Hci Group Inc (HCI) 2014 Q3 法說會逐字稿

Greetings and welcome to the Home Owners Choice third-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A 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. Kevin Mitchell, Vice President of Investor Relations. You may begin.

Thank you and good afternoon. Welcome to HCI Group's third-quarter 2014 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 the Property and Casualty Insurance Division. Following Paresh's openings remarks, Richard will review our financial performance for the quarter and then turn the call back to Paresh for an operational update and business outlook. Finally, we will open up the call to your questions.

To access today's webcast, please visit the Investor Relations section of our corporate website at hcigroup.com.

Before we begin, I would like to take the opportunity to remind all 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. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements.

Now, I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

Thank you, Kevin, and good afternoon, everyone.

As Richard will expand on shortly, we reported (inaudible) quarters for our third quarter ending September 30th, 2014. This marks our 28th consecutive quarter of profitability.

In September, we paid $0.275 per share common dividend -- sorry -- $0.275 per common share dividend which represent our 16th consecutive quarter of paying common dividends.

Our core insurance business continues to deliver excellent results. Policy holder surplus is approximately $150 million. Put this into perspective. It was $50 million at the end of 2011. And since then, it has grown -- it has almost tripled without the holding company making any significant contributions to capital and none at all since December of (inaudible) at a total cost of $10 million or an average price of approximately $4.58 per share.

This brings the total number of shares we purchased and retired in 2014 to almost 735,000 shares at a total cost of $27.8 million at an average purchase price of $37.85. And as of September 30th, 2014, we have approximately $12.2 million remaining under our Board-approved plan that was implemented March of 2014.

On a different note, our real estate division, Greenleaf Capital, has finalized two retail shopping center transactions. The first is a loan arrangement and the second is a joint venture. Both projects include a purchase option. And we expect more from Greenleaf in the coming months.

We also learned during the third quarter that HCI Group ranked number 2 on Fortune's list of the 100 fastest growing public companies in the US. The ranking is based on average revenue growth, profit growth, and relative stock performance over the past three years.

It's a wonderful achievement and we're glad to have been recognized. I just want to make sure everybody's aware that we are not looking -- we are highly unlikely to repeat that because of the metrics are so high to keep doing this year after year. But nevertheless, it was a good -- it was a good recognition.

Before I go on, I'd like to invite our CFO, Richard Allen, to take us through our financial performance for the third quarter. Richard?

Thank you, Paresh. And good afternoon, everyone.

Year over year, our third-quarter income available to common stockholders grew 5.2%. And diluted earnings per common share increased 8.8%.

There are a few items I would like to highlight (inaudible) results in 2014.

Gross premiums earned are up year over year for both the three and the nine months ended September 30th. The 9.5% increase during the quarter and 11.5% increase year to date is primarily due to premium revenue from policies assumed from Citizens in November of 2013.

The third quarter was an important quarter as we recognized the full impact of the current year reinsurance costs. Our stated premiums were $626,000 lower in the quarter ended September 30th, 2014, compared with the same period in 2013, reflecting a slightly lower run rate for the 2014/2015 hurricane season as compared with the prior treaty year.

As has been discussed in prior earnings calls, we have recorded certain benefits related to the retrospective provisions of the multi-year reinsurance treaties which amounted to $6.4 million in the third quarter of 2014, compared to $3.9 million in the third quarter of 2013.

Our net investment income in the third quarter was significantly higher than in the third quarter of 2013, reflecting a year-over-year increase in the size of our investment portfolio. We also realized a $3.3 million increase in realized investment gains year over year for the third quarter as we took advantage of market conditions.

Losses and loss adjustment expenses during the third quarter of 2014 were up $7.5 million compared with the third quarter of 2013. Due to this increase, our loss ratio to net premiums earned for the third quarter of 2013 was 35.9%, compared with 27.4% in the third quarter of 2013.

The increase in claims in 2014 is a result of an increase in severity primarily from fire-related claims as well as an increase in frequency over exceedingly good levels last year.

Policy acquisition, other underwriting expenses in the third quarter of 2014 were $1.1 million higher than in the prior year quarter. This year-over-year increase is primarily attributable to the renewal of policies assumed from Citizens in 2012 and 2013 which are now subject to commissions and premium taxes on renewal.

Other operating expenses increased by $752,000 year over year for the third quarter and $6.2 million for the nine months. These increases are primarily due to increased compensation and related expenses.

Interest expense from our senior notes increased $1.8 million for the third quarter of 2014, compared with the third quarter of 2013. The year-over-year increase for the nine-month period was $5.4 million. The increase is attributable to the Company's 3.875% convertible notes issued in December of 2013.

Our total combined operating ratio to gross premiums earned including investment income and reinsurance costs were 2,000 for the three months ended September 30th, 2014, were 74.4%, compared to 73.2% for the same period a year ago.

Total stockholders' equity at the quarter end was $179.6 million, up 11.9% from $160.5 million at December 31st. The book value per common share has increased 17.1% to $17.19 at September 30th from $14.68 per share at December 31st.

As always, we constantly review claims experience for the development and identification of trends in frequency, severity, and causes of loss being reported. We are encouraged by our results for the third quarter and remain committed to increasing shareholder value in future periods in years ahead.

With that, I'd like to turn the call back over to Paresh. Paresh?

Thank you, Richard.

Once again for this quarter, we achieved four things simultaneously. We paid a healthy dividend. We reduced share count meaningfully. We increased book value. And we increased shareholder equity. All at the time. And while we were doing this, we are obviously still pursuing growth opportunities as they arose.

Our core business delivered profitable results and we continue apply strict underwriting standards while providing our policyholders with the highest level of service.

Subsequent to the quarter's end, we will approve to assume policies from Citizens for December. We expect the policies we assume will have an [annualized] premium in the range of $80 million to $100 million. We will not know the [pile] number of policies assumed until December 16th of this year.

The majority of the assumed policies are (inaudible) to be wind-only. We will only be responsible for the parallel wind and not for such exposures as theft, fire, or water leaks. And until hurricane season starts on June 1st, 2015, we believe that our exposure will be minimal relative to these policies.

HCI Group has a history of growing at strategic moments throughout the year -- throughout the years. And this (inaudible) Citizens assumption is just one recent example of how we wait for the right moment and then pounce.

Looking forward, our consistently profitable core business coupled with our strong cash position of over $300 million allows us to patiently seek accretive growth opportunities while we remain relentlessly focused on the bottom line.

With that, we're ready to open your -- for your questions. Operator, please provide the appropriate instructions.

Operator: (Operator instructions) Casey Alexander, Gilford Securities.

Good afternoon. First of all, I heard -- I missed a little something on the $10 million worth of shares that were repurchased during the quarter. What was the number of shares and the share price?

Casey, hang on. (Inaudible) think back to that part of the script. Yes. We repurchased 246,578 shares. Total cost of $10 million. Average purchase price of $40.58.

$40.58. Okay. Great. Thank you.

All right. I just -- did the loss and the LAE came up to a more normal level from a level that had been almost exaggeratedly low. But was there any -- was there an event or a geography or a type of claim that cropped up, or an increase to IBNR? And is there any type of color that you have on the sort of change in percentage of the loss in the LAE as compared -- as a percentage of gross periods?

Yes, Casey. Look, I think you hit some of the points already in the question. Year-over-year comparisons are particularly stark because last Q3 was such a good quarter. So you have a little bit of that playing into it.

But beyond that, what we did have in the quarter, while it was a very wet summer, so we ended up with a lot more claims. We just had to get at more claims in the time I think to do with the rain, so we got a little bit more of that this year.

And secondly, we had some significant fires, right? And a few fires tend to move the number around dramatically. It's part of the risk nature of the business. Yes?

Right. Okay. On a quarter-to-quarter basis, the gross premiums earned declined by about 2.5% which would suggest about a 10% annualized attrition rate. Is that a fair rate to use in modeling going forward?

Casey, normally people ask us this stuff in terms (inaudible) counts and those kinds of things. And we typically have been talking about keeping -- retention rates are in the high 80s -- 85, 88, that kind of range -- maybe 90. So I think yes, you're right in line with that.

Some of the quarter-over-quarter variance occurs also because we don't renew our policies evenly throughout the year. So you have some quarters with a lot of renewals. And policies (inaudible) renewals. Yes.?

And what was the policy count at the end of the quarter?

I don't have it exactly in front of me, but I think it would be somewhere around 150,000, give or take one or two.

What was that? 150,000 or 158,000?

No, 150,000 plus or minus 1,000 or 2,000.

150,000 plus or minus a couple grand.

Yes.

Okay. All right. Great. I'll jump back in the queue and if I have something else, I'll come back in.

Matt Carletti, JMP Securities.

Thanks. Good afternoon. I have a few questions.

The first one, so you guys have a history of being pioneers into kind of areas that maybe others don't want to go and have a pretty good track record at it. I'm curious wind-only is an area that people have really stayed away from. There's been a few that haven't done so well there. Can you walk us through what you see in the wind-only policies and what you see is the opportunity for HCI and why you were attracted to them?

Yes, Matt. It's an intricate path we have to walk because we have to make sure that we take out these policies, you can reinsure them. Because if you think about it, the reinsurance would cover most of the parallel of these policies because it's wind-only. So to make sure that you can pay for your corporate expenses and by reinsuring kind of consistent value, sufficient price to be able to cover these policies. And getting the formula, the algorithms right, to be able to pick the right book of business took quite a while.

And the stuff I'm telling you about is exactly the same concerns the Department would have over the matter. And we had to assure them why the -- why what we were doing worked. All of those things led us into this path.

What also got us here where we (inaudible) are in a different position to most of our other brethren is a couple of things. One is that the wind-only policies tend to obviously be on the coast, right on the beach kind of thing. And it goes also to places where you might to write them a flood policy. So we already -- and this conversation had gone on with the Department well over a year ago in the sense of flood policies and wind-only policies tend to be the same policy (inaudible).

So we have been working in all of those things. But it takes a while to get that formula right and have the right structure with which to do this.

I -- obviously, time will tell as to how well we did this. Yes?

Yes. Do you think that -- and I know this might be tough to answer because you never know when a storm's going to hit -- but I guess assuming that -- you're paying for the reinsurance and there's enough reinsurance to cover the storms so in theory it doesn't really matter one way or another, at least, until renewal whether the storm hits or not. Do you think that the wind-only policies are accretive, dilutive, about the same in terms of ROE to your business as the other policies in the book, the aggregate of these policies?

Well, it depends on which measures you do. When you talk about ROE, right, clearly it's going to be accretive because you just added a big piece of revenue to the top line. And you haven't had to increase E by any. And profits are going to go up, so ROE is going to go up.

(Inaudible) guess about it from the standpoint of -- from a -- there's got to be some amount of incremental required capital because it increases P&Ls and whatnot. So on that, after adding in the incremental capital that it requires -- and I realize you have that capital. I'm kind of thinking of it in terms of like excluding excess capital, think about it in terms of required capital.

Yes, I guess you're asking, is it a better -- is it a more profitable line of business (inaudible) business. Is that--

Yes, eventually. Eventually, yes.

Yes. I think it may be slightly less profitable than our existing book on a wind-only basis. But clearly, because of the fact that we have [flood] opportunities, et cetera, that may change over time. Yes? In fact, it will.

Okay. The next question I have is, does doing the takeout change your share repurchase appetite at all? Should we expect to continue to see you repurchase shares? Or just put that on hold and there's a new growth happening?

Simple answer is I think we have made that commitment by the $40 million. I think that's been earmarked as such.

What may make a difference just in terms of full disclosure is where the shares trade at. Yes?

Of course. Of course. That makes sense. All right.

And then the last one, just a quick kind of cleaning up numbers question. Can -- do you have gross and net written premiums? And weighted average and quarter-end share count?

Gross premiums for the quarter?

Yes.

Gross written premium was $86,085,000.

Great.

Net premium written was $58,401,000.

All right.

Quarter end deployed diluted shares was 11,518,000.

Year to date for the nine months, it's 11,787,000.

All right. Thank you very much. And congrats on the quarter.

Dan Farrell, Sterne Agee.

Thanks. And good afternoon.

A question on progression on the other expense ratio. We saw a trend up through the year last year. And past of that I think was poor timing of accruals for compensation instead of comp expense. I think you've been doing that at a more even pace through the year, but we're still seeing a gradual climb, however. And I'm wondering if that pattern would continue into fourth quarter, if that's an expectation we should be thinking about?

There should be a slight decrease in that.

Okay. Okay, okay, so it is more even. Okay. That's helpful.

And then, just I guess a longer term question on thinking about reinsurance as we look ahead in reinsurance purchase. You guys obviously have a multi-year agreement that serves you well. I'm wondering if you think you'll see opportunities to do additional multi-year as you go forward? Or is that something that you think would be attractive to do versus sort of standard one year type coverages?

This is Paresh. A simple question -- a simple answer about some of this stuff is, it's a long time between now and next June. And the perception of the marketplace is shifting, right? And that's why I'm going to give you a slightly fuzzy answer.

Last year when we were doing multi-year deals, a lot of our reinsurance partners were reluctant or hesitant in doing so. They just didn't want it in their business model. I think what people are now thinking about is that if you did a multi-year deal last year, you locked in a better rate than you will get in the open market this year.

So you now have people -- the reinsurers who might be more not only willing but looking forward to doing multi-year deals. I'm not saying they're going to be but there are some people that are changing their parcel list.

Equally well, on this side of the table, people are going, "Do I want to lock in a multi-year deal if rates are going to be lower next year?" So there's a shift in thinking going on on both sides of the table.

So where all this plays out, who knows? But we remain comfortable with the multi-year deals that we have and then the amount of single-year coverage that we would have to buy -- additional coverage you will have to buy on June 1 of next year. I think we're well positioned for both sets of outcomes.

Putting it differently, we're hedged. Yes?

That's helpful. Then, just one last question just with regard to the wind policies that were taken out of The Citizens. As we think about modeling that, what kind of differences in loss ratio would there be on that? And then also, we've seen some of the experience of what the retention is on past takeouts. Is there any reason to think sort of the retention of this takeout will be maturely different? Or could we use what you've seen in the past as a proxy for that? Thank you.

Yes. All right, let's start with the retention levels rate. Our expectations, it should be about the same. But having said that, obviously, we're dealing with a new class of and a new group of customers, if you like. So they may behave differently. We -- as we do with everything else, we'll be monitoring this closely.

But to date, we don't have any reason to believe the retention rates won't be similar. But equally well, we don't have a track record of saying that it will be the same. Yes?

So that -- in terms of the losses and those kinds of things, if you look at our multi-parallel business, et cetera, the bulk of our losses obviously come from other parallels. It seems like fire, theft, water leaks as we talked about.

When you do a wind-only policy, about the only thing that can -- the losses you cover basically are hurricanes and things like tornadoes and hailstorms, very specific events.

So -- and especially when things like tornadoes -- knock on wood, never say never -- but those are not common perils that occur in Florida between the months of December and June. Yes?

Yes. No, that's helpful. Okay. That's all I have. Thank you very much.

Arash Soleimani, KBW.

Hi. Good afternoon. Just a couple of questions here. It sounds like obviously you're saying the main attraction of the wind-only policies is the opportunity within flood. Just in terms of thinking about that both in the short term and long term, I know you mentioned maybe a couple calls ago that the flood uptake was looking a bit slower. So in terms of these takeouts, what's your anticipation for when the flood piece of it really starts to flow through?

Good question. And we keep fine tuning this and playing away at it. There are progress items that you should be aware of.

One is, I think FEMA has laid out its new rate tables for next year. And I think the premiums are going up from between I think about 15% to 30%, if I remember it correctly. So when those kinds of things flow through, obviously the fact that it was slow this year may not be that for next year as people start feeling the increases of these -- the effect of these rate increases. And that's what we have been trying to communicate all along is be patient. Eventually, things will go in a certain direction.

So those aspects of things are playing into -- falling into place. And obviously, something like a -- this wind-only takeout complements that because a lot of the people who will be looking to convert will already be our customers.

So if you imagine that somebody currently is buying a wind-only policy, a flood policy, and an ex-wind]policy to cover their property, we really don't have any of those three relationships with them right now. By doing (inaudible) takeout, we are going to get the wind-only relationship with them. Their flood-only relationship is going to -- shall we put this way-- going to start deteriorating over time because FEMA. And then, (inaudible) connect the dots from there on out, right?

Right. Right. And obviously, you've had the flood initiative in place or the idea of it for a bit of time. Why was it that prior, the wind-only wasn't as attractive to you? What made it more attractive during this takeout given again just that the flood idea was already in place?

It wasn't a question of attractive or not attractive. There is a lot of science that goes behind this in terms of policy selection, making sure you are in a comfortable position to be able to buy reinsurance, not only next year, but subsequent years for these policies.

So we're doing this because -- and it took the sense of time to do it because we wanted to make sure we got it right.

Yes. No, that makes sense. And then, just in terms of kind of a general rate question. When you're renewing policies now and over the next few months, what are you seeing in your (inaudible) in terms of the primary rate?

Very simple. It's been flat. Because we haven't applied for any rate increases. We don't have any rate decreases pending. But I think it's safe to say that the current rate trend is downward.

Okay. And do you -- well, with that said, given the sort of reinsurance environment, do you expect it to be sort of margin neutral? Or do you think it will be that hurtful to underwriting margins?

Good question. Look, I think the next few months it's downward. It should be margin neutral. But this is Florida. One storm and all of these projections will go in a different direction. Yes?

Yes. The takeout you mentioned December 16th, you get the final numbers. When does the actual assumption itself occur?

It actually occurs on December 16th.

Actually occurs on that same -- okay. And with the multi-year benefit you mentioned, are those benefits just an offset to ceded earned premiums?

A ceded written and ceded earned.

Okay. So the 2.6 was within earned. Then I think you quoted a 2-point-something million number.

Your reducers are written and the earned by the same amount.

Oh, okay. Okay. And then, just last two numbers questions. What were duration and prior period development in the quarter?

Yes, I don't think we have it handy in front of us here. We'll get back to you on it. Yes? It'll be our (inaudible) piling, but we'll get back to you on it. Yes?

Okay. Thank you. That's all I have. Thanks for the answers.

Casey Alexander, Gilford Securities.

Hi. The real estate portion is up to about 5% of your investable assets. Is there a limitation to how far you can go with that either as a percentage of your assets or -- how do you feel about that? And could you give us a little bit more delineation of the real estate strategy at play?

Yes. Casey, I think that whole thing about the investable assets kind of thing, I think you're thinking you call the insurance hub. The real estate we're talking about doing is in Greenleaf. And Greenleaf capital comes from the whole -- from the parent, the (inaudible), not from the insurance sub.

So basically, the real estate deal you're talking about is being paid out of shareholder funds, not policyholder funds.

Casey, there are requirements for segment reporting. And I'm not sure of the percentage of total assets and total income for that quote division. But we're not near that yet.

Yes. And as far what we go off and do with this, we're just playing along with it. We take opportunities as they come along.

Okay. Great. Thank you.

It appears there are no further questions at this time. I'd like to turn the floor back over to Mr. Kevin Mitchell for closing remarks.

Thank you. On behalf of the entire management team, I would like to express our appreciation for the continued support we receive from our shareholders, employees, agents, and most importantly, our policyholders. We look forward to continued success.

Thank you and have a great evening.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.