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HI

Heritage Insurance Holdings, Inc. (HRTG)·Q2 2021 Earnings Summary

Executive Summary

  • Q2 2021 delivered a net loss of $4.0M (-$0.14 EPS) on total revenues of $150.2M; sequential net loss improved versus Q1 despite higher weather losses and a $9.4M reinstatement premium, reflecting early benefits from rate and underwriting actions .
  • Underwriting metrics deteriorated year over year on elevated weather and higher ceded premiums; combined ratio was 105.2% vs 100.0% in Q2 2020, but improved vs 107.7% in Q1 2021 .
  • Management emphasized continued aggressive rate increases, slowing gross written premium growth to prioritize margin, and a materially strengthened reinsurance program (prepaid reinstatement, minimal co-participation) ahead of hurricane season .
  • No quantitative revenue/EPS guidance was provided; dividend maintained at $0.06 per share (paid Oct 6) .
  • Consensus estimates from S&P Global were unavailable due to rate-limit constraints; therefore, beat/miss vs Street cannot be assessed (S&P Global consensus unavailable).

What Went Well and What Went Wrong

What Went Well

  • Early signs of improvement: “net income improved sequentially, suggesting the benefits of our underwriting and pricing actions are starting to show” despite $9.4M reinstatement premium and higher weather losses .
  • Rate adequacy focus: premiums in-force growth outpaced policies in-force growth; management reiterated aggressive rate actions across geographies to expand margins .
  • Strong reinsurance positioning: renewal completed early; reinstatement premiums prepaid; co-participation largely eliminated, resulting in “a stronger program with fewer moving parts” .

What Went Wrong

  • Elevated weather: net current accident quarter weather losses of $35.5M (cat $24.5M; other $11.0M) vs $26.8M in Q2 2020, pressuring the loss ratio and combined ratio .
  • Higher ceded costs: ceded premium ratio rose to 48.7% (+2.1 pts YoY) driven by reinsurance program costs and reinstatement premium, adding 6.3 pts to net combined ratio .
  • Lower investment income and reduced favorable prior-year reserve development (Q2 2021 $0.6M vs ~$5.0M prior-year), further weighing on results .

Financial Results

Income Statement and Key Per-Share Metrics

MetricQ2 2020Q1 2021Q2 2021
Total Revenues ($USD Millions)136.012 147.243 150.197
Net (Loss) Income ($USD Millions)4.132 (5.148) (3.950)
Diluted EPS ($USD)0.15 (0.19) (0.14)
Book Value Per Share ($USD)16.67 15.32 15.20

Underwriting Metrics

MetricQ2 2020Q1 2021Q2 2021
Gross Premiums Written ($USD Millions)290.432 274.181 337.700
Gross Premiums Earned ($USD Millions)241.792 270.411 285.646
Net Premiums Earned ($USD Millions)129.057 142.199 146.499
Ceded Premium Ratio (%)46.6% 47.4% 48.7%
Net Loss Ratio (%)61.1% 68.9% 68.8%
Net Expense Ratio (%)38.9% 38.8% 36.4%
Combined Ratio (%)100.0% 107.7% 105.2%

Weather Losses and Reserves

MetricQ2 2020Q1 2021Q2 2021
Net Catastrophe Losses ($USD Millions)17.6 15.4 24.5
Other Weather Losses ($USD Millions)9.2 16.1 11.0
Total Net Current Accident Quarter Weather Losses ($USD Millions)26.8 31.4 35.5
Favorable Prior-Year Reserve Development ($USD Millions)~5.0 1.6 0.6
Reinstatement Premium ($USD Millions)——9.4

Growth Mix Indicators

MetricQ1 2021Q2 2021
Premiums In-Force ($USD Billions)$1.1B $1.2B
Policies In-Force (Units)—593,786
GPW Growth vs PY (Florida)+17.7% +12.8%
GPW Growth vs PY (Outside Florida)+21.9% +20.3%

Segment/Geographic Breakdown (growth contribution)

  • Florida gross premiums written growth: +12.8% YoY in Q2; outside Florida: +20.3% YoY in Q2 .
  • Q1 showed +17.7% Florida and +21.9% outside Florida gross written premium growth .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue/EPS guidanceFY/Q3 2021Not provided Not provided Maintained (no quantitative guidance)
Dividend per shareQ3 2021$0.06 $0.06; payable Oct 6, 2021 to holders Sep 15, 2021 Maintained
Gross written premium trajectory2H 2021Growth to slow to prioritize margin Growth slowing; gross earned premium to continue increasing Maintained (qualitative)
Rate actions2021–2022Aggressive rate increases across footprint Continued rate increases; substantial rate earning through 2022 Maintained/extended
Reinsurance program2021–2022 seasonPrior-year structure Prepaid reinstatement; minimal co-participation; SE first-event retention $32.0M; NE $20.7M; FHCF 90% Strengthened structure

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2020 and Q1 2021)Current Period (Q2 2021)Trend
Rate adequacy & margin focusDoubling down on underwriting profit; slowing growth; double-digit FL rate increases; target ROE low double digits (clean years) “Aggressively raise rates”; premiums in-force growth > policies; rate earning continues into 2022 Strengthening margin focus
Reinsurance structureConsidering options; negotiating placement Prepaid reinstatements; eliminated co-participation above retention; stronger tower More conservative, simplified
Legislative/regulatory (FL SB 76)Cautiously optimistic; assessing impact Still early; cautious optimism with clarity expected by Q4 Monitoring with cautious optimism
Claims inflation & materials costsWeather up since 2017; planning for “new norm” Severity-driven inflation (lumber, materials) starting to subside; frequency up slightly Moderating severity pressures
Growth postureSelective growth; diversify geographically Cautiously selective new business across SE and NE; prioritize profitability Selective, profitability-first
COVID-19 impactVirtually no impact Virtually no impact Stable

Management Commentary

  • CEO: “Despite a $9.4 million reinstatement premium in the quarter and a $4.1 million uptick 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” .
  • CEO on strategy: “We’re continuing to aggressively raise rates and taking underwriting actions… focus is firmly on bottom line results rather than top line growth” .
  • CFO: “Ceded premiums were impacted by $9.4 million of reinstatement premium… added 3.3 points to ceded premium ratio and 6.3 points to net combined ratio… net loss ratio 68.8%” .
  • CEO on reinsurance: “We prepaid all reinstatement and eliminated co-participation above our retention… solid program with fewer moving parts” .
  • CFO on inflation: “Claims inflation… lumber, materials… starting to subside; severity more than frequency” .

Q&A Highlights

  • Timing of rate benefits: Rate actions from Jan/Apr begin earning in renewals; full portfolio cycle-through takes 12–18 months; more impact in H2 2021 and into 2022 .
  • Policy pruning: Ongoing underwriting discipline to nonrenew or eliminate unprofitable policies based on rate adequacy, reinsurance costs, and loss trends .
  • Growth outlook: Gross earned premium expected to increase sequentially; gross written premium growth to slow given margin focus .
  • Florida SB 76 impact: Too early post July 1 effective date; management expects better read by Q4 2021 and early 2022 .
  • Claims dynamics: Severity is the bigger issue vs frequency; materials inflation subsiding but not returning to prior lows .

Estimates Context

  • S&P Global consensus for Q2 2021 EPS and revenue was unavailable due to a data access rate-limit issue; therefore, we cannot assess beat/miss vs Street for Q2 2021 at this time (Values retrieved from S&P Global – unavailable).
  • Given sequential improvement in net loss (Q1: -$5.1M; Q2: -$4.0M) amidst higher weather/reinsurance charges, we expect many models to adjust for improved expense ratios and reinsurance posture but maintain caution on loss ratio given weather cadence and SB 76 timing .

Key Takeaways for Investors

  • Sequential improvement amid adverse weather and a $9.4M reinstatement premium supports the narrative that rate and underwriting actions are beginning to earn in; watch combined ratio trajectory into H2 2021 and 2022 .
  • Reinsurance program materially strengthened (prepaid reinstatements; reduced co-participation); should dampen earnings volatility in active storm seasons, albeit at higher ceded costs (ceded ratio +2.1 pts YoY) .
  • Margin-first posture implies slowing GPW growth while gross earned premium increases; expect policies/pricing mix shifts and selective geographic growth to continue .
  • Claims inflation severity appears to be moderating; if sustained, could relieve pressure on attritional losses, but frequency remains slightly higher—monitor loss ratio and reserve development .
  • Dividend sustained at $0.06 per share underscores capital discipline; book value per share down slightly QoQ to $15.20—watch capital/leverage vs weather exposure through hurricane season .
  • Regulatory tailwind (SB 76) is a potential medium-term positive; lack of immediate quantifiable impact necessitates caution until evidence emerges by Q4 .
  • Trading lens: Near-term catalysts include hurricane activity, evidence of rate-earn-in via combined ratio improvement, and any observable SB 76 impacts; medium-term thesis hinges on sustained margin expansion and reinsurance program stability .