Hci Group Inc (HCI) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to HCI Group's First Quarter 2015 Earnings Call. My name is Keith, and I will be your conference operator this afternoon. At this time, all participants will be in listen-only mode. Before we begin today's call, I would like to remind everyone that this conference is being recorded and will be available on replay through May 30 starting later this evening. This call is also being broadcast live via webcast and will be available via webcast replay until July 30, 2015 in the Investor Information section of the HCI Group website at www.hcigroup.com. I would now like to turn the call over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please go ahead.

Thank you, and good afternoon. Welcome to the HCI Group's first quarter 2015 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 openings remarks, Richard will review our financial performance for the first quarter of 2015 and then turn the call back to Paresh for an operational update and business outlook. Finally, we will answer 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 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. 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. Thank you for joining us for HCI Group's first quarter 2015 results. We are excited to report our results and provide a business outlook. As most of you know, HCI Group owns subsidiaries engaged in diverse yet complementary business activities, including homeowners' insurance, reinsurance, real estate and information technology. HCI's largest subsidiary, Homeowners Choice Property and Casualty Insurance Company, Inc., is a leading provider of property and casualty insurance in the state of Florida. Homeowners Choice is the fifth largest P&C insurance in the state with annualized premiums of $430 million as of the end of fiscal year 2014. As of March 31, 2015, we had approximately 175,000 policies in force throughout the state.

Also, our reinsurance subsidiary, Claddaugh Casualty Insurance Company, which participate in the Homeowners Choice reinsurance program gives us some flexibility in negotiating with our third-party reinsurers and retaining risk if we so choose.

Our information technology division, Exzeo, develops Web and cloud-based applications designed to improve our insurance operations. We believe they will add value to other companies as well going forward.

Finally, HCI also owns Greenleaf Capital, which owns and manages our real estate operations. Our real estate portfolio consists of at least two Class A office buildings, 19 acres of waterfront property, and multiple retail locations that are currently under development.

Now, turning to our results for the quarter. As Richard will expand on shortly, we reported exceptional results for our first quarter ended March 31, 2015. The first quarter, which marked our 30th consecutive quarter of profitability, was highlighted by the following events. We increased our quarterly dividend to $0.30 per share, which represents an increase of 9% from our previous quarterly dividend rate. We also assumed a small tranche of policies from Citizens in February totaling 4,704 policies with about $11 million in estimated annual premium. Of these policies, 1,605 were wind-only.

Our $40 million share repurchase plan expired at the end of the quarter. During the quarter we repurchased 37,869 shares of stock at a total cost of $1.6 million, or an average purchase price of approximately $42.51 per share. Under the plan over its lifetime, we repurchased a total of 1,028,570 shares at an average purchase price of approximately $38.85 per share.

Turning to our operations, our coinsurance business continued to deliver strong results. As Richard will discuss in a moment, our operating ratios continue to lead the industry and our retention levels remain good and consistent. Overall, the HCI Group had net cash provided by operating activities that exceeded $59 million. But before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the quarter. Richard?

Thank you, Paresh, and good afternoon, everyone. First quarter of 2015, income available to common stockholders totaled $25.3 million, or $2.21 diluted earnings per common share. This is an increase of (inaudible) diluted earnings per common share in the first quarter of 2014. Net premiums earned for the first quarter increased 23.1% to $81.7 million from $66.4 million in the first quarter of 2014. This increase is primarily due to the mix of business generated through the December and February Citizens assumptions.

The wind-only policies recently assumed from Citizens are not subject to reinsurance costs until June of 2015. For the first quarter of 2015, reinsurance costs were 25.4% of gross premiums earned as compared to 29.3% in the same quarter a year ago. Through March 31, 2015, and for reinsurance treaty years beginning June 2013, with our placement of the multi-year reinsurance treaties, benefits of $6.4 million (inaudible), respectively. In addition, we have deferred recognition of $5.9 million as of March 31 related to these adjustments and as discussed in prior earnings calls.

Our loss ratio applicable to the first quarter of 2015, which we define as losses, loss adjustment expenses related to gross premiums earned, were 17.4% compared with 19.8% in the first quarter of 2014. Based on specific exposures (inaudible) wind-only policies are minimal and in the absence of specific weather activity, (inaudible). The expense ratio applicable to the first quarter of 2015, which we define as underwriting expenses, interest and other operating expenses related to gross premiums earned totaled 22.2% (inaudible) in the first quarter of 2014. This decrease is primarily the result of the increased gross premiums earned, as mentioned earlier. Expressed as a total of (inaudible) premiums earned, the combined loss and loss expense ratio for 2015 was 50.4% compared to 60% in 2014. Improvements in these ratios reflect a significant increase in gross premiums earned.

Investment income was impacted by the recognition of other than temporary impairment losses in the first quarter of 2015 of $1.7 million. With the current market volatility and the size of our investment portfolio, impairments may develop. Investment in fixed maturity and equity securities totaled $218 million at March 31, 2015, an increase of $75.5 million from the December [31], 2014 level of $142.6 million. During the current quarter we added approximately $61 million to our investments and fixed maturity securities.

Total stockholders' equity at March 31, 2015 was $206 million compared to $182.6 million at December 31, 2014, an increase of 12.8%. Net book value per share has increased to $20.32 at the end of the quarter from $17.92 at December 2014. During the quarter our insurance company, Homeowners Choice Property and Casualty, received permission from the Office of Insurance Regulation and paid dividend to the parent in the amount of $16.7 million. We are very pleased with these results for the first quarter of 2015 and remain committed to increasing shareholder value. Now, I'd like to turn the call back over to Paresh. Paresh?

Thank you, Richard. Obviously, we are very pleased with these results. The operational momentum we established during 2014 carried into the first quarter of 2015. Even as we remain focused on applying our strict underwriting standards, minimizing operating costs while providing our policyholders the highest level of service, we continue to have our coinsurance business deliver record results. More importantly, during the first quarter, operating activities of the HCI Group enterprise provided net cash of nearly $60 million in addition to the over $88 million provided in (inaudible). With this cash flow and increasing our book value period after period, we can continue to grow even without new major business initiatives. We are continuing improving our operations, we have home-grown systems of technology, and (inaudible) insurance businesses (inaudible). In our insurance operations we consistently focus on policyholder retention, exposure management and distribution development.

Turning to reinsurance. For 2015 renewal, we think the market remains soft, but we do not know how it will turn out. We do plan to investigate alternatives that allow us to accept more measured risk within our reinsurance program using our Claddaugh reinsurance subsidiary. (Inaudible), as Richard stated earlier.

We expect to continue diversification of business operations and investments throughout the year. For example, we are making investments in real estate that we believe will add long-term value to the shareholders in a tax-efficient manner. The value of these efforts may not be fully reflected on our financial statements for a while to come. Consequently, while this diversification may cause temporary earnings volatility, we believe that in the long term they will be a net positive.

Finally, in terms of acquisitions and mergers, we remain confident that significant accretive opportunities lie in front of us, we just have to be patient and wait for them to come to us. With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

Yes. Thank you, sir. (Operator Instructions) The first question comes from Matt Carletti with JMP Securities.

Thanks. Good afternoon. Just a couple of, I think, all numbers questions today. First off, do you have gross and net written premiums handy?

For the quarter, [$81.5] million. Net was 53.6 million.

$53.6 million, and could you repeat gross? It cut out for the first part of it.

$81.5 million.

Okay, great. And then my other questions is on the expense ratios, both commissions and other operating. They were both lower than we've seen them in recent memory in the quarter. On the commissions, has something changed that makes it lower? Are the wind-onlys influencing that? And then, secondly, on the other operating, it's been kind of, pretty stable around $9.5 million for several quarters; is that more of how we should think about that in terms of fairly steady dollars and the ratio will be whatever it is, you know, how the [earn] comes out?

A lot of the wind-only policies haven't really renewed yet, and there will be a slight increase in our deferral rate, deferred commission.

Okay.

Okay, thank you. I'm sorry, did --

Just to follow up. So, is there something else that is dragging down the commission expenses? It's been 12-ish in the quarter and it's been between 14 and 16 for the past year?

Well, you've got quite a bit of earned premium not subject to commissions yet.

I follow you, I follow you. And then on the other side, the other half of the question, the operating expenses? They are looking at more in dollars, is that --

I look at it more in dollars.

Yes, are you pretty comfortable? I mean, should it be -- should we look at it, ballpark, it was $10 million in the quarter. As you grow, obviously we should expect some scale there, but is that in the near term, at least, a fairly maintainable number?

It should be relatively consistent throughout the year.

Great. Very helpful. Congrats on a nice quarter and thanks.

Thank you. And the next question comes from Dan Farrell with Piper Jaffray.

First question. Paresh, you made the comment in you prepared remarks about feeling confident that we'll continue to see some opportunities in M&A. I was wondering if you could expand on that a little bit. Is there anything in the marketplace that you are observing that makes you think that can take place? Is it the increasing competitive environment that might create opportunity? I was just trying to get a little more of your thoughts around that comment. Thank you.

Evening, Dan. Love the new business card. The idea about the M&A activity, we're seeing people having different opportunities come for sale. The other side of this is as word is getting out that (inaudible) we are getting all kinds of business opportunities that are provided to us, and I'm giving you a range that it has been as far afield as owning a chain of donut franchises, right? I'm not saying that we're going to do that, I'm just saying that we (inaudible). And some of those things may turn out to be a very good investment, and this in the context of once upon a time, we bought our headquarters office building, which looked very unusual at the time, and it is no appraised more than twice what we paid for it, right? So, this is a comment about it may create some volatility in the short term but it's really good long-term [value]. That's what we're looking at. So, we think something will come (inaudible) there are opportunities out there.

Great, thank you. And then I was just wondering if you could give us any updates on how your efforts are going with flood insurance?

As we have said for the last couple of quarters, it's been slow, but it's hopefully starting to now take some traction from the basis that the NFIP just passed through their first 25% rate increase as of April 1 of this year. So, as people start seeing those, we hope to pick up a little bit more activity in the flood book. But equally well, you can appreciate that when you're looking at 175,000 existing policies, it takes a lot of flood policies to become a material number, but it is increasing.

Okay, great. Thank you very much.

Thank you. And the next question comes from Casey Alexander with Gilford Securities.

Hi. Good afternoon. Can you review the total policies that you received from both take-outs, the December and the February, the number of policies and what you believe the premium attributed to those policies will be over the course of the next year?

Okay. Casey, I think the official numbers, and you can look them up on the Citizens website, was about 36,500 policies were technically assumed in December, and 4,700 were technically assumed in February. So, if you add those together you end up with about 40,000 policies. I say technically assumed, because (inaudible) almost think of whether you end up net of that. But going through all of that stuff, I think what we set out to do and what we did achieve between the two take-outs is about $100 million of premium in force that will roll onto our books over the next year. Does that answer your question?

Yes, it does. And the attrition rate, how do you see that developing? I know there is always a moving number, but how has it been developing thus far?

I almost will tell you it's incredible how good it is, right? Because of the way we've been doing these take-outs (inaudible), we are seeing renewal rates on these, on the assumed book to be consistent with our existing book, which is approaching 90%. So, the book is enrolling, if that is what the question is, yes?

Yes, yes. I would never ask you to speak to the results of a competitor, but a competitor reported it had adverse reserve development from 2014 and also water losses apparently this year in the Tri-County area. And that has been the bulk of where their take-outs have been. I was wondering if you guys have seen anything similar either this year or last year related to water losses in the Tri-County area?

I can't speak to other people's numbers, but I can speak to our first quarter. In Q1, at least from a claims frequency perspective in the Tri-County area, our claims count was actually down. And part of that was mainly because last year in Q1, there was a bad storm that went through Palm Beach that actually elevated the claim counts a little bit, right? So, that's why we're down. If you actually netted out for that particular thing from Q1 last year, I would say we haven't seen an uptick in frequency. Severity, we have seen some slight uptick because the assignment of benefits issues are more active down there, but not enough to make it a material conversation item on our part. And, if any, which I think (inaudible), is baked into our numbers already.

Okay, that's great. Thank you. And, lastly, as much as I like a good donut, we certainly appreciate your contemplative plan as it relates to acquisitions. Do you expect that the board would take up a new share repurchase plan? Because you used last year's very judiciously in terms of when you executed it and the prices that you executed it at. And I think it's made a lot of sense in lieu of a good acquisition falling your lap. Do you think that you as a manger would recommend it to the board, of which you are also chairman of the board, to take up a new share repurchase program?

Casey, look, over the course of the years of this stuff, in the same share price, same whatever environment, we do change our minds as time goes along, and I would tell you, having just come off of one, we will probably wait to see how some of the next few months develop, right? The item being, on the one hand, if we may end up doing an acquisition, until that date, building up some cash reserves would be a useful thing to do. On the other hand, if (inaudible) and to put that capital to work arises, it will eventually reach a point whereby we will say what is the best use of the cash? And the board will obviously debate the obvious answer that you get to that point, which is either a share buyback, dividend increase, or some kind of special dividend or the usual kinds of things that we talk about.

Right. I thought maybe you might just want to have one in your pocket in case there's real volatility in the market and yet no opportunity has shown itself yet, it might make some sense. But thank you very much for taking my questions. I appreciate it.

Actually, Casey, look, let me just answer that last little bit about having one in our pocket. Generally speaking, we tended to be a company that when we say we're doing a buyback, we are actually go and buy back shares, so I think there is some concern that we don't want somebody to say we've got a buyback in place. That doesn't actually buy back shares. So, I think if and when we were to announce it, we generally have then very quickly followed through and executed upon it. So, it puts us where we are.

Yes, okay, great. Thanks for taking my questions.

Thank you. (Operator Instructions) And the next question comes from Arash Soleimani from KBW.

Thanks, and good afternoon. Just a few questions here. So, it seems like what you're saying is the acquisitions you are going after are more likely to be outside of insurance; is that the right way to think about it?

Arash, I don't necessarily know that we would absolutely say that would be. I think what we would tell you is the insurance acquisitions that we have been looking at tend to be very richly priced currently. So, would we like to do an acquisition in insurance? We would gladly do it, but we are not seeing competitive pricing as we are seeing in some other areas. So, that's where the difference of opinion comes from.

Okay. So, it sounds like you're saying you'd be just as happy to do it outside insurance as you would to do it in insurance. There is not a preference of one or the other, per se?

Yes. Look, we're in the market to buy something, a good business that is fairly priced, right?

Right, right. And in terms of if it is something outside insurance, is it something that would maybe fit in well with Exzeo or something existing that you already have, or would it be potentially something that is in an industry outside, I guess, your current operation?

We have stated this for several years and we usually executed upon it. If we were to do an acquisition, the conversations we have is, first of all, is it a good business to own? And, secondly, do we know that there is a management team that is going to -- that would identify (inaudible), which is whether it's the existing management team or some other management team, because we don't presume to suddenly imagine that we know how to run an insurance company in Colorado any more than we presume that we have the expertise to run a donut franchise in Texas, yes?

Right, right. And, I guess in terms of, this is a similar question, but in terms of future plans for HCI, HCI's next steps, is there a right way to think about that as on the Citizens front, obviously that's not the opportunity it was even Q4 of this past year, or in prior quarters. So, is the next step for HCI, from your position -- I guess what I'm asking you, is M&A the next thing for HCI?

It is more clearly answered if we can know what's going to happen this summer and throughout this United States in terms of hurricanes and other catastrophes, etc. I say that because those things would materially change the outlook, and we do know that about this business is that every six months outlooks change very quickly. So, given all of that, all we are doing is making sure that we are prepared for when that opportunity comes along to take advantage of it. Equally well, if there is no opportunity, which is where currently the idea seems to be from Citizens, etc., to be patient and wait, and plan for the day when that does arrive, yes?

Right. That makes sense. And are you also looking at M&A opportunities in other states?

We are looking at M&A opportunities wherever we are presented them. Any one of the lines of businesses are presented. So, this is again whereby you say no a lot of times to get to a yes. Just the nature of the deal, yes?

Okay. And did you say something earlier about Claddaugh? The call was cutting out a bit at that point. I just heard you mentioning something with Claddaugh. I don't know if you could repeat that?

Yes, great question. (Inaudible) that we have that is internal to the organization, given our cash position and the health of the business and the cash flow that is there, we are in a position, if we deem appropriate, to actually retain some risk in Claddaugh, and thereby actually increasing our profitability by being a strategic reinsurer of our own insurance company.

So, like this past year you were at $10 million in Claddaugh, so is what you're saying is that you would increase the $10 million?

Yes, possibly.

Okay. And is that in terms of your, I think the total, if you take Claddaugh and I guess what you retained in terms of the third-party insurers that you worked with, so I think you had an $18 million retention. Should we think of this year something you want to keep the same, something you want to increase now that you're bigger? What's the right way to, I guess, think of, I guess, the 28. Should we assume the 28 moves up, moves down, stays the same?

Well, a simple way of thinking about this, as far as the insurance subsidiary goes, typically the industry norm is 15% of year-end surplus from the previous year, which put us at about $26 million just for the insurance subsidiary. And that is not occurring for any other reason than the increase in the surplus and capital position of the insurance subsidiary. So, these things are getting bigger for us and for everybody else as businesses grow and thrive.

Okay.

The Claddaugh part, we might increase it from $10 million to some other number, assuming we think it's appropriate.

Okay. So, that was basically the goal there was just keep and deploy access cash that you have in a way that you deem profitable?

Yes.

Okay. And a numbers question for Richard. Have you mentioned what the weighted average diluted shares outstanding?

Weighted average at the quarter, end of the quarter was 11.4 million. That's the diluted share count. The weighted average diluted share count was 11,300,000, approximately.

Okay, thank you. And was there any favorable, unfavorable development in the quarter?

As far as?

Just reserves developing favorably, unfavorably?

They are consistent. They are as consistent as they have been.

Okay. And then the last question I have here, in terms of the flood. I know you mentioned April 1 there is a rate increase that kicks in. Let's say that's going to get you some traction on the flood front. How should we think of the margins on that business? The reason I asked is because I think maybe one year ago even you had mentioned something about that business being a break-even business. Is that something where you could actually have a positive underwriting margin?

Yes. I think at this point, because of the progress we've made in terms of selection of policies, etc., it would be -- we are now looking at that business much better than break-even. In fact, one that meets our profit target. As long as we take the right policies and we say no to the wrong policies, yes?

Okay. Okay, thank you for the answers and congrats on the quarter.

Thank you.

Thank you. And we are currently out of time, so at this point I would like to turn the call back over to management for any closing comments.

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 (inaudible). We look forward to continued success in 2015.