Heritage Insurance ($HRTG) — FY21 Update

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Price: $6.23 Market Cap: $175m Valuation: 5.7x PE Category: Option

FY21 Review

Heritgage had a nice Q4... gross premiums were flattish (down 1.2% technically). Net premiums were up 5.6% YoY. They recorded a goodwill impariment of $60.5m but excluding that charge, pre-tax earnings would have been $15.6m or $0.56 per share, good for a 12-13% annualized ROE.

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Some other notes from the earnings release and earnings call:

  • Had their first sub-100% combined ratio since Q1 2020.
  • Repurchased $7.2m shares during Q4 and ~$8.5m for the full year — 1.3m shares for $6.52 per share
  • Approved $25m buyback for 2022-2023 and Heritage held $26m at holding company level

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These coastal insurers are highly cyclical based on hurricanes / weather impact. Heritage still has a huge portion of the business tied to Florida. Lessening weather + rate increases are starting to help results for this mostly Florida/coastal insurer.

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These are still highly cyclical businesses that are very much weather dependent when it comes to annual earnings performance. Coming out of a rough 2-year stretch, Heritage should generate good earnings in 2022 (I’m estimating $1.25 per share).

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The goodwill impairment took a bite out of per share book value but Heritage has historically traded at 0.8x or 1.0x book value (vs. < 0.5x today).

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FY21 Valuation — At 0.8x FY21 book value of $12.34 per share = $10. This would be ~9x earnings at $1.10 in 2022 EPS. Both multiples are in-line with longer run averages.

Final thoughts...

This clearly isn’t a set-it-and-forget-it business. But there is very real and very significant potential for mean reversion in 2022 coming out of a 2-3 year stretch of low earnings.

It’s partially a gamble that hurricane and storm impacts will be lower in 2022, something I clearly cannot predict. Q4 results highlight just how profitable the business could be under “normal” conditions. The buyback authorization also gives me some comfort with what management sees in the business over the next 12-24 months.

It’s in my Option bucket and a little over a 1% weight but could have 50-100% return potential over the next 9-12 months.