Q2 2023 Heritage Insurance Holdings Inc Earnings Call

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Good morning, everyone and welcome to the Heritage Insurance Holdings second quarter 2023 earnings Conference call all participants will be in a listen only mode.

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After todays presentation, there will be an opportunity to ask questions.

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Please also note today's event is being recorded at this time I'd like to turn the floor 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.

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 all for joining us today.

I will provide some highlights of our second quarter performance discuss our progress in achieving key objectives and offer insights into our strategic initiatives.

Following my remarks, Kirk will provide details on key financial performance metrics after which we will open the call for Q&A.

I am pleased to report another consecutive quarter of solid financial results.

Net income for the second quarter of $7 8 million.

The improvement from last year reflects the progress we are making with our strategic profitability initiatives as well as the benefit of favorable weather this quarter.

As I described last quarter, our strategic profitability initiatives include rate adequacy selective underwriting capital allocation, providing the appropriate coverage for the market and a balanced and diversified portfolio.

We believe that the combination of these initiatives will enable heritage to achieve consistent long term quarterly earnings and shareholder value.

Our continued rating action throughout her book resulted in achieving our highest enforced premium while decreasing policy count by 11, 1% as compared to the second quarter of last year.

We are also maintaining our underwriting discipline, including tightening underwriting criteria within regulatory guidelines and restricting new business for policies written in over concentrated markets where products.

We are allocating capital to products and geographies that maximize long term returns.

During the quarter, we selectively grew our Florida commercial residential enforced premium by 75, 5% over the prior year quarter, while total insured value or T. I b for that product increased 35, 3%.

And policies in force increased by only 12, 7%.

We intentionally reduced the policy count for our Florida personal lines product by 15, 8% from Q2, 2022 and three 9% from the first quarter of 2023.

Reducing Florida personal mind exposure remains a key focus and we will continue until the positive impact of recent legislation to reduce abuse of claim practices is realized.

Our disciplined underwriting approach and focused on rate adequacy resulted in a policy count reduction of eight 7% and other states, while generating a four 2% increase in premiums in force.

Efforts to maintain a balanced and diversified portfolio continue.

With no state representing more than 26, 2% of the company's T. I D. Despite the substantial increase in commercial business.

The top four states within our portfolio grew T. I V by an average of two 6% while the smallest five states grew by 27, 3%.

As a result of the diversification efforts there.

Top five personal lines states represented 71, 6% of all T. I b in the second quarter of 2023.

Paired to 72, 5% of all P. I V at second quarter 2022.

We will continue to see profitable opportunities, while maintaining a balanced portfolio.

We are pleased to have completed and fully place our 2023 catastrophe excess of loss reinsurance program.

We appreciate our reinsurance partners continued support and the recognition of our efforts to provide the appropriate coverage for the market.

We expected rates to increase from last year and have taken and will continue to take underwriting actions within statutory guidelines to ensure long term profitability and the markets we serve.

Our catastrophe reinsurance program. This year includes coverage by the rap program created by the Florida Legislature last year, which will provide reinsurance below the FH CF layer at no cost to the company.

This year's catastrophe reinsurance program and costs will also include the remaining they made about $100 million from catastrophe bonds issued in 2022 by citrus REIT, which provides multiyear reinsurance protection as well as a $235 million of multiyear.

<unk> fully collateralized catastrophe bonds issued by citrus REIT earlier this year.

We look forward, you're seeing favorable impacts of the new legislation aimed at CRO, Chile, litigated claims and other abuses in the Florida property market.

We are closely observing post litigation claim activity and will take new trends into consideration in our strategic plan going forward.

As we wait for favorable impacts of the legislation to work through the book of business. We selectively grew our commercial residential business.

<unk> continued efforts to ship, Florida personal lines business away from Florida have led to a 15.4% reduction in Florida personal lines policy count as compared to the second quarter of last year.

Yeah.

To improve systems and process efficiencies, we are investing in the systems transformation, which includes billing policy and claims modules it.

The claims component has been implemented and the billing and policy system components is expected to be rollout in early 'twenty 'twenty four.

We anticipate the new system more improved process efficiencies as well as enhance data collection and analytics with a focus on scalability and speed to market.

In addition, the new system is better geared for customer self service.

And to improve the policyholder experience.

Our second quarter results underscore the effectiveness of our targeted strategies.

We anticipate the rate increases and underwriting changes made in 2022 and plan for 2023, we'll continue to have a favorable impact on our financial position throughout the year.

We are focused on achieving consistent long term quarterly earnings and sustainable shareholder value.

Let me now turn things over to Kirk for a review of the results in the quarter and key financial performance metrics.

Thank you Ernie and good morning, everyone.

As already mentioned Heron had its third consecutive positive quarter with $7 8 million of net income or <unk> 30 cents per diluted share for the second quarter of 2023. This result reflects an improvement from the net loss of $87 9 million or a loss of $3.32 per diluted share in the second quarter of 2022 <unk>.

<unk> financial results can primarily be attributed to higher net premiums earned and investment income partially offset by higher operating expenses. The net loss in the prior year quarter was due to $98 million net of tax or $3.43 per diluted share non cash goodwill impairment charge the net <unk>.

For the quarter resulted in an annualized ROE of 19.7% on a year to date basis net income for the company is 21 8 million, which returns an annualized Roe of 29.9%.

Premiums in force exceeded 1.3 billion this quarter, representing a 10, 5% increase from the second quarter of 2022 by policy Count was down 11, 1%.

The increase in premium was driven by rate increases across the portfolio as well as selective growth in the company's commercial residential business and the use of inflation guard. These actions resulted in the average premium per policy, increasing 24, 3% from the second quarter of 2022 and six 8%.

From the first quarter of 2023.

In the second quarter of 2023, our gross premiums written increased eight 6% to $396 6 million up from $365 3 million in the same period of 2022 gross premiums earned increased to $330 million in the second quarter of 2023 and <unk>.

Increase of 11, 4% compared to $296 2 million in the second quarter of 2022.

<unk> to the in force premiums the growth in earned premiums can be attributed to our strategic efforts to selectively expand our commercial residential business higher average premium per policy route the book and the use of inflation guard all of which more than offset a reduction in premiums from exposure management.

Total revenues for the second quarter of 2023 reached $185 3 million or 13, 2% increase compared to $163 8 million in the second quarter of 'twenty 'twenty. Two in addition to higher net earned premiums the Gulf growth reflects an increase in net investment income which rose.

$2 2 million in Q2 of 2022 to $6 6 million and <unk> 2023.

Current yield curve has led us to invest proceeds from fixed income maturities and incoming premiums into short term treasury bills and money market funds, resulting in higher levels of liquidity and higher returns. Our total cash plus invested assets ended the quarter at $955 4 million.

Losses and loss adjustment expense for the quarter were $106 6 million up from $101 5 million in the second quarter of 2022, driven mostly by higher Attritional losses.

<unk> current accident year weather losses of $33 8 million were down from $38 1 million in the prior year quarter. There were no catastrophe losses in the quarter compared to weather losses of $32 1 million in the prior year quarter.

And $33 8 million of other weather losses in the current quarter up from $6 million in the prior year quarter.

The net loss and LAE ratios ended the second quarter of 2023, 63% a three eight point improvement from the prior year quarter of 64, 1% the.

And that lets ratio also benefited from favorable loss development of $2 7 million compared to unfavorable development in the second quarter of 2022 of 81000.

For the quarter. The net combined ratio was 95, 1% an improvement of 4.3 points from $99 four in the second quarter of 2022. This reflects the lower net loss ratio just mentioned and a half point improvement in the expense ratio, which decreased to 34, 8% we continue to make.

Stansell progress center margins and expect that progress to continue.

The corporate effective tax rate was 43% for the second quarter of 2023 compared to a negative effective tax rate 0.6 in the prior year quarter.

This was driven by the impact of permanent differences in relation to pretax income or loss each quarter.

The effective tax rate in the second quarter of 2023 was impacted by a valuation allowance of $2 5 million related to a tax election made by Osprey read our captive reinsurer domiciled in Bermuda.

The effective tax rate in the second quarter of 2022 was impacted by mostly the nondeductible goodwill impairment charge described earlier.

Book value per share rose to $6 27 as of June 30th 'twenty, 'twenty, three which is up 22.2% from the fourth quarter of 2022.

This increase from the fourth quarter of 2022 was driven by the net income generated in the first and second quarters of 'twenty 'twenty through as well as the benefit of lower unrealized losses on our fixed income securities portfolio.

Heritage is fixed income portfolio credit rating is a plus with a duration of 2.6 years as of June 32023, with over $247 million in cash and cash equivalents, we don't anticipate the need to sell fixed income securities in advance of maturity.

Amount of cash held outside of our investment portfolio and money market funds is now generally, earning a return north of 5%.

The board of directors will continue to assess our dividend distribution and stock repurchase strategies on a quarterly basis to ensure alignment with the company's financial performance and market conditions.

As such the board of Directors has decided to continue its temporary suspension of the quarterly dividend to shareholders no shares of common stock were repurchased during the quarter.

Our second quarter and first half of 2023 results highlight management's continued focus on our strategic profitability initiatives, we operate in a constantly evolving business landscape and seek to capitalize on growth opportunities effectively manage risk exposures and maintained cost discipline to continue to improve.

Financial results.

We remain committed to delivering long term value to our shareholders and maintaining sustainable growth and profitability in the future.

We will continue to look for opportunities to write business and to make investments and other decisions that improve the profitability of the company and drive shareholder value.

Thank you and we'll now open the line for questions.

Ladies and gentlemen at this time well begin the question and answer session.

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We'll pause momentarily to assemble the roster.

And our first question today comes from Maxwell Pritchard from Truest Securities. Please go ahead with your question.

Hi, good morning, I'm, calling in today for more clues.

I was wondering what are you all will be good morning, I was wondering if you all would be participating in the citizens takeout process.

So we are exploring the citizens takeout process, but we're doing that in conjunction with other opportunities that we have in front of us and as long as they align with our strategic profitability initiatives are it'll be something we'll consider in the future.

Okay.

And for the regulatory reform in Florida have you seen any.

And the impact of that flowing through the P&L.

I know its still so sure it and it is it is early our we are seeing some optimistic signs and metrics that are coming in but it's since it's still early we are kind of optimistic that that will continue and then kind of see the long term effects of that in the P&L.

And then finally, how has the trajectory in law suits than this quarter.

So the trajectory has been on the decline on that piece of it but again, it's still a little bit early we are seeing some decline.

The decline in the number of lawsuits that were getting from a total perspective on that but we are kind of really focusing on making sure. It's a long term trend.

Okay. Thank you.

And our next question comes from Paul Newsome from Piper Sandler. Please go ahead with your question.

Well good morning, congratulations on the quarter.

Thank you.

Wanted to ask about any.

The impact of increased costs from the reinsurance I assume.

It cost us more this quarter, but then the graph probably helped that.

What's the.

Net of all that.

Yes, yeah. The the costs did go up and again it did impact the quarter a little bit however, because it inserted in June at only a packed one month for the entire quarter. So going forward it'll impacted far more I think you can expect our poly seeded ratio would probably go up a couple of points from kind of where it is right now.

Great.

The.

Transformation.

Systems.

Systems' restoration you mentioned.

That's gonna have a measurable impact on the expense ratio.

Yeah, I think it should have a favorability on the efficiency of the overall operations than speed one of the biggest things also is the ability to put in rates and get those in as opposed to relying upon outside programming department to basically do that its bit more table driven.

Therefore also be able to expedite some efficiencies as far as getting things into the system, which again leads to some economic benefit.

That's good but no no initial costs as you're investing in.

System, that's on that basis.

Yeah, Yeah, it's capitalized and there won't be any initial expense savings would probably be over a period of time.

Right.

And then I'm sure.

Thinking about the dividend suspension.

Are there any targets from a financial perspective and capital levels are.

That they're.

There may be tied to your thinking about when the dividend might resume.

To put that in a certain level or are we see ratios at a certain level before you.

You know recommend hum.

It was a resumption in demand.

Yeah, I think the board is evaluating a number of different factors and looking at that they're looking at you know the future opportunities how to deploy capital in the future. You know it was a better to return that capital now or keep it internally for those future opportunities. So it's a myriad of items that they're looking at as far.

As you know determining.

When and if there will be a dividend.

But any thoughts I guess related to that.

No capital levels, and where you Wanna be prospectively.

Not not specific on on the capital I mean, it is one of the factors that they look at but it's not the sole one and they don't have a target. It's also you know more or less based upon a hey, what is the best use of the capital going forward for the for the growth and the opportunities that the company is looking at.

Fantastic well. Thank you for your help congratulations. Thank you. Thank you. Thank you appreciate it.

And ladies and gentlemen, with that we'll be concluding today's question and answer session I'd like to turn the floor back over to Ernie Garcia for closing remarks.

We'd like to thank everybody for joining the call today and hope everyone has a great day.

Yeah.

Yeah.

And with that ladies and gentlemen, we will conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.

Okay.