Heritage Insurance Holdings, Inc.

Good morning and welcome to Heritage Insurance Holdings Second Quarter 2021 Financial Results Conference Call. My name is Ilie and I will be the 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. Thank you for joining us today. We have been very fortunate that COVID-19 continues to have 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 all of our employees for their dedication. At first glance, the second quarter's negative net income appears disappointing, but there's a brighter story underlying the quarter's results. Despite a $9.4 million reinstatement premium in the quarter and a $4.1 million uptake in weather losses relative to the first quarter of this year, net income improved sequentially, suggesting the benefits of our underwriting and pricing actions are starting to show. It's still early innings, but we're optimistic that we're on the path to improvement. We're continuing to aggressively raise rates and taking underwriting actions to improve our profitability. As we previously communicated, our focus is firmly on bottom line results rather than top line growth. We demonstrated this in the second quarter as gross premiums written growth decelerated from the first quarter. Additionally, premiums enforce growth significantly outpace policies enforce growth, which is indicative of our focus on rate adequacy. We renewed our core excess of loss reinsurance program in the second quarter, and I believe we are solidly positioned for hurricane season. Relative to prior year's program, we've prepaid all reinstatement and eliminated co-participation above our retention. Overall, we have a solid program with fewer moving parts, which is a testament to our relationship with our valued reinsurance partners. I will now turn the call over to Kirk to provide more details on our financials.

Thank you, Ernie. Good morning. Despite the loss of the quarter, we are seeing favorable trends that we believe will lead to continued improvements and return to profitability. Gross premiums written for the quarter were $337.7 million, up $47.3 million, or 16.3% from the prior year quarter. Premiums in force were $1.17 billion, and up 18% from June of 2020, while policies in force were up 8.4% over the same timeframe. The premium increase outpacing the policy increase reflects the higher rates we are implementing throughout our book of business, which is consistent with our focus on margin expansion and adequate rates. We anticipate that we will continue to have substantial rate earning through the portfolio this year and into 2022. The seeded premium ratio was 48.7% in the second quarter, up 2.1 points year over year. Second quarter seeded premiums were impacted by $9.4 million of reinstatement premium associated with a severe convective storm reinsurance agreement. The reinstatement premium added 3.3 points to the seeded premium ratio and 6.3 points to the net combined ratio. The net loss ratio for the quarter was 68.8%, which is 7.7 points higher than the net loss ratio in the second quarter of 2020. As previously disclosed, second quarter weather losses were 35.5 million, which is approximately 8.7 million higher than the second quarter of 2020. In addition, we had 0.6 million of favorable prior year reserve development in the second quarter of 2021, down from 5 million last year. The combination of these two items impacted the net loss ratio by 6.5 points. Our net expense ratio decreased by 2.5 points, reflecting our focus on expenses and reduction in executive compensation. The net expense ratio also bended by roughly 80 basis points from a 1.2 million premium tax benefit. The net combined ratio for the first quarter of 2021 was 105.2, which is up from 100 in the prior year period, reflecting a higher net loss ratio partially offset by a lower net expense ratio. The $9.4 million reinsurance reinstatement premium in the quarter mentioned previously was attributable to increasing the net combined ratio by 6.3 ratio points in the second quarter of 2021. Although we are not pleased with the loss in the quarter, net income did improve from the first quarter of 2021, despite having a substantial reinstatement premium and higher weather losses, which we think demonstrates the very early benefits of the rate increases earning through the portfolio and the underwriting actions we are taking. We're now available to take your questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Marla Backer with Sidoti.

Thank you. So, obviously, you know, realizing that The weather is an unknown and something over which you have little control. Can you give us any sense in terms of timing around, we are starting to see some of the benefits of your proactive strategy and initiatives, but can you give us any sense around timing for when you expect to see a more meaningful benefit from some of the measures you've undertaken?

Sure. So as we mentioned in the earnings call here, right, we're starting to see that rate come through. Those rates were taken in January of this year as well as April. So from a renewal cycle, those started as early as March, but will take 12 to 18 months to cycle through our entire portfolio. So as we mentioned, we're starting to see the early signs of it. The remaining rates should be taken and coming through the third and fourth quarter of this year and well into 2022.

Okay. And then last question for me is, you know, we've seen you in the past eliminate certain policies that you, you know, considered perhaps the riskiest or in the riskiest regions. And I think your business was different at that point, you know, when you took those initiatives. But do you see yourself potentially not renewing or eliminating other policies going forward?

Well, what I would say is that's a continuous effort. We're always looking at the profitability of each policy, each region, and were we right. And, again, given some of the rate adequacy, those policies will be kind of analyzed to determine if it's based on reinsurance rates, based on loss trends, whether those policies will keep or those policies may be non-renewed. But it is an ongoing effort, and it is something that is a continuously, you know, thing from an underwriting perspective that we do. You know, we take a look as markets do change, so we're constantly, you know, taking a look at that and making sure we have the most profitable policies on the books.

Okay, thank you.

Thank you.

Our next question comes from Mark Hughes with Truist.

Yeah, thanks. Good morning. Good morning, Mark. What, how are you looking at growth in the back half of the year? Where are you seeing policies that at this point seem attractive to you?

So as we look at the continued new business growth, right, we are cautiously optimistic at looking in certain areas as the rate comes through that those policies are rate adequate. You know, that's not just in Florida, but throughout, you know, the southeast region, even into the northeast region as well. So, you know, we have a lot of healthy new business growth, but we are ensuring that it is profitable growth as it comes through. So we'll kind of be a little more selective in those areas to ensure that we, again, as we mentioned earlier, have the most profitable policies on the books there. You know, we've mentioned that, you know, growth is great, but not at the expense of the bottom line. So there has to be a, you know, nice balance between that. Yeah.

Yeah, I think we'd expect our gross earn premium to continue to increase quarter over quarter because of the amount of growth that we've experienced in the past. However, when you look at a gross written premium standpoint, that growth is going to start slowing.

So, Ernie, do you see the – pricing as adequate in most of your markets at this point?

Yes, we're looking at that end. And because the market has been taking more rate, you know, that is a very promising sign for us as we can continue growing in some of these markets. But we will not stop looking at, you know, the rate adequacy in these markets. And if there's a need to take more rate, we definitely will be doing that.

And then what's your latest thinking about the SB 76 the new changes that have been put in place, how much progress are they really going to make in limiting losses in Florida?

Yeah, so I would say I'm very cautiously optimistic that that will help, but keep in mind that just went into effect July 1st, so we're very, very early in that. You know, I'd like to see the proof after several months SB 76 taking, you know, be in place and see how that pans out. But I am cautiously optimistic that that could help down the road.

And do you think several months will be enough time to get a good look at it?

Yeah, I would think, right, that a few months into it, I would say, you know, fourth quarter would give us a little bit better indication and feeling of how things are going. And then well into, you know, obviously into the beginning of 22, because that way, you know, again, having been signed into effect July 1st, You know, and here we are in August. It's kind of tough to tell whether that's a taking hold, but several months should give us a better indication.

Are there any momentum building for any further either regulatory or legal changes in the state? I'll throw in also, you know, what's the OINR's view about the further price increases? How much distress is there out there in the sector? What else might be coming to make things better?

Well, I would say that there are some more things I think we would want some legislative assistance with. And that will be going back to the table on that next legislative session on that piece of it. I do believe the OER has been very helpful, you know, with us in getting rate adequacy in the market. As far as distress out there in the market, I would say it's a very tough market, but I think those who are keeping to their underwriting standards, understanding rate adequacy, are those that will get through the market, and others, unfortunately, may not. Thank you. Thank you, Mark.

And again, if you have a question, please press star, then 1 to join our queue. Our next question comes from Paul Newsome with Piper Sandler.

Maybe you could talk a little bit more about the components of the rising inflation, sort of excluding catastrophe losses. And there's a lot of talk about sort of the issues in Florida with respect to liability, but it does seem like a lot of this is just like, you know, non-cat weather and and other issues that maybe just aren't related to that tort reform or tort issues that are other issues.

Yeah. So, for example, in the second quarter, there was one very large PCS event, PCS 2115, which was very large and that impacted a number of carriers. It's a little bit different than the second quarter of last year where there was an impressive number of PCS events. This quarter was just like, you know, had the one large one. There was a couple other smaller ones. When you look at the claims inflation that we're seeing, you know, some of it is COVID-related. You know, when you look at the price of lumber, when you look at the price of building materials and some of the repair costs, that type of stuff, that has, you know, augmented the claims inflation. That is starting to subside. You know, as far as being able to build that into your rates, you know, because of the How we look at the rates, we look at over a longer period of time. You know, some of that will get itself in, but, you know, it'll take longer for, you know, some of that inflation, if it holds, to get into the rate activity. However, you know, we are starting to see that subside. We think that probably claims are going to be not go down to the level they were before, but we think that they are going to go below where they are right now.

And that's a severity and pure inflation issue, or is it also a a frequency of loss issue. And I'm really thinking not cat when I'm trying to get my arms around this, sort of like what you call weather, non-weather stuff.

Yeah. You know, it's more or less a severity issue than it is a frequency issue. I would say that frequency is up slightly, but not to the extent of severity.

Got it. Thank you.

This will conclude our question and answer session. I'd like to turn the call back over to Ernie Garite for any closing remarks.

We'd like to thank everybody for their participation today and hope everybody has a great weekend. This concludes our call.

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