Q3 2022 Heritage Insurance Holdings Inc Earnings Call

Good day and welcome to the Heritage third quarter 2022 earnings call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now.

I'd like to turn the conference over to Ernie Garrity, Chief Executive Officer. Please go ahead.

Yes.

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 will now turn the call over to Ernie.

Thank you Kirk and thank you for joining our call today will.

We will discuss our third quarter 2022 results. During this call I will provide overview of our strategic initiatives Kirk will provide an update on key financial performance metrics and then we will open the call for Q&A.

Our thoughts continue to be with all those impacted by Hurricane Ian which made landfall in Florida on September 28.

We remain committed to assisting our policyholders and I'm proud of the hundreds of employees, we've mobilized and deployed to respond to this effect.

Our customers have been loyal to us based on our promise to deliver service in their time of need.

We are committed to fulfilling that commitment by providing timely payment of valleys and covered claims.

Our experienced claims team has deep catastrophe handling experience, which includes distinguishing causes of loss from wind versus flood.

We continue to execute strategic initiatives that will enable heritage to achieve consistent long term quarterly earnings and drive shareholder value.

Our initiatives, which are described in our earnings release include rate adequacy, and selective underwriting product selection and capital allocation and diversification of our portfolio policies throughout 16 states.

Getting appropriate rates for our coverage offer is paramount.

We continue to take rate and all of our markets to keep up with the cost of reinsurance higher frequency of weather events and higher repair and replacement costs driven by inflation of products and services.

These higher rates are the primary driver of our 13, 6% increase in the average premium per policy throughout the books and we expect this trend to continue.

We continue to Derisk and diversify our policy makes outside of Florida.

These efforts have led to the growth of premiums in force in all states outside of Florida.

In addition, total insured values outside of Florida represents approximately 75% of our portfolio up from 71% at this time last year.

Our underwriting continues to be more selective and we continuously evaluate coverage changes where our products serves our markets, but also produces margin.

A considerable market disruption has caused us to tighten our underwriting criteria, while also restricting new business and our over concentrated markets.

Even with the tightening of our criteria and limiting new business.

Our premiums in force already a historic high of 1.24 billion at the end of the quarter.

We seek to align our capital with our products and geographies that maximize long term returns.

Correspondingly, we will exit products and states that we don't believe can generate long term returns or have limited upside potential.

I am pleased with our progress in this area.

<unk>, we continued to valley air portfolio and expect to make more changes going forward as we focus on both short and long term returns.

Yeah.

Reinsurance capacity and pricing is a factor in how we allocate capital byproduct and state.

The cost of reinsurance is expected to increase and capacity constraints are on the horizon.

We appreciate our reinsurance trading partners with whom we have developed a long term consistent relationship.

Given the expecting pricing and capacity for catastrophe reinsurance going forward, we will continue to evaluate and adjust our portfolio to manage exposure concentration.

This includes the amount of new business, we expect to write and the amount of existing business, we may renew while maintaining compliance with individual state regulations.

Yeah.

Product selection is also key to our long term success.

We reduced business in products or geographies that don't provide sufficient margin. We are entry markets, we believe offer opportunity for our company and our customers.

For example, we entered the California, and Florida markets on an excess and surplus lines basis, which allows us to be nimble and responsive to pricing and product offerings.

We continue to analyze and evaluate the challenging markets in which we operate and we will look to expand our excess and surplus lines capabilities in other states and markets.

Despite the negative impact hurricane Ian had on our third quarter 'twenty 'twenty. Two results. We are pleased with the progress we continue to make towards sustainable profitability.

Rate increases continued to meaningfully benefit written premiums throughout the book of business and we remain.

<unk> committed to proactively inappropriate lee raising rates to offset higher cost for reinsurance as well as higher loss costs.

We are taking underwriting actions to improve profitability.

This concludes my remarks, let me now I'll turn things over to Kirk loss for a review of the results in the quarter on key financial performance metrics.

Thank you Ernie and good morning, everyone. The third quarter net loss totaled $48 2 million or $1.83 per diluted share compared to a net loss of $16 4 million or 59 cents per diluted share in the prior year quarter. This loss was primarily attributable to a $40 million net retained loss for a hurricane.

And that previously was announced on October 13th and without which our net loss in LAE for the quarter would have declined by $14 8 million or 10, 6% from the prior year quarter. The company has received close to 14000 claims associated with Hurricane Ian and we protect ultimate gross losses.

Including a loss adjustment expense of $655 million.

At this level the expected ultimate loss from Hurricane Ian will remain well within the second layer of our cat XFL tower.

The third quarter was also impacted by a $10 7 million tax valuation allowance related to Osprey re and its internal revenue code select section 953 D election for which we are able to recover the valuation allowance is osprey generates future net income.

As Ernie mentioned in force premiums are at their highest level at one point to $4 billion up five 8% while policies in force are down six 9% and Tid is up two 1% the.

The increase in premiums and decrease in policy count reflects the amount of rate, earning through the portfolio and tightening underwriting.

Enforce premiums in all states other than Florida grew by 14, 4%.

Policies in force decreased by 18, 8% for Florida admitted personal lines policies.

Personal lines, Florida in force premium was down seven 8%, we grew our commercial lines premium by 18, 2% over the prior year period.

The increase in our commercial portfolio, while decreasing our personal portfolio in Florida results from our efforts to shift capital to those lines of business and geographies that generate sufficient returns and away from lines that do not.

Total revenue for the quarter declined 1% from the prior year quarter, reflecting the increase in ceded premium of 12, 4%.

Seeding the increase in gross earned premiums of four 2%.

The ceded premium ratio ended the quarter at 48, 1% up 3.3 points from 44, 8% in the prior year quarters. The increase primarily stems from higher cost of our 2022 to 'twenty 'twenty three.

Catastrophe excess of loss program. The increase this program was driven by higher rate online as well as higher total insured value.

In addition, other income is down due to a reduction policy fees associated with fewer policies in force, which is partially offset by an increase in investment income with higher interest rates.

The net current accident year weather losses of $63 8 million ended the quarter up 24, 2% from 51 4 million in the prior year quarter as mentioned.

Current accident cat catastrophe weather losses included $40 million of net current accident core catastrophe losses attributable to hurricane and up 155% from our from 16.0 million in the prior year quarter, and 23 8 million of other weather losses down 32.

8% from $35 4 million in the prior year quarter.

Attritional losses were also up slightly in the quarter, most notably in the northeast.

Expenses are up due to acquisition costs related to the increase in gross written premium with the net expense ratio driven higher by the reduction in net earned premium.

The net combined ratio for the quarter was 133, 3% up 28 points from 112.5 in the prior year quarter, driven by higher net loss ratio and that expense ratio just mentioned.

Our focus on profitability will continue to drive reductions in policy count along with rate increases anticipated to align with inflation reinsurance and loss costs.

Abusive litigated claims practices inflation continued to be our primary concern for personal lines business in Florida, and we have taken underwriting actions aimed at reducing the adverse impact of market challenges and inflation.

We're also restricting underwriting to address and surgeon policies that certain markets are becoming more dislocated.

We're also including inflation guard on all states.

Our book value per share is $4.54, but when adding back the unrealized losses in the investment portfolio. The adjusted book value is $6.65 with over $297 million in cash and cash equivalents, we don't anticipate a need to sell any of these investments in advance of maturity with the abundance of cash held outside.

Our investment portfolio.

Our duration is short at 3.4 years and the average credit rating on our invested fixed asset income portfolio is a plus.

Such we expect the unrealized losses to decline as investments mature.

We operate by designing some very challenging markets and are focused on generating an underwriting profit and remain unfettered in that pursuit, we will continue to analyze and evaluate our portfolio to optimize returns and reduce volatility.

We are just satisfied with our stock price and do not believe that it reflects the true value of the company. We firmly believe that each of our current operating companies are worth more than the total market capitalization of the company.

Management and the board are committed to providing shareholder value and we will take the steps necessary to drive that value.

We remain focused on sustainable profitability and long term shareholder returns 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.

Thank you we will now begin the question and answer session and to ask a question you May Press Star then one on your Touchtone 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, we will pause momentarily to assemble our roster.

Okay.

Our first question comes from Mark Hughes from Truest. Please go ahead.

Yeah. Thank you good morning.

Hey, good morning, Mark.

Kirk how much did you say how much cash at the holding company.

$30 million.

And then what is the surplus within the insurance operations.

Yeah. The total surplus is bad between all of that today is $261 million.

Then how do you look at our capital adequacy in terms of our underwriting leverage 261.

How much are more business would you put on or are the idea here from here that you can either paper I guess, you you've continued to grow premiums so India growing commercial in Florida.

How do you view that capital adequacy.

Yeah, I think when we look forward I mean, our our pick out yeah. We anticipate that is going to continue to decrease and we are taking substantial rates on top of our inflation guard factors and that really is what's driving our our premium increase when we look at going forward, we actually think that RFP.

Count is going to continue to decrease you know and I think our.

Those are probably going to be leveling off a little bit.

Okay.

And then for reinsurance refresh me on how much multi year reinsurance you have in place how much of your.

Power, where you have to buy this year or next year.

Yeah, we do have a cat bond for the northeast a tower and that would be the extent of all multi year.

So most of your spa.

Spend will be.

You, you'll get in the market and.

Yes and for the GP.

Correct.

And then anything of any expectation.

For the Florida legislated session.

Any.

Particular fixes or strategies under discussion as far as Youre aware.

So we have been discussing with legislators the one way fleets that you and doing something on the capa and they're all considering all of those items, but you know those items are being discussed now being strategize for a special session. At this 0.1 other comment I'd just make on you know going back to the reinsurance piece is we did defer on the rap program last year. So that is.

The available for us this year, which would assist you know below the S. H C F. Keep in mind. The FX you have accounts for almost 50% of the reinsurance program.

Thank you.

Thank you you're welcome.

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

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

Good morning.

Good morning, Bob I was wondering if you did you talk at all about what the RBC.

Ratios were in the subs or what did I missed it I apologize, but I do.

Yeah, Ed at year end Rbcs for H P. CIC was you know just a little over 310, a zephyr was in the $4 40 range and N V. IC was in the $4 20 range.

And that's that's that's that's.

Last year's year end and that says that as of year end I mean, it is calculated kind of on a on an annualized basis based upon you know, it's a 12 month rolling basis. So that's why we look at you know where it was versus the surplus.

Right, but presumably those numbers will be.

Different.

In the fourth quarter given the.

Losses.

Yeah, given the losses, Yeah. We you know we anticipate zephyr is still going to be well above.

400 N V I see I mean and heritage we are looking to.

Provide them with some additional capital or expense forgiveness in the fourth quarter. So that is already planned and in our expectations.

Could you talk about what would happen if a hurricane Nicole ends up being.

Significant debt from a reinsurance perspective.

Much the same as <unk>.

What happened in there Ian or does.

Doesn't have other changes.

Yeah, I think from a from a retention standpoint, you know our attention yeah, Max retention on a second about would be $32 million.

You know anything over $20 million, we basically have a cover that's 40 cents on the dollar. So you know even at a $30 million or $26 million to $40 million would be 32 that would be the extent of our retention. So depending upon the severity of that particular storm.

Alright.

Can you talk at a ball about the the difference in profitability between Florida and non Florida.

How much of a difference in profitability.

Yeah.

Yeah, Yeah, we typically do well.

Look at ourselves as a single segment from a reporting standpoint. So therefore, you know kind of look at it in totality I would tell you that you know our objective is to become rate adequate across.

Across the footprint and that is in every state every jurisdiction and every product and.

And so that's when you look at the extensive amount of rate we've been taking both in the northeast and the southeast.

So a little bit in Hawaii that is reflective of that goal to basically focus on rate adequacy.

Any thoughts and I'll, let this be my last question about.

You know what.

Level, you're currently getting in terms of.

Rate, respectively versus what you think the claims inflation is on on the business soon.

It seems like there hasnt been a lot of.

Make up the difference.

Inflation has been remarkably higher.

And these price increases.

The last couple of years, So where are you in your view in terms of.

What do you think the underlying claims inflation is versus two.

Yeah, we actually theory.

Yeah, when we when we look at the underlying claims inflation. Yeah. We think it is running a little over 10% you know maybe even over a little 11% of.

That is baked into our pricing and then we also have inflation guard on top of that when you look at you know when we start taking rate and then the <unk>.

Compounding of that is that the initial catching up I think with inflation has it was a little was slow, but we're starting to pick up ground and when we look at the amount of rate, earning through the portfolio year over year, it's increasing increased in 'twenty two from 'twenty, one and then.

Boeing into 'twenty three it actually is increasing substantially more than.

And then it did over the last several years. So it's really a you know a lot of that right. We've been taking is starting to take effect into 'twenty, three and actually into 'twenty four.

Yeah. Thank you I'll, let some other folks ask questions, but always appreciate though alright. Thank you. Thank you Paul.

And as a reminder, if you have a question. Please press Star then one.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Ernie care today for any closing remarks.

Thank everybody for joining the call today and hope everyone has a great day.

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

Yeah.

[music].

Okay.

Yes.