Heritage Insurance Holdings, Inc. Q3 FY2021 Earnings Call

Good morning, and welcome to the Heritage Insurance Holdings Third Quarter twenty twenty one Financial Results Conference Call. My name is Ian, and I'll be your operator today. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this event is being recorded. I would now like to turn the conference over to Arash Soleimani, Executive Vice President at Heritage. Please go ahead, sir.

Good morning, and thanks for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.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 nineteen ninety five. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. In our earnings press release and in 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 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. With us on the call today are Ernie Garateix, our Chief Executive Officer; and Kirk Lusk, our Chief Financial Officer. I will now turn the call over to Ernie.

Thank you, Arash. Good morning, everyone, and thank you for joining us today. First, let me start by thanking our employees for their hard work and dedication over the past few months. Our employees continue to provide superior customer service to our agents and policyholders and demonstrate Heritage’s ability to serve in its market as a super-regional carrier. While we were disappointed with the loss in the quarter, I'm encouraged by the underlying signs of improvement that I expect will continue next quarter and throughout twenty twenty two. Excluding realized capital gains, pretax income improved by about ten million dollars year over year, which was largely driven by a ten point improvement in the net combined ratio, including almost seven points of net loss ratio improvement. Even though current accident quarter weather losses were up about four million dollars year over year, the corresponding current accident quarter weather loss, net loss ratio actually improved by almost three points. These improvements are driven by our focus on rate adequacy and underwriting optimization. For example, as of quarter end, premiums in-force were up thirteen percent, while policies in-force were only up by three percent, resulting in premium growth outpacing policy growth by over ten points. This was even more pronounced in our Florida homeowners book, where quarter end premiums in-force were up seven point five percent, while policies in-force were down five point four percent with premium growth outpacing policy growth by thirteen points. I'm confident in our business plan, and the underlying improvements that have started to emerge should become even more visible next quarter and particularly in twenty twenty two. I will now turn the call over to Kirk to provide more details on our financials.

Thank you, Ernie. Good morning. The net loss for the quarter was sixteen point two million dollars compared to a net loss of five point two million dollars during the prior year quarter. The primary drivers of the variance relate to significant realized gains in the prior year. For reference, in the third quarter of twenty twenty we realized twenty point four million dollars of realized gains compared to none this year. The high level of severe weather and storms continue to be a major driver of losses for the quarter. Net accident quarter weather losses of fifty one point four million dollars are four point one million higher than the same quarter in twenty twenty. The twenty twenty one third quarter losses are also thirty two point seven million dollars higher than the third quarter of twenty nineteen and twenty seven point eight million dollars higher than the third quarter of twenty eighteen. To put the twenty twenty one year to date net weather losses into perspective, the twenty twenty one year to date net weather losses are one hundred and eighteen point three million dollars, compared to ninety five point three million dollars in twenty twenty, sixty point six million dollars in twenty nineteen and fifty point four million dollars in twenty eighteen. With the reoccurring severe weather events, we are factoring these losses as well as the experienced social inflation into our rate indications as soon as possible. Despite the weather events and the loss for the quarter, we are seeing favorable trends that we believe will lead to continued improvements in subsequent quarters as we return to consistent profitability. As Ernie mentioned, premiums in-force were up thirteen percent year over year, but policies in-force were up only three percent over the same timeframe, representing premium growth outpacing policy growth by ten points. In Florida, where our personal lines business represents nearly thirty seven percent of our policies in-force, in-force premium growth outpaced policies in-force growth by thirteen points. Our emphasis on rate increases over policy growth is consistent with our focus on margin expansion and rate adequacy. We anticipate that we will continue to have substantial rates earnings through the portfolio this year in twenty twenty two and twenty twenty three. We are undergoing detailed reviews of our business and curtailing the volume of new business we will accept as well as business we will renew while we focus on rate adequacy. Additionally, we are implementing a number of underwriting changes to improve the quality of our book of business. This includes minimum coverage requirements, shutting down certain zip codes, making changes to our agency force, implementing minimum roofage in certain geographic areas among other things. Ceded premiums are up thirteen percent year over year, but were outpaced by the gross earned premium increase of fifteen point five percent and as a result the ceded premium ratio dropped from forty five point eight percent in the third quarter twenty twenty to forty four point eight percent in the third quarter twenty twenty one. The ratio was also down from forty eight point seven percent in the second quarter of twenty twenty one which was negatively impacted by a nine point four million dollars reinstatement premium associated with severe convective storm reinsurance agreement. The seventy nine point eight percent net loss ratio was down six point eight points year over year. The improvement reflects lower attritional current accident year loss ratio, which partially stems from improving rate adequacy and was partially offset by lower favorable prior year development. Our net expense ratio decreased by three point four points, reflecting our focus on expenses and economies of scale associated with rate driven premium growth. The net combined ratio for the quarter was one hundred and twelve point five and down ten point two points from the third quarter of twenty twenty of one hundred and twenty two point seven. Although we are not pleased with the loss in the quarter, the amount of rate earning through the portfolio, the lower attritional loss ratio and the expense ratio are indicators of improvements in future quarters. We're now available to take your questions.

At this time, we’ll now begin the question-and-answer session. Our first question here comes from Matt Carletti of JMP. Please go ahead.

Thanks. Good morning. Kirk, you mentioned a few times a substantial rate working its way through the portfolio. Can you give us an idea of the ballpark on average? I know it will vary by state, territory and so forth, but is it kind of mid-single digit high single digit or what sort of rate are we talking about?

We're talking about mid to high single digit in most jurisdictions, however, there are going to be several that are going to be in the double digits.

Okay, great. And then you guys have over the past several years, really grown particularly outside of Florida through a number of partnerships with large national companies. Can you comment on kind of how those are going in general and about what portion of the book today is kind of that represents?

Yeah. So, we are very pleased with the growth that we've had outside of Florida with our national partners, but we continue to kind of refine where those growth areas are. Obviously, those areas that are unprofitable are where the focus is going to be. And then the overall book that we have with them probably accounts for about twenty five percent of the portfolio.

Okay, great. And then I guess my last question, just a broad question, I guess probably for you Kirk. Sitting around capital, kind of how do you feel about Heritage’s capital position currently, particularly given kind of the moderation and exposure currently and just how should we think about it as we go into twenty two?

Yeah. And I think we're positioned well from a capital standpoint, right? I mean, one of the things we did do is, we refactored our debt in the second quarter with our senior syndicate banks, which were led by regions of BMO, who were very great to work with. We were able to lower our costs, get more flexibility and increased our revolver by fifty percent there. So, we feel pretty good about that. When we look at deploying capital in the future, really the focus is on profitability. I think that there are some areas where we are going to see our count decrease much like we have this year, but the premiums are going to increase due to the rate increases. We do have some areas also particularly up North where we think that we are going to have a positive PIF growth and premium growth on top of that.

Great. As you look ahead, it seems you believe capital is at least sufficient. Do you anticipate having excess capital? Should investors consider the possibility of share repurchases at some point, or are we getting ahead of ourselves?

Well, we have about twenty six million dollars in non-regulated cash right now. We did some minor stock buybacks in the third quarter and that is something that we will evaluate going forward.

Great. Thanks very much for the answers.

Thanks, Matt.

Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.

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Yeah. No. And I would say that inflation is very real. I think that we're seeing it also. And one of the things we do with our portfolio is starting June of twenty twenty, we increased our inflation guard factor in the Southeast to eight percent, except for North Carolina, which was six percent. The Northeast has been a little lower at four percent. So when we look at the inflation guard factor plus the rate increases that we've contemplated, we think that that is going to be sufficient for that. So you are correct, we actually have increased what we consider our loss cost factor substantially over the last couple of years.

Fair enough. Progressive mentioned reducing their presence in Florida and the Gulf regions. Are there any additional updates on the competitive landscape and how it compares to what you observed in the previous quarters?

Regarding the Gulf as far as other states in the Gulf area?

Well, the example I use, Progressive said their home insurance business that they're going to try to essentially deemphasize in the Gulf Florida, actually expand elsewhere outside of those regions, but they are only one but they're decent sized.

Our current approach is to maintain our existing position. We are not increasing our exposure in the Gulf and do not plan to expand into all Gulf states, such as Texas and Louisiana, at this time. We will see what the future holds, but we are satisfied with our current presence in the Gulf. Our primary focus has been in the Carolinas and the northern regions.

I'm sorry, it wasn’t clear. I was just asking to see if you see peers being more or less competitive in your markets?

Well, we have not seen more competitors in the market. I think everyone is taking a pause with some of the exposures from what they've seen on the latest storms that hit the Gulf. We have not seen more competitors come in.

Okay. Thanks.

Thank you.

Next question is coming from Mark Hughes with Truist. Please go ahead.

Thank you. Good morning.

Good morning, Mark.

When you put together some of those pluses and minuses around the top line, more rates, maybe some tapering in PIF counts in certain markets. What do you think the top line looks like overall mix year, are you going to get it up a bit, flat?

Yeah. No. We think it's going to be up next year, because of the amount of rates that we have. I mean we took some substantial rates this year, which continue to earn into the portfolio next year and we're anticipating taking even more rate next year. So with that, even in those jurisdictions where we have PIF count going down, we anticipate premiums are going to be going up because of that rate increases. As far as like the bottom line improvements, I would say, we are not only addressing it from a rate standpoint, we're also addressing it from an underwriting standpoint, looking at where we write and how we write, what policies, and what is the roofage. So we're actually trying to address it from not only the rate but also from an underwriting perspective.

And what's your latest take on some of those regulatory reforms in Florida that kicked in earlier this year? Are they having much of an impact?

What I would say is this, we've seen a slight decrease in litigation, new litigation coming through. We're still cautiously optimistic as we're still a couple months into it to see. So, hopefully that trend continues.

Were there any updates regarding roof issues? Have there been any real changes in that area, and is it making a difference?

No, again, I don’t think there were many changes on that perspective, again, we're kind of seeing what's going to happen there going forward on that piece. But we are working actively to see if there are improvements we can make going forward.

Okay. I think that’s it. Appreciate it.

Thank you.

At this time, it looks like we have further questions. I’d now like to turn it back over to the team for any closing remarks.

Thank you for attending today. We hope everyone has a great weekend.

Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.