Hci Group Inc (HCI) 2012 Q2 法說會逐字稿

Greetings and welcome to the Homeowners Choice second quarter 2012 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Madhu, Vice President of Investor Relations for Homeowners Choice. Thank you, you may begin.

Thank you and good afternoon. Welcome to Homeowners Choice second quarter 2012 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; Richard Allen, our Chief Financial Officer; and Scott Wallace, President of our Property and Casualty Insurance division. Following Paresh's opening remarks, Richard will review our financial information for the quarter and then turn the call over to Scott for an operational update and outlook. Finally, we will open up the call to your questions.

To access today's webcast, please go to the investor relations section of our corporate website at www.HCPCI.com.

Before we begin, I would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan and project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the Company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company's business, financial conditions and results of operations. Homeowners Choice Inc. disclaims all the objections to update any forward-looking statements.

Now I'll turn the call over to our Chairman and Chief Executive Officer, Paresh Patel.

Thank you, Jay. Good afternoon, everyone, and thank you for joining us on today's call to discuss our second-quarter results.

Our second quarter this year marks our 19th consecutive profitable quarter. The HomeWise integration is almost complete and continues to perform as anticipated. Highlights for the quarter include the following items. One, Scott Wallace, the former CEO of Citizens, came on board in late April. He will provide some color later on in the call on the insurance business.

Two, we completed our follow-on offering of 1.84 million shares in late April as well.

And three, we closed on the purchase of the Treasure Island property and it is now reflected in our numbers, including a bargain purchase gain of $179,000 in the second quarter.

In summary, as we enter the main part of the hurricane season for 2012, the Company is well-positioned from a leadership perspective, from an infrastructure perspective as well as a financial perspective. We are now beginning to plan for the end of the hurricane season and the next chapter in the Company's history.

Now I would like to -- our CFO, Richard Allen, to walk you through the financial results for the quarter and the year to date. Richard?

Thank you, Paresh, and good afternoon, everyone. The second-quarter income available to common stockholders totaled $7.2 million or $0.74 per diluted earnings per common share, a significant improvement from the $1.9 million or $0.30 diluted earnings per common share for quarter two of 2011. For the six-month period, income available to common stockholders was $14 million or $1.60 diluted earnings per common share compared with $2.7 million or $0.43 diluted earnings per common share for the six months ended June 30, 2011. Gross premiums earned increased 72% in the quarter ended June 30, 2012, to $53.8 million compared with $31.2 million in the same period a year ago. For the six-month period, gross premiums earned increased 75% when compared with the prior-year period. This increase is primarily due to the revenues from policies acquired from HomeWise in November of 2011.

Reinsurance costs premium ceded were 33% of the Company's gross premiums earned compared with 45% for the quarter ended June 30, 2011. For the six-month period ended June 30, 2012, premium ceded were 29% of gross earned premiums compared with 46% in the prior year. The policies assumed from HomeWise were not subject to our excess catastrophe reinsurance until June of 2012. Going forward, we anticipate our reinsurance costs will range from 43% to 45% of gross premiums earned for the reinsurance treaty year that began June 1, 2012.

Net premiums earned increased 113% to $36.3 million from $17 million in the second quarter of 2011. This improvement was primarily due to the minimal reinsurance costs through May 31, 2012 associated with the policies acquired from HomeWise. Net premiums earned for the six-month period reflect an increase of 127% to $76.6 million compared with $33.7 million in the prior year.

Losses and loss adjustment expenses totaled $16.2 million compared with $10.5 million in the same year-ago period. It's important to note that the second quarter of 2012 includes approximately $2 million related to approximately 300 claims from Tropical Storm Debby, which occurred in June of 2012. Additional increases are attributable to the increase in policies and exposures related to the premium growth. Loss and loss adjustment expenses for the six months ended June 30 totaled $35.4 million compared with $20.9 million in the same year-ago period.

Policy acquisition and other underwriting expenses were $5.9 million for the quarter ended June 30, 2012 compared with $2.8 million in the comparable period in 2011, reflecting commissions payable to agents for production on the renewal of policies and premium taxes and policy fees. For the six-month period, policy acquisition and other underwriting expenses were $12.5 million compared with $7 million for the prior-year period. Contributors to the increase include the impact from the adoption of the revised guidance on deferred acquisition costs of $741,000 and commissions to agents for production of premiums, which increased significantly.

Other operating expenses in the quarter totaled $4.7 million compared with $2.4 million in the second quarter of 2011. For the six-month period, other operating expenses were $9.3 million as compared with $4.5 million for the prior-year period. This increase is primarily due to increases in compensation, administrative and other general expenses in both periods.

Turning to the balance sheet, investments in fixed income and equity securities totaled $49 million versus $40 million at December 31, 2011. Cash, cash equivalents and time deposits totaled $138 million compared with $113 million at the end of the prior year. Unearned premiums were $120.4 million compared with $108.7 million at December 31, 2011. Loss and loss adjustment expense reserves were $37.3 million compared with $27.4 million at December 31, 2011.

Turning to our financial ratios, the loss ratio for the quarter was 45% compared with 62% in the prior-year quarter. This decrease is attributable to the substantial increase in net premiums earned in the quarter of 2012. Our loss ratio for the six months ended June 30 was 46% compared with 62% in the prior year.

Our expense ratio for the quarter was 29% compared with 30% in the same year-ago period. Expense ratio for the six months ended June 30 was 28% compared with 34% in the prior year. The combined loss and expense ratio, a key measure of underwriting performance, traditionally used in the property and casualty industry, decreased to 74% for the second quarter of 2012 from 92% for the second quarter of 2011. Our combined ratio for the six months ended June 30 was 75% compared to 96% in the prior year.

Generally, a combined ratio under 100% reflects profitable underwriting results, whereas a combined ratio over 100% reflects unprofitable underwriting results. As you can see, we did have very successful underwriting results for the three and the six-month period ended June 30, 2012.

Now I would like to turn the call over to Scott. Thank you. Scott?

Thank you, Richard, and good afternoon to our listeners. During the second quarter, we successfully placed our reinsurance treaties for the 2012-2013 catastrophic season. Our catastrophic plan for reinsurance now provides approximately $550 million of coverage. As Richard mentioned, we expect our reinsurance cost to be approximately 43% to 45% of gross written premiums beginning in June of this year, based on the current run rate.

As we all know, the storm season for this year began June 1, and many of you are quite familiar with the Tropical Storm Debby that affected the state of Florida. This was largely a heavy rain event but did cause some losses. This tropical storm, which never turned into a hurricane, did hit during the second quarter, being in June, specifically. And as such, we have already paid many claims and established reserves for this storm, which are, for the most part, part of our second-quarter numbers.

In summary, we estimate receiving approximately 300 claims from Tropical Storm Debby and a total loss payout of $2 million, which, as mentioned earlier, has already been reserved in our second-quarter numbers.

We are encouraged by our second-quarter results and remain focused on executing on our long-term goals, including diversifying our portfolio, increasing market share and providing exceptional service to our policyholders. We continue to be well positioned to capitalize on our building momentum for the remainder of 2012 and beyond.

Before we open the call for questions, I would like to express a few of my personal thoughts since joining Homeowners Choice only 90 days ago. In short, I see a staff that is dedicated to their profession, committed to providing superior customer service and a staff that is anxious to learn more and take on new challenges. I am truly honored to lead the Property division and look forward to continued growth in the years ahead for this division.

On behalf of our entire management team, I would like to say thank you all for your support. Now with that, we are ready to take questions.

(Operator instructions) Casey Alexander, Gilford Securities.

I have a few questions here. First of all, despite the $2 million in claims from Tropical Storm Debby, the loss and loss adjustment expenses were still significantly lower than they were in the first quarter. Was there a huge absence of claims on the standard run rate, or was there a bulge in the first quarter that was related to a different event that we didn't hear about?

Casey, it wasn't any of those things. One of the items that's there in everybody's balance sheet, and Richard can speak further about this to some degree, is that as you increase the size of the business, you do have to build up your IBNR. And in the first quarter we were building up the IBNR on the acquired HomeWise business. And at this point, I think we've set aside enough for that, and that's what you're seeing the reflection of, right? So you could think of that as -- there was a start-up charge that you had in the first quarter.

Okay, well, secondly, the policy acquisition in underwriting costs, despite the higher level of business, also shrank considerably in the second quarter as compared to the first quarter.

Well, if you remember from the fourth quarter call, Casey, when we adopted that new guidance, our actual referral rate decreased

Okay.

Per the acquisition cost.

Okay, secondly, there was $1 million of policy fee income versus maybe $500,000 during the first quarter. Is there any way to model this, or is this just going to be a lumpy number that's going to sort of come at us as it comes?

The very simple answer to that is that income has gone up, because the way our book is shaped, we do the bulk of our renewals in the second quarter. And so, consequently, that's when the policy fee income maximizes out. I think the third quarter is the second-most renewals, first quarter the third-most, and the fourth quarter does very few renewals, yes? So there's roughly to give you an idea as to how that bulge goes through the book, yes?

Okay, the other thing is that other runs kind of lumpy. Can you kind of deconstruct what the other income is? Is there something in particular that you know is recurring in that line, or -- again, I'm not quite sure how to model it when it comes as lumpy as it does, a couple hundred thousand in the first quarter, $1 million in the second quarter.

The second quarter includes approximately $500,000 on the return of brokerage fees from the excess in catastrophe reinsurance treaty. This just came up this year.

Okay. So that's really one time?

It's going to be recognized throughout the next 12 months.

Casey, I think what's being said is that, as that line item suggests, that income, because of all the different transactions that you now have in a complicated organization, you end up with some miscellaneous numbers quarter over quarter. And unfortunately, it is just the way of life (multiple speakers) try to maximize the efficiency of the business, shall we say, yes?

Right, okay. And Richard, I'm going to give you my quarterly question; I'm going to give it to you a different way this time. Can you give me the basic and the fully-diluted share count?

Yes, just a moment, I've got it right here. Do you want it for the quarter or do you want it for the six months?

I'll take it both ways.

Okay, the basic for the three months is $7,112,000; fully diluted -- oh, excuse me, that's incorrect. The basic is $8,325,000; fully diluted is $9,651,000. That's for the three months. For the six months it's $7,326,000, and diluted is $8,814,000.

All right, great. I'm predictable; this time you had it.

Well, thank you.

Thank you.

I knew you would be here.

Robert Paun, Sidoti & Company.

Good afternoon

Good afternoon, Robert (multiple speakers).

Good afternoon. Just a few questions here -- first, on pricing, last August, you filed for a 12% rate increase. Did you file for another increase this year? If so, what was that number, if you can share that? And if you could talk about how you look at rates and where they are headed, that would be helpful as well.

Robert, the August rate increase you are talking to wasn't filed in August; it was actually approved to be effective in August. And the reason I'm making the distinction is, at this point, as we have to do every year, we filed our rate indication, whatever, for the coming months. It is sitting with the department. They will obviously review it, etc.; there will be, at some future point, a rate adjustment that's called a rate increase that will be agreed upon. And that will go into effect, I would suspect, somewhat before the end of this year. And I think we're talking about -- our expectation is going to be in the single digits in terms of what kind of rate increase, if any, there will be.

And being a regulated company, that's exactly how this works. Yes?

Yes, okay. Also on pricing, do you expect weak economic growth to have any impact on you pushing higher rates?

No, I don't think there's any real direct correlation between the economic growth and the rate adequacy needed for covering the exposure or the risk that we are covering.

Okay, is it more of a function of the competition in the market?

Well, probably even less than that. As Paresh accurately pointed out, rates are a function and largely controlled by the Office of Insurance Regulation here in Florida, as with other states. So this particular product line is so heavily regulated, there is only so much room in the rates, so to speak, as far as deviating from what would be an actuarially sound rate.

Okay, you are about nine months into the deal with HomeWise. Can you just provide an update on how that book of business has performed and maybe how it compares in performance relative to the original book of business?

To that point, as I said in my opening comments, it is performing as we had anticipated. And what I mean by that, to add a little bit more color to it, is there were always going to be certain differences. One is it's a newer book; Homeowners Choice was a slightly older book; the geographic dispersion was slightly different; the rates were slightly different. So as we renew the book, there's a lot of moving parts, things like the retention rates on the ATI book is much greater than the HomeWise book, etc. The claim dispersion is slightly different, just because the policy dispersion is slightly different as well. So there are various moving parts. But at the end of the day, the combined book is pretty much performing really as anticipated. And I think you're seeing that in the numbers, because that ultimately is the final scorecard. Yes?

Yes. Okay, and just one last question. On the investment side, the investment income was down about $200,000 from last year's second quarter and from the first quarter. I know it's a pretty small absolute number, but is there anything going on there? Can you talk about what caused that?

I can probably tell you what really is the occurrence is that I think as the yield curve keeps getting flatter and flatter, the ability to make any kind of investment income is -- it becomes more and more difficult. And as we have generally stated, in the investment committee, we try to be very conservative. So even though there's a much bigger investment portfolio, we are not putting that to work, just hypothetically, to say make a quarter of a point in -- or whatever the two-year CDs are going for, or two-year treasuries are going for at this point. So, consequently, that's what is impacting somewhat of the ability to generate income. Yes?

Okay, thank you for the answers.

Ron Bobman, Capital Returns.

I just had a couple of questions. Could you -- a little bit more specific on the HomeWise, could you talk about retention, sort of what portion of the renewals that you've kept? And would you give us the total PIF number and how it has maybe changed the last couple of quarter ends, presumably growing?

Yes, simple -- and these are ballpark numbers, because these --

Fine.

Yes? I think the HomeWise retention rate has been somewhere in the low 70's.

Okay.

And as far as PIF counts, as is our normal practice, it sort of peaks out at the end of the year and then sort of slides down as the year goes through to the end of the hurricane season. So I think -- and these are ballpark-ish numbers. I think we were sitting just slightly north of 120 at the beginning of the year, we end up around 115, 117, 118, something like that at the end of the first quarter. And I think we're about 110 at the end of the second quarter. It's that gradual rolloff, as we would expect. It has to do with the pretensions and so on as renewals occur. Yes?

So what happened? That's an interesting dynamic. Why does PIF go down as this storm season approaches?

It's not to do with the storm season. The PIF count goes down because whenever you issue renewals, as a normal function of homeowners, people tend to change carriers a little bit more at renewals than they do during the -- (multiple speakers) middle of the year, shall we say. Right? So as renewals come up, you will have -- always, the PIF count tends to decrease. And obviously, throughout the year, there's also a decrease in PIF count because people buy and sell their homes, etc., kind of thing. Yes? So in any given book, not just Homeowners Choice, there's a natural tendency for the PIF count to go down over time. Yes?

What, I guess, is sort of unique to Florida is growth comes from the takeouts and the HomeWise-type transactions, and less so from, like, new business, so you have that retention.

Yes. I think, depending on how much new growth you (multiple speakers) do -- yes -- it tends to reduce the rate of declines. Unless you do huge amounts of new business, it's not going to offset that decline. Yes?

Okay, thanks. And then I had -- if I pull out the $2 million from Debby -- I just want to check my math -- is an attritional loss ratio of around 39% -- is that pretty good, as far as for me to use in my estimating?

Are you going on year-to-date, or on the --

Well, in the second quarter, you had 16.2 of losses in (multiple speakers) [LAE]. If I pull out the $2 million from Debby and just take the 14.2 and divide it by 36.2, I think I'm getting [39] -- what I'm just asking you is --

Yes, it's a proper formula.

Okay, okay, and there's no reason that the attrition changes much during the calendar year, right; or, does it?

The 36 you are using -- is that net premiums or gross?

(multiple speakers) 39, actually; I got 39. I'm using net premiums earned as my denominator, which I think is a convention.

Yes. I think -- look, we are having a technical conversation here. The item that shows up in that is that -- don't forget; that net premium number is being affected by reinsurance costs.

Understood.

Yes, so you are going to have your attritional loss ratio, while you are doing it in the classic sense, is going to move around based on reinsurance (multiple speakers) --

(multiple speakers) insurance, rather than just losses at the home level.

Right.

Okay, understood. If you would just bear with me, I'm sorry -- I think that's actually that's it for me. I'll circle back if I forgot something. Thanks a lot and best of luck.

Thank you (multiple speakers).

Oh, one item -- the other line item in the income statement, $1,062,000 -- I don't know if the first questioner was touching on that, but I missed -- if you answered it, I'm sorry. If not, would you answer what that is?

I think we answered it.

Okay, I'll check the transcript.

Howard Halpern, Taglich Brothers.

In the quarter, you said you handled the 300 claims from Tropical Storm Debby. How would you assess your staff's handling of those claims, given your increased size?

This is Scott Wallace, and thank you for that question. To be honest with you, I was extremely pleased in the way that this was dealt with. It was a very, very small test; but nonetheless, a test of how the different components to proper claims handling for this type of event are handled. And it, it really, really came out very well. We handled claims quite quickly, quite efficiently. We have not, to my knowledge, received any kind of complaints as far as delays in getting adjusters out there to assess the damage and to ultimately make proper payment.

So I'm very pleased with how it has turned out. And I feel very comfortable that, with other events that hopefully do not take place, that we are still in a good position to address these things.

Okay, and can you describe a little bit about -- I know the law was recently implemented and changed. But with regards to how structural damage is viewed, have you seen enough evidence that that has changed significantly under the new law?

Yes. I think, in time, it will have a significant impact, by referring to -- you are talking about the reliance on having to prove structural damage in the first case.

Yes.

And the difficulty, as with many things in insurance, there's always a lag period where claims still may be surfacing that may have originated several years ago, which might be interpreted to come under prior language or broader language, so to speak. But I definitely think that the components of 408 will definitely have a positive impact as far as tempering the loss ratios for a sink hole.

Okay. And one last one -- I know it might be early, but could you just give a general landscape on what you envision or what you see out there in terms of potential policy additions in November and December of this year?

Well, I think to look at it, right now being in the -- at this time of year, we are really keeping most of our focus on weather-related events that may take place in this next quarter. But as we go through that period, we will, towards the end of that period, assuming conditions are right, we will then look at several different opportunities. Certainly, we have taken the takeout business from Citizens Property Insurance. We've also assumed carriers and we've also grown organically. So these are all areas in which we have opportunities to continue to grow the book of business for Homeowners Choice. And it really -- it's a little too early to tell which opportunities best fit our risk profiles and requirements. But we'll get there soon enough.

Okay, thanks, guys.

Gregory Macosko, Lord Abbett.

Perhaps an elementary question, but just go through the reinsurance treaty and the fact that the loss ratio, or expected reinsurance ratio, is going to basically remain the same as it was in the second quarter. Is this -- and again, you had a period in this current quarter without, I guess, a quarter or a month or two of needed coverage from the policies you acquired.

Sorry --

I'm having trouble understanding what you're --

Well, my point is that the ratio is the same, and yet you were not required, I think, in the current quarter to -- you didn't need to have coverage because it was out of hurricane season, I believe. And yet, was the pricing so advantageous relative to that policy that you were able to expect that the -- that 43% to 45% to go forward?

Yes, I think the way you are seeing the numbers is, I think, in the release, we are talking about what the second quarter numbers were this year versus last year?

Right.

And there you see the advantages. But I think, third quarter onwards, you are going to get all three months like over like, so it's going to jump up to the numbers Scott has put out there, about 43% to 45%. So it's going to jump up from, I think, 33% is what we said those numbers second quarter.

Yes, clearly 6 months.

Yes?

Right.

So that's what's going to happen, is that we've gone these five months. The first five months, there was -- we weren't in hurricane season, because there are no hurricanes in January.

And so the requirement there, the need there, was limited, obviously?

Yes.

Absolutely.

And as we now do the new policy, the new contract which went into effect June 1, is now going to amortize over the next 12 months. So you're going to see that step in the third quarter. Yes?

Okay. Do you expect the retention -- this is where you expect to be on a longer-term basis?

I think every year, we renegotiate the reinsurance contract. And some of it is because it's a step function. We go through this every year. Good years, it can be in the high 30's. Bad years, it has actually gone as high as the high 40s. So it's a movement around. Of course, the other side of this is it's now fixed. And as Scott had said, it's 43% -- 43% to 45% based on the current run rate, depending on what we do in terms of growth, etc., in the fourth quarter, that will move as a function. Yes?

Okay, and then finally, with regard to the -- you mentioned that there's a lot of insurance regulatory controls regarding pricing and the rates. Is it not possible for others to reduce the rates if they so choose, below what is stipulated by the commission?

In essence, no. For this line of business, I have certainly seen, in the last few years, a number of companies make filings. And the Office of Insurance Regulation came back and said your filing is inadequate. You have to charge even a higher rate because the Office of Insurance Regulation must have had other concerns as far as a reflection of the financials, the overall financials of the organization.

So no, I don't think it's that easy if you are an admitted carrier to come in and think that you are going to undercharge or grossly undercharge the marketplace, if your losses are going to be similar to the rest of the market.

Okay, thank you very much.

Ladies and gentlemen, that is all the time we have for questions. I would now like to turn the floor back over to Mr. Madhu for closing remarks.

Thank you, operator, and thank you, everyone, for your questions and time today. These are exciting times for the Company and we are glad to have you be part of them. We look forward to the remainder of 2012 and keeping you apprised of our progress. Thank you for joining our presentation. This concludes our call. You may now disconnect.

Thank you, ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.