Rating agency KBRA has revised its outlook from stable to negative for super-regional property and casualty insurance holding company, Heritage Insurance Holdings (HIH), citing continued operating losses and a significant equity decline.
Analysts downgraded their outlook for HIH and for operating subsidiary Narragansett Bay Insurance Company (NBIC), but maintained table ratings for Heritage Property & Casualty Insurance Company (HPCIC) and Zephyr Insurance Company (ZIC).
KBRA also affirmed its BBB+ insurance financial strength rating for HPCIC, the A- rating for NBIC and the BBB+ rating for ZIC, as well as the issuer rating of BBB- for HIH.
Analysts explained that the change in outlook for HIH reflects the company’s elevated Debt-to-Capital ratio of 50.8% following a significant equity decline due to a non-cash goodwill impairment charge, operating company losses and includes an accumulated other comprehensive loss (AOCL) of $54.6 million.
Heritage’s multi-state expansion plan serves to mitigate concentration risk by targeting additional states primarily in regions that have a low weather loss correlation with Florida, and the company has maintained a sound reinsurance program with high credit quality carriers and reduced retentions for subsequent events, KBRA notes.
But the company has suffered elevated operating losses in recent years, mainly due to its natural catastrophe exposure to hurricanes and winter storms.
KBRA explained that Heritage also relies heavily on reinsurance as a risk mitigant, and the increased first event retentions in recent years exposes surplus to larger declines.
This makes it subject to increasing reinsurance costs, although analysts note that Heritage itself continues to take rate increases across its Florida book as well as other markets, and both the holding company and operating companies have generated strong and consistent investment income over the past 5 years.
Heritage’s reinsurance program, renewed in June 2022, includes catastrophe excess of loss (XOL) reinsurance agreements covering HPCIC, ZIC, and NBIC, allocated among traditional reinsurers and the Florida Hurricane Catastrophe Fund (FHCF).
An aggregate of $3.2 billion of limit was purchased and the 2022-2023 reinsurance program provides substantial severity and frequency protection, including a first event reinsurance tower exhaustion point of $1.2 billion for HPCIC and $1.2 billion for NBIC, and $780.0 million for Zephyr.
KBRA believes that the catastrophe program is adequate for the various operating companies within Heritage. However, in the case of severe events, it warns that the companies remain exposed to, and may retain, significant losses and loss adjustment expenses that exceed the reinsured limits.