just wanted to kind of follow up on the comments around you are focusing a little more on profitability.

And thank you made the comment about targeting longer term of low double digits are we and clean year and a higher high.

The single digit and cat years kind of reducing volatility the.

Are you guys contemplating any change material changes to your reinsurance structure to help achieve that and you know I'm thinking like and sort of just kind of the excess of loss you know and you sort of sideways protection and I mean 2020.

Suppose the kind of.

And as you mentioned the huge frequency of event is that something youre thinking about or you think of your current structure and sufficient for your your exposure and your footprint.

What I would say is we're looking at all of the options right now, especially as we're in the middle of negotiating our reinsurance placements. So that is something we're working with our broker.

And again, we will look for every opportunity to ensure that you know that.

<unk> placement makes sense for us and at the end of the day hits the bottom line.

Great. Thank you.

This concludes our question and answer session I would now like to turn the conference back over to Ernie and go at day for closing remarks.

We'd like to thank everybody for joining us today, and we hope you have of safe and wonderful weekend.

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