Hci Group Inc (HCI) 2015 Q3 法說會逐字稿

Good afternoon and welcome to HCI Group Third Quarter 2015 Earnings Conference call. My name is Matt 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 on November 3, later this evening. The call is also being broadcast live and will be available via webcast replay until December 3 in the Investor Relations section of the HCI Group website at www.HCIGroup.com.

Now I'd like to turn the call over to Mr. Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.

Thank you and good afternoon. Welcome to HCI Group's Third Quarter 2015 Earnings Call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, and Richard Allen, our Chief Financial Officer. Following Paresh's opening remarks, Richard will review our financial performance for the third 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. Welcome to HCI's third quarter 2015 results.

As most of you know, HCI Group is a holding company with subsidiaries engaged in various business activities. Our principle operating subsidiary is Homeowners Choice property and casualty insurance company which provides homeowner's insurance in Florida.

In addition, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company which participates in the Homeowners Choice reinsurance program. We use Claddaugh to retain selective levels of catastrophic risk.

We also have an information technology operation called Exzeo. Exzeo develops innovative products and services for Homeowners Choice, the insurance industry, and perhaps other industries. Finally, we have Greenleaf Capital which owns and manages a diverse portfolio of real estate investments. We continue to investigate strategic opportunities to add to our existing operations and to diversify our operations to other operating divisions.

Now, turning to our results for the quarter, as Richard will expand on shortly, we reported profitable quarters for the third quarter, marking our 32nd consecutive quarter of profitability. A few important takeaways for the quarter are the following.

One, our insurance subsidiary experienced increased claims activity due to a weather event in West Central Florida. Secondly, we experienced investment losses primarily caused by a few investments in our equity portfolio in Q3. Despite this, we still generated $7.4 million of net income or $0.71 per share diluted earnings per common share. Also, we paid $0.30 per share in dividends which marked our 20th consecutive quarter of paying dividends.

Q3 is always our most challenging quarter considering our exposure to hurricanes and other weather-related events. We are very happy to finish the quarter with a substantial profit.

But before I go on I would like to invite our CFO, Richard Allen, to take us through our financial performance for the third quarter. Richard?

Thank you, Paresh. Good afternoon, everyone.

For the third quarter of 2015, income available to common stockholders was $7,371,000 or $0.71 diluted earnings per common share. For the same period in 2014, we reported income available to common stockholders of $14,052,000 or $1.23 diluted earnings per common share.

For the nine month period ending September 30, 2015, net income available to common stockholders was $54,771,000 or $4.84 diluted earnings per common share. Net income available to common stockholders for the same nine month period of 2014 was $48,106,000 or $4.07 diluted earnings per common share. This reflects increases of 13.9% and 18.9% respectively for the nine month period.

Gross premiums earned for the three month period ending September 30, 2015 were $103,842,000 compared to $88,944,000, an increase of 16.7% over the same period in 2014. This increase is primarily due to the renewal of policies assumed in December of 2014 and February of 2015. Premiums seeded for the current three month period were $41,070,000 compared to the $27,684,000 reported for the same period in 2014.

HCI recognizes the increase in cost of our reinsurance program for the current treaty year that was impacted by rate increases from the Florida hurricane catastrophe fund and an overall increase in the units of reinsurance purchased for the current hurricane season. Losses and loss adjustment expenses incurred for the third quarter of 2015 were $26,200,000 or 41.7% of net earned premiums compared to $21,991,000 or 35.9% of net earned premiums for the same period of 2014. The increase in losses and loss adjustment expenses in the quarter is a result of the rains in Florida and from development in prior year loss reserve.

Operating expenses increased by approximately $900,000 quarter over quarter, primarily the result of increased policy acquisition costs on renewal of the policies assumed from citizens in December of 2014 and February of 2015 and an increase in salaries due to an increase in staff count. Minimal increases are partially offset by a reduction in other operating expenses resulting from a reduction in stock-based compensation expenses.

Our investment portfolio generated a loss of $800,000 for the quarter compared to investment gains in the same period a year ago of $4,507,000. in the current quarter we recognize losses from limited partnership investments of $2,400,000 offset by approximately $1,900,000 in interest and dividend income as compared with the same period in 2014 in which we realized gains of $3,294,000.

During the current quarter we recognized other than temporary impairment losses of $1,886,000 on two fixed maturity and five equity securities. Our combined ratios, the percentage of losses and loss adjustment expenses and operating expenses through net premiums earned are 78.6% compared with 72.1% for the quarterly periods of 2015 and 2014 respectively.

For the nine month periods of 2015 and 2014, our combined ratios are 60.7% compared to 65.1% respectively. Our combined ratios to growth premiums earned improved both quarter over quarter and for the comparative nine month periods.

On the balance sheet, stockholders equity has increased to $229,140,000 from $182,585,000 at December of 2014, an increase of 25.5%. Invested assets have increased to $233,216,000 from $168,799,000 over the prior year end. Cash and cash equivalents at September 30, 2015 are $331,542,000 compared to December 31, 2014 of $314,416,000. As has been discussed on prior earnings calls, the benefit of the multiyear reinsurance treaties have been recorded in other assets of $31,836,000.

Net book value per common share has increased to $22.32 as of September 30, 2015 as compared to $17.92 at December 31, 2014, an increase of 24.6%. Our balance sheet continues to present a solid financial base for growth opportunities in the future.

Paresh?

Thank you, Richard. We are very pleased with our results for the third quarter. As the 2015 hurricane season comes to a close, we want to update our shareholders on a number of important initiatives.

On January 1, 2016, we're implementing a rate decrease of 5% for our homeowners policies, 8% for our renters policies and 2% for condo owners policies. Rates for the dwelling fire policy will remain unchanged and our wind-only rates will remain unchanged until the fire rates in early 2016. We view these rate changes as a proactive customer retention tool. Because rate changes become effective upon policy renewal it will take 12 months for these rate reductions to roll through our entire book of business.

Exzeo, our technology division, continues to develop software products that help drive efficiency within our insurance division and create future opportunities for both business and margin expansion. Greenleaf Capital, our real estate division, has completed construction of the empty tenants at two separate retail shopping locations in Q3. We continue to evaluate additional opportunities and expect more from Greenleaf in the future.

Finally, Homeowners Choice has filed with regulators to expand its product offering to include flood as a standalone product. Additionally we have a number of other exciting opportunities across all four divisions and we look forward to updating you on these developments in the future at the appropriate time.

With that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Matt Carletti, JMP Securities.

Hi, guys. Just had a few -- a number of questions, actually. You mentioned the rains and I guess some unfavorable prior claims running through the loss ratio. Could you split that out as we look at the loss ratio kind of versus prior periods? How many points of that is -- can you allocate to the rain and how much are we talking in terms of prior period adjustments?

Matt, roughly maybe about two-thirds, one-third, one-third being -- two-thirds being the rain side of the increase, yes?

Right. The delta versus kind of a cleaner quarter. Yeah.

Yeah. And the adverse development Richard that is talking about, just to provide some color to it, is the pick up in all this AOB and the litigious society we live in, that sort of coming back through the book, yeah? That's what's causing that.

Okay. Then on the investment income, I think Richard touched on the numbers. I apologize for not being able to jot them down fast enough but it was negative in the quarter and what again was driving that? What is flowing through the -- is that the limited partnership that's flowing -- kind of the volatility in the quarter flowing through net income as opposed to being a more below the line realized gains sort of marker, realized loss?

Yes, Matt. Really it's more of -- it's two pieces that are coming together. One is obviously we have an OTTI committee that has been discussed in previous quarters and they view and review all the holdings and mark them down when they see it as approximate. And by the way, they only go in one direction, only marks up. If it comes back up again, they'll have to mark it up.

Of course. Yeah. I see it.

That's just how it's done. So, two-thirds -- are in that sense, so there was some mark down coming from the OTTI. I think it involved a total of eight securities, or six -- eight securities and a couple of bonds. That's what it was. But it is them doing their job. And the other thing was -- one of the limited partnerships which is more of an equity-based partnership clearly Q3 wasn't a good investment period and we marked down mark to market. So, it isn't we're out of that fund or anything else. But we mark to market.

Great. So, both of those in terms of the actual net investment income line, I see where often LPs would flow through but is the OTTI flowing through there too? Because usually that's a -- I want to think of that as an income statement or operating income sort of item.

OTTI is a separate line. There's two lines there on the statement, Matt, just below investment income and realized gains.

So, the answer to your question is yes, it is flowing through the income statement.

Right. Through the income statement. But I'm trying to get at what's going through the -- when you report a loss of $519,000 on net investment income, what piece is flowing through that net investment? Essentially what I'm trying to get at is after the volatility in the quarter how should I look at net investment income on a more normalized basis?

The net investment income includes the loss from the limited partnership.

Okay. Perfect. I think I hear you say that was about $2.4 million?

Yes.

Okay, Perfect. That's very helpful. Lastly, I know I didn't scribble them down quick enough. I know, Richard, you gave at least one of them. Could you just repeat the gross written premium and net written premium in the quarter?

Gross written premium in the quarter was $105,787,000. Net written premium for the quarter was $64,294,000.

Perfect. Okay. Great. Thanks very much for the answers. I'll let somebody else get in the queue.

Thank you.

Thank you, Matt.

Casey Alexander, Ladenburg?Thalmann.

Hi. Good afternoon.

Good afternoon.

Good afternoon, Casey.

I'm interested in the strategy around the rate decrease first. There has been a pretty regular 2% to 3% premium attrition on a quarterly basis. Is it your hope that the rate decrease will stem that policy attrition?

No, Casey. I honestly don't know that given how high our retention numbers are that they can go much higher. It isn't necessarily from that side. The other part of that is that it isn't to make them go higher but I think you are looking forward, you're looking at a much more competitive and softer insurance market, primary insurance market. And better to take a few preemptive steps than reactive steps when your retention start moving in the wrong direction.

Okay, great. That makes some sense. As regards the rain and also the settlement and development of older claims, do you expect any spillover into Q4 on either of those events?

The rain event I think we are already seeing normalized claim activity before the end of the quarter already, even before the end of Q3 because the rain events occurred from mid-July to early August.

Those should be settled by now.

Yeah. So, that stuff has fairly passed us by. The second part about the adverse developments, this is increasing lawsuits and that sort of activity, reopening old claims activity. That one I would tell you -- I would like to hope it isn't continuing on but history tells me otherwise, yeah?

Lawyers will be what lawyers will be.

Yes.

There was a pretty fair-sized draw down in the fixed maturity portion of the investment portfolio. Is that a strategic decision? And it led to a pretty broad increase in cash on a quarter to quarter basis. Is there a strategic decision being made? Is it in regards to the management of the portfolio?

Casey, I would necessarily talk in terms of strategic stuff but I can tell you what that draw down is. In hindsight, things look differently but going into midway through the quarter, et cetera, the investment committee felt you may be looking at upcoming time of rate increases. Remember how certain everybody was about that September rate increase?

As a safety mechanism we went more to cash in the event that rates were increased which may have had a negative impact possibly on the bond portfolio. So, you needed to rebalance a little bit in those lines and that's what went on. I don't think you can infer from that big strategic changes going forward. It was a time and a place.

Okay. And you said I believe Greenleaf was working on code development of a shopping center which they had an option to acquire at the end of the development period. Has the company decided whether they're going to exercise that option and acquire that property? Or just finish up with the co-development of it?

Let me give you an appropriate answer. What we're announcing at this point is two of those co-developers have actually now opened for business which is great progress and, yes, we have an option to purchase both of those properties. There's some delay in the timeframe at which we can exercise our options but we do have options on both properties. As to what we will do, it would be inappropriate for me to speculate right now as to which direction we're going to move on that. We will make comments when we actually pull the paper or pass on the figure --

Right. So, you've finished the construction but you still have time to make that decision?

Yes. And actually the way it works is the decision is made at some future point, not necessarily five years, not too distant in the future, but there's a point at which point we either say yes or no and we're not at that point yet.

Lastly, I know several of the properties that the company owns are also in the Tampa area where you had the excess rain. Was there any impact on the owned properties as a result of the tremendous rain that fell? It was unbelievable.

Yes. Actually I guess it speaks to how well we maintain our properties, so, no, there was no impact whatsoever on our properties.

Okay. Great. Thank you so much for taking my questions.

Thank you.

(Operator Instructions) Arash Soleimani, KBW.

Thank you and good afternoon. A few questions here. Was the increase in the seeded premiums percentage, was that from the wind-only policy? Was that the major driver there?

Good afternoon, Arash. You're talking about the premiums seeded and the -- basically the reinsurance cost, right?

Yeah. Premiums seeded and the percentage of growth.

Yes. You're seeing a couple of things flow through there. And just to provide color, we had released an 8-K talking about how much reinsurance we were buying and you would've noted that we were buying a much taller tower than we have in years past. Part of that was because it was our first year with the wind-only book. We wanted to be overly cautious of a single big event taking us to the top of the tower. We were increasing the height of the tower. Obviously that comes at a cost.

So, you've got some of that flowing through there. The other item that's going through there is obviously a bigger book and the third item is the cat fund, the hurricane cat fund changed a couple of allocations and the rate online that they charge for various reasons that we can go into if you're interested. I think most people are aware of them. And the net result of that was that increased our reinsurance costs as well. And that happened very late in the renewal cycle. So, those are the three cycles that increased that seeded premium. But I think it will get better into the (inaudible) season because they're better at handling all those items going forward.

Can you remind us what the reinsurance load is for the wind-only policies versus a traditional homeowners policy?

We don't necessarily break it out separately -- it's very difficult to break it out separately just because rates are lower, but then the number of perils you're covering is also lower. So, you end up with lots of different moving parts. But I think we are very well satisfied with the margins that we are making on the current wind-only book.

Okay. How was the October take out progressing?

Just for the record, the official date for the October take out was October 27. I think citizens will eventually publish a letter of who assumed what, et cetera. I think they've already put out something about 48,000 policies in total were taken out across all the carriers. I think our portion of it was around 2,700 policies. I think the take out business is not dead yet. It's sitting in ICU and there's like priests in the room.

Okay. Thanks. And in terms of I think Casey had asked about the adverse development, what basically was the year over year increase in the loss ratio, just to be clear? Two-thirds was from rain. One-third from adverse development? Is that the right way to think of it?

Yeah. I think. I'm not looking at those numbers in front of me but I think it was about 4 points -- and I'd say about a point and a third would be adverse stuff and two and two-thirds would be the rain.

And was that, was it a frequency or a severity issue?

The rain? Let me talk about the rain. Maybe that will clarify this for everybody. About a third of Homeowners Choice's book is in the Tampa Bay area which is mostly Pinellas and Hillsborough Counties. We have very little in Pasco County but that was effected as well. So, across all these three counties, it sort of rained for around 20 days straight, so much so that you could -- you had places that were under a couple of feet of water, not from anything other than the rain was coming down faster than the drains could drain the water out.

And we picked up increasing claim activity for this. The claim activity that we picked up isn't from -- what happens when you have that much rain that consistently, where somebody in a roof has a slight hole, in a normal rain event rain storm they may get two or three drops of water that comes through and is absorbed by the insulation in the attic. Getting 20 days straight of rain and it was a lot of inches of rain as well, you don't get two or three drops. You probably end up with 200 drops. Now the insulation gets soaked, the water comes through to the ceiling, et cetera.

So, you pick up claim activity from roof leaks and internal damage from water running down walls, et cetera, those kinds of things. That's what we saw in those three weeks of solid rain. Obviously it hasn't been raining since then so those claim activities has returned back to normal. So, it's a -- I don't want to make it seem like -- that's what we're in the business of. Losses occur. And we're just pointing out what it was as opposed to -- it's unusual.

Two years ago we were discussing or three years ago we were discussing Tropical Storm Isaac and Debby. There's always something. That's what it was this quarter. That's why we like -- we love getting out of Q3 with profit.

Okay. Were there any water mitigation issues?

Not really in the third quarter.

No more than is normally -- any other situation. The rains and the water mitigation issues were slightly different and it was also in different parts of the state.

Okay. And I guess in terms of your flood opportunity, there was a -- I guess NFIT rate change that went into effect. Any greater opportunity there that you're seeing? If you could talk a bit about that?

Absolutely. So, the flood opportunity, and this is why we would -- to us it's getting better and better. And it's getting better and better for two reasons. Obviously when we originally got into it a couple of years ago, there was a massive rate change the NFIT was pushing through. But then that got dialed back and that changed the dynamics quite a bit. But now as the rate increases are going through we are seeing increasing activity of people saying -- could we move to Homeowners Choice?

So, that is moving in our direction. It's a slow increase but it's starting to increase in that fashion. The other thing that is working in our favor is in the interim, two years with the small number of policies that we have, et cetera, we have gained experience and developed better underwriting capabilities, et cetera. So, we are actually more poised to take advantage of the situation as well. So, both items are working in our favor.

And just to illustrate some things that kind of do work in our favor, in the rains in Tampa earlier in the summer we did generate our first two flood claims which actually is very good from a learning and a systems and processes development perspective. They weren't materially big but it makes sure that all of everything works and we could see what to do in those cases, et cetera. So, I think we have a huge and growing experience base on which we can really expand on the flood opportunity. Stay tuned for more developments.

Thanks for the thorough answer. I know this is your favorite question. Can you tell us the policy count at the end of the quarter?

It is my favorite question and I basically had an answer ready because I figured somebody would ask. Quarter three end policy count is about 163,000. That compares to about -- just under 148,000 last year. So, it's up about 15,000 year over year.

Okay. And numbers question. What were the GWP -- I'm not sure if someone else -- gross written premiums were?

Gross written premiums for the quarter -- excuse me -- were $105,371,000 compared to $86,085,000.

And did you say what the actual dollar amount of the adverse was already?

No. We did not.

No. We did not because part of what we're trying to not get into is breaking it out would make it appear that we think it's unusual, one-time, and that kind of thing. This is the business we're in. When you write insurance and reinsurance, events occur, things occur, and we generally just roll them into our earnings. It's not exceptional.

But it was basically lawsuits and such, just in the ordinary course of business I guess?

We're in a business of insurance and it happens.

Yes. Just like the rain event. We didn't break it out as a separate dollar item either.

Okay. Some of your competitors have been seeing some of their take out premiums return, I guess largely because of higher opt out rates. Is that something you're seeing as well?

Yes. We are. I think different people will have different numbers in terms of what percentage of people are opting out but we are seeing -- we can all agree we're seeing higher opt out levels.

What about retention? I know you talked about doing some rate decreases to boost your pension. What is the retention you're seeing now in your policies?

Let me just correct you on that just because I did that with Casey. We are not doing the rate things to increase retention. I think we're doing it to maintain retention. But the retention's already at such a high level that I don't think there are many things you can do to increase it. But we are reducing party retention. But party also, given our loss history and how things have worked out, a rate decrease is warranted. So, we're doing that.

But where our retention rates are, and I did look into that just before I came in here as well. Year over year, if you compared first nine months of this year to the first nine months of last year, especially in terms of policy books that were consistently the same, retention rates are consistent with last year. So, we're not seeing a drop off with retention. It's staying at the same high level that it has stayed -- I think --

Was that 88%? Is that the number you've thrown out before?

Yes. It's a very high 80s, approaching 90s kind of number. Yeah? (inaudible)

I'm sorry. What was the last part?

We're staying consistent with that. I think it reflects, hopefully, the satisfaction our policy holders have with us being their insurer for what is usually their largest asset. I think just like when the rains came, a lot of people were happy that we were their carrier of choice.

Okay. Did you -- I apologize if somebody had asked this already. Did you say what the share count was, weighted average diluted shares outstanding?

No. We hadn't. But I think Richard is looking it up.

Weighted earnings per share for the quarter, it was 11,371,000 and for the year, for the nine month period, it was 11,347,000.

All right. Thank you very much for your time.

Thank you, Arash.

Thank you.

Due to time constraints, this concludes our question and answer session. I'd like to now turn the call back over to Kevin Mitchell who has a few closing remarks.

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 policy holders. We look forward to our continued success.