Q3 2021 Hci Group Inc Earnings Call

Good morning, and welcome to HCI group's third quarter 2021 earnings call. My name is Kate and I will be your conference operator this morning.

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 December 9th 2021, starting later today.

Call is also being broadcast live via webcast and available via webcast replay until November 19, 2022 on the Investor information section of HCI group's website at Www Dot HCI group Dotcom.

I would now like to turn the call over to Matt Glover Gateway Investor Relations Madam. Please proceed.

Thank you and good morning, welcome to HCI group's third quarter 2021 earnings call. Today's call is Karen Coleman Hei's, Chief operating officer, Mark Harmsworth, Hei's, Chief Financial Officer, and Paresh Patel, Hei's, Chairman and Chief Executive Officer.

Thank you in his opening remarks, Mark will review our financial performance for the third quarter of 2021, and then Paresh will provide an operational outlook.

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 995.

Such as anticipate estimate expect intend plan project and other similar words and expressions expressions are intended to signify forward looking.

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 indentified and the company's filings with the SEC.

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.

Group disclaims all the obligations to update any forward looking statements and with that I would like to turn the call over to Kevin Coleman, Chief Operating Officer Karen.

Thank you, Matt and welcome everyone I.

I'd like to provide a brief update on the quarter.

New to our story HCI group is comprised of more forming division, our real estate operations screening capital our captive reinsurer plateau in our two insurance subsidiary homeowners choice, our traditional insurance company and tip tap our technology, driven homeowners insurance company, which includes exiting the software development company.

Yeah.

My remarks on this call will focus primarily on our insurance operations and events at the HCI group parent company level.

And for highlights this quarter, our insurance division reached another milestone as consolidated annualized gross premiums reached approximately $615 million in the quarter.

The pace of growth at both of our insurance subsidiary homeowners choice and Khatab again exceeded our expectations.

At homeowners choice strong policy retention combined with incremental growth from strategic opportunities in Florida, including transitioning business from Gulfstream property and casualty insurance company contributed to double digit growth in the quarter.

At the end of Q3, <unk> annualized premiums were approximately.

$214 million, which compares to $87 million in the prior quarter.

Prior year quarter.

Number of weather events in the third quarter of 2021 had an adverse impact on profitability for the property industry.

These events include a tropical storms alpha Craig and on re as well as Hurricane Ida and Nicholas.

Even with the weather challenges in the third quarter, ACI incurred only $6 $5 million and growth weather related losses in the quarter for the quarter.

And we did not have any reinsurance recoveries for current quarter weather losses.

This amount $2 $9 million of losses are for <unk> and the remainder is for HCI.

Two additional points first the stronger than expected premium growth in the quarter resulted in both of our insurance subsidiaries, having a reinsurance true up.

Also this quarter, we received approval in rate increases of six 2% for homeowners choice and nine 9% for kitkat.

Both of these rate increases become effective December one of this year.

For the Senate Bill 76 insurance litigation reform.

Effective July one in.

In line with my prior comments, it's too early to see any real trends. However, we remain cautiously optimistic in the third quarter. However, we did observe a decline in the number of lawsuits were seeing.

Despite profitability challenges across the industry in the quarter, our superior technology allow both of our insurance subsidiaries to deliver superior results.

<unk> technology on speaking about was developed by our subsidiary <unk> our subsidiary <unk>.

Now moving to the HCI group level. The recent recently declared a regular quarterly cash dividend of <unk> 40 per share our 44th consecutive quarterly dividend that is 11 years and counting of dividend.

Lastly, lastly in my report also during the quarter, our number of holders of our convertible notes converted or exchanged their notes for common shares.

<unk> increased our book value by $4 per share and cut our long term debt in half.

This is a great outcome for the company.

And with that I'll turn it over to Mark to discuss the details of our financial results for the third quarter and the nine months of 2021 Mark. Thanks.

Thanks, Karen.

As shown in the press release diluted earnings per share reflect a loss of <unk> 72 in the third quarter results were impacted by current quarter cat events as well as some adverse development on cat events from prior periods. In addition, there were some expenses related to the conversion of a sizable portion of our convertible debt into equity.

QWERTY, which I'll discuss in a minute.

Q3 was another quarter of strong growth gross written premiums were up 50% from the same quarter last year and are up 33% year to date gross premiums earned were up 40% over the same quarter last year and are up 37% year to date, we are driving growth in both of our.

Our insurance companies homeowners choice gross written premiums were up 33% this quarter and gross premiums earned were up 13%.

<unk> gross written premiums were up more than 100% over the same quarter last year and gross premiums earned were up 160% consolidated gross premiums earned of just under $150 million. This quarter were another record for the company.

I wanted to give a little color on our loss expense for the quarter when looking at loss expense. It's helpful to separate cat claim from normal daily claims if we do that separation this quarter to $62 $7 million breaks down into $13 billion of cat expense and $49 7 million of daily loss expense <unk>.

$10 million of Cat expense was made up of $6 5 million of gross losses for storms that happened in the quarter Hurricane and tropical storm on re and $6 $5 million of development on two storms from last year Hurricane Sally and tropical storm data the driver on needs to being litigation these storms happened before.

The change in the Florida litigation role.

So let's come back to the $49 $7 million of daily loss expense. The best way to look at this is as a percentage of gross premiums earned in Q3, the daily loss expense as a percentage of gross premiums earned was 31% which was better than expected why.

And the last on the call last quarter I talked about loss ratios by company and by line of business and this quarter performed better than expected.

The biggest improvement was in tip tab, we've discussed the 45% Attritional loss ratio for Tiptop homeowners line many times.

But it has been performing better than expected in the third in the third quarter. The Attritional loss ratio was only 37, 5%.

This lower loss ratio for tip tap was the main driver in the consolidated loss ratio being lower than expected this quarter.

Okay. So I wanted to come back to something that I mentioned at the top related to the balance sheet.

As you know, we had about $139 million of convertible debt on our balance sheet at the end of the second quarter and during the third quarter, we exchanged $82 $8 million in principle for 136 million shares of the company's common shares.

These transactions have a number of material positive impact.

Long term debt is down more than $82 million from $160 million at the end of the second quarter to $78 million at the end of the third quarter shareholder equity is up by a similar amount book value increased by about $4 per share or debt to cap ratio dropped from 53% to 36% and finally our <unk>.

Count increased from $8 million and 265000 at the end of June to $9 million 591000 at the end of September I should also mention that we booked a $1 $3 million of expense in the third quarter related to these exchanges.

It's important to note that this deleveraging is an ongoing process at the end of Q3.

After the transactions I just mentioned it was about $56 million of principal outstanding on our converts.

In October we converted an additional $27 $7 million, bringing the balance outstanding as of October 31 down to just $28 million of.

Total deleveraging of about $110 million.

Now I wanted to make a few comments on cash flow and liquidity consolidated cash is up $137 million. So far this year in cash flow from operations is over $48 million.

Cash flow from operations consists of $12 million of cash flow from tip tap insurance group and $36 million of cash flow from other HCI entities I should mentioned that the $48 million of consolidated cash flow from operations is a conservative number as it excludes the operational impact of the quota share arrangement with UPC since that cash is flowing.

Trust account that we classify as other assets rather than cash if it were included cash flow from operations would be over $128 million year to date.

The strong cash flow performance is driven of course by higher unearned premium that also because net reserves are increasing we continue to expand significantly more in loss expense than we're paying out.

In terms of liquidity both of our insurance companies are in a strong surplus position and at the holding companies. We have just over $95 million in cash and liquid investments and full access to the $65 million available on our line of credit with fifth third for total holding company liquidity of about $160 million.

To summarize the company continues to grow we are strengthening reserves strengthening an already strong balance sheet cash is going up that is going down we are investing in the future and we are profitable year to date and with that I'll hand, it over to Paresh.

Thanks Mark.

Current mark made important points in their remarks.

HCI has achieved growth ahead of our expectations with both homeowners choice and tipped up contributing.

And the Attritional loss continues to improve even with at our current growth trajectory.

And this is all possible because of the technology that we have developed at our subsidiary <unk>.

<unk> current growth plan targets.

Let me start again tipped up card growth.

<unk> targets a compound annual growth rate in gross written premium of approximately 95% from 2022 2023.

Of course to have this level of growth.

We need to invest in the business, including people and technology.

In order to maximize the opportunity, we anticipate that ticked up insurance group will cost like operating losses through 2023.

For clarity tipped up insurance group includes subtypes insurance operations.

And our technology Technology Division <unk>.

And speaking of tipped up reinsurance group's future.

Typically we use our quarterly earnings.

As an opportunity for investors to adapt and to.

Investors questions and provide additional commentary on the future of HCI.

We value the transparency with our investors. The recent events required this quarter to be a little different.

Let me explain last night, we publicly filed.

Form S. One registration statement to take it public.

Now that that registration statement has been filed securities laws restrict what we can discuss.

So under advisement from our legal counsel.

We cannot take additional questions at this time.

I hope you understand.

Thank you and we look forward to engaging next quarter when we can take questions consistent with our normal practice.

Okay.

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