Q4 2021 Hci Group Inc Earnings Call
Good morning, and welcome to HCI groups fourth quarter 2021 earnings call. My name is Paul 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 April nine 2022, starting later today.
The call is also being broadcast live via webcast and available via webcast replay until March eight.
2023 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 Matt. Please proceed.
Thank you and good morning, welcome to HCI groups fourth quarter 2021 earnings call.
Today's call is Karen Karen Coleman, Hei's, Chief operating officer, Mark Harmsworth Chief.
Financial Officer, Paresh Patel, our chairman and Chief Executive Officer.
Alright, Karen opening remarks.
Mark will review our financial performance for the fourth quarter of 2021, and then Paresh will provide an operational outlook.
To access todays 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 this 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 forward.
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 <unk>.
Fillings 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.
CAGR disclaims all the obligations to update any forward looking statements now with that I'd like to turn the call over to Kevin Coleman, Chief Operating Officer Karen.
Thank you, Matt and welcome everyone. Thank you all for joining US. This morning, 2021 was a decisive year for HCI group with meaningful progress on key initiatives across the company.
Our insurance division posted another strong quarter of growth ending the year with annualized gross premiums of around $720 million up 35% from a year ago.
Both of our insurance subsidiaries grew while our consolidated gross loss ratio remained stable below 40%.
At homeowners choice, we reported gross written premiums of $103 million in the fourth quarter up from $97 million last year benefiting from strong retention and rate increases while producing an attritional loss ratio of just 26%.
At tip tap, we reported gross written premiums of $86 million in the fourth quarter up from $42 million in Q4 last year.
While for the year annualized gross premiums more than doubled to just under $250 million up from $100 million at the end of 2020.
Tip tap started 2021 and one state and at the end of the year was in 12 states and we have additional expansion plan for 2022.
Our insurance carriers remain well capitalized with the combined surplus of more than $200 million.
Looking back over two years HCI has doubled annualized gross premiums while holding gross loss ratio flat below 40% I'd say this is a remarkable accomplishment. These.
These results speak to the effectiveness of our proprietary technology, it's ongoing enhancements and the potential to scale our business at attractive margins as we expand market share.
Moving onto Greenleaf, our real estate subsidiary, we closed the year with a strong quarter, earning a profit for the full year. We're very excited about our real estate assets, which include marquee commercial properties and rapidly growing central Florida.
At year end, our real estate portfolio had an appraised value of nearly $120 million with only 22 million and associated debt.
We expect green leaf to sustain its momentum in 2022 as the team continues to capitalize on embedded value in our real estate portfolio.
Now moving to the group level, we've taken targeted actions to strengthen our balance sheet, reducing debt to capital to its lowest level in recent years.
In the fourth quarter, we converted an additional $32 million of our convertible senior notes, reducing the outstanding balance to $24 million down from 130 <unk> at the beginning of the year.
Together with the 100 million capital infusion from Centerbridge partners early last year.
We've increased our combined equity and preferred capital by more than $200 million, while reducing our debt by nearly 70%.
The Bottomline is that HCI group and its subsidiaries and our 2022 on sound footing with strengthened balance sheet and the ability to grow without the need for external capital.
In my closing 2021 was a year in which we produced tangible results for our shareholders. We increased revenue expanded our footprint and strengthened our balance sheet, while growing book value per share, 24% and paying our 45th consecutive quarterly dividend at <unk> 40 per share.
I'll now turn it over to Mark to provide more detail on our financial results Mark.
Thanks, Karen.
The fourth quarter was another strong quarter for growth and another profitable quarter capping off a year of growth profitability and balance sheet strengthening.
The fourth quarter was profitable despite being adversely impacted by significant storm in the northeast in late October .
Gross premiums written grew by 36% in the quarter and grew by 34% for the full year gross premiums earned grew by 44% in the quarter and grew by 39% for the full year.
While tiptop of of course is leading the growth both of our underwriters are growing homeowners choice gross premiums earned grew by 19% for the year and tip tap grew by 123% to more than doubled for the year.
Consolidated gross premiums earned this quarter were another record for the company as Karan mentioned annualized premium has grown to just under $720 million, which is about but it was two years ago.
Let's talk for a minute about loss expense will launch expenses up in dollar terms. This is driven mostly by growth. The consolidated loss ratio was actually up very little less than 1% and that was mainly because of the change in business mix the underlying loss trends are actually improving.
The attritional loss ratios for homeowners choice in Tiptop were both lower in 2021.
For homeowners choice. It was about 26%, which was a couple of points lower than last year for tip taps, Florida homeowner business. It was 42, 5% also a couple of points lower than last year.
The UPC business in the northeast had a non cat loss ratio of around 45%, which is about what wed expected. However, when we dig deeper into the data we see that as we have gotten more involved with this business. We are seeing a decline in the core loss ratio.
While this is a work in progress it is very encouraging and showing that this expansion model can be very effective.
One more thing on the income statement noticed that interest expense is about half of what it was last year. This drop relates of course of a decrease in long term debt, which ill discuss in a minute and going forward interest expense should be about a third of what it was in 2021.
Let's turn to the balance sheet as we have discussed we have been materially de levering the balance sheet.
We started the year with $180 million in debt and a debt to cap ratio of 47% and we ended the year with about $60 million in debt and a debt to cap ratio of about 16%, that's a drop of $120 million in debt and a huge decline in debt to cap most of this came.
From converting our convertible debt to equity in the second half of the year.
At the end of 2021, we are we have just $68 million of debt about $36 million of this is secured by real estate and the balance of convertible debt is now effectively extended for another five years.
Well have to make a few comments on cash flow and liquidity our operations are continuing to produce strong cash flows.
Cash flow from operations for tip tap was $45 million for the year and consolidated cash flow from operations with just over $96 million.
Up from 70 $677 million in 2020.
There are a few things that drive the delta between net income and cash flow from operations, we had about $20 million of non cash expenses things like depreciation and stock based compensation.
As the business grows we are collecting unearned premiums and actual claims paid are significantly less than claims expense as we continue to build reserves.
As we've mentioned many times, we have to strongly funds insurance companies with a combined surplus of $214 million at.
At the holding company level, we have $70 million of cash and investments and access to 50 of our $65 million credit line for total holding company liquidity of about $120 million.
Just a few other numbers that might be helpful shareholder equity increased from $201 million at the beginning of the year to $324 million at the end.
Common shares outstanding for the purposes of dividends and book value per share or $10 million 131000, and fully diluted share count is about $10 million 380000, including the dilutive dilutive effect of the warrants options and the remaining convertible note book value per share was 31.
And 92.
Up from $25 83 at the end of last year.
In summary, the company continues to grow loss ratios are declining debt is down equities up cash.
Cash flow was increasing we have strong capital and liquidity positions at the insurance company and holding company level and we have the financial capability.
If profitable opportunities present themselves and with that I'll hand, it over to Paresh.
Thanks Mark.
Building on carrier in Mark's remarks.
All of the HCA operation that are performing well.
I'd like to spend a few minutes on tip tap and the maturing expectations of investors.
Market conditions have changed especially for <unk>.
Last year and the year before all you needed to do will show growth and there was a strong demand for these types of companies.
And as everyone is aware enthusiasm for these companies has subsided considerably.
In the market today, there is an expectation that companies need to deliver rapid growth with a solid capital management plan.
Along with this Theyre also must be solved there must be solid underwriting and a path to profitability.
If you can show all four items, then you fulfill the high expectation of the markets had last year.
And I wanted to take this opportunity.
Two.
Update you on progress on the scale.
First let's talk about growth.
We are growing in Florida, doubling year over year for a second consecutive year.
Outside of Florida, we continue to add premium across new states and with the two UPC transaction now complete we have really accelerated our nationwide expansion.
Second let's talk about capital.
Chip taps growth plans are fully funded and we see no need for outside capital.
Furthermore, tipped up has a very strong corporate parent in HCI.
Third we should discuss underwriting.
Results in Florida are coming in as we expected, but more importantly early results from our UPC North East transaction are very positive in the time, we've taken over underwriting and claims we have seen several percentage points of improvement and this book of business as well down the path towards our long.
Term margin targets.
The IGZO technology is proving its effectiveness and we expect the technology to provide similar success with the UPC southeast transaction.
Finally, and most importantly, let's discuss profitability.
Our segment results clearly show a strong track record of profits at homeowners choice.
Our objective is to get tripped up to a point, where it is having similar success to homeowners choice.
Tip tap throughs on recent results include the full cost of our continued investment in <unk> and also all guided cost of operating it as a separate company.
Despite this we think periods of profitability will be achieved in 2022.
This will give us a very solid base from which to build from.
And please note that I'm talking about actual profit not just the path to profitability.
As the months go forward, we think the market is going to clearly see and appreciate that tipped up is delivering on the actual promise of insure tech.
I am confident that over the time market will realize the full intrinsic value of tip tap, which is not doing said this current valuation.
So understanding where we stood operationally.
It puts the status of the tipped up IPO into context.
When the market when market conditions change we.
We will reevaluate adapt and continue.
From the beginning.
<unk> has been to make sure we execute our plan and give you maximum value for existing shareholders.
And we are committed to that plan because we are in the early innings of maximizing tipped up full potential.
In closing.
<unk> top and bottom line results are on track and we continue to deliver on nationwide expansion plans.
Our technology continues to be our differentiator.
As demonstrated by our track record of being a top performer in Florida and we are now excited by the results we are demonstrating outside of Florida.
Because this proves that our technology works on a national basis.
And with that I will open up for questions.
Operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality. Once again. Please press star one if you have any questions at this time.
Please hold while we poll for questions.
And the first question is coming from Matt Karaleti from JMP.
Your line of lives.
Hi, Thanks, good morning.
Matt.
I wanted to ask you and expense ratio question.
Weather, just if you could help us unpack the consolidated expense ratio.
I know that there is.
Some pressure on it from.
The investments you need to make to expand to tap into more states kind of before the premium ramps there.
And also.
The first year business that tip tap rights with the increased commission can you help us understand kind of what we're seeing reported the numbers were there for the quarter of the year kind of just rough order of magnitude what impact those couple of items are having on the expense ratio and where you might expect it to run once tipped up to a more scaled.
Hey, Matt it's Mark.
Yes, I think I think a couple there's a couple of things.
That are that are driving the loss expense the.
The loss ratio a little bit higher.
I talked about.
Loss expense earlier loss expense I think is is trending in the right direction on a consolidated basis.
It's pretty flat.
In the high Thirty's.
Thats trending that's trending down.
Which is which is helpful in terms of the overall.
The expense ratio.
What's been been trending up a little bit in 2021 on the expense side is operating expenses.
And the labor expenses and Thats largely been driven by.
Scaling up tip tap.
Separating the companies and sort of the expenses that go along with that.
But we expect those numbers to come down a little bit going forward in 2022.
A lot of professional fees that type of thing in 2021.
So we expect the expense ratio to come down.
And to get closer to our longer term target of 90 to 95 in the longer run.
Okay, great very helpful.
Just two others one quick one and then one last one just on the numbers while we're on it you mentioned the.
More than $200 million of surplus how much at yearend was sitting at the top.
So 214 is.
Is the total.
And for tip tap, we've got a $93 5 million.
$93 four.
<unk> develops.
Great and then last question Paresh, just as we think about.
Legacy homeowners choice.
Florida has been a difficult market, which historically for you guys has created opportunities.
Over the years homeowners choices as shown many different ways to take advantage of that can you just give us an update on kind of how youre viewing the Florida market broadly and what opportunities that might <unk>.
Pretend for.
Homeowners choice going forward.
Okay.
Sure two things one is.
The Florida homeowners market.
Yet again soon.
It seems to be in freefall, Alright, I think we have a two companies go out of business for the last two weeks.
There is various other pressures out there.
I should note.
Spite all of that stuff homeowners choice on a stat basis has actually made a slight income last year.
And we live in the same.
State with the same.
Issues that everybody else does it just shows you the power of the technology and once we stabilize the portfolio how it can keep going.
Two very adverse conditions, which we currently have so thats me.
Advertising the value.
The current portfolio homeowners choice now lets talk about future opportunities, yes, because of how we've always handled as a long term basis, we see a large and growing opportunity in Florida for those people that know how to do this right.
And I state that because it's very easy to get involved it's much more difficult to exit successfully is to loosen.
Liquidations show.
Having said that.
The other item that you need to get right is timing and we are aware of both items. So we're sitting here waiting.
And.
Planning.
For the opportunity to be maximized and the timing to be correct and thats when we will take advantage of it.
<unk>.
Hopefully that answers the question yeah.
Yes very helpful. Thank you for the answers and best of luck going forward.
Thank you once again, ladies and gentlemen, if you wish to enter the queue to ask a question you can press star one on your phone at any time once again that is star one on your phone if you wish to enter the queue to ask a question.
And the next question is coming from Mark Hughes from Truest Mark Your line is live.
Yes. Thank you good morning.
Good morning, Mark.
Paresh.
Can you talk about the periods of profitability for a tip tap.
Could you talk about what is driving that I think.
Sooner than what you had perhaps communicated previously.
Yes.
Okay.
Matt.
I'm, sorry, Mark the way things are going.
Yeah.
As these opportunities are mounting in Florida and elsewhere, we are starting to see the benefits of it so one of the items.
As I alluded in my opening remarks was.
The Florida business is growing faster than we had even anticipated and obviously you are now amortizing your expenses over a larger revenue base, so that get to.
Better margins.
On a different note as we've also stated by both Mark and myself.
On the northeast business that we acquired it.
<unk>.
It's improving at a much greater.
Right than we even we had anticipated rate.
Putting it.
A different way.
How effective our technology is.
Even shocks us sometimes as to how quickly it gets things improved.
And.
We continue to see the benefits of that that's what's made this things accelerate.
A lot quicker than than we had originally anticipated.
Okay and just on that.
The improvement Youre seeing in the northeast.
Could you flesh that out a little bit is that are you identifying the policies that are less profitable and not.
Non renewing is that.
The claims or the pricing.
Actions, making the difference is a little more would be helpful. There.
Yes.
And.
Mark the simple answer to that is it's all of the above it is them that there is one item that suddenly makes the numbers improve.
<unk>.
Yeah.
Better pruning of the book in the correct way better pricing of the book.
Better expense management, whether it's on the admin side or the loss ratio side or the reinsurance side all of those things coming together is what.
Coming to your adding together and giving us a better combined ratio.
So.
To my other comments that I had said.
Ensure tech that is working.
Understood.
In the past.
Generous enough to talk about growth goals, especially a tip.
I Wonder when you think about 2023.
'twenty two.
Yes.
If there are some broad.
Strokes, you might give us in terms of your top line expectations.
Absolutely Mark what I, what I will tell you is.
Obviously with all the geopolitical events and everything else that are going on out there.
The world is getting to be a choppy are noisier place. So we.
We are.
<unk> growth will be lumpy in our case at this point, but what.
What I can clearly see is a path to that $1 billion of premium we talked about in 2025.
So we will get there it just is going to be.
In.
In steps as opposed to.
Our ramp if you get if you see what I'm getting at here.
I do.
And just to be clear the $1 billion is consolidated into the $1 billion.
I'm thinking of 1 billion it tipped up might be possible.
Okay.
And then the.
On the real estate you the appraised values of $120 million I think.
Carrying value on our balance sheet.
It's about $30 million less than that I'll give you the exact number in a second but.
So the.
As Karen mentioned appraised value of about 120 carrying value is free.
It's in a couple of different spots in the balance sheet, but total carrying value or book value by <unk> 83, one thing to just keep in mind about that though so.
Karen mentioned, the appraised value I've talked about the appraised value we've talked about the delta between those two of about $35 million, but one thing to just keep in mind that is a very conservative estimate because that.
Appraised value is bank appraisal right and so those are typically.
Fairly conservative and if you were to look at the market value of those real estate assets I think it is considerably higher than that.
Praise value was very very conservative estimate.
The full value of.
Those assets.
Our market value, sorry, just something to keep in mind, when we talk about appraise value because it's the only thing you can.
Sort of verify.
It's still pretty pretty conservative.
Yeah, and Mark building.
Building on what Mark just said the other Mark just said.
Appraisals get done.
Looking at previous comps on all those kinds of things.
A inflationary environment that we're in with the real estate prices, especially here in central Florida, as Kevin alluded to in our comments.
Creasing the rates they are.
I think that portfolio of real estate that we're sitting on is going to be worth considerably more than the $122 million or whatever the appraised value is when all is said and done so and the one thing everybody has known about us over the years, we're very patient and maximizing value.
But we clearly see the opportunity here.
Yeah, Yeah and then.
Paresh you mentioned.
Timing to maximize the opportunity could you maybe flush that out a little bit to what.
Developments youre going to want to see in the <unk>.
They may be.
Regulatory developments.
Or.
Financial developments.
Among competitors.
What's it going to take.
It makes it more likely that you.
You can act with the capital you've got.
Yes.
Yes.
I would tell you that.
While we always welcome regulatory action and legal action and everything else that would that would improve.
Conditions in the state and mainly because it would be beneficial for all policyholders, whether they're ours or somebody else's throughout the state it will keep down insurance rates.
We have never conducted ourselves in a manner, whereby we hope that that's going to happen because.
Hope is not a strategy.
We are looking at the opportunities and timing of it is really fundamentally based on.
Yes.
Being patient and noting when the market is sufficiently pricing the risk and when we see that that's when we act upon it.
Sometimes things look to be.
Very favorable but there is it a short shelf our path to profitability and I think somewhere in some of our.
The presentation materials, we've talked about having been made a profit 53 out of 57 quarters right.
That should basically tell you that we.
Really value the fact that when we take on our book of business. We want we needed to be profitable. It is what makes companies healthy and it is good not only for the.
For the company, it's good for shareholders, but more importantly, it's also good for its policyholders.
Does that mean, you'll be around for a long haul so.
<unk>.
The short answer to your question.
Is that.
I don't have a calendar in mind as to when that day will occur, but we sit here and watch every day to see when that day arrives and when it arrives we will act upon it but we're just getting ready for the day when we're called into action.
Yes, that's right.
I might ask.
I think you made the point that you should see improve.
Improve overtime.
The goal is to get it to the level.
HCI, presumably thats, the 26% Attritional loss.
How much progress you're going to be able to make on that in 2022.
You've got a lot of growth coming onboard and that influences that should should that be a number that.
C.
Movement this year.
Yes, Hey, Mark it's Mark.
The keep in mind that I think we've talked about this before the the loss ratio for homeowners choice.
Is it is a blended loss ratio of homeowners.
And wind only right. So if you look at the loss ratio for.
The homeowners' piece of that it's more like 30% to 35, so I think that that's probably the more realistic target for four where tip tap is headed.
Rather than the 26.
And we're definitely making progress on that.
The attritional loss ratio last year.
2023.
On tip tap H O with 45 this year it was 42 and a half.
It's definitely trending in the right direction.
And that that I would take 35 is probably a better target for that and that's definitely insight.
And Mark building, what Mark just said just look at those numbers right.
In a deteriorating market.
And.
Also growing rapidly which tends to.
Give you some adverse selection.
The loss ratio actually improved by two and a half points.
Pretty remarkable.
When you when you put that perspective.
Site yet.
I appreciate it thank you very much.
Thanks Mark.
Thank you.
This concludes our question and answer session today, I would now like to hand, the call back to Paresh Patel, our chairman and CEO at HCI for closing remarks.
Thank you.
I was going to start with just thank you and the entire management team on behalf of the entire management with the shareholders employees agents and most important our policyholders for their continued support I also know that.
There are a lot of shareholders on this call and everybody's anxious about the share price and the stock price and everything else.
So just a few comments might be helpful.
Given all of the operating results, we're talking about what we're seeing.
My simple opinion, we have a fantastic.
Opportunity that's in front of us.
And the run up in the stock price last year.
Was merely a preview.
Of the future.
Prospects of HCI group.
And putting it simply hei as best they can.
He is still ahead of us not behind us.
But.
I can also appreciate that you might just look at that and say those are just.
Talking points in platitudes.
Let me talk about walking the walk.
Even when the share price ran up yes last year, all the way to $139 80, which I believe is the all time high.
You will note.
That none of the insiders myself included especially myself.
Sold a single share.
Alright.
We are putting.
Our commitments.
In our actions that our best days lie ahead of us and the true value of HCI.
Not yet been realized.
So stay tuned for us to take actions on those behalf.
Going forward.
Thank you and see you in the next quarter.
Thank you, ladies and gentlemen for joining us today for our presentation. This concludes today's call you may now disconnect.