Q3 2019 Earnings Call
Good afternoon, and weapons Inc. see I group third quarter 2019 earnings call. My name is Davenport and I'll be your conference operator this afternoon.
Hi, all participants will be handled well be any listen only mode. Before we begin todays call I would like to remind everyone that this conference call is being recorded and will be available for replay to December 29 team. Starting later this evening.
The call is also being broadcast live webcast and available via webcast replay until December 29 team on the Investor information section of H.B. I Think's website at Www Dot H.T.I. group Dotcom I would now like to turn the call over to Kevin Mitchell.
H.T.I.s senior Vice President of Investor Relations. Sir Please proceed.
Thank you and good afternoon.
Welcome actually I groups third quarter 2019 earnings call.
With me today.
I will tell our chairman and Chief Executive Officer, Mark on towards our Chief Financial Officer.
Following parishes opening remarks, Mark will review, our financial performance for the quarter.
And first nine months of 2019, and then turn the call back to push for operational update and business outlook.
Finally, we will take your questions.
The access today's web cast please visit the Investor information section of our corporate web site at H.C.I. Group Dotcom.
Before we begin I would like to take the opportunity to remind all listeners that today's presentation 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 or 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.
Uncertainties aren't identified in the company's filings with the Securities and Exchange Commission.
Sure any real school uncertainties develop into actual events. These developments could have material adverse effects on the company's business financial condition and results of operations H.T.I. group disclaims all the obligations to update any forward looking statements.
Now with that I would like to turn the call over the past Patel, our chairman and CEO Paris.
Thank you, Kevin and welcome everyone.
Before I walk provides details around our financial performance for the quarter and the first nine months of 29 team I would like to touch on some events and highlights from the quarter.
Obviously, we generate diluted earnings of 73 cents per share NCR has been profitable now in 46 for the last 48 quarters.
The two exceptions it'd be the quarter them, which hurricane Hermine and heartache and Michael ahead.
Also in July we paid a dividend of 40 cents per common share a 36 consecutive quarterly dividend.
The current yield is nearly 4%.
And as most of you know hurricane activity generally peaks in the third quarter of every year.
This year, we had acquired third quarter.
Although already can Dorian devastated the Bahamas in September .
Let's go to the east coast to Florida, without making landfall.
Alright somebody losses from Dorian Whats light.
However, as we always do when a hurricane friends, Colorado.
That is BARDA.
We just Ben you business until the Dorian Fred had huh.
That's suspension impacted our new business production for about three weeks out of the quarter.
But despite the suspension.
Oh, the gross written premiums were up 8% over the third quarter Plenti 18, reflecting the rapid growth Tiptop insurance company, our technology driven insurance subsidiary.
With that I'll now turn it over to see if a mark how is what will give us who will walk us through the financial performance for third quarter, Mark [laughter]. Thanks parish [laughter]. So net income on a GAAP basis.
The third quarter was $5.9 million and GAAP diluted earnings per share were 73 cents.
On an adjusted basis net income for the quarter with 5.4 million and adjusted diluted earnings per share were 67 cents.
Year to date net income under GAAP basis was 20.1 million and 14.7 on an adjusted basis year to date diluted earnings per share where $2.49 on a GAAP basis, and one dollar and 82 cents on an adjusted basis.
The third quarter was another chapter in our growth story and the second quarter written premiums grew from the previous year and that trend continued in the third quarter gross written premiums at 97.3 million were 8% higher than the same quarter last year at about 2% higher year to date.
This growth growth is Paris mentioned has been driven by Typtap Typtap wrote over $16 million in premium this quarter and has written more than 36 million year to date, we're really excited about the growth here and we expected to continue the growth in written premium will start to translate into higher earned premium and we expect that you have.
Happened in the fourth quarter. This would be the first time a quarter over quarter, increasing gross premiums earned has happened in some time.
A couple of other things on the income statement in June we announced our new reinsurance program and estimated reinsurance premiums of 31 million per quarter. That's assumed some significant growth in typtap, but we did say that premiums could increase if the typtap growth outpaced our expectations, which it has in Q3 premium ceded for reinsurance or about five.
$500000 higher than that 31 million just mentioned this reflects a higher t. ivy adjustment than anticipated because of the extraordinary growth typtap ceded reinsurance in Q4 should be about the same as it wasn't this quarter.
[noise] netting this net investment income is about 1.4 million.
Less than the same quarter last year. This was driven largely by the fact that limited partnership income was unusually high in the third quarter last year.
Loss expense in Q3 was about $1.5 million higher than last year. This was largely driven by typtap. While we expect the long term core loss ratio to be similar to that of homeowners choice in order to build reserves and be conservative we have been and we'll continue to reserve at a higher loss ratio well. This may drive slightly higher loss expenses in the.
Near term as it did this quarter. We think this is the right thing to do in addition, we booked a loss reserve in the quarter for Hurricane Doran of of about a million dollars.
[laughter] loss expense year to date is about $11 million higher than the first nine months of last year about one third of this is explained by tip top as mentioned above and most of the balance by the hail event that we had in the first quarter.
If you're looking really closely you might notice our effective tax rate. This quarter is a little low at 24.2%. This was due to the lowering of the Florida corporate income tax rate. The drop was retroactive to January 1st and so the full year to date benefit was booked in Q3 with this new Florida rate, we expect the go forward.
Consolidated income tax rate to be about 26.8%.
Now to the balance sheet press release shows a comparison to December 31st 2018, So I'll make a few comments on those movements first you will see some changes within investment the biggest of which is 66 million dollar reduction in short term investments, which of course were sold to fund the $90 million debt Paydown in March fixed term secure either up well some secure.
Ladies matured and we're used to pay down the debt. We also purchased some new corporate bonds back in January to capitalize on the increase in rates that was happening earlier in the here.
Reinsurance recoverable and loss reserves are both up we increase the ultimate for hurricane Michael to $32.5 million and the ultimate for Hurricane Irma to 508 million. These changes increase reinsurance recoverable and loss reserves and the balance sheet, but have no impact on the income statement as of September Thirtyth with.
Paid about $368 million and aroma claims and we have added an additional 140 million in reserves.
In terms of overall loss reserves and the balance sheet. The increase is largely driven by the cat adjustments mentioned above however reserves for daily claims are also up despite open claims and open litigation being down as we continue to take a cautious reserve stance.
Just a few comments on capital management as you know we are now paying a dividend of 40 cents per share. While this is about 7% higher than it was last year. The actual cash dividends paid in the quarter, where the same as last year because the share count continues to drop speaking of which we have continued the execution of our $20 million buyback plan I prefer to do.
19, do the end of September we had bought back about 368000 shares at an average price of just over $41 in 25 cents to share. There is just under $5 million left of the $20 million authorized and we'll continue with the program until the end the year.
The number of common shares outstanding at the end of September was approximately 7.883 million. This is down 7% from a year ago and 13% from two years ago as our buyback program continues to reduce the shares outstanding.
Only diluted share count at the ended the quarter was 9.860 million.
Book value per share at the end of September was $23.37, which is up 8% from the started the year. One final out in terms of holding company liquidity, we have about $50 million of cash and investments at the holding company level as well as access to the $55 million available on the revolving credit facility.
And with that I will turn it back paresh.
Thanks Mark.
As you can see from a financial results.
Q3 was another successful quarter freight tea.
We are growing organically and profitably driven primarily by Typtap, our technology based insurance subsidiary.
And despite this is access patron of new business production during the pendency Cardigan Dorian.
Gross written premiums at Typtap increased four fold compared to a year ago.
Earlier in the year, we had projected that typtap.
We'd have more than $50 million or premiums enforced by the end of the year.
Updating that forecast at this point, we expect Typtap will surpass that number by Thanksgiving.
So despite dependency of Dorian we will be there a month ahead of schedule.
This underlines the value of our investments in technology and analytics is now clear.
We can you now grow rapidly while maintaining strict underwriting standards.
And with that we are ready to open the call for questions. Operator, please provide the appropriate instructions.
Thank you Sir the floor is now open for questions. If you do have a question. Please press star one all your telephone keypad at this time questions will be taken in the order they were.
In the order they came in again, ladies and gentlemen, if you do have a question. Please press star one or your telephone keypad at this time.
Okay. Our first question comes from.
Matt Carletti with JMP Securities. Please state your question.
Thanks, Good afternoon.
Just a few questions parish I was hoping it might be able to get a little more color on on the success it to tap in particular.
How did that growth kind of build over the quarters, maybe maybe a month by month picture over you want I want to frame it.
And also to how should we think about kind of where you've been getting the best traction are there certain geographies within Florida that you're finding it works better or certain types of production sources.
Okay. So in terms of.
Growth of Typtap.
We you know we were growing quite rapidly it.
Finding more business every week compared to the week before obviously went on to own the nearly zero when Dorian was approaching.
And from a Sunday sod business has come Roaring back and our best performing we was last week I see that with some.
Hesitancy in mind, because usually the cyclicality to the business and you new business production tends to fall off in the fourth quarter.
So far we haven't seen in Typtap, but.
Business cycles, our business cycle than we will have some kind of slowdown in near future.
We've said we are going to.
Probably be 50 million premium enforced by the end of.
November .
And we are setting a goal for next year of trying to get to about a 100 million if the trends continue which right now is looking very good.
In terms of where we're getting business from we're getting it from all the places we would like to get it from sort of the portfolio is coming up in a very similar footprint as the one that we have for homeowners choice with the exception that were not writing a lot of business in the Panhandle.
So everything is going according to plan or actually.
Slightly ahead of plan and to put this into perspective I think in April we had said we would get too.
50 million by the end of the as it was about 39 weeks away.
We're going to be about four weeks ahead of schedule on that despite having a three week setback because of Dorian sort of gives you an idea as to how much.
The business is performing ahead of our expectations.
Yes, that's very helpful.
And then another kind of Big picture question, just curious your thought on yeah, as we sit here and look and ensure attack.
Sure a lot of companies out there.
Yes, some during a very good job a differentiating themselves and not.
One thing that's very common as gross and Typtap clearly is participating in that one thing that last comminutes profit.
That is something that it seems you guys have figured out we took tap so I'm curious just with kind of some of the headline your valuation metrics and things like that you see out there that are getting reported from the.
The bunch.
How do you think of that when you think about what to tap is worth within HCR.
Okay. So.
Great question.
Yes, we are aware of the met the valuation metrics applied to a lot of other companies that are basically entirely focused on growth.
But eventually income is what is necessary otherwise, it's just you buying the business.
We've always taken that different viewpoints that insurance ensure tech.
We'll have the wording sure incentive so it has to make insurance sense.
So we focus more on getting the the Formula correct and then starting to scale up so.
We have approached the reversal what a lot of other folks have done which is thought would tech for us and we worry about making money laid wrong. We said make money first and then scale up and that is starting to now.
Come to fruition as we've seen this thing growth.
As far as evaluation of this of the of TBSA clearly.
I don't think any value is particularly being subscribe to two tipped up within the age group, let alone Edgier, which is providing the underlying technology.
But.
Eventually I think.
The two things we'll have to meet either some of some of the short tech companies.
I would come down in valuation to where we are all one would have to acknowledge that our valuation should rise to approach that have some of these companies because we are actually achieving in tip tab.
The promise that some of these companies hold for the future the helped to someday tank.
Thank you for the for the color and one one quick numbers question for Mark you know kind of my quarterly question.
Net written premiums do you have the Andy.
Yeah 65.76 million.
Thank you very much congrats on nice quarter, guys best of luck on board.
Yes, Thanks, Matt.
Yes.
Okay. Our next question comes on Mark Hughes from Suntrust.
Two questions.
Thank you good afternoon.
Good afternoon my remark.
Oh no two can you describe how you're being conservative on setting losses as you're ramping up there.
When do you think you'll know or have a good idea or you know how much time before you were confident that you can.
Ramps up those are losses at the it more.
Normal long term level.
You know it's it's we're as we've said we're pretty excited about the growth but in terms of you know its size, it's still fairly small relative to homeowners choice, obviously and you know there's just not enough data to get your arms around that.
As I said you know in my script, we expect that rate to be about what homeowners choice is potentially a little bit last where you know we've got a lot of experience. We're applying the same general underwriting standards.
We have no reason to think that it won't be that.
But we just feel like the right thing to do through this growth phase is is to try and build up the reserves and just to do so by.
Going with a higher loss ratio, but I I think it'll take some time that I think the most important thing is there is there's no reason to think that it will be different from that of homeowners choice.
Can you quantify how much more youre, putting in terms of the Christian.
In it let me, let me take that one yes mark.
It becomes difficult to Sam would you put in there in Cushing because.
Tim to have a small enough that one large fire.
Would make that cushion disappear in the short term.
The key thing that we are trying to point out is that we're being conservative.
One to that.
When we approached 100 million in premium that's one of these businesses stabilize out so we're on that track, but we're not quite there yet.
And three that we are doing this conservative booking ahead of things we're not running this that someday, we hope as we scale up the loss ratio will improve.
We're actually already there and were taking a more conservative than just in case, you Miss something and the loss ratio does deteriorate a little bit from the numbers it's been posting currently.
Understood you mentioned the.
I think your reserves are up a your open litigation is down could you just give us a few thoughts it any measures might be able to share around the open litigation and then your observations about new law suit.
The plaintiffs attorneys.
Started to target Oh, I guess non storm claims is I understand that they had a lot to do with the.
With her mind with Michael are they going back to a day to day claims.
Yeah I'm done.
The recent regulatory changes or they have a bunch of an impact.
So I mean I lot of questions I I think it still is you know as we've said before I think that its.
I think it's a little early to tell whether those you know legislative changes are going to have a material impact on on litigation flow and on loss reserves.
In terms of in terms of.
Numbers open claims.
From the end of the year to the end of third quarter are down about 15%.
Litigation Open litigation is down more than that.
And those are pretty significant drops.
And I encouraged by the fact that the open litigation is down even more than the claims are down.
Yes of course that drives a lot of.
A lot of the reserve requirement.
But yet as as I sort of set in the script in order to sort of keep a cautious stance daily.
Daily reserves are still up from the ended the year to the ended the third quarter.
Okay and.
Mark.
Adding some something to Mark's comments and some other different color.
What we're seeing it out of course, our book is.
Our Tri County.
This is speaking just on daily claims not the cats, though right.
We are seeing a an improvement in terms of lawsuits in Tri County area, but it is slightly being offset by a increase in lawsuits in the non comp county area. So.
The lawsuit fever is spreading beyond Tri county, but because it's somewhat underwriting decisions. We took several years ago. We are seeking the pay off by the reduction in the number of lawsuits we are getting in Tri County, and we are monitoring the non Tri County area.
Something to watch going forward.
The way to characterize.
Morning, Matts question.
Why youre growth the Typtap is getting better or do you find that its.
Increasing distribution do you find that the.
Ease of use or a convenience perhaps for the agents.
Leading to a kind of.
Learning curve, where you see.
Progressively more business out of the agents once there.
On the system and working with you in any way you could flesh that out a little.
Yeah, I think it's a number of things, but really the core underlying thing is the technology that we that we deployed.
Well the technology less agents, who is that the can very quickly get an underwriting decision, yes, no maybe.
Four or five questions that most which is a lot quicker than anything else and to the extent that we are.
Now open for business and we know what our risk appetite is.
It's become a very easy go to location for agents.
To put this into perspective, where we're only binding something like six 7% of the quotes we do in a given week.
But what we've.
Achieved in the technology is a week into thousands of quotes.
And do them very efficiently and that that has a choose translation normally for efficiency for us as an organization, but also if you value. The Asians time, they can do that lots of quotes and get an answer almost instantaneously.
So as we see agent focused and they see the value of this we sort of become there.
We're not quite there yet, but we're starting to become their ensure the go to ensure a when somebody walks us through the door.
Right.
So we're becoming favorites.
And they're becoming very fans of the technology huh.
[noise], Yeah, I'm very good thank you.
Again, ladies and gentlemen, if you do have a question. Please press star one all your telephone keypad at this time.
Please hold on poll for questions.
[laughter].
And while you me. Our next question comes from Christopher Campbell with KBW. Please state your question.
Hi, Yes, hi, good afternoon gentlemen.
Good afternoon Paris.
I guess my first question just kind of a numbers one what are the cats and then the reserve development for the quarter.
I think mark give the cats in his.
His prepared remarks, Yaghi I gave the number four.
We updated the ultimate for Michael.
To 32 and a half.
We updated the ultimate for Irma and then I gave the numbers in the number the paid number for arm and the reserve number from.
Oh, no I was thinking about like the net cash like that then that cats that are heading here.
No one hit your numbers.
It would hit that he and the last three numbers yeah. The actual like net net cat losses that you guys had this quarter.
Oh, there's oh I see okay. So there is it really yet so the only thing we had Chris sorry about that.
So we're thinking about Michael and around there. So the only thing we really had was doran.
We put up a million dollars for Dorian.
It's of caution yeah.
And that that yet so in terms of cat losses on the in the loss reserves.
Theres just a million dollars not relates to Dorian sorry, sorry about that yeah, I'd actually I think we haven't couple answering the question I'm thinking about it and I heads because.
For US Q3 was.
Cat or a Kitty cat free quarter as well. So we just looking at Dorian the number of claims that have come in just one of the data office.
Okay got it and then reserve development or was there anything this quarter.
Yeah, I mean, we we've we've been doing the same thing I think I've mentioned that each.
Each quarter, we've been booking a couple of million dollars in reserve development each quarter, we'll look at that at the end of year.
Year to date, I think worried about six and a half something like that so we did the same thing in the third quarter that we did in the first few quarters. So no real change there.
Okay, and then how much was that Andy and this quarter.
This quarter was 2 million.
Okay got it.
Great and then I think you guys invention that the the open litigation is down more than you know our I think the litigation claims are down more than the claims are again nice to close claims.
I guess.
Right. So if frequency is down it is severity up is that why the daily reserves are actually rising is that you are seeing kind of you know you are saying low frequency, but then kind of more a lot more.
More inflation in those losses.
I don't look forward to characterize it that way I think Mark said some of the development was because of a typtap now growing enough being conservative positions on that.
The other part of it is.
You know in terms of the number open claims coming down is because the frequency of new claims coming in.
It has dropped off significantly.
So if you imagine that we were.
Hypothetically say closing twentys suits a week.
But if we only getting 15 the numbers eventually going to come down.
Number of open suits is going to eventually come down is that kind of effect you will see is that.
The frequency of new suits come again has.
Has been tailing off for several months now and it's starting to have an effect. Yes. If you will kind of reported basis number of claims in Paris mentioned number of claims is coming down number of losses, just coming down more than the number of claims is coming down.
The number of open claims total non linear as I mentioned is down about 15%.
Let is down more than that part of that is just because we're getting fewer and fewer litigation claims and also because we're probably causing a little faster. If if your question is related to that to why why are you still getting some adverse development.
I you know some of that is just caution in some of that is.
Truing up our litigation reserves for prior years, a little bit, but the overall trends there are very strong.
Claims dropping lawsuits are dropping opens there are dropping.
And a lot of the reserve increases just started being cautious.
Yeah, because I'm trying to think about it right I'm thinking about the loss ratio was up to like 50.2, this quarter versus 47.6, a year ago, and then if I'm just thinking about the puts and takes right. So the benefits would be right. The lower frequency of lawsuits doesn't sound like severity is getting any worse.
And then the only thing you only like Delta wouldn't be then the growth in camped out right. So if the loss costs are coming down and then and then cats aren't a big deal I would expect it sounds like frequency numbers would be like what do you know I think yeah, the loss cost should be coming down versus versus Oh, sorry, I'm trying to guide.
I guess in a way back and then where we should expect to core loss ratio.
Can't be going forward.
Chris I think mark in his prepared remarks talked about 11 million.
The bulk of which was to do with Typtap and then fix a half million wants to do with the hail event in the first quarter.
Yes, so Chris if you look if you look at loss expense and you can look at it on the quarter or you can look at year to date, either way right. So I think what you're getting at what you're getting at is sort of hey happen how come the core loss ratio isn't dropping right right, yeah, I'm thinking about the bigger part of your book.
Im seeing these better better loss trends.
Yeah, so okay. So.
First a little bit every detail and then a little bit bigger picture. So when you go through there's a lot of things that are that are in the numbers and we mentioned them in the in the prepared remarks, so if you're looking year to date.
We've got about there's there's about $11 million that relates to.
You know tip tap.
The Theres a million dollars for Dorian, we've got to money in there for that for that.
Hail event in the first quarter, so you've got a significant amount of money in there that really serve relates to other things. If you back some of those numbers out and look year to date the core loss expense for the current year is lower than the core loss expense for last year, which is sort of what you would expect to see.
And that that yes, that's happening.
Okay. That's helpful. Yeah, I'll look at the year to date numbers I got to be easier to see it and then just kind of one last one like you add to your rolling Chip Caf I mean does that change your your share repurchase appetite overtime.
Oh I don't know her two things are interrelated because.
We don't have to downstream any happened on the Typtap.
Since we capitalize it three years ago with a 25 million despite having whether for hurricanes.
It's making money key item is making money.
And we are finding of capital with which to keep our insurance operations running.
And do all the other things that we do as well.
Okay perfect well, thanks for all the answers.
Thank you.
[noise] at this time. This concludes our question and answer session I would now like to turn the call back over to Kevin Mitchell, who has a few closing remark.
As always on behalf of the entire management team I'd like to thank our shareholders employees agents. 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 todays call you may now disconnect.
[noise].