Hci Group Inc (HCI) 2018 Q1 法說會逐字稿

Good afternoon and welcome to HCI Group's First Quarter 2018 Earnings Conference Call. My name is LaTonya, and I'll be your conference operator this afternoon. (Operator Instructions)

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 June 1, 2018, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until June 1, 2018, on the Investors and Information section of the HCI Group website at www.hcigroup.com.

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

Thank you, and good afternoon. Welcome to HCI Group's First Quarter 2018 Earnings Call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; and Mark Harmsworth, our Chief Financial Officer. Following Paresh's opening remarks, Mark 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 take your questions.

To access today's webcast, please visit the Investor Information 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.

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

Thank you, Kevin, and welcome everyone. The first quarter was another positive one for us. We earned $10.8 million and as Mark will discuss in greater detail, $12.7 million on a non-GAAP adjusted basis. Also, we continued our normal path of paying dividends, repurchasing shares and increasing book value.

Here are some noteworthy events from the quarter. We experienced positive non-cat claims trends, with fewer claims and fewer losses. We think this is because of good weather, also the contracted public adjusted focusing on Hurricane Irma, and also the implementation of our positive underwriting technology. We'll talk about that more later.

Hurricane Irma claims have unfolded as we predicted last October. We are comfortable with our current loss estimate.

We also repositioned much of our investment portfolio due to changes in the tax code and the flattening yield curve. And finally, after the quarter ended, the board increased the quarterly dividend. Mark will discuss all of these things in detail.

So at this time, I would like to turn it over to our CFO, Mark Harmsworth, who will walk us through the financial performance for the first quarter. Mark?

Thanks, Paresh. So fully diluted earnings per share in the quarter were $1.11 on a GAAP basis. Adjusted earnings per share were $1.26, up from $1.15 in the same quarter of last year. As mentioned on our last call, the new accounting treatment for unrealized gains and losses on equity investments, introduces new volatility and earnings when equity values change. To better compare it to prior periods, we have disclosed and explained adjusted earnings per share, which takes out the impact of unrealized gains and losses in equities.

As you look at the income statement, one of the things you'll notice is that our loss expense is down 23% from the first quarter of last year. A couple of things explain the decrease. In the first quarter of last year, we booked $2.5 million of adverse development, and there was no material adverse development in the first quarter of this year. Second, non-cat claims and lawsuits are down, and down significantly. The number of non-cat claims in the first quarter of this year was 26% less than the first quarter of last year, and the number of non-cat lawsuits was 28% less. There was very little weather in the quarter, but claim volumes were down across the spectrum.

As we discussed before, our income tax rate has declined significantly as a result of the federal tax changes effective January 1, 2018. While a number of things impact the rate, the 27% effective tax rate in the first quarter should be a reasonable estimate of the normal rate going forward.

Before leaving the income statement, I wanted to add that our gross pretax margins in the quarter were 17.25% on a GAAP basis, and 20.25% on an adjusted basis. This, as well as our combined ratio, highlights the continued efficiency of our operations.

Now turning to the balance sheet. As you know, we live in a dynamic investment environment and so we have been strategically repositioning our investment portfolio. We sold a number of a longer-term corporate and municipal bonds, and invested the proceeds into shorter-term treasuries and certificates of deposit. The net impact of these changes was to cut our average term to maturity in half. While our average yield declines somewhat, this should be balanced out by increasing yields on cash. More importantly, it will reduce volatility and allow us to take advantage of opportunities created by rising rates.

Given the volatility in the equity market, we also locked in some gains and reduced our equity exposure during the quarter from $60 million to $46 million.

Also in the balance sheet, you'll notice that our reserves continue to decline as we process payments for Hurricane Irma. At this point, we are maintaining our original estimate of $267 million for the ultimate exposure to Irma.

Last comment on the balance sheet, book value per share on March 31, 2018, was $22.45, up slightly from $22.14 at the end of last year.

Now a few comments on capital management: our capital position and liquidity remained strong. We have over $160 million of surplus in Homeowners Choice, just under $25 million of surplus in TypTap and about $100 million of cash and liquid investments at the holding company level.

During the quarter, we bought back just over 184,000 shares at an average purchase price of $35.39, for a total investment of $6.5 million. The weighted average number of fully diluted shares outstanding in the quarter was 11,897,791 and the number of shares outstanding for purpose of calculating book value per share and dividends at the end of the quarter was 8,593,850.

The steady reduction in the number of shares outstanding through our buyback programs has helped us to increase earnings per share but it has also allowed us to increase dividend payments to existing shareholders, without an increase in the total dividends paid out by the company.

On April 16, our Board of Directors approved an increase in our annual dividend from $1.40 to $1.50 per share. However, the dollar amount of our dividend payment in the second quarter of this year will be about the same as it was in the second quarter of last year.

So in summary, it was another good quarter for us. Earnings per share were strong; our efficiency ratios look good. We are repositioning the investment portfolio to increase returns with less risk, and we are maintaining a strong level of liquidity at the holding company level.

With that, I'll turn it back to Paresh.

Thank you, Mark. First, a quick note on reinsurance. Our renewals for the 2018 hurricane season are near completion and we expect ceded premiums will remain flat year-over-year. But today, I want to talk about our insurance operations and the impact of our internally developed technologies.

We've been talking about our investments in technology and data analytics for some time now. But our performance during Irma -- Hurricane Irma and the first quarter results show the power and possibilities of our in-house technology. It is not speculation; it is actually in our results. And due to the positive underwriting technology that we have developed, we have industry-leading ratios.

Using this technology, we started TypTap entirely powered with it, and it has enabled TypTap to grow with little marketing, without excessive commissions or the benefit of large insurance company networks. And note that in 2 years, TypTap has survived 3 hurricanes and grown to $10 million of premium in-force, without any additional capital infusions from the parent company. That's a great outcome.

Finally, we believe this technology can be married with any existing book of business and materially improve its operating results. We know this because we speak from experience. Therefore, our future plans are to increase the volume of business we put through our technology platform. How do we plan on doing that? We will do that through a combination of 3 things. One, geographic expansion, like the 9 additional states that we will be selling flood insurance into in the coming months; secondly, adding new products like TypTap Home, which was launched just a little while ago, which expands the industry-leading platform we have for quoting and binding our business; and finally, through mergers and acquisitions because more volume through this platform will only make it more efficient.

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

(Operator Instructions) Our first question comes from Brian Hollenden with Sidoti.

In terms of potential acquisitions, how does your internally developed technology capabilities play a role? Would you be able to use your platform to lower an acquired company's combined ratio?

That's an interesting question, Brian. Historically, our approach has been to focus on companies that were failing financially and acquire them at a fair book-to-price -- price-to-book multiple. Although we still are focused on that discipline, we have evolved our thinking based on the recent success of the positive underwriting technology. Today, when we evaluate companies, we often look for well-known organizations who have failed to proactively invest in the technology, because it's going to be needed going forward.

So if we were to merge with a competitor, to answer your question, we would implement our technology suite and would have a material impact on their combined ratio, that -- we just said it earlier. And for example, kinds of things that we've gotten into, we approached FedNat earlier this year about a merger; that would have been an excellent example of something we could do, where we could combine companies that would do fantastic together. But at least in this particular case, they -- the board decided not to engage in discussions with us and the deal is dead. But there are still plenty more fish in the ocean, similar to FedNat, and we'll find somebody to do this with.

And I guess it's very situational dependent, but just from a high level, I mean, would you expect 5 to 10 -- 500 to 900 basis points of improvement? Or what sort of range do you think you could bring to an acquisition in terms of overall savings?

I think you've sort of pretty much hit the range, 500 to 900 basis points.

Okay. And then turning to the reinsurance renewals, just wanted to make sure I heard you correctly, so you're expecting the ceded premiums to remain flat?

Yes. Basically, the amount that we ceded in the first quarter is what we would expect to cede in the second and third quarter on a dollar basis.

And just if I can follow up there, I mean, I guess, some of us kind of, were expecting and maybe going into the renewals, you would have been -- I would think, would have been expecting a rate bump. I guess, just maybe can you walk us through maybe why you didn't get a year-over-year rate increase on the reinsurance renewals?

Partly; I don't want to speak about the specifics because we're still in the middle of the negotiations, so it would be inappropriate to comment. But one general overarching comment that I think has been stated at various points throughout the industry is that the expected huge rate increase were [6.1] that were expected, have -- do not appear to have materialized, mainly because of an overabundance of reinsurance capacity, and obviously, we're benefiting from some of that.

Our next question comes from Mark Hughes with SunTrust.

Has your retention changed at all in the reinsurance? Is it going to be similar to last year's program or the current program?

I can answer one part of it, and another part of it is still under discussion. The part that I can, Homeowners Choice, the insurance subs retention will probably remain consistent with last year. As far as the HCI Group goes, how much retention we take as a group is subject to some negotiation that we're going through currently. But it will not be greater than last year.

Not greater than last year. And then the rate online, I don't know if there's any detail you could provide there, your premium is -- I think the overall book is down a little bit in the Homeowners Choice. Is the rate online up?

Again, I think these are all questions that we will gladly answer much more crisply once the negotiations are finished the next quarter. But we're still in the middle of some of these things, so we really don't want to get into details at the moment.

Understood. The TypTap, the home platform that you launched recently, could you talk a little more about that? How do you anticipate that will get traction? How do you market that, bring it to consumers' attention?

Actually, we have already started on the same path that we started with the TypTap Flood product 2 years ago. Mainly, we're making agents aware of it, we've had very positive feedback in the initial feedback from them, and what will occur is, as time goes on, people become more and more familiar and accustomed to it and we should see an increasing stream of business coming from it, like we currently enjoy from the TypTap Flood program.

And then any thoughts, any projections you might share in terms of the volume? You had a nice release the other day about hitting the $10 million mark. Care to make some prognostications about where you might be at the end of this year or the following year?

Okay. So maybe I can help it out this way. And by the way to your previous question also, one of the key things about why TypTap Home is very different to anything that's gone before it, it only requires about 4 or 5 questions; then you get a price. It is so simple and easy to use, it's as simple and easy to use, almost as the Flood product is. So I should have made sure I got that plug in there.

In terms of volume production, et cetera, currently, TypTap is adding something a little bit north of $100,000 of premium, written premium a week. So if you take us at a $10 million [clip], or currently you can add it growing by about $100,000 a week and project out into the future. Obviously, we are working hard every day to try and accelerate that growth from $100,000 a week to a higher number.

Great. Okay. The $1.26 in adjusted earnings, I assume that includes the $2.2 million investment gain?

Yes, it does because that's realizing -- we're trying to do this on an apples-to-apples basis. The $2.2 million is realized investment income, so it would've been there under the old GAAP standards. The -- yes.

And then it's removed, I guess, the mark-to-market, the unrealized gain?

Good point, yes.

How about -- any comment on lawsuits overall? Do you think there -- is there still just as much activity in the system; it's just shifted over to the storm claims? Is there some reason to think that the underlying situation might be improving?

It's a great question, and I'm going to give a multipart answer. From what we are observing, the overall number of lawsuits is up not only for us but across the industry, but it's because about half of those lawsuits now being filed are Irma-related. So when you put the normal daily lawsuits in plus the Irma-related ones, the overall volume is definitely much higher. For our own part, our Irma lawsuits at this point far exceed, on a weekly basis, our daily lawsuits. And our daily lawsuits, as Mark indicated earlier, are down year-over-year.

And as again, to illustrate the point, we think that, that decrease is a combination of 2 items. One is the lawyers and the PAs, et cetera, are focusing more on Irma, so that has produced some reduction and we see that across a number of other companies too. But secondly, what we are seeing, which we think, hopefully, is more material is because of some of the steps we took a little while ago due to the positive underwriting technology, we are seeing an increased drop off, more than what would be explained just by Irma and those kinds of things. But that's specific to us.

Our next question comes from Matt Carletti with JMP Securities.

I just have a couple -- I did have a couple left; Brian and Mark covered a lot of ground. On the low non-cat claims, just kind of following on the last discussion there, how -- kind of in dollars or loss ratio points, how much below normal would you estimate that was versus what you would have expected in the quarter? And have you seen those trends continue into April?

So the loss ratio, that -- our historic loss ratio, as you know, is around the 25%, 26% mark, and the loss ratio in the first quarter was about 23%. So that's sort of the difference between -- there's a couple of million dollar difference to what you'd normally expect. And it's, in terms of trend, that's a trend that's been going for some time. The reduction in the number of claims, the reduction of incurred, the reduction in lawsuits, that just sort of continued in the quarter and we'll see where it goes. I mean, it's difficult to say what will happen in the second quarter, but it's definitely a trend that's helpful.

Okay, great. And then just one other numbers question, I think you mentioned that the $267 million ultimate Irma estimate held tight. Where are you on a paid basis?

You know, I -- sorry?

About $200 million, I think.

Yes, so the paid, we're at about $210 million and incurred's a little higher, but Paresh mentioned the lawsuits are starting to come in. And I think the important thing there is that there's still some significant room to run in terms of the reserves that we've set and the lawsuits just starting to come in, but we expected the lawsuits to come in and we allowed for that from the start. And it's a little early to tell how many that will ultimately turn out to, but so far, we've got a fair amount of room to run there.

Our next question comes from Sean Reitenbach with KBW.

I was wondering, going forward, do you think the AOB environment has stabilized? Or is it still, you guys think it could get worse from here?

It depends on which context you look at this. What we are clearly seeing is on an industry-wide basis, the number of lawsuits filed in the first quarter was at a record number, but some of that, like I -- as we said, was due to Irma and some of it's also the daily stuff. So you do have a mixture of both items. I don't think the AOB problem on a statewide basis goes away all by itself. If anything, it might be getting worse because Irma has accelerated the spread of the AOB disease, shall we say. And we can tell this because we see new law firms popping up, et cetera, that are in the AOB business. So we see that clearly and that's occurring.

As far as our own book goes, obviously, we try not to be just passive participants in this and wait for these things to happen. So using some of the technologies and items that we've developed over the years, we are trying to combat it, and sometimes, we come out a little bit ahead as we seem to be at the moment and the overall claim lawsuit count is decreasing a little bit. I'm sure we'll have good quarters and bad quarters going forward.

Okay. Do you guys expect to receive any approval for additional rate increases in 2018? And kind of following up on that, do you expect any -- do you expect the tax reform to drive rate competition, if at all?

Okay. So one part of the question is about rates going up, the other one is about rates going down.

Yes.

So no -- and that's fine. I was just extrapolating. We've always -- and again, speaking for our company, not the industry as a whole, we've always approached rate setting with the idea that we like stable rates. We don't like rates to increase dramatically or decrease dramatically. It is not how we intend to do business. So we are just beginning to assemble the data to submit to the OIR for our annual rate submission. I'm sure they will review it and we will have a discussion as to what the appropriate thing to do, given our performance, the new tax law, et cetera, would be. But my sense, and this is a sense, not anything other than that, is I don't honestly know that we feel we should have a material rate increase or a material rate decrease. So a few points this way or that way.

Okay, great. Also, what type of claims infrastructure do you plan to set up in your new states? Or will you -- are you thinking about outsourcing to a third party's?

I think we have systems and tools and everything else capable that we could -- because the field work is done by third parties already anyway, but all the claims reserving, check issuance, all that stuff, we can do that from our existing operations. Until we get large in other states, I don't honestly know that we need to set up operations there to that degree.

Okay. And finally, I was wondering with -- going back to the approach to FedNat, we're wondering, was this disclosed before?

Yes, I'm looking at my General Counsel, he's shaking his head. I think I might -- I guess, at this point, he's going to be working through the night to make sure we get all the correspondence disclosed by tomorrow morning. Sorry.

Okay. What was the back-and-forth nature? Was it proposed by HCI? Or any idea why the board wouldn't engage? Did they give a reason?

The only item I can tell you is yes, we did initiate the approach. As far as all the back-and-forth, I think once we disclose everything overnight, it should -- everybody can read for themselves, yes?

Yes. Great.

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.

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 updating you on our progress in the near future.

Thank you for joining us today for our presentation. This concludes today's call. You may disconnect your lines at this time.