Investor Presentation April 2016 Disclaimer Safe Harbor Statement - - PowerPoint PPT Presentation

April 2016

Investor Presentation

Disclaimer

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 of 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 of 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

• perational 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 and the Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 8, 2016, subsequent Quarterly Reports on Form 10-Q and Heritage’s other filings with the Securities and Exchange Commission.

1

Attractive Financial Profile

$43 $219 $436 $586

FY12 FY13 FY14 FY15

27.5% 28.7% 26.9% 32.0% 28.2% 28.3% 22.0% 22.5% 19.7%

0% 20% 40% 60% 80% 100% FY13 FY14 FY15 Gross Loss Ratio Ceded Premium Ratio Gross Expense Ratio

Market Share Gains & Disciplined Underwriting Model Drive Profitable Growth

Annual Gross Premiums Written Annual Gross Combined Ratio

$(MM)

74.9% 79.4% 81.5%

2

Track Record of Consistent Growth

($6) $34 $47 $93

FY12 FY13 FY14 FY15

Net Income

$(MM)

Focus Remains on the Bottom Line

+96% y/y

3

Strong Balance Sheet

• One of the best capitalized Florida insurers – $216 million in surplus
• 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

27 63 173 216 28 101 255 357

$0 $100 $200 $300 $400 FY12 FY13 FY14 FY15

Statutory Surplus Equity

($MM)

4

Looking Ahead: Identify New Opportunities

Continued Opportunity in Florida & Multi-State Expansion Underway Deep Relationships with Highly Rated Reinsurers Proven Underwriting & Unique Claims Servicing Model Seasoned Management Team Attuned to Demands of an Evolving Marketplace Strong, Conservative Capital Structure New Product Introductions

5

Investment Case

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

have grown to ~257K, or ~$592MM in annualized premium as of 12/31/15

Business

• 2013: 45.0% ROAE(1)
• 2014: 26.5% ROAE(1)
• 2015: 30.2% ROAE(1)

Superior ROE Potential

• Rated “A” (Exceptional) by Demotech; $357MM GAAP equity as of 12/31/15
• 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
• In-house water mitigation / restoration & reconstruction services is key

competitive advantage

Unique Claims Servicing Model

• Voluntary growth, multi-state expansion, M&A, incremental Citizens assumptions
• Expansion in commercial residential, general liability and other products;

approved in North & South Carolina, Alabama & Mississippi

Sustainable Market Opportunity

(1) ROAE = Net income / (Beginning stockholders equity + ending stockholders equity / 2 )

6

Core Market: Attractive Florida Dynamics

• Capturing Opportunity in Florida
• Florida is the 3rd largest U.S. state and is

projected to grow over 36% by 2040(1)

• Inforce 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 3rd largest FL domestic personal and commercial lines insurer by gross premium written as of 9/30/15(3)

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

7

New Markets: Coastal State Expansion

• Multi-State Expansion Underway
• Hawaii: Zephyr Insurance acquired adding

>$60MM of voluntary premium

• North Carolina: signed on over 100 agents and

wrote approximately 100 policies in the month

• f Feb 2016
• South Carolina: next state to be rolled out;

licensed to write, now finalizing forms and rates

• Alabama & Mississippi: applications approved
• Georgia & Massachusetts: applications

pending

8

Strategic Approach to New Market Opportunities

2012 2013 2014 2015 2016

• Initial $23MM

equity raise

• Began writing

voluntary policies in Florida

• Participated in 1st

Citizens take-out

• Formed the CAN

Managed Repair Vendor Program

• Second $33MM

equity raise

• Formed Osprey Re
• Assumed 5

Citizens personal residential policies totaling ~90K

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

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

• Built commercial

residential department

• Acquired SSIC policies
• Assumed ~57K

personal and 2.2K commercial policies

• Acquired BRC

Restoration Specialists

• Approved to write

P&C in North & South Carolina

• Assumed ~68K

personal and ~830 commercial policies

• Announced

acquisition of Zephyr

• Approved to write

P&C in Alabama & Mississippi

• Closed acquisition of

Zephyr in 1Q16

9

Overview of Zephyr Transaction

• 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

2015 Direct Premium Written $64mm 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:
• 2015 Statutory Net Income: $14MM
• Statutory Surplus at 12/31/15: $68.5MM
• Rating: Financial Strength Rating of A’ from Demotech

Transaction

• Acquisition of Zephyr by Heritage in an

all-cash transaction Deal Value

• $134mm purchase price

Financing

• Cash on hand

Approval and Timing

• Form A acquisition filing with the State
• f Hawaii Insurance Division approved

late February; announced close 3/21/16 Other

• Zephyr management team and

employees to remain in place

• Opportunity for substantial reinsurance

savings from diversification

Note: Figures are rounded

10

Since IPO: Delivering on Growth & Strategic Initiatives

• Opportunistic policy assumptions
• ~257K policies in force as of 12/31/15, 75% assumed from Citizens
• ~$60MM in premium acquired from Sunshine State Insurance Company (SSIC)
• Citizens take-outs in 2015 were ~68K policies. Incremental 2016 Citizens take-outs: ~4,000

policies in Jan, ~7,000 policies in Feb before final opt-outs

• Diversification
• Growing commercial book, commercial underwriting team established
• Multi-state growth: licensed to write new business in North & South Carolina, approved in

Alabama & Mississippi, and have applications pending in Massachusetts & Georgia

• 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; $250MM placed for

2016

• Grow Florida Market Share
• Over a quarter of a million policies in force in Florida
• Network of ~1,400 independent agents actively writing policies
• 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

11

Growth in Voluntary Book of Business

10,000 20,000 30,000 40,000 2014 2015

Commercial Lines Premium Written(1)

$(000)

• Personal Lines Voluntary
• 2015 new policies bound were approximately

23,000 polices, +24% y/y

• 2015 inforce written premium of $60MM,

+63% y/y

• Inforce written premium including SSIC $99MM at

year-end

• Commercial Lines Voluntary
• Established in-house commercial team in 4Q14
• New premium written in 4Q15 over $20MM,

+253% y/y

• Inforce written premium of $46MM at end of

4Q15, up from $6MM in 4Q14

• Commercial offers attractive biz mix-shift given

lower loss ratios

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000

• 5,000

10,000 15,000 20,000 25,000 2013 2014 2015

Personal Residential(1)

New Policies Bound Inforce Written Premium

Inforce

(1) Excludes SSIC

12

Capturing Share in Commercial Residential

$4.5 $6.3 $10.1 $10.7 $36.2 $51.7 $62.8 $90.9 $188.1 $320.7 $3.5 $4.5 $6.2 $8.4 $8.4 $65.6 $71.0 $86.1 $311.9 $403.3

Total Premiums Written (9/30/14 in Force) Total Premiums Written (9/30/15 in Force) Heritage’s commercial reported loss ratio remains in low-single digits one year in operation

$(MM) $(MM)

American Capital Assurance Co. American Capital Assurance Co.

13

Superior Underwriting & Continual Improvement

• 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

In-house Underwriting Capability Minimal Exposure to Risky Structures

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

14

Strong, Diverse Distribution Relationships

• Agreements with five large national insurance companies / agencies:
• Advance take-out approvals cover more than 5,100 agents
• Network of ~1,400 independent agents actively writing policies

– Partnership with FAIA Member Services (“FMS”) expands agent relationships – ~64,000 personal lines voluntary policies(1) in force as of Dec 31, 2015, currently writing additional ~2,000 per month(2) – ~$47MM commercial inforce written premium(1) as of Dec 31, 2015

• Significant potential for future growth; new state expansion

Agency Relationships Voluntary Business

(1) Includes SSIC (2) Average personal lines voluntary policies written per month in 2015.

15

Differentiated Claims Model

• In-house

claims adjusters

• Work

performed by Heritage & sponsors

• Onsite

inspection typically within hours

• Seamlessly

integrated with claim system Notice of Loss Inspection Adjusting Repair & Restoration

Benefits:

• Decreased claims severity
• Reduced loss experience
• Shortened claim tail
• Increased renewal rates

16

Capitalizing on Favorable Reinsurance Dynamics

• 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

$1.3B $1.2B $339M $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

(1) For the year ending May 31, 2016

2015-16 Reinsurance Program(1)

17

Modeled Results Represent Program Strength

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

18

A Unique Opportunity in P&C Insurance

• Favorable Florida demographics
• Voluntary residential insurance expansion
• Mix-shift into more commercial residential business
• Coastal state expansion
• Incremental Citizens take-outs

128 209 257

• 50

100 150 200 250 300 2013 2014 2015

Continued Growth in Policies-in-Force

(000s)

Executing Multiple Growth Opportunities

19