Investor Presentation January 2016 Heritage Insurance Holdings, - - PowerPoint PPT Presentation

Investor Presentation

January 2016 Heritage Insurance Holdings, Inc. (NYSE:HRTG)

1 Safe Harbor Statement This presentation contains “forward-looking statements” that are based on management’s beliefs and assumptions and on information currently available to

• management. Most forward-looking statements contain words that identify them as forward-looking, such as “anticipates,” “believes,” “continues,” “could,”

“seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives

• f those terms that relate to future events. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause

actual results, performance or achievements of Heritage Insurance Holdings, Inc. (“Heritage”) to be materially different from any projected results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements represent the beliefs and assumptions

• f Heritage only as of the date of this presentation and Heritage undertakes no obligation to update or revise publicly any such forward-looking statements,

whether as a result of new information, future events or otherwise. As such, Heritage’s future results may vary from any expectations or goals expressed in, or implied by, the forward-looking statements included in this presentation, possibly to a material degree. Heritage cannot assure you that the assumptions made in preparing any of the forward-looking statements will prove accurate or that any long-term financial or operational goals or targets will be realized. For a discussion of some of the important factors that could cause Heritage’s results to differ materially from those expressed in, or implied by, the forward-looking statements included in this presentation, investors should refer to risks identified in Heritage’s Annual Report on Form 10-K for the year ended December 31, 2014, subsequent Quarterly Reports on Form 10-Q and Heritage’s other filings with the Securities and Exchange Commission.

Disclaimer

A Unique Growth Opportunity in P&C Insurance

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Deep Relationships with Highly Rated Reinsurers Continued Opportunity in Florida & Multi-State Expansion Underway Unique Claims Servicing Model Proven Underwriting and Policy Acquisition Capabilities Seasoned Management Team Strong, Conservative Capital Structure

Investment Case

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• Founded in 2012 to provide personal residential insurance in Florida
• Business has expanded to include commercial residential; policies in force

have grown to ~240K, or ~$542MM in annualized premium as of 9/30/15

Business

• 2013: 45.0% ROAE(1)
• 2014: 26.5% ROAE(1)
• First 9-mos 2015: 32.8% ROAE(2)

Demonstrated ROE Potential

• Rated “A” (Exceptional) by Demotech; $332MM GAAP equity as of 9/30/15
• Conservative reinsurance program, which includes pre-paid

reinstatements, designed to capitalize on favorable pricing dynamics

Strong Balance Sheet

• Vertically integrated, end-to-end claims resolution
• Contractors’ Alliance water mitigation / restoration contractor

subsidiary is key competitive advantage

Unique Claims Servicing Model

• Citizens depopulations, voluntary policy growth, multi-state expansion

and M&A

• Expansion in commercial residential and general liability

Sustainable Market Opportunity

(1) ROAE = Net income / (Beginning stockholders equity + ending stockholders equity / 2 ) (2) ROAE = (Net Income first nine-months / 3) * 4 / (Beginning stockholder equity + ending stockholders equity / 2)

Source: FLOIR, Citizens, SNL Financial. (1) University of Florida, Bureau of Economic and Business Research, Florida Population Studies, Bulletin 169, June 2014. (2) Market share defined by Direct Premiums Written. Excludes insurers who only operate in Florida and Citizens (3) Excludes State Farm

1-50 50-500 >5000 Population by sq. mile

The Market: Attractive Florida Market Dynamics

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• Capturing opportunity in Florida
• Florida is 3rd largest U.S. state and is projected to grow over 36% by 2040(1)
• Population is skewed toward hurricane-prone coastal areas
• Market dislocation following Hurricane Andrew accelerated post 2004/2005 seasons
• National & regional insurers reduced exposure in Florida with market share declining 87% in 1999 to

32% in 2013, creating opportunity for FL specialists (2)

Heritage has opportunistically grown its market share to become the 4th largest FL domestic personal and commercial lines insurer by gross premium written as of 6/30/15(3)

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History: Strategic Approach to Market Opportunities

2012

• Initial $23MM equity

raise

• Began writing

voluntary policies in Florida

• Participated in 1st

Citizens take-out

2013

• Formed the CAN

Managed Repair Vendor Program

• Second $33MM equity

raise

• Formed Osprey Re
• Participated in 5

Citizens personal residential take-outs totaling ~90K

2014

• IPO: NYSE “HRTG”
• Acquired the assets of

SVM (water mitigation firm) and formed Heritage Claims Response Team

• Built commercial

residential department

• Acquired SSIC

policies

• Participated in ~57K

personal and 2.2K commercial take-outs

2015

• Acquired BRC

Restoration Specialists

• Approved to write

P&C in North & South Carolina

• Participated in ~46K

personal and 333 commercial take-outs through 3Q15

• Announced

acquisition of Zephyr

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Transaction

• Acquisition of Zephyr by Heritage in an

all-cash transaction Deal Value

• $120mm purchase price, subject to

closing GAAP book value adjustments Financing

• Cash on hand

Approval and Timing

• Customary regulatory approval
• Expected closing during Q116

Other

• Zephyr management team and

employees to remain in place

• Opportunity for substantial reinsurance

savings from diversification

Zephyr Overview

• Zephyr Insurance Company (“Zephyr”) is a specialty

property insurance company domiciled in Hawaii and headquartered in Honolulu, HI

• Founded in 2000, owned by privately-held Ocean Harbor

Insurance Group

• Led by President Richard Toyama with 15 employees

focused on providing differentiated customer service to policyholders

• One of the largest residential insurers in Hawaii with LTM

GPW $68mm and ~30% of the wind-only market share

• Product: single peril residential hurricane-only policies to

Hawaii residents

• Distribution: Network of 80 independent agents and

through partnerships with other insurers

• Key Statistics:
• 6/30/15 LTM Net Income(1): $10MM
• 6/30/15 Capital & Surplus: $58MM
• Rating: Financial Strength Rating of A’ from Demotech

Transaction Highlights

Overview of Zephyr Transaction

1) Net income negatively impacted due to elimination of quota share in June 2015. Excluding quota share estimated annual net income ~$13MM

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• Obtain consistent market-leading position in Hawaii property insurance market
• Accelerate diversification strategy and generate substantial reinsurance savings

from uncorrelated exposure

• Further Heritage’s position as a leading coastal property insurer – hurricane-only

product offering complements Heritage’s portfolio

• Attractive, seasoned book of business with long track record of profitability
• Long-tenured management team continues to manage business locally with

additional experience provided by Heritage

• Enhances scale in coastal insurance market
• Generates attractive shareholder returns with immediate EPS accretion and clear,

achievable synergy potential

Strategic Rationale

Zephyr: Expanding Leadership in Coastal Markets

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Since IPO: Delivering on Growth and Strategic Initiatives

• Opportunistic policy assumptions
• ~240K policies in force as of 9/30/15, 74% assumed from Citizens
• ~$60MM in premium acquired from Sunshine State Insurance Company (SSIC)
• Incremental 2015 Citizens take-outs: July ~6,500 policies; Sep ~26,000 policies; Oct

~11,600 policies and Nov take-out in process, anticipating ~5,000 policies after opt-outs

• Diversification
• Growing commercial book, commercial underwriting team established
• Multi-state growth, approved in North Carolina and South Carolina, applications

submitted in Massachusetts, Georgia, Alabama and Mississippi

• Zephyr acquisition provides immediate presence in Hawaii; opportunistic M&A
• Optimal Reinsurance Program 2015-2016
• Favorably priced, multi-year reinsurance (~$1.8B first event, ~$2.2B total)
• Completed $200MM Citrus Re CAT bonds in 2014; $277MM in 2015
• Grow Florida Market Share
• Approval on take-outs from State Farm, Allstate, B&B, AAA Insurance
• Network of ~3,500 independent agents
• Enhance Claims Handling and Repair Services
• Acquisition of Contractors Alliance Network for water mitigation & loss containment
• BRC Restoration Specialists adds fire, mold, roofing services & add’l water mitigation

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Executing Voluntary Business Strategy

5,000 10,000 15,000 20,000 2014 2015*

Commercial Lines Premium Written(1)

$(000)

• Personal Lines Voluntary
• New policies bound were

approximately 5,600 polices in 3Q15

• Inforce written premium of $55MM

in 3Q15, +49% from year-end

• Inforce written premium including

SSIC $96MM in 3Q15

• Commercial Lines Voluntary
• Entered market in 4Q14 with the

acquisition of American Strategic Insurance underwriting team

• New premium written in 3Q15
• ver $6MM; record production

levels for the month of October

• Inforce written premium of $27MM

in 3Q15, +371% from year-end

• Commercial offers attractive biz

mix-shift given lower loss ratios

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

• 5,000

10,000 15,000 20,000 2013 2014 2015*

Personal Residential(1)

New Policies Bound Inforce Written Premium

Inforce (000)

(1) Excludes SSIC policies and premium. NOTE: * First nine months of 2015

Policies

Capturing Share in Commercial Residential

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Total Premiums Written (6/30/15 in Force) Attractive Historical Loss Ratio Total Premiums Written (9/30/14 in Force)

American Capital Assurance Co.

$(MM)

Source: Citizens, FLOIR, Company Filings. (1) CPIC Claims Data.

American Capital Assurance Co.

(1, 2)

Gross Loss Ratio (’09-’14 Average)

$4.6 $6.8 $9.5 $10.5 $56.7 $63.5 $74.1

$87.3

$202.4 $319.9

$3.5

$4.5 $6.2 $8.4 $8.4 $65.6 $71.0 $86.1 $311.9 $403.3

American Capital Assurance Co.

$(MM)

6.9% 5.5% 4.0%

• Key underwriting factors:
• Suitability of risk
• Adequacy of premium for risk
• Impact on overall geographic mix
• Internally underwritten / supervised by Chief Underwriting Officer & supported by Chief Actuary
• Strict underwriting guidelines promote consistent profitability
• Active inspection process
• Ineligible properties
• Leverage proprietary data analytics and capabilities
• Fully integrated with reinsurance strategy – ability to model impact to reinsurance costs in real time

Superior Underwriting + Continual Improvement

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In-house Underwriting Capability

Peers Sinkholes: X Screen Enclosures: X Aging Roof: X Existing Damage: X Vacant / Unoccupied: X

Minimal Exposure to Risky Structures

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• Agreements with five large national insurance companies / agencies:
• Advance take-out approvals cover more than 5,100 agents (responsible for writing more

than 85% of eligible personal residential policies held by Citizens as of December 31, 2014)

• Network of ~3,500 independent agents

– Partnership with FAIA Member Services (“FMS”) expands agent relationships – ~62,000 personal lines voluntary policies(1) in force as of Sep 30, 2015, currently writing additional ~2,000 per month(2) – ~$29MM commercial inforce written premium(1) as of Sep 30, 2015

• Significant potential for future growth; new state expansion

Voluntary Business Agency Relationships

Strong, Diverse Distribution Relationships

(1) Includes SSIC (2) Average personal lines voluntary policies written per month during the first nine months ended Sep 30, 2015.

Differentiated Model: Vertically-Integrated Claims Management

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Decreased Claims Severity Reduced Loss Experience Shortened Claim Tail Increased Renewal Rate

Notice of Loss

Seamlessly integrated with claim system

Inspection

On-site inspection typically within hours

Adjusting

In-house claims adjusters

Repair & Restoration

Water mitigation & repairs performed by Heritage and Heritage-sponsored vendors

Capitalizing on Favorable Reinsurance Dynamics

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2015-16 Reinsurance Program(1)

(1) For the year ending May 31, 2016 Osprey Osprey $20mm

• Conservatism & Strength of Program
• Most important part of risk

management strategy and single largest cost

• Model inputs validated by full time

catastrophe risk manager

• Ability to access alternative

reinsurance markets and benefit from favorable pricing

• Multi-year coverage mitigates

uncertainty in future pricing

• Early to recognize and allocate

meaningful coverage in the ILS market

• Purchased coverage well in

excess of regulatory requirements – low retentions

$1.8B $1.7B $1.7B $1.5B $1.3B $1.3B $1.2B $339M $321M $154M $35M $15M Top & Drop II NIL Top & Drop I NIL Citrus Re 2015 Class A and 2014 Class 1 Notes NIL Citrus Re 2014 Class A Notes NIL Layer 2 RPP Mandatory FHCF 75% of $1,004M xs $336M Citrus Class B Citrus Class C Layer 2 1 @ 100% Layer 1 1 @ 100% Layer 1 RPP $20M xs $15M NIL $15M Retention

Modeled Results Demonstrate Program Strength

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Description

Worst Individual Storm – Hurricane Andrew Worst Calendar Year – 2004 Hurricane Season

Probability

1:31 years 1:181 years

% of Coverage Exhausted

40.2% 17.8%

• Sufficiency of our reinsurance program is tested in the AIR US Hurricane Model

(Touchstone v3.0)

• Testing includes replication of the worst individual storms and calendar years of multiple

events that have occurred in Florida’s history

• Modeled results show ability to withstand worst catastrophic events

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Attractive Financial Profile

Disciplined Model Focused on Profitable Growth

$43 $219 $436 $419

27.5% 28.7% 26.8%

32.0% 28.2% 26.9% 22.0% 22.5% 19.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Gross Loss Ratio Ceded Premium Ratio Gross Expense Ratio

Annual Gross Premiums Written

$(MM)

Gross Combined Ratio

NOTE: * First nine months of 2015

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Building a Track Record of Consistent Growth

Strengthening Strategic Position

($6) $34 $47 $72

Net Income

$(MM)

NOTE: * First nine months of 2015

27 63 173 194 200 201 28 101 255 288 312 332 $0 $50 $100 $150 $200 $250 $300 $350 FY12 FY13 FY14 1Q15 2Q15 3Q15 Capital & Surplus Equity

Strong Balance Sheet

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• One of the best capitalized Florida insurers – $201 million in surplus
• Additional capital provides further cushion on a consolidated basis
• 100% equity capital financed, no reliance on quota share agreements to support

underwriting (all reinsurance bought on excess of loss basis)

• Low risk investment portfolio: minimum weighted average credit quality of “A”
• Conservative capital structure to promote sustainability and growth

Best-In-Class Capital Structure

($MM)

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• Favorable Florida demographics
• Voluntary residential insurance expansion
• Commercial residential
• Coastal state expansion
• Incremental Citizens take-outs

Industry Leading Growth and ROE Potential Multiple Avenues for Profitable Growth

• Proprietary underwriting analytics
• Deep management & technical expertise
• Vertically integrated claims management

reduces losses

• Favorable reinsurance dynamics with

deep reinsurance relationships

• Conservative capital structure and risk

management culture

Differentiated Business Model

A Unique Growth Opportunity in P&C Insurance