Q1 2022 Heritage Insurance Holdings Inc Earnings Call
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Good morning, and welcome to the Heritage Insurance Holdings first quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Kirk Lusk Chief Financial Officer. Please go ahead.
Yeah.
Good morning, and thank you for joining us today, and we invite you to visit the investors section of our web site investors Dot 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. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances.
In our earnings press release, and 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 may make.
For a description of the forward looking statements and the 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.
Our comments today will also include non-GAAP financial measures the reconciliations of and other information regarding these measures can be found in our press release.
With me on the call today as Ernie guarantee our Chief Executive Officer, I'll now turn the call over to Ernie.
Thank you Kirk and now I would like to thank everyone for joining the call today.
I'd like to thank our heritage employees for their dedication to the company as well as our policyholders I also would like to thank our valued reinsurance partners for their commitment to our program.
On this call we will begin with an overview of our performance for the quarter ending March 31, 2020 to provide updates on key financial performance metrics and then open the call for Q&A.
The first quarter of 2022 marked another quarter impacted by severe weather losses. These higher weather losses resulted in a net loss of $37 million or $1.15 per diluted share.
Despite the substantial increase in net current accident year weather losses during the quarter, we remain encouraged by the rate and form changes implemented throughout the book of business over the last 18 months.
These changes coupled with additional geographic diversification and more restrictive underwriting for new and renewal business will continue to positively impact our portfolio.
These changes are highlighted by the improvement in our Attritional loss ratio for new business quarter over quarter, the initiatives to tightened underwriting and increase rates have improved our average premium per policy by 10, 7% from the first quarter of 2021.
The impact of existing rate increases has not worked its way through our entire book of business.
Therefore, this amount does not include rate changes on policies, which have not yet renewed.
For perspective, our 2022 voluntary homeowners renewals for all states are averaging a 21% rate increase over the prior year with our existing rate changes.
We will continue to seek rate changes commensurate with our cost of doing business.
Rate changes are implemented at policy renewal and our earn throughout one year policy period.
We are committed to proactively and appropriately raising rates to offset higher loss cost and taking underwriting actions to improve our profitability throughout the year.
We look forward to finalizing our cat ex ol reinsurance program, which should be completed by the end of this month.
We used our SPV citrus free again this year for a portion of our cap ex ol program specific to the northeast we were pleased with the pricing of this $100 million reinsurance cat bonds as we continue to successfully access the capital markets as part of our risk transfer program.
This concludes my remarks, let me now turn things over to Kirk loss for a review of the key metrics and numbers.
Thank you Ernie and good morning enforced.
In force premiums grew by 4.7% during the quarter to $1.2 billion, primarily due to rate increases while policies in force for the same timeframe were down five 5%.
We believe the rate and underwriting changes being implemented will have an impact later this year as volatility of loss costs are reduced and produce meaningful improvements in the bottom line.
We recognize the litigated claims environment has made the Florida market very difficult and we're taking rating and underwriting actions that we believe will position the company well in the future just could dampen our future growth in the Florida market efforts to shift business from Florida has resulted in a 19, 1% reduction in personal lines policies enforced in the state.
As a result of the continued execution of our diversification strategy 74, 4% of our T. A V was outside of Florida up from 69% as of the first quarter 2020 one.
We think it is important that the tid increase outside of Florida with district distributed among nearly each state, which we conduct business, which improves our overall diversification of risk.
The ceded premium ratio was 46, 8% in the first quarter down 60 basis points from 47, 4% in the first quarter of 2021.
The decrease primarily stems from gross premiums earned growth outpacing ceded premiums growth.
The first quarter weather losses were up substantially to $63 $8 million.
Current accident year weather losses include $45 million of net current accident quarter cat losses, while we were up from $15 $4 million in the prior year quarter.
This year over year increase also includes $18 $8 million of weather losses up from $16 1 million in the prior year quarter.
First quarter 2022 where the losses are primarily attributed events in Florida, particularly severe storms in mid January and mid March.
Pre announcement of weather losses last week's reflects our commitment to transparency with our shareholders as well as an appropriate approach to estimating losses are.
Our net loss ratio of 91, 6% ended the quarter 22.8 points higher from the prior period due to the higher weather losses outlined.
We believe the social inflation affecting Florida claims is driven largely by litigated claims practices, which drives up the loss costs associated with each weather event. The Florida legislation has taken some actions to address this issue by a Senate Bill 76, and we are interested in seeing the outcome of the special session. Later this.
Right.
Our net expense ratio decreased by 90 basis points to 37, 9% driven by our continued drive to manage G&A expenses policy acquisition costs are relatively flat as a percentage of net earned premiums.
The net combined ratio for the quarter of about 2022 was 129, 5%, which is up from 107, 7% in the prior year period, reflecting our higher net loss ratio, partially offset by a lower net expense ratio.
Total capital returned to shareholders. During the first quarter of 2022 was $6 $7 million, reflecting a six cents per share regular quarterly dividend and repurchase of shares during the quarter, we repurchased 721118 shares at an average price of $6 93 per share totaling approximately $5 million.
Yeah.
Many of our markets and especially Florida are challenged by social and economic inflation continued litigation and increasingly severe weather, we have taken considerable actions to mitigate their at their facts and improve our underwriting results, including taking rate increasing increasing our inflation guard factor tightening underwriting.
Standards and managing exposures are.
Our actions have improved our portfolio, while claims inflation that litigation associated with continued severe weathers continue to dampen the impact of those improvements.
As such you can expect the management to accelerate our initiatives. The management team is focused on improving margins and returns to shareholders. We are committed to taking rate where it is needed tightening our underwriting standards. Even further while remaining compliant with state regulatory requirements and changing our product coverage and exposures all.
All in an effort to accelerate the changes we believe are necessary until we achieve our target returns we.
We will consider all options to realize the value of our entities and we will also take the actions necessary to improve margins.
That concludes our prepared remarks, operator, we are ready to begin the question and answer portion of the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question is from Marla backer with Sidoti. Please go ahead.
Okay.
Hmm.
Stepping back I'm looking at some of the initiatives that you'll have you know done and accomplished over the past several quarters.
Yeah.
Yeah C J.
Do you see any areas, perhaps where some of the diversity and you know that you hope to inject into the underwriting a buck.
Now might not have lived up to your expectations are there any areas. In addition to Florida, where do you think you know, perhaps you should pull back now as well.
Hey, Mike It's a good question. So we continue to look at the book and we're pleased with the actions undertaken but I think to understand that some of those actions, whether they're non renewals increasing rates take 12 to 18 months to flow through the book. So we are on a monthly and quarterly basis are constantly looking at those actions and seen where it's appropriate.
Brigit to take but to understand the full effect of those it does take 12 to 18 months. So we continue to look and there's areas outside of Florida that we are constantly looking at but we're overall pleased you know with the direction in which we're heading on with the underwriting performance.
Yeah. In addition to that I'd say, we're also much more surgical. So for example, you know we will look at each individual state and our distribution within that state by county between coastal and inland and adjust the portfolio you know where we aren't seeing the returns we want to so yeah, it's not a carte Blanche I think view of the.
Different diversification, because it's much more surgical than that.
And then once you take a decision to either you know as you say surgically you know shift a little bit tweak the portfolio.
Is it still the same 12 month process before you see a you know that shift actually happened.
Yeah, It will take a bit of time to roll through the book because you do have to give a non renewal notice right or for example in some areas where we've terminated agents that takes some time for those policies to roll off so those things. Unfortunately do not happen overnight. It takes a little bit of time on that you've gotta get proper notice you know if it's a non ring.
And some of the rates that we take on are on a renewal basis. Both by the time you get those approved it does take a bit of time.
Okay.
And then left.
Question for me is can you give us a little bit more color on some of the partnerships that you formed in that you know where you where he sees though.
That part of the business.
Yes, so we do have some large partnerships with liberty mutual Geico, safeco and that Jen and we're constantly in communication with them.
Regarding the business that we're looking to target they have been very cooperative very good about looking at those pieces and obviously in a true partnership there were times, where we have to you know pull back in certain areas and they understand but then we refocused on other areas, where it's more profitable for us and they have been very good partners with respect to that.
Thank you.
The next question is from Paul Newsome with Piper Sandler. Please go ahead.
Mr. Newsome. Your line is open on our end, perhaps its muted on yours.
I'm sorry can hopefully you can hear me now.
I want I wanted to home in on the go.
Just a cat losses to start with they were unusually large by.
Your standards as well as really anybody else in the industry.
Was there anything that would lead us to suggest that this was.
Just a particular concentration area or maybe you know maybe you could talk about how you define your cat losses, maybe you're having a different definition than the standard industry.
Anything that would give us some insights into why heritage as cat losses were anomaly in the quarter versus peers.
Yeah correct. Okay. So first of all you know there are there were there were six tcs events.
We categorize into that you know P. C. S. 22, 11, 20 to 12, 22, 18, 1920, and 21 of the largest one of those is 22 12. When you look at the states that that impacted you know it was Alabama.
Georgia, Florida, and North Carolina are predominantly you know the bulk of those losses are in Florida and also when you look at you know I think our our reserving practices you know we do.
<unk> had like when you look at our reserving practices over the since third quarter of 2018, we've had favorable development up until this quarter. This quarter. We did have slight unfavorable development of like $2 4 million, but prior to that we've had tell from third quarter 2018 until now have had favorable development.
To the tune of about $30 million. So we think our reserving is prudent and accurate so I can't speak for anybody elses losses or their reserving, but you know that that's how we look at it.
Are you reserving certainly has been a relative strength versus your peers could you I always thought it was going to be my second question, whether you had was a developer.
With all of it or not because we didn't focus on that given it's an unusual development for you.
Yeah, Yeah, we did have a $2 $4 million worth of development and again first quarter in a long time, there was really nothing.
In particular about that as far as you know where it was coming from you know it was just like a myriad of things. There's a couple of the storms Elsa Fred and Ida, which are all retained for us are they are not.
Not into our cat layer. So you know those did deteriorate slightly and so therefore those are fully retained.
That makes sense different topic could you talk a little bit about it.
Precisely.
The profitability of the Florida book versus the non Florida book.
Bookings is it wasn't.
That much different than the rest of the book this quarter or were not just.
Additional details would be great.
Yeah, well with with the weather losses, obviously, the you know the the Florida book you.
It did not perform well when we look at going forward because of the rate increases that we are taking in the Florida market and also due to the tightening of the underwriting standards. You know are we have we are looking at that is seeing you know quarter over quarter improvement in that but again.
It's a you know the weather that is driving it obviously this quarter.
Right.
The big topic.
We're really in the last year or so has been.
Underlying claims inflation versus rate.
We could look back a year ago, and then look at sort of the next 12 months.
Hum.
Where do you think he is doing from a rate versus claims inflation perspective. It would seem if you sort of add up the year rolling basis that you might have lost some traction, but is that fair to say that or or or not maybe you could just.
Thinking about how let us know how you're thinking about that.
Okay, well I think we look at you know claims inflation, probably running around <unk>.
12% overall, and that's kind of how we look at the portfolio. That's what we look at you know building into our pricing and I think is consistent with what we've seen over the past year and so from that standpoint, I think we're building that inappropriate you know we have increased our inflation guard factors throughout our geography to also can't.
Complete that so that would be over and on top of the rate increases that we're getting so I do think that there is probably you know the I think we've got the inflation currently paying although that you know as everyone knows can move up and down and it has some volatility to it.
It's the I think the you know the social inflation and probably the weather that are the ones that are probably even a little bit more difficult to predict.
I'll, let some other folks ask questions.
You get the help as always.
Thank you Paul.
Again, if you have a question. Please press Star then one.
The next question is from Matt Karaleti with J M. P. Please go ahead.
Hey, good morning.
Good morning.
I just want to go back to trying to better understand the but the cat slash weather losses in the quarter.
Just to get somebody some of your peers that have similar footprints.
You guys did a number of magnitudes of what they have reported.
Can you define for US what is the cat for heritage and what is weather for heritage because it seems that the weather bucket as the majority of it in the cat bucket isn't.
Necessarily so sizable.
Yeah, well the cat bucket was where it was 44 million a $45 million and the other whether it was the 18 seven number. So so it is predominantly the cat number and as the find by the P. C S events.
So that is what we we put into that bucket is P. C S events.
Tcs events I'm, sorry, it's PCR so that's our defined path.
Yes property Cat atrophies yeah.
Putting the PCF events into the cat bucket correct.
So it does not have any cat.
Okay.
Do you have handy like.
You know how many.
Claim counts that came off one of those events.
Does that relate to that 60, I'm, sorry, wherever they go to $64 million of cats and weather.
As far as you know reported claims as of.
Yeah 331, there was 876.
Okay.
Alright, Okay. Thanks, and then just.
Separate question.
Did you mean against the backdrop of obviously a lot of your peers in the market or are struggling quite a bit can you just update us on how you view your capital position Yeah as you sit here today.
Yeah, I think we looked at our capital vision as good I think we we've got Osprey that we were able to utilize also we also have our service companies.
And then in addition to that you know we do have a syndicate of banks or do you have a revolver available to us.
So from that standpoint, you know when we do think that we're okay from a capital position and you know continuing to look at that going forward.
Alright, great. Thank you for the answers.
And in addition to that I would I wouldn't mention that fact.
A cash position you know our nonregulated cash is $35 million.
Okay. Thank you.
The next question is from Nick ear, Covello with Dowling and partners. Please go ahead.
Hi, good morning.
Good morning.
Well first of all it was on Holdco liquidity, but that's a $35 million correct and then can you just describe so where's groups that's groups that surplus as of the quarter end and was anything downstream at this point in time.
Let's see here, let me pull that up real quick.
Yeah.
Yeah, it's almost that surplus is 294.
Yeah.
Across the entity.
Okay. Thank you.
Then.
I guess just on the G&A expense just looking for greater was relatively in line with the year over year, but it was up versus the prior three quarters. So is there something or can you. Just help me think about that going forward on an annual basis quarterly cadence would be would be helpful.
Yeah, I think I think you're going to see it a little bit higher in the first quarter of each year and then dropped slightly you know throughout the year.
So I know last year, it probably dropped first quarter, where it was was higher and then it dropped.
A fair amount in the second quarter.
Quarter, I would expect it to drop some into the second through the fourth quarter, but probably not to the extent it did last year.
Okay. Thank you.
And then I guess on the renewals I don't know how much you can talk about now but.
So I guess my first thought that the capacity has been secured at at this point in time or no.
I'm talking about reinsurance reinsurance placement.
Right.
I'm, sorry, you broke up there you're referring to the reinsurance placement.
That is correct reinsurance, yes, yeah.
So we did go out to the market early we've met with all our large reinsurance partners. We're very pleased about what we're seeing and we're in the process of that being placed are we're very optimistic again, we've got a lot of commitments and we're in the process and expect that to be fully placed by the end of the month.
And then obviously you know in the announcement, we did go out early and make the cat bond placement as well.
Got it. Thank you that's all I had.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Ernie give or take for any closing remarks.
We thank everyone for joining the call today and wish everyone a great weekend.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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