Q2 2019 Earnings Call
So the H.C.I. group incorporated second quarter 2019 earnings call. My name is seven and I will be your conference operator this afternoon.
At this time, all participants will be in a listen only mode. Before we begin todays call I would like to remind everyone that this conference call is being recorded and will be available for replay through September six 2019, starting later this evening.
The call is also being broadcast live via webcast and available via webcast replay until September six 2019, or the Investor information section of the H.C.I. group's website at Www Dot H.C.I. group Dot com.
I would now like to turn the call over to Kevin Mitchell eight <unk> Senior Vice President of Investor Relations. Sir. Please proceed.
Thank you and good afternoon.
Welcome to H.C.I. group second quarter 2019 earnings call with me today are Paresh Patel, our chairman and Chief Executive Officer, and Mark <unk>, Our Chief Financial Officer.
Following parishes opening remarks, Mark will review, our financial performance for the quarter, and then turn the call back to Paresh for an operational update and business outlook.
Finally, we will take your questions.
To access todays webcast. Please visit the Investor information section of our corporate website at H.C.I. 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.
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 Companys filings with the Securities and Exchange Commission.
Should any risks or uncertainties develop into actual events.
These developments could have material adverse effects on the company's business.
Financial conditions.
And results of operations H.C.I. group Inc. disclaims all the obligations to update any forward looking statements.
With that said I would now like to turn the call over to Paris Patel, our chairman and CEO Paresh.
Thank you, Kevin and welcome everyone.
Enrollment Mark will give you details on our financial performance.
But first here are some highlights of the quarter.
We generated fully diluted earnings per share of 90 cents continually got consistent record.
A consistent track record of profitability.
We have been profitable in 45 of the last 47 quarters.
The streak only being broken by.
Florida being impacted by Hurricanes.
Also in June we paid our 30 fiveth consecutive quarterly dividend.
At roughly the $40 a share we yield about 4% a year, which is a pretty good dividends.
Also during the quarter, we completed a catastrophic reinsurance program for the 2019 hurricane season.
I am pleased to say that why do we reduce the absolute spend compared to last year's program, we maintain similar levels the limit and retention.
We believe this is due to the Reinsures appreciating our technologies that provide data transparency and efficient claims management.
And finally and most importantly.
Tim touched gross written premium more than doubled in Q2 compared to Q1.
Tip jobs growth is organic and it's profitable.
With that I'll now turn over the call to our CFO Mark College was forced to walk us through the financial performance for the second quarter Mark.
Thanks Paresh.
Net income for the second quarter of $7.6 million up from 6.4 million in the same quarter last year for the first six month net income of 14.3 million was down from 17.2 million in the same six month last year.
Fully diluted earnings per share in the second quarter were 90 cents on a GAAP basis down slightly from 92 cents in the second quarter last year.
And on an adjusted basis fully diluted earnings per share were 81 cents compared to one dollar and one cents last year.
This quarter was an encouraging one for us on our last call I talked about the different stages of growth that should start to reveal themselves in the numbers.
And this quarter represented an important step in that direction consolidated gross written premiums of $133 million were 1% higher than the same quarter last year, driven by the growth of tech growth of tip tap our technology powered insurance subsidiary.
In the fourth quarter of 2018, Tiptop wrote about $4 million in premium and flood and homeowners combined in the first quarter. This year that grew by 50% to 6.1 million and in the second quarter that more than doubled to just under $14 million driven by the growth of tip taps new homeowners product.
The growth in tip top has fueled consolidated premium growth quarter over quarter and we believe that this is the new phase for us as we move from one of carefully controlled risk reduction to carefully controlled profitable growth.
A few other highlights from the quarter.
As you know, we recently announced our new reinsurance program for the period June 2019 to May 2020.
We estimate the consolidated net reinsurance cost to be about $124 million for that period. This does include expected growth for typtap, but its subject to a true up at the end of Q3.
Also note that the estimated reinsurance costs are net of about $10 million of estimated benefit under a multiyear agreement.
Reinsurance premiums ceded in the second quarter were slightly higher than it should be going forward.
As of course, they only reflect one month of the new less costly agreements.
As has been the trend for a while investment income was up from the same quarter last year, reflecting higher interest income and higher limited partnership income we had a very small net realized loss on the sale of some investments as well as the $1.3 million or unrealized gain on equities, reflecting the increase in the stock market in the second quarter.
In terms of expenses just a couple of things to note first obviously interest expense is down significantly from the same quarter last year as a result of paying off the convertible debt in March.
Our second Las expenses are up about two and a half million dollars from the second quarter last year, we had some adverse development in the quarter and we increased reserves as we did in the first quarter.
The second quarter was a fairly average one in terms of weather.
And the 2000 accident 2019 accident year is developing significantly better than 2018, but to be cautious we are reserving for 2019 at the same rate as the adjusted rate for 2018 as a result, our reserves on the balance sheet continue to go up.
As of June 32019, total reserves for daily claims so excluding cats are about $2.75 million higher than December 30, Onest 2018. Despite the fact that the number of open claims is actually down about 8%.
Well the recent it'll be legislation may help the overall claims environment, we're continuing to take a cautious stance.
Now to the balance sheet just couple of quick things here first long term debt is down from the end of last year by about $88 million and our debt to cap ratio has dropped.
From 58% to 47% after we pay down the convert back in March.
Second you'll notice a new item on the balance sheet for 2019 called revolving credit facility. This is the amount that we have drawn on the new credit facility with fifth third bank to fund certain real estate investments this year.
Just.
A few quick comments on capital management as you know, we declared and paid a dividend of 40 cents per common share in the second quarter and announced a dividend of the same amount for the third quarter as Paris mentioned, the current stock price that the yield of right around 4%.
The board approved a $20 million stock buyback program for 2019 and in the second quarter, we bought back 161000 shares bringing the total to about 192500 shares.
To the end of June .
The number of common shares outstanding is down about 4% to 8.053 million at the end of June and this should continue to decline as we execute on the balance of the 2019 buyback plan of which there is about $12 million left at the end of June .
On a fully diluted basis, we're now just under 10 million shares outstanding at the end of June . This should also continue to decline as we continue to execute on the buyback plan.
Just as an aside at the rate we're buying back shares our basic share count by the end of 2019 should be about 11% less than it was at the end of 2017 that means that someone that owns a share of stock HD I stock in December 30, Onest 2017, they will effectively own 11% more of the company than they did 24 months before and they received over $3 in dividends along the way.
I should also mention book value, our net book value per share is up from $21.71 at the end of 2018 to $23.16 at the end of the quarter.
In terms of Holdco liquidity, we have over $50 million of cash and investments at the holding company level as well as access to the remaining $55 and the revolving credit facility for total liquidity of just over $100 million.
And with that I will turn it back to Paresh.
Thank you Mark.
Q2 demonstrates that our investments in technology, and our focus and analytics are paying off.
Well in some other before tax companies say they are developing disruptive technologies doing insurance in a better way and hoping someday in the future to be profitable. We do all of that now we have industry, leading technologies and we are already profitable.
Our internally developed technologies include an automated online platform for quoting and binding policies.
Although.
Things, we also have an automated intelligent underwriting tools that help them do risk selection.
We have policy management software and systems, and we have world class claims management software.
All of these technologies makeup processes fast efficient and cost effective.
While improving both the customers and the agent experience and helping us reduce costs.
We also believe we have superior analytics that Andy fight trends and improve underwriting performance.
Our underwriting standards, a strict and exacting.
We are very selective in the policies we except.
And our automated underwriting tools in corporate all of these analytics.
These tools.
A prostitute, they're very similar to artificial intelligence.
Software and that they are constantly learning and improving.
So we believe that these tools and the strict underwriting standards.
Based on years of Florida data that have enabled us.
We will continue to enable us to profitably navigate the challenging, Florida, and South Florida market.
And all of these technologies analytics are embodied in Typtap technology, driven insurance company.
September .
In the second quarter is adding about $1.5 million, a new premium per week.
Up from 800000 per week in the previous quarter and 500000 per week in the quarter before that.
It now has over $32 million of premium in force and we project by the end of the year tipped up we'll have over $50 million of premium in force.
And one more time, typtap strap and growth is organic and profitable.
Were not sacrificing margins for the sake of growth.
This is important because bear in mind.
That $100 million of premium at a 20% margin generates the same profit dollars as $400 million.
And the premium with 5% margins.
We're very proud of the progress Typtap is making.
And with that we're ready to open the call for questions.
Operator, please provide the appropriate instructions.
Thank you.
At this time, we will be.
At this time, we will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You may start to if you will like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Our first question comes from a lot of Matthew Carletti of JMP Securities. Please proceed with your question.
Hey, Thanks, good afternoon.
Perished couple of questions to start.
Maybe just sticking on Typtap can you can you paint a picture for US as you look ahead, you know not quarters, but several years down the road how do how do you see kind of a.
Typtap developing vis-a-vis homeowners choice are you at some point do you cut out as well as were I would say past proof of concept look to transition some of that over or are they truly going to be kind of independent and maybe you know Greg pass will be different.
Look the simple way of looking at that is.
Homeowners choice has a wonderful set of customers and people love that brand and people are there customers have been long term customers an average for six to seven years.
So we see no reason to disrupt that installed base.
Makes sense, but.
Yes, that's the existing book homeowners choice.
The growth and the future of the company lies in Typtap and.
You bet on calls for several years.
We are making sure that everybody clearly understands.
That we're doing the things every said was impossible to do which is grow organically grow rapidly make money right. This is all done one policy at a time and Typtap has achieved.
Number is that a fantastic at a very.
Hey in his life individual.
And enforce yeah.
Yes, we are going to add more and more capabilities and.
Lines of business and areas that we do business and to the Typtap, Brian because that's a name that.
Synonymous with the future.
And when you when you say areas that you do business and lines and lines of business can you expand their little bad is that is that.
Building, a book a bit more outside of Florida or is that getting more diversified even within florida or little bit above.
Well.
Im going to start sounding sure take im sorry, but.
Thank you this way when we start Typtap, we were going after the flood opportunity and the flood opportunity is about $3 billion I think nationwide and we were doing in Florida. So maybe it was about a billion dollars yeah that was a premium in Florida.
So we were.
We were addressing a billion dollar opportunity by adding homeowners we've had another $8 billion of opportunity and we're now attacking a $9 billion market combined and we're trying to see how much of that market share can we get.
In the future what are we going to do is expand into other states and maybe other lines because we are trying to increase that market.
The total addressable market and increase it from 9 billion to some much greater number and as you know in the insurance space.
There are one hundreds of billions of dollars of market space to do eventually attached. So you would ask the question the long term.
Thats, what we are aspiring to do in the course of the next several years.
Great and then maybe shifting gears a little bit.
What are your views on your kind of in your eyes, how is the Ob environment evolved in Florida, particularly given that the changes that took place in July one kind of what did you see in the kind of ramp up before July one and then how has that changed since July one.
So obviously July one is a inflection point, but.
Because oh, the passage of the new law and going into effect on July one.
But right now it's too early to tell.
What.
Major.
It has had on.
On industry going forward now will we know in a few months time, absolutely just that it's too early to tell them all.
In terms of our experience and what we saw.
We did not see a material difference in the number of it'll be claims and are lawsuits leading up to July one.
I think that that was the nature of your question as to what's going to happen post July one and whats going to look like July one of next year, It's just too early to tell.
Okay, Great and then just a couple real short ones.
You mentioned, a little bit of reserve strengthening was that largely will be related or was that related to something else.
No. It's it's just just general fairly similar to.
To what we did in in the first quarter, we added two and a half million something like that.
About three quarters of that is related to 2018.
And you know our loss ratio usually runs between about 23, and a half 25 and a half.
We initially booked 2018, a little bit on the lower end of that.
Based on the way it looked at the end of the year and we are just increasing that a little bit.
We've moved it up from about 23, and a half to 24 and a half I think.
Okay. So just reflects an adjustment in the ultimate for 2018, and a little bit of 2017.
Okay, and one last one just a number.
Do you have net written premium sandy.
I do.
51, well 52 million.
Great. Thanks, very much and best of luck going forward.
Good.
Our next question comes from the line of Mark Hughes of Suntrust. Please proceed with your question.
Oh, Thank you good afternoon.
Yes, and Mark.
The typtap.
The run rate. It did you say a million and a half per week here recently.
Yes.
Was there a boost in Twoq you around kind of the start of storm season.
With that settled down a little bit in Threeq, you are you continuing to see that build.
Mark at some point.
The accelerating build will tail off but as I said in my prepared remarks, we were doing about 400000, a week in December it accelerated all the way through first quarter, where we ended at about 800000, a week and then it continued accelerating in the second quarter 2 million and a half and we're still seeing doing them.
Hopefully it keeps accelerating through the end of the year.
But obviously nothing trees don't grow to the Sky eventually it will tail off but even at a million and a half its a very good number to keep sustaining at yes.
And then maybe just an update on where you are assuming success what.
Is the normal profile either in terms of the structure of the behavior.
The typical to TEP.
Buyer.
So look we're seeing two things that you should.
You should factor into this and this is looking under the Hood that make this thing very encouraging.
Our quote to bind ratio is around 7%.
Putting it differently is that every 100 quotes we do only end up taking about seven policies. So close to that point of only being selective. So I think there are a lot more people who want to be kept up customers than we are willing to accept us to customers because it's helping us shape the profile of the book to what we wanted to be.
And I think I don't have it handy, but I know things that we monitor and look at is what the average premium per policy is and it's quite healthy.
Im being told US about 2900, yes, it's very market very similar to HCP see its between 28 and $2900 per policy.
Though.
A simple soundbite takeaway from this is.
We are growing typtap organically with the same characteristics as we once upon a time grew homeowners choice.
The populating from citizens.
And you can imagine how encouraged we are that if we get the same outcome as we ventured with homeowners choice.
This could be a.
A wonderful outcome.
And when you say a quote to volume does that a request to quote so they ask for a quote from you and you bargained, 7% of those policies.
Oh.
Actually as how we define it is because of these systems automated nobody request a quote things that they go to an agent the agent types in the address and whatever the fact that the day.
Got a quote for that system for that policy is what triggers in our system. So there were 100 opportunities at least started.
Tipped up for at least seven that abound.
Understood.
The investment income in the quarter any unusual items. There I think you said the partnership income was up is this a good sustainable level would you say on a go forward basis.
Yes. It was it was a little higher than normal Mark I think it was.
So limited partnership income.
Average is about 750000, a quarter and in Q2, it was a million for the quarter, so about $250000 higher than average.
So other than that I think it was pretty everything that's pretty normal.
So is it.
What we did in Q2 is probably a little higher than you'd expect going forward, mainly just because it was a good quarter for limited partnership income.
And post acquisition costs continued to.
Move up a little bit is that the typtap effect or is that just the strong growth in the quarter.
Yes, it's it's.
We talked about I talked about this a little bit on the last call and I had suggested that that enough that the percentage that will start to go up a little bit just as the mix changes so.
Tap has has a higher.
Cost of acquisition per policy, and so as the balance shifts towards tip top and in periods. When Typtap is writing a lot that percentage is going to is going to go up so.
If we continue to write strong in Q3.
Ill help probably again be higher higher in Q3, but you know I think Q2 is probably a.
Pretty good estimate of where it will be at a little higher than what I had suggested on the call last time, just because if that grew considerably faster than I expected it to.
And finally I wonder if.
As you might comment on the competition is maybe reduced appetite on the part of other carriers for business.
Influencing or contributing to your growth.
How do you assess the market when you look at your competitors.
So there's been lots of.
Different conversations and statements made by competitors all over the place on the matter.
And.
I think there's going to be more changes coming in the coming quarters, because people have talked about rate increases and those kinds of things, which again tends to agitate a.
A book of business. So you will probably get more churn in the state of Florida.
From a measure a metric from our perspective. The fact that we are doing I think something like 7000 quotes a week.
Gives us a very good idea that there is obviously a fair number of fair amount of business that is.
Looking for a new.
Carrier.
Every given week, so that gives us plenty of.
Opportunity from which to select the policies of the walk.
And roughly saying what that means like is that it was easier to select a good book of his home citizens when that a million map policies than when they have 500000 policies.
The 7000 quotes a week tells us that there's lots of.
Churn going on that that lets us assembled a book we want.
If.
People do rate increases et cetera, the other.
Dislocation in the marketplace that will just enhance that number.
And to Paris is point before while while we are growing in tip top and while that.
We're excited about that were being very very selective as he said about the policies that we pick.
And the reason for that goes to what I talked about in my comments about that.
Sustainable profitable growth not just growing for the sake of growing.
Understood. Okay. Thank you.
I would like to remind our participants at this time, if you would like to ask a question during the Q when a session.
Please press star one on your telephone keypad.
Our next question comes from the line of Christopher Campbell of KBW. Please proceed with your question.
Hi, good afternoon gentlemen.
Good afternoon, Chris.
Yes, I guess, just a few numbers questions.
It sounds like the adverse development was 2.5 million what were cats as an absolute dollar amount and then what were repurchased.
So the only.
So in Q2, we.
Had about $500000 related to.
Cat if you will so we did a couple of things in there first of all we increased the ultimate for.
For what.
This forecast that we're keeping track of rice so.
Michael Irma.
Matthew and the Hailstorm, we increased it's something we're obviously looking at that every quarter, we increased the ultimate for the hailstorm from Q1 from 5 million to 5.250 million. So there's there's $250000 worth of expense for that in Q2.
And then we also.
How about two to $250000 worth of expense related to the math you and that's just something that sort of continues to run a little bit.
And the rest of it is just is just.
Okay, Yes, that's it for cat.
No no movement in Michael or core aroma.
So thats the only cat numbers that are in that.
24 million.
Okay got it and then.
Okay. So just a quick question on map you. So why is that storm been so hard for like companies to get their alike.
To get there there are estimates right on I mean, we're seeing a lot of development on that not just the ti.
Unlike in general like was there anything special about that storm that made it harder to do a job than a normal cat.
Hi, there Matthew Michael.
Matthew yet.
Yes, I mean, Matthew is what two years ago three years. It yes, I mean, the development on that has not really been that significant from.
The initial ultimate maybe 15% higher than originally something like that so.
You know its just theres not that many claims left open. It's just some of those claims you end up settling for a little bit more than you expected to.
We've still got we still got some pretty good reserves left for that but.
Yeah, I don't think its really develop yes, I don't think anybody is really talking about active development at any great fashion yeah yeah.
Okay, and just taking one of your peers also an assay development this quarter.
Okay, Yes, yes.
Seems kind of late reported how did seem theres anything special about it and what accident years drove the reserve strengthening was that all 18.
No it's a bit if you look at.
Probably the best way to look at it is to look at the first.
Six months total so weve booked.
About four and a half million dollars worth of adverse.
On what.
What we think of the daily claims.
About.
Two thirds of that is 2018.
Then there is a little bit for 2017, and then very minor amounts for prior years.
And I think I talked earlier about that it's the development on 2018 has just been a little bit higher than what we expected.
So we tweak to that but not dramatically higher.
Okay, but it's it's mostly 18 in 17.
Okay Perfect and then what was the dollar amount you guys spent on share repurchases.
Look I think it was 101000 shares like how much was that like in actual dollars.
For the quarter, Yeah, 6 million 6.663 million.
Perfect.
Now I think you had mentioned you guys Didnt see a spike up in terms of like.
The claims before the deadline.
How would you describe now that were like a little over a month.
Into that posed ASV reform era like have you seen a noticeable year over year improvement in any of your July claims metrics that are that are giving you confidence that ASV reform might be.
Hi, it might be a positive in terms of core loss ratios.
Chris as we stated earlier rate is just too early to call.
The the reason being is don't forget.
The legislation and what it does is for all it will be that assigned after July one.
Right.
You still have a tail going back a couple of years several years.
It will be that was signed before that.
This is going to take a while to shake out in a direction as to what what concrete effective has and 30 35 days at 36 days. After legislation went into effect. It's just too early to tell yes, just to add to that a little bit. The I agree. It's too early to tell and there may be a positive impact of it.
But we're not we're not baking any of that into our reserving methodology at this point, where I think I mentioned it earlier in my prepared remarks, but.
If you if you take out the hailstorm, which we treated separately 2019 is developing favorably compared to 2018.
I think in but we're just continuing to reserve at at that higher rate and if if some positives to come out of it will be then then we'll deal with it but I think it's going to be a while before we really start to see that and we're not we're not baking any of that optimism into our reserving methodology in anyway.
Okay, and then just one last one on the reinsurance renewals like it sounds like you guys are spending you're spending less overall with like similar limits and Retentions. So I guess just what are your pricing down like is that the way, we should think about it and just given.
How little lost Creek that you've had.
Oh.
Chris the reason.
It's difficult to answer that question in that context.
He is because different people look have different ways of saying was pricing up down left or right because you're talking about on a risk adjusted basis et cetera, and so on.
All I know is at the end of the day, we've got a similar tower to that one is last year and the money we spend is.
Several several million dollars less.
Right, how it allocates into all the different pieces.
Different different layers move around in different ways.
Got it and were there any major like parts of the program that changed I'm thinking on a risk adjusted basis like it's just I mean, it sounds like you paid last.
And that's what I'm, saying is that you can fight.
Risk adjusted basis is a technical computation.
And.
It's designed to sort of say per unit cost it was this or that.
The other side of it is for our economics is how many millions of limit you buy and warm weather Dot what was the dollar spend far right and what we're saying is that we bought the same units as last year and we spent.
We had a gross spend that was less.
We'll leave it to everybody else, who say well thats rates are up or down or left or right here.
Okay makes sense.
Thanks for all the answers.
Yes.
I would like to remind all of all participants at this time, if you would like to ask your question. Please press star one on your telephone keypad.
At this time. This <unk>. This does conclude our question and answer session I would like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
On behalf of the tire management team I'd like to express our appreciation for the continued support we receive from our shareholders employees agents and most importantly, our policyholders we look forward to updating you on our progress in the near future.
Thank you for joining us today for our presentation. This concludes todays call. You may now disconnect have a wonderful rest of your day.
Well it goes on them are back in private conference everyone has disconnected. It is just myself in you know him.
Awesome. Thanks, guys.
Absolutely have a great day, you do okay bye-bye.