Q2 2021 Heritage Insurance Holdings Inc Earnings Call
Good morning and welcome to Heritage Insurance Holdings. Second quarter, 2021 Financial results conference call. My name is I lie, and I will be the 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 Arash soleimani. 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 that Heritage PCI.com for the earnings release. And our earnings call will be archived. 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 Management's, current expectations, and are subject to uncertainty and changes in circumstances.
And our earnings press release. And then our SEC filings, we detail 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 make for a description of the forward-looking statements and risks that could cause our 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 us on the call today are already Garrett, a our chief executive officer and Kirk Lusk, our Chief Financial Officer. I will now turn the call over to Ernie.
Thank you, Arash. Good morning everyone. Thank you for joining us. Today we have been very fortunate that COVID-19 continues to have virtually no impact on our business and much of that has to do with our employees, productivity remains high and continue to provide our policyholders and distribution partners with the service. They have come to expect from Heritage. I would like to thank all of our employees for their dedication.
At first glance.
Income appears disappointing but there's a brighter story. Underlying, the quarters results.
They spied a 9, point 4 million reinstatement, premium in the quarter and a 4 point, 1 million uptake in whether losses relative to the first quarter of this year. Net income improved sequentially, suggesting the benefits of our underwriting and pricing actions are starting to show. It's still early Innings, but we're optimistic that we're on the path to Improvement.
We're continuing to aggressively raise rates and taking underwriting actions to improve our profitability. As we previously communicated, our focus is firmly on bottom line results. Rather than Top Line growth. We demonstrated this in the second quarter as gross premiums written growth accelerated from the first quarter. Additionally premiums, enforced growth significantly, outpace policies in force,
Which is indicative of our focus on rate adequacy.
We renewed our core excess of loss, reinsurance program in, the second quarter and I believe we your silently position for hurricane season.
Irr relative to the prior Year's program. We've prepaid all reinstatement and eliminated Co participation above Our intention overall. We have a solid program with fewer moving Parts which is a testament to our relationship with our valued reinsurance partners.
I will now turn the call over to Curt to provide more details on our financials.
Thank you, Ernie. Good morning. Despite the loss of the quarter, we are seeing favorable trends that we believe will lead to continued improvements and returned to profitability. Gross premiums written for the quarter were 3 hundred and thirty 7 point 7. Million up forty 7 point 3 million or 16.3 percent from the prior year quarter premiums enforce were 1.17 billion and up 18% from June of 2020 by policies in force were up 8.4% over.
Same time frame, the premium increase outpacing, the policy increase reflects, the higher rates, we are implementing throughout our book of business, which is consistent, with our focus on margin expansion and adequate rates. We anticipate that we will continue to have substantial rate learning to the portfolio this year and into 2022.
The seated premium ratio was forty 8 point 7 percent in the second quarter up 2.1 Point year-over-year. Second quarter seated premiums were impacted by 9 point 4 million of reinstatement, premium associated with a severe convective storm, reinsurance agreement, the reinstatement premium added 3 point 3 points to the seated premium ratio and 6.3 points to the net combined ratio.
The net loss ratio for the quarter was 68.8% which is 7 point 7 points, higher than the net loss ratio in the second quarter of 2020 as previously. Disclosed second quarter, whether losses were thirty 5 point 5 million which is approximately 8 point 7 million higher than the second quarter of 2020. In addition, we had point 6 million, a favorable prior year Reserve development in the second quarter of 2021 down from 5 million last year.
The combination of these 2 items impacted the net loss ratio by 6.5.
Points.
Arnett expense ratio, decreased by 2 point, 5 Points reflecting our focus on expenses and reduction and executive compensation. The net expense ratio also banded by roughly 80 basis points from a 1.2 million premium tax benefit.
The net combined ratio for the first quarter of twenty Twenty-One was 105 point to which is up from a hundred in the prior year period reflecting a higher net loss ratio partially offset by a lower net expense ratio. The 9 point 4 million. Reinsurance reinstatement, premium in the quarter mentioned, previously was attributable to increasing the net combined ratio by 6.3 ratio points in the second quarter of 2021.
Although we are not pleased with the Lost in the quarter. Net income did improve from the first quarter of 2021 despite having a substantial reinstatement, premium and higher weather losses, which we think demonstrates the very early benefits of the rate. Increases earning through the portfolio and the underwriting actions. We are taking
We're now available to take your questions.
We will now begin the question-and-answer session to ask a question. You may press star then 1 on your touch-tone phone, if you are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please. Press star. Then 2 comes from Marla backer with sidoti.
Thank you. So obviously, you know, realizing that the weather is an unknown and, you know, something over which you have little control. Can you give us any sense? In terms of timing around, you know, we are starting to see some of the benefits of your, you know, proactive strategy and initiatives, but can you give us any sense around timing? But when you expect to see, you know, a more meaningful
from some of the measures you wander, take
Sure. So as we mentioned in the, in the earnings call here, right? We're starting to see that rate. Come through, those rates were taken in January of this year, as well as April. So I from a renewal cycle those started as early as March, but will take 12 to 18 months to cycle through our entire portfolio. So as we mentioned, we're starting to see the early signs of it. The remaining rate should be taken and coming through the third and fourth quarter of this year and well into 22.
Okay. And then last questions for me is, you know, we've seen you in the past eliminate certain policies that you, you know, considered perhaps the riskiest or and, and the riskiest you chant, and think your business was different at that point, you know, when you took of those initiatives. But do you see yourselves? Potentially not, not renewing or eliminating.
Their policies.
Work. Well, what I would say is, that's a continuous effort. We're always looking at the probability of each policy, each region and where we write, and, again, given some of the rate adequacy, you know, those policies will be kind of analyzed to, determine is based on reinsurance rates, based on, you know, lost Trends. Whether those policies will keep all those policies may be non-renewed, but it is an ongoing effort. And it is something that is a continuously. You know thing, if I'm an underwriting perspective that we do,
We take a look as mortgage to do change. So we're constantly, you know, taking a look at that and making sure we have the most profitable policies on the books.
Okay, thank you. Thank you.
Our next question comes from Mark, Hughes with truest.
Yeah, thanks. Good morning morning Martin
How are you looking at growth and the back half of the Year? Where are you thinking policies that at this point being attracted to you? So as we look at the continued new business growth, right? We are cautiously optimistic at looking in certain areas as the rate comes through that those policies are ring adequate. You know that's not just in Florida but throughout you know the Southeast region even into the
Northeast region as well. So, you know, we have a lot of healthy new business growth, but we are ensuring that it is profitable growth as it comes through. So, will kind of be a little more selective than those areas to ensure that we again, as we mentioned earlier, have the most profitable policies on the books. You know, we've mentioned that, you know, growth is great but not at the expense of the bottom line so there has to be a, you know, nice balance between that. Yeah, yeah I think we expect our grocer and premium to continue to increase quarter over
Irr Corner because of the amount of growth we've experienced in the past. However, when you look at a gross written premium standpoint, that growth is going to start slowing
Do Ernie. Do you see the pricing Edge adequate and most of your markets at this point? Yes, we're looking at that end and because the market has been taking more rate, you know, that is a very promising sign for us as we can continue growing in some of these markets, but we will not stop looking at, you know, the raid act adequacy in these markets and if there's a need to take more rate, we definitely will be doing that.
Then what's your latest thinking about? The SB 876, new changes that have been put in place how how much progress are they really going to make in limiting losses in Florida. So I would say I'm very cautiously optimistic that that will help but keep in mind that just went into effect July 1st. So we're very very early in that, you know, I'd like to see the proof after several months.
SB 76 taking, you know, being placed and see how that pans out. But I am cautiously optimistic that that could help down the road.
And do you think several months will be enough time to get a good good? Look at it? Yeah, I would think, right? That a few months into it. I would say, you know, fourth quarter would give us a little bit better indication and feeling of how things are going. And then well into, you know, obviously into the beginning of 22 because that way, you know, again, having been signed into effect July first, you know, and here we are in August. It's kind of tough to tell whether that's a taking hold, but a several months should give us a better indication.
But there any of it, any momentum building, for any further, either regulatory or legal changes in the state, I'll throw in. Also, you know what the oir is view about the further price increases? How much distress is there out there in the in the sector? What else might be coming the to make things better? Well, I would say.
That there are some more things, I think we would want some legislative assistance with and then that will be going back to the table on that next legislative session on that piece of it. I do believe the Oar has been very helpful. You know with us in getting raped, adequacy in the market as far as distress out there in the market, I would say it's a very tough Market but I think those who are keeping to their underwriting, standards understanding rate, adequacy are those that will get through the
Cat and others. Unfortunately, may not.
Thank you. Thank you, Mark.
If you have a question, please press star. Then 1 to join our cue.
Our next question comes from Paul Newsome with Piper Sandler.
Or you could talk a little bit more about the components of the rising inflation. Serve, excluding catastrophe losses. And that there's a lot of talk about sort of the issues in Florida with respect to liability, but it does seem like a lot of this is just like,
Yeah, yeah yeah. So so for example, you know, in the second quarter there was, you know, 1 very large PCS event, PCS 2120.21:15, which was very large and that impacted a number of carriers, you know, it's a little bit different than the second quarter of last year where there was an impressive number of PCS events. This this quarter was just like you know, had the 1 large 1, there was a couple other smaller ones, when you look at the claims inflation that we're seeing, you know,
Some of it is COVID-19 related. You know, when you look at the the price of lumber, when you look at the price of building materials and some of the repair costs, that type stuff that has you know, augmented the, the claims inflation that is starting to subside, you know, as far as being able to build that into your rates, you know, be because of the how we look at the rate, we look it over a longer period of time, you know, some of that will get itself in, but you know, it'll take longer for some of that inflation if it holds together.
Into the rate activity. However, you know, we are starting to see that
We think that probably claims are going to be not go down to the level they were before, but we think that they are going to go below where they are right now.
That's a severity inflation issue. Or is it also a frequency of lost issue? It's not cat when I'm trying to get my arms around.
Yeah, you know, it's more or less a severity issue than it is a frequency issue. I would say the frequency is up slightly but not to the extent of severity.
Thank you.
This will conclude our question-and-answer session. I'd like to turn the call back over to Ernie Garrett. A for any closing remarks.
We'd like to thank everybody for their participation today and hope everybody has a great weekend. This concludes our call
The conference has now concluded, thank you for attending today's presentation. You may now disconnect