Q3 2022 Hci Group Inc Earnings Call
[music].
Good afternoon, and welcome to HCI group's third quarter 2022 earnings call. My name is Paul 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 we will be available and will be available for replay through December eight 2022, starting later today.
The call is also being broadcast live via webcast and available via webcast replay until November eight 2023 on the Investor information section.
HCI group's website at Www Dot HCI group Dot com.
I would now like to turn the call over to Matt clever Gateway Investor Relations.
Please proceed.
Thank you Paul and good afternoon, welcome to HCI group's third quarter 2022 earnings call.
On today's call is Karen Coleman, Aci's, Chief operating officer, Mark Harmsworth, Aci's, Chief Financial Officer, and Paresh Patel.
As chairman and Chief Executive Officer, Oleg <unk> operational update Mark will review, our financial performance for the third quarter of 2022, and then Paresh will provide a strategic update Dr.
Today's webcast. Please visit the Investor information section of our corporate website at Www Dot.
<unk> Dot com.
Before we begin I'd 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 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.
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.
<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 here.
Thank you, Matt and welcome everyone before we discuss the quarter I would like to express our sincere sympathy for all who have been impacted by hurricane in the category four hurricane that hit Florida, just six weeks ago everyday as we work with our customers. We're reminded of the thousands who have been affected and the time it will take to fully recover.
Serving our policyholders remains our top priority is why we're here.
Having navigated 15 storm season, and several major Hurricanes Hei was prepared when Ian made landfall on September 28, our dedicated customer service team answered call, providing a human voice to our policyholders, while keeping wait times to a minimum after just 14 days, we had received over 10000 claims.
Across homeowners choice and tip tap.
We thank all of our associates for their hard work and dedication to our policyholders.
Immediately after Ian made landfall our proprietary technology showcased its ability within the claims handling process. Our systems are specifically designed to drive efficiency and claims processes through resource allocation management oversight and report automation.
We have real time information at our fingertips.
This unique transparency is invaluable and is a proven differentiator in claims handling.
On October 10th we shared our preliminary views of parking in a presentation posted to our web page to date. We've received just over 12000 claims in line with our initial estimates and consistent with a lot that is comfortably within our reinsurance towers.
Now moving onto our third quarter financial results.
Pretax impact of Hurricane Dorian was $78 million for the quarter, resulting in a loss of $51 million for the company.
If not for Ian we would've reported a profit for the quarter.
Gross premiums earned grew more than 20% over last year, while our loss ratio excluding in improved more than six points sequentially to 41%.
This improvement in our loss ratio reflects both the decline in daily claims frequency and rate actions at both of our carriers.
Mark will provide more detail on these numbers.
Investment income was another bright spot in the quarter highlighting the power of our diversified business model and the potential to generate additional income from our balance sheet.
In the third quarter net investment income increased $16 million over last year, including a $13 million gain from the sale of one five acres of land in our agreement subsidiary.
Excluding this gain income from our investment portfolio doubled over last year as we put cash to work in short duration debt instruments.
With rates, increasing and plenty of liquidity on hand, we look forward to generating more income from our sizeable investment portfolios.
Finally, we remain committed to returning capital to shareholders. During the quarter, we continued to execute our share buyback and paid our 48 consecutive dividend at <unk> 40 per share.
And in October we declared a similar dividend to be paid in the fourth quarter.
And now I'll turn it over to Mark to provide more detail on our financial results Mark.
Thanks, Karen.
Hurricane Ian was obviously an event that had a significant impact on our results for the quarter.
I'll discuss that impact as well as some positive trends in the business that are a little harder to see because it's Ian.
Last month at our website, we presented the net impacted and those numbers have not changed the total expense related in this quarter $77 6 million $65 million of higher loss expense and $12 million of higher reinsurance expense as we reversed some accrued benefits under our multi year reinsurance agreement.
I also wanted to explain the gross loss estimates as you know we have a few different reinsurance towers and I'll explain the impact by reinsurance tower for homeowners choice. The gross loss estimate is $550 million and the reinsurance tower limit is $936 million for tip tap the gross loss estimate for Florida.
Wind is $370 million in the reinsurance tower limit is $610 million for.
Tip tap to flood the gross loss estimate is $40 million and the reinsurance tower limit is $61 million and lastly for the non Florida tower expected growth lost $10 million against the reinsurance limit of 525.
Yes.
There are of course these are of course estimates and while things are progressing as expected. It's still early in these numbers could change. However, we have significant additional capacity in our reinsurance towers should claimed start to develop outside of these expectations.
So, let's turn to the rest of the quarter on a pre tax basis, we lost $63 $6 million in the third quarter.
The loss from Ian was $77 6 million beforehand, we made just over $14 million pre tax which is obviously a strong quarter.
There are two positive trends that I wanted to point out.
Loss ratios are coming down and investment income is going up.
About the loss ratio first if you remove the impact of in the loss ratio. This quarter was 41, 4%. This is more than six points lower than the second quarter, this year and lower than the third quarter last year.
There are three main things that drive the loss ratio of frequency severity and average premium per policy.
Frequency is down for both homeowners choice and tip tap it is significantly lower than the second quarter, this year and lower than the third quarter last year.
The other thing that's happening is average premium per policy is increasing while increases in average claim severity has started to moderate in other words average premium per policy is going up faster than average severity.
The combination of all these factors because resulting in lower loss ratios for both homeowners choice and to attack.
In our last call I said, we expected the loss ratio to start coming down and it has come down faster than expected.
Looking ahead, we are hopeful the legislative changes already passed will provide a further tailwind for continued lower loss ratio.
The second trend I mentioned is that investment income is going up.
Net income this quarter was just over $18 million 13 million came from the sale of a small land parcel as previously announced and when that's taken out investment income of about $5 billion.
Double what it was in the same quarter last year and it will continue to increase.
We are starting to see the impact of higher interest rates and in a very beneficial way.
Our strategy has been to remain disciplined with it with a preference for cash and short term assets with returns Dow improving we are putting more money to work and this is beginning to have a meaningful impact on our results.
I wanted to touch on holding company liquidity at the end of September we had just over $150 million of cash and financial assets at the holding company level and well over $100 million of Unlevered real estate.
Before the end of the year, we made downstream some capital into our two insurance companies, but we have more than enough capital available to do that.
This is one of the advantages of having strong holding company with with a solid liquidity position.
Just another couple of things quickly.
To the end of September we bought back 149000 shares under our buyback program and when combined with those bought back as part of the convertible issue. We have bought back a total of $1 million 186000 shares so far in 2022.
As of September 30, the number of shares outstanding was $8 million 926000, which is 12% lower than at the start of the year.
In conclusion, while Ian was obviously a significant event we are prepared for these events with a well structured reinsurance program and a solid balance sheet. Looking ahead. The fundamentals are starting to improve and we look forward to playing an important role in the evolving Florida homeowners.
Homeowners market and with that I'll hand, it over.
Thanks Mark.
Let me start by offering my deepest sympathies to those who have been impacted by hurricanes.
We are here to help our policyholders move forward and rebuild their lives.
And while on a daily basis. The entire company is currently working to take care of our policyholders.
This is an earnings call and everyone is expecting a business outlook, which is why the falling commentaries focus on the business aspects of the company in the future outcome.
So let us begin.
Clearly <unk> has been a devastating event that has caused massive disruption to the Florida market.
However.
History suggests that with great disruption comes great opportunity as well.
And Ian has firmly established the value of our main business, which is insurance not only to our policyholders, but to others as well, including the Florida legislature.
As Ian approach no one thought they had too much in charge.
Everyone. Appreciate the coverage they had and some wished that even bought more.
Going forward the demand for insurance will only increase low one is considering going without insurance and the next hurricane season.
The Florida legislature must solve for the availability of homeowners insurance next year.
And therefore, they will have a special session next month to do just that.
And under any range of outcomes from that session. We are poised to benefit.
Why is that.
Because we know what it takes to succeed in Florida.
There are four imperatives.
Capital Technology and.
And reinsurance and then in addition, you need a seasoned management team that can deliver the results.
In the past people have under appreciated everything with the need for capital.
We have always talked about need to be good at all four.
And HCI group is uniquely positioned in all four areas.
But let's go through them in detail.
Booked.
There is a shortage of surplus capital in Florida.
But we raise capital earlier this year and have significant liquidity at the holding company level.
Second we have invested in cutting edge technology for over a decade now and our systems are proven at this point, both within Florida as well as outside Florida.
This is Eva cheap not quick to be able to replicate it.
Our technology not only provides efficiency.
Has been proven to drive superior underwriting results.
Third there is a concern regarding reinsurance.
The industry.
But let's be clear.
The debate is about reinsurance capacity shrinking and repricing.
Not above the total lack of reinsurance.
Homeowners choice.
<unk> already secured about three quarters of his Florida reinsurance needs for next year.
And picked up is not that far behind.
The balance of reinsurance needs to be secured.
But there will be a flight to quality and we should be the beneficiary.
Simply put we expect there to be enough reinsurance available for our needs in 2023.
Finally, we have an experienced management team that has navigated successfully in Florida for 15 years.
We are up for the upcoming challenges in 2023.
In summary, we expect it to be a watershed event for the Florida market.
Next year.
We expect policyholders.
Capital providers, and reinsurers will gravitate towards high performance.
We think we are as a company to thrive in that environment.
With that we will open for questions.
Operator, please provide the instructions.
Thank you Sir.
Ladies and gentlemen, the floor is now opened 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 handset if listing.
On speaker phone to provide optimum sound quality. Once again, please press star one if you have a question at this time.
Please hold while we pull for questions.
And the first question is coming from Matt <unk> from JMP.
Matt Your line is live please proceed.
Thanks, Good afternoon.
Hey, Matt.
Paresh I was hoping I could actually just kind of follow on from those last points you made in last quarter provide us with an update in terms of.
Plans to establish a new subsidiary company.
With a pretty sizable opportunity in terms of.
It does have a few hundred million dollars worth of business you put on the books fairly quickly.
Fast forwarding a few months now post Ian can you update us on kind of your thought process. There in terms of if you still see the same opportunity a better opportunity of worse opportunity and if your timeline you're thinking about that has changed at all.
Sure, Matt So in terms of the timeline.
Through all of this we are we have been making progress towards setting up those subsidiaries. So that continues.
As previously stated and we expect them to be.
Hopefully up and operating sometime next year.
Sure.
As far as the opportunity goes in Florida.
<unk>.
I think as I've said in my state in my prepared remarks.
Ian has really crystallized.
The.
The value of the product that we sell insurance.
Okay.
The demand for it is going to be greater than ever and it's just a question of making sure you have a mechanism whereby you can provide.
<unk>.
Two.
People, who would be our customers in a healthy profitable manner, which is what we're working at every day.
Okay great.
And then you made some comments thereabout.
Your reinsurance and having homeowners choice secured about three quarters of its needs already and tip tap not far behind is there is there any other color you can provide even high level and I'm thinking along the lines of.
Kind of a magnitude of change in pricing or if it requires significant changes to retentions or or if you're just having crossed the bridge on on those items yet in terms of having to make a decision yet.
Yes.
The simple answer to that is.
I don't know the extent of the repricing or any of those aspects or how much the supply will shrink.
But what I do know is it isn't going to zero.
There will be a flight to quality and we are the folks that people think of first when they think about who do they want to place reinsurance with so those are the nature of the comments I was just providing perspective that all of the.
Debate, that's going on in industry, but reinsurance is about a reduction in supply not a.
Elimination of reinsurance so right.
Yes.
Okay, Great and then Mark if I could just.
A follow up from some of your comments you talked about kind of the underlying attritional loss ratio.
Obviously, we've seen kind of the improvement come faster than planned.
Can you talk a little bit about expectations moving forward are you seeing kind of continued improvements in some of the items that you talked about that we should expect continued improvement or are we just kind of gotten to the finish line quicker.
Kind of.
We should accept.
Expect more stabilization maybe.
Yes, good question.
Obviously anything that I say is that trend is going to be weather dependent but.
We do expect continued improvement.
As I mentioned in my prepared remarks that the trends are moving in the right direction.
<unk> frequency is coming down.
Arguably more and more important average premium per policy is going up faster than the severity is going up. So the example in Q3 the average premium per policy was about 17% higher than the third quarter of last year and average severity was up about 8%. So there's a there's a <unk>.
GAAP, there and I think that gap may will widen because some of the some of the premium increases are just starting to kick in so if you look for example, there's just homeowners choice.
In Florida, but in the third quarter, we wrote 9% or 10% more in growth written premium with 13% fewer policies.
And obviously claims don't come from premium they come from from policies right. So I think that I think that gap.
It may likely.
Widened so to come back to <unk>.
I think it's going to continue to improve we I think on the last call that it would we expect it to come down a couple of points per quarter because of the impact of those things. Obviously it came down faster in Q3 than we had than we had expected, but I think we'll still see that drop off a couple of points from the third quarter and fourth quarter weather dependent of course.
But that's our general expectation is that the trends are moving in the right direction and we expect it to increase.
To keep.
Keep doing that.
Okay, great very helpful. Thank you both for the color.
Thank you. Thank you.
Once again, ladies and gentlemen, if you have a question you can enter the Q&A queue by pressing star one on your phone at any time once again.
Star one to enter the queue at any time to ask a question.
And the next question is coming from Mark Hughes from Truest.
Mark Your line of sight you May proceed.
Yes, Thank you and good afternoon.
Welcome to the formulation you just you just gave us.
We're already up 8% what did you say for pricing.
So that number was on consolidated basis.
And it was at Florida.
Florida number.
So average average premium per policy as at the end of the third quarter is up about 17%.
From Q3, Q3 last year to Q3 of this year.
And then severity up 8%, yes 80.
<unk> hundred eight and a half something like that.
Okay.
First you mentioned the three quarters because the towers are already in place does that represent.
Premium or is that just dollars of coverage.
Okay.
Markets, mostly the limit if you just measure it in terms of how much limit goodbye.
Yeah in terms in terms of dollars I think.
Four.
I'll go through homeowners choice because thats the one I mentioned.
We have a.
Multilayer mulch.
Multiyear cover down low then we have the cat fund, which will be available to us next year and will be further app layer.
For those.
The reinsurance to assist policyholders that was passed in the special session on may 24th.
So all of those pieces will be there for us in the upcoming year. So it really fills out most of the needs for homeowners choice very quickly between just those three pieces. So again.
Gerald.
Tenor of my my commentary and also actually some of the numbers Mark was talking about.
Is.
We're not disputing that.
Ian was a watershed event in Florida has.
In reinsurance there will be challenges for the industry as a whole.
We were just trying to distinguish that.
For us in the specific.
The future is much greater than the general commentary that's going on in the industry. We wanted to make sure. We said this thing in this call because.
Apart from earnings calls, we don't really get many opportunities to make public statements.
So this was a moment to let them know that.
Things that I've said in the generalities do not necessarily apply to us on the specific yet.
Understood how much capital do you think there'll be down streaming and could you kind of give us an update on <unk>.
Any appropriate capital ratios at the subs you don't want to do that.
Leverage kind of leverage limits.
Yes, let me answer that in.
To say no comment and the reason for that is I think with the special session upcoming.
And whatever.
Legislative items.
Yes.
Yeah.
It will definitely color, what we do they're asking for a year and I think as Mark alluded to we already have the money, but how we allocate and what we do with it is going to be very dependent on what is done in the special session.
When you mentioned the 150 at the Holdco, and then $100 million of Unlevered real estate.
That's separate from the $1 50, correct, yes.
Yes, yes, yes, and yes, so that 150 as you know.
Most of that is cash or near cash that's at the holding company level.
The real estate stuff is outside of.
The insurance companies, but that's in addition to it I'm not counting the credit facility and that either.
What about the.
<unk>.
Development, yet a little I think adverse last quarter.
How are you seeing that lately.
Yes, I mean theres some in Q3 as well.
I would say the same thing that I said in the last last for Q2, there's a couple of specific things add is one of them.
A couple of accident quarters for tip tap back in 2020 that we're just working through it so it's there.
Similar.
Q2.
So yes, there is still some of that that's there but that's.
That's included in that loss ratio right.
The other thing too.
I've said this before but.
And it's still true, we're expensing more than where we're paying out right. If you.
Take cost out because of those kind of.
With the timing of reinsurance payments in that kind of thing it can distort things a bit but if you just look at sort of regular non cat reserves were I think about $29 million higher than reserves at the end of September than we were at the end of December so those loss ratios that you can see while they're improving.
So we're still.
Dealing with some adverse and.
We're still in a situation where expensing more of them okay.
We're still building reserve.
Yes.
Sure.
How are you looking at Greif, you're kind of in the fourth quarter as we speak.
Are you kind of biding your time until the legislature.
Do you think this is a good time to be growing.
Mark Let me take that one I think.
Given.
In.
Sure.
We sort of cost right into the business and given the.
What <unk> laid out for.
The balance of this year it makes sense to pause.
Until you know what.
Well the legislature does here.
Yes.
Yes.
Okay.
That was it for me thank you very much.
Thank you at.
At this time this concludes our question and answer session.
I'd now like to turn the call back over to Paresh Patel, who has a few closing remarks.
Okay. 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 I want to summarize my earlier comments.
There is an increasing demand for our product and our realization for the importance of the importance of a healthy insurance market.
We have all the pieces in place to benefit from a tremendous opportunity in front of us.
And we have the right management team to execute on this opportunity.
We look forward to providing an update on our progress on our next earnings call. Thank you have a great evening.
Yes.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. At this time. Thank you for your participation.