Q2 2020 Hci Group Inc Earnings Call

Service, please. Standby. We are about to begin.

Good afternoon, and welcome to HCI group second quarter 2020 earnings call. My name is Christy 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 September 5th, 2025 or later this evening. The call is also being broadcast live via the web cast and available via webcast replay until August 6th 2021 on the investor information section of spi group's website at ww.w. I would now like to turn the call over to Rachel swansinger investor relations for our regional please proceed.

Thank you and good afternoon. Welcome to HCI group second quarter 2020 earnings call with me on today's call is Parish Patel our chairman and chief executive officer. And my life is worth our Chief Financial Officer following parishes opening remarks. Mark will review our financial performance for the second quarter of 2020 and then turn the call back to perish for an operational update apps without looks finally we will take your questions to access today's webcast. Please visit the investor information section of our corporate website at ww.w. Before. We begin I would like to take the opportunity to remind our listeners by today is presentation and responses to questions may contain forward-looking statements May pursue into the private Securities litigation Reform Act of 1995. We're such as anticipates estimates expect intend plan and project and other similar words and expressions birth.

Intended to signify 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 risk or uncertainties develop into actual events. These developments could have material adverse effects on both knees Business Financial condition and results of operations. HCI group has claimed all the obligations to update any forward-looking statements now is that I would like to turn the call over to our our chairman and CEO Parish. Thank you Rachel and welcome everyone.

I hope everyone is healthy and

safe

first very quickly a comment about hurricane SAS SAS stayed off the coast of Florida there for we've had very few claims and we don't expect many also as I've stated before ati's operations have not been material impacted by the covid-19 pandemic and we continue to do buisness normally now on to our second quarter results. It was a solid quarter fully diluted and adjusted earnings per share or $1.08.

Highlights for the second quarter include Grocery and premiums that were up 29% over the same quarter last year.

Net income was up 18%

We paid forty cents per share dividend a 38th consecutive quarterly dividend and based on today's share-price. Our stock has a yield of 3.4%

Also, we completed integration the policy transition from anchor Property and Casualty and retention of that book has been as expected.

And finally, we also completed a catastrophic insurance program for the 2020 hurricane season.

We increased our first event coverage Tower from 960 million to almost one point four billion dollars. We believe the additional limit better positions the company for the 2023 hurricane season, and all of their was a higher expense incurred for the higher limit. We determined that was most important to protect the business Enterprise over maximizing short-term profit margins. I will now turn the call over to our CFO Mark harmsworth will walk us through our financial performance for the for the second quarter mark

Thanks Parish. The second quarter was another good one for us a gap faces diluted earnings per share were $1.08 on the Justin a diluted earnings per share were $0.86 which was up from 81% in the second quarter last year for the first six months adjusted earnings-per-share were $1.51 up from $1.15 from the first six months of last year. As you know, we've been talking about growth for a number of quarters now and that upward trend has continued growth written premiums were up 29% over the same quarter last year end up 24% year-to-date. The increase is being driven by the continued growth of Tip Tap as well as the trash and policies from anchor Property and Casualty gross earned premiums were also up 29% this quarter and 21% year-to-date again driven by the growth in Tip-Top as well.

the transition of business from anchor

back in June. We announced our new reinsurance arrangement for June 2020 to May 2021. We purchased significantly higher limits and the net premiums for that or estimated to be forty four million dollars per quart up from 31 million from the previous treaty year. We Insurance expenses this quarter reflects two months at the old rate and one month at the new rate as in the past few quarters, there were significant changes within investment income. Well total investment income was about the same as last year. There were some shifting around within the components of it and that investment income was down driven by lower limited partnership partnership income and lower yields on cash, but both realized and unrealized investment gains. We're up substantially as the equity markets recovered and we also sold some fixed-term security at a game.

Los expense

About 15 million dollars over the same quarter last year. This was largely driven by the increase in Gross premiums are and a change in the mix of business, but it was also impacted by some weather in the quarter off and then offset somewhat by lower prior-year development to be more specific about thirteen million of the increase was driven by growth in earn premium and exit business. We booked about six million dollars each other related losses, and then these two increases were offset somewhat by lower prior-year development, which was about four million dollars less than the same quarter last year.

Before turning to the balance sheet just two other quick things in the income statement during the quarter. We purchased a small amount of our convert where we bought these at a discount to par value because of the way that the accounting done is for Monday through the accounting is done for Converse. We booked a small loss of $150,000 one last name. You may notice that the effective tax rate is a little low this quarter at about 24% driven by a couple of unusual and we expect that to return to the normal 27% now to the balance sheet are cash and cash flow remained strong in the first six months cash cash flow from operations with life over 100 million dollars driven by increases in unearned premiums and an increase in reserves as the book is growing. We are setting aside a considerable amount of money in reserves to pay claim that may eventually come to the end of June. We have increased non cat reserves. I just over twenty six million dollars. In other words are lost expense for the first six months is $26.

Is higher than we have paid out in claims discontinues are conservative and undeserving speaking of a strong balance sheet yesterday. We announced something that will strengthen it further as faith in the press release we closed on the agreement to sell her Cypress Cypress Clemens property since this closed in July, it is not reflected in our second quarter financials when it is recorded in the third quarter. It will increase earnings per share. Okay, I appreciate are and cash. We have mentioned many times that our book value is understated because our real estate portfolio is reflected on a cost basis while this transaction will significant boost book value per share. There are still significant unrealized gains in our real estate portfolio that effectively under under State Book value even after this one transaction closes.

A few things on Capital Management, you know in June we paid a dividend of $0.40 per share. Although the amount per share with constant the total amount of just over three million dollars in cash with 7% less than the same thing last year due to the decrease in the number of shares outstanding you may recall that we announced the $20 buyback plan for this year in the second quarter. We bought back 50 1834 at an average price of $40.48. The total shares bought back so far this year on the twenty-twenty plan or 100 2844 at an average price of $38.64 at the end of June. There is about $16 available under the 20 20 plants. Just one other quick number book value per share at the end of the quarter of $23.75. Again, this is before the recognition of the gain on Cypress common in summary. This was another good quarter for US Written premiums are growing learned premium package.

Rolling Cash Flow was growing.

And the balance sheet remains strong and is getting stronger and with that. I'll turn it back to Parrish.

Thanks, Mark.

Obviously we are very pleased with our second quarter performance. Our results demonstrate that ATI has ended a period of growth. And for reasons, I'll explain here. We expect the growth to accelerate our engine for growth and profitability is a tip top insurance company are technology-based Insurance Company.

And eight years ago, we began investing in technology with a mission to develop software data data analytics and artificial intelligence to simplify the internet experience for a job and prospective policy-holders. Why are the same time improving profitability?

Tip-tap embodied knowledge as we developed. It uses our Innovative proprietary online platform to quote and bind policies quickly and efficiently agents and prosperous policyholders answer a few simple questions and receive quick responses.

Tip-Top uses power plug or Adams designed to identify policies that deliver profitable results while mitigating risk.

And as everyone knows Tip-Top has grown rapidly organically over the last four quarters over the last four years. And also with the last four quarters as agents and perspective policyholders should cover it Simplicity ease-of-use and speed.

Premiums in the end of second-quarter exceeded $75 million dollars three times the size. It was a year ago. And we expect that. They will reach a hundred million thousand dollars before the end of the year.

And as we announced this morning, we plan on expanding tipped footprint Nationwide.

A fully realized this expansion plan will lead to an increase in tips addressable Market by nearly ten times from approximately ten billion dollars with in Florida to more than $105,000 Nationwide.

While experiencing premium growth Tip-Top has been consistently profitable. It's analytics and policy selection technologies have led to industry-leading combined underwriting racial.

All of this what operating in Florida a very challenging litigation and hurricane-prone Market Tip-Top has survived profitably is often several hurricanes, and I did just climb it.

So in summary, we believe that at this point tipped up is a proven platform that has industry-leading technology analytics growth and profitability off our goal at this point is to maximize the value of tipped up for our shareholders all of you on this car.

And we plan to do this to continue to organic growth and expanding into additional States.

Additionally, we will be exploring strategic opportunities which could include outside investment joint ventures licensing or even a spin-off.

With that, we're ready to open the call to your 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 then one on your telephone keypad this time. If you're using a speaker phone, please pick up your hands to provide the best sound quality again, ladies and gentlemen, if you would like to ask a question, it is start then one on your telephone keypad.

And our first question comes from Matt with JMT security.

Good afternoon. And what happened in the quarter, you know high-level question. What are some of the Lessons Learned, you know, you've kind of refined tip-tap, you know, you've been in the market in place for a few years strong growth strong returns. Um, you know, it was kind of your how you built the company. You know, what lessons have you learned as you've done that that will kind of you think make the expansion Nationwide, you know a successful and be you know, probably I would imagine you could do it a bit quicker than it took you in Florida cuz you had to learn on the fly the first time and now you know how to do it.

Thanks, man. It's a great question the lessons you've learned along the way and this is why it's taken a waited patiently for the four years to prove and what we thought was going to happen was actually happening and we had the results to to back it up. But fundamentally, there's a couple of things one is we have shown that we know how to organically grow a business very quickly tipped up is tripled in size in a year. So you got to be able to produce business but more importantly it's not just about producing business is can you actually do it profitably found in the slide deck we put up we showed you our loss ratios compared to the industry average so you don't have to grow fast, but if you really have something of value it should do it at a better result than the average industry average and we have proven both of those things and we've done it consistently across two product lines both flood and with dead

Homeowners insurance. So having done that we know we have the techniques the algorithms down as to how to go into other states and grow there as well. So we are now about to embark on that expansion Journey at this point having proven the the platform and then in terms of kind of the behind-the-scenes stuff. I mean, I know it took you, you know, you you built kind of a the the database the algorithms and everything behind it. There's a lot of proprietary data there and you did it for I think five and half million homes or how many however many are in Florida. Can you talk a little bit about kind of that process as you expand outside of Florida how it might be you kind of how how we might look at the timing and how we might think of you adding states in the top Forty Nine all at once but they might come regionally or you know a few of the times

Yes, man. What we've done is we sort of divided into phase one phase to phase one. We're going to

10 to 20 additional States and phase two will be the balance of the state now, obviously for those that are aware of this, uh insurance is regulated on a state-by-state basis. So we we will be applying to each of these twenty States and they will take their appropriate amount of time a grinding is a licensor for us to get operations running so slow 20 States will not come online immediately. They will come on one after the other as as the application process completes itself and then we set of operation. So this is a month not a short-term Journey but more of a medium-term journey that we would be on and we just making every know that we're we're going to go over the next decade and that's really the item that way. We're on here. Yeah.

Right and then last question on tiptoe, I know in in Florida, you found a while. It can be direct-to-consumer you found that the agents, you know, really love it for for the ease of use and how fast it is, you know. Well do you think it'll be a similar approach as you go into to these new States you expect it to be more of a you know in a a tool Aging in love with and and gets you in the door there or are you thinking about ways you could do more, you know kind of direct-to-consumer marketing or otherwise to to kind of, you know, go right to the End customer.

Good question. Yeah, the the biggest thing we think about in the other state is agents are agents policyholders a policy holders wage Behavior human behavior tends to be the same.

Corine's available different from Texans or you know New Yorkers for that matter, right? Not the new expansion States but just example so a lot of the stuff I think will behave similarly and as far as you know, are we talking about going direct-to-consumer? Probably not because I think the agents do control most of the busy and we've tried to make this thing agent friendly and actually consumer-friendly as well because when the agents recommended the consumer they have to like it as well. So we've

The best way of looking at what we've done over the last four years why we've sort of stayed focused in Florida is we sort of said let's make sure you build the first state correctly and that you know who that this stuff works. Then you it's almost like franchising going to all the other states just replicating the your winning formula over and over again. So this is why we didn't suck and two fifty states four years ago, even though you know, we might have been able to do that number of the people took that approach. We want to get one right first and then expand and that's what we're doing now. That's why we real excited because we know we have something that works.

Right makes sense. One last one. Just a quick one for Mark. And then I apologize I missed it, but net written premiums in the quarter if you have it. Sure. Yeah. It's 137.5 / 52 wonderful. All right. Thank you very much for the answers and you know best of luck with the the expansion. Thank you. Thanks, Matt.

Our next question comes from Mark hummus with truth security, please proceed.

Thank you.

Mark how much did anchor contribute to the growth written premium and the quarter?

about forty two and half million

some of the language in some of that is renewal understood talked about maybe pursuing or expecting the Strategic opportunities and assemble like you were the painting a fairly broad brush. There. Are there any relationships Association or Partnerships that can help help with the National Expansion? And I wonder if you could just expand on the what sort of thing do you have in mind?

Well great question. It's and it's broad question. Right? I think my my written comments were my prepared comments were more to do with the capital structure of the company in terms of how we would grow tip-tap. Yeah. I think the nature of your question could also apply to Thursday using third-party distribution networks etcetera to to sell our products etcetera and or partner with incumbent insurance companies in various States. Yes. We are open to those possibilities. Well, we you know the key item to take away from my prepared remarks is we are not mission to maximize the value of Tip Tap to the to the to the shareholders and we will do what's prudent to make that happen.

In my hearing you that you're thinking about the potential that the growth since as as attracted as you might like that might put a capital strength and and so you're contemplating how to handle that. Is that what you're saying? Yeah, I mean you up to now if you can imagine what we've done with Tip Tap, it has entirely been paid for by the capital structure of the HCI group, right and you know in the initial phases expansion, we can continue to happen of cash to continue the growth but you you have to contemplate the possibility that if you got you got additional capital in you might be able to grow at a much faster rate and you know, because we have to balance our Capital without growth, so why wouldn't you consider Partnerships in that fashion? Yeah.

Yeah, the I'm looking at your presentation you highlight some attractive lost numbers for Tip Top kind of giving us a sense of wage. Do you think the run-rate you know what this platform could do outside of Florida?

Yes, just to put some of these numbers into perspective on a nationwide basis the homeowners insurance business package and premium and I think in 2018, which is the last year. We actually had numbers for it ran a combine a hundred and three combine hundred 3% combined putting a differently in this life took in $105. And when all the expenses were paid it probably cost him like a hundred or a hundred six hundred seven million billion dollars, right exactly the highest money business.

Yeah we are looking to do is.

You know carve out of five billion dollar book out of that but one that runs probably more like a 90 combined not a hundred three that's 13 points is a big deal when you're talking about 5 billion dollars. Yeah.

Yep, anything you would anticipate in the kind of the near-term ramp-up expenses is you're looking to expand into other states. Obviously, there's some ground work that needs to be done about how how much would we think about the magnitude of that?

actually

Mark I think the the biggest magnitude of that the items that we've already talked about in our prepared remarks saying because we were talking about growth and everything else. We went and took a more conservative stance in buying reinsurance this year in the size of the tower ebart, right just because we didn't want to be distracted. Should there be an active hurricane season on Thursday and also from box prepared remarks what you saw was we've taken a much more conservative stance in terms of the money. We're we're setting aside in reserves for non cat claims. So these are really the biggest Capital items that we're doing in terms of actually applying to State et cetera. That isn't as expensive as opposed to the steps. We've already taken the artificial expenses increased very very minimal going forward.

Understood. Thank you very much. Thank you.

And our next question comes from bill with Dalian partner, please proceed.

Great. Thank you. If I could just follow up on the expansion plans looking at your your phase one state. Is there a certain reason why you might go to a certain States first because it looks like it doesn't have a couple of states in the Southeast but it's in the middle of the country. It's not on the coastal areas. So I was just wondering if you could help us understand how you got to the different states and phase one what kind of attracted you to those first simple answer. I will give you money Analytics.

we sort of

Looking at all the other forty-nine states and we look at a number of different factors as to what would make sense as to what sequence the to go after them and off when you actually did that a little bit. They took us to the set of states that you're looking at currently and we did that because it made sense. And ultimately I think of it this way. If you are going to be Nationwide, you have to go to all 49 states you just debate in the order in which you're going to go do them and check to make sure that we pick the states. We like first and secondly the item was wondering be clearly communicate that we are talking about going National nod we going to be Regional in the Southeast or we going to be a coastal writer or anything else of that nature.

Understood understood and when you think about the analytics and using your technology in Florida, I would think you'd have a lot of data from operations that you could then use to to kind of help your your models. I was wondering how you plan to handle the data and getting charged the necessary information. You need to input into your models to properly under right in other states kind of is is it third-party, you know, it's going to be a lot of third-party any any thoughts on getting the data necessary to

To do this expansion would be helpful. Okay. Yeah, let me answer the question in a slightly different way in terms of what's really involved in this expansion so long to do it in Florida for that matter is one part where you need to get the raw data and when we start doing this in Florida all those years ago that raw data wasn't available. So we actually created it all ourselves in this day and age raw data is available much much more readily available throughout the country. So the value of creating your own dead as somewhat decreased over time and we can we can use third party data sources, but more importantly is

What we did over the last four years we built an algorithm that works that knows how to process that data digest it and make smart decisions. Very very quickly that algorithm doesn't really change as you go from state-to-state it adapts and given that we already have this this is what make