HRTG - Heritage Insurance Holdings

[walkie518]

Ticker: HRTG

Shares Outstanding: 29,740,441

Price/sh: $12.77

Mcap: ~$379,785,431.57

Book Value: $357,959

Book/sh: $12.04

DAC + Intangibles + Goodwill + Other Assets: $121,550,000

Tangible Book: $236,409,000

Tangible Book/sh: $7.95

GAAP Net Income '16, '15, '14: $33,856,000, $92,512,000, $47,097,000

GAAP EPS (Diluted) '16, '15', '14: $1.14, $3.05, $1.82

 

Heritage is a ~$380m market cap P&C insurance company based in Clearwater, Florida. 

 

2016 was a rough year for Hertiage resulting exposure to Hurricanes Hermine and Matthew as well as the costs to integrate the $134m acquisition of Zephyr, a Hawaiian hurricane wind-only insurer ($110.3m net of cash acquired).  The combination of these two reduced earnings to under cost of capital and the stock has declined from its 52-week high of $16/sh to $12.77/sh.

 

The acquisition also obscured the balance sheet a bit adding roughly $71m of intangibles.  Though Zephyr controls 30% of its specialty market, it's in Hawaii, which is very far away from Florida, and it was purchased around 1.5x book value(net of cash) or 1.9x book at full cost.  It's unclear how valuable this acquisition is without further clarity on the underlying value of Zephyr--so one must trust that management pulled the trigger to add rather than detract from the company.  It is likely that the result of the combined entity will be unclear until 2017.  That said, we might be looking at a very different company in 6 months. 

 

There has been some insider activity at and around the current share price.  The Chairman/CEO, Bruce Lucas, purchased 16,000 shares on March 20, 2017 for $12.57/sh, last June he purchased 15,700 shares at $12.45/sh, and last May Lucas purchased 18,500 shares for $13.3977.  Lucas owns 764k shares and has 500k options in the company valued at roughly $9.5m and $6.2m. 

 

There are NO material institutional holders of the stock.  My data indicates that there is no 13F filer with a position greater than 25bps. 

 

Anyone ever look at this one or have any thoughts?

 

[InelegantInvestor]

How is their underwriting? What is the historical combined ratio?

What is their exposure to a megacatastrophe?

[walkie518]

Combined Ratios:

2016: 92.8%

2015: 65.0%

2014: 71.4%

 

Reinsurance Program: First event coverage up to $1.9B in FL and $1.1B in HI.  Multiple event coverage up to $3B.  First event loss retetion is the first $40m.  In Hawaii, it's first $30m.  If there is a second event in Florida, primary retention decreases to $15m and the rest are ceded to third parties.  In Hawaii, a second event results in primary retention decreasing to $5m.  More details on this program can be found on pp 9-10 in the latest 10K.

 

Many of the FL policies were assumed through a depopulation program at Citizens.  While not all have renewed, 84% and 78% did in personal and commercial lines respectively.

 

Investments are largely in short-term (less than 5yr) bonds.  98% in BBB+ or better (576.9m amort cost and $571m at fair value).

 

The stock portfolio is (for whatever reason) valued using FV at $31.8m--this is a little murky, but the largest position is in energy stocks followed by financial names.  The "other" category is everything else.  Since it's a small part of the portfolio, it may not be too material to the long-term view of the company.

 

 

 

 

[InelegantInvestor]

Even 2016 was not awful, 2015 was quite good. Worth taking a deeper look, I think.

[walkie518]

I took a small position to watch. 

 

Growth has been steady.  It appears few on this forum are interested.  Perhaps I don't blame them when no one on Wall Street covers the company.  That said, should the firm continue to grow so too should the attention it garners. 

 

A primary concern with a small insurance firm like this is what isn't in the 10-K. 

 

The CEO has been a buyer of shares at higher prices than where it trades today. 

 

[muscleman]

http://finance.yahoo.com/news/heritage-insurance-holdings-inc-reports-201100032.html

 

Could anyone please help me understand how "Gross premiums written" could be less than "Gross premiums earned" in 2016?

 

I thought "Gross premiums earned" = "Gross premiums written" - reinsurance premium

[magneto23]

Let me help out a bit...I've followed this one since IPO and the entire FL HO insurance sector.

 

Benefits of Zephyr are mostly from capital efficiency in form of reinsurance synergy which is a huge cost (40%) for these insurers. Same will be true for any growth and/or acquisitions outside of FL that you are likely to see.

 

You will likely not see too much institutional ownership until they are more diversified like UIHC and to a lesser extent UVE. Even then, plenty of folks will pass knowing that there is a real risk of ruin for these companies, i.e. blowing through the top of their reinsurance towers, even if the probability of that is quite small. I think there is a place to own these as long as you know the risk/reward.

 

Prior year combined ratios are misleading because a) Citizens depopulations/takeouts (which had been growth area in previous years and is now effectively over) had low acquisition cost and no cat reinsurance cost for first half year, and b) attritional loss ratios have increased markedly in last few years due to systematic scamming from lawyers/contractors in assignment of benefits (AOB) cases. Companies have had to re-estimate upward previous assumptions on reserves and payouts (big negative in 2016), and are now pulling out of Dade/Broward counties and increasing rates in response. The FL legislature has some bills to try and deal w/ it, but sense is this year won't pass because plaintiff's bar friendly leaders of the congressional committees (and in some cases politicians even making money themselves from it). I'm told, next year could be better when those leadership positions turn over. In the meantime, Citizen's could reinflate just as it had post-KRW, which could then set the stage for de-pops again once law changes. Gotta love FL!

 

That said, primary rates are going back up now and reinsurance costs are still going down (Matthew/Hermine didn't even breach reinsurance layers in some cases). HRTG is trading at or below prior quarter's BVPS with a buyback that is accretive. There is excess capital (raised w/ expensive debt in Q4) with which to do a lot of repo, or a cash deal, so Street estimates are low. Bruce owns a lot of stock, and invested $20m intially...he has paid himself pretty well also, though the company had put up ROEs in the 25-30% range so not entirely unjusitifed. Some will say that's lucky / no wind. Regardless, everyone did well so no sour grapes from me.

 

Don't expect premiums to really grow (ex a deal).. top line growth can be bad in insurance anyway. Rather they are going to manage the profitability and the capital base as they should.

 

Difference b/w gross and net is reinsurance, difference between written and earned is accounting/matching principle of revenue recognition.

[walkie518]

Thanks Magneto for that color...very helpful and roughly in line with my thinking.

 

One item I don't understand, the stock portfolio appears to have a very high distribution yield relative to the market.  Do you have a feel for what any of those securities might be? 

[magneto23]

I don't know what stocks they own... and at $17m part of $1bn assets, I don't really care. Including preferred they say it's mostly energy/financials (prob mostly in the prefs).