Q2 2021 Hci Group Inc Earnings Call

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Good afternoon, and welcome to HCI groups second quarter 2021 earnings call. My name is Matthew and I'll be your conference. Operator. This afternoon. At this time, all participants will be on 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 5.2021, starting later this evening.

The call is also being broadcast live via webcast and available via webcast replay until August 5th 2022 on the Investor Information section of HCI group's website at Www Dot HCI group Dot com.

I would now like to turn the call over to Rachel Swansea 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 Coleman, our Chief operating Officer, Mark Harmsworth, Our Chief Financial Officer, and Paresh Patel, our chairman and Chief Executive Officer.

Following the opening remarks, Mark will review our financial performance for the second quarter of 2021 and of the Harris will provide an operational outlook and then we will take your questions.

The access todays webcast. Please visit the Investor information section of our corporate website at Www Dot HCI group Dot com.

For 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 1095.

Words, such as anticipate estimate expect intend plan and project and other similar words and expressions are intended to signify forward looking statements for.

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 Companys filings with the Securities and Exchange Commission should any of risk or uncertainties develop into actual events. These debt.

The mix could have material adverse effects on the company's business financial conditions and results of operations.

HCI group disclaims all of the obligations to update any forward looking statements now with that I would like to turn the call over to Karen Coleman, Our Chief operating Officer Karen.

Thank you Rachel and welcome everyone. It has been another productive quarter for HCI as we continued to execute on our strategic goals and position the company for long term success.

The second quarter was marked by several notable events.

In June we paid a <unk> 40 per share dividend, our 40 <unk> consecutive quarterly dividend.

The insurance Division consolidated annualized gross premium is approaching $600 million.

We successfully restructured our reinsurance program by purchasing for separate reinsurance towers to reflect the operational separation of the 2 companies with total cost within our expectations details recovered in our July 19th the form 8-K.

We benefited from strong support by our long standing reinsurance partners as well as participation from new reinsurance the capacity.

In connection with our ongoing transaction with United and property and casualty insurance company <unk>.

<unk> entered into a new quota share reinsurance agreement in June.

As part of the transition of policies from UPC to HCI, we have agreed to provide 100% quota share reinsurance on all of the UPC in force.

Sure.

And renewal policies per for the northeast States.

Under the new agreement each of our insurance subsidiaries to take 50% of the quota share business.

We're close to finalizing all of the regulatory approvals to transact the business in the fourth phase, which also includes approvals of the transition of UPC policies to us.

On our last call. We stated that tip tap was on track to reach its goal of $200 million by year end well because of its growth and addition of UPC business picked up has reached its goal well ahead of schedule by surpassing $200 million at the end of the second quarter.

Also the Florida legislature of recently passed Senate Bill 76, with intend to curb claims and litigation of users.

In EMEA up to the July 1 effective date of the loss similar to our peers. We did see an increase in litigation filings. However post July 1 we expect an improvement in litigation trends.

After quarter then on July 7 tropical storm Alpha made landfall in the sparkling populated region region of West Central Florida overall.

Overall, we don't see alpha as a significant event.

At the real estate Division Greenleaf capital, we continue to be pleased with our performance all of our operating properties are generating a profit.

<unk> had tremendous success, creating shareholder value through these real estate investments as a reminder, last year, we sold 1 of our properties for a gain of $37 million and even with that sale, we still have over $30 million of unrealized gains in the real estate portfolio.

And with that I'll turn it over to Mark to discuss our financial results for the second quarter and first 6 months of 2021 Mark.

Thanks, Karen.

This was another strong quarter for us as we continue to build the business and invest in the future, while maintaining profitability cash flow surplus and liquidity position.

As we showed in the press release diluted earnings per share or 24.

This includes the impact of the preferred shares issued to Centerbridge, which I'll touch on again in the minutes.

Gross premiums earned this quarter were a record high.

Earned premiums grew by about 29% from the same quarter last year and year to date are up 35%.

Driving growth on 2 fronts first we are using our strong surplus capital position to realize on strategic opportunities like the 1 with UPC transition policies from the northeast business into our book.

Second we are continuing to drive voluntary growth through our technology enabled platform Tiptop, which has experienced tremendous growth since the inception.

At June 30, our consolidated annual run rate for premiums of about $585 million.

Which is up 60% from the end of 2019.

We recently issued a press release, showing our new reinsurance program net premiums ceded are expected to be about $207 million for the 12 months beginning June 1.2021, the increase from the previous contract year is driven by growth in both of our underwriters tip tap in homeowners choice of.

Results in Q2 reflect 2 months under the pool of reinsurance program and 1 month of under the new for the second half of the year, we expect premiums ceded to be around the 37%, which is 3% to 4 points lower than the second half of last year.

Looking at the results this quarter, you'll notice that loss expenses are up from the second quarter of last year.

This increase is a function of growth and product mix.

The consolidated loss ratio of 40% of a little higher than the 37% from the second quarter of last year as growth is coming from products with slightly higher loss ratios than the traditional homeowners choice business having.

Having said that everything is performing as expected we continued to build reserves by expenses more than we are paying out net reserves are up $14 million. So far this year.

Policy acquisition expenses are also up significantly over the same period last year and again this is related to premium growth and product mix. The consolidated the consolidated rate of about 16% is higher than the second quarter of last year that premium growth is coming from tip tab of the northeast business with both of which both come with her.

The Commission.

I wanted to make a few comments on cash flow and liquidity.

Holiday the cash is up $195 million. So far this year about half of that is from the capital raise to support the growth in tip top but also cash flow from operations remained very strong in the first 6 months of the year cash flow from operations was over $95 million.

At the holding company level, we of just over $55 million in cash and liquid investments and full access to the $65 million available on the credit line with fifth third.

As you know in February we raised capital from Centerbridge and the form of preferred shares because of the way preferred shares are accounted for while they are outstanding the reduced earnings per share by about 25% to 30 per quarter. The details of that calculation of are included in today's press release.

However, since we don't consider the preferred shares to be a permanent part of our capital structure. We consider this a temporary impact.

Just 1 more thing I mentioned on the last earnings call that we have reorganized our segmented reporting. So you can see the results of operations for each of our insurance operations as well as the real estate and corporate segment. This gives the readers of better view into the way that we look at the business.

Wrapping up the company continues to grow we are investing in the future both cash and capital positions are strong at the insurance company and holding level of holding company levels and with that I will hand, it over to Paresh.

Thanks Mark.

Yes.

In previous earnings calls.

We had predicted the ticked up the in force premiums will reach 50 million by the year end of 2019.

And obviously, we exceeded that.

Then we told you that ticked up would be $100 billion company before the end of the year 2020, and we exceeded that.

Finally, we said picked up would reach the $200 million Mark by the end of 2021.

As Karen mentioned annualized premium has already reached $200 million.

Several months ahead of schedule.

Also this time last year, we laid out of strategic plan and we thought it would be helpful to summarize where we spend today.

First we disclosed plans to expand to step out of Florida.

And we have achieved that currently tip tap is actively writing in 5 states outside of Florida, and the secured licenses of the total of 15 states outside of the state of Florida.

Second.

A year ago, we told you of our price to reorganize our corporate structure and create a separate management team for <unk>.

We have also achieved that.

Late last year, we will reorganize the accreted the tipped up insurance group, which now has a separate workforce separate management team separate board of directors and I said separate financial reporting structure.

And as an example of the build out of the tip that management team Encore Bhandari recently joined the company as Chief Financial Officer CFO.

Prior to joining the company encore with CFO of both solutions.

We are excited to have encore joined our team as we think his background in technology of insurance will be invaluable for tips up going forward.

Furthermore, <unk>, who has been with HCI for over 10 years has moved to tip tab as the senior financial officer.

Also in the second quarter, we added a new head of Investor relations for tip Tap Bill Broomall, who has joined from Dowling and partners.

And thirdly, we had said a year ago. The we will disclosing plans to explore strategic alternatives, including securing outside investors support our growth ambitions with Tipton.

And obviously, we achieved that several months ago as we discussed in our prior calls in February of this year, we secured of $100 million of equity capital for Centerbridge partners.

All of that recap brings us to today.

Just prior to this call.

We announced the tipped up of insurance group submitted a form S..1 draft registration statement confidentially with the SEC.

Relating to our proposed initial public offering of <unk> common stock.

As many of you can appreciate our comments going forward on this filing with the limited.

We are announced of the funding.

To wrap up.

We are always from the company with the long term strategy in mind and have tried to be transparent and communicative with our shareholders.

And as of as my earlier comments show, we have a track record of executing on our plans and we continue to look forward on continuing on that path.

With that we're now ready to open the call for questions.

Operator can you please provide the appropriate instructions.

Certainly ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star 1 on your phone at this time, we do ask the while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

Once again, if you have any questions or comments. Please press star 1 on your phone please hold with the poll for questions.

And our first question is coming from Matt <unk> of JMP Securities. Please proceed.

Hey, Thanks, good afternoon.

Good afternoon, Matt.

Hoping to ask a few questions on the tip tap some some numbers questions.

Obviously, getting the $200 million run rates of great accomplishment congrats.

What was the gross written in the quarter and to the extent you can say anything about your expectations for the back part of the year.

That'd be helpful. I know you've said in the past I think that yes.

For a little more cautious around wind season, but any update you can provide would be helpful.

So.

Hey, Matt it's Mark so gross written premium for.

Sure.

Tap in Q2 was $60.7 million.

Great.

Alright, and anything you can add about kind of going forward or rather the left that let that lie.

Matt I think.

As we've stated in the.

Opening comments.

Ticked up ends up with about $60 million of business from the UPC transaction.

There's about 150 million of organic growth that type of has already achieved.

And some of the $200 million.

As you play out the rest of the year.

We expect the $150 million.

The activation business through increased dramatically as we get into the fourth quarter.

So.

We're expecting at this point kept up to August the can be well north of $200 million by the end of the year.

Okay, that's great.

Then.

I mean, obviously the other.

Issue I think in share tech broadly in the actually came up on up on in other companies call today centers around kind of cash flow.

Profitability broadly what the can you share what cash flows look like at tip tap, whether the second quarter of year to date.

Just kind of give us a picture of how that stands.

Yes, Matt it's mark so so I mentioned consolidated year to day cash flow from operations, which obviously is good.

And also positive in tip top as well.

For <unk> consolidated I think.

Cash flow from operations was about $28 million for the first 6 months of the year.

On the positive excellence.

Excellent.

And then could you talk a little broadly about expenses.

I mean, the number in the quarter the book.

Really good.

But you mentioned encore and bill and the.

Kind of linked in the other places it's clear that you guys are growing rapidly.

The scale tip tap.

What should we expect going forward in terms of investments on the to build.

The build the business.

Yes.

You look at.

The tip tap surplus number at at 630.

Yeah. So net premiums written for the quarter of Matt Yeah of course would be great. Yeah. It was 138.5 million.

Yeah.

Consolidated.

In tip top surplus is about $44.5 million at the end of June.

Right. Thank you for all of the color and you know can congrats on all of the successful.

[noise]. Thanks bye thanks.

Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press the star 1 on your phone at this time, please hold while the poll for questions.

Our next question will come from Mark Hughes of true of Securities. Please proceed.

Yeah. Thank you good afternoon.

The remark.

Did you talk about the the loss ratio in the quarter.

Just maybe even roughly disaggregate what was.

The U P C and the growth I think you're reserving more conservatively on those newer policies, how 'bout you might've been the underline lost strength would.

It would be curious to get the some thoughts on that and then.

How you see that playing out what's the progression you know what's the time period as you think of re underwrite the book raise prices et cetera.

Yeah market, it's mark.

So so sort of starting big picture of if you look at the movement in.

The loss of expense from the second quarter of last year of the second quarter of this year.

Premiums are up gross premiums are and you're up about 32 million.

The next year.

Will the U P C b lower.

Oh.

Let me take that 1 mark.

We.

Obviously, we'd like to think of it would be but there's so many transactions that debt book is about the go through that I think we would keep the number the same until we have compelling evidence to to make it different.

Okay Fair.

Fair enough and then what's your latest view on the Legislative changes you alluded to the fact that the.

Kicked in here recently, what's your latest view on how much impact of those might have.

It's a little bit early for us to be able to tell obviously, we know what the legislature's intent was and were looking forward to that intent.

Come forward.

We did pull some of that.

On the July numbers from.

The precinct increasing demand for for the actual curve and currently.

The appear to be down about 50% from July of 2020, keeping keeping in mind the slide.

The Senate Bill 76 deals with.

Does it doesn't include the <unk> piece and so we're just talking about the other states that are coming in so many of our contracts.

Cautiously optimistic, but still too early to tell.

Yes, okay.

Yeah.

Thank you very much.

Thank you thanks Mark.

Thank you there are no further questions in the queue at this time once again, ladies and gentlemen, if you have any questions or comments. Please press star 1 on your phone at this time, please hold while we poll for questions.

At the package that concludes our question and answer session on behalf of the entire management team I would like to thank our shareholders employees agents and most importantly, our policyholders for their concern.

That's the part we look for.

Updating you on our progress in the near future.

Thank you for joining us today on our presentation. This concludes today's call you may now disconnect.

Okay.