Q2 2023 HCI Group Inc Earnings Call
Good afternoon, and welcome to H C. I group's second quarter 2023 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 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 nine 2024.
The Investor information section of H C. I group's website at Www dot each C. I group Dot Com I would now like to turn the call over to Matt Glover Gateway Investor Relations.
Please proceed.
Thank you John and good afternoon, everyone welcome to HCI group's second quarter 2023 earnings call.
Today's call is Ken Goldman Aci's, Chief operating officer.
It's worth Hei's, Chief Financial Officer, and Paresh Patel, Hei's, Chairman and Chief Executive Officer.
Hello, Karen the operational update Mark will review, our financial performance for the second quarter of 2023, and then perishable by the strategic update.
Access todays 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 1995.
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 uncertainties are identified in the company's filings with the Securities and Exchange Commission.
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 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 Gary.
Thank you, Matt and welcome everyone HCI group reported another strong quarter with pretax income of $23 million and diluted earnings per share of $1.28.
Operating earnings improved over last quarter again, reflecting positive contributions from each of our business segments and insurance gross premiums earned were stable, while losses and expenses decline driving increased profitability in the quarter. Our consolidated loss ratio was approximately 34% down from 40.
Seven 9% last year and consistent with our expectations.
Homeowners choice continues to generate healthy earnings well it tipped up insurance group reported its second straight quarter of GAAP profitability in.
In May we finalized our reinsurance program for the coming year with rates in terms that were consistent with our expectations. We filed an 8-K detailing this program with the SEC on may 31st.
In investment net investment income totaled $8 $8 million almost entirely derived from interest on our cash and fixed income holdings, our portfolios continue to generate steady streams of income benefiting from higher interest rates short duration and reinvestment yields above 5%.
Finally, HCI group continued to deliver on its commitment to shareholders paying a dividend of <unk> 40 per share our 50 <unk> consecutive quarterly dividend to.
To summarize this quarter highlighted the underlying strength of our diversified businesses and the true earnings power of HCI group.
And now I'll turn it over to Mark to provide more details on our financial results.
Thanks, Karen so as Karen mentioned pre tax income for the second quarter was $23 million and diluted earnings per share were $1 28 sets the.
The pre tax income was similar to that of the first quarter. This year with one significant difference in the first quarter, we had a gain of almost $9 million from the sale of real estate and this quarter's profit was driven simply from the regular ongoing operations of our insurance businesses and what we see as a strong.
Repeatable operating quarter.
The past few quarters, we've highlighted several positive trends and as you can see from the results. These trends continue to support sustained profitability.
The trends we've discussed our higher average premium per policy, increasing investment income lower policy acquisition costs and most important a lower gross loss ratio.
Let's take a look at each of these first as was the case in the first quarter gross premiums earned are up despite policies enforce being down driven by rate adjustments made over the past few quarters combined with the natural attrition of the book.
Our consolidated average premium per policy is about 25% higher than it was a year ago, which helps reduce the loss ratio and improve earnings the.
The second positive trend is that investment income is up investment income of $8 $8 million is more than double what it was in the same quarter last year, driven by increasing interest income on fixed term investments and on cash our investment strategy is working and were and while our yield is up considerably we still have a short.
<unk> term to maturity, which gives us the opportunity to further increase in investment income in the coming quarters.
The third positive trend is that policy acquisition expenses are declining as a percentage of gross premiums earned in Q2 policy acquisition expenses were 12, 4% of gross premiums earned down from 14, 8% in the same quarter last year because of lower commissions and the transition of the UPC book.
The last and most important trend is that it is a decline in the consolidated loss ratio, which is following the glide path we've been discussing over the past few quarters.
On previous earnings calls, we said, we expected a material beneficial impact from the new legislation, Florida and that impact is starting to show up in our results.
The consolidated gross loss ratio with 34% this quarter down considerably from 47, 9% in the same quarter last year, driven by lower claim frequency flattening claims severity lower litigation frequency and higher average premium per policy.
I wanted to mentioned Tiptop just for a minute you may recall that tip top insurance group was profitable in the first quarter and it was a gain in the second reflecting the same trends discussed on a consolidated basis higher average premium per policy higher investment income and a lower loss ratio.
Just a few other quick things in book value per share increased significantly from $18.91 at the start of the year to $21.92 at the end of the second quarter cash and financial investments at the holding company level were $164 million at the end of the quarter.
Up from $140 million at the start of the quarter.
Before turning it over to Paresh I wanted to step back from the numbers to just add one thing what I what I hope comes through in my comments here is that the that the trends that have led to these results are the same continuing trends we've been discussing for some time now and we think that they are sustainable we've manage the business carefully to get to this.
Point and while we can never predict the future. This quarter reflects what we expect to see going forward and with that I'll hand, it over to Paresh.
Thanks Mark.
Karen talked about a positive Q2 results.
Mark laid out why the results this quarter are sustainable.
There are several items that we've talked about on previous calls, but I think are worth reviewing.
First we've positioned our investment portfolio to provide investment income and a meaningful and sustainable fashion.
By staying on the short end of the curve, we maintain maximum flexibility and we are making a healthy income from that side of the business.
Second following legislative reform that was passed last year in Florida.
We anticipated that the loss ratio would come down and it has.
Third.
The uncertainty around the availability and affordability of reinsurance is now behind us with the placement of our 2023 reinsurance program.
And lastly, a year ago, we took decisive action to combat economic inflation.
And those rate actions continue to work through our book of business.
So overall, while earned premium has been roughly level year over year the profitability of the business has improved considerably.
And all of this is important as a backdrop.
Because we now have a healthy stable business.
We can now look to the future and the obvious thing to do is to expand and grow the business, especially in Florida.
And that is exactly what we plan to do.
We've applied with the Florida or I are for our citizens the population in the fourth quarter of this year.
We're starting from a baseline of approximately 200000 policies and $740 million of enforced premium throughout the U S. At the end of Q2.
We will now resume growth to a higher number in the future.
In summary, going forward, we are looking to grow our policy count.
Grow our in force premium and grow our profitability.
With that I will turn it over for questions.
Operator, please give instructions.
Absolutely. Thank you 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.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
The first question comes from Matt <unk> with JMP. Please proceed Matt.
Hey, Thanks, good afternoon.
Uh huh.
Hey, good afternoon.
I'll pick up right, where you left off with the news of applying for our citizens de pop.
Is there any any color you can give us on it sounds like Q4, but in terms of potential kind of.
Number of policies or amount of premium that ideally you'd like to execute on or is that stay tuned yet to come.
Well, it's a mixture of both but Matt just so far.
Let everybody know because they'll all be.
In 30 days or so anyway.
As you know we've done this.
Many years.
And yes.
There is a process by which we go through so what we've applied for a 75000 policies in the month of November and November 'twenty, one to be precise but as you should also know that is a maximum number the actual number of policies. We will get will be some number that is less than that is just the way the process works.
As you go through the various soups and the actual number of policies and premium we will get will actually be best known on November 21st the date of the assumption.
It's just we're on the road between now and that Hill.
Yes.
Is there anything that can maybe you could offer some guidance there I mean, we can look to.
Takeouts, you've done I mean, you've done a lot of them over the course of the.
The company, obviously not in recent history, but you know and the market was right for them.
But I know theres been some leg.
Legislative changes rule changes around citizens in terms of.
People are having to go or not go.
Any color you can provide there in terms of how that might change the potential conversion rate or it's just too early to know you want to you to go through it.
Hmm, Matt Historically, you know the numbers haven't been as high as 65%.
It has expanded outside of Florida, and and we are seeing.
A lot of household names you know.
Cut to recalibrate their their appetite nationally you know a lot of it seems climate change related what he's got it I think of a C. I as you know having a lot of experience in a state that.
Kind of has gone through that over the past 2030 years is there a longer term opportunity there for HCI or what lessons have you guys learn by operating in the environment that is Florida that maybe you can can take elsewhere when the time's right.
Yeah, <unk> I think I'll listen <unk> reading the.
Headlines in the press releases in the area.
Statements and earnings call from number of other carriers et cetera, especially outside Florida.
You sort of get the level of angst that is going on I.
I think.
If I was to predict what's going to occur.
Judging by what happened in Florida, probably like 15 20 years ago the.
The supply and and number of people willing to offer policies is going to shrink demand isn't going away. Because every household some of these policies. So supply is going to shrink demand is going to stay the same old grow it'll take a while for premiums to adjust the new reality that are I think I've reached facing.
Using climate changes as an example that you used but eventually all that will stabilize out and there will be somebody let just say by 2030, who will be providing assurance and we'd be doing it in a profitable manner right. It's just between now and then there will be a lot of.
<unk> in terms of both who the carrier is and who was the rates are.
That is what I think is is starting to.
<unk>.
Unfold throughout the country.
We've seen this movie before because that's exactly what happened in Florida. After the 0405 storms here.
Nope that makes perfect sense and there's a couple of quick numbers questions and I could probably from Mark.
On the policy acquisition costs, you highlighted kind of coming down to it you're right about 12, and a half per cent from a couple of points higher year ago are we could we cut out work through the adjustments there in terms of lower commissions and some of the forces or or where where do you think I could go going forward.
Yeah, I I think that.
That's about where it's going to be for the foreseeable future unless there's any other changes it might drift down a little bit <unk>, but I think the bulk of that.
Improvement that you've seen there is reflected in wherever it is in the numbers now.
Alright, and then just a quick numbers one do you have premium sandy.
Yeah, So it's $113.6 million.
Alright, Thank you very much for for all the color and congrats on my order.
Thank you.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone. The next question comes from Mark Hughes with Choosed Mark. Please proceed.
Yeah. Thanks, good afternoon.
Good afternoon and Mark.
You have come a long way in a short period of time on a lost cause I.
I Wonder if you could.
Maybe breakout how much might've been more favorable weather in the quarter.
How much is.
Your own pricing initiatives and.
And how much progress is actually.
Tangible progress from the regulatory reform <unk> I think you said you think losses.
Get down to the 30 per cent level is that still a good number could go lower based on what we see here.
Hey, Mark it's it's it's mark so so.
To the first part of your question about the weather.
So there really was not a discernable difference in the weather between Q2 last year and Q2. This year. So the decline in the loss ratio from second quarter last year to the second quarter of this year really didn't have anything to do with whether there was it is always whether in Q2, we had a significant amount of weather and Q2 last year.
He had a significant amount of weather in the second quarter of this year. So that's not the reason that the loss ratios down to the last ratios down for the three or four things that I mentioned earlier and you know average premium is up obviously, that's gonna help frequency is down which helps <unk>.
And you know the average ultimate cost of the claim is down because litigation is down. So you know those three things work their way through the loss ratio at a different pace you see the impact of the average premium for policy going up you see that first so <unk>.
That's probably maybe 60, 65% of the reason for the drop this quarter the balance being some of the legislative changes, but I think the most important thing to say and I think I set it in my comment.
Is is we developed an expectation of what we thought would happen to the loss ratio when we.
When the legislation came out and that is still our expectation what we've seen in the first half of the year is consistent with with what we saw frequencies coming down litigation is coming down and to your point about the 30 per cent I think parents should I have both mentioned that we think the consolidated loss ratio.
It will come down from.
About 40% to about 30% and you know it would take some time to get there, but we still we still feel that that's where we're headed so the trends are moving in the right direction and we are really encouraged by the progress.
Oh and thanks for the detail how much are you going to pursue voluntary business you're progressives.
Are you going to be.
Be more dependent or look to drive growth on the take out.
The acquisition cost is certainly pretty.
Pretty attractive is that is that gonna be the focus.
Mark is parrish regarding that I think we are doing laundry business anyway. It's just the how's it runs through the book is word where the numbers become different mmm.
Mmm the take out is a opportunity that we've anticipated for awhile and we've actually communicated in previous calls and it is now here and we are taking advantage of it. It's it's almost like an addition to be able to things we've been doing so we are.
<unk> I guess, the overall theme that we're trying to communicate is.
Two two quarters a garage on the legislation go past, we people were asking hey, what will this mean, how much impact will you see people who are trying to get quantified and we made.
We models things and we tried to tried to do forecast with things were going to be and how things will evolve and I think what we're telling you halfway through the year is things are working out fairly much like we had said and now it's actually showing up in the numbers. The way we had set it and then the follow up actions. We had said we would take one that.
Was achieved is what we are laying out for the back half of the year yeah.
So I understood.
The premium's heated what is a good run right with the new reinsurance and place.
Tonight.
Yeah, Yeah, it's it's it's mark mm pretty similar to what it is in in in queue to we we issued an 8-K I think it's 67.
$67 million and change very close to what it was yeah, I actually just about $67 million. So.
Very similar to what it wasn't cute.
Okay can you change and I think it would last what are you talking about the.
Your prior pattern kind of boosting up reserves, a little bit on a quarterly basis.
No. Thank.
Thank you drifted away from that is that.
Was there any impact from that when we think about the loss ratio.
No not really I mean, we had net reserves are pretty flat.
So far this year.
We didn't really have much adverse development and in the first quarter, we booked a little bit less than a million dollars.
Uhm.
There's really not much going on there I mean, you know <unk>.
Reserves for the most encourage that for the most part of coming in where we expected them to and so we're not having to really make any adjustments.
Adjustments for prior periods.
And we're keeping that reserves pretty flat for now.
Some indications that there that they they could be starting to come down, but so far we're keeping them flat.
Yeah.
Yeah, two tap written in the quarter was a down year over year Nonrenewal would flood business what was the driving that.
Yeah, there's there's a little bit of noise in their mark. It's it's part of it is is is is flood about 8 million of it with slide because we had about $4 million Britain premium and Q2 last year and we had negative written premium this year, just because where there was a return of some of the the hundred premium so.
That's part of it.
Oh and the other the other is U P C South east.
So the written premium was down in the second quarter for that and that was just kind of a timing thing you may remember with the.
The the U P C.
Chant changes at U P. C. We renewed a lot of the policies that would normally have renewed and Q2 were renewed in Q1, and so we had higher and higher and higher sorry, written premium in Q1, and then lesson Q2 and keeps you for UPC southeast was actually a little bit negative. So there's there's a lot of noise in the <unk>.
You too written numbers that make it a little bit hard to follow but you know in Q3 will be back to sort of the normal pattern of Britain premium.
How much cash at the whole group.
So as I mentioned in cash and financial investments at the holding company levels about 164 million.
I think the cash component of that is about.
135, something like that.
Okay.
Great. Thank you very much.
Thanks Mark.
If there are any remaining questions. Please indicate so now my pressing star one on your Touchtone phone.
Okay. We have a couple of questions into the first coming from Lee Terry with term partners. Please proceed.
Good afternoon parish in all your group, what an outstanding quarter very pleasant.
I wanted to get an idea from your own how the whole.
Reinsurance environment is shaking here I know, there's been a lot of changes different directions, now that you've completed it and seeing how it had ended up last month, what's the outlook going forward from that.
Uhm Lee.
The simple answer about the reach us outlook.
I didn't make it in my prepared remarks was that.
Beginning of the year, there was some uncertainty about the availability and affordability of reinsurance rain.
And all of that speculation goes on and I think from what Mark has said and Karen et cetera, and what was released in the 8-K.
We place our insurance program, because we had anticipated these changes et cetera. The numbers are there is now on the 8-K, so at least for US we don't have a.
A reinsurance variability anxiety.
Till next June at the earliest here the other thing on a general reinsurance industry thing I think which was the nature of your question.
I think the anxiety level amongst reinsurers at least in terms of Florida seems to have.
It seems to have abated.
Especially by what happened in May I think there are lots of <unk>.
Reinsurance availability is now funding to normalize.
Affordability is a different price, but that's that's just what that is yet.
Thank you perish well done.
Thank you could hear your voice again Lee.
Okay, we have a follow up coming from Mark with Truest Mark. Please proceed.
Yeah. Thank you just wanted to make sure I was clear on the deep hops, it's been awhile.
You take.
Take the premium whenever you're whenever you.
Being successful on.
And then the.
Really know reinsurance associated reinsurance costs or acquisition costs.
Until those policies.
Until you get to the next storm season or when the policies renew.
Does that is that the right way to think about the financial impact.
Yeah and Mark.
<unk> has with you so when you do an assumption.
You will book G. W. P on the assumption date.
Of whatever on premium there was the acquisition cost will be zero until those policies expire renew onto our paper at which point would go back to normal.
The reinsurance cost on those policies with occasional with very few exceptions will be zero till June one of next year.
Yep Yeah.
Three components move in slightly different ways, but just so you know yeah.
Any kind of subjective commentary about the quality of the.
All the fees and the citizens now.
Increase.
How do you how fertile take.
Take out opportunity.
I think the.
The way I would characterize it as citizens has 1.3 million policies, if I remember correctly as of the end of June .
That's a lot of policies.
We are talking about trying to pick.
At most 75000 policies, but.
You said 65000 policy would be 5% of the book right.
Can we find here.
5% that we like out of that that big of a pool Wheeler.
We like our chances yeah.
But that is your I'm not commenting on the entire pole.
You are my sole mission is can I find.
75000, policyholders that we might want as HCA customers.
And the answer would be yes.
Understood. Thank you.
If there are any final questions. Please indicate so now my pressing star one once again that's star one if you have a question or comment.
We have no further questions in queue. At this time. This concludes our question and answer session I would now like to turn the call back over to Perish Patel, who has a few closing remarks.
Yeah.
On behalf of the entire management team.
I would like to thank our shareholders employees agents and most importantly.
Current policyholders as well as our anticipated future policyholders for their continued support.
We look forward to updating you on our progress in in the coming quarters. Thank you everyone.
At this time. This concludes our question and answer session. This.
This concludes today's call you may now disconnect.