Heritage Insurance Holdings, Inc. Reports Financial Results for Third Quarter of 2018

October 31, 2018 4:01 PM

CLEARWATER, Fla., Oct. 31, 2018 /PRNewswire/ -- Heritage Insurance Holdings, Inc. (NYSE: HRTG) ("Heritage" or the "Company"), a property and casualty insurance holding company, today reported its financial results for the fiscal quarter ended September 30, 2018.

Heritage Insurance (PRNewsFoto/Heritage Insurance Holdings, Inc)

Third Quarter 2018 Highlights

  • Third quarter 2018 net income of $6.0 million ($0.23 per diluted share) and GAAP operating income of $14.2 million
  • Premiums in force increased 55% year-over-year to $923 million and gross premiums written increased 51% to $233.6 million over the same period, primarily reflecting inclusion of NBIC
  • Personal lines Tri-County Florida TIV accounted for only 5.7% of companywide TIV, down 9.2 points year-over-year, reflecting exposure management efforts and diversification outside Florida
  • New non-catastrophe Tri-County Florida claims count down 31% year-to-date
  • $3.2 million of favorable prior year reserve development
  • Expanded relationship with GEICO's insurance agency to all states (previously only NBIC states)
  • Received licenses in Virginia and Maryland, bringing total licensed count to 15 states
  • Book value per share of $15.16, up 18% year-over-year; $390.6 million of stockholders' equity
  • Board of Directors declared a regular quarterly dividend of $0.06 per share

Bruce Lucas, the Company's Chairman and CEO, said, "We reported a solid third quarter despite retaining $16.6 million of catastrophe losses associated with Hurricanes Florence and Lane, as our vertically integrated structure continues to benefit results. We have continued our trend to diversify away from Florida's Tri-County, which reduces our exposure to the state's assignment of benefits crisis. Personal lines Tri-County Florida TIV only accounted for 5.7% of our overall third quarter 2018 book of business, down 9.2 points year-over-year. We're also continuing to expand outside Florida and recently received licenses in Maryland and Virginia, bringing our total licensed count to 15 states and look forward to new growth opportunities.

Results of Operations

The following table summarizes our results of operations for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands, except percentages and per share amounts):

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

Change

2018

2017

Change

Revenue

Gross premiums written

$

233,613

$

154,355

51%

$

701,643

$

455,845

54%

Gross premiums earned

$

234,164

$

153,063

53%

$

692,298

$

460,025

50%

Ceded premiums

$

(115,926)

$

(57,855)

100%

$

(356,748)

$

(182,189)

96%

Net premiums earned

$

118,238

$

95,208

24%

$

335,550

$

277,836

21%

Total revenues

$

125,295

$

101,774

23%

$

355,293

$

298,005

19%

Operating income

$

14,216

$

1,413

906%

$

47,184

$

26,365

79%

Income (loss) before income taxes

$

8,991

$

(9,221)

NM

$

32,295

$

11,319

185%

Net income (loss)

$

5,989

$

(8,696)

NM

$

23,227

$

3,929

491%

Per Share Data:

Book value per share

$

15.16

$

12.84

18

$

15.16

$

12.84

18%

Earnings (loss) per diluted share

$

0.23

$

(0.34)

NM

$

0.88

$

0.14

520%

Return on average equity - Net Income

6.2%

(10.4)%

16.6

pts

8.0%

1.6%

6.4

pts

Ratios to Gross Premiums Earned:

Ceded premium ratio

49.5%

37.8%

11.7

pts

51.5%

39.6%

11.9

pts

Gross loss ratio

25.1%

41.8%

(16.7)

pts

25.7%

34.1%

(8.4)

pts

Gross expense ratio

22.4%

23.8%

(1.4)

pts

18.8%

25.0%

(6.2)

pts

Combined expense ratio - Gross

97.0%

103.4%

(6.4)

pts

96.0%

98.7%

(2.7)

pts

Ratios to Net Premiums Earned:

Net loss ratio

49.6%

67.3%

(17.7)

pts

53.0%

56.4%

(3.4)

pts

Net expense ratio

44.3%

38.2%

6.1

pts

38.8%

41.4%

(2.6)

pts

Combined expense ratio - Net

93.9%

105.5%

(11.6)

pts

91.8%

97.8%

(6.0)

pts

*NM = not meaningful

Ratios

Ceded premium ratio. Our ceded premium ratio represents ceded premiums as a percentage of gross premiums earned.

Gross loss ratio. Our gross loss ratio represents net losses and loss adjustment expenses as a percentage of gross premiums earned.

Net loss ratio. Our net loss ratio represents net losses and loss adjustment expenses as a percentage of net premiums earned.

Gross expense ratio. Our gross expense ratio represents policy acquisition costs and general and administrative expenses ("G&A") as a percentage of gross premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses.

Net expense ratio. Our net expense ratio represents policy acquisition costs and G&A expenses as a percentage of net premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses.

Combined ratios. Our gross combined ratio represents the sum of ceded premiums, net losses and loss adjustment expenses, policy acquisition costs and G&A expenses as a percentage of gross premiums earned. Our net combined ratio represents the sum of net losses and loss adjustment expenses, policy acquisition costs and G&A expenses as a percentage of net premiums earned. The combined ratio is the key measure of underwriting performance traditionally used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results.

Quarterly Financial Results

Net income (loss) for the third quarter of 2018 was $6.0 million compared to ($8.7) million for the third quarter of 2017. The increase primarily reflects net income associated with the inclusion of Narragansett Bay Insurance Company ("NBIC"), acquired on November 30, 2017, income from hurricane mitigation activity, the prior year quarter's inclusion of a $6.9 million non-cash charge associated with Heritage's convertible debt and a reduction in retained catastrophe losses ($16.6 million in third quarter of 2018 vs. $20.0 million in the prior year quarter).

Gross premiums written were $233.6 million in the third quarter of 2018, up 51.2% from $154.4 million in the prior year quarter. The increase primarily stems from inclusion of NBIC, partly offset by a decrease in Florida premiums related to exposure management efforts aimed largely at Broward and Miami-Dade counties.

Gross premiums earned were $234.2 million in the third quarter of 2018, up 53.0% from $153.1 million in the prior year quarter. This increase stems from the same items impacting gross premiums written.

The ceded premium ratio was 49.5% in the third quarter of 2018, up 11.7 points from 37.8% in the prior year quarter. The increase is attributable to inclusion of NBIC, which has a higher ceded premium ratio than the legacy Heritage entity due to its quota share reinsurance agreements. Excluding NBIC, but including reinsurance synergies, the Company's ceded premium ratio would have been 35.0% for the third quarter of 2018.

The net loss ratio was 49.6% in the third quarter of 2018, down 17.7 points from 67.3% in the prior year quarter. The decrease stems from increased hurricane mitigation activity and lower retained catastrophe losses in the current year quarter.

The Company's net expense ratio was 44.3% in the third quarter of 2018, up 6.1 points from 38.2% in the prior year quarter. The increase stems from non-recurring business acquisition related expenses and NBIC-related integration costs, partly offset by $18.1 million of ceding commissions associated with NBIC's quota share reinsurance contracts.

The net combined ratio was 93.9% in the third quarter of 2018, down 11.6 points from 105.5% in the prior year quarter. The decrease stems from net loss ratio improvement, partly offset by net expense ratio deterioration, as described above.

Book Value Analysis

Third quarter 2018 book value per share increased 18% year-over-year to $15.16.

As Of

Book Value Per Share

September 30, 2018

December 31, 2017

September 30, 2017

Numerator:

Common stockholders' equity

$

390,556

$

379,816

$

301,681

Denominator:

Total Shares Outstanding

25,769,804

25,885,004

23,500,174

Book Value Per Common Share

$

15.16

$

14.67

$

12.84

Conference Call Details:

Thursday, November 1, 2018 – 8:30 a.m. EDT Participant Dial-in Numbers Toll Free: 1-888-346-3095Participant International Dial In: 1-412-902-4258Canada Toll Free: 1-855-669-9657

Webcast:

To listen to the live webcast, please go to http://investors.heritagepci.com/. This webcast will be archived and accessible on the Company's website.

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

September 30, 2018

December 31, 2017

ASSETS

(unaudited)

Fixed maturity securities, available for sale, at fair value (amortized cost of $528,139 and $552,458 in 2018 and 2017, respectively)

515,541

$

549,796

Equity securities, available for sale, at fair value (cost of $16,906 and $17,548 in 2018 and 2017, respectively)

15,709

17,217

Total investments

531,250

567,013

Cash and cash equivalents

221,524

153,697

Restricted cash

12,250

20,833

Accrued investment income

3,753

5,057

Premiums receivable, net

68,621

67,757

Reinsurance recoverable on paid and unpaid claims

324,826

357,357

Prepaid reinsurance premiums

282,649

227,764

Income taxes receivable

36,249

37,338

Deferred policy acquisition costs, net

75,702

41,678

Property and equipment, net

18,480

18,748

Intangibles, net

81,911

101,626

Goodwill

152,459

152,459

Other assets

15,653

19,883

Total Assets

$

1,825,327

$

1,771,210

LIABILITIES AND STOCKHOLDERS' EQUITY

Unpaid losses and loss adjustment expenses

$

421,095

$

470,083

Unearned premiums

484,680

475,334

Reinsurance payable

217,022

17,577

Long-term debt, net

178,330

184,405

Deferred income tax

11,963

34,333

Advance premiums

33,435

23,648

Accrued compensation

10,486

16,477

Accounts payable and other liabilities

77,760

169,537

Total Liabilities

$

1,434,771

$

1,391,394

Commitments and contingencies

Stockholders' Equity:

Common stock, $0.0001 par value, 50,000,000 shares authorized, 26,569,804 shares issued and 25,769,804 outstanding at September 30, 2018 and 26,560,004 shares issued and 25,885,004 outstanding at December 31, 2017

3

3

Additional paid-in capital

295,500

294,836

Accumulated other comprehensive loss

(9,583)

(3,064)

Treasury stock, at cost, 7,214,797 shares at September 30, 2018 and 7,099,597 shares at December 31, 2017

(89,185)

(87,185)

Retained earnings

193,821

175,226

Total Stockholders' Equity

390,556

379,816

Total Liabilities and Stockholders' Equity

$

1,825,327

$

1,771,210

HERITAGE INSURANCE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive (Loss) Income

(Amounts in thousands, except per share and share amounts)

(Unaudited)

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

2018

2017

2018

2017

REVENUES:

Gross premiums written

$

233,613

$

154,355

$

701,643

$

455,845

Change in gross unearned premiums

551

(1,292)

(9,345)

4,180

Gross premiums earned

234,164

153,063

692,298

460,025

Ceded premiums

(115,926)

(57,855)

(356,748)

(182,189)

Net premiums earned

118,238

95,208

335,550

277,836

Net investment income

3,847

2,735

9,704

8,210

Net realized gains (losses)

5

365

(307)

1,011

Other revenue

3,205

3,466

10,346

10,948

Total revenues

125,295

101,774

355,293

298,005

EXPENSES:

Losses and loss adjustment expenses

58,695

64,035

177,775

156,728

Policy acquisition costs, net of ceding commission income for the three and nine months ended September 30, 2018, of $13,781 and $42,097 respectively

26,569

20,906

58,167

66,086

General and administrative expenses, net of ceding commission income for the three and nine months ended September 30, 2018, of $4,526 and $13,772 respectively

25,815

15,420

72,167

48,826

Total expenses

111,079

100,361

308,109

271,640

Operating income

14,216

1,413

47,184

26,365

Interest expense, net

5,225

3,751

15,431

8,163

Other non-operating income, net

6,883

(542)

6,883

Income (loss) before income taxes

8,991

(9,221)

32,295

11,319

Provision for income taxes

3,002

(525)

9,068

7,390

Net income (loss)

$

5,989

$

(8,696)

$

23,227

$

3,929

OTHER COMPREHENSIVE (LOSS) INCOME

Change in net unrealized (losses) gains on investments

(2,895)

593

(9,918)

8,473

Reclassification adjustment for net realized investment (gains) losses

(5)

(365)

307

(1,011)

Income tax (expense) benefit related to items of other comprehensive income

1,665

(81)

3,249

(2,866)

Total comprehensive (loss) income

$

4,754

$

(8,549)

$

16,865

$

8,525

Weighted average shares outstanding

Basic

25,631,871

25,883,267

25,663,415

27,647,146

Diluted

26,046,938

25,883,267

26,340,759

27,647,146

Earnings (loss) per share

Basic

$

0.23

$

(0.34)

$

0.91

$

0.14

Diluted

$

0.23

$

(0.34)

$

0.88

$

0.14

About Heritage

Heritage Insurance Holdings, Inc. is a property and casualty insurance holding company headquartered in Clearwater, Florida. Its insurance subsidiaries, Heritage Property & Casualty Insurance Company, Zephyr Insurance Company, and Narragansett Bay Insurance Company, write approximately $923 million of personal and commercial residential premium through a large network of experienced agents. The Company is currently writing property and casualty insurance policies in Alabama, Connecticut, Florida, Georgia, Hawaii, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, and South Carolina. Heritage Insurance Holdings, Inc. is led by a seasoned senior management team with an average of 25 years of insurance industry experience.

Forward-Looking Statements

Statements in this press release that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "or "continue" or the other negative variations thereof or comparable terminology are intended to identify forward-looking statements. This release includes forward-looking statements relating to our estimate of retained catastrophe losses from Hurricane Michael and the related profit from our vertically integrated loss mitigation affiliates. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties that could cause our actual results to differ from those expressed or implied herein include, without limitation: the possibility that actual losses may exceed reserves; the concentration of our business in coastal states, which could be impacted by hurricane losses or other significant weather-related events such as northeastern winter storms; our exposure to catastrophic weather events; increased costs of reinsurance, non-availability of reinsurance, and non-collectability of reinsurance; our failure to effectively manage our growth and integrate acquired companies; increased competition, competitive pressures, and market conditions; our failure to accurately price the risks we underwrite; inherent uncertainty of our models and our reliance on such model as a tool to evaluate risk; the failure of our claims department to effectively manage or remediate claims; low renewal rates and failure of such renewals to meet our expectations; our failure to execute our diversification strategy; failure of our information technology systems and unsuccessful development and implementation of new technologies; a lack of redundancy in our operations; our failure to attract and retain qualified employees and independent agents or our loss of key personnel; our inability to generate investment income; our inability to maintain our financial stability rating; effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions; the failure of our risk mitigation strategies or loss limitation methods; and changes in regulations and our failure to meet increased regulatory requirements; and other matters described from time to time by us in our filings with the Securities and Exchange Commission, including, but not limited to, the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 15, 2018. The Company undertakes no obligations to update, change or revise any forward-looking statement, whether as a result of new information, additional or subsequent developments or otherwise.

Heritage Insurance Holdings Inc.

Investor Contact: Arash Soleimani, CFA, CPA Executive Vice President & Director of Investor Relations 727.871.0206 Email: asoleimani@heritagepci.com

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SOURCE Heritage Insurance Holdings, Inc.

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