Q1 2020 Earnings Call

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Good afternoon, and welcome to see I Group first quarter 2020 earnings call. My name is that Mike and I will be a conference. Operator. This afternoon. At this time, all participants will be and they will be in a listen only mode.

Sure. 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 720, 20, starting later this evening.

This call is also being broadcast live by webcast in available via webcast replay until August 720, 20 on the Investor information section of hate to see I.

Fine at Www Dot eight yeah, I agree dot com.

I would now like to turn the call over to Rachel Juantigar Investor Relations for H.T.I. Rachel. Please proceed.

Thank you and good afternoon welcome to H.C.I. groups first quarter 2020 earnings call with me on today's call is Paresh Patel, our chairman and Chief Executive Officer, and more crimes worth our Chief Financial Officer.

Following pareshs opening remarks, Mark will review our financial performance for the first quarter of 2020, and then turn the call Dr. parish for an operational update and business outlook. Finally, we will take your question.

Access today's webcast. Please visit the Investor information section of our corporate website at Www Dot H.C.I. group Dotcom 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 may.

Pursuant to the private Securities Litigation Reform Act of 1995.

Words, such as anticipate estimate expect intend plan and project and other similar words, an expression 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.

See I group disclaims all their obligations to update any forward looking statements now with that I would like to turn the call over to Paresh Patel, our chairman and CEO perish.

Thank you Rachel.

And welcome everyone.

I'm not just on todays call my first addressing them back to covert 19 pandemic.

The crisis has impacted companies and people all over the world an awesome thoughts Gaga those who've been affected by it.

Since the beginning of the crisis, our priority has been the health and wellbeing of our employees and maintaining superior service to our policyholders.

So in early March we implemented all work from home arrangement and I'm pleased to report that we have done so without significant impact guard operational effectiveness or capabilities.

Our adept and talented I teaching enabled us to service, our policyholders and handled claims normally.

I can tell you the <unk> I can certainly that respond underpinned Nick is not unlike responding to a weather catastrophe event.

And we were well prepared.

Also to our knowledge none of HCR employees have tested positive for the virus so far.

We have exceptional people and then well vital to our success and we are committed to supporting them to this critical time.

Turning to the business.

I'll start over the corner our investment portfolio.

The current 19 pandemic has not materially affected our business.

Nor do we expect it to do so.

Our insurance companies have received a few coded claims, but we believed our exposure is very limited.

We've also offered to defer some policyholder premium.

We have also offer we've also offer due course policyholder premium payments that are coming due.

Homeowners insurance premiums are usually paid annually in most cases connected to a mortgage.

We do not view premium collectively to be a significant issue at this time.

Turning to Greenleaf, our real estate Division, we are working with some tenants on the lease payment.

Some of these pittman tenants, our restaurants, James and retail establishment and Theyve been hard hit hard by the crisis.

But keep in mind that most of our anchor tenants our grocery stores at a large banks.

Which are you doing just fine.

Also we own and operate two marino's at a restaurant.

And while we continue to pay the employees at those facilities those operations have been closed temporarily or running at very reduce capacity.

So what is the combined impact of all of this stuff.

The combined operational impacts are not material.

For context, the total cost of all of these impacts equals about one major fire loss a month on a business that generates about 36 million of revenue on month, so not material at all.

Incidentally, we have not applied for any government loans, including loans under the payroll protection program and nor do we expect to do so in the near future.

As Mark will elaborate in a moment our cash flow is healthy our balance sheet is strong.

And with the exception with the unrealized investment losses, we had a very good quarter and we continue to pay our normal dividend of 40 cents per share.

I will now turn the call over to our CFO, Mark Commonwealth, who will walk us through the financial performance for the first quarter Mark.

Thanks parish on a GAAP basis net income for the quarter was just over $500000 or seven cents per share on an adjusted basis. Net income was 4.2 million or 54 cents per share up from 2.8 million or 35 cents per share in the first quarter last year.

Before getting to the numbers I wanted to turn the clock back a year on our first earnings call. In 2019, we talked about growth we laid out three phases of growth how they would show up in the numbers and ultimately how they would start to positively impact our results.

12 months later it all played out as we described in Q2 last year gross premiums written were up over the same quarter. The previous here in Q4 gross premiums earned were up and this quarter is where it really starts to impact our financial results.

In Q1 gross premiums earned were up 12% this.

This growth as well as the growth in written premiums was driven by our technology enabled insurance company Typtap.

While gross premiums armed burned were up 12% net premiums earned were up 20% or about $10.5 million over the same quarter last year.

The growth in net earned premiums help to drive our consolidated combined ratio down to 88% for the quarter and we think this is the most important indicator of what happened operationally this quarter.

So with all that positive momentum why with GAAP net income only about $500000 first investment income, which is normally about $3 million. Just so per quarter was negative which was very unusual for us. This was largely related to investments in limited partnerships.

As we know the capital markets had one of their worst quarters in history and this impacted impacted our limited partnerships in Q1, we recorded a loss of $3 million for limited partnerships, which combined with lower rates on cash dragged investment income negative.

Also in the quarter, we recognize the $2.2 million realized investment losses, as we made some changes to our portfolio to rebalance it and in the process triggered a few realized losses.

Lastly, and this was the biggest impact we recorded an unrealized investment losses, just over $4.8 million as equity investments dropped along with the decline in the overall financial markets.

When the new accounting standards came into effect for equity Securities. We commented that equity market volatility could translate into earnings volatility in some quarters and this was one of them.

Investment volatility most of which is not cash related had a dampening effect on what was otherwise a very strong quarter again, the most important results for the quarter is the combined ratio of 88%.

Well on the income statement, a quick update on loss expenses, which are up slightly this increase was driven by the increase in gross premiums earned offset by a reduction in weather related losses, you may recall that we had a significant hailstorm in the first quarter last year.

Now, let's turn to the balance sheet for a minute as mentioned most of the investment related items were non cash cash flow from operations in the first quarter was $25 million more than double the $11 million of operational cash flow in the first quarter last year.

Cash flow is important.

If you look all the way back to the beginning of 2017 the ratio of cash flow from operations to dividends paid has steadily increased.

So thats, our cash flow what about cash position at the end of Q1, we had just over $317 million in cash an increase of about $88 million for the quarter that increase is somewhat higher than the cash flow from operations to 25 million I just discussed because in addition to that we also received $30 million an advance premiums from.

Anchor further we had a net reduction in fixed term securities as some investments insured.

As we know there is considerable uncertainty with respect to covert 90 that code 19 outbreak and in times like this are strong financial position bears mentioning again, we have two well capitalized insurance companies with significant excess surplus under a holding company with excess liquidity.

At the end of last year homeowners choice had an RBC ratio of 625% and tip top had an RBC ratio were 432% and both insurance companies made money in the first quarter of this year. So we do not need to put money into either the insurance companies, having said that should we ever need to we have 58 million.

In dollars of cash and investments at the holding company level as well as $40 million available on a revolving credit facility.

Quick update on the buyback program.

The end of 2019, we had about $1.2 million left available on the 2019 buyback program and we executed purchases in the first two months of 2020 to close out that program.

Keeps adding policies and what I can tell you what it looks like.

Is that this crisis is actually made for a company like tip.

<unk> five questions you can add Apollo you'll get behind a policy et cetera, it's much more set up for the unfortunate world we find ourselves in in the news.

In the present time, and probably the new normal going forward. So.

You know I think a chip that can be a very huge beneficiary of this in the long term.

<unk>.

Great and then maybe the other one from bark you know the Sun and some of your comments you know you'll kind of the half a million of income in the quarter, but there is very strong past slow paradox and and in some of the pieces are obvious, but I was hoping that or you know you're kind of walk.

Talk us through you know how you get for me to be kind of water. The major moving pieces just want to make sure that we're understanding maybe what little bit of gap counting versus markets versus you know cash flow to business.

Sure.

So so first thing I should mention when when the Q. comes out.

Actually see cash flow from operations of 55 million I mentioned 25 million and my prepared remarks that we need to that different is the $30 million from anchor.

So now 25 million I'm, not I'm, not including that because the 25 million is just straight cash flow from sort of ongoing operations, but I think your question is how you get like how to get from half a million of net income to that 25 million exactly. So yeah. So so the way that you sort of get there is is.

First of all is it as I started mentioned, there's there's a number of.

Investment related you know hits, if you will that we looked in the income statement that are not cash related I list I listed them all they add up to about 10 and a half million. So if you add that 10 and a half million to the half a million net income that'll get you to about 11 million of more sort of like normalized you know.

Cash net income if you will.

And then to that there is there is about $4 million of a combination of depreciation in stock based compensation, which are noncash those are standard every quarter.

Yeah. So that'll take you up to about 50 million and then other thing is.

Daily reserves are about $8 million. So what I mean by that is you see the $28 million in Los expense and the P. and L. there, we expensed about $8 million more than we actually paid out so reserves daily reserves went up by about 8 million.

So if you take the 15 I mentioned before you add the eight that kids. He did 23 and then you know the rest of it is sort of.

Rounding error, but that does that does that answer your question that sort of how you get from.

Yeah.

<unk> figure that last little bit yeah, I mean, some of the the stuff that was pretty straightforward and then yeah. Yeah that that's very helpful. Great White. Thank you for the for thing for the color and up that's all go for it.

Thank you <unk>.

Okay. Our next question comes from Mark. He was last time tries to save your question.

Good. Thank you good afternoon.

Referred to Mark.

Give us a it kinda latest take on the impact of anchor on the.

P. you know how it includes good loss ratio expense ratio and then kind of the bottom line at least in the near term or that'll trend over time.

Hey, Mark it's Mark So <unk>, we we we mentioned I think in the press release about 60 $65 million a premium.

That as of April 1st of course, none of that is in the queue. One numbers at all that old eventually start to earn in as I think we mentioned when we talked about the deal.

The uplifting the income statement you won't see it immediately because a lot of those some of those policies are gonna be at the existing rate, but as they start to renew and our rates.

The deal will start to be a little will start to be more creative. So you know, we don't really give guidance bidding Q2, you'll you'll see the combined ratio will probably.

And go up a little bit and lost expenses will go up a bit because we're gonna be booking losses off of that.

Off of those lower premiums for policy initially so in Q2, you'll see.

<unk> go up a bit and you'll see to combine ratio go up a bit and then after that as it as they transition on to our rates.

You'll start to see that sort of normalize out.

On the you'd mentioned or the lower yields impacted net investment income how much of that isn't during the.

You know to look at what are your cash was growing off before the crisis to today, how much of that will will be with us in the two two q. and beyond.

So.

<unk>, we're driving investment income obviously from you know fix terms securities.

And also from cash.

You know, it's no secret that the eagles than cash or down a little bit.

You know if you.

If you look at investment income in the first quarter. It was a couple of hundred thousand dollars negative you take out the impact the negative impact of limited partnerships that takes you to about 2.8.

That's a little bit less than it has been in the past.

And that would probably give you a a bit an indication of what that delta is.

So your your question was how much of that is in during there's there's probably you know two to $300000 a quarter that investment in income going forward is is is probably going to be it a little bit lower.

Because of the lower yields on cash.

Yeah, and Matt Oh, sorry, Mark to that point.

Some of that is also.

Taking positions call what the future now holes.

You don't feel like chasing.

No single bed or 20 Bucks.

Commission checks or interest rate checks kind of thing. So we have made a conscious decision to just have a very solid amount of cash in the bank.

And not because it on a particularly good investment income, but it gives us the operation flexibility for the for now and the opportunities that may arise in the near future. So we are.

We're not reaching for you, which will be the temptation to try and replace appear a thousand.

Rather going the other way, saying that we'd rather have the cash and hence monks comments about how much cash who was sitting on at the end up to one.

Understood. Thank you.

Hmm.

Oh.

Okay. Our next question comes from the <unk>.

<unk>.

Thank you I just talking about a parish on your comment about the shelf registration.

You don't have any acquisition cranberry now, but how do you think about balancing growth it to happen.

Maybe.

Going through.

You know in organically How'd, you balance that.

It automatically organically.

Sorry.

Maybe doing another something similar to you did it with anger.

Oh, Okay, Yeah Oh.

No the best way of answering that is.

We know what we can do with anger.

And once in awhile and opportunity comes along that is significantly better than that.

And if we see that we might do something now the other side of it.

Is we also said on the spot whereby I think if you go by the numbers <unk> talked about about the surplus as we have in various places.

We could grow the insurance company, so about $700 million in premium.

Before we wouldn't need to go outside sources for capital.

So with that much firepower.

We have the luxury of of being able to do both if we choose the right, but equally well what has what I think we've proven over the over the last decade or so is we we only interested in gross if it.

Visit material opportunity in doing so.

Growth for growth sake is never been hour mantra.

Oh.

We are preparing in various ways.

We think given all the destruction that have occurred in the last.

60 days shall we say they will.

There may be opportunity there'll be forthcoming just like the one the last great in the great recession about a decade ago. So it should come along we want to be prepared and that's what we are very this x. four at this point yeah.

Yeah.

Thank you.

And.

Might be a little nuance put where the anchor the 41 I believe at a time.

You announced the deal you mention 43, so <unk> with her about 2000 policies that.

Didn't come over.

<unk> is that how I understand it correctly.

That's exactly how you should think of it yeah. Because the 42000 were was there in February or January when we announced the deal we wanted to put up a 41000 as to what seem so that it across on April one.

Got it and then last one on.

Reinsurance.

Well, if you have any perspective.

On how that is progressing at this point.

Through one of my sharing your thoughts that'd be helpful.

Yeah, well ruined the middle of the negotiations as would be expected. This time of year. So obviously, we don't necessarily comment on the specifics too.

So everything is done and dusted, but having said that.

It's not too much of a reach for everybody to appreciate that.

I don't know very unusual here, where everybody's in depression, both on the insurance side and on the reinsurance height.

And given that the negotiations are a little bit more intense and our normal years.

But at the end of it.

There's still a functioning market and I think.

We will get our insurance place.

<unk>.

That's all I had thank you.

Thank you.

I would like to turn it back all the to management.

Yeah.

On behalf of the entire management team I would like to thank our shareholders employee and Asian, and most importantly, our policy holders for their continued support hey look forward to updating you on our progress in the near future.

Thank you. Thank you.

It's not closed today's conference call.

We thank you. Thank you for your participation you may decision I can I get this time and have a great that.

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