Hci Group Inc (HCI) 2015 Q2 法說會逐字稿

Good afternoon, welcome to HCI Group's Second Quarter 2015 Earnings Call. My name is Tim, and I will be your conference operator this afternoon. At this time, all participants will be in a listen-only mode. Before we begin today's call, I would like to remind everyone that this conference call is being recorded, and will be available for replay through September 4th starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until October 4th on 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. Mr. Mitchell, please proceed.

Thank you, Tim, and good afternoon. Welcome to HCI Group's Second Quarter 2015 Earnings Call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; Richard Allen, our Chief Financial Officer.

Following Paresh's opening comments, Richard will review our financial performance for the second 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'd 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 of these 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 of 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. Welcome to HCI Group's second quarter 2015 earnings call. As most of you know, HCI Group is a holding company with subsidiaries engaged in various business activities. Our principal operating subsidiary, Homeowners Choice Property and Casualty Insurance Company, which provides Homeowners Insurance in Florida. Based on written premiums, Homeowners Choice is the fifth-largest homeowners' insuror in the state of Florida.

In addition, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in the Homeowners Choice reinsurance program. We Claddaugh to retain selected levels of catastrophic risk and avoid the associated third party reinsurance premiums.

We also have an information technology operation, Exzeo, which develops innovative products and services for Homeowners Choice, the insurance industry, and perhaps others as well. We have high expectations for our IT operations.

Finally, we have our Greenleaf Capital Division, which owns and manages a diversified and growing portfolio real estate investments.

We continue to investigate strategic opportunities to add to and further diversify our operations.

Now turning to our results for the quarter. The second quarter of 2015 marked our 31st consecutive quarter of profitability. During the quarter, we generated $22 million of net income, or $1.93 of earnings per common share. We also paid $0.30 per share in dividends, our 19th consecutive quarter of paying dividends. This brings the total dividends paid to date to $4.35 per share.

We increased our book value also, and the end of the quarter was at $22 exactly per share, up from $17.92 per share at the end of last year. This represents an increase of over 23%.

Finally, we also successfully placed our reinsurance program for the 2015 hurricane season effective June 1st. The program provides event coverage up to approximately $1.45 billion, which, according to catastrophic models is sufficient to cover the probable maximum loss resulting from a one in 260-year event.

All of our private reinsurors are either a invest rated A- or better, or they have fully collateralized their exposure to us.

As we said, Allen will expand on in a moment, Homeowners Choice continues to operate with a high degree of efficiency. We believe our operating ratios lead the industry and that these efficiencies are the result of our adherence to strict underwrite pricing guidelines, our focus on minimizing operating costs and our ongoing commitment to customer service.

Now I invite our Chief Financial Officer, Richard Allen, to take us through the financial performance for the second quarter. Richard.

Thank you, Paresh, and good afternoon. For the second quarter of 2015, income available to common stockholders totaled $22 million or $1.93 diluted earnings per common share, and increase of 34% and 38.8%, respectively, from the $16.4 million and $1.39 diluted earnings per common share in the second quarter of 2014.

For the six-month period ended June 30th, net income available to common shareholders increased to $47.4 million compared with $34.1 million in the same period of a year ago, an increase of 39.2%.

Net premiums earned for the second quarter of 2015 increased 21.9% to $76.4 million from $62.6 million in the second quarter of 2014. Net premiums earned for the six-month period reflect an increase of 22.5% to $158.91 million compared with $129 million for the year-ago period. This increase is primarily due to the mix of business generated through the December 2014 and February 2015 Citizens assumptions and subsequent renewals.

Direct and gross premiums written for the quarter were $156.2 million and $155.3 million, respectively. For the six-month period, corresponding amounts were $238.1 million and $236.8 million.

For the second quarter of 2015, reinsurance costs of $31.4 million or 29.1% of gross premiums earned as compared with 31.3% in the same quarter a year ago.

Year-to-date stated premiums of $59.2 million or 27.2% of gross premiums earned compared with 30.3% for the same period of 2014. We anticipate that ceded premiums for the remaining quarters of the 2015 [treaty] year will be in a range of $40 million to $42 million per quarter.

During the three and six months ended June 30, 2015, as a result of our placement of the multi-year reinsurance treaties that began in June of 2013, we have accrued benefits of approximately $6 million and $12.4 million, respectively.

As of June 30, 2015, we had a total of $40.5 million of accrued benefits and $6.7 million of ceded premiums deferred related to these adjustments as discussed in prior earnings calls.

Our loss ratio applicable to the second quarter of 2015, which we define as losses and loss adjustment expenses related to net premiums earned, was 26.9% compared with 29.3% in the second quarter of 2014.

For the six-month period ended June 30, 2015, our loss ratio was 25.1% compared with 28.6% for the period ended June 30, 2014. Decreases on our loss ratio are related to the mix of business that we incur.

The expense ratio applicable to the second quarter of 2015, which includes underwriting expenses, interest, salaries and wages, and other operating expenses related to net premiums earned totaled 30% compared with 34% in the second quarter of 2014.

The expense ratio for the six months ended June 30, 2015, was 28.5% compared with 33.1% for the six months ended June 30 of 2014.

The year-over-year decreases are primarily due to a decrease in the stock-based compensation expense. Expressed as a total of all expenses related to net premium term, the combined loss and loss expense ratio for the second quarter of 2015 was 56.9% compared with 63.7% in the same quarter of 2014.

For the six-month period ended June 30, 2015, the combined loss and loss expense ratio was 53.5% compared with the same period in 2014 of 61.8%. Improvements in these ratios reflect a significant increase in gross premiums earned as well as a change in the mix of policies as already mentioned.

Investment-related income was impacted by the recognition of $293,000 of other than temporary impairment losses in the second quarter. With the current market volatility and the size of our investment portfolio, investment impairments may develop.

Year-over-year for the six-month period, investment income reflects a decrease primarily the result of these other-than temporary impairment adjustments and our portfolio values. Investments in fixed maturity and equity securities total $225.8 million at June 30, 2015, an increase of $83.1 million from December 2014 level of $142.6 million.

During the six months ended June 30, 2015, we added approximately $68.4 million to our investments and fixed maturity securities. Total stockholders' equity at June 30, 2015, were $225.7 million compared to $182.6 million at December 31, 2014, an increase of 23.6%.

Paresh mentioned net book value per share has increased to $22 per share as of June 30th, from $17.92. This is based on 10,263,149 shares outstanding at June 30th.

As these results demonstrate, we have experienced solid year-over-year improvement during the second quarter of 2015.

Now I'd like to turn the call back over to Paresh.

Thank you, Richard. As I stated earlier, we've secured our reinsurance program for the 2015 hurricane season. Looking ahead, we believe that our program would enable us to comfortably absorb two Hurricane Andrew-type storms in a single year. We have also mentioned on our previous calls that our strong financial position allows us to increase a level of risk we're retaining Claddaugh.

The 2015 hurricane season, Claddaugh retains approximately $78 million of risk while displacing $26 million of third party premiums, which adds directly to our profit from operations. We think this is a prudent risk and one that we are very capable of affording.

Although items of note -- we continue to see small areas of value in certain pockets of Citizens' policies. We also see our relative portfolio continue to grow. We plan to offer new products and services and put our technology to use and, finally, our strong financial position should enable us to act quickly should accretive opportunities become available.

In summary, we are very pleased with our results and the actions we have taken for the future. We are excited for the challenges and opportunities that lie ahead of us.

With that, we're ready to open the call for questions. Operator, please provide the proper instructions.

Thank you. (Operator Instructions) Matt Carletti, JMP Securities.

I had a couple of questions, kind of big picture type questions, and they're kind of related. The first one is I'd just love to get your view, kind of, one of the companies that started the Citizens takeout, been doing it for a long time of where do you think that opportunity stands today? I know it's just one of the opportunities you have, but love to hear your (inaudible) thoughts?

Sure, Matt. I think, you know, Citizens consists of a number of different books of business, it's not just one block. Really, the main multi-peril poll for personal lines is fairly picked over and tapped out at this point. But we do see opportunities in things like the wind-only book.

If you recall, last year we were the -- one of the first companies to do a big wind-only takeout because what we saw was an untapped pool. That pool still remains largely untapped, but we are extremely aware that there are a number of other companies looking at that pool now a year later, and we realize what we saw last year. So we are looking to possibly do something with that pool in the fourth quarter.

Okay, and then, more broadly, maybe it's a growth question on that's kind of just one opportunity, but where do you see the biggest growth potential over the next few years? Obviously, you have flood, you have some IT initiatives, you have the commercial real estate book. I'd just be curious to hear where an update on where you think your best opportunities lie?

I think that I'll talk to you right across the whole piece, right? So we'll start with the real estate. The real estate opportunities, basically Greenleaf, to some degree, operates almost like a REIT-like structure owning lots of real estate, they're adding more to it. The only difference being is that the cash it needs to acquire more properties -- if you are a REIT you have to keep issuing more shares. We can do it from the cash flow coming off the insurance operations. So that represents an opportunity for growth, but we don't have to go into other states or anything else.

The second item in terms of growth is I think everybody is rapidly looking just to grow by growing top line. We are looking at it differently. We are saying we should grow in places where the opportunity lies in our favor not increasing competition.

So, for example, we could expand to other states in multi-peril lines, but the market is softening, and competition is increasing in every state in those areas. The part we are concentrating on, like the wind-only take at our Citizens and the flood opportunity, which is more of a national opportunity, both markets, the primary rates are going up quarter after quarter, year after year, for the policyholders.

So we are entering markets where rates are still hardening. Everybody else seems to want to compete for market share in areas that are softening. So in both areas, we sort of have a untapped field ahead of us, and historically, this is how we always operate and done very well at. We chase hard markets, and everybody else follows us later on and chases the markets when they become soft. So we continue to do that for the coming quarters and years.

Casey Alexander, Gilford Securities.

The reinsurance treaties that you put into place, I mean, for one in a 260-year storm is the highest that the Company has ever chosen to protect their book. Obviously, that comes with a tradeoff in terms of the reinsurance premiums that you're ceding. Can you give us, sort of, what the Company's thinking was in terms of putting together such a strong treaty?

Absolutely, Casey. It's a couple of things. One is, yes, on an absolute number, that number is the highest it's ever been. But part of that is we also have requirements that they're supposed to buy to both from the OIR and from Demotech, our rating agency.

So what we bought definitely conforms to all of those things. And part of what you're seeing in the one in 260 is the result of two things that have maturely changed year-over-year. One is hiding the wind-only book means that you really end up buying reinsurance that works slightly differently. And, secondly, the CAT fund is shifting around in our reinsurance tower, as well.

And, thirdly, the CAT fund is, in itself, how much coverage it provides is shifting. So all of those things combined together can move us to the number that we are at. It is a very large number, and it definitely means that Homeowners Choice is very well protected from any major storm, because both at the top of this tower would require a lot of outcome.

I mean, I think you can do some very simple math whereby if you add -- if you divide the top of the tower, which is $1.45 billion, by the number of policies we have, you end up at a number of something like $8,000 per policyholder or something that we have just for one event, which is a huge number.

Okay, great, thank you. Secondly, can you sort of -- because this has become a lot more complicated than it has been in the past with a captive reinsurance company. Can you, sort of, define the Company's retention both traditional CAT and then you've sectioned off a flood side of the portfolio. So can you give us a feel for kind of the two sides of this portfolio and what the Company's retention is?

Sure, and, Casey, look, the way to look at this is as we have multiple divisions, we do look at them slightly differently. So job one is to make sure that the Homeowners Choice, which is the regulated insurance subsidiary, is very well protected. And, as I said, even after two Hurricane Andrew-style events, that Company will be very well capitalized to continue doing business, going forward. So we made sure that happens, one. And because you have that, you can then do other things.

So one of the other -- so one of the ways we did this was when we got into the flood business 18 months ago, there was some uncertainty about what that risk meant, et cetera. So we constructed reinsurance in a fashion whereby Homeowners Choice really has all losses from flood losses covered by third parties. The third parties being Claddaugh at the lower end of the tower, and third party reinsurance above that.

So having done that, it gets everybody's safety that a flood tower in no way affects and the flood exposure nowhere affects anybody in Homeowners Choice. Having segmented that, everything else is in what we call the main tower, which is the main reinsurance that we talk about. And what we did there was Homeowners Choice subsidiary again, that subsidiary only has $16 million of retention in the first event and $16 million of retention the second event.

When you look at that against a business that has $180 million of surplus and probably a lot of tax credits that it can recoup in the event of losses, that's really not a great deal. So that protects Homeowners Choice, and once we know that is so well protected, we can look at the capital in the rest of the group and say what can we do with it? And that's when we came into the product part of it where Claddaugh had an opportunity that, you know, we had an [arm's length] transaction lined up from Homeowners Choice where we were going to cede $78 million of risk to third parties. The premium associated with that was $26 million.

When you look at those numbers you say, if you can afford to keep it, why wouldn't you keep it? And we did. But, you know, we basically met three criteria. Criteria one was we only retained risk after Homeowners Choice was fundamentally secured. Two, even in the softening reinsurance market, the premium was of such a nature, of such amounts that it made sense for Claddaugh to take it; and, three, Claddaugh actually had the capital with which to collateralize it, which it did. So meeting all those three criteria enabled us to do this.

It's what you are now seeing the true value of the book of business and the diversified operations that we run. In any given quarter, we always have a lever we can pull in one division or the other, and we are quite happy to do it as long as we collectively deliver the results our shareholders expect of us.

Arash Soleimani, KBW.

I just have a few questions. One, I know these are pretty small, but I'm just curious, where are the OCTI losses from Q1 and Q2 coming from?

We have developed some of our investment portfolio includes equities, and [joys] of equities is they go up and they go down, and given the numbers you are posting when you have anything that goes down, OCTI is a great way of adjusting your cost bases.

One of our criteria, Arash, is it's got to be in an impaired situation for a minimum of 12 months before we consider it. We look at probable downgrades in the stack by various analysts, and then what's our potential to hold it to maturity on some items?

And a lot of these things, because they're equity, we do hold onto them, and that's why they become OCTI. If we had told them because we didn't believe that they would have any issues, then you would have just run through the income statement. These things are showing of OCTI because they are down in the market but we haven't -- we don't think they are over and done with. So we sort of continue to hold onto them and sometimes these things have a way of coming back.

So, Richard, from his side of the table, marks them down as it meets the criteria. From the Investment Committee side of the table, they continue to hold them because they still think it's a good investment, especially as some of these things that are being marked down, actually also have a very nice yield attached to them. (multiple speakers) BDCs, oil sector investments, those kinds of things, yes?

Okay, that makes sense, thanks. Then a few numbers questions. One, could you provide a gross premiums written and policy count?

I think gross premiums written I mentioned, but just a second, and I'll dig it back out for you here.

Yes. I think the policy count at the end of the quarter was around 170,000 or so.

And do you have -- do you track, I guess, organic policy generation for the quarter?

No, we don't, because it's almost so meaningless in our measurements over the years, that we just don't track it.

Gross premiums written for the quarter -- $155.3 million.

Thanks for looking that up. And was there any development, favorable or adverse, in the quarter?

As far as losses, no.

Okay. My next question is do you guys have any files, rate increases for flood?

I don't think we'll actually -- that's an interesting question, Arash. I don't think the departments in the mindset prove any increases of any rates at the moment. So I'm sure we might have some flood rates out there somewhere, but I also know that they will -- it would be wishful thinking to imagine that you actually had an increase through the department.

And do you have any rates filed in other states?

Not on an admitted basis. We have ENS licenses in a couple of places, but that's a different situation.

Okay, and I wanted to confirm something from Casey's question -- did you respond to Casey's question that flood -- there's no exposure for flood inside your statutory subsidiary. It's only within Claddaugh and within third parties.

Minimal exposure is retained within the insurance company. (inaudible) percent.

I'm sorry, what was that?

Yes, I think it is minimum in [grounding] areas kind of thing, if there is anything there that shows up. We're just saying that either an abundance of caution, I think it really may be zero, but we never like to say zero, yes?

So, basically, all of HCI, all of the exposure for flood is basically in Claddaugh then for HCI? Is that correct?

Mostly, yes.

Primarily.

And then -- so the [soft-based] compensation, does that flow through other operating expenses?

Yes.

And my other question on the CAT fund, you mentioned in your comments that it's shifting for HCI? Can you just talk about how it's shifting and how that impacts you?

Yes, absolutely. I think two things -- one is as you do a wind-only book mixture, those policies carry a higher cap on premium and have a higher coverage associated with them. So that moves the thing around. The other thing is a number of companies opted out of the 90% crunch of their election this year, which meant the rest of us, the ones that did keep the 90% election, actually got a lot more limit for the same dollar. So it added to the amount of reinsurance cover provided by the CAT fund. I think it increased it by about 10% more than it would have if people hadn't taken down the retentions or the participations.

Did you have to pay more for that or were you able to get that existing rate?

No, it sort of comes out of the CAT fund. What the CAT fund does is has everybody take -- select their participations. Based on that they [try to read] whatever the premiums they're going to be charged. But the other side of that is they then divvy up $17 billion based on everybody's participation. So we just got a greater share of the $17 billion because a lot of people spend down from 90% to 45% at the last moment.

Okay. And when you said in your comments, you mentioned flood is a national opportunity. Can you talk to -- I guess expand on that a bit more?

Absolutely. Let me just give you three sets of numbers, and then tell you how big an opportunity it is if you know what you're doing. Don't get me wrong, there's ways of losing money in any market. And, you know, people routinely prove that to us.

But use again NFIC's numbers. I think the NFIC writes about $3.5 billion worth of premiums throughout the United States. Of that $3.5 billion, $2.5 billion is in the East Coast states, that's going from Texas around the Gulf to Florida and up to Maine. And of that $2.5 billion, almost $1 billion of it is in Florida. We think over the course of time, this could help us expand into all these other East Coast states and we could probably easily pick up 15% to 20% market share. I don't mean next week or next month or next year, but over the course of the next number of years and just doing simple math, 20% of $2.5 billion is around $500 million.

Okay. And you mentioned -- you said the rates were hardening in two places. One was flood, what was the other one?

The wind-only (multiple speakers).

(inaudible).

Yes.

What are the rate increases you're seeing on the wind-only side?

Well, I think Citizens filed rates for this a year ago where they ran up about 10% or so.

Okay.

I don't know the exact number, you'll have to ask Citizens, but I think there was some great increase (inaudible) as of February 1 this year, yes?

Okay. And in terms of the -- your IT initiative -- I guess my question there is do you have plans, and not necessarily in the next six months but just generally, maybe in the next two or three years, are there plans to monetize some of the IT products that you have? Or is the idea there moreso to use them internally and to, kind of, save money by not having to outsource those functions?

I would answer both. As far as internally, using internally, I think -- monetizing by using it internally, we already do that. I think our numbers speak to that, in fact, in terms of efficiency, et cetera. As far as monetizing it with third parties, I think eventually third parties will realize the value of these tools and at some point we are quite open to licensing them to third parties. And when we do, there will be some valuation that will be created for that subsidiary, because all the tools are designed such that Exzeo develops them. Homeowners Choice is merely the first licensee of those tools, but they are available to be licensed by third parties.

Thanks, and just a very last question -- on the expense ratio I know you said stock-based compensation drove it down. Again, year-over-year it went down, like, 400 basis points. Was that all from stock-based compensation or was something else flowing through there as well -- the entire year-over-year decrease?

Stock-based compensation was a primary piece of it.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few 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 in 2015.

Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.