Heritage Insurance Holdings, Inc.

Good morning and welcome to Heritage Insurance Holdings fourth quarter 2020 financial results conference call. My name is Kate and I will 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.

Good morning and thanks for joining us today. We invite you to visit the investor 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 1995. 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 Garate, 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. We have been very fortunate that COVID-19 has had virtually no impact on our business, and much of that has to do with our employees. Productivity remains high, and we continue to provide our policyholders and distribution partners with the service they have come to expect from Heritage. I would like to thank our employees for their hard work and dedication to the organization. Net income and book value per share growth were positive in the fourth quarter, despite an unprecedented level of weather losses. We are also pleased to report our tenth consecutive quarter of favorable prior year reserve development. While our top line growth was solid at almost 20% in the quarter, our main focus in 2021 will be on the bottom line as we continue to raise rates across our footprint, including double-digit compounded rate increases in Florida. We are also taking underwriting actions where necessary to further boost profitability. As mentioned in the earnings release, we recently launched a partnership with the NubMeg Agency, a subsidiary of the Hartford, to offer home policies in select coastal markets. We look forward to working with the NubMeg Agency and appreciate their partnership. I will now turn the call over to Kirk to provide more details on our financials.

Thank you, Ernie. Good morning. Growth premiums written for the quarter were $282.3 million, up $46.9 million, or 19.9% from the prior year quarter. We started writing in Maryland during the fourth quarter, bringing the total number of active states to 16. For the full year, written premiums were up $142.2 million, which is an increase of 15.2% versus policies in fourth growth of 9.2% over the same period. As I mentioned last quarter, we are focused on making an underwriting profit and obtaining adequate rates. As we look forward, I expect our growth to slow as we focus on margin expansion. The seeded premium ratio was 42.9% in the fourth quarter, down 1.1 points year-over-year, and down from the third quarter of 45.8%. The decrease year-over-year largely reflects a fourth quarter true-up that benefited the seeded premium ratio. Both the year-end and fourth quarter were significantly impacted by weather events. For the full year, the company had $134.2 million of current accident year weather losses, $58.3 million higher than 2019's $75.9 million total. For the fourth quarter, current accident quarter weather losses were $38.9 million, which was $23.7 million higher than 4Q 2019's The net loss ratio of 70.4% is higher than the prior year quarter net loss ratio of 51%. The increase is mostly attributable to CAT losses and other weather events. There are regional differences, but overall, PersonalEye's non-CAT pure premium trends are up between 4% to 6% driven by long-term loss severity trend of 4% to 6% with long-term frequency relatively flat. Our personal lines overall rate increases were over 10% in 2020 and are anticipated to be just over 9% for 2021. Overall, personal lines rate increases for Florida across all personal lines products was over 16% in 2020 and anticipated to be over 10% in 2021, excluding any expedited filing for reinsurance rates. These numbers exclude the impact of inflation guard, which adds approximately 3% to 6% more rate depending upon geography. The net combined ratio for the fourth quarter of 2020 was 108.7, which is up from 89.3 in the prior year period, reflecting a higher net loss ratio. In the fourth quarter, we generated a tax loss for the year, which due to the CARES Act, we were able to carry back and deduct at the pre-tax reform 35% corporate income tax rate. In 2019, we focused on our capital structure and continuing to refine our exposures in Florida and expanding our footprint into other states. In 2020, the growth of the top line was a result of those efforts. We are now focused on increasing our margins. We are now available to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Marla Backer from Sidoti. Go ahead.

Thank you. So can you talk a little bit with the new partnership with the subsidiary of the Hartford, can you talk us through a little bit about, you know, this has been a part of your strategy, it seems to be working well. Can you talk us through, you know, what portion of the new business historically has been generated by these partnerships and where you see that figure going?

Thank you, Mark. So, yeah, you know, it is a strategy we've had for the last couple of years. We'll continue to value those partnerships with the large carriers that we've had. We don't necessarily comment on the specifics of those partnerships as we value them going forward. So with the nutmeg agency, that is a new relationship. And again, as we stated, you know, we are working with them on select coastal markets. That is a new relationship we just started. But that continues to be a part of our strategy, and we'll move forward with that as we grow the company.

Okay, thanks. And then one more question, which is, as you start to think now about the 2021-22 reinsurance season, are you tweaking your strategy in any way as you get closer to some of those negotiations?

What I would say is that we're refining that strategy. We continue to stay on course with the diversification. Geographically, that helps us. We've seen it work in the past. We continue to believe that that will work going forward. We've seen the savings. We've seen where we have not received the same rates as others have. As we know, the reinsurance market rates are going up, but we believe our strategy has continued to provide reinsurance savings to us, and we'll continue with that.

Thank you.

You're welcome. Thank you.

Our next question is from Mark Hughes from Truist. Go ahead.

Yeah, thank you. Good morning. Morning, Mark. Ernie, you mentioned underwriting changes you're making, and Kirk, you point out that will probably lead to some deceleration and growth. Could you give a little more detail on that? Is there any particular geography or type of property that you're going to be a little more – strict in your underwriting?

Sure. Good question, Mark. So what we're doing is looking at the underwriting bottom line. And at the end of the day, you know, it's refining the strategy and ensuring that the margins are expanding. So as we look across our geographic footprint, there are some areas where we believe, right, profitability is not there. So we're kind of closing that down, slowing the growth there. That will still allow us to grow in other areas where, obviously, you know, profitability is better, and that way it will increase the bottom line margins.

Yeah. On top of that, I mean, one of the other issues that we're really looking at is our concentration of risk and how that is driving our PML. And really, you know, trying to look at a geography to make sure that, you know, we are diversified, you know, geographically, which means that, you know, there are areas where, you know, We could probably write a significant amount of business, but we don't want to just from a concentration standpoint.

Yeah. On that topic, what's your sense of the Florida market? Do you have much appetite in Florida? And how do you see the competitive environment there? It seems like there's a lot of pain going through the system. Is there opportunity to grow profitably there?

I would classify as selective growth, right? It is not growth at the expense of the bottom line. We've got a pretty good sized book that we're comfortable with. We will continue to evaluate opportunities and growth there, but it has to make sense to the bottom line. As you know, the competitive market here is there are a number of carriers that have shut down, have shed some policies. So we are in the position now where we're holding to our underwriting discipline and making sure that at the end of the day, it is providing an underwriting profit.

I wonder from, say, an ROE standpoint or your target combined ratio, I wonder if you could give some thoughts on that. Is your pricing, do you think, with the 9% rate increase and the inflation guard, is it adequate to get the target combined ratio or ROE you would like, or do you need another year or two? And if you do have some target numbers that, you know, notionally you'd like to share, I'd be interested to hear. Yeah.

Well, you know, again, when we look at our target combined margins, that type of stuff, it's really it's a timing issue. So, you know, we are pricing to rate adequacy. However, you know, it does take a period of time for that premium to earn through. So when we look at the ROE targets and getting to the combined ratio targets, we do think that the rate increases do get us to where we need to go. It's just a timing issue as far as how that earns in over the period of time.

And what is that target, either combined or ROE?

I think our long-term target ROE is in the low double digits in non-CAT years, and in CAT years, We want it to be in the high single digits. We do think that, you know, we are not going to have some of the very high ROEs or some of the very low ROEs because of the amount of retention that we take in the reinsurance program and the amount of reinsurance we purchase. So the idea is, you know, we're actually aiming to be a little bit more stable on the ROE in the long term.

Thank you.

Our next question is from Paul Newsome from Piper Sandler. Go ahead.

Good morning. Could you talk a little bit about the components of that 20% growth in the quarter? And maybe just start there.

Paul, the growth was higher outside Florida. and a bit lower in Florida. And rate is a bigger contributor to growth in Florida.

Fair enough. That's really all I had to do. Thank you. Appreciate it.

All right. Thank you.

Again, if you have a question, please press star, then 1. At this time, we have no more questions. So this concludes our question and answer session. I would like to turn it back to Ernie Garate for closing remarks. Oh, wait, wait. We have two more questions. I'm sorry. We'll go on with the questions. So we have Mark Hughes from Truist. Go ahead.

Thank you. The weather losses this year, the $134 million versus $75 million last year, is there a kind of expected level? I'm just sort of curious whether 2019 was a good year, 2020 was a bad year, or how you think about that question.

Yeah, that's a very good question. And I think that, you know, the question is, you know, are some of the weather losses we're seeing now the new norm or, you know, are they abnormalities? When you look at the last several year, weather losses have been up since about 2017. You know, generally speaking, we'd look at 2019 as not being a good year either. And so, therefore, 2020 was, you know, extraordinarily high. However, as we look at our rates going forward, you know, we are looking to contemplate as much of the weather losses as we can as we look at, you know, our own results, and including that in the indications. So, again, I think that it was probably, you know, high for 19, and that just even gives you an idea of how much higher 2020 is. But the question is, is that the new norm or not?

We're, I think, hoping for the best, but planning for this being maybe a new norm. And Mark, keep in mind, 2020 had record 30 named storms this year. So just keep that in mind as we go forward. Will that be the norm, as Kirk mentioned, going forward? You know, hopefully not. But we're preparing nevertheless.

Yeah, understood. How about from a rate perspective in Florida? I think you described 9% overall. Raj pointed out most of the growth in Florida was rate. What are you requesting in Florida, and what do you think the average is when you look across the industry for rate increases?

What I would say is, I mean, across the industry, everyone is taking rate. Obviously, you're seeing double-digit rates being taken in Florida. You know, we have always held steady that we continue to take rate when rate is needed. not just when there's a bad year in storms. So we constantly are looking at that and making sure actuarially sound rates are in our portfolio. So we'll continue to do that going forward. We have taken some rate, and those have been smaller increases over time. That's been happening for a number of years now, and we'll continue to do that looking forward.

Is the industry up double digits?

Yes, it definitely is. Thank you very much. Thank you, Margaret.

Our next question is from Matt Carlitti from JMP. Go ahead.

Hey, thanks. Good morning. I just wanted to kind of follow up on the comments around, you know, focusing a little more on profitability. I think you made the comment about, you know, targeting longer-term. A low double-digit are we in clean years and a higher high single-digit in cat years kind of reducing volatility. Are you guys contemplating any material changes to your reinsurance structure to help achieve that? You know, I'm thinking, like, instead of just kind of the excess of loss, you know, any sort of sideways protection? I mean, you know, 2020 exposed kind of, as you mentioned, a huge frequency of event. Is that something you're thinking about, or do you think your current structure is sufficient for your exposure and your footprint?

What I would say is we're looking at all the options right now, especially as we're in the middle of negotiating our reinsurance placement. So that is something we're working with our broker. And again, we'll look for every opportunity to ensure that, you know, that reinsurance placement makes sense for us and at the end of the day hits the bottom line.

Great. Thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Ernie Garate for closing remarks.

We'd like to thank everybody for joining us today. We hope you have a safe and wonderful weekend.

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