HCI Group, Inc. Q3 FY2024 Earnings Call

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 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 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.hcigroup.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 Paresh 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 Paresh 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'd like to take the opportunity to remind 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'd like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?

Thank you, Matt, and welcome, everyone. Since our last call, we have been impacted by three hurricanes. Hurricanes Debby 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, and families in Florida, Georgia, South Carolina, and North Carolina. Our hearts and prayers go out to everyone impacted. These three 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 1 and Category 4 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 we 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're 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 Debby 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 Debby 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 one or two storms in a quarter can be more than offset, and the results of the third quarter clearly show that. Now let's talk about Q4. 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 in-force 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 $490 million. Shareholder equity has more than doubled. Book value per share has almost doubled, debt to cap has been cut in half and we've grown the company by almost 40%. Book value per share increased in the third quarter despite the two hurricanes. In Q4, we expect 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'll hand it over to Paresh.

Thank you, Mark. As indicated by Karin and 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 to be one of those years when we will have recoveries 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 seeing unfold. First, we think Florida is an attractive homeowners 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 year. Building on that commitment, we have added another 42,000 policyholders who chose to move to HCI from Citizens. And we believe the best way to demonstrate our confidence is to grow the business, 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, Tailrow, which we plan to have fully operational by early 2025. In summary, we have withstood an active hurricane season. Our business is healthy. We have no plans to increase rates in Florida at this time, and we've recently added 42,000 new customers, and we are starting a new carrier that would be operational in a few months. With that, I'll turn it over for questions.

And the first question today is coming from Matt Carletti from Citizen JMP.

Paresh, I was hoping you might be able to offer some observations on Milton just specifically how we should think about it? I mean, I think we always like to compare it to maybe prior storms, so I don't know if Ian's kind of the right comparison. But just with the claims you've 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're 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, Matt. A couple of things, right? We track how claims come in. And usually, by this time, we would have received, three weeks into the storm, about two-thirds of the ultimate number of claims we're going to get, right? So using that as a benchmark, we are seeing Milton come in at roughly between half to two-thirds the size of Ian, yes, just by actual claim count. And I want to kind of explain it further in the sense of this is actual claim counts. So even though the business has grown considerably since Ian made landfall, the actual claim counts we are seeing are much lower. And that is occurring, I think, because Milton was not Ian. Simple as that.

Okay. That's good. That's very helpful. Is there a technical difficulty?

Matt?

On the takeout, you kind of hit your 40,000.

Matt, you broke up there a little.

I'm sorry, can you hear me okay?

Yes. Can you repeat the question, please? Yes?

Sure. Yes. It's about the takeouts 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?

Sure. To provide some background for those on the call, the takeout in October was highly sought after by several carriers, with around 400,000 policies approved for depopulation that month. Our two participating carriers had one of the lowest selection rates, so we anticipated a take rate in the low 40s, meaning for every ten policies we chose, we expected to get four at best. With a goal of reaching 40,000 policies, we planned to try again in November, as we believed multiple attempts would be necessary. However, the actual response was much higher than expected, likely influenced by the reputation that Homeowners Choice and TypTap have established, making them the preferred choice for many. Our technology ensured we only selected individuals who were interested in joining us, contributing to the impressive take-up rate. I've seen the figures for the other participants in the October take-up, and they average around 50%. So yes, we outperformed expectations, but many factors played a role. Additionally, since we achieved such success in October, we won't be participating in November as we have already reached our capacity.

Understood. That makes sense. And one last one, if I could. Mark, you mentioned the underlying loss ratio was around 25% in the quarter, which I believe is kind of the lowest number we've seen yet, so it keeps showing improvement. Is there anything in that number that's one-time in nature or unique? Or as we look forward, is that, in your view, a fairly sustainable kind of line in the sand?

No. I mean that's a pretty stable number. That number has been normalized. We booked a small credit to reduce the expense on prior periods. It wasn't a big number. But we've 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 that's a good number going forward. In the fourth quarter, as you know, sometimes claims in a quarter where you've 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 Q2 and Q3 of next year.

Your next question is coming from Mark Hughes with Truist.

Mark, you mentioned the additional $35 million in premium for the fourth quarter from the takeout, and we are starting from a base of around $265 million to $266 million from the third quarter. Regarding the $200 million, if we account for a full quarter, would the $35 million be closer to $50 million?

Yes, it's a little bit prorated for the fourth quarter.

Yes. What kind of premium ceded should we consider for a run rate basis, either in absolute dollars or percentage?

Yes. So good question. So the premiums ceded in Q3, I think, were $109 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 $102 million. That should be the number, except for the adjustment that we've mentioned for Milton. But that's the number going forward and that will take you through until the end of May.

Yes. And refresh me on the Q4 adjustment for Milton.

So the adjustment to the premium ceded line is about $50 million for Milton. That's included in the $128 million that I mentioned in my prepared remarks.

Yes. So $50 million in ceded premium and then what $78 million in losses.

Yes, exactly.

Okay. How much cash at the holdco?

Over $200 million.

And then Paresh, could you remind me about the new carrier, including its size, intent, and the area we are targeting?

Mark, it's just normal business for us in the sense of we had one carrier back in the day, which is Homeowners Choice. We grew it to a certain size, then we started our second carrier TypTap, both TypTap and Homeowners Choice have well north of $500 million premium at this point. We had already started our third carrier CORE as a reciprocal for commercial residents last year. And Tailrow is going to be our next growth carrier. It's a reciprocal based in Florida, and we're going to capitalize it. We're going to give it a surplus, no doubt and grow it starting in 2025, yes.

Yes. When I consider the general and administrative expenses this quarter, around $19 million, is that a reasonable estimate? Or is there still some distortion due to the takeouts or anything unusual? Is that a reasonable estimate?

Yes, that's a pretty good run rate. I mean, Q4 sometimes tends to be a little bit lower than Q3, but there's nothing unusual in that number. That's a solid figure moving forward. The same applies to operating expenses.

Do you have any insights on the competitive landscape in Florida considering the recent storms? Is there an influx of new capital, and what is the carriers' appetite for new business? There seemed to be excitement about the takeouts, but how would you describe the competitive situation?

Mark, it has been just over three weeks since Milton, and while I can't speak for every carrier, I believe we are all actively managing policyholders and addressing claims. The situation is starting to stabilize, and it appears to be business as usual for everyone. I don't think the appetite has significantly changed one way or the other. Regarding new capital, Tailrow is a new player that we aimed to lead with, and we are currently here. There may be other carriers or new capital entering the market, but I don't have insight into who will fund what. It's reasonable to expect some new capital to emerge in the state at this time, so we will have to wait and see.

Your next question is coming from Casey Alexander with Compass Point.

Mark must be a great analyst because his first four questions were exactly what my questions were going to be. So I'm okay. I'll hop back in the queue.

You have a question coming from Michael Phillips with Oppenheimer.

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 business you're getting to grow in Florida ex the depop stuff?

Michael, it's Paresh. I think we would describe the situation a bit differently. We're aware of the concerns of our policyholders, as well as the commentary and news surrounding it. The most pressing worry for many insureds right now is the uncertainty of their insurance rates for the upcoming year. This anxiety can lead to various issues. We want to assure our policyholders of the steps we are planning to take. I can only speak for ourselves, but we do not intend to raise rates in Florida in 2025, as we don't see a necessity for it at this time. Ultimately, it's our decision, but that's our current perspective.

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

I'm sure it might influence our margins, but we're not focusing on margins for any particular quarter. We have a long-term relationship with our policyholders. For instance, we have a policyholder who has been with us since 2008. Unfortunately, when Helene passed, their car parked next door caught fire, burning down their entire house. From the claim notes I've seen, that person is quite traumatized by the incident. Do we really need to discuss whether we will raise rates next year? That is why we’re taking these actions—to provide support. We answer the phones and review the claims because we are Floridians too. Seeing these events motivates us to help people rebuild and return to normality so we can maintain the relationships we've built with our policyholders.

Yes, that makes sense. I guess one more, a little 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 depop business. And I'm sure that's always going to be present at some point in future years. But if you put that aside, what's next for HCI? Kind of what's the next strategy? And I would think it's this, I'll try to answer the question, but tell me if I'm right or wrong and maybe help me out to deeper. It's growing outside of Florida. And if that's the case, and let's talk about that. If it's not, if it's a different answer, tell me what that is. But kind of what else for HCI when you put depop aside?

We engage in depopulation because it is currently a focus, but it is not our only initiative. We've successfully operated for many years without it, so it's just a trend at the moment. Reflecting on a question you raised at the beginning of hurricane season about the potential impact of another hurricane, we have faced three landfalling hurricanes this season and have remained resilient. Our actions validate this resilience. In a world increasingly affected by climate change and disasters, we might have developed a method for risk selection and underwriting that allows us to adapt to these changes effectively. If that's the case, we have managed to implement this strategy in a challenging environment, which could enable us to expand it to other parts of the country where opportunities may arise. Additionally, we prioritize allocating capital to areas that yield the highest return on equity. We are presenting our performance figures as they are, and we strive to ensure accuracy. Our results are a testament to our effectiveness. 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're all looking forward to a more peaceful and less dramatic 2025. 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. At this time, this concludes our conference call.