Investor Presentation March 2016 Heritage Insurance Holdings, Inc. - - PowerPoint PPT Presentation

Investor Presentation

March 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 and the Annual Report on Form 10-K for the year ended December 31, 2015 which is expected to be 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.

Disclaimer

Innovative Team Identifying New Opportunities

2

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

Heritage: Investment Case

3

• 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 policy growth, multi-state expansion and M&A, incremental

Citizens take-outs

• 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 )

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

Core Market: Attractive Florida Market Dynamics

4

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

5

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
• Assumed 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

• Assumed ~57K

personal and 2.2K commercial policies

2015

• Acquired BRC

Restoration Specialists

• Approved to write

P&C in North & South Carolina

• Assumed ~68K

personal and ~830 commercial policies

• Announced

acquisition of Zephyr

6

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

• Form A acquisition filing with the State of

Hawaii Insurance Division approved late February; expected close in 1Q16 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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Since IPO: Delivering on Growth and 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
• Approval on take-outs from State Farm, Allstate, B&B, AAA Insurance
• 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

8

Executing Voluntary Business Strategy

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
• ver $20MM
• 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 (000)

(1) Excludes SSIC policies and premium.

Policies

$3.5

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

Capturing Share in Commercial Residential

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Total Premiums Written (9/30/15 in Force) Total Premiums Written (9/30/14 in Force)

American Capital Assurance Co.

$(MM)

$4.5 $6.3 $10.1 $10.7 $36.2 $51.7 $62.8

$90.9

$188.1 $320.7

American Capital Assurance Co.

$(MM)

Heritage’s commercial reported loss ratio remains in low-single digits one year in operation

• 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
• 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

Voluntary Business Agency Relationships

Strong, Diverse Distribution Relationships

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

Differentiated Model: Vertically-Integrated Claims Management

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• 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

Capitalizing on Favorable Reinsurance Dynamics

13

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 Expense Model Focused on Profitable Growth

$43 $219 $436 $586

27.5% 28.7% 26.9%

32.0% 28.2% 28.3% 22.0% 22.5% 19.7%

0% 20% 40% 60% 80% 100%

Gross Loss Ratio Ceded Premium Ratio Gross Expense Ratio

Annual Gross Premiums Written

$(MM)

Gross Combined Ratio

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Building a Track Record of Consistent Growth

Strengthening Strategic Position

($6) $34 $47 $93

Net Income

$(MM)

NOTE: Net income figures are rounded

27 63 173 216 28 101 255 357 $0 $100 $200 $300 $400 FY12 FY13 FY14 FY15 Statutory Surplus Equity

Strong Balance Sheet

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• One of the best capitalized Florida insurers – $216 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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Industry Leading Growth and ROE Potential

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

Executing Multiple Growth Opportunities

128 209 257

• 50

100 150 200 250 300 2013 2014 2015

Continued Growth in Policies-in-Force

(000s)