Q3 2021 Heritage Insurance Holdings Inc Earnings Call

Good morning, and welcome to the Heritage Insurance Holdings third quarter 2021 financial results Conference call.

My name is Ian and I'll be your operator today.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Please note this event is being recorded.

I'll turn the conference over to rush, so some of the money.

Executive Vice President at Heritage.

Please go ahead Sir.

Good morning, and thanks for joining US today, we invite you to visit the investors section of our web site investors about heritage PCI Dot com, where the earnings release 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.

Statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.

In our earnings press release and in our S. T. SEC filings, we detail material risks that may cause our future results to differ from our expectations.

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 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 got Arete, our Chief Executive Officer, and Kirk Lusk, Our Chief Financial Officer, I will now turn the call over to Ernie.

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

First let me start by thanking our employees for their hard work and dedication over the past few months our employees continue to provide superior customer service to our agents and policyholders and demonstrate heritage is the ability to serve in its markets as a super regional carrier.

While we were disappointed with the loss in the quarter I'm encouraged by the underlying signs of improvement that I expect will continue next quarter and throughout 2022.

Excluding realized capital gains pre tax income improved by about $10 million year over year.

This was largely driven by a 10 point improvement in the net combined ratio, including almost seven points of net loss ratio improvement.

Even though current accident quarter weather losses were up about 4 million year over year.

Corresponding current accident quarter weather loss net loss ratio actually improved by almost three points.

These improvements are driven by our focus on rate adequacy and underwriting optimization.

For example, as.

As of quarter end premiums in force were up 13%.

While policies in force were only up by 3%.

Resulting in premium growth outpacing policy growth by over 10 points.

This was even more pronounced in our Florida homeowners book.

<unk> quarter end premiums in force were up seven 5% while policies in force were down five 4% with premium growth outpacing policy growth by 13 points.

I'm confident in our business plan and the underlying improvements that have started to emerge should become even more visible next quarter and particularly in 'twenty to 'twenty two.

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

Thank you Ernie good morning.

The net loss for the quarter was $16 2 million compared to a net loss of $5 2 million during the prior year quarter. The primary drivers of the variance relates to significant realized gains in the prior year.

Reference in third quarter of 2020, we realized $20 4 million of realized gains compared to none this year.

The high level of severe weather and storms continue to be a major driver of losses and the losses for the quarter.

Net accident quarter weather losses of 51, 4 million or $4 1 million higher than the same quarter in 2020.

2021 third quarter losses are also $32 7 million higher than the third quarter of 2019, and $27 8 million higher than the third quarter of 2018.

To put the 2021 year to date net weather losses into perspective, the 2021 year to date net weather losses, or $118 3 million compared to $95 3 million in 2020.

$60 6 million in 2019, and $50 4 million in 2018.

With the reoccurring severe weather events, we are factoring these losses as well as the experienced social inflation into our rate indications as soon as possible.

Right the weather events and the loss for the quarter were seeing favorable trends that we believe will lead to continued improvements in subsequent quarters as we return to consistent profitability.

As Ernie mentioned premiums in force were up 13% year over year by policies in force were up only 3% over the same timeframe representing premium growth outpacing policy growth by 10 points in Florida, where our personal lines business represents nearly 37% of our policies in force enforced pre.

NIM growth outpaced policies enforced growth by 13 points.

Our emphasis on rate increases over policy growth is consistent with our focus on margin expansion and rate adequacy we.

I hate that we'll continue to have substantial rates, earning through the portfolio. This year in 2022 and 2023.

We are undergoing detailed reviews of our business and curtailing the volume of new business, we will accept as well as business, we will renew at while we focus on rate adequacy. Additionally.

Additionally, we are implementing a number of underwriting changes to improve the quality of our book of business. This includes minimum coverage a amounts shutting down certain zip codes, making changes to our agency force implementing minimum roof age in certain geographic areas among other things.

Ceded premiums are up 13% year over year, but were outpaced by the gross earned premium increase of 15.5% and as a result, the ceded premium ratio dropped from 45, 8% in third quarter 2020 to 44, 8% in third quarter 2010.

'twenty one the ratio was also down from 48, 7% in the second quarter of 2021 which was negatively impacted by a 9.4 million reinstatement premium associated with severe convective storm reinsurance agreement.

The 79, 8% net loss ratio was down 6.8 points year over year improvement reflects lower attritional current accident year loss ratio, which partially standards for improving rate adequacy and was partially offset by lower favorable prior year development.

Our net expense ratio decreased by three four points, reflecting our focus on expenses and economies of scale associated with rate driven premium growth.

The net combined ratio for the quarter was 112.5 and down 10.2 points from third quarter of 2020 of $122 seven.

Although we are not pleased with the loss in the quarter the amount of rate, earning through the portfolio the lower attritional loss ratio and the expense ratio are indicators of improvements in future quarters. We are now available to take your questions.

Yeah.

At this time, we will now begin the question and answer session.

A question you May Press Star then one on your telephone keypad.

Here you can speakerphone, please pick up your handset before personal iqs.

So Charlie a question. Please press Star then.

Two.

At this time, we will pause momentarily to with some of our roster.

It looks like our first person in your expense or macro idea of JMP.

Please go ahead.

Thanks, Good morning.

Uh huh.

You mentioned, a few times I think substantial rate working its way through the portfolio can you.

Give us an idea of the ballpark on average I know it'll vary by by state and territory and so forth, but is that kind of mid single digit high single digit or what what sort of rate are we talking about.

We're talking about you know mid to high single digits.

In most jurisdictions. However, there are going to be several that are going to be in the double digits.

Okay, Great and then you guys have.

You know over the past several years really grown particularly outside of Florida.

Through a number of partnerships with large national companies.

Can you just comment on kind of how those are going in general and in about what portion of the book today is kind of that represents.

So we are very pleased with the growth that we've had outside of Florida with our national partners, but we continue to kind of refine where those growth areas are obviously those areas that are unprofitable.

Or is where the focus is going to be and then the overall book that we have with them probably is accounts for about 25% of the portfolio.

Okay, Great and then I guess my last.

Question, just a broad question I guess, probably for you Kirk centered around capital kind of how do you feel about heritages capital position currently, particularly in kind of a little moderation in exposure currently and just how should we think about it as we go into 'twenty two.

Yeah, and I think we're positioned well from a capital standpoint, I mean, one of the things. We did do is we did refinance.

All of our debt in the second quarter with.

With a fourth soon to get banks, you know, which was led by regions of BMO, which you know were very great to work with we were able to lower our costs get more flexibility and increased our revolver by 50% there. So.

So I feel pretty good about that when we look at deploying capital in the future I mean is it really the focus is on profitability.

I think that there are some areas, where we are going to see our Pip count decrease much like we have this year, but the premiums are going to increase due to the rate increases.

We do have some areas also particularly up north where we think that the we are going to have a positive pip growth and premium growth on top of that.

Great and I mean, as you look forward would you it sounds like you clearly believe capitals or at a minimum adequate do you do you foresee your excess capital position should should investors be thinking about the potential for share repurchases at some point or are we or.

Or are we getting ahead of ourselves.

Well, yeah, we have about $26 million worth of cash nonregulated cash right now we did do some more.

<unk> stock buybacks in the third quarter and that is something that we will evaluate going forward.

Great. Thanks, very much for the answers.

Okay.

Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.

Hey, Good morning, I was hoping you could talk a little bit more about what you're seeing from a clean cost inflation perspective.

Other companies are reporting depending upon their businesses.

Pretty high rates of severity.

And.

I guess the concern would be you know maybe a mid.

Single digit.

Increase in <unk>.

Great isn't actually sufficient to overcome.

Volcker's severity from sort of underlying cost.

<unk> plus whatever you think.

It would be not be happening from a.

Weather type deterioration perspective.

Yeah, No and I would say that that inflation is a very real I think that we're seeing it also in one of the things we did with our portfolio. Starting June of 2020, we increased our inflation guard factor in the southeast two 8%.

Except for North Carolina, which was 6% the northeast has been a little lower at 4%. So when we look at the inflation guard factor plus the rate increases that we're we've contemplated.

We think that that is going to be sufficient for that so you are correct. We actually had increased what we consider our loss cost factor substantially over the last couple of years.

Fair enough.

Hum.

Progressive is talking about pulling back in in in Florida, and the Gulf regions.

And any further updates on the competitive environment there.

People getting out are they getting in is pretty similar to what you saw the last couple of quarters.

Regarding the golf as far as other states in the Gulf area.

Well. The example, I use progressive said their home insurance business that theyre going to trend.

Essentially deemphasize the golf various Florida and.

Actually expand elsewhere outside of those regions that are there only one there.

<unk> size, Florida right.

So our RMC our current approaches to stay where we're at we're not really kind of increasing our Gulf exposure, we do not have plans to.

Expand into all the Gulf States I E, Texas and Louisiana at this time, so that remains to you know, we'll see what the future holds down the road there, but we're very happy with our current exposures in the Gulf really our focus has been in the Carolinas and up north.

I'm, sorry, I wasn't clear I was just asking to see if you've seen.

Appears to be more or less competitive in your markets.

Well, we have not seen more competitors in the market I think everyone has taken a pause with some of the exposures from and what they've seen on the latest storms that hit the Gulf we have not seen more competitors come in.

Great. Thanks.

Got it thank you.

As a reminder, favorite question. Please press Star then one.

Next question is coming from Mark Hughes of Truth. Please go ahead.

Thank you and good morning.

Morning, Mark Mark when you put it.

Whether some of those are pluses and minuses around the topline more rate, maybe some tapering in pip counts in certain markets.

What do you think the top line looks like overall next year or do you make it up a bit.

Yeah.

Yeah, No. We think it's going to be up next year because of the amount of rates do we have.

We took some substantial rates this year, which continue to earn into the portfolio next year and we're anticipating taking even more rate next year, so with that even in those jurisdictions, where we have pip count going down we anticipate premiums are going to be going up because of that rate increases you know as far as like the you know the bottom line improvements I would say you know what.

We're not only addressing it from a rate standpoint, we're also addressing it from an underwriting standpoint, looking at where we write how we write what policies what does the roof age. So we're actually trying to address it from not only the rate, but also from underwriting perspective.

And what's your latest take on some of those regulatory reforms and the Florida kicked in earlier this year are they having much of a.

Impact.

What I would say is this is we've seen a slight decrease and litigation new litigation coming through we're still cautiously optimistic as we're still a couple months into it to see so hopefully that trend continues.

And then how about any maybe some.

<unk> is around the roof issues.

Yeah.

Were there any real changes there and is that helping.

No again I don't think there were many roof.

Any changes on that perspective, again, we're kind of seen what's going to happen there going forward on that piece, but we are working actively with the <unk> to see if there are improvements we can make going forward.

Okay.

I think that was it I appreciate it thank.

Thank you.

As a final reminder, if you have a question. Please press Star then one.

This time it looks like we have no further questions I would now like to turn it back over to the team for any closing remarks.

Yes.

Okay.

Thank you for attending today, we'd go peer everyone has a great weekend.

Yeah.

Okay. Thank you.

Conference call.

Turning today's presentation you may now disconnect.

Okay.

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