IPO Report: Heritage Insurance Holdings (HRTG)

Heritage Insurance Holdings ($HRTG) provides personal residential insurance for single-family homeowners and condominium owners in Florida and is headquartered in Clearwater, FL.

Six other companies are scheduled for the week of May 19, 2014.  The complete IPO calendar is available at IPOpremium.

The manager is Citigroup.  The co-managers are SunTrust Robinson Humphrey, Sandler O’Neill + Partners, Dowling & Partners Securities, JMP Securities, and Willis Capital Markets.

HRTG scheduled a $90 million IPO with a market capitalization of $438 million at a price range midpoint of $15 for Friday, May 23, 2014 on the NYSE.  SEC filings

Heritage Insurance Holdings (HRTG) IPO Report

Overview

HRTG provides personal residential insurance for single-family homeowners and condominium owners in Florida.

HRTG wrote its first policy in November 2012 and, has a newly formed insurance company, as no legacy issues.

In December 2012, HRTG began selectively assuming policies from Citizens through participation in a legislatively established depopulation program, which is designed to reduce the state’s risk exposure by encouraging private insurance companies to assume Citizens’ policies.

That means HRTG policies are in the higher risk category.

Based on annualizing Q1 2014 earnings the P/E is 14. The price-to-book ratio is 2.

Valuation

Glossary

Conclusion

The rating on HRTG is neutral.

Business

HRTG is a property and casualty insurance holding company headquartered in Clearwater, Florida and, through its insurance subsidiary, Heritage P&C, HRTG provides personal residential insurance for single-family homeowners and condominium owners in Florida.

HRTG began operations in August 2012 and wrote its first policy in November 2012.

Citizens

In December 2012, HRTG began selectively assuming policies from Citizens through participation in a legislatively established depopulation program, which is designed to reduce the state’s risk exposure by encouraging private insurance companies to assume Citizens’ policies.

Once Citizens informs HRTG which policies it may assume, HRTG notifies each policyholder of its offer to assume their policy, the amount of their estimated premium upon renewal, and their right to elect not to participate in or “opt-out” of the assumption transaction.

Citizens transfers to HRTG the unearned premiums as of the effective date of the assumption transaction for the policies that have not opted out of such transaction.

A policyholder may also opt-out during the 30-day period following the effective date of the assumption transaction. If a policyholder opts-out during such period, HRTG returns the applicable unearned premiums to Citizens.

Citizens' assumption transactions

On December 4, 2012, HRTG entered into its first assumption transaction with Citizens, resulting in its assumption of 37,000 policies and assumed premiums written of  $43.2 million.

HRTG entered into five additional assumption transactions during the year ended December 31, 2013 (one in the first quarter of 2013 and two in each of the second and fourth quarters of 2013), resulting in its assumption of an aggregate of 90,000 additional policies and assumed premiums written of $97.6 million.

HRTG entered into three additional assumption transactions during the three months ended March 31, 2014, resulting in its assumption of 13,000 additional policies and assumed premiums written of $16.8 million.

HRTG intends to continue assuming policies from Citizens that meets its assumption strategy and underwriting criteria.

In connection with its assumption of 39,000 policies in June 2013, HRTG entered into a retroactive quota share reinsurance agreement with Citizens that resulted in its recognition of $26 million of retroactive reinsurance income, representing the earned premium, net of associated losses and loss adjustment expenses, from such policies for the period from January 1, 2013 through May 31, 2013.

HRTG does not expect to enter into similar retroactive arrangements with Citizens in connection with future policy assumptions.

Growth plan

During 2013 and the three months ended March 31, 2014, HRTG implemented a number of initiatives to grow its voluntary program, including establishing a network of independent agents throughout Florida, offering competitive pricing and focusing on superior customer service.

As a result of these efforts, HRTG had 15,417 voluntary policies in force as of March 31, 2014, compared to 145 voluntary policies in force as of December 31, 2012.

HRTG's wholly-owned subsidiary, Contractors’ Alliance, manages repair and mitigation services provided to HRTG's customers.

In March 2014, HRTG completed the acquisition of the assets and personnel of the largest vendor in the Contractors’ Alliance network, SVM Restoration Services, Inc., for $2.5 million.

Dividend Policy

No dividends are planned.

Competition

HRTG competes not only with other stock companies, but also with Citizens, mutual companies, other underwriting organizations and alternative risk sharing mechanisms.

HRTG’s principal lines of business are written by numerous other insurance companies. Competition for any one account may come from very large, well-established national companies, smaller regional companies, other specialty insurers in HRTG’s field and other companies that write insurance only in Florida.

5% stockholders

Bruce Lucas     6.8 %

Use of proceeds

HRTG expects to net $92 million from its IPO. Proceeds are allocated as follows:

$55 million of the net proceeds from this offering and the Concurrent Private Placement to increase HRTG's statutory capital and surplus to enable it to write additional policies and $25 million of the net proceeds to fund collateralized reinsurance through Osprey, HRTG's reinsurance subsidiary.

HRTG intends to use the remainder of the net proceeds to fund the growth of its business and for general corporate purposes. HRTG may use a portion of the net proceeds from this offering and the Concurrent Private Placement to pursue expansions of the insurance products that it offers in existing and new markets.