Q1 2021 Hci Group Inc Earnings Call
Good afternoon.
Welcome to <unk>.
C. H C. I groups first quarter 2021 earnings call. My name is Tom 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 June 6th 2021, starting later this evening.
The call is also being broadcast live via webcast and available via Ria.
A replay until May six 2022 on the Investor information section of HCI group's website at Www Dot H C. I group Dot Com I.
I would now like to turn the call over to Rachel sponsor group Investor Relations for HCI. Rachel. Please proceed.
Thank you and good afternoon welcome to HCI Group first quarter 2021 earnings call with me on today's call is Karen, calling our Chief operating officer, Mark Harmsworth, Our Chief Financial Officer, and Paris Hotel, our chairman and Chief Executive Officer.
Following opening remarks, Mark will review our financial performance for the first quarter of 2021, and then Paris will provide an operational highlights and we will take your questions.
Today's webcast. Please visit the Investor information section of our corporate website at Www Dot HCI group Dot com before we begin I would like to take the opportunity to remind our listeners that todays 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.
Looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties.
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.
See I group disclaims all the obligations to update any forward looking statements now with that I'd like to turn the call over to Karen Combing Our C O L parent.
Thank you Rachel and welcome everyone. It's been a tremendously busy and productive start to 2021 for HCI as you can see by our financial performance. Our disciplined execution continues to produce consistent profitability growth and best in class margins. The first quarter was marked by several important achievements.
First at the HCI group level consolidated in force premiums surpassed half a billion dollars and we expect it to continue increasing in the coming quarters in March we paid a <unk> 40 per share dividend, our 40 <unk> consecutive quarterly dividend.
Second Greenleaf capital, our real estate division continuing to be a valuable part of our diversification strategy both in producing positive cash flows and capital appreciation.
Third homeowners choice continues to be profitable and grew through strategic strategic acquisitions, such as anchor in UPC.
Kitkat grew as well, it's about the $130 million of in force premium putting it on track to reach its goal of $200 million by the end of the year and as previously disclosed kitkat raised $100 million from Centerbridge partners.
Also international expansion continues on track not only with receiving regulatory approvals, but also in writing our first policy outside of Florida.
Finally in response to the immense growth we are seeing we recently created separate management teams for HCI and tip tap insurance group.
The separation will allow each management team to focus on specific growth initiatives.
As we established infrastructure for a billion dollar company.
Since 2007, HCI has a proven track record of success and growth with the achievements I've just outlined we look forward to seeing HCI continue on this path throughout 2021 and beyond.
Now I'll turn it over to Mark to discuss HCI financial results for the first quarter of 2021 Mark.
Thanks, Karen.
This was another good quarter for us with tremendous growth new capital and strong earnings diluted earnings per share were <unk> 75.
Up from seven in the first quarter last year.
Growth was the big story in the quarter as it has been for some time now gross premiums written were up 65% with strong growth coming from both of our insurance companies and.
In homeowners choice gross premiums written were up 39% from 58 million to $81 million and tip tap gross premiums written were up 142% from 18 million to just under $45 million.
Consolidated gross premiums earned were up 42% again growth came from both homeowners choice and tip tap.
In homeowners choice earned premium was up 35% from just under $76 million to over $102 million driven in part by the strategic acquisition business from anchor and UPC.
And tip tap earned premium was up 73% led by the organic growth of its homeowners product as an indication of the impact of some of this growth consolidated gross premiums earned this quarter were the highest they have ever been in any quarter in the history of the company and of course Theyre going higher.
Looking at the income statement, you'll see that loss expense is up significantly. This is simply connected to the growth in gross premiums earned.
As at March 31, non cat loss reserves are up about $10 million higher than at the end of December as we continue to expense more than we are paying out is continued our conservative reserving methodology.
Both of our insurance companies are in strong financial position with homeowners choice surplus of 127 million at the end of March is up about 7 million from the end of last year and tip tap surplus of $50 million up $11 million from the end of last year couple.
Couple of things on capital and liquidity as previously announced to cash.
<unk> insurance group raised $100 million of growth capital from Centerbridge partners this quarter.
There's a new line on the balance sheet called redeemable Noncontrolling interest the $86 million. There reflects the amount received less transaction costs and also net out the value attributed to the warrants are about $8.6 million.
In terms of holding company liquidity, we have just over $50 million of cash and financial investments and HCI and full access to our $65 million credit.
Credit facility with fifth third that's well over $110 million of liquidity at the holding company level. In addition, there was another $55 million of cash in the holding company for Capex insurance group.
As you know there have been a few changes in share counts. So we included some of that data in the press release for.
For purposes of estimating diluted earnings per share.
The diluted share count is about $10 1 million at the end of March. This is up about 350000 shares from the new shares issued under the renewal rights agreement as well as the dilutive effect of the warrants.
Wrapping up the company continues to improve in every way both insurance companies are growing earnings are up and our capital positions are strengthening at the insurance company level and at the holding company levels and with that I'll hand, it over to Paresh.
Thank you.
Thank you Kelly Mark for that summary.
The results from the first quarter.
By the way, Kevin Coleman is our new Chief operating officer.
She has been with the company in various capacities for over 10 years and will be joining our calls going forward.
You've seen the results from Kevin and Mark.
HCI is reaping the benefits of the decisions made in previous years, including our investments in technology and data and our consistent focus on profitable underwriting.
Currently tip tap is experiencing rapid growth within Florida, and as Karen mentioned earlier it has begun operating outside of Florida.
Our transaction with UPC also continues on track and it should be a great accelerator with ticked ups growth outside of Florida.
Finally, we continue to explore strategic opportunities for both HCI and Tipton.
In summary, the entire group is performing well.
And as we are benefiting from the decisions we made previously.
We expect to benefit from the decisions, we're making today.
Our brightest days.
Yet ahead of us.
With that we're ready to open the call for questions.
Operator, please provide the appropriate instructions.
Thank you Sir.
Ladies and gentlemen, the flow.
<unk> is now open for questions.
I'd like to ask a question at this time. Please press star one on your telephone keypad to enter the queue. Once again can be star one on your telephone keypad to enter the queue at this time.
Please hold a moment, while we poll for questions.
And your first question is coming from JMP Securities.
Matt Carlotti Matt.
Matt Your line is live you may ask your question.
Thanks, Good afternoon.
Paresh I was hoping to start with.
Kind of state of the Florida market.
Obviously, you guys are in a strong position I think a lot of your peers are.
And last from a position.
And so just kind of how do you book.
Whether HCI <unk> tap kind of see the market unfolding for yourselves.
The balance of the year and as part of that if you have an opinion on the recently passed legislation.
What that might mean for you.
Claims in.
Fraudulent activity.
As we move forward.
Okay Matt.
Look we got us for the question in two parts.
The first part I'm going to let Karen tell you with some numbers some of the impacts of that.
The legislation and we're going to answer in the context of if it had been in place when <unk> hit the state of Florida.
Thanks Paresh.
We believe that the legislation will be helpful. In the reduction of the first notice of loss that occurred when we went back and we looked at the <unk> numbers that we had.
The first day.
Year one.
Claims that were filed 9% of those went into lawsuit. So people that filed timely claim in Irma, 9% ended up in lost Inc.
And year to day.
The claims that were filed 34% of them have ended up in loss so far.
The near three those sort of late reported claims more than 50% of them are already in law suit. So the reduction of the time to file should should help quite a bit.
Okay.
Matt you kind of get the idea of just the tenant.
And the legislation moving it from three years to two years.
Has a slight impact on claims but has a huge impact on litigation yet.
So that's a net realized example, very helpful. Yes.
Trying to just.
And also the sliding fee schedule should help reduce litigation or a minor dispute. So all of those things moving positive and it was a good legislation because the folks who did have filed claims in year, one and year two they are not impacted.
It was a good balanced legislation and worked out fine.
As far as.
Speaking about the Florida market.
I think the Florida market.
Continues to be.
General sense challenging and I think that's been requested by a number of our peers.
The item that really the differentiating both HCI in Tiptop from most of our peer group is.
Basically.
Those decisions were made years ago to invest in technology and data.
That is what is allowing us to operate in exactly the same.
Terrible environment all of our peer group operated with the materially different results yet.
We sort of alluded to this couple of years back and Youll see it really play out at this point.
Yes.
Great and then maybe if I could focus on <unk> for a moment.
Just kind of provide us an update of I mean, obviously you guys have been expanding we've seen the press releases.
The license.
A number of additional states.
Just where that stands.
Compared to kind of the original path you set out several months ago.
Drill ahead of schedule I buy a car from your comments $130 million of in force premium. So it does feel like we're well on our way towards your.
$200 million target for the year.
Yeah, absolutely look.
I got to hand, it to the management team as well here right because.
If you'll recall over over the years, we we were at $25 million and we said we'd get to $50 million by doubling they did that then we said it's $50 million, we got double it to $100 million that was last year.
We had originally thought.
And then the other states are running a little bit slower than we had anticipated from <unk>.
Alan.
Pretty good outcome.
Great and then last question if I can.
Obviously the <unk>.
Annual reinsurance renewals coming up here end of the month.
You know any any thoughts you can provide us either from a market perspective, I mean, we obviously know the market itself has had its challenges, but that you guys have that stood out as.
You know putting up much better results, what that might mean for HCI and if theres anything you can share specific to ACI in terms of changes you might.
I expect to make to the program, there's significantly more or less limit or changes to retention and so forth.
Yeah. So a couple of things in terms of the market in general right.
The annual ritual, we've got renewals coming up on June one so does the rest of the Florida industry.
And the negotiations are well underway.
Putting into the Liberal perspective.
June one this year from our perspective looks a lot.
Smoothed the June one last year did you.
With COVID-19 with COVID-19 being there et cetera. So.
You know things will get sorted out and things will be fine.
Other things that we should point out. This is particular to HCI group, Inc. Tip tap in us.
Is that instead of a stepped up as mature and as Kevin talked about separate management teams et cetera. We're also beginning to now buy reinsurance in a whole different way. So instead of buying one wind tower does it HCI wind tower homeowners choice wind tower I should say the Tiptop wind tower.
Sure.
And this is Florida and then there's a third wind tower from non Florida.
And then the fourth tower, which is a flood tower. So we've sort of had two as well.
Segment of the business and grown up had to now start looking at these things as a separate.
Entities, which is a different thing to what I think most.
The direction most companies have headed in yeah.
Mhm.
And given the.
Differences in kind of seasonality of cat season, and things like that as you expand nationwide is that a reasonable assumption that we might expect different retention levels. So forth on like a.
Tiptop tower versus up HCI Flora ex Florida tower versus a Florida tower nuances like that.
Yes.
Matt the biggest takeaway from this is how we're looking at.
Not only tipped up on homeowners choice, but also Florida the northeast other parts of the country is we basically look at each geographic area, let's say and we think of it as a separate business and we make sure that day.
Our rates are adequate and we have appropriate reinsurance for that geographical area. So each geographic area has to sort of make sense on its own not suddenly say Oh, we benefit because you know we're buying a big Florida towers. So that would be just puts the risk and there are any of those kinds of things. We actually are looking at these things as.
Separate businesses that we are hum.
Hopefully running profitably. So eventually if we would end up with.
Page 10 separate businesses that are all profitable run property run.
They sort of had.
The added benefit of Av.
Buttressing each other should there be a problem with one of them yeah.
That makes sense great well. Thank you. Thank you very much for the color best of luck and congrats on the nice starts per year.
Thank you.
Okay.
And the next question is coming from Truth Securities Mark Hughes Mark. Your line is live and you May ask your question.
Yes, Thank you and good afternoon.
Mark could you talk about the.
The loss ratio.
In prior quarters, you've alluded to some of the impact from anchor and UPC and all of that.
Loss ratio impact might trend over time too.
Refine that book raise prices, where need needed et cetera could you talk a little bit about that how much impact this quarter and where it's going.
Yes, I mean, it was it was it pretty straightforward quarter really.
It was like I said in my prepared remarks.
The increase in loss expense was just really completely attributable to the to the increase in gross premiums earned a consolidated loss ratio was I think about about 35%. So.
We have different pieces of the business that we reserve in different ways. So homeowners choice is that sort of 24% 25% ratio and.
The anchor book, because it is a little bit higher.
We are in and then onto our paper. So so the pricing is in line.
The loss ratio, a little bit higher there because that tends to be.
To be strictly homeowners.
The loss ratio is a little bit higher on tip tap.
And then the loss ratios I think we probably talked about last time around for UPC is more like a net in the 50.
The 50% range so.
It's really just sort of this is just sort of a straightforward quarter of of the premiums times the loss ratio and of course, we track everything else to make sure that everything is on track.
Those loss ratios.
And.
Paid incurred those types of things came in pretty much in line with what we expected.
So another question on the policy acquisition expense.
Were there any unusual items in there or is this a reasonable run rate.
Yes, the only thing that's different is.
As you know.
The policy acquisition right on.
It's happened a little bit higher, but you sort of used to seeing that that's flowing through.
In the one thing that's a little bit different than what we may be seeing is that the policy acquisition expense on.
On the UPC book is is higher.
It comes in.
<unk> 35 per cent range. So if you if you see you would see that increase that you see from Q from say Q4 to Q1 is it really just related to that.
And then that will come back down a little bit over time.
But that you see a little bit of a little bit of a bump in the pack right.
In Q1, and it's really the UPC book.
And then the tax rate was there any offset in operating expenses.
Yeah. Good question, So we had.
The tax rate can move around a little bit, but what was a little unusual this quarter is we had some.
Restricted shares that were.
That were canceled and.
Just as part of the reorganization, Karen mentioned separate management teams or whatever and so it was a little bit of moving around in the restricted shares.
Some new ones for granted some were canceled so.
There was I think a 140000 restricted shares canceled something like that and then the dividends related to that get reclassified we expense them in the GAAP book, but theyre not deductible for tax purposes, and so we had the topic a couple of years ago, where you have them.
Unusually high.
A permanent difference and it's just sort of a onetime thing so and I think that pushed the tax rate to 30%, 35% to 36% or something like that.
But nothing's changed in terms of the overall long term.
Tax rate of about 2027% to 8% so it isn't unusual.
And it was about it was.
Operating expenses were a little bit higher than normal.
Cause of that reclassification that happened. So is this sort of a onetime thing.
Impacts the tax rate and we were up against a very low tax rate in Q1 last year, because we had some windfall.
Windfalls run through so that kind of explains that difference does that does that is that what you were getting at that helpful.
Yes that is helpful.
Thank you very much.
Youre welcome.
Okay.
Thank you.
Once again, ladies and gentlemen, refreshed star one on your telephone keypad to ask a question at this time.
And your next question is coming from Raymond James Greg Peters.
Greg Your line is live you may ask your question.
Good afternoon, and thank you for letting me ask a question.
I wanted to pivot to the real estate operations.
I noted that in your comments you highlighted.
Fact that.
We're benefiting in part from Mark to market adjustments in the value of the real estate operations.
And if I look at the schedule of what you own.
The Florida.
Real estate market as you well know is on fire and I'm just curious about.
Your buy sell and hold decision, making process as it relates to some of these properties. The tiara in a vertical retail property that we bought in 2011 has to be.
Yes.
Substantially more than what your cost is so just looking for some perspective on that yes.
So it's Marc I'll take part of that question.
So in terms of sort of the mark to market we're not.
[noise] equities or fixed term securities or something like that.
Okay.
Thanks, and then just pivoting back to to tap you know you you you talked about the role out into the new states.
And I know you just had a call on this but if you just give us perspective, or how you're approaching pricing.
For the new states, how you're developing pricing you know any background on that would be helpful.
Oh, absolutely Mark mm.
Hi.
I'm, having a senior moment here that's okay. That's okay I have them every day [laughter], yeah, [laughter] so yeah.
Yeah. The way, we we developed pricing is you know.
We're talking about being.
Andrew admitted markets and being admitted that means there's lots of data on incumbents in each of these states. So you know.
A high level, we tend to look at probably the top 10 carriers at any given state and see what the pricing looks like et cetera, and then we try to develop price even that is competitive with a couple of them that we that we would like to model ourselves. After so that's roughly how the price and you said it said to be.
You know.
Market, Andrew a slightly on the competitive side of the market.
And any given state that you have to do it state by state to see what's going on and obviously at that point. You then have to go through.
The rate inform filings and you'll work with the regulated in each state do you go to get inappropriate.
And forms.
Filed and approved so is quite a cumbersome process I'm simplifying it a lot, but there are a lot of people quite a lot of hours each day to getting to getting just off the ground yet.
It makes sense and.
Anybody as well thanks for letting me ask the questions.
Okay Yep.
And there are no further questions at this time.
This concludes our question and answer session I would now like to turn the call back over to ratio sponsor, who has a few closing remarks.