Name: Heritage Insurance Holdings, Inc. Q2 2022 Earnings Call
Start: 2022-08-05T09:31:00.000Z

Executive Summary

Reported Q2 2022 GAAP net loss of $87.9M (-$3.32 diluted EPS) driven by a non-cash goodwill impairment; underlying underwriting performance improved with adjusted net income of $2.9M ($0.11 adjusted EPS) and a net combined ratio of 99.4% .
Revenue rose 9% year over year to $163.8M and net loss ratio improved ~470 bps YoY to 64.1% despite higher catastrophe losses; prior quarter Q1 2022 was materially weaker due to elevated weather losses and a 129.5% combined ratio .
Management suspended the regular $0.06 quarterly dividend and instead allocated capital to repurchase common stock given shares trading below tangible book value, signaling a near-term capital return pivot .
Reinsurance program incepted June 1 with appropriate coverage; Heritage did not use Florida RAP and deployed Citrus Re to access collateralized reinsurance, a positive for risk transfer and capital markets access .
S&P Global Wall Street consensus estimates for Q2 2022 were unavailable at time of retrieval; estimate-based beat/miss analysis cannot be provided (consensus unavailable via S&P Global).

What Went Well and What Went Wrong

What Went Well

Underwriting profit with a net combined ratio of 99.4% (down ~580 bps YoY) reflecting improved rate adequacy and exposure management; “our underwriting profit for the quarter and nearly 6-point reduction in our combined ratio demonstrate that our focus on profitability, exposure management and rate adequacy are having the desired impact” — CEO Ernie Garateix .
Geographic diversification continued with 74.4% of total insured value (TIV) outside Florida vs. 69.8% a year ago, reducing portfolio volatility .
Reinsurance program executed without reliance on Florida RAP; “Heritage secured appropriate levels of reinsurance… we did not use the new Florida RAP program, and our program included deployment of Citrus Re” — CEO .

What Went Wrong

Non-cash goodwill impairment (~$90.8M after tax) was the primary driver of GAAP loss; management noted market dislocation, inflation, higher reinsurance costs, litigated claims, and stock trading below book value as triggers .
Net current accident year weather losses increased to $38.1M (vs. $35.5M prior-year); catastrophe losses were $32.1M (vs. $24.5M prior-year), partially offset by lower other weather losses ($6.0M vs. $11.0M) .
Florida remains challenged by a litigious environment; management paused new personal residential policies in highly populated counties and continues to trim Florida exposure (PIF -18.9% YoY; Florida loss ratios elevated) .

Financial Results

Metric	Q2 2021	Q1 2022	Q2 2022
Revenue ($USD Millions)	$150.2	$158.6 (derived from 6M total $322.4 minus Q2 $163.8)	$163.8
GAAP Diluted EPS ($)	-$0.14	-$1.15	-$3.32
Adjusted EPS ($)	-$0.14	N/A (not disclosed)	$0.11
Net Loss Ratio (%)	68.8%	91.6%	64.1%
Net Expense Ratio (%)	36.4%	37.9%	35.3%
Net Combined Ratio (%)	105.2%	129.5%	99.4%
Net Current Accident Year Weather Losses ($USD Millions)	$35.5	$63.8	$38.1
Catastrophe Losses ($USD Millions)	$24.5	$45.0	$32.1
Other Weather Losses ($USD Millions)	$11.0	$18.8	$6.0

Underwriting and premium KPIs

KPI	Q2 2021	Q1 2022	Q2 2022
Gross Premiums Written ($USD Millions)	$337.7	$283.2 (6M $648.5 − Q2 $365.3)	$365.3
Gross Premiums Earned ($USD Millions)	$285.6	$287.4 (6M $583.6 − Q2 $296.2)	$296.2
Net Premiums Earned ($USD Millions)	$146.5	$152.9 (6M $311.2 − Q2 $158.3)	$158.3
Ceded Premium Ratio (%)	48.7%	46.8%	46.6%

Balance sheet and book value

Metric	Q4 2021	Q1 2022	Q2 2022
Book Value/Share ($)	$15.20	$12.82	$6.80
Adjusted Book Value/Share ($)	$15.20	$12.99	$8.35
Cash & Cash Equivalents ($USD Millions)	$359.3	$359.3	$290.9
Total Stockholders’ Equity ($USD Millions)	$343.1	$281.8	$180.5

Geographic exposure (as of June 30)

Metric	Florida (2021)	Florida (2022)	Other States (2021)	Other States (2022)	Total (2021)	Total (2022)
Policies in Force	241,581	195,987	352,205	354,534	593,786	550,521
Premiums in Force ($USD)	$598,869,936	$564,814,121	$574,888,835	$648,621,713	$1,173,758,771	$1,213,435,834
Total Insured Value ($USD)	$121,256,973,834	$103,200,520,845	$280,332,366,098	$299,177,714,835	$401,589,339,932	$402,378,235,680

Capital & regulatory metrics

Metric	Q1 2022	Q2 2022
RBC ratio (Heritage)	N/A	>320%
RBC ratio (Zephyr)	N/A	>400%
RBC ratio (NBIC)	N/A	>370%
Non-regulated cash ($USD Millions)	$35	~$30

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Dividend policy	Q2 2022	Regular $0.06/share quarterly dividend	Allocate $0.06/share to repurchase common stock given shares below tangible book value	Suspended dividend for the quarter; pivot to buybacks
Ceded premium ratio	H2 2022	Not provided	Expect ~“47-ish” of gross premiums earned; Q3 slightly elevated, Q4 down; H2 comparable to H1	Directional update provided
Reinsurance program	6/1/2022 inception	Not applicable	Secured appropriate levels; did not use Florida RAP; deployed Citrus Re (capital markets collateralized reinsurance)	Program finalized with favorable structure

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2021 and Q1 2022)	Current Period (Q2 2022)	Trend
Florida litigation/regulatory	Emphasized SB76; diversified away from Florida; cautious on PIF growth	Cautiously optimistic on legislative actions; more reform needed; paused new personal policies in populous counties	Continued caution; trimming Florida exposure
Rate actions & inflation guard	Average premium per policy +10.7% YoY; HO renewals averaging +21% in 2022	Florida mid-teens plus 10% inflation guard (SE/Hawaii) and 7.5% (NE); resulting ~20%+ in Florida	Rates and inflation guard maintained/expanded
Reinsurance & Citrus Re	$100M Northeast cat bond placed; capital market access highlighted	Program incepted 6/1; no Florida RAP; Citrus Re deployed; appropriate coverage	Ongoing capital markets utilization
Underwriting profitability	Q4 2021 net combined ratio 93.2% (sub-100% first since Q1’20)	Q2 net combined 99.4%; underwriting profit despite higher cat losses	Improving vs prior year; better than Q1’22
Capital management	Q4’21 buybacks $7.2M; Q1’22 buybacks ~$5M	Dividend suspended in favor of buybacks; equity down on goodwill impairment and AOCI	Accretive buyback focus; equity impacted by non-cash
Goodwill impairment	Noted previously (Q4’21) as non-cash charge	Wrote down remaining goodwill ($90.8M after tax) due to market conditions/stock price	Completed; removes future goodwill risk

Management Commentary

“Our underwriting profit for the quarter and nearly 6-point reduction in our combined ratio demonstrate that our focus on profitability, exposure management and rate adequacy are having the desired impact… we expect these improvements to continue each successive quarter.” — CEO Ernie Garateix .
“Despite the underwriting gain in the quarter, management determined that it was appropriate to write down the remaining goodwill… driven by… inflation, higher reinsurance costs, and litigated claims… at this point, the company does not have any goodwill remaining on the balance sheet.” — CFO Kirk Lusk .
“Heritage secured appropriate levels of reinsurance, we did not use the new Florida [RAP] program, and our program included deployment of Citrus Re… We are cautiously optimistic that the actions taken by the Florida legislature will have a positive impact… but also believe that more legislative action needs to be taken.” — CEO .

Q&A Highlights

Rate trajectory: Florida rate increases mid-teens plus inflation guard (10% SE/Hawaii; 7.5% NE) → “premium increases would be 20%+” in Florida; loss cost trends ~11–12% .
Capital/regulatory: RBC ratios in excess of regulatory comfort (Heritage >320%, Zephyr >400%, NBIC >370%); non-regulated cash ~$30M at holdco .
Ceded premium outlook: Expect H2 ceded premium ratio around “47-ish” of gross premiums earned; Q3 slightly elevated and Q4 down .
Florida strategy: Continued trimming of Florida exposure; willingness to revisit growth if market conditions materially improve; Florida loss ratios still higher due to litigation .
Goodwill impairment mechanics: Triggered primarily by stock price vs. DCF-derived fair value and cumulative market factors; not due to underlying asset performance .

Estimates Context

S&P Global Wall Street consensus estimates for Q2 2022 EPS and revenue were unavailable at time of retrieval; accordingly, we cannot provide beat/miss analysis versus consensus (consensus unavailable via S&P Global).
Evidence from company-reported results suggests underlying underwriting improvement versus Q2 2021, but formal sell-side estimate comparison is not possible this quarter.

Key Takeaways for Investors

Underlying underwriting performance improved materially YoY (combined ratio sub-100%), indicating rate, re-underwriting, and diversification actions are taking hold despite elevated catastrophe activity .
The non-cash goodwill write-down resets book value optics and removes future goodwill risk; adjusted metrics (EPS, book value) better reflect core underwriting trajectory .
Reinsurance program strength (no RAP, Citrus Re deployment) and RBC ratios provide resilience for peak-loss scenarios; management highlighted limited capital impact at operating insurers due to captive backstop .
Strategic capital allocation pivot (suspending dividend in favor of buybacks) is accretive while shares trade below tangible book, but reduces income yield; monitor Board’s quarterly reassessment .
Florida remains a swing factor: legislative momentum is helpful, but litigation remains a headwind; continued exposure reduction and rate actions should further stabilize loss ratios .
Near-term trading implications: headline GAAP loss from goodwill impairment is a one-off; investors should focus on adjusted profitability, combined ratio progress, and catastrophe loss normalization cadence .
Medium-term thesis: If rate/inflation guard continues to outpace loss cost inflation and Florida reforms advance, Heritage’s diversified footprint and reinsurance access could sustain underwriting profits and ROE improvement .

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