Heritage Reports Fourth Quarter and Full-Year 2018 Results

CLEARWATER, Fla., March 1, 2019 /PRNewswire/ -- Heritage Insurance Holdings, Inc. (NYSE: HRTG) ("Heritage" or the "Company"), a property and casualty insurance holding company, today reported its financial results for the quarter and year ended December 31, 2018.

Fourth Quarter 2018 Highlights

• Fourth quarter 2018 net income of $3.9 million ($0.15 per diluted share); full year 2018 net income of $27.2 million ($1.04 per diluted share).
• Retired $155.4 million of debt, while borrowing $114.2 million at a lower interest rate, resulting in over $7 million of annual pre-tax interest savings and lower financial leverage. Quarter-to-date in first quarter 2019, repurchased an incremental $5.8 million principal amount of convertible notes and paid down $10.0 million of revolving credit facility debt, further reducing interest expense and financial leverage; 83% of the convertible notes issued in 2017 have been repurchased, leaving only $23.4 million in principal amount outstanding held by third parties.
• Expanded Commercial residential product to New Jersey, reflecting revenue synergy associated with NBIC acquisition.
• Launched partnership with Safeco Insurance, a Liberty Mutual Company, to provide discounts for bundled coastal homeowners and auto policies with NBIC.
• Focus on underwriting profitability drove a 2.0% year-over-year premiums-in-force reduction to $923.7 million at fourth quarter 2018.
• $1.3 million of favorable prior year reserve development in the quarter.
• Board of Directors declared a regular quarterly dividend of $0.06 per share, bringing total dividends declared to $6.4 million and total capital returned to shareholders to $8.4 million for the full year.

Bruce Lucas, the Company's Chairman and CEO, said, "In the fourth quarter, we enhanced our capital structure, meaningfully reducing interest expense, our debt-to-capital ratio and short interest in our shares. We also received an investment grade issuer rating from Kroll Bond Rating Agency, reflecting our balance sheet strength and favorable operating results. These moves make us a stronger competitor in the markets we operate in, allowing us to more nimbly respond to new business opportunities as they arise, while reducing volatility for our shareholders. Overall, 2018 was an impressive year – we achieved solid profitability despite experiencing three hurricanes and substantial winter storm activity across our multi-state footprint, and incurring non-core charges related to our business acquisition, debt refinancing and NBIC headquarters relocation activities. Our vertically integrated structure continues to serve as an attractive hedge in storm years and our underwriting initiatives are bearing fruit.  In 2018, we also became licensed in two new states and expanded Contractors' Alliance Network and our commercial residential products to the northeast. Our underwriting efforts in areas prone to assignment of benefits (AoB) abuse are benefiting claims trends and we continue to pursue rate increases across our platform where necessary to achieve appropriate margins. I am pleased to report that we launched our much anticipated partnership with Safeco Insurance, a Liberty Mutual Company, in the Northeast where we will provide discounts for bundled home and auto policies in coastal zones. I believe we are well positioned to execute our organic growth strategy in 2019 and look forward to the year ahead."

Results of Operations

The following table summarizes our results of operations for the three and twelve months ended December 31, 2018 and 2017 (amounts in thousands, except percentages and per share amounts):

Ratios

Ceded premium ratio. Our ceded premium ratio represents ceded premiums as a percentage of gross premiums earned.

Gross loss ratio. Our gross loss ratio represents net losses and loss adjustment expenses as a percentage of gross premiums earned.

Net loss ratio. Our net loss ratio represents net losses and loss adjustment expenses as a percentage of net premiums earned.

Gross expense ratio. Our gross expense ratio represents policy acquisition costs and general and administrative expenses ("G&A") as a percentage of gross premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses.

Net expense ratio. Our net expense ratio represents policy acquisition costs and G&A expenses as a percentage of net premiums earned. Ceding commission income is reported as a reduction of policy acquisition costs and G&A expenses.

Combined ratios. Our gross combined ratio represents the sum of ceded premiums, net losses and loss adjustment expenses, policy acquisition costs and G&A expenses as a percentage of gross premiums earned. Our net combined ratio represents the sum of net losses and loss adjustment expenses, policy acquisition costs and G&A expenses as a percentage of net premiums earned. The combined ratio is the key measure of underwriting performance traditionally used in the property and casualty industry. A combined ratio under 100% generally reflects profitable underwriting results.

Quarterly Financial Results

Net income (loss) for fourth quarter 2018 was $3.9 million compared to $(5.0) million for the prior year quarter. The increase primarily reflects a $34.1 million non-cash, non-deductible charge associated with convertible debt in the prior year quarter and income from hurricane mitigation activity in the current year quarter, partly offset by higher retained catastrophe losses ($17.7 million pre-tax in fourth quarter 2018 vs. $0.4 million in the prior year quarter) and $11.3 million of previously disclosed pre-tax non-core expenses in the current year quarter.

Gross premiums written were $221.7 million in fourth quarter 2018, up 30.6% from $169.7 million in the prior year quarter. The increase stems from inclusion of a full quarter of Narragansett Bay Insurance Company ("NBIC"), acquired on November 30, 2017, partly offset by a decrease in Florida premiums related to exposure management efforts aimed largely at the Tri-County region.

Gross premiums earned were $234.0 million in fourth quarter 2018, up 27.7% from $183.3 million in the prior year quarter. This increase stems from the same items impacting gross premiums written.

The ceded premium ratio was 49.3% in fourth quarter 2018, up 4.8 points from 44.5% in the prior year quarter. The increase is attributable to inclusion of a full quarter of NBIC, which has a higher ceded premium ratio than the legacy Heritage entities due to its quota share reinsurance agreements. Excluding NBIC, the Company's ceded premium ratio would have improved by 2.6 points year-over-year in fourth quarter 2018, reflecting reinsurance synergies and exposure management efforts.

The net loss ratio was 50.3% in fourth quarter 2018, up 6.3 points from 44.0% in the prior year quarter. The increase relates primarily to a higher ceded premium ratio in the current year quarter due to inclusion of a full quarter of the NBIC quota share reinsurance program, higher retained catastrophe losses and a more conservative initial accident quarter loss pick, partially offset by better reserve development and higher hurricane mitigation income.  

The net expense ratio was 36.1% in fourth quarter 2018, down 3.9 points from 40.0% in the prior year quarter. The decrease relates primarily to the benefit of a full quarter of ceding commission income related to the NBIC quota share reinsurance program and lower incurred expenses in the current year quarter. 

The net combined ratio was 86.4% in fourth quarter 2018, up 2.4 points from 84.0% in fourth quarter 2017. The increase stems from a higher net loss ratio, partly offset by a lower net expense ratio, as described above.

The 41.4% fourth quarter 2018 effective tax rate is above prevailing statutory tax rates in our operating jurisdictions due to the combined impact of permanent differences and limited pre-tax income. 

Full Year Financial Results

Net income (loss) was $27.2 million for the year ended December 31, 2018 compared to $(1.0) million for the prior year. The increase primarily reflects net income associated with inclusion of a full year of NBIC, income from hurricane mitigation activity and the prior year's inclusion of a $42.2 million non-cash, non-deductible charge related to convertible debt, partly offset by $17.9 million of non-core pre-tax charges and higher retained weather losses in the current year.  Gross premiums earned were $926.3 million in 2018 compared to $643.3 million in 2017. The net combined ratio was 90.4% for 2018 compared to 94.1% in 2017.

Book Value Analysis

Book value per share decreased 1.6% to $14.43 at December 31, 2018 compared to the prior year.

Conference Call Details:
Monday, March 4, 2019 – 8:30 a.m. ET
Participant Dial-in Numbers Toll Free: 1-888-346-3095
Participant International Dial In: 1-412-902-4258
Canada Toll Free: 1-855-669-9657

Webcast:
To listen to the live webcast, please go to http://investors.heritagepci.com/. This webcast will be archived and accessible on the Company's website.

About Heritage
Heritage Insurance Holdings, Inc. is a super-regional property and casualty insurance holding company headquartered in Clearwater, Florida. Through its insurance subsidiaries and a large network of experienced agents, the Company writes over $900 million of gross personal and commercial residential premium across its multi-state footprint.

Forward-Looking Statements
Statements in this press release that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "or "continue" or the other negative variations thereof or comparable terminology are intended to identify forward-looking statements. This release includes forward-looking statements relating to (i) our ability to execute our organic growth strategy for 2019; (ii) our expectations related to our business strategy; (iii) our beliefs regarding our underwriting guidelines; (iv) our expectations regarding the benefits of our debt restructuring; and (v) our diversification expectations. The risks and uncertainties that could cause our actual results to differ from those expressed or implied herein include, without limitation: the success of the Company's marketing initiatives; inflation and other changes in economic conditions (including changes in interest rates and financial markets); the impact of new federal and state regulations that affect the property and casualty insurance market; the costs of reinsurance and the collectability of reinsurance; assessments charged by various governmental agencies; pricing competition and other initiatives by competitors; our ability to obtain regulatory approval for requested rate changes, and the timing thereof; legislative and regulatory developments; the outcome of litigation pending against us, including the terms of any settlements; risks related to the nature of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for losses and loss adjustment expense; our ability to build and maintain relationships with insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in loss trends; acts of war and terrorist activities; court decisions and trends in litigation; and other matters described from time to time by us in our filings with the Securities and Exchange Commission, including, but not limited to, the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 15, 2018. The Company undertakes no obligations to update, change or revise any forward-looking statement, whether as a result of new information, additional or subsequent developments or otherwise.

Investor Contact:
Arash Soleimani, CFA, CPA
Executive Vice President
727.871.0206
Email: [email protected]

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SOURCE Heritage Insurance Holdings, Inc.