HCI Group, Inc. Q1 FY2024 Earnings Call

Good afternoon, and welcome to HCI Group's First Quarter 2024 earnings call. My name is Kelly, and I will be your conference operator. 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 7, 2024, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 8, 2025, on the Investor Information section of HCI Group's website, www.hcigroup.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please go ahead.

Thank you, Kelly, and good afternoon, everyone. Welcome to HCI Group's First Quarter 2024 earnings call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the first quarter of 2024, and then Paresh will provide a strategic update. 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 in response 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, Chief Operating Officer. Karin?

Thank you, Matt, and welcome, everyone. In the first quarter, HCI Group reported Pre-Tax 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 $0.40 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 a 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 obtained 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 and select the 70,000 policies that best met our underwriting standards. So far, what we have observed is that we were able to offer the majority of policyholders a 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 $0.25 billion of premiums in a few months with almost no added expense. Now I'll turn it over to Mark to provide more details on our financials.

Thanks, Karin. So as Karin mentioned, this was another good quarter for the company. Pre-Tax 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 2-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 Karin mentioned, we had some weather this quarter. Maybe more importantly, 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 in TypTap. Before I move to the balance sheet, I wanted to mention one more thing on the income statement. As Karin 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 its 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 are 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 Paresh.

Thank you, Mark. As highlighted by Karin and Mark's comments, HCI 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 U.S. 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 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 HCI Group of companies. And it extends even further than that. We're also hearing from agents, brokers, and investors 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, it will be done in our typical prudent fashion, and we are setting ourselves up to be ready to take advantage as these opportunities present themselves. With that, I will turn it over for questions.

The floor is now welcome for questions. Your first question is coming from Michael Phillips with Oppenheimer.

First question, Mark, when you mentioned the combined ratio expectations, you said low to mid-80s. What time frame is that referring to, this year or a longer-term outlook?

No. I mean, this year, yes, like now. The point is that it's obviously significantly lower than that right now. But once we normalize toward the end of the second quarter with reinsurance and policies for Citizens, we expect a combined ratio similar to the second half of the year.

I'm curious about your upcoming reinsurance renewal. With the significant growth from Citizens, how are you approaching this? Most of your growth in 2024 will be in Florida, which seems more concentrated than other areas. Does this mean you will purchase more reinsurance, or as a larger company, will you need less? How are you considering the need for reinsurance compared to previous years due to Citizens?

We have successfully grown this business from approximately $50 million in premiums in 2007 to its current state. While the business has experienced fluctuations, we purchase reinsurance appropriately. We are actively negotiating for a suitable reinsurance tower for the upcoming wind season. We are in the midst of those discussions now. Our goal is to secure a reinsurance tower that matches our business size. The only uncertain factor remains the cost of the reinsurance fee. While we anticipate that the total cost may increase due to the larger volume, it raises the question of whether it will also increase as a percentage of revenue.

Lastly, Paresh, you mentioned the incoming phone calls. You're not aiming to grow the company apart from policy increases, but are you also receiving calls and considering fronting for other homeowners' companies that don't have your technology as you expand beyond Florida to a nationwide scale? Would that be an option?

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

Last one for now, 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 million. Is that still the case for CORE?

Ultimately, yes.

And that's this year, Paresh, right?

Yes. And I think that you brought up before, look, I also want to point out how amazing this is, right? CORE had 0 revenue on January 1 this year. It's May 8, less than 5.5 months later and you are up to $55 million as we had sort of laid out that we will be doing this, right? This is how easily and seamlessly we could add to this, yes?

Your next question is coming from Mark Hughes with Truist.

The low to mid-80s, low to mid-80s combined ratio. Just to be clear, is that gross or net earned?

Net earned.

That's on net earned?

Yes.

And then the cash at the hold co. at this point?

The holding company liquidity at the end of Q1 is about $220 million.

And then did you give an earned premium number for the takeout this quarter?

What I mentioned regarding earned premium is that $67 million of it pertains to Citizens assumptions. From that amount, $3.6 million is CORE. Some of this is direct and some is assumed, but in Q1, the majority of it is assumed.

Yes. And then how do you feel about the Citizens. 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 potential, say, next time around?

As we had said previously, there's still 1.1 million policies in Citizens. We can clearly see using our technology that a large number of them are green. A large number of them are red. So, there is still an opportunity there. It's just a question of when to go after them and what is the most prudent fashion in which to do so, yes?

And then is there a written number associated with the takeout? You obviously just gave the earned, but is there a written just for referencing?

So the total assumed written in Q1 was about $43 million.

And was that already incorporated into the Homeowners Choice and TypTap and CORE?

Yes. I mean I can give it to you by underwriter if you need it that way. But of that $43 million, that was CORE.

And Mark, from previous conversations, you know it works like differently with Citizens because your written premium is only the unearned premium that you're assuming. So, it sort of comes in a lumpy fashion to lead the renewal and get them onto our paper.

Yes. Regarding the success with the Citizens takeout, you mentioned that the renewals are exceeding expectations and that your pricing allows for competitive or lower rates for renewals. Was there an additional factor contributing to this success with the Citizens takeout, such as the benefits or an improved customer experience?

The other item is the loss ratio on the business we've assumed is better than we anticipated. And you know that we've added that quarter of $1 billion of premium with almost no added expenses.

Your next question is coming from Matthew Carletti with Citizens JMP.

Paresh, as you discuss future possibilities for significantly increasing the size of the company, how do you perceive HCI in terms of similarities and differences? Specifically, I am curious about the potential in Florida. Is there a certain market share you feel satisfied with, or do you expect Florida's growth to align closely with national trends, resulting in your company simply becoming larger?

Matt, if you're looking at geography, when we discuss the $150 billion market, approximately $20 billion is located in Florida. There's significant room for growth there, especially since that's our local market. The remaining $130 billion is mostly found in Texas and California, among other states, and all these areas are experiencing some challenges, as noted in industry news. Eventually, I believe these markets will stabilize at much higher levels, and there will be opportunities arising. We can afford to be patient regarding the timing of these developments. We're positioning ourselves advantageously, without limiting ourselves to when California or Oklahoma might present opportunities; we're simply waiting. When those opportunities do arise, we'll be ready to take action.

How do you view the leverage that the technology provides? If you were to become two or three times larger, what expense ratio do you think you could operate at, or what spread do you believe could be better than what the market currently offers?

Matt, we view this from a slightly different perspective. If you consider the first $1 billion in numbers, when we approach the second $1 billion, losses will likely increase in proportion due to the business doubling, which might result in a similar figure. Agent commissions are expected to increase as well. However, other corporate overhead and expenses will not double; they may rise somewhat, but it’s clear they won’t double. This is where we see leverage increasing. Although there will be some additional expenses, we recently added almost $300 million in premium with hardly any increase in operating expenses. That’s the source of our leverage, and automation is a factor here too.

Could you provide some early insights on Q2? You've mentioned that Q1 was slightly impacted by weather, contributing to a marginal increase in the gross loss ratio. Since we're only about halfway through the quarter, is Q2 looking normal or more active based on what you've observed?

So far, it looks pretty normal. Nothing unusual at this point in April.

And then last one, just numbers. Do you have net written premiums consolidated handy?

Yes. $187 million.

Hey Matt, I was thinking about a previous question. I'm really excited about something I mentioned in my prepared remarks. We've often discussed technology in personal lines and homeowners' policies. While we were getting CORE operational, we realized how much our technology platform accelerates the time to market for a new line of business. Commercial residential differs from residential, and we've discovered that this platform can be applied not only in various regions but also across different lines of business. You can transition from residential to commercial residential and even explore commercial opportunities. I'm not saying we're currently doing that, but we're definitely recognizing that this platform can be utilized in many ways we haven't before. Once it's successfully implemented, you can easily expand on it. That’s what’s potentially creating the opportunity to double or triple our growth. There’s more to this than just increasing the number of policies.

Your next question is coming from Michael Phillips again with Oppenheimer.

Kind of a follow-up to Mark. Your comments about litigation propensity down 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?

We've made assumptions about the ultimate loss costs for previous quarters, including the number of lawsuits we expect to receive. Every quarter, we update our estimates for how many lawsuits we anticipate. For the older quarters before the legislative changes, things are developing as we expected, with nothing unusual and no adverse developments in the first quarter. For the quarters after the legislative changes, we've taken those changes into account when making selections. We're still evaluating whether we should adjust our estimates downward, but we haven't done much of that yet and need more time. Currently, we have about 35% fewer lawsuits than we would have anticipated under the old rules, but we haven't reserved as optimistically as that figure suggests.

So you didn't reserve for a, call it, whatever the number, a 35% drop or kind of the right number. But as you said, you built something in, but it wasn't to the level that you're currently seeing, right?

Yes, we expected improvement, but it has exceeded our expectations, so that's a positive outcome.

Michael, the other side of that is we actually go back. We had stated that many a time that we expected 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 will at that point make appropriate adjustments.

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, brokers, and most importantly, our policyholders for their continued support. Thank you.

This does conclude today's conference call.