Hci Group Inc (HCI) 2024 Q1 法說會逐字稿

Welcome to HCI Group's First Quarter 2024 earnings call. My name is Kelly and I will be your conference operator. (Operator Instructions) I would like to remind everyone conference call is being recorded and will be available for replay through June for starting later call is also being broadcast live via webcast and available via web.

Yes, for your information section of HCI Group's www.hci. group. I would now like to turn the call over to Matt Glover Gateway Investor Relations. Matt, please.

Thank you, Kelly, and good afternoon, everyone. Welcome to HCI Group's First Quarter 2024 earnings call. On today's call is Karen Coleman, HII's Chief Operating Officer, Mark Hahn, terrific HII's, Chief Financial Officer, and Paresh Patel, HCA's Chairman and Chief Executive Officer. Following Kevin's operational update, Mark will review our financial performance for the first quarter of 2024, and then Paris will provide a strategic update To access today's webcast, please visit the investor information section of our corporate website at w. w. w. dot HCI Group.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. Ichigo disclaims all the obligations to update any forward looking statements.

And with that, I would like to turn the call over to Ken Goldman, Chief Operating Officer. Karen?

Thank you, Matt, and welcome everyone. In the first quarter, HCI. group reported pretax income of $77.4 million and earnings per share of $3.81. Similar to my comments last quarter, each business unit made a positive contribution to our results, including another quarter of homeowners, choice and TypTap both being solidly profitable. In-force premiums grew in the first quarter and remained above 1 billion. We reported another quarter of improvement in our underwriting results. Despite modest weather losses in the quarter, our gross loss ratio improved to 31% compared to 34% in the prior year's quarter. HCI. continued to deliver on its commitment to shareholders paying a dividend of $0.4 per share. Our 54th consecutive quarterly dividend. Also in the quarter, we completed our first assumption at condo owners, reciprocal exchange or as we call it core, which totaled $40 million of in-force premium Following quarter end core completed the second assumption in April, which brings total in-force premium to $55 million.

Before I turn it over to Mark, I wanted to provide a quick update on the business that Homeowners Choice and TypTap has assumed from Citizens since November 2023. Overall, the power of the technology we built is showing its value, and we've seen results exceed our expectations. We were able to evaluate Citizens' entire portfolio to select best 70,000 policies that best met our underwriting standards. So far, what we have observed is we were able to offer the majority of policyholders at renewal offer that was comparable to or less than if they had stayed with Citizens. We've retained more policyholders than we had expected the loss ratio in the business we've assumed is better than anticipated, and we've added more than a quarter of 1 billion of premiums and a few months with almost no added expense.

Now I'll turn it over to Mark to provide more details on our financials.

Thanks, Karen. So as Karen mentioned, this was another good quarter for the Company. Pretax income was just over 77 million and diluted earnings per share were $3.81. These results are being driven by the same positive trends we've been discussing for a while premium growth, higher investment income, better loss trends and declining expense ratios. Gross premiums earned were 42% higher than the same quarter last year, driven by growth in Florida earned premium includes $67 million of premium assumed from Citizens, of which $3.6 million relates to core, which I'll talk about in a minute.

Investment income of $14 million this quarter was about 40% higher than the fourth quarter last year, continuing the trend of higher investment income each consecutive quarter, driven by higher cash and investment balances combined with higher rates. As we mentioned on the last call, we're starting to lock in some of the higher rates by strategically adding term to our bond portfolio. We recently purchased $170 million of year treasuries at just under 5%. The consolidated gross loss ratio this quarter was 31%, down from 33.6% in the same quarter last year when the legislative changes were announced in 2022, we expected the gross loss ratio to come down to around 30%, which it has the loss ratio was slightly higher than in Q4 because, as Karen mentioned, we had some weather this quarter. Maybe more important, the positive loss trends we've been discussing for over a year now have continued as an example, litigation propensity for the number of lawsuits for any given number of claims is 35% lower than it was before the legislative changes took effect, I mentioned declining expense ratios in my introduction, labor and operating expense as a percentage of gross premiums earned have been declining with each consecutive quarter. Why? Because of our operational leverage. In the past 12 months, we've added more than 300 million of premium and added only a handful of people along with the lower loss ratio. This helps lead to a lower combined ratio, which was around 70% in the fourth quarter last year and just under 67% this quarter. This, of course, is being impacted by the citizens' assumptions for which we have limited reinsurance and policy acquisition expenses. But once these normalize, we expect the combined ratio to be in the low to mid 80s, which is indicative of a very healthy insurance company and reflects the operational efficiencies we've generated with our technology platform and TypTap.

Before I move to the balance sheet, I wanted to mention one more thing in the income statement, as Karen mentioned, we recently started core, which is a new operating model for us in that we only administer the policies, even though we did not own the underwriter, we are required to consolidate income statement into ours. That means Consolidated premiums include core premiums. Consolidated reinsurance includes core reinsurance and the same for loss expense and policy acquisition expense. Then, of course, there's an adjustment to net income for any economic gains or losses which are not ours in order for a reader to be able to see the impact of CORE. We now show it separately in our segmented financial information in the 10 Q now to the balance sheet, which continues to improve driven by profitability, debt management and capital management. You may recall we recently completed a number of capital transactions and when combined with growing profitability, the result is a much stronger balance sheet in the last 12 months consolidated cash and investments have gone up by $340 million. Holding company liquidity has grown by $30 million. Debt has dropped by more than 60 million. The debt to cap ratio has declined from 62% to 37%. Shareholder equity has more than doubled to 395 million. And lastly, book value per share has gone up from just under $21 per share to over $38 per share.

In summary, this was another great quarter for the Company. Revenues up all of our expense ratios are down and the balance sheet has continued to strengthen.

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

Thank you, Mark. As highlighted by Kevin and Mark's comments. Hca posted outstanding results in the first quarter. This is because of our technology and it is not just a talking point. It is driving our operational capabilities as well as our financial results. And even though we've grown to over 1 billion of in-force premium, this is just a fraction of the $150 billion homeowners premium market across the US. So there is still plenty of room for growth, but more interesting is something new that we are noticing.

Let me elaborate. We have added 70,000 new customers across Homeowners Choice and TypTap. In addition to that, we've added over 400 condo association policies at core. The process was seamless because we have the platform to efficiently onboard these policies and as we've demonstrated, we can do it profitably. But we're also noticing that as these policies policyholders come up for renewal, they are staying with us in ever greater numbers. This is true across homeowners, choice, TypTap and core. Furthermore, we have seen strong interest from others to also join our phones have been ringing with prospective customers interested in getting a policy from one of the age group of companies, and it extends even further than that. We are also hearing from agents, brokers and investors. I'm asking if we can do more so in summary, the opportunity that is unfolding in front of us isn't to add some incremental policies. It is much bigger than that. We are looking to see how we can double or triple the size of the business. We think large numbers of policies are out there still searching for a better solution. And this is just the beginning. There is a growing sense that these trends are expanding throughout the country and we can use our technology platforms to capture the various opportunities out there in the market as they arise. But as always, we will it will be done in our typical prudent fashion, and we are setting ourselves up to be ready to take advantage of as these opportunities present themselves.

With that, I will turn it over for questions.

(Operator Instructions) Michael Phillips, Oppenheimer.

Good afternoon, everybody. First question, Mark, when you when you mentioned the combined ratio expectations, you said low to mid 80s from what timeframe was that this year? Or just kind of it wasn't a longer-term timeframe?

No. I mean, I mean, this year like now because I think the point was it's obviously significantly lower than that right now. But once once we normalize in that toward the end of the second quarter with with reinsurance impact for the citizens policies that that's that. That's our expectation for combined ratio like the second half of the year.

Okay. Great. Thank you. And then I guess just curious how you guys reinsurance renewals coming up pretty soon. How do you think about that given the big growth from Citizens? I mean, I don't know if it's in one direction, your most of your 2024 growth is going to be in Florida. So maybe more concentrated than you otherwise would have been to the buy more for you just bigger companies.

So you need less just how are you thinking about the need for reinsurance relative to prior years because of some of my colleagues a look well, we have managed this business to grow from around EUR50 million of premium back in all27 the way to what it is now. So as the business grows and shrinks, which it has done occasionally as well we buy an appropriate amount of reinsurance. So yes, the business has grown, but we aren't in the market trying to buy an appropriate tower for the upcoming wind season. We are right in the middle of those negotiations and everything else. So the two items that are there is we are buying an appropriate topsides tower for the appropriate size business. The only item that is not finished yet is what will the cost of that center that reinsurance be, but one presumes because you're buying a lot more quantity, might be the overarching goal but it's a question of will go up as a percentage of revenue.

Yes. Right. Okay. Good. Yes, thank you. And then I guess lastly, you mentioned the phone calls that are coming out and you're not looking to grow the Company policy by policy, but maybe looking to be more stuff. And I guess, are you also considering Are you getting any goals and would you consider maybe being Frontline for other homeowners companies that already write business that don't have your technology and in front for them as you expand outside of Florida and into more nationwide? Would that be an option?

Yes, there's there are a number of options that that people have approached us with and obviously we're evaluating them, including people wanting us to buy books of business or by small carriers kind of thing. So there's a broad range of options that are unfolding in front of us. Obviously, we're trying to make sure we are prudent as to where we deploy our technology so that it has maximum long-term value, but front and could be an example as well.

Yes. Okay. Yes, sure. Thank you and my last one for now on just a numbers question. You had mentioned the in-force premium from core April to $55 million. I think before you said you were targeting around 75. Is that still the case for core ultimately? Yes, for the assets, you're correct, right?

Yes.

Okay.

You could buy a new product for look at. I also want to point out amazing. This is a core had zero revenue on January 1st this year. It may find that in less than 5.5 months later and yard up to $55 million as as we had sort of laid out that we will be doing this site. This is how easily and seamlessly we can add to this here

Okay, great. Thank you.

Mark Hughes, Truist.

Yes, yes, thank you. Good afternoon, everybody. A low the low to mid-80s, Zymark low to mid 80s combined ratio just to be clear that is that gross or net earned net earned. But on net earned?

Yes.

Okay. And then the is the cash at the holdco at this point?

So total holding company liquidity at the end of Q1 is about 220 million.

And then did you give a earned premium number for that takeout this quarter?

And so that what I said was the bottom in earned premium. There's 67 million of that relates to Citizens' assumptions. And of that 67, 3.6 million of it is core.

Okay.

And that you think that the in-force book some some of that is direct. Some of that is assumed in Q1. Most of that is assumed. Right?

And then how do you think about the?

I got no, sorry, I was coughing.

Sorry about that Africa. How do you feel about the takeout opportunity? Are there still attractive policies after what you've done and others. How do you feel about the the potential phase next the come around?

And Mark, as parish on, as we had said previously, there's still 1.1 million policies in Citizens right now, we can clearly see VR technology that a large number of them are green, a large number of them are red Bay. So there is some opportunity there, right. It's just a question of when and when it went to go after them and what is the most prudent fashion and wish to do so.

Yes, yes, on And then is there a written number associated with the takeout you obviously just gave there and if it is there our written just for reference sake for written?

Yes. So there is about the total assumed written in Q1 was about 43 million.

And that was so is that already incorporated into the Homeowners Choice and TypTap and or present while not core yet?

Yes. I mean, I can give it to you by underwriter if you need it that way. But of that of that 40, yes, of that 43, 19 of that was core it. And Mark, you know, from previous conversations, you know, it looks like definitely with Citizens because your written premium is only the the unearned premium that you're assuming so it sort of comes in lumpy fashion and we do renewals and get them onto our paper.

Yes, when you're talking about the success you're having with the Citizens takeout I think you said the renewals are coming in better than expected. Your pricing generally you're able to offer pricing that's in line or less for renewal or was there another aspect of it is that again, as you're describing the success you've had with it, the Citizens takeout was that was that covering the VICIC. and the benefits are they on a better experience.

The other item is the loss ratio on the business we've assumed is better known as the Pinnacle and that you've added that quarter of $1 billion of premium with almost no added expenses.

Exactly. Okay. All right. Thank you very much.

(Operator Instructions) Matt Carletti, Citize's JMP.

Yes, thanks. Good afternoon. I'm at the Paris afternoon from Paris, where you talk about, um, you're looking forward and opportunities to double triple the size of the company and you kind of hit those milestones. You asked a party how you view HCA kind of being similar or different. And I guess where I'm going with this is more more geography than anything else you and how much opportunity do you consider you continue to see in Florida. Is there a certain market share at which you feel like you've got enough of the market? Where do you kind of see Florida growing in lockstep with the rest of the country and not changing much. You just guys being bigger.

I meant if I was speaking, just geography-wise, right, when we talk about the $150 billion, probably about to 20 billion is in Florida?

Yes, we didn't go so plenty of room to grow there. And that's obviously right in our backyard. And that opportunities than in the rest of the country, the $130 billion, a big chunk of the Texas chunk of it in California, et cetera. And all of these markets are going through the stress, just read any of the industry paper pricing, you'll see it on. I think all of those markets will eventually stabilize out at much higher numbers and at some point, there will be an opportunity how quickly that takes we can be patient to when it actually happens. So we're just setting ourselves up. We're not handicapping as to when California will become an opportunity or when Oklahoma will become an opportunity. We're just sitting here, we're patiently waiting. But what it does when they do become an opportunity is when we will jump in here.

Yes.

How do you think about you talked a bit in your comments and in the press release about the leverage that the technology provides. How do you think about it, you become say twice the size or three times the size? Like is there? Is there certain expense ratio you believe you can operate or are certain?

Yes, spread better than kind of what the market is, Mark, I think we think of it in a slightly different context, but just to sort of put this right, so if you imagine that the first billion and these are rough numbers?

Yes, when we write a second billion, right, losses will go up proportionately because we double the business, you might end up with a similar number of agent commissions will probably double up as well. But all the other kinds of exit or corporate overhead, other expenses, right? Those will not double up. They will increase somewhat, but it's very easy to see that they will not double up. And that's where I think the leverage increases there will be some additional expense because it won't be zero, but it's as we just added some foreign $80 million of premium, almost 12 million of premium. And we've hardly had any dollar increase in operating expenses.

That's where that leverage is coming from?

Yes, yes. Then the automation again.

Yes, great. And then if I could just a couple, I guess one, I guess one numbers question. One maybe numbers you mentioned Q1 had a little weather to it, and that's maybe why or I'd like to point to a fraction of a point higher on credit loss ratio and I know it's only about halfway through the quarter, but any early insights on Q2?

Is it looking normal, looking active, just from what you guys see And so far, it looks it looks pretty normal. Nothing unusual at this point in April.

Okay, great. And the last one, just numbers. Do you have net written premiums consolidated pending?

Yes, 186 hundred and 87 million.

Wonderful. Thanks very much. Appreciate it.

But it's a bad thing about a question from before. The other thing, by the way, and this is why I'm so excited in my what I was saying in my prepared remarks, right? We have long talked about technology and in personal lines and homeowners policies and that kind of thing the interesting thing is in getting core up and running, we suddenly realize how much of our technology platform it speeds up time to market of a new of a new line of business commercial residential, it is different to commercial to residential.

Yes, and sure, it is it has opened our eyes that this platform can be used not only in different geographies, but also in different lines of business, right? You can go from residential to commercial residential to one or go to commercial, et cetera. And I'm not saying we're doing that today. But we're certainly looking at this platform could be used in lots of ways that we've never used that before because once it's successful, you can just add onto it. So that's what is creating that opportunity about maybe doubling or tripling there is more here than just writing more policies yet?

Yes.

No, that makes a lot of sense, but thank you. And congrats on a really nice start to the year. Thank you.

Michael Phillips, Oppenheimer.

Okay, thanks. And one more thing. Let me back up a kind of a follow-up to mark your comments about the litigation propensity that around 35%. Can you remind us how are you handling your prior year loss picks? And reserves given what you're seeing there for that propensity to come down?

That's a good question. I mean, we've for all of the accident quarters from, you know, prior we've made assumptions about what we think the ultimate cost of loss cost would be for NEOs accident quarters. And that includes assumptions that we've made for the number of lawsuits that we will ultimately get. And so I mean, literally every quarter, we're updating that estimate of how many lawsuits will ultimately get. And and what I would say is that things are developing for the the older accident quarters prior to the legislative changes, things are developing pretty much as we expected them to be nothing unusual. We didn't have any adverse development in the we did have any adverse development at all in the first quarter for the accident quarters after the legislative changes, we're still being we made selections that took into account the changes in legislation we're still evaluating those as to whether we should potentially bring them down a little bit. But we haven't really done much of that yet. And we will have to we need a little bit more time to go by. So you know, the way those those accident quarters are developing is we've got about 35% fewer lawsuits than we than we would have gotten in the old world, if you will, or the old rules. And but we haven't we haven't reserved quite that optimistically.

That makes sense. No, it does. Yes. So you didn't reserve for a call it, whatever the number at 35% drop or heavy, and it's kind of the right number. But as you said, you build something in it, but it wasn't to the level that you're currently seeing. Right, okay.

Yes, we knew it was going to be better, but it's better than it's better than we thought it was going to be.

So it's good.

And Michael, the other side of that is we actually go back. We had stated that many times that we expect the numbers to be better, but we didn't have enough evidence to book to the better number. So we've tended to be conservative in the quarters since the legislation got passed, but eventually reality, whatever it is will manifest itself and I think Mark, that point make appropriate adjustments.

Okay, great. Thanks a lot, guys.

Thank you.

This concludes our question-and-answer session. I would now like to turn the call back over to Parrish hotel, who has a few closing

on behalf of the entire management team, I would like to thank our shareholders, employees, agents, brokers and most importantly, our policyholders for their continued support. Thank you.

This does conclude today's conference call. You may now disconnect your phone lines, and have a wonderful day. Thank you for your participation.