Hci Group Inc (HCI) 2016 Q3 法說會逐字稿

Good afternoon. Welcome to HCI Group's Third Quarter 2016 earnings Call. My name is Tim 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 for replay through December 3 starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until December 3 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. Sir, please proceed.

Thank you and good afternoon. Welcome to HCI Group's third quarter 2016 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 about the recent storm activity in Florida, 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 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 an 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 a material adverse effect on the Company's business, financial conditions, and results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements.

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

Thank you Kevin and welcome everyone. As most of you know, HCI Group is a holding company with subsidiaries engaged in diverse yet complimentary business activities. Our principal operating subsidiary is Homeowners Choice Property & Casualty Insurance Company which provides homeowners insurance in Florida.

The newest addition to our Company which we introduced earlier this year is TypTap Insurance Company featuring tpytap.com an online platform for quoting and binding policies. TypTap currently offers private flood insurance to Florida homeowners. We encourage our listeners to visit www.TypTap.com to experience the platform. It provides a quote in seconds and a policy in minutes.

Additionally we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our Homeowners Choice and reinsurance programs. We also have an information technology operation called Exzeo, which develops innovative products and services for insurance subsidiaries including the technology powering typtap.com. We expect to find other means to leverage Exzeo technologies capabilities.

And finally, we have Greenleaf Capital, which owns and manages our growing portfolio of real estate investments. Okay, so the big thing everyone wants to talk about is hurricanes and I know you want to hear about it so I'll get right to it.

First, as with any disaster, our thoughts are with those who have been impacted. We are working diligently to [keep] our policyholders get their lives back to normal as quickly as possible and they're in our thoughts and prayers.

So, getting to specifics. Most specifically, Hurricane Hermine made landfall in North West Florida in early September making it the first hurricane to hit Florida in 11 years. Thus far, we have received over 300 claims related to Hermine and currently expect losses totaling approximately $2.5 million. Hermine was not a [material] event for us.

Hurricane Matthew, a Category 4 hurricane [scattered] the East Coast of Florida in early October before making landfall in South Carolina. Although it did not make landfall in Florida it still had a significant impact on the state.

Thus far, we have received approximately 2000 claims related to Matthew and we estimate pre-tax losses of $20 million to $25 million at this time. Neither Hurricane Matthew nor Hurricane Hermine will trigger reinsurance recoveries outside of the HCI Group. So although Florida hadn't experienced a hurricane since 2005 we prepare and plan for these types of events each year; 2016 was no exception. Hermine and Matthew put our preparations of planning to the test. I am pleased to report the performance of our CAD response team and our technology has exceeded even my elevated expectations.

For example, nearly all claims for both storms were handled by our personnel here at headquarters in Tampa, Florida and our reliance on third parties for any kind of call handling services was very minimal. Furthermore, using tools developed by our Exzeo Technology Group, including Exaeo.com which is logistic software and our atlas view of data visualization tool, our team was able to, one, estimate the impact ahead of storms and allocate resources in advance. Two, identify trends and reduce claim processing times and three, keep stakeholders informed real-time of what was happening.

As a result, after the hurricanes we quickly returned our business operations to normal and more importantly we helped our policyholders get their lives back to normal as quickly as possible. The data provided by atlas view has been well received by regulators and reinsurers. We believe that this will have long-term beneficial effects to the company.

Now, turning to our results for the quarter. As Richard will expand on shortly, we reported profitable quota, we reported profitable results, despite Hurricane Hermine during the third quarter [net] marking it as our 35th consecutive quarter of profitability. We also paid $0.30 per share dividend marking our 24th quarter, executive quarter, of paying a dividend. Our cumulative dividends paid since inception now total $5.85 per common share. Now, before I go further, I would like to invite our CFO Richard Allen to take us through our financial performance for the third quarter. Richard?

Thank you Paresh and welcome everyone. For the quarter ended September 30 our net income was $11.3 million or $1.10 diluted earnings per share compared to the same period of 2015 of $7.4 million or $0.71 diluted earnings per share. From an operational point of view, significant variances or commentary are net premiums earned which were relatively flat with an increase of $535,000 reflecting the reduction in reinsurance premiums quarter-over-quarter as previously discussed and the impact of our rate reduction from January and normal policy attrition.

Losses and loss adjustment expenses decreased slightly quarter-over-quarter. In the current quarter we were impacted by Hurricane Hermine while in the same quarter the prior year we incurred losses from a significant rain event that centered on the Gulf Coast of Florida. All other expenses increased slightly, primarily the result of increased staffing requirements. Other significant contributors for the quarter were net investment income increased $3.3 million reflecting gains in our limited partnerships and other investments. We recognized a gain on the Greenleaf purchase of a public anchored shopping center of $2 million; the result of favorable fair value as compared with the purchase price negotiated in the original development contract.

Other than temporary impairment losses of $0.2 million or lower by $1.7 million as compared to the prior year same quarter of $1.9 million. During the third quarter we repurchased a total of 198,055 shares of common stock at an average price of $30.29 for a total cost of $6 million. With the repurchase made in the first six months of the year, for the first nine months of the year, there remains $2 million as of September 30.

As of November 1, the repurchase plan has been completed. Net book value increased to $25.38 from $23.10 at December 31, 2015. Paresh?

Thank you Richard. Even with the impact of Hurricane Hermine we are pleased with our results for our third quarter of 2016. Over the past few years we have begun several strategic initiatives to enhance and diversify our business operations; they paid off in Q3. For example, we continue to optimize our book of business by ensuring the policies [to our] stringent risk profile. As a consequence, top-line growth slowed. This slow down resulted in a decrease in our gross premiums earned but contributed to a reduced reinsurance spend compared with last year.

I've often stated that we're more interested in the bottom line than the top-line. Despite the two recent hurricanes, we believe our insurance division is appropriately capitalized for any growth that we may contemplate. It doesn't need additional capital.

Additionally this year we launched our new insurance subsidiary TypTap which sells private flood insurance. Since March we have seen strong interest from our agent network and of current we have all 1500 TypTap policies in force. The recent hurricanes had a minimum financial impact on TypTap. We believe the technology underlying TypTap coupled with the current state of the flood insurance market with afford us excellent growth opportunities in the future.

We're saying this considering that National Flood Insurance Program, NFIP experienced multiple flood events this year and is up for reauthorization in 2017. We plan to continue strategic investments in technology and real estate and will have more on that in the future.

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

Thank you sir. At this time we will be conducting a question and answer session. (Operator instructions.) Our first question comes from the line of Matt Carletti of JMP Securities, please proceed with your question.

Hey thank you good afternoon.

Good afternoon Matt.

Paresh, a couple of questions to start. First one, loss ratio improved a bit in the quarter, sequentially even despite the small amount of hurricane losses. Can you comment on that a little bit? I assume it has something to do with maybe where your provisions are versus AOB and where the actuals are coming out? I might be wrong on that but -- and if it's not, can you just give us an update on AOB and where things stand for HCI and more broadly?

Okay, Matt, in terms of absolute dollars obviously the loss and [loss of net] expenses went down slightly year-over-year. I think -- and we took some [pains to] make sure we pointed it out. Last year in Q3 we had those 21 days of rain on the West Coast which resulted in a lot of claims etc., so the numbers -- you know, and obviously this year we have Hermine but I think what you're sort of seeing is maybe some of the losses from last year might be a little bit more than Hermine was this year. In terms of AOB, I think you're doing that comparison of Q3 this year versus Q3 last year. I think it was comparable, it didn't improve but it didn't get any worse. So, by Q3 last year we were already into the full front of AOB. So that's why I think it's comparable in a flat basis year-over-year.

Yep, I was looking at more on a ratio basis in the loss ratios improved versus sequentially, you know, as we went through the year and I remember the first couple of quarters this year at least one of them had some adverse development related to AOB, was that -- was there less of that or none of that in the quarter or was that similar this quarter?

I think that -- yeah, in terms of adverse development I think there was less thereof. I think we had got our reserving to that point, yes?

Yeah, that's what I was getting at, yeah. Yeah, I think that's a delta. Oka.

Yeah.

Great, and then second question would be, you know, you made an announcement maybe just a couple of weeks ago now about first takeout announcement that we've seen from you guys in a little while. Just wondering if you could comment on that kind of -- often when you guys do takeouts there's a different flavor to a takeout or is it just as simple as you haven't done a takeout in a while, Citizen's changes kind of every day, what comes in and out and there's the opportunity for some new business.

Okay Matt, that's going to be a slightly complicated answer. I just say that because --

Okay.

-- what it is, right? There are a couple of background information items that become relevant in our decision; one, is Citizens is in the process of changing how takeouts are done and there'll be a new process going effective January 1. So we are -- and the system that we had -- I'd say perfected to quite a degree for the last decade, it's going to come to an end at the end of this year. So this is one last (inaudible), that's one.

Gotcha.

Secondly because of the AOB stuff, a year ago there was a -- everybody was rushing to do takeouts and obviously we stepped back. It's amazing the difference a year makes because at this point there are very few people advocating takeouts. We tend to have the same viewpoint regardless of whether it's popular or popular when we look at things. So all of these things were there. The other prevailing item that causes the question to come up is gee, Citizens shrunk [are all] of the good policies are gone? Well, yes, if you talk in generalization but this is all about detail and where we go into detail is the following set of things that make this thing happen. One is we shrank over of the years so consequently we have extra capacity with which we take on some more policies and we don't necessarily increase our risk we just replenish the risk compared to what we already shedded over the course of the year.

Okay.

And then secondly, in the fact that everybody else stepped back and we now have a clear shot at it, there is an underlying thing. There were a lot of people who was tagged for takeout by other carriers in previous years and they all cut out; they didn't want to leave Citizen's. Maybe they didn't want to leave Citizens because of the [carrier] they would end up with.

So all of those people are still sitting in there. We've been keeping track of all of this stuff. So, given that the system is going to change in January, it was a clear opportunity to take one final shot at those people and giving them an alternative to come join the happy customer base of HCI and see if they want to leave Citizens for us as opposed to somebody else.

So, given all of those things, it was a wonderful clear opportunity to do this and obviously it speaks somewhat to the planning and organization of this company that we had planned for all of this back in the summertime and despite Matthew coming to shore on October 6, by October 20, we were sending out letters for this takeout, etc.

We've basically not made a big deal of it because I think it's going to be 5000 to 10,000 policies which is more of a replenishment than anything else and we didn't want to send mixed messages over it.

Gotcha, okay. No, that's very helpful. And then just for Richard a few numbers questions and I apologize if I missed them but gross written and net written premiums and then just what you have for book value for share, fully diluted at quarter end?

Gross written for the current quarter, $93,264,000.

Okay.

Prior quarter, [$105,000 versus $71,000] that's in thousands.

Yeah.

You needed nine months?

No, no, no, just the quarter.

Okay, and then what was it, net premium?

Yeah, net written, yeah.

Third quarter, $64,022,000; $64,294,000.

Great, and then just quarter end book value?

Well, the quarter end book value was -- we has spoken -- you wanted the shares too? -- go into them?

Yeah, that would -- yep.

The book value was [$2538].

Yeah.

[$2538]?

Yep.

Yeah.

Great, thank you very much.

Thank you.

(Operator instructions.) Our next question comes from the line of Arash Soleimani of KBW, please proceed with your question.

Hi, good afternoon.

Good afternoon.

Just had one follow-up to Matt's question looking at the loss ratio, what was -- was there any development at all this quarter for 3Q 2016?

Repeat your question please?

I'm just trying to back into the accident year loss ratio. So I wanted to know what prior period developed?

The actual dollar amount of the current quarter I'm not sure of yet. We're still working on that for the statutory [blanks].

Okay, but it's just what it sounds like, it's fair to assume that it's lower than last quarter or last year? You seem to --

I would say it's less than, less than prior quarter.

Less than prior quarter, okay. Okay, and the other question I had was, oh, can you give me the policy count if you have that handy?

Glad you asked, it's about 146,000.

Okay.

And I'm keeping it to the nearest thousand, plus or minus a couple of thousands just for the simple reason that I think this quarter should hopefully list it to everybody. Policy count isn't how the business is managed, it's loss ratios and everything else that count and I see that you've asked the question and I know it's been an ongoing item, this is an interesting quarter where we shrank the top-line, the gross premium, we were even on the [then] premium line and we were up on the pretax earnings and I see that you've asked the question and I know it's been an ongoing item, this is an interesting quarter where we shrank the top-line, the gross premium. We were even on the [then] premium line and we were up on the pretax earnings despite their being a [cap]. Sometimes it makes you wonder about why growth is the only way of running a business, doesn't it?

((Crosstalk))

-- I was just --

No, Arash, I wasn't suggesting that you were suggesting that, I was merely pointing out that it's been a quarterly conversation that's gone on for several quarters and it might be a useful point to have that conversation in the (inaudible) area at this point, yeah?

Sure, that makes sense. Thank you. And I guess it sounded like you told Matt, AOB is basically the same, I guess, in terms of it's impact last year versus this year. Just from a litigation perspective, I know last quarter you provided some trends in your book, what are the litigation trends looking like this quarter compared to prior quarters?

Okay, Arash, I'll give you more detail than you probably care for but in terms of lawsuits and things, we actually have seen a slight low in the summer but for the last two or three months it's come back to normal expectations and normal expectations is the same amount of lawsuits as we were getting last year which is about a hundred a month. So we are back to that kind of number. So that's why we can't sit here and say that AOB is getting worse, equally well if you're getting a hundred lawsuits a month which is about the same as last year, it's not getting any better either.

Right, right. And are you seeing any kind of heighted AOB activity from like Matthew or Hermine, were you seeing, I guess, public adjusters try to take advantage of those situations or not?

To be fair -- yeah, great question. But look to be fair about Hermine and Matthew, those events are too fresh for some of that activity to [stale] yet. I suspect while in those things it's at a minimal level currently, it will escalate over the course of time, that's just naturally how these things work out.

Right, right.

-- need to tell ya.

Yeah. And I know you said the takeout that you had signed up for was, I guess, because you said it was the last opportunity that could be there for -- so you haven't actually -- do you have any plans of actually doing a takeout or you just wanted to have that on the shelf?

No, I think the takeout is underway and just so that I clarify my statement to the last opportunity, I'm saying it's the last opportunity under the current Citizens takeout process.

Oh, okay.

Not saying it's the last opportunity to ever do a takeout ever again. I'm just saying, citizens is going through a material change of process as of January and the current process we know very well and we've used for years. So one last time.

The takeout is in process as we speak, yeah?

So when would the actual takeout date be?

I think we assume the policies as of November 22.

Okay. And can you -- I apologize if you already mentioned this, just with the, I guess, amount of policies and annualized premiums would be associated with that?

It's not going to be a great deal. We think it's going to be somewhere in 5000 to 10,000 policies and you can therefore extrapolate to $12 to $24 million and premium [in force], yeah?

So that's on an annualized premium [in force], okay.

Yeah.

And I assume this new process that you're saying is coming -- it just seems like I guess is it more difficult or it seems like is it worse in a certain way or --

No, I wouldn't characterize it any such -- it's a -- You know, Citizen's has been working hard at this and has planned a major overhaul of the takeout process for quite a while and it's being implemented in January, right? In some ways I think if you were to ask Citizen's they would probably tell you it's and improvement and it's more customer, consumer, friendly, etc. So, my points should not be taken as me saying anything bad about the new process just that it's different and we are very familiar with the current process, yeah?

Sure, sure. I'm just -- another question on the loss ratio, is what we saw this quarter kind of a fair run rate?

Let me give you a very caveated answer, it's a fair -- it may be a fair number assuming a few sets of things; one, the AOB and litigations environment doesn't change, it can get better, it can get worse. Two, obviously the number that we've got for the quarter obviously has Hermine built into it so you'd have to back that out. And three, it (inaudible) that number will move based on other, I think it was the phrase that we were using, (inaudible) [events] that may add to the underlying number.

Yeah.

Yeah, but all of those variations are part of doing the business, yeah?

Sure, sure. And I know you said this in the beginning, how many -- you had 300 claims from Hermine, how many was it from Matthew?

Okay, I think we said more than 300 for Hermine and approximately 2000 for Matthew thus far.

Okay. Okay, and then any updates on TypTap? Are you getting, I guess, more traction with that? Any changes in I guess appetite from policyholders?

Yes, absolutely. TypTap keeps improving week after week. I think last week was a record week in terms of number of policies [bound] etc. So every week life gets better and I think as I said in my prepared statements we currently have 1500 policies in force for TypTap and it continues to grow.

Great, can you remind, what was the average premium for policy in TypTap?

I didn't think I went into that but I think you're looking at a couple of million dollars, maybe a little bit more in premium.

Okay, all right, that was all my questions, thanks very much and congrats on the quarter.

Thank you.

Thank you.

There are no further questions at this time over the audio portion of the conference. I would now like to turn the conference back over to Kevin Mitchell who has a few closing remarks.

Thank you for joining us on today's call. We look forward to updating you in the future.

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