Investor Presentation - (NYSE: HRTG) January 2020 - Heritage Insurance
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Investor Presentation
(NYSE: HRTG)
January 2020
SAFE HARBOR Statements in this presentation 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,” “approximate,” “plan,” “intend,” “could,” “would,” “estimate,” or similar expressions are intended to identify forward‐looking statements. Forward looking statements include, but are not limited to, statements about the Company’s expectations with regard to net investment income, underwriting margins and capital to support future premium growth and expansion initiatives. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that could cause the Company’s actual results to differ materially from those expressed or implied by such forward‐looking statements. Such risks and uncertainties include, among other things, risks related to the possibility that actual losses may exceed reserves; the concentration of the Company’s business in coastal states, which could be impacted by hurricane losses or other significant weather‐related events such as northeastern winter storms; the Company’s exposure to catastrophic weather events; increased costs of reinsurance, non‐availability of reinsurance, and non‐collectability of reinsurance; the Company’s failure to effectively manage its growth and integrate acquired companies; increased competition, competitive pressures, and market conditions; the Company’s failure to accurately price the risks it underwrites; the inherent uncertainty of the Company’s models and reliance on such models as a tool to evaluate risk; the failure of the Company’s claims department to effectively manage or remediate claims; low renewal rates and failure of such renewals to meet the Company’s expectations; the Company’s failure to execute its diversification strategy; failure of the Company’s information technology systems and unsuccessful development and implementation of new technologies; a lack of redundancy in the Company’s operations; the Company’s failure to attract and retain qualified employees and independent agents or loss of key personnel; the Company’s inability to generate investment income; the Company’s inability to maintain its financial stability rating; effects of emerging claim and coverage issues relating to legal, judicial, environmental and social conditions; the failure of the Company’s risk mitigation strategies or loss limitation methods; changes in regulations and the Company’s failure to meet increased regulatory requirements; and other matters described from time to time by the Company in its filings with the Securities and Exchange Commission, including, but not limited to, those set forth in its Annual Report on Form 10‐K for the year ended December 31, 2017 and subsequent Quarterly Reports on Form 10‐Q (or such other reports that may be filed with the SEC). 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, except as required by law. Non‐GAAP Financial Information: This presentation includes financial measures that are not presented in accordance with generally accepted accounting principles in the U.S. (GAAP). A reconciliation of these non‐GAAP financial measures to the most directly comparable GAAP financial measure can be found in the Appendix to this presentation on slide 25. Note: This presentation also contains information regarding securities analyst consensus and other financial professionals’ estimates of certain financial items for Heritage and other industry participants derived from reports of FactSet Research Systems (“FactSet”). These estimates are projections made by securities analysts and other financial professionals who cover Heritage and other industry participants. Any opinions, forecasts, estimates, projections or predictions regarding Heritage’s performance made by such third parties (and, therefore, such estimates) are theirs alone and do not represent the opinions, forecasts, estimates, projections or predictions of Heritage or its management. By providing these estimates, Heritage does not imply its adoption of, endorsement of or concurrence with such information, conclusions or recommendations. Heritage assumes no liability for the accuracy of such estimates and undertakes no liability to update or revise such estimates based on new information or otherwise. January 2020 Investor Presentation 2
TABLE OF CONTENTS
COMPANY OVERVIEW
Company snapshot………………………………………………………………………………………………………………………………………………………………………. 5
Timeline of events..……………………………………………………………………………………………………………………..………………………………………………. 6
Management team.……………………………………………………………………………………………………………………………………………………………………… 7
Corporate structure..………………………………………………………………………………………………………………………………………………….……………...... 8
Book of business……………………………………………………………………………………………………………………………………..…………………………………… 9
In‐force metrics……………………………………………………………………………………………………………………………………………………………………………. 10
Distribution………………………………………………………………………………………………………………………………………………………………………….......... 11
Reinsurance program…………………………………………………………………………………………………………………………………………………………………… 12‐13
Investments……………………………………………………………………………………………………………………………………………………………………….……..…. 14
INVESTMENT CONSIDERATIONS
Value proposition…………………………………………………………………………………………………………………………………………………………………......... 16
Underwriting performance, capital management and underwriting leverage…………………………….………………………………………………... 17‐19
Diversification strategy…………………………....…………………………………………………………………………………………………………………………...…….. 20‐21
Book value per share growth, ROEs and valuation……………………………………………………………………………………………………………………….. 22‐24
Appendix: Reconciliation of GAAP and non‐GAAP measures………………………………………………………………………………………………….…….. 25
Investor relations contact details………………..……………………………………………………………………………………………………..………………….……… 26
Note 1: all market data as of the close on 1/8/2020 unless otherwise noted
Note 2: all non‐market data as of 9/30/2019 unless otherwise noted
January 2020 Investor Presentation 3
Company overview
Heritage Insurance
COMPANY SNAPSHOT
What we do: Heritage Insurance Holdings, Inc. is a super‐regional property and casualty insurance holding company
with over $900 million of gross personal and commercial residential premium across it’s multi‐state footprint.
QUICK FACTS MARKET/FINANCIAL DATA
Active personal residential insurer in 12 coastal US NYSE: HRTG
states & licensed in 4 additional states
Market Cap/Stock Price: $386 million/$13.08
6th largest homeowners insurer in FL and 22nd
nationwide (as of 12/31/2018) Annual Dividend/Yield Per Share: $0.24/1.8%
Active commercial residential insurer in FL & NJ Remaining share repurchase authorization: $38.1 million
2nd largest admitted commercial residential insurer in FL Total Equity/BVPS: $445.2 million/$15.37
and 7th largest commercial multiple peril (CMP) insurer
in the state (as of 12/31/2018) Total Assets: $1.8 billion
Vertically integrated structure with in‐house In‐Force Gross Premiums: $926.8 million
underwriting, actuarial, customer service, claims
Financial Strength Ratings:
processing and adjusting functions (3rd parties used as
needed) Demotech: HPCIC (A), NBIC (A), ZIC (A Prime)
Kroll: HPCIC (BBB+), NBIC (A‐), ZIC (BBB+)
489 employees (481 full‐time)
Investment grade issuer rating (Kroll: “BBB‐”)
Founded in 2012, followed by IPO in 2014
Headquartered in Clearwater, FL
January 2020 Investor Presentation 5
THE HERITAGE STORY
Founded in 2012, Heritage has quickly grown into a leading coastal US P&C insurer.
2012 2014 2016 2018
Company inception HRTG IPO (NYSE): Began writing PRES in NC & SC, Received KBRA financial
Started writing $11/share beginning of multi‐state expansion strength and investment grade
voluntary personal Sunshine State policy Acquired Zephyr, a wind‐only HO issuer ratings
residential (PRES) assumption insurer in HI CAN expansion to non‐FL states
business in FL Launched commercial Launched GL insurance in FL GEICO relationship expands
Participated in first residential (CRES) Commenced Nat Gen partnership Commenced Safeco (Liberty
personal division and participated AoB begins to meaningfully impact Mutual) partnership
residential in first commercial results Eliminated majority of
assumption from residential assumption Final year Heritage participated in convertible debt used to
FL Citizens from FL Citizens Citizens assumptions acquire NBIC
2013 2015 2017 2019
Formed Contractors’ Alliance Initiated quarterly Began writing PRES in Began writing PRES in VA
Network (CAN) in FL, Heritage’s cash dividend GA and AL Began writing CRES in NJ
vendor managed repair program Sawgrass Mutual policy (first CRES expansion
Formed Osprey, a captive assumption outside FL)
reinsurer. Acquired NBIC, a coastal Expanded product
Retroactive quota share HO insurer in NY, NJ, CT, offering in Hawaii
reinsurance agreement with RI & MA
Citizens
January 2020 Investor Presentation 6
EXPERIENCED MANAGEMENT TEAM
Bruce Lucas: Chairman & CEO Richard Widdicombe: President Ernie Garateix: Chief Operating Officer
Co‐founded Heritage in 2012 and Co‐founded Heritage in 2012 and has Has been in his current role since
has been with the company since been with the company since inception 2014, prior to which he served as
inception Executive Vice President since the
Prior to Heritage, Mr. Widdicombe company’s 2012 founding
Prior to Heritage, Mr. Lucas was served as Risk Manager of Homeowners
CEO of Infinity Investment Funds, Choice Property & Casualty Insurance Prior to Heritage, Mr. Garateix
a value‐oriented hedge fund Company served as Vice President of
Operations at American Integrity
Before that, Mr. Lucas was an Before that, Mr. Widdicombe was Insurance Group
attorney with Weil, Gotshal & President of People’s Trust Insurance
Manges where he represented Company and previously served as Before that, Mr. Garateix was
large institutional clients such as president of FedNat, both of which are Associate Vice President of IT at
Enron and GE Florida‐based property insurers FCCI Insurance Group
Kirk Lusk: Chief Financial Officer Arash Soleimani: Executive Vice President Randy Jones: President, Commercial Division
Has been in his current role Has been in his current role since 2018 Has been in his current role since 2014
since 2018 Prior to Heritage, Mr. Jones was SVP of
Prior to Heritage, Mr. Soleimani was a
Joined Heritage in 2017 via the sell‐side equity research analyst American Strategic Insurance’s (ASI)
acquisition of NBIC Holdings, covering the P&C insurance sector at commercial division
Inc., where Mr. Lusk was also Keefe, Bruyette & Woods (KBW) and Before that, Mr. Jones served in
Chief Financial Officer. Stifel Financial management at other insurance
Before that, Mr. Lusk was Before that, Mr. Soleimani worked in enterprises including Marsh &
International Chief Financial Deloitte’s Audit & Enterprise Risk McLennan Companies
Officer of Aetna, Inc., Chief Services division Mr. Jones holds the American Risk
Financial Officer of Alea Group Manager (ARM) and Certified Property
Holdings Bermuda Ltd. and Mr. Soleimani is a CFA charterholder
and a licensed CPA Insurance Adviser (CPIA) designations
Chief Financial Officer of GE
ERC Global Casualty and GE
Capital Auto Warranty Services
January 2020 Investor Presentation 7
VERTICALLY INTEGRATED STRUCTURE
Unique, vertically integrated structure reduces our reliance on third parties, benefiting our loss, LAE and
operating expenses, while also serving as a hedge during catastrophe years.
Vertically integrated structure reduces our earnings volatility, supporting P/E‐based valuation for HRTG.
MGA structure allows us to meet holding company capital needs (e.g., debt servicing, share repurchases,
M&A, etc.)
ORGANIZATIONAL STRUCTURE
Risk bearing entity Heritage Insurance
(AL, GA, FL, MS, NC, SC) Holdings, Inc.
(NYSE: HRTG)
Heritage Property & Contractors’ First Access
Zephyr Acquisition Heritage Insurance Skye Lane
Casualty Insurance NBIC Holdings, Inc Heritage MGA, LLC Alliance Network Osprey Re Ltd. Insurance Group,
Company Claims, LLC Properties, LLC
Company (HPCIC) (CAN) LLC
Provides HPCIC & ZIC with Mitigation and Captive reinsurer Subsidiary that owns
NBIC Financial NBIC Service Westwind
HI Holdings, Inc. underwriting, personnel construction Heritage’s corporate
Holdings, Inc. Company Underwriters, Inc.
and other services division, serves as headquarters
a hedge in
Provides NBIC with catastrophe years
Narragansett Bay
underwriting, personnel Zephyr Insurance
Insurance Risk bearing entity (HI)
and other services Company, Inc. (ZIC)
Company (NBIC)
Risk bearing entity (CT, RI, MA, MD, PA, NY, NJ, VA)
January 2020 Investor Presentation 8
BOOK OF BUSINESS
As of 3Q2019, we have $926.8 million of gross premiums in‐force across three statutory insurance entities (Heritage/NBIC/Zephyr) and write two main
lines of business, including personal residential (PRES) and commercial residential (CRES). We also write some commercial general liability (CGL)
insurance. We’re actively writing in twelve states, but have licenses in sixteen.
PREMIUM SPREAD TIV SPREAD
Includes: PRES in AL, CT, GA, NC, Other Includes: PRES in AL, CT,
Other, 8.6% RI, SC, VA, FL CGL & NJ CRES 11.0% GA, NC, RI, SC & NJ CRES
HI, 5.8% MA
MA, 6.7% 8.7% FL PRES
23.9%
FL PRES, 43.9%
HI
NJ, 7.7% FL CRES
10.4%
6.1%
NJ
NY, 19.8% 11.7%
FL CRES, 7.6% NY
28.3%
= actively writing PRES = personal residential • CRES = commercial residential • CGL = commercial general liability • TIV = total insured value
= licensed
CT, DE, MA, MD, PA,
AL, FL, GA,
NJ, NY, RI, VA HI
MS, NC, SC
3 Statutory Insurance Entities:
January 2020 Investor Presentation 9IN‐FORCE METRICS
Florida property insurance accounts for 51.5% of Heritage’s consolidated gross premiums in‐force, but it only reflects 30.0% of property
insurance total insured value (TIV) – the $5.16 Florida PRES average premium per $1,000 of TIV is almost triple the $1.92 non‐Florida average
(Florida’s more expensive policies reflect its higher hurricane risk), while the $364,805 Florida PRES average insured value is well below the
$770,874 average for non‐Florida states (property values in Florida trail those in Heritage’s northeast US states).
TIV Metrics (Property) IN‐FORCE METRICS ($ in millions )
Gross Premiums In‐Force
$1,000,000 $12.0 YE2015 YE2016 YE2017 YE2018 3Q2019
$9.85
Average insured value per policy
$900,000 PRES $478 $516 $850 $837 $851
$10.0
$800,000
Premium/$1K TIV
CRES $113 $119 $90 $83 $70
$770,874
$700,000 CGL $0 $1 $2 $4 $6
$8.0
$600,000 Total $592 $635 $942 $924 $927
$5.16
$4.88
$500,000 $6.0
$4.04
$3.53
$400,000 Policies In‐Force
$4.0
YE2015 YE2016 YE2017 YE2018 3Q2019
$1.92
$300,000 $7,952,364
PRES 253,726 318,824 518,957 508,424 515,258
$364,805
$374,860
$328,068
$450,486
$200,000
$2.0
$100,000 CRES 3,405 3,625 3,100 2,973 2,509
$0 $0.0 CGL 0 852 2,393 4,289 6,507
FL PRES
Non‐FL PRES
FL PRES ex‐TC
CRES
FL PRES TC
FL PRES & CRES
Total 257,131 323,301 524,450 515,686 524,274
Total Insured Value (Property)
YE2015 YE2016 YE2017 YE2018 3Q2019
Average insured value (left axis) Premium/$1K TIV (right axis) PRES $72,102 $109,888 $289,974 $296,432 $309,498
CRES $22,764 $26,367 $22,832 $23,038 $19,952
PRES = personal residential Total $94,866 $136,256 $312,806 $319,470 $329,451
CRES = commercial residential
TC = Tri‐County (FL)
January 2020 Investor Presentation 10DISTRIBUTION
• Over 6,000 appointed producers across our multi‐state platform
Overview
• Relationships with multiple auto carriers, whereby the policyholder receives a bundled
product discount.
• Over 2,300 actively writing independent agents
• 35% of voluntary premium is written by agents affiliated with eight large agency networks that
HPCIC have master agency agreements with HPCIC
• CRES policies are written through roughly 400 independent agents in FL
• Relationships with multiple auto carriers
• Roughly 175 retail independent agents representing approximately 500 agency locations
NBIC
• 8 wholesale relationships that have access to 1,500 retail locations
• Relationships with 70 actively writing independent agencies
Zephyr
• 52% of voluntary premium is written by agents affiliated with three large agency networks
January 2020 Investor Presentation 11CATASTROPHE REINSURANCE PROGRAM
Heritage has a conservative 2019‐2020 catastrophe reinsurance program, protecting the
Company against hurricanes and severe weather events and reducing earnings volatility.
Substantial severity and frequency protection.
Significantly increased return period to the highest level in the Company’s history.
$1.5 billion first event reinsurance exhaustion point in the southeast.
Heritage's first event retentions in the southeast and Hawaii remain at $20 million, accounting for
4.6% of second quarter 2019 GAAP equity (pre‐tax), down from 5.2% in the prior year. First event
retention increases slightly in the northeast to $13.8 million from $12.8 million in the prior year,
but accounts for just 3.1% of second quarter 2019 GAAP equity (pre‐tax), down 20 basis points
year‐over‐year.
Reduced catastrophe reinsurance spend by $10 million vs. prior year. Total cost to Heritage of
$249.2 million (27.0% of second quarter 2019 premiums‐in‐force), down from $259.5 million
(27.9% of second quarter 2018 premiums‐in‐force) last year.
Heritage’s third‐party reinsurers are rated “A‐” or higher by A.M. Best or S&P or are fully
collateralized.
Note 1: 2019‐2020 catastrophe reinsurance program commentary based on 8/31/2019 projections (AIR v6, hurricane only, long term view with demand surge).
January 2020 Investor Presentation 12CONSERVATIVE REINSURANCE RETENTION
AFTER‐TAX FIRST EVENT FLORIDA RETENTION AS % OF 3Q2019 GAAP EQUITY
9%
8.2%
8%
6.9% 6.9%
7%
6.5%
5.9%
6%
5%
4%
3.4%
3%
2%
1%
0%
HRTG FL peer median UVE HCI FNHC UIHC
Note 1: Based on 2019‐2020 catastrophe reinsurance programs.
Note 2: Assumes a modeled 1‐in‐50‐year first event for HPCIC based on 8/31/2019 projections (AIR v6, hurricane only, long term view with demand surge).
Note 3: Excludes reinsurance reinstatement premiums and income from vertically integrated operations.
Note 4: UVE retention includes both UPCIC & APPCIC and FNHC retention includes both FNIC and MNIC, but excludes PIH.
Note 5: Calculation based on 21.0% and 5.5% US federal and Florida statutory corporate income tax rates, respectively.
Source: Peer company reports.
January 2020 Investor Presentation 13INVESTMENT PORTFOLIO
Heritage has a very conservative investment portfolio, consisting predominantly of low duration, fixed income
securities. As of 3Q2019, duration was 3.5 years, 0.2 years above 2Q2019 and 0.1 years below 3Q2018.
INVESTMENT PORTFOLIO BREAKDOWN (3Q2019) NET INVESTMENT INCOME PERFORMANCE
US government, $700 3.0%
Other, 4.5%
9.8%
2.5%
Net investment income yield
$600 2.4%
Investments ($ in millions)
2.5%
Munis, 12.6%
Industrial & misc. $500
2.0%
1.9%
bonds, 31.4% 1.8% 2.0%
1.6%
$400
1.4%
1.5%
$300
1.0%
$200
0.5%
$100
$331.2
$400.1
$603.0
$567.0
$528.6
$645.1
$136.2
$0 0.0%
Special revenue 2013 2014 2015 2016 2017 2018 3Q2019 YTD
bonds, 41.8%
Investments (left axis) Net investment income yield (right axis)
January 2020 Investor Presentation 14Investment considerations
Heritage InsuranceVALUE PROPOSITION
Compelling • Currently trading at significant discount to peers, despite attractive relative ROE and income metrics
financial metrics • Consistent track record of double‐digit book value growth
• Vertically integrated structure provides a hedge in catastrophe years, reducing loss retention and
Business model designed further reducing earnings volatility, supporting use of P/E‐based valuation for HRTG
to reduce earnings
volatility • Solid reinsurance program, including lowest reinsurance retention in FL peer group as a % of equity;
protects against hurricanes and other severe events, reducing earnings volatility
• Organic premium growth, fueled by relationships with independent agents and auto carriers
Growth & • Diversification initiatives and re‐underwriting efforts in Florida’s Tri‐County – including rate
underwriting increases, policy form enhancements and conservative policy selection – should benefit
outlooks underwriting margins
improving • Commercial residential business serves as an AoB‐hedge in Florida and provides us with additional
growth opportunities
• Investment grade debt rating provides easy access to capital, allowing nimble response to market
opportunities as they arise
Prudent capital
management • Below‐peer operating leverage = ample capital to fuel our growth
• Track record of capital return via share repurchases and regular dividend
• Successful M&A execution provides synergies and access to new markets
Management has • Significant insider ownership aligns management’s interest with shareholders
significant skin in the • CEO owns 2.7% of outstanding shares
game • President owns 2.3% of outstanding shares
• Total insider ownership = 12.6% of outstanding shares
January 2020 Investor Presentation 16UNDERWRITING PERFORMANCE
Heritage has experienced significant premium growth since inception, stemming primarily from Citizens
depopulation transactions through 2015 and from M&A and organic growth in subsequent years.
Heritage’s premium growth is unprecedented, reaching almost $1 billion of gross in‐force premiums 5 years after the company’s founding. The modest
premium decline in 2018 stemmed from Tri‐County FL exposure reduction efforts in response to litigation abuse and FL CRES de‐risking.
IN‐FORCE PREMIUM
$1,000 $942.4 $923.7 $926.8
$900 55.4 53.5 53.4
$800
331.5
$700 337.2 351.0
$635.3
$591.5
$600 58.1
113.5 118.6
$500 $461.3 90.1
82.7 70.4
$400 94.1
$300
$200.1
$200 0.0
$100 $51.6
200.1 367.2 478.1 458.6 465.4 450.2 451.9
$0
2012 2013 2014 2015 2016 2017 2018 3Q19
HPCIC ex CRES FL CRES NBIC Zephyr
January 2020 Investor Presentation 17UNDERWRITING PERFORMANCE (CONTINUED)
Heritage’s underwriting operation has outperformed peers almost every year since inception.
SOLID UNDERWRITING MARGINS
120% 107.0% 115%
104.7%
94.8%
100% 99.2% 95%
87.8% 94.1%
92.8% 90.4%
79.9%
77.1% 84.6%
80% 72.9% 39.8% 75%
71.4% 34.8% 41.0% 38.1%
65.0%
60% 55%
32.4% 31.3%
27.5%
40% 35%
58.0% 59.4%
53.1% 52.3%
20% 40.5% 40.1% 37.5% 15%
0% ‐5%
2013 2014 2015 2016 2017 2018 3Q2019 YTD
Tornadoes, Hurricanes Hurricane Irma & Hurricanes Lane, Southeast hail and
Hermine & Matthew, AOB AoB Florence & wind storms
Citizens takeouts benefit HRTG’s margins Michael, AoB
Loss ratio (left axis) Expense ratio (left axis) Peer median (right axis)
Note 1: Peers include FNHC, HCI, KINS, UIHC & UVE
Source: FactSet and peer company reports
January 2020 Investor Presentation 18CAPITAL MANAGEMENT & OPERATING LEVERAGE
Heritage has been a responsible steward of shareholder capital and currently has $38.1 million remaining on its
share repurchase authorization. Since 2016, the Company has returned $80 million to shareholders through
common share repurchases and dividends.
Heritage’s ratio of trailing‐twelve‐month (TTM) net premiums written to 3Q2019 equity is only 1.0x , among the
lowest in its peer group, which is indicative of its conservative balance sheet. Looking ahead, Heritage has
adequate capital to fuel its premium growth and multi‐state expansion initiatives.
DISCIPLINED CAPITAL MANAGEMENT CONSERVATIVE NET OPERATING LEVERAGE
$60 40% 1.8
Net operating leverage (NPW/Equity)
35% 1.6
34% 35% 1.6 1.5
$50 1.4 1.5 1.5
30% 1.4
$ in millions
27%
$40 1.2
$32.6 24% 25% 1.2
23% 1.0
$30 21% $28.1 20% 1.0
18% 16%
$17.2 15% 0.8
$20 25.6
21.6 0.6
10% 0.6
$8.4 11.9
$10
2.0 5% 0.4
7.0 6.5 6.4 5.4
$0 0% 0.2
2016 2017 2018 3Q2019 YTD
0.0
Dividends Share repurchases
PLMR HRTG HCI FNHC Peer UVE UIHC KINS
Debt‐to‐capital ratio (right axis) Dividend payout ratio (right axis) median
Note: Debt‐to‐capital calculated as debt principal divided by the sum of debt principal and Note 1: Based on trailing‐twelve‐month (TTM) net premiums written as of 3Q2019
stockholders’ equity Source: Peer company reports.
January 2020 Investor Presentation 19DIVERSIFICATION STRATEGY UNDERWAY
% OF CONSOLIDATED PROPERTY TOTAL INSURED VALUE (TIV) IN FLORIDA
100.0% 100.0% 100.0% 100.0% Through a combination of M&A and organic growth,
100% Heritage has been diversifying its book of business to
new states, resulting in a better spread of risk and
90% lower reinsurance costs. Diversification has been
occurring within the FL book too, as Heritage has
34.0% steadily been reducing its personal residential (PRES)
80%
& commercial residential (CRES) exposure to Tri‐
70.6% County, FL (TC). PRES exposure reduction in TC is
70% 58.9% 57.1%
intended to limit exposure to litigation abuse, while
67.6% CRES reduction in TC is intended to reduce
60% concentration risk in the event of a storm.
25.7%
50% 41.3%
40%
15.4% 32.1% 31.6% 30.0%
30%
11.5%
20% 41.1% 40.3% 21.7% 23.3% 23.2%
32.4%
27.5%
10% 17.8% 3.8% 2.9% 2.2%
6.6% 5.5% 4.6%
0%
4Q12 4Q13 4Q14 4Q15 4Q16 4Q17 4Q18 3Q19
Personal Residential: Tri‐County, FL Commercial Residential: Tri‐County, FL Other FL
January 2020 Investor Presentation 20FAVORABLE CLAIMS TRENDS
Heritage’s Tri‐County, FL (TC) exposure reduction efforts are bearing fruit, as the region’s contribution to open
non‐hurricane claim counts continues to decline for both litigated and non‐litigated claims. This is benefiting
overall claims trends – beginning with 1Q18, litigated claims have generally been accounting for a smaller
percentage of Heritage’s non‐hurricane open claims inventory.
Tri‐County, FL (TC) claims are typically more expensive A decline in litigated claims should benefit
given the prevalence of assignment of benefits and underwriting margins, given that litigated claims are
litigation abuse in the region typically more expensive to resolve
TRI‐COUNTY FL NON‐HURRICANE CLAIMS TRENDS LITIGATED NON‐HURRICANE CLAIMS AS % OF TOTAL CLAIMS
31% consists of 55% in
84%
82%
82%
82%
90%
81%
80%
60%
79%
79%
79%
79%
79%
78%
TC and 19% elsewhere,
77%
54%
73%
80% 52% 52%
49% 49% illustrating rationale
67%
66%
50% 46% 45% 45% behind TC de‐risking
63%
70% 44%
61%
58%
59%
56%
41%
55%
55%
55%
55%
54%
39%
52%
51%
51%
60% 38% 37%
49%
40% 35%
47%
46%
34%
44%
33%
31% 31%
41%
50% 31%
39%
38%
30%
40%
27%
21%
30% 20%
20%
10%
10%
0% 0%
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
Tri‐County, FL open litigated claims as % of total open litigated claims (non‐hurricane)
Tri‐County, FL open non‐litigated claims as % of total open non‐litigated claims (non‐hurricane)
Note: Excludes NBIC.
January 2020 Investor Presentation 21SOLID BOOK VALUE PER SHARE GROWTH
Since inception, Heritage has provided investors with solid book value per share growth. Including cumulative dividends
declared, Heritage’s book value per share compound annual growth rate (CAGR) is 26% since the Company’s 2012 inception.
SOLID GROWTH IN BOOK VALUE AND CUMULATIVE DIVIDENDS PER SHARE
$18
$16.32
$16 $15.20 $15.20 $0.95
$0.53 $0.77
$14
$12.70
$11.76 $0.29
$12
$0.05
$10
$8.56
$8 $7.20
$6
$4 $3.38
$2
$11.71
$12.41
$14.67
$14.43
$15.37
$3.38
$7.20
$8.56
$0
2012 2013 2014 2015 2016 2017 2018 3Q2019
Book Value Per Share Cumulative Dividends Per Share
January 2020 Investor Presentation 22ABOVE‐PEER ROE, BUT BELOW‐PEER VALUATION
SOLID ROE PERFORMANCE, EVEN IN HURRICANE YEARS TRADING AT A MEANINGFUL DISCOUNT TO PEERS
RETURN ON EQUITY (ROE) PRICE/BOOK VALUE
Citizens depopulation transactions benefit ROEs Active northeast
US weather &
Hurricanes Lane, 2.0x 1.9x
35%
30.3% Florence & Michael
30% 28.1% 1.5x
Severe 1Q16 FL tornadoes,
Hurricanes Hermine & Matthew 1.5x 1.3x
25%
Southeast hail
20% 1.0x 1.0x
Hurricane Irma and wind 0.9x
1.0x 0.8x
15% 11.1% storms,
9.5% Hurricane Dorian
10% 6.7%
4.8% 0.5x
5%
5.7x
0% 0.0x
2014 2015 2016 2017* 2018 3Q2019 YTD HRTG Peer median FNHC UIHC KINS UVE HCI PLMR
Assignment of benefits (AoB) abuse
PRICE/2020E EPS
2016‐2018 AVERAGE RETURN ON EQUITY VS. PEERS HRTG’s P/E multiple is
16x
16% HRTG’s average ROTE over at an 37% discount to 25.0x
14.4% 14x
HRTG’s average ROE from 2016‐3Q19 the last 3 years has peers
14% 11.6x 11.6x 11.6x 12.1x
YTD has outperformed by 110 bps. outperformed by 730 bps. 12x
12%
10x
10% HRTG* 7.9x
8.1% 7.3x
7.0% 7.1% 8x 6.9x
8% Peer Median
6% 6x
4% 4x
2% 2x
0% 0x
Average Return on Equity Average Return on Tangible Equity HRTG Peer median FNHC UVE KINS UIHC HCI PLMR
*HRTG’s 2017 return on equity (ROE) and return on tangible equity (ROTE) metrics are non‐GAAP and adjusted to exclude a $42.2 million non‐cash, non‐tax deductible charge related to the mark‐to‐market of a
derivative liability associated with the Company’s convertible debt. The derivative liability was reclassified to equity in 4Q17.
Note: ROE represents net income for the period (annualized for 3Q2019 YTD) divided by average stockholders’ equity during the period. The ROTE calculation excludes goodwill and other intangible assets from equity.
Source: FactSet and peer company reports
January 2020 Investor Presentation 23HIGHLY ATTRACTIVE VALUATION RELATIVE TO PEERS
P/E P/BV Return on Equity Return on Tangible Equity
Ticker Company 2019E 2020E Current 2019E 2020E 2016 2017* 2018 3Q19 YTD 2020E 2016 2017* 2018 3Q19 YTD
HRTG Heritage Insurance Holdings, Inc. 15.2 7.3 0.83 0.83 0.75 9.5% 11.1% 6.7% 4.8% 10.7% 10.7% 20.0% 16.9% 10.1%
FNHC FedNat Holding Company 12.3 6.9 0.86 0.85 0.79 0.5% 3.7% 7.0% 4.7% 11.8% 0.5% 3.7% 7.0% 4.7%
HCI HCI Group, Inc. 16.7 12.1 1.88 1.95 1.87 12.1% -3.1% 9.4% 14.7% 15.8% 12.2% -3.2% 9.7% 15.1%
UIHC United Insurance Holdings Corp. NA 11.6 0.96 0.95 0.90 2.4% 2.6% 0.1% -5.6% 8.0% 2.5% 3.2% 0.1% -7.0%
UVE Universal Insurance Holdings, Inc. 14.9 7.9 1.53 1.53 1.59 29.9% 26.4% 24.9% 24.3% 19.7% 30.0% 26.5% 25.0% 24.4%
KINS Kingstone Companies, Inc. NA 11.6 1.01 1.01 0.96 17.5% 13.2% 3.4% -11.3% 8.5% 18.0% 13.4% 3.4% -11.4%
PLMR Palomar Holdings, Inc. 30.4 25.0 5.72 5.40 4.45 9.0% 5.0% 20.9% -0.2% 19.5% 9.1% 5.0% 21.0% -0.2%
Ex-HRTG coastal property median 15.8 11.6 1.27 1.27 1.28 10.6% 4.4% 8.2% 2.2% 13.8% 10.7% 4.4% 8.3% 2.2%
HRTG vs. ex-HRTG coastal property median -3.7% -36.6% -34.4% -34.9% -41.0% -10.2% 155.2% -17.9% 118.7% -22.4% 0.6% 355.8% 102.3% 355.4%
Note: Year‐to‐date (YTD) return on equity (ROE) and
return on tangible equity (ROTE) metrics are annualized.
Source: FactSet and peer company reports HRTG’s large valuation discount doesn’t correspond to its returns relative to peers
NET INCOME ($ in millions) Impact of net MARKET CAP ($ in millions)
unrealized equity $600
$100 $92.5 Impact of net unrealized equity losses on 2018 gains on YTD 3Q2019
NI assuming a 25% $496
net income (NI) assuming a 25% tax rate: $500
$80 UIHC: $(9.3) million PT, $(7.0) million AT tax rate: Despite consistently
HRTG: $(2.1) million PT; $(1.6) million AT UIHC: $15.5 million $377 generating more net
$60 $400
$47.1
PT, $11.6 million AT income, HRTG* has a
$41.0 $41.1 HRTG: $3.4 million lower market
$40 $33.9 $300
$27.4 $27.2 PT; $2.6 million AT capitalization than UIHC.
$20 $15.8
$10.1 $200
$5.7
$0.3
$0
$100
‐$20
‐$21.7 $0
‐$40 HRTG UIHC
2014 2015 2016 2017* 2018 3Q2019 YTD
Note: PT = pre‐tax; AT = after‐tax Source: FactSet and peer company reports
HRTG* UIHC
Source: FactSet and peer company reports
*HRTG’s 2017 net income and ROE are non‐GAAP and adjusted to exclude a $42.2 million non‐cash, non‐deductible charge related to the mark‐to‐market of a derivative liability associated with the Company’s
convertible debt. The derivative liability was reclassified to equity in 4Q17. Please see slide 24 for a reconciliation of HRTG’s non‐GAAP measures to their comparable GAAP measures.
January 2020 Investor Presentation 24APPENDIX: NON‐GAAP RECONCILIATIONS
RECONCILIATION OF GAAP AND NON‐GAAP MEASURES
$ in millions
2017
GAAP Net income (loss) $ (1.1)
Conversion option liability fair value 42.2
Non‐recurring business acquisition related expenses ‐
Tax impact ‐
Adjusted net income $ 41.1
2017
GAAP ROE ‐0.3%
Conversion option liability fair value 11.4%
Non‐recurring business acquisition related expenses 0.0%
Tax impact 0.0%
Adjusted ROE (non‐GAAP) 11.1%
January 2020 Investor Presentation 25ADDITIONAL INFORMATION Arash Soleimani, CFA, CPA Executive Vice President asoleimani@heritagepci.com 727.871.0206 Website: investors.heritagepci.com
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