Hci Group Inc (HCI) 2024 Q3 法說會逐字稿

Good afternoon and welcome to HCI Group's third quarter, 2024 earnings call. My name is Paul and I will be your conference operator at this time. All participants will be in listen-only mode before we begin today's call. I would like to recommend I would like to remind everyone that this conference call is being recorded and will be available for replay through December 7, 2024. Starting later today.

The call is also being broadcast live via webcast and available via webcast replay until November 7, 2025, on the investor information section of HCI Group's website at www.HC I group.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Thank you, Paul and good afternoon. Welcome to HCI Group's third quarter, 2024 earnings call on today's call is Karin Coleman HCI's, Chief Operating Officer, Mark Harmsworth HCI's, Chief Financial Officer and Parish Patel HCI's, Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the third quarter of 2024 and then parish will provide a strategic update to access today's webcast. Please visit the information section of our corporate website at www.hcigroup.com.

Before we begin, I would like to take the opportunity to remind listeners that today's presentation and responses to the 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.

We are 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 statement.

Now, with that, I would like to turn the call over to Karin Coleman, Chief Operating Officer.

Thank you, Matt and welcome everyone. Since our last call, we have been impacted by three hurricanes, hurricanes, Debbie and Helene occurred in the third quarter and Milton made landfall early in the fourth quarter. These storms have affected our customers as well as our neighbors, employees, families and families in Florida, Georgia, South Carolina, North Carolina. Our hearts and prayers go out to everyone impacted.

These 3 events have produced more than 10,000 claims and we expect to pay hundreds of millions of dollars to help our policyholders rebuild their lives despite category one and category four hurricanes making landfall in the third quarter. HCI Group had positive earnings reporting pretax income of $14 million and diluted earnings per share of $0.52. This is a tremendous result.

HCI continued to deliver on its commitment to return value to shareholders by paying a dividend of $0.40 per share our 56th consecutive quarterly dividend.

Subsequent to the third quarter, we successfully added policies from citizens given the expectation for a competitive assumption process. Our original plan was to add roughly 40,000 policies from citizens in the fourth quarter.

We were pleased with the response from policyholders and were able to reach our target ahead of schedule at the October assumption. Approximately 42,000 policyholders chose to join HCI.

In closing, I want to address the talk about the impact of this year's overly active hurricane season on future rates for Florida.

We believe it is important to have stability for our policyholders and therefore we are not looking to increase rates in Florida at this time. Now I'll turn it over to mark to provide more details on our financial results.

Thanks Karin, as Karin mentioned, this has been a very active storm season. We issued a press release in October detailing the expected impact of hurricanes Debbie and Helene in the third quarter and the actual results are consistent with what we said in that release. Despite a net expense of $58 million from hurricanes Debbie and Helene pretax income in the third quarter was just over $14 million and diluted earnings per share were $0.52.

The reason we made money in a quarter with those hurricane losses is due to the strength and profitability of the underlying business. The underlying loss ratio, this quarter was a little under 25%. And maybe more importantly, the underlying combined ratio was 70% with a low underlying combined ratio and a well structured reinsurance program in place. The impact of a storm or two and a quarter can be more than offset and the results of the third quarter clearly show that.

Now let us talk about quarter four. In early October hurricane Milton made landfall in Florida as a category 3 storm and we expect the net expense for Milton to total $128 million including the reversal of benefits under a Multiyear reinsurance agreement.

This loss is higher than the storm losses in the third quarter. But again, underlying profitability should mitigate a lot of that.

That underlying profitability should be higher in the fourth quarter than the third quarter. Partially as a result of the premium growth from the citizens assumption we announced recently, we expect total enforced premium from this assumption which happened in late October to be around $200 million. Adding an additional $35 million to gross premiums earned in the fourth quarter.

There should be minimal added costs associated with this premium. Other than of course, the incremental loss expense.

Just a couple of things on the balance sheet which continues to strengthen during the 12 months ended September 30, cash and investments are up 400 and $90 million. Shareholder equity has more than doubled. Book value per share has almost doubled debt to cap has been cut in half and we have grown the company by almost 40%.

Book value per share increased in the third quarter. Despite the two hurricanes in quarter four, we expect it to take a bit of a step back. But by the end of January or February, we expect book value per share to be back to where it was at the end of September.

What about holding company liquidity, total cash and financial investments at the holding company level grew during the third quarter and are well over $200 million. And with that, I will hand it over to parish.

Thank you, Mark.

As indicated by Karin, Mark's comments.

It has been a very interesting few months at the start of every hurricane season.

Our preferred outcome is always the same. We hope for a very quiet year, but we also plan for the possibility of catastrophic events like hurricanes and we buy a conservative reinsurance program to cover such possibilities each year.

This just happens through one of those years when we will have recoverage under those reinsurance contracts.

But with all of that said, I want to step back and look at the bigger picture.

Despite the three hurricanes making landfall in Florida, our balance sheet remains strong and the underlying business is performing well.

And as we look forward, I want to highlight several trends that we are unfolding that we are seeing unfolding.

First, we think Florida is an attractive homeowner's market and we are committed to operating in the state in the future.

Second, as Karin highlighted in her comments, our customers have endured a lot over the past few months, and we have no plans to increase our policyholders' rates in Florida in the coming years.

Building on that commitment, we have added another 42,000 policyholders who chose to move to ACT from citizens and we believe the best way to demonstrate our confidence is to grow the business and which is exactly what we have done.

And finally, we also think this will be an opportunity to grow the business further in the future. Therefore, we are currently working to start our fourth admitted carrier, which we plan to have fully operational by early 2025.

In summary, we have withstood an active an active hurricane season. Our business is healthy. We have no plans to increase rates in Florida at this time and we have added recently added 42,000 new customers and we are starting a new carrier that will be operational in a few months.

With that, I will turn it over for questions.

(operator instructions) Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we pull for questions.

And the first question today is coming from Matthew Carletti from Citizen JMP. Matthew, your line is live.

Thanks. Good morning or good afternoon. I was hoping you might be able to offer some observations in Milton. Specifically, how we should think about it. I think we always like to compare it to maybe prior storm. I do not know if Ian is kind of the right comparison, but just with the claims you have seen coming in, maybe kind of the impact that the reforms have had, how big of an event you feel it is for Florida, you are on the ground seeing it firsthand. Whereas I think a lot of the others are kind of model estimates just any insights you have. There would be helpful.

Sure thing. A couple of things right. We track how claims come in. And usually within by this time, we would have received 3 weeks into the storm about two-thirds of the ultimate number of claims you are going to get. Right.

So using that as a benchmark, we are seeing Milton come in at roughly between one-half to two-thirds the size of the year. Just by claim count. (inaudible) And I want to cut out explain it further in the sense of this is actual Claim Council, even though the business has grown considerably since Ian made landfall. So even though we have a lot more policies, the actual claim counts we are seeing is much lower and that is occurring, I think because Milton was no Ian. Simple as that.

Okay. Great. That is good. That is very helpful.

(inaudible) On the takeout you kind of hit your 40,000 or?

I am sorry. Can you hear me? Okay.

Can you repeat the question, please?

Sure. It is about the takeout and just maybe what insights you might have on. The conversion was very strong, even stronger than we saw last year, which was stronger than kind of historical. Just why you think that might be and just kind of some of the dynamics there.

Okay. So just as background for everybody else listening on the call, the takeout for October was very heavily sought after by a number of carriers. And I think about 400,000 policies were approved to be depopulated in that month. Right. And we had our two carriers participating in that takeout were amongst the lowest premium, so we kind of had expected that we might get a head rate in the low 40s. Right. So, if every 10 policies we selected, we would get 4 of them at best. Right. That was the whole idea. And because we wanted, as Karin mentioned, we want to get to 40,000 policies.

We said, lets them during November as well because we might need multiple attempts to get to our requisite 40,000 policies. What happened in practice though is we had a very high take-up rate, and I think some of that is just because of Milton and things going on and other things. I think it just speaks to the brand that a CIA homeowners' choice and tip t have built up that people if they Are doing anything would prefer those things. And our technology making sure that we only selected people who wanted to come with us. So all of that coming together gives you that very high take up rate. I think I have seen the numbers for the rest of the people in, who participate in October take. I think collectively it is sitting at around 50%. So, yes, we did much better. But I think there is a lot of factors that contribute great and great, sorry. But one other thing just so that we, because we do it so well in October, we are not going to therefore then also participate in November. Because we have reached our capacity in one month.

Understood. That makes sense. And one last one, you mentioned the underlying loss ratio is around 25% in the quarter, which I believe is kind of the lowest number we have seen yet. So keep showing improvement. Is there anything in that number that is one time in nature or unique or as we, as we look forward, is that in your view, a fairly sustainable kind of line in the sand?

No, that is a pretty stable number that number has been normalized. We booked a small credit to reduce the expense on prior periods was not a big number, we have taken that out and looking at the 25 it would have been actually even less than that.

So 25 is a good number. I think that is a good number going forward in the fourth quarter. As you know, sometimes claims in a quarter where you have had a significant storm. Sometimes the daily claims can be a little bit less. But I think 25 is a pretty good number for the next couple of quarters until we get into, the weather in quarter two and quarter three of next year.

Great. All right. Thank you very much for the answers. I appreciate it.

Your next question is coming from Mark Hughes with Truest. Please pose your question. Your line is live.

Thanks. Good afternoon.

Afternoon, Mark.

Good afternoon, Parish. Mark. I think you suggested the incremental $35 million in premium in the fourth quarter from the takeout.

And we are working off of a base of what 265, 266 in the third quarter.

And then the $200 million was that the kind of when you have it for a full quarter, it would be at 35 would be more like 50.

That is a way to read it.

It is a little bit prorated for quarter three.

And then what kind of keyboard?

What kind of premium seat? Should we think about for kind of on a run rate basis either absolute dollars or percentage?

Good question. The premium seated in quarter three, where I think one-hundred and 9 million, but you had the $12 million adjustment that we talked about there.

The right number now going forward, sort of the normalized number is about one-hundred and 2 million that should be the number except for the adjustment that we have mentioned for Milton, one-hundred and 2 million is the new sort of quarterly baseline number. Then for quarter four, of course, you have to make the adjustment for Milton, but that is the number going forward and that will take you through until the end of May.

And refresh me on the do four adjustment for Milton.

The adjustment to the premium seated line is about $50 million for Milton. That is included in the 128 million that I mentioned in my prepared remarks. And that is the reversal of benefits under the multi-year agreement with Berkshire.

50 million seated premium and then what 78 in the losses.

Yes, exactly.

Okay.

How much cash at the Holdco.

Over $200 million.

And then, perish your comment about the new carrier? Refresh me on the and I might have missed some of your comments today, but the new carrier the size intent. What area are we targeting?

It is just normal business for us in the sense of. We had one carrier back in the day which is home and a choice. We grew it to a certain size. Then we start our second carrier tip tap.

Both tips up and homeowners' choice are well, north of 500 million at this point. We had already started our third carrier core as a reciprocal for commercial resident ship last year. Point and payroll. It Is on that legacy. It will be our next growth carrier. It is a reciprocal based in Florida. We are going to capitalize it. We are going to give it a surplus note.

We grow it starting in 2025.

When I think about the G&A this quarter about $19 million. Is that a reasonable run rate or is that going to? Is there still some distortion around the takeout or anything unusual? Is that a decent run rate?

That is a pretty good run rate. Quater four sometimes tends to be a little bit lower than quarter three, but that is generally. There is nothing odd in that number. That is a pretty good go forward number the same thing for operating expenses.

Okay. Any comments on the competitive environment in Florida, with these storms, maybe some new capital in the market or you tell me. What is the appetite among the carriers for new business? Obviously, there is enthusiasm about the takeout. How would you characterize the competitive environment?

Mark, it has been a little bit over three weeks after three or four weeks, I guess after Milton at this point. And I think no one to speak for every carrier out there. But I think we are all busily taking care of policy holders and taking care of claims and all those kinds of things. So that dustt of what comes next is just beginning to settle. So, but everybody seems to be, healthy and it seems to be business as usual. So I do not think appetite went up or down as far as your part of the question about new capital.

Well, technically, we want to lead the way. So here we are, but I am sure there are other for other carriers or other capital that may be forming. I do not have visibility as to who is going to fund what or whatever kind of thing, but it is normal to expect that there will be some capital that, that lend to the state at this point. So wait and see. Operator next question.

Your next question is coming from Casey Alexander with Compass Point Research & Trading LLC. Please push your question. Your line is live.

Thank you. Mark must be a great analyst because his first 4 questions were exactly what my questions were going to be. I am okay, I am back in the queue. Thank you.

Okay.

(operator instructions) You have a question coming from Michael Phillips with Oppenheimer. Please pose your question. Your line is live.

Thanks. Good afternoon. I guess I wanted to ask a little bit about the comments about rates in Florida and your strategy for at least the coming year not to raise rates. Does that signify? I guess a desire on your part, excluding all the depop is you are getting to grow in Florida. The depot stuff.

Well, Michael, it is Paresh. I think we would characterize slightly different to that as we sort of. That is why we made the comments we did.

We see what is been going on with our policy orders, and the commentary and the news articles and everything else. The latest anxiety that afflicts a lot of insurance. What will my insurance rates be like next year?

Right. Anxiety causes issues. We just wanted to kind of let our policyholders know actions that we will be taking, right? I am not speaking for the industry or for anybody other than us, but we are not looking to raise rates in 2025 in Florida. Because I think, frankly, we would not see a need to do so now solely up to us, but that is at least what our beliefs are.

It sounds good. You are obviously your margins are strong. I wonder if that will have any implications for maybe slight pressure on your margins next year.

I am sure it might have some effect on the margins, but we are not doing this for margins in any given quarter.

We and our policy holders have a long trust in terms of all of this stuff.

Let us talk about some of this. We have a policy holder who has been with us since 2008. And all the events and whatever unfortunately, when Helene went by. They had a car park next door outside that next to their house that caught fire and pretty much burned the whole house down.

I think that person is whatever. I have just seen the claim note is fairly traumatized by all of this stuff.

Do we really need to say that they should be thinking about whether we are going to raise rates next year or not. That is why we are doing this is because we answer the phones. We look at the claims we are Floridians too and when we see all of this stuff. This is one more effort on our part to try and help people build and restore themselves to normality so we can go back to the relationships we have had with our policy holders.

That makes sense. Thank you for that. But I guess maybe more higher level would be a large part of your strategy, obviously, has been at least for the past year and longer, of course, it comes and goes. But this year has been a big part of your story is the deep business. And I am sure that is always going to be present at some point in future years. But if you put that aside, what is the next strategy? And I would think it is this. So I will try to answer the question but tell me if I am right or wrong, maybe help me out go deeper. It is growing outside of Florida. And if that is the case, then let us talk about that. If it is a different answer, tell me what that is, but kind of what else for HCI, when you put depot aside.

Okay. We do de ups because they are there. It is not the only item that we have.

We have run the company for several years when there was no depot. It just is the flavor of the month currently, but the longer-term kind of thing. And I was kind of remembering a question you would ask the beginning of hurricane season about what happens if there is another hurricane or whatever.

Well, guess what? We have had three landfalling hurricanes in one hurricane season and we are healthy and we're not just saying that our actions build to that effect.

Deeds speak even louder than our words and how you could also look at this is in a world where that is being afflicted by climate change and more catastrophes, et cetera.

Maybe we have figured a way to do risk selection and underwriting to a level that lets us, basically be climate adapted. And if that is what we have done just happens to be the place we have done it at where it is also one of the most intense places to do it at. Kind of sets you up very nicely to say, maybe we can do this in the rest of the country and opportunities will occur? And the other side of that is what we have also done is that we tend to allocate capital to where we can get the highest ROE, right?

So here we are putting up numbers that they are what they are, and I am sure, so we do our best to make sure we do it correctly. Our results speak for themselves.

No. Thank you. I think it is certainly a testament to your strength with a lot of tough results coming in. You guys shared quite well. So thank you. I think that is all I had. Thank you very much.

Thank you.

At this time. This concludes our question-and-answer session. I would now like to turn the call back over to Paresh Patel 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 are all looking forward to a more peaceful and less dramatic 2025. Thank you.

At this time. This concludes, thank you, everyone. This does conclude today's conference call.