Q3 2023 HCI Group Inc Earnings Call
Good afternoon, and welcome to HCI group's third quarter 2023 earnings call. My name is Mike 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 December <unk>.
2023, starting later today.
Call is also being broadcast live via webcast and available via webcast replay until November seven 2024 on the Investor information section of HCI group's website at Www Dot H C. I a group dotcom.
I'd now like to turn the call over to Matt Glover Gateway Investor Relations Ma'am. Please.
Please proceed.
Thank you, Mike and good afternoon, welcome to HCI group's third quarter 2023 earnings call.
On today's call is Karen Goldman Hei's, Chief operating Officer, Mark Harmsworth, Ti's, Chief Financial Officer, and Paresh Patel, Hei's, Chairman and Chief Executive Officer.
Fallen Karen's operational update Mark will review, our financial performance for the third quarter of 2023, and then Paresh will provide strategic update.
To access 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 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.
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 companys business financial 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 another strong quarter with pretax income of $20 $1 million and diluted earnings per share of $1 34. This was a great result in the third quarter included $6 $5 million of catastrophe losses from Hurricane Italia, which made landfall in Florida.
Cat three hurricane.
Marks the third straight quarter of pretax income over $20 million and brings year to date pre tax income to over $63 million.
Gross premiums earned increased almost 4% in the third quarter.
Our consolidated gross loss ratio was 35, 4% in the quarter and adjusting for the Hurricane Italia losses that I mentioned, our gross loss ratio saw a sequential improvement to approximately 32%.
We remain on a path of continued improvement in our underlying gross loss ratio, which mark will elaborate on in a few minutes.
Legislative reforms introduced last year in Florida had been effective they are continuing to bring stability to the Florida homeowners market and provide whole policyholders with greater consumer choice.
Similar to prior quarters each of our business segments had a positive contribution to our quarterly results.
Our insurance divisions homeowners choice generated another quarter of consistent earnings and tip tap insurance group reported its third straight quarter of GAAP profitability.
And investments net investment income totaled $9 $4 million almost entirely from our cash and fixed income holdings.
Our investment portfolio generated another quarter of steady income and has benefited from the current rate environment.
HCI is pursuing top line growth in the fourth quarter and the company is currently adding customers from citizens in total HCI group is a prove to assume up to 125000 policies, which includes the recent approval by the Florida office of insurance regulation for our second citizens assumption by tip tap.
We know we won't know for a few weeks the exact number of policies that I'd like to move to HCI and our expectation is that H D. I could add between $150 million to $250 million of in force premium.
Finally, HCI group continued to deliver on its commitment to shareholders paying a dividend of <unk> 40 per share or 52nd consecutive quarterly dividend.
To summarize HCI group delivered another quarter of solid profitability and we think there is an opportunity to build on our momentum now I'll turn it over to Mark to provide more details on our financial results.
Thanks, Karen So as Karen mentioned this is the third consecutive quarter with pretax earnings have been more than $20 million.
In the first quarter pretax income was over $20 million and included a one time gains in the sale of real estate in the second quarter pre tax income was over $20 million with no. One time gains this quarter pre tax income was again over $20 million, despite having a cat three hurricane hit the state of Florida.
These improving earnings are the result of trends we've been discussing for a while now.
Your average premium per policy, increasing investment income flat operating costs and improving claims trends in.
In the third quarter gross premiums earned were up despite policies in force being down driven by rate adjustments made earlier in the year high.
The higher average premium per policy, both in Florida and outside of Florida has helped to reduce the loss ratio and increase earnings.
Increasing investment income as the second trend, helping to drive improved earnings if you will.
Look at the income statement this quarter it looks like investment income is down, but that's because we had a real estate sale in the third quarter last year. If you adjust for that ongoing investment income is almost double what it was a year ago and it continues to go higher.
Third positive trend is that expenses have been flat, we're driving significant operating leverage by generating higher premium revenue without increasing operating expenses.
The last trend is the continued improvement in the loss ratio I should clarify one thing quickly. If you look at the loss expense for the third quarter last year. It included a large expense related to hurricane in of about $64 6 million and a loss expense for the third quarter. This year. It includes as Karen Karen mentioned.
Losses of $6 5 million or Hurricane Italia together.
A clearer picture of loss trends, we need to adjust for both if we do that the consolidated loss ratio in the third quarter last year was 41, 4% and in the third quarter. This year. The gross loss ratio is down to 32%.
This improvement in the loss ratio was being driven partially by higher average premium per policy, but more importantly, a lower claim frequency and reduced litigation frequency. We believe is a result of the insurance reform legislation in Florida.
I've mentioned this before but we are not getting to these lower loss ratios by reducing reserves in fact net reserves at the end of Q3 are the same as they were at the start of the year.
She had mentioned a few things in the balance sheet shareholder equity has grown by about 25%. So far this year and book value per share is up from $18 91 at the start of the year to $23 and 27 at the end of the third quarter cash and financial investments at the holding company level or just over 167 million.
Up from $140 million at the start of the year.
We're also happy to announce that we signed a new credit facility with fifth third bank with significant improvements the amount of the credit available increases from 50 million to $75 million and the term of the facility has been extended from two years to five.
Combined with cash and financial investments at the holding company level. This increases total available liquidity at the holding company to just under a quarter of a $1 billion, which is available to support new growth initiatives.
Speaking of new opportunities as Karen mentioned, we're in the process of assuming a number of policies from citizens, which we expect will increase premiums and more importantly substantially increased earnings starting in the fourth quarter.
Summarize this is another great quarter for the company and we are positioned for even better results revenue was going up investment income is going up the loss ratio is coming down policy acquisition and operating expenses are flat and earnings are growing with that I'll hand, it over to Paresh.
Thanks Mark.
Karen and Marc walk everyone through our solid financial position at the end of the third quarter.
With approximately $750 million of enforced premium and both of our insurance division is being GAAP profitable and cash flow positive.
But looking forward to Q4, we're building on this space by assuming policies from citizens we.
We expect to close out 2023 within a stones throw of a billion dollars of in force premium.
And we expect to cross that Mark in early 2024.
And while reaching this milestone will be an accomplishment we are already planning for what comes next.
There are several initiatives that we're looking at and each is in different stages of development.
One item of note is that we are in the process of forming a new reciprocal carrier in Florida.
The new carrier is going to be called condo owners reciprocal exchange and will mark our entry into the commercial residential insurance space.
Our application is currently pending regulatory approval and we hope to commence operations in early 2024.
Beyond that we have additional plans and we will stay well disclose them as we go forward. Please stay tuned.
To summarize where we are.
We had a solid quarter in Q3 in.
In Q4, we will have additional growth in Florida by adding additional policies from citizens.
And we are looking forward to a very bright 'twenty 'twenty four with that we'll open the line for questions.
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And our first question will come from Matt Karr Leddy with J N T.
The underlying loss trends Mark you talked a bit about it I was hoping you could dive in a little further you have always known you guys to be pretty conservative and kind of what you have what you printed in a quarter.
Can you give us a look behind the scenes and maybe what are you seeing in paid or is there kind of some of the indications may be even stronger than what we're seeing and you're just given a little time to make sure that it's fully baked.
Yeah. Good question. So so yeah, I mean generally speaking.
Claims trends are really good.
We're seeing some pretty significant decreases in claim frequency.
Weather adjusted claims frequency is is is down about 20% quarter over quarter.
Litigation the number of lawsuits is 30% to 40% less than you would expect it to have.
Sure quarters like Q3, Q4, so things are things are performing well.
The Florida loss ratio has improved significantly.
As we've talked about and yeah. We're still you know, we're still being I would I would use the word prudent in how we reserve so.
Our loss expense is higher than what our paid their incurred are.
And for.
For the for the for the full year.
We've kept reserves flat and I think that that says something.
The policy count was down the number of open claims is down.
But net reserves are flat so no statistics like you know average reserves per open claim and those kinds of things are up significantly so.
We're taking a fairly prudent approach to reserving.
It's when you look at the face financials it looks it looks very good.
And I would I would say that the trends or maybe even a little bit better than how it shows that does that help.
Yes, exactly what I was looking for.
And then maybe if I can take outs.
Karen I appreciate your comments on.
I think you should expecting kind of a $150 million to $250 million enforce premium.
How should we think about in terms of average policy size for kind of what's coming out of what you were looking to take out of citizens. I know you won't know exactly but what kind of ballpark, what's the average premium per policy.
So Matt.
Matt It's mark what I would assume about 3700.
Per policy, that's a good estimate at this point, we won't know for a little bit yet, but that's it that's a pretty reasonable estimate of what we would expect on a consolidated basis.
Okay great.
And then maybe just a high level question.
Can you talk a little bit about the competitive environment in Florida, I mean, obviously, there's a loss picture is getting better or would you talk through that.
But yeah, we've all seen the bankruptcies and the company's shrinking and things like that what kind of can you give us an update on the competitive front, what youre seeing in terms of companies that you'll have an appetite to go out and right.
How about a business versus those that might still be playing a little bit defense.
Yeah, Hey.
Hey, Matt aren't true.
The thing that I would say about that.
A lot of there's been a couple of new startups, so that's been going on.
A lot of a number of the existing players are obviously participating citizens. The populations. So that's kind of like an optimistic thing. We also noted a couple of other carriers have mentioned that the shrinking their books and so on so that's also.
In the opposite direction, a little bit and citizens is.
Sitting there absorbing any any movement back and forth. So all of those things are playing out.
So I'd say, it's a mixed bag at this moment in time in terms of.
People are growing versus shrinking.
From our own perspective I think.
We sort of see that.
The Florida insurance space is getting to a better place and obviously as it gets to a better place there will be policyholders.
Policyholders will have more choices and more cargos.
Starting with US I mean, we're talking about growing by almost a third in the next few months.
So.
Just just by our actions yet.
Yeah, absolutely great well, thank you for the answers and congrats on a nice quarter.
Thanks, Matt.
Before we hear from our next question here a reminder, that if you would like to pose your own question to please press star one at this time.
Next we have Mark Hughes with truest.
Yes, Thank you and good afternoon.
Hey, Mark what is your what is your view at this point regarding voluntary policy growth.
The increase at our homeowners choice.
We've got a what would be a driver there this quarter and then.
Obviously, the pick up on one of the big impact, but we're gonna be growing on a voluntary basis as well.
Mark Great question, but a couple.
A couple of things because we have both homeowners choice and tip tap in the Florida market.
Part of our agreement and how regulators have us operate.
Homeowners choice doesn't write voluntary single policies.
Is blocked so business like take outs et cetera. So.
There isn't voluntary right because the homeowners choice side on the picked up side there is and it just continues along its own.
Arizona steady pace and we're supplementing it with.
What's sort of with a couple of Takeouts in this particular moment in time yeah.
Okay understood.
The reciprocal exchange Oh, you're talking about what's the.
What's the thinking there or what's the economic model, how quickly will that ramp up.
Oh again, so we wanted to kind of get out in front of this because oh. What's happened is we've filed with the Oi are for approval and the filing itself makes it somewhat.
Public that we are in the process of doing that so we wanted to make sure that a transparent so that all shareholders are aware that this is going on.
The thesis for the business really is that.
While there is a hard market or.
Semi semi hard market going off for the residential parcel land residential business.
It's a very very tough market right now very hard market for.
For commercial residential this is like the whole condo buildings in that kind of stuff. So we were presented with an opportunity to enter that line of business and grow.
At a significant rate and you know we.
We've spent.
A few months doing the economics in the mass and everything else and we think it's a healthy business for us to enter where we can add value both to our shareholders, but more importantly to the policyholders and the condo owners that will be.
The policyholders of this company. So it seemed like there was an opportunity for a win win solution, where everybody is looking for some more parking and we are as we always do pioneer.
Pioneering a way and go into a new area.
And then.
The Mark I think you've talked mostly about a 30% gross loss target here you are at a 32%.
I wouldn't say, it's early days, but.
No you got them pretty close pretty quickly is that still the.
Target or could you, perhaps go lower than that.
Yeah, I mean, I think we've talked about the 30% a few times, we said that it would take a little bit of time.
To get there. The you know the loss ratio has dropped every quarter now for a number of quarters.
I think 30% is still the right target could it be a little bit less than that in some quarters I think it probably could.
You know I think 30, 30% is I think still probably you know comfortable with target on a consolidated basis that.
At least for now.
Thank you very much.
Thanks Mark.
A reminder to press star one if you would like to join our window. During our question and answer period, we now hear from Casey Alexander with Compass point.
Yeah, just a little clarification that the condo honor reciprocal exchange is is that being seeded by is that a part of the 125000 policies that are being taken down from citizens that are specific to that market or are you entering that market with a different distribution.
Scheme distribution channel.
Casey Let me answer the question this way right.
All that's gone on with the Colorado recycle exchange is that we have.
By application with the Oi or with regulators.
It is not included in any of the 125000 policies that we've been approved because we can't be approved for funding any of those things until the application is approved yep.
So oh yep.
So then I'm curious what is the sort of distribution strategy to actually write that business is it is it you know independent brokers or how do you. How do you expect to get in that market. Once you are approved.
Actually we have all the usual.
Kevin is open to us that there couldn't be a depopulation from citizens for that business and that business also generally works slightly differently to a personal lines residential which sort of tends to auto renew every year here.
Here, because it's condo associations on condo boards are involved it's a slightly more complicated sale cycle that involves brokers then we will use brokers.
And it just reapplied for a re underwritten and every year.
Just as a larger.
Mhm for policy kind of business.
Has a slightly different.
Rhythm to it and that's why we're doing it the way we are yeah.
Okay and then my last question is you know sort of more high level question about the the.
The depopulation, we just you know HCI was built on deep populations in the.
In the late early two thousands.
And then and then didn't do very many for quite an extended period of time and now it's moving back into the market whats different about this D population compared to the <unk> populations that you did in the past when you were originally building the company and you know sort of why.
The acceleration back into that market at this time.
Just a high level, that's a helpful thing to hear.
Totally so you're right we did deep populations back.
Before they were popular back in 2007, eight 910 kind of timeframe.
We did some again you know 11, 12, 13 and 14, we kind of did.
Las Vegas the population in 2014, we did do some other minor top up ones in euros in 17, 18, and 19 I think 19 was the last time, we did the depopulation before this year.
Uh huh.
But the item and all of that stuff is that we were doing this as citizens.
It peaked out to $1 2 million policies I think in two.
2012.
And then we stopped when the policy count dropped around 400000.
And you know because.
The moment had passed.
The card is it really should be aware of is in the last two years or so cities has ballooned to around what are the $1 7 million policies 1.4 million policies at this point and.
Again, there's.
But you're really refreshing to depopulate from that pool.
Along the way is what I would say, it's just like what it used to be before.
It is it in the sense of some of the rules have changed from citizens, but more importantly, our technology and our capabilities.
Have advance tremendously in the last decade, so for us to do it would be population at this point, it's a lot more.
Easier and automated and easier for some of the risk selection than it was a decade ago. So from all of those things.
You know he has improved so to put it this way.
Choice is doing what it was built to do only new or better and much more improved.
Okay. Thank you for taking my questions.
Okay.
We have mark Hughes with tourists.
Yes. Thank you the expense ratio looked pretty good this quarter any one timers or is this something that's sustainable.
It was if you compare it quarter over quarter. There was one one thing that creates just a little bit of a.
We.
Stock based compensation in the third quarter last year was about a million or two higher than the third quarter of this year. So that's one of the reasons that its down but you know if you go back and look for the last quite a while.
You know you put labor and Opex together, it's been pretty flat for a number of quarters.
And so yeah, I would say that it's sustainable.
The percentage that the ratio is going down a little bit because gross premiums are going up a bit but.
You know the dollar value of labor and Opex combined has been flat for a while and I think it's reasonable to assume that it will for us in the future for a while.
Okay, so opportunity for continuing improvement in the ratio.
Yep Yep.
Yeah.
Okay.
And then the I think I can back into the math, but you know your hit rate.
125000 policies, you're talking about premium of 150 to 250.
I didn't get my calculator fast enough, but what do you think would be a hit.
Hit rate is on the how does that.
Kind of compare to your historic experience.
Mark I think it's going to be very similar to what we've said in the past.
Right and you know I think we had said.
When all is said and done we.
We will end up with somewhere like pick a number between 40 to 70000 policy somewhere in that kind of range yet in terms of policy count.
On pages, you can sort of say that somewhere between 33 and <unk>.
65% or so yeah.
Mhm.
Hum.
It seemed to be pretty good.
Function of.
Less competition or more astute picking that you're picking your policy, but others are overlooked.
Or.
Yes, youre, saying that no.
Not inconsistent with the past.
Yeah, So I think well.
Ali Ali.
Just make some general comments, so we are expecting somewhere between that and I just said the calculator, Matt sorry, it's between 40 and 60% right is what we're expecting our success rate to be.
I don't necessarily know that everybody else is also in the 40% to 60% range. It we haven't followed everybody closely enough to know that.
We just know that.
Well, yeah, we we run our own race and that was what we were kind of hoping to get and we seem to be.
Achieving that mechanism, because that's where our technology enables us to do yeah.
We try to make it as smooth and easy transition for citizens policyholders.
And because of that.
Large numbers of them are.
Look at this as a favorable opportunity to leave citizens and join us and that's what they do and then they stay with us to give you an idea because Casey asked earlier about takeouts.
We have policy holders now or on the 17th renewal with us.
And these are people we'd be populated from citizens back in 2007.
So as you're watching this play out.
It's you know we run our own race and we know how are how all behaves.
Yeah, Yeah, Okay. Thank you very much.
Matt <unk> with JMP.
Thank you just a couple of numbers housekeeping questions.
So probably for Mark.
Net written premium and tip tap that surplus if you have a surplus that tip tap if you have it.
Yeah. So so net net written premium consolidated was $132 million.
101 hundred $32 1 million.
Hmm tip tap surplus.
And then.
Alright, and then Tiptop surplus 91 6 million.
Yeah.
Alright, thank you.
Okay.
Yeah.
One moment, while we poll for any additional and final questions.
At this time. This concludes our question and answer session I would now like to turn the call back over to fresh Patel, who has a few closing remarks.
Thank you on behalf of the entire management team I would like to thank our shareholders employees agents and most importantly, our policyholders for their continued support thank you.
<unk>.
At this time this concludes our question and answer.
Session. This concludes today's call you may now disconnect.
Okay.