Heritage Insurance (HRTG) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Heritage Insurance Holdings reported Q1 2019 net income of $7.0 million, a decrease from $14.8 million, with total assets at $1.68 billion and operating cash flow significantly improving Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total investments | $567,008 | $528,593 | | Cash and cash equivalents | $279,720 | $250,117 | | Total Assets | $1,676,993 | $1,768,713 | | Total Liabilities | $1,241,906 | $1,343,380 | | Total Stockholders' Equity | $435,087 | $425,333 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Account | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Gross premiums written | $210,348 | $204,366 | | Net premiums earned | $109,691 | $106,108 | | Total revenues | $118,261 | $112,026 | | Net income | $6,964 | $14,829 | | Diluted earnings per share | $0.24 | $0.55 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $85,322 | $(12,132) | | Net cash (used in) provided by investing activities | $(34,171) | $55,747 | | Net cash used in financing activities | $(21,544) | $(3,668) | | Increase in cash, cash equivalents, and restricted cash | $29,607 | $39,947 | - The company adopted the new lease accounting standard, ASU 2016-02 (Topic 842), prospectively in Q1 2019, resulting in approximately $2.8 million in right-of-use assets and lease liabilities with no material income statement or cash flow impact[30][31] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported Q1 2019 net income of $7.0 million, a decrease driven by a higher net combined ratio of 97.3%, despite 2.9% gross premium growth and a reduced debt-to-capital ratio - Net income for Q1 2019 was $7.0 million, or $0.24 per diluted share[114] - Gross premiums written increased 2.9% to $210.3 million[114] - Favorable prior year reserve development of $0.6 million[114] - $6.8 million was returned to shareholders via dividends and buybacks[114] - Debt-to-capital ratio reduced to 24.1%, down 10.7 points year-over-year[114] Key Financial Ratios Comparison | Ratio | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net loss and LAE ratio | 56.6% | 50.0% | | Net operating expense ratio | 40.7% | 32.2% | | Net combined ratio | 97.3% | 82.2% | - The increase in the net loss ratio to 56.6% was due to higher current accident quarter net losses, partly offset by favorable reserve development, while the net operating expense ratio increased to 40.7% primarily due to the favorable impact of NBIC-related purchase accounting in the prior-year quarter and reduced ceding commission income[129][130] - Net cash from operating activities was $85.3 million, a significant improvement from a $12.1 million use of cash in Q1 2018, primarily due to the collection of reinsurance on catastrophe claims and a reduction in unpaid losses[138] Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio is exposed to interest rate, credit, and equity price risks, with a 100 basis point rate increase potentially decreasing fixed maturity fair value by 3% or $18.4 million Interest Rate Sensitivity of Fixed Maturity Securities (as of March 31, 2019) | Hypothetical Change in Interest rates | Change In Estimated Fair Value (in thousands) | Percentage Change in Estimated Fair Value | | :--- | :--- | :--- | | 100 basis point increase | $(18,368) | (3)% | | 100 basis point decrease | $18,363 | 3% | - Credit risk is mitigated by investing in fixed maturities that are generally investment grade and by diversifying the portfolio, with 92% of the fixed maturity portfolio rated BBB- or higher as of March 31, 2019[173][175] - Equity price risk is managed through industry and issuer diversification and asset allocation, with the equity portfolio valued at $17.4 million primarily invested in the financial, energy, and other sectors[176] Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[180] - There were no changes in internal controls over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, though controls were implemented to facilitate the adoption of the new lease accounting standard[181] PART II – OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal actions, which management does not expect to have a material adverse effect on its financial position or results - The Company is party to claims and legal actions arising in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition or results[182] Risk Factors No material changes have occurred with respect to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes have occurred with respect to the risk factors disclosed in the 2018 Form 10-K[183] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2019, the company repurchased 347,740 shares for $5.0 million under its share repurchase program, with approximately $45.0 million remaining available through December 31, 2020 Issuer Purchases of Equity Securities (Q1 2019) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Dollar Value of Shares that May Yet be Purchased (end of period) | | :--- | :--- | :--- | :--- | | Jan 2019 | — | $ — | $50,000,000 | | Feb 2019 | — | $ — | $50,000,000 | | Mar 2019 | 347,740 | $14.56 | $44,989,000 | - The Board of Directors authorized a stock repurchase program on August 1, 2018, allowing the company to repurchase up to $50 million of its common stock through December 31, 2020[185] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files