Q4 2022 Heritage Insurance Holdings Inc Earnings Call
Good day and welcome to the Heritage Insurance Holdings fourth quarter 2022 earnings Conference call.
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I would like to turn the conference over to Kirk Lusk Chief Financial Officer for the company. Please go ahead, Sir 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 two.
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.
Thank you all for joining us today.
I will provide an overview of our strategic initiatives for the fourth quarter 2020 to.
Kirk will provide an update on key financial performance metrics.
Then we will open the call for Q&A.
We are pleased to announce that we returned to positive adjusted net income in the fourth quarter.
We are encouraged by the strategic initiatives that we believe will enable heritage to achieve consistent long term quarterly earnings and drive shareholder value.
These strategic profitability initiatives include rate adequacy and selective underwriting.
Product selection and capital allocation as well as diversification of our portfolio of policies throughout 16 states.
We remain encouraged by our improving metrics and the long term positive impact we believe it will have on our underwriting income.
Yeah.
We took significant rating actions throughout the book of business this quarter, resulting in an increase in average premium per policy up 18, 1% over the prior year quarter.
And five 6% over third quarter 2022.
These higher rates are the primary driver of our 15, 5% increase in gross premiums written and we expect this trend to continue.
Our underwriting continues to be more selective and we continue to evaluate coverage changes so where our product serves our markets, but also produces margin.
The considerable market disruption this past year has sharpened our focus on timely rate actions tightening underwriting criteria.
Expanding restrictions on new business, written and over concentrated markets or products.
Even with the tightening of our criteria and limiting new business. Our premiums in force are up nine 6% at a historic high of $1 3 billion at the end of the year, while our policy count is down.
We continue to align our capital with the products and geographies that maximize long term returns.
These efforts have led to a reduced policy count for Florida personal lines business by 16, 2% as compared to the prior year period.
Our disciplined underwriting and rating actions have reduced our Florida personal lines told them insured value by 11, 1%.
While driving a one 9% decrease in premiums in force.
It's disciplined underwriting approach resulted in a policy count reduction of 2.5% and other states, while generating an 11, 9% increase in premiums in force.
We will continue to reduce our exposure in products and geographies that we don't believe will generate long term returns or have limited upside potential in compliance with regulatory requirements.
Our focus on maintaining a balanced and diversified portfolio this quarter.
Salt it in our top five personal lines states, representing 79, 2% of all T. I B at fourth quarter 2022.
Paired to 79, 8% of all T I D at fourth quarter 2021.
This was further evidenced by the fact that our top four states grew T. I D by an average of 2.2% while the smallest five states grew by 56, 7%.
With no state representing more than 26% of our total insured values.
Okay.
Product selection is also key to our long term success.
We reduced business and products or geographies that don't believe provide sufficient margin.
Our entry markets, we believe offer opportunity for our company and our customers.
For example.
In addition to the California market, we entered the Florida market last quarter on an excess and surplus lines basis.
Which we believe allows us to be nimble and responsive to pricing and product offerings.
We have since evaluated and expansion of E&S policies to include South Carolina, where we anticipate offering E&S policies in the second quarter of 2023.
While we continue to analyze and evaluate E&S offerings in other states and markets.
We are encouraged by our improving metrics and a long term positive impact we believe they will have on our underwriting income.
We believe this discipline also better positions heritage for the upcoming June reinsurance season.
Speaking of reinsurance season.
Insurance capacity and pricing is a factor in how we allocate capital byproduct and state.
As we discussed in last quarter's call. The cost of reinsurance is expected to continue 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.
The higher reinsurance costs will be partially mitigated through participation by our Florida affiliate any program created by the Florida Legislature last year, which will provide us with some reinsurance limit at no cost to the company.
We also expect to have the ability to access the capital markets through citrus REIT, which provided 100 million dollar limit on last year's northeast Cat ex oil program.
Given the expected pricing and capacity for catastrophe reinsurance going forward, we will continue to bad way and adjust our portfolio to manage exposure concentration, which can drive up reinsurance costs.
This includes limiting 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.
We are also exiting relationships with agents, who are not producing good business for us.
We are pleased with the progress we continue to make towards sustainable profitability.
Increases continue to meaningfully benefit written premiums throughout the book of business.
And we remain committed to proactively and appropriately raising rates to offset higher cost for reinsurance as well as higher loss cost as well as taking underwriting actions to improve profitability.
Before turning the call over to Kirk.
I wanted to express my encouragement for the recently Paas, Florida Senate Bill two way during the December special session of the Florida Legislature.
I am cautiously optimistic that it will accomplish the goals of the legislature, our governor and the state CFO to stabilize the Florida property insurance market and curtail abuse and claims practices.
Our strategy will remain unchanged until we see the impacts of the legislative changes in our results.
This concludes my remarks.
Let me now turn things over to Kirk loss for a review of the results in the quarter and key financial performance metrics.
Thank you Ernie.
Good morning, everyone.
Fourth quarter net income was $12 5 million or <unk> 48 per diluted share and up from a net loss of $49 2 million or $1 79 per diluted share in the prior year quarter. This represents a return on average equity during the quarter of 40% annualized our in force premiums at an all time high of one.
One 3 billion while policies in force are at the lowest level since the third quarter of 2019, our average premiums increased 18% from the fourth quarter of 2021 and of that increase $9 seven of it occurred in the last six months and $8 six of it in the fourth quarter alone. This shows the impact of the Kantar.
Rate increases in the portfolio as well as the inflation guard factor.
We expect rate increases to continue and potentially accelerate throughout 2023.
We did see an opportunity in the commercial residential market to capture profitable premiums and expand that product line commercial residential in force premium increased 41% year over year, while the policies enforce increased less by less than 1%.
In addition, we see opportunities in the E&S market and are now operating E&S homeowners policies in Florida, which we expect to expand into other states. We've been writing E&S business in the state of California for several years and has been a profitable product due to our specific underwriting criteria and the ability to change forms and adjust rates as needed.
Gross written premiums are up 15.5% and gross earned premiums were up 8% year over year net premiums earned are only up three 9% compared to last year's fourth quarter due to the increase in ceded premium.
The increase in ceded premium is primarily driven by the increase in the 'twenty to 'twenty two to 2023 cat extra well program as well as the higher ceded premium on a net quota share program in the northeast.
Total revenue for the quarter increased four 7% from the prior year quarter, reflecting the increase in net earned premiums just mentioned and higher investment income due to an increase in return partially offset by lower other revenue, which is driven by lower policy fees associated with the lower policies in force.
Net loss in LAE for the quarter was $103 8 million, which was an increase of four 8% over the prior year.
Losses for the quarter included $10 3 million in losses from Hurricane Nicole and prior adverse development of $2 2 million adverse development includes net losses of $14 1 million related to Hurricane Irma.
We re estimated our ultimate losses for Hurricane Irma in the fourth quarter recognizing most of the open claims are late reported litigated claims as a result of that re estimation heritage has exhausted the private layers of reinsurance, but has 40% participation in the S. H C F limit remaining.
The increase in losses caused an increase in the net loss ratio of 50 basis points.
Expenses are up due to higher policy acquisition costs related to the increase in gross written premiums and benefits costs, along with investments in I T.
The impact of the increase in cost to increase the expense ratio by two points three points of which 1.4 points relates to policy acquisition costs.
The net combined ratio for the quarter of 2022 was 96, 1% up two nine points from 93, 2% in the prior year quarter, driven by a higher net loss ratio and net expense ratio just described.
Book value per share is $5.13, but when adding back the $53 6 million and realized losses in the investment portfolio. The adjusted book value is $7 23 sets with over $280 million in cash and cash equivalents, we don't anticipate a need to sell these investments in advance of maturity or.
<unk> is a short 3.2 years and the average credit rating on our invested fixed income portfolio is a plus as such we expect the unrealized losses to roll off as investments mature.
Our focus continues to be on profitability and we expect to continue to drive reductions in policy count to manage our tid and cat ex ol reinsurance costs, which are expected to rise. Despite the recent favorable legislative changes in Florida, We don't expect to shift our strategy of reducing exposures until we see meaningful <unk>.
<unk> and our loss results and metrics, we expect rate increases to exceed inflation and loss costs and will take the steps necessary to adjust rates as soon as possible to reflect any increase in reinsurance costs.
We include inflation guard in our pricing for all states to address rising loss costs due to material and labor.
We continue to restrict underwriting across the portfolio to avoid unprofitable business, especially in dislocated markets and also to keep our exposures relatively flat given the expected tight reinsurance capacity of our cat <unk> renewal in the spring.
Our focus is on rate adequacy deficiency cat ex ol reinsurance program underwriting integrity, providing the right product for the market and a balanced portfolio and operational and efficiency and effectiveness.
We will focus on these initiatives provide our policies holders with the service they expect and to provide consistent returns for our shareholders. We will continue to analyze and evaluate our portfolio to optimize returns and reduce volatility.
We remain dissatisfied with our share 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, particularly given the statutory surplus of each of the insurance companies are worth more than the total market capitalization of the.
Company.
Management and the board are committed to providing shareholder value and we'll take the steps necessary to drive that value.
We remain focused on sustainable profitability and long term shareholder returns as I 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 includes our prepared remarks, operator, we are ready to begin the question and answer portion of the call.
Thank you.
I'll begin with we will.
I'll begin my question and answer session to ask a question in my Press Star then one on you touched on phone.
If you are using a speaker phone please pick up your handset before pressing the keys.
Who withdraw your question. Please press Star then two.
Today's first question comes from Paul Newsome with Piper Sandler. Please go ahead.
Good morning, congratulations on the.
On the profit in the quarter that's wonderful.
Could you walk can you walk us through what actually is going to get renewed.
And for reinsurance over the course of the year.
I think it's it's not everything right.
Pieces, but but theres also that quota share in there.
If you just kind of walk us through exactly what's going to be renewed and what would potentially face higher prices yeah, well. The two largest ones are the net quota share which is a 12 31. So that's already been renewed for the bulk of the year and the other really large one is the cat XL well, which is.
A six one.
And as part of that cap ex ol there is a cat bond for the northeast which is already in place.
From the previous year.
It's a multiyear.
Right.
Is it the entire X a well it gets renewed or just part part of it.
The entire cat XL well that's on six one.
Got it.
Excluding the cat bond portion yes.
Catherine.
The net quota share.
Any changes in the economics of that that we should put into our model with respectively.
Yeah, Yeah. The net quota share we did drop that slightly from a percentage standpoint, although the cost was up so from a ceded premium standpoint, it's probably going to be a slight increase.
Right.
And then maybe you could just address kind of your view of what on the margin you're getting with rate versus claims inflation.
Particularly in Florida, but maybe even more broadly given you.
Book isn't just words.
Well claims inflation as we've seen that actually dropped recently I mean, we're still looking at it in the high single digits low double digits.
You know and what we have is we have an inflation guard factor seven.
Seven 5% in the northeast and then 10% in the southeast, California, and Hawaii and on top of that I would say the bulk of our rate increases almost across the footprint are double digit rate increases. This year. So when you look at it as the difference there.
Again because of some of the claims inflation we've seen in the past you can expect that probably the difference between the current claims inflation and that rate's going to be close to double digits.
Great.
And then.
I will let somebody else ask any update on RBC ratios and capital levels in the various subsidiaries at year end.
Yeah, each of our subsidiaries you know the RBC.
Typically at heritage is going up from last year, MGIC is down slightly but it's still well over 350%.
And then Zephyr actually increased also it was a 440 last year and it's up last year. You know heritage was 311, yeah, we expect that number to be actually in the 330 range. This year. So again an improvement in our in our rbcs and so we felt pretty good as far as you know where each of the statutory entities as from a cat.
Standpoint.
Fantastic I'll, let some other folks ask questions appreciate it.
Bob.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one our next question today comes from Mark Hughes I Truest. Please go ahead go ahead.
Hey, good morning, Yeah. Thank you good morning.
Good morning.
How is the weather this quarter was this an unusually good weather quarter or was this normal weather quarter or you are just sort of thinking.
It is certainly a seasonality.
But is this kind of run rate or is there something unusual.
Are you, referring to the fourth quarter or the first quarter forthright with Macquarie.
Fourth quarter, but you can talk about first quarter too.
Do you honestly, yes, yeah, the fourth quarter with with a almost about what you would expect.
You know from a you know when you look at the non cat weather the non Hurricane Cat and then the Hurricane Cat you know it was very comparable to last year. So I would say it was you know about it kind of a flat year.
Yeah Okay.
And then anything you want to say about the first quarter.
No I this year so far in the first quarter is kind of merit remembering what we've seen in the past so.
Okay. So.
Normal similar to the fourth quarter.
Seasonality.
Hi, Joe.
Yep.
You you'd mentioned pricing you expect to continue and perhaps accelerate.
With the rate actions, you're taking will that kind of keep the pace of rate increases going.
I'm thinking.
Two accelerated do you need to see what happens with the reinsurance renewals and then that would drive the acceleration or.
How are you thinking about that there's definitely a component with the reinsurance right as we mentioned over with Paul the Capex. So I always play six one once we have you know what that pricing would be then we would kind of evaluate that and obviously rates would be adjusted accordingly to that piece. So in some areas of our portfolio you might see rates go.
Further because of the increase in reinsurance.
From that perspective.
And I think it's a good question I mean, we do expect reinsurance rates to continue to go up you know last year. They went up rather substantially and so I mean that is actually contributing to the some of the substantial rate increases that we're taking and I think that that is probably going to continue and we will actually be looking at you know each state to see what we need to do.
Upon those reinsurance rates because unfortunately, I I think that you know the overall market is going to see increases.
Across our footprint, even despite some of the positive recent legislative actions, which we're very pleased about but I don't think that that's going to ease reinsurance rates at this point.
What was the dollar amount of that CAD ex ol spend last year roughly just so we can sort of get a sense of what.
The base is when we think about potential increases.
Yeah that.
Net spend was Oh, I'll confirm that number up and it was around.
Yeah about 306 $370 million.
30 minutes okay.
And then.
The E&S in Florida, where does that bring in Korea. When did you say you are.
You started offering E&S policies in them.
Is that a.
Driving business that you're you feel as though adequately priced.
So it definitely is adequate price we've had we've been in the Florida E&S business for a little bit over a year.
As we saw some of the conditions in the market. We basically pause you suspended the admitted so we will continue focusing on the E&S with select agents in the area, but it is adequately price we do have the flexibility there as market conditions change to make those pricing changes accordingly.
And then the commercial business.
What gives you confidence that you're getting a reasonable pricing there how how open is that market for additional growth.
A couple of things there on the commercial each risk is modeled individually and we do have some flexibility on the pricing side with an IR P. M factor that we can adjust accordingly to make sure that again, we're adequately priced to the market conditions, even for the crossroads the residential piece.
Yeah.
I assume you're making some assumption about what your.
<unk> costs youre going to be looking like if you're still.
Growing that commercial piece correct.
[noise] assumption, yes, yeah, well and also I mean, I think the you know when you look to think about that commercial portfolio. It did grow last year premiums were up substantially actually our policy count was down but premiums were up substantially.
I would expect that growth to slow to be flat. This year as we manage our exposures for the reinsurance process. So I think that you know the growth we had last year, it's probably not going to repeat itself in 2023.
Okay, great Yeah, the other thing.
The other thing on the commercial is you know we do right just the garden style.
Of course habitation all sell from an underwriting standpoint, you know we are not going to deviate from that to actually get any more premium also.
Well then let me ask one more of the California E&S.
How are how much are you leaning into that market at this point.
We're not leaning heavily again, we do think that that's a long term play it is a small portfolio. It's a disciplined underwriting approach and again on an E&S basis. So we do have our toe in the water. There was a it is profitable business that we're writing out there and we'll kind of see long term where that plays out.
If you have any estimate on what you think the reforms and.
Florida could mean heard 10 points on the loss ratio what do you think of that number.
Yeah, you know I don't think we have a number at this point I think it's early I think we're looking at all the metrics and the trends to kind of see where this will eventually end up you know M. I cautiously optimistic that it is going to stabilize the property market in Florida, absolutely, but until we have a little bit more time and data I think we kind of refrain from exactly what that would mean, but.
Everything that was passed by the legislature in December is absolutely a promising sign for the Florida market.
Yeah.
Okay.
Thank you very much thank you Martin.
Ladies and gentlemen, our next question today is a follow up from Paul Newsome of Piper Sandler. Please go ahead.
Thank you again.
So are you seeing any regulatory pushback with some of your rates.
Oh that sounds feels like sounds like Florida is a very accommodative, but obviously, california as much in the news and I think even in New York.
Who's with being.
Resisting.
Some of these rate increases.
Your perspective on it.
Experience has been so far so what I would say is that we have very good relationship with each of our regulatory environments and we are always proactive to provide them information that's what's going on so a case in point you know as we go out and borrow placing our reinsurance we are not waiting to the reinsurance is placed after discussions we are giving them. Some insight is.
What's going on and working with them on that piece so.
Again everything from a rate perspective is backed up actuarially right. We're not looking at numbers and saying. This is what we think this is based on metrics that are coming in from loss cost reinsurance pricing that the actuaries put together and then make the case on that piece. So I think we will continue those conversations with them proactively in front so.
I understand what is happening in the marketplace and why these rates are necessary, yeah, and I'd say it does vary by by state, but in general they're seeing the reality of the reinsurance rate increases and I would say the bulk of them understand the situation.
And so therefore, our understanding how we're approaching it.
That was my last question really appreciate the help as always appreciate it. Thank you. Thanks Paul.
Ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for any final remarks.
Thank you we'd like to thank everyone for joining the call today and I. Appreciate the interest inherited we're encouraged by these fourth quarter results and look forward to the balance of 2023, as we continue to execute against our strategic profitability initiatives to achieve consistent long term quarterly earnings and drive shareholder value. Thank you and have a great weekend.
Thank you this concludes today's.
This conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.