HCI Group, Inc. Q1 FY2021 Earnings Call

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. At this time, all participants will be in a listen-only mode. 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 condition 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, continues to be a valuable part of our diversification strategy, both in producing positive cash flows and capital appreciation. Third, Homeowners Choice continues 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. 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 a $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 non-controlling 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.

Thank you, everyone. The floor is now open for questions. Our first question comes from Matt Carletti at JMP Securities. Matt, you can go ahead and ask your question.

Thanks. Good afternoon. Paresh, I wanted to start by asking about the current state of the Florida market. Clearly, your company is in a strong position, while many of your competitors are not. How do you see both HCI and TypTap navigating the market for the rest of the year? Additionally, do you have any insights on the recently passed legislation and its potential impact on claims and fraudulent activity moving forward?

Okay Matt. Look, we're going to split the question into two 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.

Thanks Paresh. We believe the legislation will assist in reducing the number of first notices of loss based on our analysis of the claims from Hurricane Irma. In the first year after Irma, 9% of the timely filed claims resulted in lawsuits. In the second year, 34% of filed claims ended up in lawsuits. By the third year, more than 50% of late-reported claims were already in lawsuits. Therefore, reducing the time to file should significantly help.

Yeah. So Matt you kind of get the idea just that in the legislation moving it from three years to two years has a slight impact on claims but has a huge impact on litigation.

So, that real-life example is very helpful.

Yeah. And also the sliding fee schedule should help reduce litigation of a minor dispute, so all of those things are positive. And it was good legislation because the folks who did have five claims in year one and year two, they're not impacted. 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 justified 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 all our peer group operates in with materially different results.

Great. Could you provide us with an update on TypTap? It's clear you have been expanding, and we've seen your press releases about being licensed in several additional states. How does this compare to the original plan you set out several months ago? It seems like you're ahead of schedule, especially with the mention of $130 million in in-force premium. It feels like you're on track to meet your $200 million target for the year.

Absolutely. I have to commend the TypTap management team for their impressive performance. Over the years, we had initially set a target of $25 million, and then we aimed to double that to $50 million, which they achieved. Moreover, last year, we increased that goal to $100 million, and they hit that as well. This year, we set our sights on doubling from $100 million to $200 million, and based on the Q1 numbers, they are well positioned to meet that target. The team is executing effectively. On a broader scale, I see TypTap's prospects in three main areas. First, Florida is performing exceptionally well and is in line with our expectations. Second, our expansion into other states and obtaining necessary licenses, as well as having rates and forms approved, is progressing more slowly than we anticipated. Some of this can be attributed to the need for collaboration with regulators in each state, which can be delayed in a COVID environment. However, this slight lag isn't significant if you consider a longer timeframe. The third aspect is particularly exciting due to the UPC transaction. The four northeast states we acquired from UPC will significantly boost TypTap's growth in those regions. Overall, Florida is thriving, the northeast is looking more promising than we initially thought, and while progress in other states has been a bit slower than expected, the overall outlook remains positive.

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 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. A few points to mention. In general, regarding the market, it's that time of year again with renewals set for June 1, and the entire industry is in negotiations. Looking ahead, June 1 this year appears to be much smoother for us compared to last year when we dealt with COVID and other issues. We expect everything to sort itself out. Additionally, specifically for HCI Group and TypTap, as TypTap has developed and as mentioned by Karin, with separate management teams, we are now approaching reinsurance differently. Instead of just one wind tower, we have distinct entities: one for Homeowners Choice, one for TypTap in Florida, another from non-Florida, and a separate flood tower. As we have streamlined the business and evolved, we've started to focus on these separate entities, which contrasts with the direction most companies have taken.

Considering the differences in seasonality for cat season and other factors as we expand nationwide, is it reasonable to assume that we might see varying retention levels between a TypTap tower and an API Florida tower, or between a X Florida tower and a Florida tower?

Yes. The key point here is our approach to TypTap and Homeowners Choice as well as our operations in Florida and other regions. We evaluate each geographic area as if it were its own individual business, ensuring that our rates are adequate and our reinsurance is suitable for that location. Each area needs to function effectively on its own. We also benefit from purchasing a large Florida tower, allowing us to manage the risk effectively. We view these regions as distinct businesses that we aim to operate profitably. Ultimately, if we end up with ten profitable businesses, they can support one another in the event of challenges with any of them.

That makes sense. Great. Well, thank you very much for the color. Best of luck and congrats on the nice start to the year.

Thank you.

And the next question is coming from Truist Securities, Mark Hughes. Mark, your line is live. You may ask your question.

Yes, thank you. Good afternoon. 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. It was a fairly straightforward quarter. As mentioned in my prepared remarks, the increase in loss expense was solely due to the rise in gross premiums earned. The consolidated loss ratio was around 35%. Different parts of the business are reserved in various ways. For Homeowners Choice, the loss ratio is about 24% to 25%, while the Anchor book has a slightly higher ratio as it mainly consists of homeowners. TypTap also has a higher loss ratio. As for UPC, we discussed previously that its loss ratio is closer to 50%. Overall, it was a straightforward quarter with premiums multiplied by the loss ratio. We monitor everything else to ensure that it aligns with those loss ratios, and the paid/incurred figures came in pretty much as we anticipated.

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 main difference is that the policy acquisition rate for TypTap is slightly higher, which you are probably familiar with. However, it's important to note that the policy acquisition expense for the UPC book is more elevated, landing in the roughly 35% range. So, the increase observed from Q4 to Q1 is primarily attributable to that factor. This expense will gradually decrease over time. Additionally, there is a slight increase in the tax rate for Q1, which is mainly due to the UPC book.

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

Yes, that's a good question. The tax rate can fluctuate somewhat. This quarter, what was unusual was the cancellation of some restricted shares as part of the reorganization that Karin mentioned, which involved separate management teams. There was some activity with the restricted shares; around 140,000 were canceled while some new ones were granted. The dividends related to those canceled shares are reclassified, and although we expensed them in the GAAP books, they are not deductible for tax purposes. We encountered a similar situation a couple of years ago that resulted in a permanent difference in the tax rate, which is a one-time occurrence. I think this situation elevated the tax rate to around 35% or 36%, but the long-term tax rate remains about 27% to 28%. This is just an unusual occurrence that temporarily impacted the tax rate, and we also faced a very low tax rate in Q1 of last year due to some windfall gains, which explains this difference. Was this information helpful?

Yeah. That is helpful. Thank you very much.

Thank you. Your next question comes from Greg Peters at Raymond James. Greg, your line is now open for questions.

Good afternoon and thank you for letting me ask a question. 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?

Yeah, it's Mark. I'll respond to part of that question. Regarding the mark-to-market, we are not reflecting that in the numbers you see. We have some properties with a significant difference between their book value and their appraised value, not to mention their potential market worth. There is a considerable gap that is not represented anywhere. We are unable to conduct any mark-to-market adjustments like we could with equities or fixed-term securities. Previously, we mentioned around $30 million of unrealized gains. We sold one property, realizing a $44 million gain, and we still likely have about $30 million in unrealized gains remaining. This is part of our long-term real estate strategy focused on capital appreciation, which we have successfully pursued in the past and plan to continue doing. However, there are hidden assets on the balance sheet that we cannot leverage for mark-to-market opportunities.

Thanks. 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 on how you're approaching pricing for the new states, how you're developing pricing? Any background on that would be helpful.

Absolutely, Mark. I apologize, Greg. I'm experiencing a moment here. So, the way we develop pricing involves entering admitted markets, which means we have access to a lot of data on the existing carriers in each of these states. Generally, we analyze the top ten carriers in any given state to understand their pricing structures. From there, we aim to create pricing that is competitive, modeling ourselves after a few key competitors. Essentially, our pricing is designed to be in line with the market or slightly more competitive. It’s necessary to approach this on a state-by-state basis to understand the specifics. Naturally, at this stage, we must handle the rate and form filings and work with the regulators in each state to ensure our rates and forms are filed and approved appropriately. It's quite a complex process, and while I’m simplifying it, there are many dedicated individuals who invest a significant amount of time in each state to get it launched.

Make sense. Anyways well thanks for letting me ask the questions.

Thank you.

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.