Hci Group Inc (HCI) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to the HCI Group's First Quarter 2021 Earnings Call. My name is Tom, and I will 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 6, 2021, starting later this evening. The call is also being broadcast live via webcast and available via replay until May 6, 2022, on the Investor Information section of HCI Group's website at www.hcigroup.com.

I would now like to turn the call over to Rachel Swansiger, Investor Relations for HCI. Rachel, please proceed.

Thank you, and good afternoon. Welcome to HCI Group's First Quarter 2021 Earnings Call. With me on today's call is Karin Coleman, our Chief Operating Officer; Mark Harmsworth, our Chief Financial Officer; and Paresh Patel, our Chairman and Chief Executive Officer.

Following Karin's opening remarks, Mark will review our financial performance for the first quarter of 2021 and then Paresh will provide an operational outlook, and we will take your questions. To access today's webcast, please visit the Investor Information section of our corporate website at www.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 disclaims all the obligations to update any forward-looking statements.

Now with that, I would like to turn the call over to Karin Coleman, our COO. Karin?

Thank you, Rachel, and welcome, everyone. It's been a tremendously busy and productive start to 2021 for HCI. As you can see by our financial performance, our disciplined execution continues to produce consistent profitability, growth and best-in-class margins.

The first quarter was marked by several important achievements. First, at the HCI Group level, consolidated in-force premiums surpassed $0.5 billion, and we expect it to continue increasing in the coming quarters. In March, we paid a $0.40 per share dividend, our 42nd consecutive quarterly dividend.

Second, Greenleaf Capital, our real estate division, continuing to be a valuable part of our diversification strategy, both in producing positive cash flows and capital appreciation.

Third, Homeowners Choice continue to be profitable and grew through strategic acquisitions, such as Anchor and UPC.

Fourth, TypTap grew as well. It surpassed $130 million of in-force premium, putting it on track to reach its goal of $200 million by the end of the year. And as previously disclosed, TypTap raised $100 million from Centerbridge Partners. Also its national expansion continues on track, not only with receiving regulatory approvals, but also in writing its first policy outside of Florida.

Finally, in response to the immense growth we are seeing, we recently created separate management teams for HCI and TypTap Insurance Group. This separation will allow each management team to focus on specific growth initiatives as we establish infrastructure for $1 billion company.

Since 2007, HCI has a proven track record of success and growth. With the achievements I just outlined, we look forward to seeing HCI continue on this path throughout 2021 and beyond.

I'll now turn it over to Mark to discuss HCI's financial results for the first quarter of 2021. Mark?

Thanks, Karin. This was another good quarter for us with tremendous growth, new capital and strong earnings. Diluted earnings per share were $0.75, up from $0.07 in the first quarter last year. Growth was a big story in the quarter as it has been for some time now. Gross premiums written were up 65% with strong growth coming from both of our insurance companies. In Homeowners Choice, gross premiums written were up 39% from $58 million to $81 million. And in TypTap, gross premiums written were up 142% from $18 million to just under $45 million.

Consolidated gross premiums earned were up 42%. Again, growth came from both Homeowners Choice and TypTap. In Homeowners Choice, earned premium was up 35% from just under $76 million to over $102 million, driven in part by the strategic acquisition business from Anchor and UPC. In TypTap, earned premium was up 73%, led by the organic growth of its Homeowners product. As an indication of the impact of some of this growth, consolidated gross premiums earned this quarter were the highest they have ever been in any quarter in the history of the company and, of course, they are going higher.

Looking at the income statement, you'll see that loss expense is up significantly. This is simply connected to the growth in gross premiums earned. As of March 31, non-cat loss reserves are up about $10 million higher than at the end of December as we continue to expense more than we are paying out. This continues our conservative reserving methodology.

Both of our insurance companies are in strong financial positions. Homeowners Choice surplus of $127 million at the end of March is up about $7 million from the end of last year and TypTap surplus of $50 million is up $11 million from the end of last year.

A couple of things on capital and liquidity. As previously announced, TypTap Insurance Group raised $100 million of growth capital from Centerbridge Partners this quarter. There's a new line on the balance sheet called redeemable noncontrolling interest. The $86 million there reflects the amount received, less transaction costs and also net out the value attributed to the warrants of about $8.6 million.

In terms of holding company liquidity, we have just over $50 million of cash and financial investments in HCI and full access to our $65 million credit facility with Fifth Third. That's well over $110 million of liquidity at the holding company level. In addition, there is another $55 million of cash in the holding company for TypTap Insurance Group.

As you know, there have been a few changes in share counts, so we included some of that data in the press release. For purposes of estimating diluted earnings per share, the diluted share count is about 10.1 million at the end of March. This is up about 350,000 shares from the new shares issued under the renewal rights agreement as well as the dilutive effect of the warrants.

Wrapping up, the company continues to improve in every way. Both insurance companies are growing, earnings are up, and our capital positions are strengthening at the insurance company level and at the holding company levels.

And with that, I'll hand it over to Paresh.

Thank you. Thank you, Karin and Mark, for that summary of the results for the first quarter. By the way, Karin Coleman is our new Chief Operating Officer. She's been with the company in various capacities for over 10 years, and will be joining our calls going forward.

You've seen the results from Karin and Mark. HCI is reaping the benefits of the decisions made in previous years, including our investments in technology and data, and our consistent focus on profitable underwriting.

Currently, TypTap is experiencing rapid growth within Florida. And as Karin mentioned earlier, it has begun operating outside of Florida. Our transaction with UPC also continues on-track, and it should be a great accelerator for TypTap's growth outside of Florida. Finally, we continue to explore strategic opportunities for both ATI and TypTap.

In summary, the entire group is performing well. As we are benefiting from the decisions we made previously, we expect to benefit from the decisions we are making today. Our brightest days are yet ahead of us.

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

(Operator Instructions) And your first question is coming from JMP Securities, Matt Carletti.

Paresh, I was hoping I could start with kind of state of the Florida market. Obviously, you guys are in a strong position. I think a lot of your peers are in less of a position. And so just kind of how do you -- both whether HCI and/or TypTap kind of see the market unfolding for yourselves over the balance of the year? And as part of that, if you have an opinion on the recently passed legislation and what that might mean for claims and fraudulent activity as we move forward.

Okay, Matt. Look, we're going to split the question in 2 parts. The first part, I'm going to let Karin tell you with some numbers, some of the impacts of the legislation. And we're going to answer in the context of if it had been in place when Irma hit the state of Florida.

So we believe that the legislation will be helpful in the reduction of the first notice of loss that occurred when we went back and we looked at the Irma numbers that we had. The first -- the year 1 claims that were filed, 9% of those went into lawsuit. So people that filed timely claim in Irma, 9% ended up in lawsuit. In year 2, the loss -- the claims that were filed, 34% of them have ended up in lawsuit so far. And in year 3, those sort of late reported claims, more than 50% of them are already in lawsuit. So the reduction of the time to file should help quite a bit.

Yes. So Matt, you kind of get the idea, just that in the legislation, moving it from 3 years to 2 years, has a slight impact on claims but has a huge impact on litigation.

So -- yes, that real-life example is very helpful.

Yes. And also the sliding fee schedule should help reduce litigation of a minor dispute, yes. So all of those things are positive. And it was a good legislation because the folks who did have [5] claims in year 1 and year 2, they're not impacted, yes. So it was a good balanced legislation and worked out fine.

As far as speaking about the Florida market, I think the Florida market continues to be, in a general sense, challenging and I think that's been said by a number of our peers. The item that really is differentiating both HCI and TypTap from most of our peer group is basically back to those decisions we made years ago to invest in technology and data. That is what is allowing us to operate in exactly the same terrible environment that has all our peer group operates in with materially different results. We sort of alluded to this a couple of years back and you're seeing it really play out at this point.

Great. And then maybe if I could focus on TypTap for a moment. Could you just kind of provide us an update of -- and obviously, you guys have been expanding. We've seen the press releases of being licensed in a number of additional states. Just where that stands compared to kind of the original path you set out several months ago. You're all ahead of schedule. I saw it in your comments, about $130 million of in-force premium. So it does feel like we're well on our way towards your -- you had a $200 million target for the year.

Yes. Absolutely. Look -- and I got to hand it to the TypTap management team as well here, right, because if you recall, over the years, we were at $25 million, and then we said we'll get to $50 million by doubling. They did that. Then we said it's $50 million, we're going to double it to $100 million. That was last year. They did that. And this year, we've said we're going to double from $100 million to $200 million. And just by the Q1 numbers, they're well on track for that. So the team is executing really well, right?

In terms of TypTap's prospects on a more macro level, I would break it into 3 areas. Florida, obviously, is doing very well. It's right on track with what we had said and expected. The expansion into the other states and getting licenses and the rates and forms approved, it's a little bit slower than we had anticipated. But some of that is understandable because we do have to get together with regulators in every state. And in a COVID environment, it sometimes delays things. So we're maybe running a little bit behind on that, but not much. But if you're thinking in the space of years, this is not a material difference.

The third part, right, which is really exciting, is because of the UPC transaction. The 4 northeast states that we've acquired from UPC, they will really accelerate growth for TypTap in those areas. So on balance, one is, Florida is doing really well. Northeast is going to be way better than we had originally thought. And then the other states are running a little bit slower than we had anticipated. But on balance, pretty good outcome.

Great. And then last question, if I can. Obviously, the annual reinsurance renewals coming up here in end of the month. Any thoughts you could provide as either from just a market perspective? I mean we obviously know the market itself has had its challenges, but you guys have stood out as putting up much better results. What that might mean for HCI? And if there's anything you could share specific to HCI in terms of changes you might expect to make to the program, is it significantly more or less limit or changes to retention and so forth.

Yes. So a couple of things. In terms of the market in general, right, it's the annual ritual. We've got renewals coming up at June 1. So do the rest of the industry, and the negotiations are well underway. Putting into a little bit of perspective, June 1 this year from our perspective looks a lot smoother than June 1 last year did with COVID being there, et cetera. So things will get sorted out, things would be fine.

Other things that we should point out, this is particular to HCI Group and TypTap and us, is that instead of -- as TypTap has matured and as Karin talked about separate management teams, et cetera, we are also beginning to now buy reinsurance in a whole different way. So instead of buying one wind tower, there's an HCI wind tower -- Homeowners Choice wind tower, I should say. There's a TypTap wind tower and this is Florida. And then there's a third wind tower from non-Florida. And then the fourth tower which is a flood tower. So we've sort of had to -- as we've segmented the business and grown up, had to now start looking at these single separate entities, which is a different thing to what I think most -- the direction most companies have headed in.

And given the -- I'd say, the differences in kind of seasonality of cat season and things like that as you expand nationwide, is it a reasonable assumption that we might expect different retention levels and so forth on like a TypTap tower versus API -- ex Florida tower versus Florida tower, nuances like that?

Yes. Matt, the biggest takeaway from this is how we are looking at not only TypTap and Homeowners Choice, but also Florida, the northeast, other parts of the country is we basically look at each geographic area, let's say. And we think of it as a separate business and we make sure that it's -- our rates are adequate and we have appropriate reinsurance for that geographical area.

So each geographic area has to sort of make sense on its own, not suddenly sell it, we benefit because we're buying a big Florida tower, so we can just put the risk in there, right, those kinds of things. We're actually looking at these things as separate businesses that we are hopefully running profitably. So eventually, if we would end up with, say, 10 separate businesses that are all profitable, run -- properly run, they sort of have the benefit of addressing each other should there be a problem with one of them.

And the next question is coming from Truist Securities, Mark Hughes.

Mark, could you talk about the loss ratio? In prior quarters, you've alluded to some of the impact from Anchor and UPC and how that loss ratio impact might trend over time as you refine that book, create prices where needed, et cetera. Could you talk a little bit about that, how much impact this quarter and where it's going?

Yes. I mean it was a pretty straightforward quarter, really. It was -- like I said in my prepared remarks, the increase in loss expense was just really completely attributable to the increase in the gross premiums earned. The consolidated loss ratio was, I think, about 35%. So we have different pieces of the business that we reserve in different ways.

So Homeowners Choice is that sort of 24% to 25% ratio. And the Anchor book is a little bit higher even on to our paper, so the pricing is in line. The loss ratio is a little bit higher there because that tends to be strictly Homeowners. The loss ratio is a little bit higher on TypTap. And then the loss ratios, I think we probably talked about last time around, for UPC is more like in the 50% range.

So it's really just sort of -- this is just sort of a straightforward quarter of the premiums times the loss ratio. And of course, we track everything else to make sure that everything is on track to support those loss ratios and paid/incurred, those types of things, came in pretty much in line with what we expected.

And then similar question on the policy acquisition expense. Were there any unusual items in there? Or is this a reasonable run rate?

Yes. The only thing that's different is, as you know, the policy acquisition rate on TypTap is a little bit higher, but you're sort of used to seeing that flowing through. And the one thing that's a little bit different than what you've -- we may be seeing is that the policy acquisition expense on the UPC book is higher. It comes in, in the, I think, 35% range. So if you see -- you see that increase that you see from, say, Q4 to Q1 is really just related to that. And then that will come back down a little bit over time. But that's -- you see a little bit of a bump in the tax rate in Q1 and it's just -- it's really the UPC book.

And then the higher tax rate, was there any offset in operating expenses?

Yes, good question. So we had -- the tax rate can move around a little bit. But what was a little unusual this quarter is we had some restricted shares that were canceled. And just as part of the reorganization, Karin mentioned separate management teams and whatever. And so there was a little bit of movement around in the restricted shares. Some new ones were granted. Some were canceled.

So there was, I think, 140,000 restricted shares canceled, something like that. And then the dividends related to that get reclassified. We expensed them in the GAAP books, but they're not deductible for tax purposes. And so we had this happen a couple of years ago where you have an unusually high permanent difference. And it's just sort of a onetime thing. So -- and I think that pushed the tax rate to 35% or 36% or something like that.

But nothing's changed in terms of the overall long-term tax rate of about 27%, 28%. So it's just an unusual thing and it was about -- there was operating expenses were a little bit higher than normal because of that reclassification that happened. So it's just sort of a onetime thing, impacts the tax rate. And we were up against a very low tax rate in Q1 last year because we had some windfalls run through. So that kind of explains that difference.

Is that what you were getting at? Was it helpful?

Yes, that is helpful.

(Operator Instructions) And your next question is coming from Raymond James, Greg Peters.

I wanted to pivot to the real estate operations. I noted that in your comments, you highlighted the fact that you're benefiting in part from mark-to-market adjustments in the value of the real estate operations. And if I look at the schedule of what you own, the Florida real estate market, as you well know, is on fire. And I'm just curious about your buy, sell and hold decision-making process as it relates to some of these properties. So the Tierra Verde Marina property that you bought in 2011 has to be worth substantially more than what your cost is. So just looking for some perspective on that.

Yes. So -- it's Mark. I'll take part of that question. So in terms of sort of the mark-to-market, we're not taking advantage of it in any way in the numbers that you see, right? So we've got some properties, as you alluded to. We've got some properties where there's a pretty substantial difference between what we have it on the books for and what it appraises for, let alone what potentially it might actually be worth.

So that -- there's a pretty significant delta there and that does not show up anywhere. We don't -- we can't do any kind of mark-to-market or whatever. And we used to talk about this a year or 2 ago. We would say we had $30 million maybe of unrealized gains there. We sold one property. And as you know, we had a $44 million gain on it. So -- and if -- we still have probably $30 million or so of unrealized gains that are there.

So we -- it's part of our real estate strategy. Long-term strategy, as we've talked about before, is capital appreciation. And I think we've made good on that strategy. We've realized some of that stuff in the past and we'll continue to do that. But there is that sort of hidden asset, if you will, on the balance sheet. It's -- we cannot take advantage of any kind of mark-to-market that we could do if they were equities or fixed-term securities or something like that.

And then just pivoting back to TypTap. You talked about the rollout into new states. And I know you just had a call on this. But if you just give us perspective of how you're approaching pricing for the new states, how you're developing pricing? Any background on that would be helpful.

Absolutely, Mark -- Greg, sorry. Sorry, Greg. I'm having a senior moment here.

That's okay. I have them every day.

So yes, the way we develop pricing is we're talking about being -- entering admitted markets and being admitted. That means there's lots of data on incumbents in each of these states. So at a high level, we tend to look at probably the top 10 carriers in any given state and see what their pricing looks like, et cetera. And then we try to develop pricing that is competitive with a couple of them that we would like to model ourselves after. So that's roughly how the pricing is set. It's set to be market and/or slightly on the competitive side of the market in any given state. But you have to do it state by state to see what's going on.

And obviously, at that point, you're going to have to go through the rate and form filings and your work with the regulators in each state to get an appropriate rates and forms filed and approved. So it's quite a cumbersome process. I'm simplifying it a lot, but there are a lot of people who work quite a lot of hours in each state to get it just off the ground, yes.

And there are no further questions at this time. This concludes our question-and-answer session. I would now like to turn the call back over to Rachel Swansiger who has a few closing remarks.

On behalf of the entire management team, I would like to thank our shareholders, employees, agents and most importantly our policyholders for their continued support. 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 now disconnect.

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