HCI Group Inc. Q1 2023 Earnings Call
Okay.
Good afternoon, and welcome to HCI groups first quarter 2023 earnings call. My name is John and I'll 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 is being recorded and will be available and excuse me. It will be available for replay through June eight 2023, starting later today.
The call is also being broadcast live via webcast and available via webcast replay until may 9th 2024 on the Investor information section of HCI group's website at Www Dot H C I group Dot com.
I will now turn the call over to Mac lover Gateway Investor Relations Matt. Please proceed.
Thank you John and good afternoon, everyone welcome to HCI groups first quarter 2023 earnings call.
On 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.
Foreign currency operational update Mark will review, our financial performance for the first quarter of 2023, and the parish will provide a strategic update.
Today's webcast. Please visit the Investor information section of our corporate website at Www Dot HCI group Dotcom.
Before we begin I'd like to take this opportunity to remind our listeners that todays presentation and responses to your 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 and.
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.
Any risks or uncertainties develop into actual events. These developments could have material adverse effects on the company's business.
Natural conditions and results of operations.
<unk> group disclaims all 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.
HCI group reported a strong first quarter with pretax income of $23 $1 million and diluted earnings per share of $1 54.
Homeowners choice Kitkat and Greenlee subsidiaries all contributed to earnings with several noteworthy accomplishments during the quarter.
Tip tap insurance group, our insurance and technology subsidiary reached a milestone with its first quarter of profitability on a GAAP basis and more than $350 million of in force premium.
At both of our insurance companies loss ratios improved from last quarter, driven by lower claim volumes, partially due to legislative reforms enacted in Florida last year.
Our real estate Division Greenleaf capital earned over $9 million, reflecting gains on the sale of two properties disclosed on our last call.
As a reminder, over the last three years Green leaf realized gross proceeds of close to $90 million and a gain of $60 million on just for transactions and we believe there is still plenty of upside in our real estate portfolio.
In addition, our investment portfolio earned $9 million during the quarter with 90% of it coming from interest income alone.
This is a result of steps we took to reposition the balance sheet into short duration interest, earning asset over the last year. We now have an investment portfolio capable of generating $30 million in interest income on an annualized basis with a low risk profile.
We also continued to deliver on our commitment to shareholders paying a <unk> 40 per share dividend, our fifth consecutive quarterly dividend.
In summary, it was a solid profitable quarter with all three of our main divisions contributing to the success of the quarter and now I'll turn it over to Mark who will provide more detail on our financial results.
Thanks, [laughter] as Karan mentioned pre tax income for the quarter was $23 1 million and diluted earnings per share or $1.54 up from nine cents in the first quarter of 2022.
We discussed several positive trends over the past few quarters and those trends are translating into material sustainable improvements in earnings.
First gross premiums earned are up despite policies enforce being down driven by rate adjustments made over the past few quarters. This means that while revenue was up exposure was down.
Second investment income is going up.
As Karen mentioned, we had a gain from a real estate portfolio, but even if that is excluded the remaining $8 $8 million of investment income is more than three times, what it was in the same quarter last year.
This increase in investment income is being driven by steadily increasing interest income on our bond investments and on cash.
When interest rates were low we held onto our cash and when they started to go up we carefully invested some of that cash and bond.
At the end of Q1, we have $500 million invested in fixed term securities at an average yield of three 7% compared to 150 million invested at one 6% a year ago.
We have continued to manage the risk as well our average term to maturity in the bond portfolio was just over one year and we still have over $300 million in cash.
The third positive trend that policy acquisition expenses are declining as a percentage of gross premiums earned in Q1 policy acquisition expenses were 12, 6% of gross premiums earned down from 16, 4% in the same quarter last year because of lower commissions and a change in the mix of new versus.
Renewable business this reduced expenses by more than $7 million for the quarter.
I saved the loss trend declining loss expenses for last is it deserves more explanation in the first quarter, our consolidated loss ratio with 33% down considerably from 40% in the same quarter last year. The lower loss ratio was driven by higher average premium per policy moderating claims.
So dairy as well as lower claim and litigation frequency some of which is as a result of the legislative changes in Florida.
I should note that we did not get to these lower loss ratios by reducing reserves, while we had slowed the pace of reserve increases we have not yet started to reduce them.
So stepping back that four positive trends that I went through and the combined impact of all of these trends is a material positive impact on the operating performance of the company as evidenced by the strong earnings in the quarter.
These trends, it's also positively impacted our insurance and technology subsidiary tip Top insurance group higher average premium per policy higher investment income and a lower loss ratio and a lower expense ratio led to tip tap insurance group being profitable for the quarter.
Our real estate Division also had another very strong quarter as Karen mentioned, we sold two of our commercial properties for a gain of $8 $9 million. Another example of our opportunistic real estate real estate strategy.
Just a few other quick things consolidated cash flow from operations was $99 million or about $11 per share compared to $57 million in the same quarter last year book value per share increased to $20, 97% from $18.91 during the quarter.
A quick comment on holding company liquidity cash and financial investments outside the insurance entities were $160 million at the end of the quarter up from $145 million at the end at the start of the quarter.
Of course this does not include the $120 million in value represented by our investments in real estate and Greenleaf.
In summary, this was a strong quarter for us our operating strategies are paying off the insurance market in Florida is improving and we've positioned the business to deliver superior ongoing operating results and with that I'll hand, it over to Paresh.
Thank you.
Marc and Carrie.
Outlined our strong financial results for the quarter.
We are seeing the benefits.
The company's underwriting and rate actions as well as a bold leadership provided by the Florida legislature in 2022.
These benefits should continue in the upcoming quarters and provide a solid foundation for the future.
Before talking about future prospects for hei.
I wanted to briefly comment on reinsurance.
We are finishing up the placement for both of our insurance companies and like prior years, we will provide full details when everything is finalized.
Yeah.
Our reinsurance program is progressing as expected.
We came into the renewal with the majority of the program already set.
Between the Florida Hurricane Cat fund the reinsurance this is.
Policyholders or rap program and a multi year contract tipped up in homeowners choice has secured approximately 70% of the play of limit purchased.
The remaining 30% is being placed in.
In the private market now and were enough capacity is available.
On a blended basis.
The rates will be higher but the cost within expectations.
Now looking towards the future.
Homeowners choice continues to be regarded as one of the best performing homeowners carriers in Florida.
And Green leaf continues to prove its worth as a separate real estate division that deliver solid long term returns.
Both homeowners choice and Greenleaf at this point has solid proven track records on which we continue to build.
Now, let's talk about kicked up insurance group.
It made a GAAP profit in Q1 of this year.
Last year, we talked about ticked up seeing periods of profitability.
The first quarter of this year shows that we're executing on that vision.
But I'll work is not done we continue to leverage our technology and optimize our book of business, while maintaining strong retention ratios and.
And we plan to build on the current momentum and in T. G. I G.
Finally.
We continue to make progress on items, we mentioned in previous calls.
We had talked about setting up additional insurance companies.
We are in the process of setting up two new carriers.
Named tail role in Paris.
We still have work to do before these new companies write their first policies. Good progress is being made.
In closing.
From our perspective, we actually thought we are starting to see a turn in the operating environment in Florida.
The underwriting actions, we've taken over the past several months along with the benefits of Legislative reforms have started to show up in our Q1 results.
On prior calls we highlighted that there would be an opportunity for us in the near future.
We are seeing that opportunity unfold in front of us.
The days ahead are even brighter.
With that I'd like to open the call to questions operator.
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, a 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. It may be necessary to pick up your hat.
Said before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Mark Hughes with Truest. Please proceed.
Yeah. Thank you very much.
Mark you are listed a number of the drivers of the improvement in the.
Our loss ratio to 33 40, how your premiums and then.
There are two or three other things could you repeat those.
Yeah. So.
Yeah. So part of it is obviously higher average premium per policy.
The other thing I mentioned is is.
His claim severity is kind of it is moderating.
And but really more importantly.
Claims frequency is declining and also litigation frequency is also declining.
And.
Those are the four drivers that number three and four it probably being the most important.
Great. Thank you.
They only popular characterize the yeah. It it it was good question a little bit not a not a huge issue you might recall in the first quarter of last year in Florida, We had more weather than you would normally see in in the first quarter. So we had we had less weather in the first quarter this year than last year.
In Florida, but we had more <unk>.
Weather related expense weather related losses in the northeast this quarter than the first quarter last year. So.
It was not really a big factor. It was you know it was it was a little bit of the draft, but not not not really a big one to dispute because of those things those two things really sort of upset plenty of other mostly.
The two new carriers.
I'm.
[noise] listed and kind of.
Cause when you're brought her appetite for new Dayton.
The.
Written premiums.
If I'm looking at it properly yoga.
<unk> definitely up.
Pretty pretty meaningfully.
What do you hope to capture.
The two new carriers refresh me on that.
Absolutely Mark.
Two things in terms of expect it tells me just growing the top line. We can do that just within the two carriers that are already up and operating.
The two new carriers are.
Are being setup, because we are now starting to set up for the next phase of.
Five growth and while we haven't disclosed how they fit into the group and.
Exactly they were doing.
Repair you are doing this too.
In a manner, where they were those two new carriers, we both expensive and complementary to the car and to carry that we have here.
Yeah.
And then Mark you had mentioned that you.
Starting to slow.
<unk> reserve increases.
Go on in the other direction, though could you give us some dimension magnitude of.
Of that you know how much have you changed how much are you still.
Kind of working away at the quarter to quarter.
Yeah. So.
Yeah, we went through this period, where we talked about it a lot where we were expanding more than we paid out and reserves were going up.
And then a few reasons for that we will growing obviously and also.
The the number of of open lawsuits unexpected lawsuits.
And so we're increasing our we're expecting more than they were paying out and as a result reserves were increasing.
In Q1 this year net reserves were pretty flat. We didn't we didn't really increase then we didn't decrease them. So are los expenses pretty close too.
To what the encouraged lots expenses and was paid losses were so.
Haven't we haven't really started to we haven't really started to to reduce them at this point, but you know given the trends and some of the numbers that we're seeing.
I I think that's that's <unk>.
Possibility for that for the future that's probably the next phase of death.
Thank you very much.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone once again, that's star one if you have a question or a comment. The next question comes from Matt Karaleti with J M. P. Please proceed.
Hey, Thanks, good afternoon.
After that.
Just what are the circle back on one of the questions bark at their on whether when it's kind of Florida being a little maybe below normal in northeast well above normal netting out to sounds like pretty normal with that comment hold true for tip tap when we think about what kind of it didn't get profitable, but it did.
So I'm kind of a normalised whether quarter or did it run a little hot or a little cool.
Yeah. It was I mean that comment holds for for both I mean it was.
Less weather in Florida more weather in the northeast.
But you know it's it's.
The you know the the.
The improvement in the loss ratio the biggest driver was with.
The decrease in in even whether adjusted claims frequency was down considerably even if you take leather out of it.
If you if you remove the weather claims in both quarters and just look look at whether adjusted frequency was down substantially.
More than we expected it to be and.
That's why you know that.
That statement that we made on the last call about.
Loss ratios expecting them to be I think I said 25 per cent Parrish mentioned.
From 40 per cent down to 30%.
The what we saw in the first quarter would indicate that.
Definitely heading towards that.
Okay, and then as we think about.
Say growth across the year.
And I'm not so much the a bit more about exposure gross or kind of when you is your startup obviously new companies or even within the existing companies think about not just kind of kind of right gross how how should we think about that in terms of timing with.
When reinsurance and steps when.
Hurricane season, my plan to that the reinsurance trip later in the fall is it reasonable to think that that might be a little more back and waited or or am I think about that wrong.
I'm glad you're thinking about exactly correctly growth will give back and waited in the in the contact with <unk>.
Yeah exactly okay, great and then just the numbers question probably from arc do you have the net written premiums for the quarter.
Yeah, the the $129.4 million.
Wonderful.
Great. Thanks, so much.
Once again, if there are any remaining questions. Please press star one on your Touchtone phone, we have a follow up coming from Mark Hughes with Truest Mark. Please proceed.
The improvement in severity any comment around inflation building materials.
That part of this as a moderating yeah.
So so the question so I I use the term moderating in you you might recall.
Inflation obviously.
It was an issue is an issue I think it was probably the second quarter of last year, where we really were we really thought that probably the biggest impact of that increase.
But it it started to kind of level out after that and and you know I think parishes mentioned that we track the cost of those things and I think it's it's sort of been level. Since then so if you look at claim severity in the first quarter of this year.
It's higher than the first quarter of last year it is but.
But it's it took that bump in Q2 of last year and since then hasn't moved a lot and that's why I use that term moderating so it's higher than it was in the first quarter of last year, but I think about 10% or so but it it it it's not having the the adverse effect that it was having you know in in Pryor.
Past quarters.
So you essentially lap in the current quarter.
Yeah, Mark a different way of looking at at this.
Is.
And the second quarter last year it was unknown whether.
Increasing was going to be repetitive thing that follow up to a quarter after quarter after quarter I think what mark is saying and what we're saying is that the average very quickly jumped and Q2 of last year. So that has been flat. Since then so it's more of a step function right as opposed to a.
A increasing ramp which is obviously very good news.
Yeah Yeah.
Mark any thoughts on loss ratio for a game.
Maybe not for the year, but it kind of the underlying trend line I think your.
Suggesting that you're seeing improvement, but we're not.
We're only on the way, but you know we're at a 33%.
Lost reassure, which is a pretty darn good and maybe.
Not too much of influence from weather you know where.
What's the right run right yeah.
Yeah, so so I.
I'll go back again to something that we've had in the last earnings call and I just mentioned that we.
We felt that that overall impact on the consolidated loss ratio as you know in the.
Twenty-five percent range parish talked about it going from 40 to 30 and I, we still think that that makes sense and that that's the wrap that we're headed towards second court, that's that doesn't necessarily say that that that's gonna happen every quarter second quarter.
Everybody knows it's sort of a quarter, where there's usually some leather the loss ratio in the second quarter is usually a little higher than it is in the first quarter.
But you know I I think we're we're we're.
We're headed back down toward that that 30 per cent range I think I think we'll see it.
Again, if you have to be careful cause it's only one quarter right.
And those trends that we're seeing are are good, but we need time to make sure that they that they settle in so does that does that answer the question.
It does thank.
Thank you.
You've seen any weather, so far and I mean, we're almost halfway through the first quarter.
Probably of April in hand.
I I know.
A lot of opportunity for other things to happen, but.
The reason is going so far.
This is parrish.
Two things, yes, we are picking up somewhere.
Quarter.
But as Mark.
Indicated it's what you normally expect in the second quarter.
Then.
It's been a choppy springs, so there's been some.
<unk> claimed activity, but it's not.
Anything.
Beyond what our expectations were right so from that sense, it's very good.
The other thing I think to summarize some of the stuff you your conversations back and forth with Mark I.
I think what's being indicated is that movement from 46 last year to 33.6 this year right.
Isn't.
The results of a a one time windfall, whether it'd be reserved relief or one time, one quarter, where the weather was.
Usually benign right.
Does that all those kinds of things and Q1 numbers.
Sort of telling you that a lower loss ratio is on the way and it's probably sustainable it'll it'll fluctuate up and down a little bit second quarter.
Because of what they might be slightly worse. It normally is but you are clearly and solidly on a path.
Having improved loss ratios that actually improve combined ratio for that matter.
Understood and then Paris, you've mentioned the 70 per cent of the reinsurer insurance programs already placed in that.
You said that cause it kept from Florida Hurricane can't fund the Rep program, what else did you mentioned in the.
Also are mostly we have.
One or two multiyear contracts. So those rates were obviously checked last year yeah.
Yep and then the 30 per cent of being place now any observations about the.
<unk> capacity your capital.
In the in the market any.
Kind of recent.
Sure <unk> around.
Big of you know the ILS spreads.
Narrowed or there's some.
Maybe movement in that direction does that does that mean anything.
Yeah, we've heard and said.
Several of the things that we see all that movement the.
The more important thing that we are usually a focus on this at this point in time is can we get our program place train.
And that will hardly feel confident about it that's really it.
We hear rumors or and or conversations about what's happening in the industry as a whole, but you know at this point in time they become very.
Narrowly focused on making sure all programs are completed.
So.
Yeah Fair enough, maybe just one more of the.
Mission expense.
Improve nicely you mentioned.
Some decline in <unk>.
Commission raped maybe mix.
I assume if you're not pursuing much new business in two two or three Q maybe the.
It stays at the same rate maybe the mixes consistent on new and renewal then pop back up in the fourth quarter how much. This is.
We're going to stay with us versus perhaps temper.
I I think I mean, it does depend a little bit on that next.
But you know I I I think it's been coming down for awhile and I think where it is now I think it will probably decline a little bit more but not a lot. So you know if if.
If you're if you're modeling that I think that that right. There right now is probably probably a pretty good number.
And maybe that's one more if I might.
Anything in Greenleaf around somebody who's concerns around commercial real estate in the lending environment does that.
Have any impact on the valuations or liquidity in the market. So.
Florida is it's hot.
But I'm just curious.
Mark two things one is all the real estate, we we either have.
Paid for in cash or where there is a lot I think it's the it's the.
Mortgages unlocked.
Very nature.
Long duration fixed rate.
From our perspective, we don't feel any pressure on them.
Things yeah. The other thing is and cutting it looks.
Executed.
As Karen mentioned it have prepared comments before transactions over the last three years.
Hasn't really D have really freed up a lot of capital.
HCI group by selectively.
Selling the southern assets, excluding the Lakers to shopping clauses that we did which freedom about 141 billion of capital, Yeah, Yeah, and and Mark I I would just add one thing to that that.
We've talked about this before but you know there's that very sizable delta between what we've got the real estate on the books for and you know what.
What it appraises for with bank appraisals or what we think it is worth and and even as we've gone through some of these transactions that number is not getting any smaller and you know it's still even if you look at the bank appraisal, there's still a 50 million dollar difference between the.
The bank appraised value of our real estate and when it's on the books for so we've got some really good quality properties and very Unlevered I think total total debt on that $120 million a value was about four and a half million. So you know good quality real estate and good markets.
To this point and values and maintain its very low low leverage and it's been you know carrying.
Carrying went through the numbers, it's been a it's been a great investment for us.
Okay. Thank you for all the answers.
Thank you.
At this time. This concludes our question and answer session I would now like to turn the call over to perish Patel, that's a few closing remarks.
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.
Thank you.
This concludes today's call you may now disconnect.