Q2 2022 Heritage Insurance Holdings Inc Earnings Call
Good morning, and welcome to the Heritage Insurance Holdings second 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 Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad too.
To withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Kirk Lusk. Please go ahead.
Yeah.
Good morning, and thank you for joining US today, we invite you to visit the investors section of our web site investors Dod Heritage PCI Dot com, where the earnings release and our earnings call will be archived.
The 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 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.
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 will now turn the call over to Ernie.
Thank you Kirk and thank you all for joining the call today to start I would like to express my appreciation for our team at heritage and for their hard work and dedication to the company the commitment of our employees policyholders and belly partners continues to drive growth across our 16 state footprint.
We especially appreciate the solid relationships, we have built with our reinsurance partners.
During the call today I will provide a brief overview of our second quarter 2022 performance. Kirk will then provide an update on our key financial performance metrics and then we'll open up the call for Q&A.
First of all I'd like to highlight the positive underwriting income for the quarter. Despite the many challenges we face in our markets our rate underwriting and exposure management initiatives are having the desired impact on our results.
Our net combined ratio of 99.4 attests to the positive impact our strategic initiatives, which resulted in underwriting income for the quarter.
Overall, I'm very pleased with our second quarter results, excluding the impact of the goodwill write down second quarter net income was $2 9 million or 11 cents per diluted share up from a net loss of 4 million in the prior year quarter.
This improvement was primarily driven by higher net earned premium which outpaced the increase in losses. The current accident year weather losses increased to $38 1 million up 7.34% from the prior year quarter. However, our net loss ratio of 64.1% was down nearly <unk>.
Five points from the prior year amount.
The rate informed changes strategically implemented throughout the book of business over the last year and a half along with our geographic diversification intentional exposure management and selective underwriting for new and renewal business has begun to positively impact our portfolio.
These initiatives resulted in improved average premium per policy by 11, 5% from the second quarter of 2021.
Our continued selective underwriting efforts to date were on display this quarter as we experienced a nearly six point reduction in our combined ratio.
Rate increases continued to meaningfully benefit written premiums throughout the book of business, we remain committed to proactively and appropriately raising rates to offset higher loss costs and taking underwriting actions to continue to improve our profitability.
During the second quarter, we completed our catastrophe reinsurance program integrating traditional reinsurance and insurance linked securities without the use of parametric covers.
The success of our program and love a maturity made the new Florida rap program unnecessary to complete the risk transfer.
Our program includes deployment of citrus re which brings additional collateralized reinsurance through capital markets.
Lastly, we did suspend offering new personal residential policies and the more highly populated counties in Florida during the quarter.
Efforts to increasingly diversified business outside Florida remain successful as we experienced an 18.9% reduction in policies in force and a 14.9% reduction of total insured value for the state of Florida.
We also continue to evaluate the impacts of legislation on the homeowners insurance marketplace.
The litigious practices in Florida on not only causing companies to go out of business be downgraded reduce their writings in the state, but also are driving up cost to every single property insurance buyer in the state of Florida.
We appreciate the action taken by the Florida Legislature and are cautiously optimistic that actions, we'll take have a positive impact on our results and challenging claim environment, but also believe that more needs to be done.
This concludes my remarks, let me now turn things over to Kirk for a review of the results in the quarter on key financial performance metrics.
Thank you Ernie and good morning.
Is there any stated we are pleased with the underwriting results of the second quarter, our focus on rate adequacy underwriting and profitability in all our geographies has started to gain momentum and resulted in an adjusted net income a non-GAAP measure of $2 9 million or 11 cents per diluted share when excluding the impact of the goodwill write down.
The underwriting gain in the quarter management determined that it was appropriate to write down the remaining goodwill at this time.
That determination, primarily reflects the decline in economic conditions, which impacted the current stock price and the volatility was a property insurance market caused by the impact of inflation higher reinsurance costs and litigated claims and some of our markets.
At this point the company does not have any goodwill remaining on the balance sheet. There was no write off of intangibles.
Driven by the noncash goodwill write down of $92 million or $90 8 million after tax the net loss for the quarter was $87 9 million or $3 32 per diluted share.
In force premiums grew by 3% from Q1 this year to just over $1.2 billion, while policies in force decreased by one 6% from Q1.
The in force premiums are at the highest level with average personal lines property policy premiums for the first time is just under $2000.
Year over year premium in force was up three 4% while policies in force were down by seven 3%.
The decrease in policies was most pronounced in Florida, where our personal lines policy enforce was down nearly 19% year over year.
We are committed to the Florida market, but recognize the challenges with conducting business in Florida abuse.
Abusive litigated claims practices, our primary concern and we've taken underwriting actions aimed at reducing the adverse impact of these market challenges.
We anticipate rate increases in all our geographies, we will continue to align with loss costs.
Our strategy to remain focused on rate adequacy underwriting and profitability in all geographies has been successful and we'll continue to drive moderate reductions in policy, count, which will mostly be offset by rising rates in all states.
Total revenue for the quarter was up 9% from the prior year quarter, reflecting an increase in premiums earned investment income fewer realized losses and slightly lower other income from policy fees due to lower policies in force.
The second quarter weather losses were $38 $1 million compared to the prior year weather losses of $35 5 million.
The weather losses this quarter impacted the net loss ratio by 24.1 points and is very consistent with last year's impact of weather losses of 24.2 points on the loss ratio.
Development was negligible with 610000, a favorable development in 2021 and about 82000 of unfavorable development this quarter.
Our net combined ratio for the second quarter of 2022 decreased 5.8 points to 99.4% from 105, 2% in the second quarter of 2021.
The decrease reflects a 4.7 point improvement in the loss ratio predominantly driven by our underwriting and rate actions and a 1.1 point improvement from expenses.
The ceded premium ratio was 46, 6% in the second quarter down 2.1 points from the second quarter of 2021 of 48, 7%.
The decrease primarily stems from the growth of gross premiums earned outpacing ceded premium growth and a severe convective storm reinstatement premium in the second quarter of 2021.
Shareholders' equity decreased to $180 5 million or $6.80 per share for the second quarter of 2022 driven mostly by the write down of goodwill and unrealized losses on our fixed income investment portfolio, which is driven by higher interest rate environment.
With over $200 million in cash and cash equivalents, we don't anticipate the need to sell these investments in advance of maturity given a duration of three six years.
Adding back the unrealized losses, the adjusted book value per share is $8 35 per share.
We operate by design and some very challenging markets and are focused on generating an underwriting profit and remain unfettered in that pursuit, we have derisked in some areas and expanded and others. We have shut down production in some locations and expanded in others.
We are disappointed with the current stock price and while the good write down was necessary. We believe that the only way to regain the value of the company is to consistently generate a profit and to achieve our target return on equity over an extended timeframe the.
The entire management team and the board of directors are committed to achieving that objective and we'll take the actions necessary to create value for shareholders shareholders.
As I have stated before we will consider all options to realize the value of our entities and 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.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speaker phone 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.
Okay.
And then you had kept the limit.
And our first question will come from Mark Hughes of Truest. Please go ahead.
Yeah. Thanks, Good morning, Hey, good morning.
Did you all disclose.
Your typical rate hike and the Florida and then in other markets.
Would be curious to get that versus how you see.
Loss cost trends now.
Yeah.
Yeah, Yeah. The rate increases are in the Florida market had been in the mid mid teens outside of that it varies from you know the low single digits to double digit in a few states. It is higher than that you know it actually exceeding the team.
<unk> in some locations, where we just had the ability to get more rate.
On top of that we do have an inflation guard factor.
Which is 10% and the south east in Hawaii, and seven 5% in the northeast so.
Combining those two rate increases are across the board definitely in the mid teens to higher.
Okay.
Right.
Some COVID-19 would be on top of the mid teens in Florida or is that the that that yes, it would be on top.
Okay. So.
Premium increases would be 20%.
Plus presumably than the.
Florida.
Relation guard.
Yeah, that's correct and then how do you see loss cost.
Trends at this point, what the rate of increase there.
Yeah loss costs, we have been seeing those you know to get that type of stuff. Yeah. I mean, we look at it at three five and 10 year time frame and its been right around 11% to 12%.
How about lately.
I guess.
It seems like.
Material prices have been coming down so maybe it's a it's too volatile at this point, but.
Your sense of how.
How it's running as we sit here today.
Yeah It is down.
I mean, there's click down a point or two over the last couple of quarters. So it is trending favorably, but it's still is right around that range.
And what is the total statutory capital and maybe.
Both that are in Florida, and then in the northeast the Narragansett.
Yeah, the statutory capital of harnessing all of that and then also I know what other question that always comes up is what is our nonregulated cash that is about $30 million the stat equity across the group.
Our heritage has about 106 Zephyr 78 N V I see 92 totaled $2 75.
And then well what kind of position you in you know to the extent that you there's a large storm in Florida.
Full retention that you've got $40 million.
On the $106 million in the Stat capital what the what would.
What happens then.
Well you know that is a backstop, but also by Osprey, which is our captive so the hit to the insurance company is it.
Near that extreme.
Yeah, It's actually you know in the in the low numbers, it's like $5 million to $10 million as opposed to the $40 million, which can be absorbed by osprey and osprey is already fully collateralized for that.
Okay.
Indeed under the storm are not a capital situation you are correct you are.
Okay.
And then depending on the size of the storm I guess your judgment.
With.
Yeah, the contracting some kittila you've got the opportunity.
Yeah to get make up for those losses.
All right.
Uh huh.
Total ceded premium.
Premium or premium ratio you know when we think about the.
For Q3 Q4, what are what kind of numbers are we looking at.
You know yeah. Despite the increase in reinsurance this year, which is very been very substantial when we look at the increase in the premiums and the rates, we're getting that type of stuff. It actually is going to be relatively flat for the first from the first half of the year.
I mean third quarter will be the third quarter is going to be slightly elevated, but then fourth will be down so for the second half of the year will be very comparable to the first half.
I look forward to you said it.
Yes.
And good growth.
Gross premiums earned.
Okay.
And you said in the Holdco capital with.
30 million.
Correct.
Okay Alright. Thank you very much. Thank you. Thank you.
The next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Hey, good morning, Paul.
Good morning nicer.
Nice to see an underwriting profit.
Got it.
Hum.
What kind of them actually some follow up questions on the stat capital.
What are your RBC ratios of.
Of late.
It would be looking at probably the the heritage company in excess of 300, I'm sorry, it's well in excess of 320 Zephyr would be in excess of 400 and N B I see would be in excess of $3 70.
Two well well in excess of what.
And let's say.
Curious about.
Correct.
And then on the goodwill.
Right down.
Was there a specific trigger.
For the second quarter versus say the first quarter.
A lot of the things you've talked about like the declining economy, and we will share price had been true for a while.
Was wondering if there was a specific trigger you know whether it be reinsurance for something else.
Is that caused the write down.
Other than to like it.
And an end of year.
Yeah.
Right, but no it was actually a combination of things and one of the things I would comment on the first of all is that it was not due to the performance of the underlying assets the underlying assets are performing well.
And it really comes down to the stock price there there's two parts.
Parts of the analysis one is your discounted cash flow. The other part is what is your stock price multiplied times a.
Control premium that gives you an idea of what you know what that is and then you take the difference between that and goodwill and so it's really.
The main driver as far as the math is concerned as the stock price. The drivers are the combination of those items.
Over a period of time, so when we look at the first quarter.
Some of those were trending that way as far as you know drops in stock price poor economic performance overall.
Dislocation in the property market and some of the markets we operate in and I think that it's in looking at all those factors, yeah, and so therefore being consistent for a couple of quarters. That's why we evaluate it on an interim basis as opposed to typically on 10 one.
Okay. Thank you that's what I heard you ask I appreciate it thank.
Thank you. Thank you.
Once again, if you would like to ask a question. Please press Star then one.
And the next question comes from Marla Backer of Sidoti. Please go ahead.
Thank you.
Okay.
Talk a little bit about what kind of.
What are your expectations might be for potential regulatory changes in the Florida market I mean given that.
You know this is a topic that's been under discussion for a quiet.
Huh.
So yeah. So first I'll say that the reform and the changes that we did get out a special session. We're very grateful and appreciative of but as we stated we do believe there's more that needs to be done and we think that what came out of special session is more discussions around what those specifics are so we are actively working.
And providing feedback, but I don't think theres anything just quite yet, but I think the overall goal is to limit the litigious nature of what we have here in the state of Florida. So I do think that momentum will continue going forward into the next session.
Okay, and given where you are right now and in the process do you risk manage.
Moving profitability do you feel that at this point you are.
Getting close to looking for new.
Market.
Sure.
To do business potentially in order to to grow your book of business.
So I think we're always looking at some new markets and we do the due diligence around that so we will continue with the current objectives that we have which is you know limiting that what we have in Florida, but we're always constantly looking at those other markets and seen where there's opportunities as they arise.
Thank you.
Thank you. Thank you.
The next question is a follow up from Mark Hughes of Truest. Please go ahead.
And just curious when you think about the losses in the quarter you weather losses, as you laid them out or.
You feel pretty high but the.
Underlying losses, it looks like improved pretty meaningfully.
Is that entirely you kind of a rate underwriting action was there some other aspect of the weather.
Maybe it was just a little more favorable this quarter I'm just kind.
Kind of curious whether this is just.
And again I.
Could I have the numbers in front of me.
And it looks like Theres still a lot of weather losses, but I'm just sort of curious whether there's any any other dynamic that one might attribute the improvement to other than the.
Yeah, no and when you do you've laid out.
And when you look at the weather losses from a ratio standpoint.
Last year second quarter weather losses made up 24.2 points of the loss ratio. This year $24. One so even though you can say hey that the losses are elevated there very consistent from a ratio standpoint year over year and Mark what I will say is we've mentioned several times the underwriting initiatives that we've taken on given the.
Conditions, we've had been more selective on the policies and better quality of risk that we're taking I think youre seeing that come through.
Yeah and then.
Your posture in Florida at this point, you're obviously getting nice rate increases.
We're going to reduce your total insured value would you anticipate though that that stabilizes and.
Maybe you get some growth in Florida, or what what's the posture now still still trimming in Florida.
Rate increase.
At this point, we're very confident about the initiatives, we're continuing to take.
Should the market conditions change and there is an opportunity for growth us for in the state of Florida, We will consider that but at this point in time, we're very pleased with the initiatives. We are taking will keep down that same path at this point time.
Yeah anyway to characterize the if we look at the loss ratio in Florida versus outside of Florida.
Comparable different a lot different.
Yeah no.
They had been higher and I think because of the lot of the rate and the underwriting actions that type of stuff. It is starting to turn a but it'll it'll take a little while before it gets more consistently and of course, the litigious environment in Florida does elevate that substantially.
Yeah. Okay. Thank you very much alright. Thank you. Thank you Mark.
This concludes our question and answer session I would like to turn the conference back over to Ernie Gray for any.
Closing remarks.
We'd like to thank everyone for joining the call today and wish everyone a great weekend.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Yeah.
[music].