Q4 2022 Hci Group Inc Earnings Call
Good afternoon, and welcome to HCI groups fourth quarter 2022 earnings call. My name is John 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 it will be.
And will be available for replay through April 2023, starting later today.
Call is also being broadcast live via webcast and available via webcast replay until February 2024.
<unk> information section of HCI group's website at Www Dot HCI group Dot com.
I would now like to turn the call over to Matt Glover Gateway Investor Relations Matt. Please proceed.
Thank you John and good afternoon, everyone welcome to HCI groups fourth quarter 2022 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.
<unk> operational update Mark will review, our financial performance for the fourth quarter of 2022, and the Paresh will provide a strategic update.
Texas today's webcast. Please visit the Investor information section of our corporate website at Www Dot HCI group Dotcom.
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 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 Exchange Commission.
Should any risks or uncertainties develop into actual results. These developments could have material adverse effects on the company's business financial conditions and results of operations.
HCI group disclaims all obligations to update any forward looking statements.
I would like to turn the call over to Kevin Coleman, Chief Operating Officer Karen.
Thank you, Matt and welcome everyone H.
HCI group reported net income of $2 $6 million and diluted earnings per share of 18 cents for the fourth quarter, an improvement over last year and last quarter.
Let me start with our insurance Division results in our insurance subsidiaries benefited from three factors first prior rate actions second a decline in our gross loss ratio to 39, 4%.
$39 four includes cost associated with Hurricane Nicole and winter Storm Elliot.
Third investment income nearly tripled over Q4 last year as we put our balance sheet to work at yields over 4%, while maintaining short duration and ample liquidity.
And for Hurricanes in the claims received for homeowners choice and tip tap insurance totaled just over 13000, we continue to support policyholders impacted by hurricane and leveraging our technology and resources to expedite the claims handling process.
Mark will provide more detail in his remarks.
On the Legislative front in December the Florida Legislature passed Senate Bill two a which squarely addresses the rising cost of litigation and social inflation and the Florida property insurance market.
The provisions of this law build on Senate Bill two Dean passed in May and represent substantial changes to the laws governing the litigation of property insurance claims in Florida.
Provisions in this landmark Bill include three main items. It eliminates one way attorney fee provisions related to property claims.
It abolishes assignment of benefits.
And it reduces the filing deadline for one year for policyholders reporting a claim.
Mark will detail the favorable impacts we're seeing in our business. We have heard some industry experts are projecting a reduction to loss expense on the order of 25% to 40% obviously the level of improvement will vary from company to company, but we expect to see a significant change in litigation costs when the challenges take full when the changes take full effect.
We commend governor to Santos and the Florida legislature for taking decisive action to stabilize the property insurance market in Florida.
Now moving to our real estate subsidiary Greenleaf capital, we want to disclose in our 10-K that we are under contract to sell two of our retail shopping center investment properties for gross proceeds of more than $31 million.
Similar to the sale of Cypress property in 2020, and then century Park right away in 2022. These transactions highlight our ability to capitalize on the strength in the Florida real estate market.
We plan to provide more detail on these transactions on our next call.
Finally, a word on capital and a difficult year for the industry HCI continue to return capital to our shareholders through dividends and share repurchases during the quarter, we repurchased nearly 3% of outstanding shares at an average cost of $37 per share and paid our 49th consecutive quarterly.
Send to shareholders at <unk> 40 per share visa.
These actions underscore the strength of our balance sheet and the commitment we have to our shareholders now.
Now I'll turn it over to Mark who will provide more detail on our financial results.
Thanks, Karen So as Karen mentioned net income this quarter was $2 $6 million or <unk> 18 per share.
Net income includes a small revaluation gain of about $800000 related to the UPC book and loss expense included $7 5 million for the combined.
<unk> cost of Hurricane Nicole and Winter Storm Elliot.
Even with these storm losses included the fourth quarter consolidated loss ratio was 39, 4%, which is the lowest of the year and a point lower than the fourth quarter last year.
There are a number of reasons a number of things helping to lead to a lower loss ratio first claim frequency has been declining in the second half of 2022 claim frequency was 12% less than the second quarter, sorry in the second half of 2021.
Second while the average premium per policy is going up claims severity has started to level off.
While severity climb steadily from the first quarter of 2021 to the second quarter of 2022. It has not changed much since then.
Third litigation frequency has started to moderate for the full year litigation frequency was only down slightly but in the fourth quarter of 2022 litigation frequency was 15% less than the fourth quarter of 2021.
Looking ahead, we are confident that the downward trajectory of the consolidated loss ratio will continue.
As Karen mentioned, the Florida Legislature has passed legislation that should further reduce loss expenses as follows.
First because 15% to 20% of our total claims or claims we expect claims to dropped by a similar percentage second because the average.
Average severity of any Ob claim is higher than a non it'll be claim. We also expect to claim severities decline.
Third with the abolishment of the one way legal fee statute and <unk> being unenforceable, we expect lots of frequency to drop by 30% or more.
In terms of the overall impact on loss expense, we've seen models, showing a 25% to 40% decrease in loss expense and while we are modeling at the lower end of that range. We expect this to have a material positive impact on loss expense.
There are a couple of other trends in the business that I also wanted to point out as you can see investment income was about three times what it was in the fourth quarter last year when interest rates were low we kept most of our investable assets and cash that we could capitalize when interest rates increase as they have.
At the end of last year, we had $40 million fixed income investments and at the end of this year, we had over $480 million invested which combined with higher rates is driving higher investment income.
Another positive trend and policy acquisition expenses gross premiums earned were up 17% from the fourth quarter last year to the fourth quarter. This year you have policy acquisition expenses are slightly lower because of the mix of renewals versus new business lower commissions and lower costs related to the UPC business.
Dan why don't you move over to a couple of things on the balance sheet.
As you know hurricane Ian landed in Florida right at the end of the third quarter. Since then we've had time to evaluate the claim development and we have adjusted the ultimate down by about 15%. This of course has no impact on the income statement, but it is important we are getting more comfortable that the impact of this storm is significantly less.
Got it.
In terms of non Cat claims I mentioned that the loss ratio was down but we didn't get there by decreasing reserved in fact, we have been increasing them.
During the year, we already loss expense was about $40 million higher than losses paid.
Reserves are 25% higher at the end of this year than they were at the start.
This is significant because it means that loss ratios are going down even as we have increased loss reserves.
Just a few other things we're in good surplus position with each of our underwriters with RBC ratio of over 330% for both in terms of holding company liquidity, we have just under $150 million of cash and financial investments at the holding company levels.
And our $50 million credit facility with fifth third.
Karen mentioned it that we could could we completed our share buyback program in the fourth quarter. The total total dollar amount bought back under that program was $17 million for the year and when combined with the shares bought back as part of our convert offering the total number of shares bought back in the year with over $1 4 million or about 14.
Percent of the shares outstanding at the start of the year.
So in summary average premium per policy is going up loss ratios are coming down profitability is improving legislative changes should lead to further improvement.
And if you owned a share of HCI stock at the beginning of the year you own 16% more of the company than you did a year ago and with that I'll hand, it over to Paresh.
Thank you Mark.
I want to begin with a reflection on our history and then discuss the future.
We have a track record of being good allocators of capital and doing what we thought was best for shareholders, even if it seemed counter the industry views.
For example.
We patiently maintained a large cash position where interest rates were at record lows for several years.
Now we are seeing a significant increase in investment income.
We've deployed the cash in short term treasuries and the full impact of our decisions will flow through over time.
Okay.
We are leveraging our investment in technology to change how underwriting is done.
Tip tap has now grown to have $320 million of in force premium and is writing business in 13 states.
This is up from just $100 million in premium and only operating in one state two short years ago.
<unk> is just getting started and we will continue as geographic expansion.
Last night, we saw an opening to raise capital at attractive terms and executed on that opportunity.
Because of this we have tremendous amount of liquidity the holding company.
And this gives us the flexibility to execute on any new opportunity that may arise.
And as Kevin highlighted Greenleaf is trading assets now, both buying and selling real estate and creating tremendous value for the parent company.
But looking into the future.
We want to build on that track record and deliver consistent profitability and strong returns for our shareholders.
And in 2023, there is an opportunity we think to do both.
Let me provide some context and color.
Florida is an overlook opportunity.
Putting it simply look at where the industry is today versus where it was a year ago.
In 2022, because of actual inflation as well as social inflation. The industry was playing catch up raising rates in order to bring back some operational margins.
Those rate actions are now coming through because of the lag on the implementation.
But the elimination of one of the attorneys fees that <unk> will lead to improved loss trends.
And as Mark highlighted we're already seeing improvement in our gross loss ratios.
A year ago reinsurance costs were increasing and there were some concerns about the availability of reinsurance.
This year.
The upcoming June one renewal.
We expect reinsurance cost increase is more normal given there was a loss. However, it appears to be just a cost issue not an availability issue, which is fantastic and this is something that we can handle.
A year ago.
I'll push on Jake operational and G&A costs, while increasing due to inflation of a very tight labor market.
This year those costs have stabilized.
And.
Given our disciplined approach to balance.
Our investment portfolio our investment in <unk>.
Westwood income is increasing this year versus last year.
So when you combine all of these different inputs.
For the first time in several years, there are more tailwind than headwind for the Florida insurance industry.
The decisions that we've made over the last several years.
<unk> positioned us for this day.
And with the improving operating environment in Florida.
The moment has arrived.
And with that I will open it up for questions.
Operator, please provide instructions.
Thank you Sir at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question comes from Mark Hughes with Truest.
Mark. Please proceed.
Yes, thanks, good afternoon.
Good afternoon Mark.
On the reinsurance outlook, you say, it's not availability, but costs any way to frame that up a bit it seems like folks who talked about.
30% to 50% increases what do you think.
Sure thing Mark.
Yes, I think some of the rates could go up that much but it's also a question of.
Will you be paid that across every single dollar of reinsurance spend.
To put this into perspective for both companies about 60% of the reinsurance limit is purchased from the Florida Hurricane Cat Fund.
And while that is expected to go up a little but it's all going to be 30% to 50%.
Secondly, both of our underwriters, both homeowners choice and tip tap.
Before the wrap layer from last year so those.
Layers will be now.
Provided in 2023 and they come at zero cost so that actually can.
Dragged down the cost of reinsurance for us.
The private market interests will go up.
Some of the numbers you talked about but we also have homeowners choice, which has a large.
Section at the bottom of the reinsurance program.
Place on a multiyear basis with fixed will yield terms. So given all of these things, yes. It will go off but.
It won't be the headline.
30% to 50% that you're looking at yes.
You've alluded to.
How much of the program is exposed to more private market.
Adjustments.
Well for homeowners choice.
Very little I would say.
Living here, a little bit maybe about $150 million of private market limit.
Picked up I think is a similar number but given that it doesn't have the benefit of the multiyear deal.
Homeowners choice does yes.
Yes Luke.
Good.
Yeah.
Was there any reserve development in the quarter.
Yes, there is some I mean, it's that's something that as we've done consistently over the last couple of years its not.
It's pretty similar to what it was in the fourth quarter of last year.
Pretty similar year and if you look at the full year, it's pretty similar to what it was for the full year. So no no real significant changes there.
What was it in the fourth quarter last year.
I think it was about 12 and a half something like that 10 to 12.
Similar to this year I think it's including the $39.
Yes, that's all included in there yes.
Okay, Yes.
And then the.
You mentioned the $800000.
That's separate from the.
The $3 million re measurement items.
<unk>.
Income statement are those separate could you explain that.
Yes.
<unk>.
There was sort of two things that happened at the same time, so we had to adjust the valuation on the on the UPC.
Now that was originally booked and what happened is there's two pieces to it was it was an asset that we set up and that asset was reduced.
A couple of million dollars to.
So that was an expense.
And then we also reduced the contingent liability because we had a contingent liability for commissions that were only over a certain size. So the contingent liability comes down and the contingent and the asset also went down and those two sort of offset one another the net is about eight or $900000.
But they show up in two different lines. That's why you see that $3 million in the revenue line.
Yes, okay.
You mentioned, the you think a potential for losses to improve 25% to 40% when fully implemented when when.
When do you think that will be.
I think you said.
Your modeling kind of at the lower end of the improvement range.
When does that fully kick in do you think.
I mean, it's a little hard to say because these things are going to transition right.
So when we talk about the low end of that range say, 25%.
I think it's probably going to take a couple of years could potentially take a couple of years to fully get to that.
At some of the AOE for example transitioned through.
But you'll see significant improvement obviously in 2023.
So I think I think that will we had talked before about the loss ratios coming down overtime and I think that that will continue through 2023, and 2024 is that sort of transition through the book.
Then final question your growth.
Presumably you're modulating your growth depending on what you see here in the market.
It looks like Youre, a little more restrained in the fourth quarter correct.
See it differently.
How do you see that.
Stacking up in 2023.
Your enthusiasm about growing the top line.
Well.
Mark.
Similar to the question that we were already sort of.
What I said in my statements.
We have a lot more tailwind than headwind, but the one headwind that is there is a cost of reinsurance.
And so and we do live in a.
Okay.
<unk>.
Country at the moment, so given both of those things show we.
We are.
Both <unk> and.
<unk> about about growing but making sure we grow at the right time in the right way so youll.
Pascal deals to go already in the last few months because it wasn't the right deal at the right time so.
It's opportunities as they arise and executing them when they do.
Hey, Mark its Mark. This is just one thing I just wanted to add in there I know.
Bedded in your question there I think.
You were probably referring to the gross written premium number in Q4, which is down.
Yes, yes, yes, so part of that is there's a bit of an anomaly there.
In the way that that the.
UPC quota share agreements are accounted for so in the fourth quarter of last year, we signed the fourth.
UPC quota share agreement and the way those are booked as when you setup.
Quota share you book all of the unearned premium that gets book to written premium and then the offset is an unearned premium so that was $35 million in the fourth quarter of last year, and then and then.
Premiums in the fourth quarter. This year is just sort of as the book renews. So you have to sort of.
Factored that out and if you do that.
Gross written premiums up about 7% quarter over quarter and premiums enforced, which you could argue.
Maybe a better way to look at it premiums enforced have continued to grow throughout the year. So that that drop that you see in the fourth quarter is a little impacted by that.
UPC thing because it makes sense.
Sure Doug Yeah. Thank you very much.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone. The next question is coming from Matt <unk> with JMP. Please proceed.
Hey, good afternoon.
Good afternoon, Matt.
If I try to put it all together kind of a lot of what we've been talked about in terms of the.
Mark you talked about.
Magnitude of the impact is from some of the models.
The reforms and the timing.
And we think about.
Obviously reinsurance costing more for you guys doing a good job of taking rate and.
Inflation guard and things like that when we get to kind of say that two years that mark was talking about.
What do you think combined ratios look like are we are we do you think we're back in kind of the 85% to 90% world, but I think of it as kind of CCI, putting up over the long run or.
Where do you think you can get to.
Okay, Great question Matt.
So let me try to answer this question in a couple of items and by the way.
One of the things that we've been very careful in doing that we can become.
<unk> behalf here.
When we do loss provisioning for a quarter, we do it in the quarter. So we already have set money aside for losses with a data loss in Q1 2022 for example, even though the claim may come in.
This summer.
So we've put all the money at the site, what we have seen already in Q1 et cetera.
Lanes that are dropping off they're not coming in as <unk>.
Fast and why that becomes important the claim doesn't come in.
Then later on they can be a lawsuit that would come in so the claim frequency goes down the lawsuit frequency goes down.
And where this is ultimately going to lead to is the.
The money we have to reserve.
For each quarter is going to improve as we go forward and take a while to roll through but.
Some of that is also important to know that.
Each quarter, we sort of start from fresh to say what will eventually cost but to your bigger question.
This is.
Important so why are you going to have a healthy flow reinsurance industry, because we took.
Along with the rest of industry paid pick a number within 2000 30 billion in expenses in <unk> and that was all done through private insurance and reinsurance.
And we think the legislature and the governor for Paas and the reform, which is going to give us a better outcome, but here's what the numbers now look likely.
So if a year ago, you took $1 of premium.
Youll probably looking at.
Approximate numbers here, so don't try to reconcile them, but it's pretty reasonably accurate.
So you took a dollar of premium you spent about 36 38 on reinsurance.
You may have got a penny of investment income.
Interest rates were so low you also had about 40 cents.
Crystal on non Cat losses, and then you had.
Policy acquisition costs, corporate overhead et cetera around 23.
All of which would basically lead you to have a very a 1% margin shall we say yes.
Here's what's happening as this thing breaks through.
Because of the rate increases.
Will it go the other way around so let's start from the bottom the corporate overhead which are about 23 is going to stay roughly about the same.
Okay.
Mark's earlier comments, what we've seen in Attritional losses, because of the legislation legislation passed is probably likely to go from 40 to maybe around 30.
Now offsetting that the reinsurance costs will go up with a goal from like 38 tenths, let's say 45, so they'll go up some some pennies there.
But if you had.
Less important.
<unk> positioned.
Instead of making a penny you're going to make about prepayments. So all of these pennies of that sub debt.
Add up.
But the biggest item that will also.
Also happened is.
Because rates went up you will make about $1 20, and premium take a while but that's where you're going to get too and so therefore your margins will.
We will increase substantially and that is what will be needed to replenish surplus.
A healthy Florida industry until the steps that have been taken.
Eventually lead to that outcome.
That is a very very very positive outcome and that's what keeps us very excited in terms of shadow those numbers as to what it does to margins Jeff.
Yes.
Helpful and Barry.
Very easy way to think about it so thank you.
One other if I could just a quick one you mentioned greenleaf selling or.
Entering.
<unk> to sell the two retail properties I think I heard $31 million of gross proceeds what are those carried out.
In terms of book value today, and any any guidance you can give on when you think that transaction might close.
Yeah, Hey, Matt look.
We wanted to make sure we mentioned it because it's in our 10-K and not everybody reads, our 10-K and subsequent events and everything so.
The two properties are under contract that Havent closed and we tend not to.
Add up the numbers.
Because we actually haven't been or had you only mentioned that because we wanted to touch upon disclosure to everybody.
And.
That's why but we will and as Kevin alluded to we will talk further about it at the next earnings call. When we hope to report that he is actually sold two properties yet.
Fair enough sounds great. Thank you for the color I appreciate it.
If there are any remaining questions. Please indicate so by pressing star one on your Touchtone phone. The next question comes from Casey Alexander with Compass point. Please proceed.
Yes, hi, good afternoon, a lot of my questions have been answered, but I do have one question.
Expected, 25% improvement in loss expenses.
Would really only apply to those expenses that come from the state of Florida.
If I understand it correctly so.
As you look forward and the expansion of the book, including tip tap outside the state of Florida, what percentage of your losses would you be expecting to come from the state of Florida as opposed to that percentage that you would expect it will be coming from outside the state of Florida.
Yeah. So so it's mark so yes, you're right.
The 25% or so that we've talked about is on the Florida loss expense.
So, Florida is about 80% of our book.
That 25% drop is not going to be on.
On the not on the non Florida, but there's other things going on that are affected are already affecting the loss ratio as well.
Rate.
Dropped and frequency that we are already starting to see even before the legislation.
And so when we talk about the consolidated loss ratio going let's say from 40 down to 30.
We're sort of looking at that 25% drop on the 80% of the book that Florida.
That also I think the loss ratio in Florida will drop more than that when you take into account some of those other things.
And that will get it to us that will get us I think to 25% on the full on the consolidated loss ratio, even though to your point.
20% of the book is outside of Florida.
Okay.
That's the only question I had left thank you.
Yes.
At this time. This concludes our question and answer session I would now like to turn the call back over to Paresh Patel.
A few closing remarks.
Yes.
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 a realization of the importance of a healthy insurance market.
We have all the pieces in place to benefit from the tremendous opportunity in front of us and we have the right management team to execute on this opportunity.
We look forward to providing you with an update on our progress on our next earnings call. Thank you very much.
At this time. This concludes our question and answer session. This concludes today's call.
You may now disconnect.