KBRA Assigns Ratings to Heritage Insurance Holdings, Inc. and its Key Operating Subsidiaries
NEW YORK--(BUSINESS WIRE)-- Kroll Bond Rating Agency (KBRA) assigns the following insurance financial strength ratings (IFSR) to the key operating subsidiaries of Heritage Insurance Holdings, Inc. (HIH) (NYSE: HRTG): BBB+ to Heritage Property & Casualty Insurance Company (HPCIC); A- to Narragansett Bay Insurance Company (NBIC); and BBB+ to Zephyr Insurance Company, Inc. (ZIC) (collectively referred to as Heritage). Additionally, KBRA assigns an issuer rating of BBB- to HIH. The Outlook for all ratings is Stable. Heritage is a leading U.S. domestic residential property insurer with headquarters in Clearwater, Florida.
The ratings for Heritage’s operating companies reflect its favorable operating results, continued progress in executing the organization’s strategy to geographically diversify its business profile, and adequate capitalization with conservatively invested asset portfolios. Since the founding of the organization in 2012, Heritage has generated $382 million in cumulative operating profits, and despite active hurricane seasons in 2016/17 maintained a consolidated combined ratio below 100% every year since its first full year in operation. Collectively across the organization, Heritage has continued to adhere to its strategic plan to actively grow and diversify the business both organically and through acquisitions. KBRA notes that 11% of total insured values (TIV) is generated by ZIC (Hawaii exposure; acquired in March 2016), 53% by NBIC (northeast U.S. exposure; acquired in November 2017), and 36% by HPCIC (southeast U.S. exposure). Additionally, KBRA positively views Heritage’s diversified product distribution – including agency networks and strategic partnerships – and that the company’s executive officers and directors are significant shareholders, owning nearly 14% of HIH’s outstanding common stock.
As a catastrophe-exposed property writer, Heritage must maintain a prudent catastrophe excess of loss reinsurance structure designed to absorb multiple severe events. Currently, Heritage’s programs are designed to provide adequate coverage in excess of statutory requirements for HPCIC, NBIC, and ZIC, along with coverage for additional events through reinstatements. The first event retention for each insurance company subsidiary is: HPCIC – $20.0 million (12% of surplus); NBIC – $12.8 million (12% of surplus); and ZIC - $20.0 million (25% of surplus). KBRA believes that the program performed well in 2017, absorbing all gross Hurricane Irma losses above Heritage’s $20 million retention, and projected Hurricane Florence losses are similarly well within the current program’s limits.
Tempering these strengths are the organization’s exposure to natural catastrophes. Additionally, any sizeable hurricane activity or significant change in limits/costs for reinsurance may constrain the operating position (profitability/leverage) of any affected insurance subsidiary. While the new business mix continues to shift away from Florida, Heritage (specifically, HPCIC) continues to be a significant Florida property writer in terms of premium volume, policies in-force, and total insured value. Moreover, KBRA believes that full integration of recent acquisitions as well as organic expansion to additional states involves moderate execution risk.
HIH benefits from substantial intercompany cash-flows from Heritage MGA, LLC (HMGA), its managing general agent, and Contractors’ Alliance Network, LLC (CAN), a vendor network manager for Florida claims. The revenue and earnings from these direct subsidiaries alone can support holding company obligations, including interest payments, as well as potential contributions to the operating companies. HIH’s debt-to-capital ratio at year-end 2017 was approximately 35%, comprising senior secured notes maturing in 2023 (issued in 2016 to support business growth) and convertible senior unsecured notes (issued in 2017 to finance the NBIC acquisition). The company was in compliance with all covenants through the second quarter of 2018. Additionally, HIH operating companies provide sound fixed charge and cash coverage for the holding company’s current obligations. The company is considering potential refinancing options in the near term to obtain more cost efficient working capital.
The Stable Outlooks reflect KBRA’s expectation that Heritage will continue to execute upon its business strategy by making prudent decisions with respect to at-risk capital given the nature of lines of coverage offered and execution risks present. Additionally, KBRA believes that HPCIC will benefit from its diversification efforts within Florida (notably, a reduction in tri-county exposure) along with increased expansion to the surrounding states in the southeast. Likewise, NBIC and ZIC should benefit from the deployment of Heritage’s vertically integrated claims management.
The ratings are based on KBRA’s Global Insurer & Insurance Holding Company Rating Methodology published on October 10, 2017.
A full report will soon be available on www.kbra.com.
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Source: Kroll Bond Rating Agency