Q3 2023 Heritage Insurance Holdings Inc Earnings Call

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Okay.

Good day and welcome to the HRC to third quarter 2023 earnings Conference call.

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Please note today's event is being recorded.

I would now like to turn the conference over to Kirk Lusk CFO. Please go ahead.

Good morning, and thank you for joining us today.

Bite 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 Kurt and to everyone joining us today.

I will discuss our third quarter performance progress of our strategic initiatives and provide updates on our progress towards sustained profitability.

After my overview Kirkwood delve into our financial metrics and then we'll open the floor for questions.

Despite challenges in the property insurance space, including social and actual inflation.

Increased frequency and severity of catastrophic events and rising reinsurance costs.

I'm encouraged to report a substantial improvement in our financial position.

Strides towards sustained profitability.

Our third quarter saw a net loss, but with an improvement from the same quarter last year.

Our policyholders agents and employees were significantly affected by two catastrophic events this quarter.

In early August wildfires on the island Maui cause devastating losses.

Followed by Hurricane Odile yacht in the Florida Panhandle at the end of the month.

Our policyholders and employees affected by these events remain in our thoughts and we are steadfast in our commitment to fair and timely claim handling.

The strategic profitability initiatives, we shared a year ago continue to guide our actions.

We've seen a 25, 5% increase in average premium per policy year over year.

And a five 1% increase quarter over quarter.

Our premiums in force are up by eight 4% at 1.3 billion with a reduction in policy count by 13, 6%.

These improvements signify are meticulous efforts to manage exposures, particularly in personal residential business, while expanding commercial residential business.

In Florida, we selectively grew our commercial residential premiums in force by 75, 3%.

While maintaining a disciplined approach that led to a 16% decrease in Florida personal lines policies in force year over year.

This approach has created a more balanced and diversified portfolio with no state exceeding 27% of the company's total insured value even with the significant commercial business growth.

Our total insured value outside of Florida accounts for 73, 5% of our entire portfolio.

Slightly down from 74, 8% in the same quarter of 2022.

This change reflects a conscious strategy driven by careful exposure management and selective expansion in Florida's commercial segment.

Our focus remains on altered we.

Continue to prioritize rate adequacy selective underwriting and judicious capital allocation to products and geographies promising long term returns.

We are committed to continuous improvements in claim handling, including an upgraded claims system and claim processes, which will allow our claims team to work more efficiently.

We remain resolute in our commitment to timely pay legitimate claims and deny or contest, what we do not know.

We are confident that our strategic initiatives will continue to bear fruit.

Translating and consistent long term quarterly earnings and enhance shareholder value.

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

Thank you Ronnie.

Everyone does.

Despite the loss in the quarter of $7 4 million equivalent to 28 cents per diluted share. It does demonstrate a continued positive trajectory compared to a net loss of $48 2 million or $1.83 per diluted share experienced in the same quarter of 'twenty to 'twenty two.

Both quarters experienced net cat losses of $40 million.

The improvement in third quarter 2023 can be primarily attributed to growth in net premiums earned an increase in net investment income and lower weather and Attritional losses.

Premiums in force increased to 135 billion, which is an eight 4% increase from the third quarter of last year.

This growth reflects our portfolios rate increases and selective growth in commercial residential products, while strategically reducing our policy count. The net result is an increase in the average premium per policy of 25, 5% from the prior year quarter. In addition, our gross premiums earned experienced growth of nine 4% to 300.

Third and $37 million.

Our total revenues for the quarter were $186 3 million, a 12, 6% increase from last year driven by increase in net premiums earned was $16 9 million and a twofold increase in net investment income compared to the third quarter of 2022, we have designed our investment and reinvestment strategies to align with the yield curve.

Consequently, augmenting both liquidity and returns.

Losses and loss adjustment expenses decreased by 15, 7% for the third quarter of 2023, mainly due to lower attritional and weather losses, our net loss in LAE ratio improved significantly dropping to 74, 4% from 97, 6% in the third quarter of 2022, reflecting higher premiums.

Earned and reduced losses just noted.

The quarter concluded with a net combined ratio of 110, 8%, reflecting our strengthening underwriting discipline. Despite two catastrophic event this quarter with retained losses of $40 million.

Our corporate effective tax rate fluctuated, reaching an effective rate of 38, 3% compared to an effective rate of two 2% in the prior year quarter.

The variance is driven by the impact of changes to evaluation allowance, which is updated quarterly as well as permanent differences in relation to projected annual pretax income or loss.

Evaluation allowance relates to tax elections made by Osprey re the company's captive reinsurer domiciled in Bermuda for the current year quarter, the valuation allowance decreased well for the prior year quarter. The valuation allowance was established.

Our book value per share has improved to $5.65, whose represents a 10, 1% increase from the fourth quarter of 2022, and a 24, 4% increase from the third quarter of 2022 or.

Our annualized return on equity for the nine months ended September 32023 registers at 13, 6% year to date, marking an improvement from the 96% loss reported for the nine months ended September 30th 2022.

This underscores the significant strides we've made in bolstering our financial stability and enhancing profitability.

Results for this quarter demonstrate our continued focus on strategic profit initiatives and consistently improving our margins and overall financial position we remain.

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Thank you for your attention we are now ready to take your questions.

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Today's first question comes from Paul Newsome of Piper Sandler. Please go ahead.

Good morning, Paul.

Mr. Nissan is your line muted perhaps.

Yeah.

Yeah.

Can you hear me now.

We can hear you now yes, we can hear you Paul.

Sorry I've been.

The new phone.

Yeah can we oh.

We can talk about any signs of tort reform in your most recent views on this.

I'm, sorry could you repeat that Paul we didn't hear you there.

Florida had some tort reform could you do you see anything in this quarters results stood out and could you talk about your most recent thoughts there.

Sure. So we are seeing slight decrease in litigation, which is the data trend, we'd like to see on that piece of it.

Think one of the things is that what he received just to the one year anniversary of Hurricane we're monitoring that and see how that develops but I think there are positive signs in the marketplace that litigation is down.

Fantastic cheaper senior squad.

We all want to talk about where you're going from a pricing perspective, maybe ignoring the tort reform perspective.

In Florida, but also be your outside Florida.

Florida markets.

And how you think that.

Ranks up with what you think the underlying claims inflation.

So during the cat losses normalizing the cat losses for a moment.

Where do you think you are in terms of margin improvement.

On a written.

Okay.

Our focus is on rate adequacy in all our territories.

We have taken substantial rate increases in particularly in the south east in the Florida market over the last couple of years. So that is actually I would say you know close rate adequacy and I would say that the the other aspect of that is that the claims inflation has dropped from the COVID-19 years.

You know reinsurance rates are up substantially. So therefore, there still is some need for rate due to the the reinsurance increases throughout.

Throughout the portfolio the northeast I would say that the claims inflation has been high.

Higher than.

Then then in the South East recently, and so therefore, it will probably be taking more rate up there also reinsurance rates are increasing up there and you know the northeast has not historically had the type of rate increases that the south ease of experience. So theres a little bit of catch up there from a rate adequacy standpoint, so that's where that's kind of how we see the landscape.

Have you gotten pushed back in New York on rates.

Allstate was out yesterday talking about their challenges to get rate increases in New York.

No I think New York has been very good to kind of work with I think they've seen all the actuarial documents.

Data that we provided.

Regarding reinsurance and inflation on that piece of it and I think they've been very very good to work with on that respect.

In respect to that.

But I'll ask one more question then let somebody else yes.

One of your competitors was telling me actually yesterday.

Hum.

They need to make some changes in your Hawaiian.

Because the reinsurance is really gotten very expensive there and.

No. This is their book or something in your book.

We're seeing the.

Essentially.

Low single digit returns because of the higher reinsurance costs.

Is that your experiences as well do you also worry about the increased reinsurance, particularly after the season.

Yeah. We are seeing you know fairly substantial increases in reinsurance in the Hawaiian market and we are where we're addressing that and they have already had discussions with the department of Ed.

Great. Thanks, I appreciate all the help pretty much alright. Thank you.

Thank you and our next question today comes from Mark Hughes Suntrust. Please go ahead.

Yes, good morning, Mark morning good.

Good morning.

Were you already.

Yeah, Ernie good morning, Kurt Good morning.

Yeah.

The.

Gross losses for the Maui wildfires and the idea you can you share that number.

We haven't disclosed those individual numbers, yet, we just kind of given a combined number of the $40 million net.

That's your know how.

There is the gross loss.

The growth is not significantly larger there and we have a just a little bit of per risk.

Reinsurance on there, it's actually about you know a little less than $4 million.

Okay.

Seemingly the reinsurers, who have made a pretty good returns on your program. This year is that fair.

I think that is a fair assessment, yes.

Yeah, Yeah, okay.

How much more room to run on the commercial residential business.

How do you feel like your market share is there to do you think it can get bigger.

We think we can get a slightly bigger on that piece, we're reevaluating that as you know.

If we look at the market right now is heading into 'twenty, four and making plans for that piece, but again, its all going to be dependent on profitability looking at areas and making sure. We're not overly concentrated in any one area on that piece of it but we do think there is some more runway on that piece, yeah, yeah that there've been a number of meetings with agents to kind of explore additional.

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And we think that there are some opportunities there that would give us some additional runway.

Yeah Okay.

One to look at your non cat non weather losses, they are definitely down substantially year over year, maybe ticked up a little bit sequentially.

Is that a.

Seasonality, perhaps just around the <unk> you.

You see a similar pattern last year, I think you'd said Ernie.

Youre seeing a improvement in litigation would.

Would you say that the progression from <unk> to <unk> was.

Normal in terms of the non cat non weather losses are good.

How would you characterize.

I'd say its because its also a bit of seasonality right. When you get to that end of the third quarter on that piece last year. If you take a look at Ian right or whether Attritional losses were low obviously after hurricane Ian right, which is normally what we see on that piece of it but we are very pleased in the direction that it's heading in.

Hope that that continues yeah. One other aspect of that is with our fifth count down a path to go down that actually has a tendency to drive.

The frequency down a little bit there also so when you look at the the Attritional losses, you know with our premiums being up in Pip count being down. That's also one of the drivers.

Very good thank you.

And thank you ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.

We appreciate everybody joining us on the call today and wish everyone a great weekend.

Thank you. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Okay.