Investor Presentation January 2016 Heritage Insurance Holdings, Inc. (NYSE:HRTG)
Disclaimer Safe Harbor Statement This presentation contains “forward - looking statements” that are based on management’s beliefs and assumptions and on information cur rently 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 expe ctations 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 H eritage’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 Herita ge’s other filings with the Securities and Exchange Commission. 1
A Unique Growth Opportunity in P&C Insurance Continued Opportunity in Florida & Multi-State Expansion Underway Seasoned Management Team Proven Underwriting and Policy Acquisition Capabilities Unique Claims Servicing Model Deep Relationships with Highly Rated Reinsurers Strong, Conservative Capital Structure 2
Investment Case • Founded in 2012 to provide personal residential insurance in Florida Business • Business has expanded to include commercial residential; policies in force have grown to ~240K, or ~$542MM in annualized premium as of 9/30/15 • 2013: 45.0% ROAE (1) Demonstrated • 2014: 26.5% ROAE (1) ROE Potential • First 9-mos 2015: 32.8% ROAE (2) • Rated “A” (Exceptional) by Demotech; $332MM GAAP equity as of 9/30/15 Strong Balance • Conservative reinsurance program, which includes pre-paid Sheet reinstatements, designed to capitalize on favorable pricing dynamics • Vertically integrated, end-to-end claims resolution Unique Claims • Contractors’ Alliance water mitigation / restoration contractor Servicing Model subsidiary is key competitive advantage Sustainable • Citizens depopulations, voluntary policy growth, multi-state expansion Market and M&A • Expansion in commercial residential and general liability Opportunity (1) ROAE = Net income / (Beginning stockholders equity + ending stockholders equity / 2 ) 3 (2) ROAE = (Net Income first nine-months / 3) * 4 / (Beginning stockholder equity + ending stockholders equity / 2)
The Market: Attractive Florida Market Dynamics Population by sq. mile 1-50 50-500 >5000 • Capturing opportunity in Florida Florida is 3 rd 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 4 th largest FL domestic personal and commercial lines insurer by gross premium written as of 6/30/15 (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 4 (3) Excludes State Farm
History: Strategic Approach to Market Opportunities 2012 2013 2014 2015 • Initial $23MM equity • Formed the CAN • IPO: NYSE “HRTG” • Acquired BRC raise Managed Repair Restoration • Acquired the assets of • Began writing Vendor Program Specialists SVM (water mitigation • Second $33MM equity • Approved to write voluntary policies in firm) and formed Florida raise Heritage Claims P&C in North & South Response Team Carolina • Participated in 1 st • Formed Osprey Re • Built commercial • Participated in ~46K Citizens take-out • Participated in 5 residential department personal and 333 Citizens personal • Acquired SSIC commercial take-outs residential take-outs through 3Q15 totaling ~90K policies • Announced • Participated in ~57K acquisition of Zephyr personal and 2.2K commercial take-outs 5
Overview of Zephyr Transaction Zephyr Overview Transaction Highlights • Zephyr Insurance Company (“Zephyr”) is a specialty property insurance company domiciled in Hawaii and • Acquisition of Zephyr by Heritage in an Transaction headquartered in Honolulu, HI all-cash transaction • Founded in 2000, owned by privately-held Ocean Harbor Insurance Group • Led by President Richard Toyama with 15 employees • $120mm purchase price, subject to Deal Value focused on providing differentiated customer service to closing GAAP book value adjustments policyholders • One of the largest residential insurers in Hawaii with LTM GPW $68mm and ~30% of the wind-only market share • Cash on hand Financing • Product: single peril residential hurricane-only policies to Hawaii residents • Customary regulatory approval • Distribution: Network of 80 independent agents and Approval and through partnerships with other insurers Timing • Expected closing during Q116 • Key Statistics: • 6/30/15 LTM Net Income (1) : $10MM • Zephyr management team and employees to remain in place • 6/30/15 Capital & Surplus: $58MM Other • Opportunity for substantial reinsurance • Rating: Financial Strength Rating of A’ from Demotech savings from diversification 1) Net income negatively impacted due to elimination of quota share in June 2015. Excluding 6 quota share estimated annual net income ~$13MM
Zephyr: Expanding Leadership in Coastal Markets Strategic Rationale • 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 7
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 8
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