Q1 2022 Hci Group Inc Earnings Call
[music].
Yeah.
Good morning, and welcome to HCI groups first quarter 2022 earnings call.
My name is Holly and I will be your conference operator.
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 four 2022, starting later today.
The call is also being broadcast live via webcast and available via webcast replay until may 23rd 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. Please.
Please proceed.
Thank you and good morning, everyone welcome to HCI groups first quarter 2022 earnings call.
Today's call is Karen Coleman, HCI group's Chief operating officer, Mark Harmsworth, Hei, Chief Financial Officer, and Paresh Patel, Hei's, Chairman and Chief Executive Officer, Mike.
<unk> opening remarks, Mark will review our financial performance for the first quarter of 2022, Paresh will provide an operational outlook tracks as today's webcast. Please visit the investor information section of our corporate website at.
Www Dot HCI group dotcom.
We begin I would like to take the opportunity to remind our listeners today that.
Today's 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 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. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission to.
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.
<unk> group disclaims all the obligations to update any forward looking statements now with that I would like to turn the call over to Kevin Coleman, Chief Operating Officer Carey.
Thank you, Matt and good morning, everyone.
The first three months of 2020 to mark another quarter of growth and profitability for HCI.
Reported earnings of nine cents per share and adjusted earnings at <unk> 34 per share excluding the impact of unrealized investment losses.
Paired to fourth quarter 2021, adjusted earnings improved despite elevated weather related costs, which mark will touch on in a moment.
Our insurance business continued to grow with gross written premiums up 40% from the first quarter of 2021, reflecting growth at both of our insurance subsidiary.
Homeowners choice gross premiums written increased 12% over first quarter of 2000 $21 million to $91 million.
Gross premiums written nearly doubled just over $86 million.
Our growing premium base to produce a stable loss ratio around 40% similar to the fourth quarter, highlighting steady operating performance across our insurance business.
Our two renewal rights transactions with United property and casualty one involving business in four North East Bay and a second in three states in the southeast continue to migrate into the HCI platform during the quarter.
The northeast book fully transition to HCI as of April one while the South East will begin to transition on June one.
Now shifting gears I'd like to take a moment to talk about how we're managing our balance sheet. You may recall last quarter. We highlighted actions we took in 2021 to significantly reduce our debt.
Today, I'll touch on our investment portfolio, which is well positioned for the evolving interest rate environment.
HCI group and its subsidiaries ended the year with investable assets.
$800 million with over 600 million in cash and cash equivalents.
Since that time interest rates have increased dramatically improving returns on fixed income investments and other assets.
We started to put some of our cash to work allocating capital to higher yielding investment mostly at the short end of the interest rate curve.
During the quarter, we purchased over $120 million and short duration Treasury Securities.
We're focused on finding additional opportunities.
Increased income from our portfolio in 2022.
Lastly, we remain confident in our business strategy and intrinsic value of our shares.
To that end in March the board approved a $20 million share repurchase program.
Also during the quarter, we paid our 46th consecutive dividend to shareholders at <unk> 40 per share.
One final note on legislative matters insurance markets, and Florida remain fluid.
Florida Legislature adjourned in March without passing major reform, we're encouraged by the Governor's decision to call a special session in Bay and look forward to legislative proposals aimed at stabilizing the market for homeowners insurance in Florida.
Now I'll turn it over to Mark to provide more detail on our financial results.
Mark.
Thanks, Karen.
Adjusted earnings per share were 34 cents for the first quarter compared to 77 in the same quarter last year a.
GAAP basis earnings were nine cents per share compared to 75 cents in the first quarter last year.
The difference between GAAP earnings per share and adjusted earnings per share relates to unrealized investment losses. These are unrealized changes in the market value of equities.
Unrealized losses explain about half of the change in GAAP net income from last year to this year and of course result from the general market decline during the quarter on an operational level, we had a good quarter.
Adjusted net income, which factors out the unrealized investment losses was $5 $5 million compared to 7 million in the same quarter last year a.
The drop of just $1 $5 million. Despite this being a more active quarter for weather as I'll explain in a minute when I talk about the loss expense.
This was another quarter of strong growth gross premiums earned were up 37% from $131 million in the first quarter of last year to $179 million in the first quarter. This year about half of the growth came from Florida and the other half from our expansion our Nash.
<unk> expansion.
Florida gross premiums earned grew by $24 5 million from $110 3 million to $134 8 million.
Gross premiums earned in the expansion states more than doubled from $20 5 million to $44 million.
As Karen mentioned gross premiums earned in Tiptop, Florida homeowners business with double what they were in the same quarter last year, continuing their pattern of strong organic growth.
As the company has grown some of our ratios have changed as the business mix has changed one of those has been the consolidated loss ratio consolidated loss ratio was 46% this quarter compared to 35% in the first quarter last year.
Half of that increase was from business mix and the other half because of weather, we had a couple of wind and hail events in the quarter with added about three points of loss ratio or about $6 million of loss expense for the quarter as I mentioned, despite the $6 million of weather related losses. Adjusted net income was only down one 5 million.
In the same quarter last year.
One thing you might notice in the balance sheet is that fixed maturity securities are up a little over $100 million since the end of the year as it relates to the treasury purchases. The Karen just mentioned the average term to maturity for our fixed term portfolio is now about two and a half years and we have over $500 million $550 million.
In cash.
The business continues to be a strong generator of cash consolidated cash flow from operations was just over $57 million in the quarter compared to 36 million in the same quarter last year.
So tip tap cash flow from operations was 43 million well up from $27 million in the same quarter last year.
I'm talking to few times about the Delta between net income and cash flow from operations part of that difference is noncash expenses like stock based compensation during the quarter. During starting this quarter will show that separately in the segmented information section of the Q2 that anyone can see that impact this quarter stock based.
<unk> was $4 $3 million. While this is part of our expenses. This is a noncash item. So we want to make sure that that number has shown clearly.
In terms of liquidity, we have just over $130 million of cash and investments outside of the two insurance companies and access towards $65 million credit facility.
As you know we have significantly de levered the balance sheet in the past year or so.
Last year, we reduced long term debt from $156 million down to $45 million and at the end of the first quarter, our debt to cap ratio is less than 16%.
As Karen mentioned, we announced the 20 or $20 million stock buyback plan as it was approved in mid March there were no shares bought back in the first quarter and will report on the progress of that throughout the year.
Just a couple of quick numbers, you might what book value per share.
Its $31.66 as at March 31 down just 26 cents from the end of the year.
Basic shares outstanding for purposes of dividend and book value per share or 10.125 million and fully diluted share count is about $10 million 160000.
And with that I'll hand, it over to Paresh.
Thanks Mark.
Karen Mark gave a great summary of where we ended the quarter.
I want to focus my comments on where we are headed.
As many of you on this call are aware governor Desantis called a special session in Florida, which is scheduled for the end of May.
There is a growing awareness of issues facing the Florida property market.
We applaud the decision to take a deep review of the situation.
In recent weeks, we've also had meetings with insurers and the overall feedback has been very positive.
Plenty of reinsurance capacity available for HCI and we've received.
Computer interest from reinsurance to join the HCI program.
However.
We must wait to see what comes out from the special session to get our final pricing outcome on this year's reinsurance placement.
Well speaking of reinsurance.
There is also a great reinsurance opportunity for HCI.
Reinsurance captive Clauda offers us the ability to participate on certain portions of the HCI reinsurance program.
And as history has shown.
<unk> has a significant profit from its participation on Hei's reinsurance program.
Switching topics in.
In this inflationary environment with a really hot real estate market in Florida.
The true value of Greenleaf, our real estate division is coming into focus.
In recent weeks, we have turned out offers at certain of our properties.
<unk> that is three times the number that is on our books.
To give an idea.
As to how valuable Greenleaf has become.
If we sold our entire real estate portfolio at current market prices.
Would expect to book, a $75 million gain on our carrying costs.
With that I'll turn my comments back to insurance and technology operations.
Homeowners choice continues to be a powerhouse and a top performer in the Florida homeowners market.
The cash generated at homeowners choice has helped US fund our growth and we like the flexibility it creates for the future.
Next I want to talk about <unk>, which is our technology subsidiary.
The underwriting technology used by both of our insurance subsidiaries.
The exit of underlying technology, which has long been proven in Florida is now being validated as we expand on a national basis.
And the company that uses it acknowledges the most is ticked up.
<unk> is using your technology on its nationwide expansion.
We have gone from operating in one state at the end of 2020. The currently operating.
In 2012 states.
And with plans to increase our footprint this year and into the future.
And tip tap is now starting to show signs of profitability in line with my comments last quarter.
We are very pleased with how the first few months of this year of progress and we remain committed to our long term objectives to build a book of business that produces consistent profitability.
Before wrapping up.
I wanted to make a few comments about a new opportunity that has arisen since the beginning of the year.
As Karen highlighted we ended 2021 with over $600 million in cash and cash equivalents.
To put this into perspective this represents about $60 per share in.
In cash that we have on our balance sheet.
This is how much cash you have been sitting on.
And most of that cash hasn't really been earning any any real income.
But with rising interest rates as.
As we push as we put the cash to work.
It should produce meaningful income.
In closing.
All of our business units are performing well.
We have a tremendous opportunity to put our investment portfolio to work.
Have a very strong balance sheet that is unlevered.
And we have set the stage for bigger opportunities they are unfolding in the future.
With that we're ready to take questions.
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 pick up your handsets listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Matt <unk>. Please announce your affiliation and pose your question.
Hey, Thanks, good morning, its Matt <unk> with JMP.
Hey, good morning.
First question I was hoping to ask a question about growth I mean, it was just really strong in the quarter.
But I know, it's not kind of straight line across the year. So can you help us with how we should think about.
The cadence of growth for the remainder of the year, particularly thinking about upcoming restrict reinsurance renewals.
Wind season, and so forth and maybe at least in my mind I think of it as Florida and non Florida is kind of two separate yes.
Answers maybe.
Yeah.
Sure, Matt, it's gonna be suddenly involved and so.
We sure can do.
Growth in the first quarter.
Tend to stay flat over the next two quarters and then we grow again in the fourth quarter that has been a cadence over the years.
One would expect this year it would be not materially different.
As far as outside Florida goes.
There. We are we are we are sort of going through the transition as the UPC book comes on board and the biggest delta that's going to occur between now and the end of the year is the southeast book, we have a 85% quota share on currently and on June one I'll go.
100% because that should produce some.
Like in.
Incremental increase in gross premiums.
But beyond that it's at least stable for the next couple of quarters.
Okay, Great and then and then I caught your comment shifting to Greenleaf.
About.
Got it.
Current market values, and what's happened with Florida real estate prices in particular, you commented on.
One of them is a property or more than one property that you were offered three ex kind of carried value and turned down I was just curious.
Why why did you turn that down was it that you viewed it as undervalued was it that you're you're owning that particular property with a view towards income overtime not necessarily capital gain just curious.
How you view that.
Yeah, Mike Great question, So look.
What happened and I won't name the property specific property, but what happened was.
We got an offer on that property and it was for a very credible party and this is what they're willing to pay.
The problem was when.
When we sort of looked and said what comparable properties has so far.
In the general area.
The offer was I would say.
25, 20% to 25% to low brightcove instead of three actually should've been Forex if you like.
But.
That gives you an idea as to why we said no because we didn't want to lose that much money on the table, but on the other side of that is because of how the property for so long and we purchased it at such a good price right.
This is why you see that vary.
Very high multiple and when we realize that we were just talking about old appraisals and then those kinds of things we thought it was best to.
Quantify what would happen if we did dispose of entire portfolio to give us an idea as to how much we are carrying it on the books for yeah.
Yes.
And I'll, let mark to make a financial Covid.
No I guess I didn't think rather Matt. Good question, you know rather than focusing on that one when property. Its a good question, but you know I think we've it shows that we own so it's not the core business, but we own some really valuable real estate and I think that it's been a it's been a very good investment for us over a over the last few years.
Great.
And then last one if I could.
I just wanted to touch on that.
Upcoming special Legislative session and not in any way asking you to predict the outcome.
But just I guess two folds one is just your general thoughts on.
I think one of the things that's being proposed is maybe having the FH the apps.
Lower the retention offer more low down coverage.
Which would obviously be cheaper.
Then you kind of second part of the question is just how given the timing I think it's may 23rd or something like that the special session.
Obviously reinsurance renewal coming up kind of how just process wise.
You guys are handling that with a lot of uncertainty.
Just weeks away from your reinsurance renewal.
Hum.
So.
But the way we are handling it well first of all the Cat fund adjustments et cetera, right that is obviously one of the items that's being discussed.
The problem obviously.
You don't know, whether it's going whether that's what will happen or do something else or whatever so.
A lot of what if scenarios and that's why while we're encouraged we have not made any conclusions as to what's going to happen.
In terms of the placement and this is why we made the comments just so that we we were transparent with all the investors is that because of the special session.
Finalizing reinsurance would be a little bit later this year, then you wouldnt expect another years.
Having said all of that the way that's probably going to go is that is who knows.
Clarity come through on the Cat Fund I think people will start placing programs and getting it done.
Until that point the number quite.
Quite a bit so rather than speculate on it we've just we've just conditioning everybody too.
If you like planning on.
A mad scramble towards the later in the later part of my later part of my Yeah.
Okay.
Thank you for the color and congrats on a nice start to there.
Hum.
Your next question for today is coming from Mark Hughes. Please announce your affiliation and pose your question.
Yeah. Thank you good morning Truest Securities.
Mark.
The opportunity to put more of your cash to work what's the.
Piece going to be on that if you've got quarterly net investment income here.
$3 million and you put a little more of that $60 per share to work you know a year from now what's the investment income looked like.
Yes, it's a good question so I mean, we're.
Sure.
We're in a good position right because we've got a pretty significant amount of cash and where.
We're going to layer that in and in fact that carefully.
But did you know just as an example, even if we invested say half of that.
$275 million at two and a half points, that's about $7 million a year of $1 $75 million.
Per quarter and that that's a significant bump.
Bumping investment income if you look at where investment income and sitting at now so.
We'll we'll make prudent decisions about how to invest that at and and had a lot of that but just as an example that sort of how I think of it is what it would look like if we invested half of it is that even even just half of it is a very meaningful bump in investment income.
Yeah Yeah.
Paresh.
How much capacity would you look maybe to put to work in Canada.
Uh huh.
If there is opportunity with.
What's the potential for a.
Both the capital and the returns there.
So mark given where everything is out we will definitely putting some money to work in Colorado.
The only debate that we're having is how much and some of that is also going to depend on.
The special sessions in reinsurance and everything else. So we.
Sure.
You know because the anchor seems a little bit vague because.
We've always been.
What we are we wait for the opportunity to come in front of us and when it does we pounce on it but if the opportunities are there we don't we don't push a bad position right and.
And.
Could digress and then comment.
You've seen this with us in every fashion right.
We bought real estate and how long food for all these years and suddenly it's become a wonderful asset.
It wasn't a popular decision or we did it but we knew it was the right one.
Sitting in sitting on $600 million of cash or building up of pilots I kind of remember the cash which is what we've been doing over the last two years.
Interest rates have been nothing has been exercising discipline.
Someday the opportunity will come just.
Oh God.
Got the cash and here we are suddenly in one quarter that opportunity is lost some new front of us.
And Carter is a very similar kind of thing so as we go through the month of May depending on what happens in reinsurance markets.
<unk> will have great opportunities, but it would only exercises opportunities.
As that as they become prudently obvious yet.
Yeah, Yeah, okay.
At tip tap.
I think you've spoken previously about our goal of a billion in premium by.
2025, that's still a good number and you mentioned to have shown signs of profitability.
I Wonder if you could.
Do you expect to be profitable for the full year, you know maybe to profitability by the end of the year just occasion.
Occasionally be profitable depending on the weather, how how to think about that as well okay. So great question.
The billion dollars for tip tap, yes, we're still on track for that.
Again, Ironically enough. If you wanted to you could get there a lot a lot quicker.
Visit idea about pacing of growth so that your infrastructure and your company sort of stays alongside with that yeah. So.
We're building it for a long term. So we are doing things in a measured way.
As far as the profitability of kicked up goes if you'll recall my comments last quarter. What would happen is first there'll be occasional months of profitability. Then vacate those quarters, then there'll be the year is a year of profitability.
Consistent with all of.
Those are the fourth crusher will be going down eventually now.
The quarterly profits the anchor.
Okay. Yeah, you profited consistent profitability is still in front of us not been achieved yet.
But that first thing are occasional and occasional month being profitable.
That actually has already been done we actually had a profit per month in the first quarter.
But obviously overall as you'll see in the two we didnt get the insurance group didn't make money in the quarter.
There was a month of profitability and as we go along I suspect we may have other quarters, where there's an occasional month of profitability, but it.
May not translate into caulking profitability, just yet, but we are seeing that step by step progress towards that.
Okay.
I understood yeah, and by the way the reason it's slightly volatile is because we obviously are in the insurance business and weather is part of it and you know.
A storm here or there could take a profitable quarter and make it unprofitable and it is the nature of the business yeah.
Yes.
Hmm.
How about you.
Your potential to take advantage of the dislocation.
Other carriers, having challenges getting downgraded.
Either book Rolls or your organic.
So opening up the organic channel a little bit more how do you.
How do you see the environment right now.
It's a great time, if you're if you're already worried about top line growth.
It's a great time.
You just open up and business we're pouring.
The art of all of this is that you take on a book of business that you are always going to be profitable for them.
10 years.
And why do we think and 10 year terms.
Looking at homeowners choice.
Most of their customers have been with homeowners choice for well over six or seven years at this point.
And they stay with us consistently and it's a very good cash flow machine because.
Building for the long term.
You, you're very deliberate as to when you take stuff on.
And we are sort of exercising that.
Yeah.
Yeah.
We're having to maintain our disciplined exercise patience.
That week.
Add business to the books at the right at the right time and at the end with the right customers and at the right price. So.
It may look like.
We haven't done anything yet, but we are setting the stage behind the scenes and a lot of ways waiting for the right moment to come along just like the $600 million cash on the balance sheet until December .
December it was not really a an item, but its close we were aware of is building.
And then suddenly in the first quarter, an opportunity came along and here we are yeah. So.
This is this is what gives us.
A lot of.
Confidence is as to where we're going is that we now have a very solid track record of.
Of being disciplined operators yeah.
Yeah.
Then I'll ask one more if I might.
When we think about the loss ratio I think Mark you pointed out reasonably steady here she's been doing pretty well in spite of a little more weather.
Any kind of underlying trends that we ought to anticipate just to do.
Kind of integrate the northeast and southeast States here is.
Is there a likely trajectory or are we.
Kind of waiting to see what happens with the special session etcetera.
Yeah, I mean in terms of trends I think a couple of data points. The last the last earnings call.
I had said that.
So Q4, our loss ratio was I think 43.
And I said that with the new changes in business mix that we've been talking about for a year now.
Did that consolidated loss ratio and expect that to be sort of in that high 30.
Maybe two to three points higher than that if.
If we have a bit of weather and then you look at what happened in Q1, we had a bit of weather and the consolidated loss ratio was a tiny bit higher port 46. So you know it is.
It's pretty consistent with with what we had expected given the level of business mix.
And looking ahead I you know what I had suggested on the last earnings call I think you know.
I'd say, it's still the same that's sort of our.
Our expectation and we've talked about all the individual components at various different times, but I think for modeling purposes I think it is.
It's it's probably useful to just start thinking about a consolidated loss ratio at this level of mix and and you know I I think that you know.
40 ish is probably about right a little bit better if theres not whether you know round there if it's if there is.
Is that does that help.
It sure does.
You've probably answers.
Thanks Mark.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
Yeah.
There are no further questions in queue that does conclude today's question and answer session I would like to turn the floor back over to Paresh for closing remarks.
Thank you on behalf of the entire management team I would like to thank our shareholders employees agents and most importantly, our policyholders for their continued support.
As we end this call.
To summarize my earlier closing comments.
We have a tremendous opportunity to put our investment portfolio to work we have a very strong balance sheet that is unlevered.
And we have set the stage for the bigger opportunities that are unfolding in our future.
These are not just words, we have great conviction and a track record.
Of doing exactly that.
Look forward to talking to everybody next quarter.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
You for your participation.