HCI
#Thank you, and good afternoon.
Welcome to HCI Group's First Quarter 2016 Earnings Call.
With me today are <UNK> <UNK>, our Chairman and Chief Executive Officer; and <UNK> <UNK>, our Chief Financial Officer.
Following <UNK>'s opening remarks, <UNK> will review our financial performance for the first quarter of 2016, and then turn the call back to <UNK> for an operational update and business outlook.
Finally, we will answer questions.
To access today's webcast, please visit the Investor Relations section of our corporate website at hcigroup.com.
Before we begin, I would like to take the opportunity to remind our listeners that today's 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 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 Company's business, financial conditions and results of operations.
HCI Group, Inc.
disclaims all obligations to update any forward-looking statements.
With that said, I would like to now turn the call over to <UNK> <UNK>, our Chairman and CEO.
<UNK>.
Thank you, <UNK> and welcome everyone.
As most of you know, HCI Group is a holding company with subsidiaries engaged in diverse yet complementary business activities.
Our principal operating subsidiary is Homeowners Choice Property & Casualty Insurance Company, which provides homeowners and flood insurance in Florida.
The newest addition to our company which we introduced during our last call is TypTap Insurance Company.
TypTap focuses on flood insurance to Florida homeowners.
We expect to add other lines of business in the future.
We encourage our listeners to visit TypTap website at typtap.com to experience our new platform.
It provide a quote in seconds and a policy in minutes.
Buying insurance has never been easier.
We believe this is the way all insurances will purchased in the future.
Additionally, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casual Insurance Company which participates in our reinsurance programs.
We also have an information technology operation called Exzeo which develops innovative products and services for insurance subsidiaries, including the underlying technology powering typtap.com.
We expect to further leverage the Exzeo technologies in the future.
Finally, we have Greenleaf Capital which owns and manages our diverse and growing portfolio of real estate investments.
And as we've done throughout the Company's history, we continue to investigate strategic opportunities to further enhance and diversify our operations.
Turning to the quarter results, as <UNK> will expand on shortly, we reported profitable results despite a challenging environment during the first quarter.
This marked our 34th consecutive quarter of profitability.
Here are a few important highlights from the quarter.
One, our principal operating subsidiary, Homeowners Choice Property & Casualty Insurance Company with approval from the Florida Insurance Regulators paid a dividend to the parent in the amount of $19 million.
This second such dividend demonstrates our insurance subsidiaries continues to be self-sufficient and profitable.
It does not require additional cash investment.
In fact, it generates cash.
Secondly, we paid up $0.30 per share in dividends, marking our 22nd consecutive quarter of paying a dividend.
Our cumulative dividends paid since inception now total $5.25 per common share.
In addition to the dividend, we repurchased a total of 186,858 shares of common stock at an average price of $32.11 for a total cost of $6 million.
This leaves a further $14 million remaining on the $20 million repurchase plan we announced at the end of last year.
Thirdly, we repurchased $13 million in principal of our 3.875% convertible senior notes at a significant discount.
This resulted in a small gain.
Finally, we initiated the soft launch of typtap.com and we are very pleased with the results to date.
With that, I'll turn the call over to <UNK>.
<UNK>.
Thank you, <UNK> and good afternoon everyone.
For the first quarter of 2016, income available to common stockholders totaled $6.1 million or $0.60 diluted earnings per share.
This compares to the same quarter of 2015 of $25.4 million or $2.21 diluted earnings per share.
Gross premiums earned were $98.8 million for the current quarter, a decrease from $109.6 million for the prior year quarter.
This decrease is attributable to normal policy attrition and the slight impact of the 5% rate reduction effective on new and renewal policies beginning January 1, 2016.
Ceded premiums earned were $40.4 million in the first quarter of 2016, which increased from $27.8 million in the first quarter of 2015.
For the first quarter of 2016, reinsurance costs were 40.9% of gross premiums earned as compared to 25.4% in the same quarter a year ago.
This increase is primarily the result of the increased reinsurance cost for the treaty year effective June 1, 2015.
Through March 31 of 2016 and for reinsurance treaty years beginning June of 2013 and 2014, with our placement of the multi-year reinsurance treaties as discussed in prior earnings calls, benefits of $4.7 million and approximately $40.4 million were recognized, respectively.
Net premiums earned for the first quarter of 2016 were $58.4 million compared to $81.7 million in the first quarter of 2015.
Loss and loss adjustment expenses increased by approximately $8 million in the quarter compared with the first quarter of 2015.
Approximately $5 million of this increase was due to the adverse weather activity and $3 million is related to normal loss activity.
Our loss ratio applicable to first quarter of 2016, which we define as losses and loss adjustment expenses related to gross premiums earned was 27.4% compared with 17.4% in the first quarter of 2015.
This percentage increase is as we've just discussed.
The expense ratio applicable to the first quarter of 2016, which we define as underwriting expenses, interest and other operating expenses related to gross premiums earned, totaled 24.3% compared with 20.2% in the first quarter of 2015.
Expressed as a total of all expenses related to net premiums earned, the combined loss and expense ratio for the first quarter of 2016 was 87.3% compared with 50.4% in the same quarter of 2015.
These fluctuations in the ratios reflect the variances in gross premiums earned, reinsurance cost and the unusual weather activity in the quarter.
We are constantly monitoring claim activities for development of trends in frequency, severity and causes of loss for the potential impact on incurred losses and loss adjustment expenses.
Investment income and related investment items increased by approximately $1.2 million primarily resulting from a reduction in the other than temporary impairment charges recognized in the first quarter of 2016 as compared with the same quarter in 2015.
With the current market volatility and the size of our investment portfolio, impairments may develop.
Investments total $239.6 million at March 31, 2016, an increase of $6.6 million from December 31.
Net book value per share has increased to $23.87 at the end of March from $23.10 at December 31 of 2015.
We are pleased with our first quarter operating results, which were led by strong fundamentals throughout our organization.
We remain committed to increasing shareholder value in future periods.
Now I'd like to turn the call back over to <UNK>.
<UNK>.
Thank you, <UNK>.
In light of the adverse weather events, we are very pleased with our profitable results for the first quarter of 2016.
Clearly, it was a difficult quarter but adverse weather will not happen every quarter.
Looking ahead, there are important positive developments.
We had expected the soft market conditions would lead to a decrease in retention.
We are currently not seeing that decrease.
Retention levels remain near 90%, similar to 2015.
This could indicate a tightening in the homeowners insurance, market.
Two, we have not fully completed our reinsurance program for the 2016, 2017 hurricane season, but we expect to be well reinsured with the first event coverage of approximately $1 billion.
We did get off to an early start on our placement this year and we have preliminary numbers while not yet final that we expect to recognize less than $120 million of reinsurance expense over the treaty year.
Finally, we have a strong balance sheet, including a sizable cash balance.
We are prepared for the opportunities and challenges ahead.
With that, we are ready to open the call for questions.
Operator, please provide the appropriate instructions.
Absolutely, <UNK>.
It's been incredible to watch it grow and blossom.
We are seeing people do quotes in TypTap at a quite an astonishing rate.
I think people are just trying it out, so to speak.
But the activity that's going on is quite fascinating to watch and as the word is getting out, we're seeing more and more activity.
So we are very pleased with how TypTap is developing.
Clearly, we planned this firm to be a marathon and not a sprint.
So it's not just about the last two months, but the progress so far has been beyond our expectations.
Yes, but I think generally speaking there seems to be a turn.
When we had got the rate cut late last year, the general prevailing environment was of softening rates.
With the change of events that seems to have occurred over the last few months, everybody seems to be applying towards rate increases.
Now having said that, what kind of rate increase you want or what kind of rate increase you can get really depends on where you ---+ what position you started from and also how losses are developing in your portfolio.
So it's almost one of the strange situations that the higher the rate increase you may be looking for, it may be more an indication of what the future looks like for you.
From where we sit currently, we are not actually planning any rate increases at the moment.
We are rather trying to manage our stable book of business in a manner that we can absorb the impacts of some of these things that are occurring because we like our policyholders who have been with us for a very long period of time and we (technical difficulty) just pass the rate increase on because we can or things of that nature.
Gross written for the quarter was $75.5 million.
Net written was $35.2 million.
That's correct, yes.
We expect it to be under that number and this is what we are going to amortize as a group just so I'm clear to what we're talking about here.
Yes, <UNK>ny.
You're talking about the policy acquisition and the other underwriting expenses, that line item.
I think instead of thinking of it as a percentage, we sort of thought of it more in terms of strict dollars terms.
It's gone up a little bit year-over-year, primarily due to the fact that last year we had assumed a large book of business, had them sort of renewed onto our paper.
As it renews onto our paper, we get some increase in expenses because of that, direct written versus assumed, so to speak.
So that's what's made it go up a little bit, plus you do get some normal expense increases, pay raises, those kinds of things, but I wouldn't expect it to go much higher from here.
I think it's sort of found to be baked in here, and based on a dollar term per basis here.
Yes, I think if you measure this over the course of time, over the courses of a few years because that's ---+ the change is quarter-to-quarter, [although not much] but when you look year-over-year, it starts making ---+ you start seeing it.
A few years ago, we used to be ---+ gross premiums to surplus used to be close to four to one and now this year, it will be closer to two to one.
Little over two to one.
Little over two to one, and that's despite the dividend that was paid out.
What we've done is that the book has matured and we have come off ---+ taken our foot off the gas in terms of growth.
Our leverage has decreased significantly, but we still continue to have income and earnings and everything else.
So, all of these things basically means that as a company, if you just talk about the insurance subsidiary, which [used to be equal to] the leverage at four to one, it's now on a leverage at two to one with practically double the size or the amount of premium we write without actually needing any more capital in that subsidiary.
That's what I meant by not only does it not need cash is actually generating cash at this point.
Does that help.
Sure, <UNK>.
Look, basically, at any given point that we look at it, and we want to go buy something, we look at the bonds, the stock and the converts as independent items.
The stock, we already had a buyback in place.
So that was working as it was.
So let's take that off the table for a second.
So now you have the decision between the baby bonds and the converts.
The baby bonds are trading at par.
The converts were trading at $0.87 on the dollar.
And it seemed like you can buy a dollars' worth of debt back for $0.87.
Doesn't really require a lot of science.
That's a good purchase and as it was available, that's why we went and bought that back, because we manage the balance sheet at all times and the converts are due in three years' time, I believe.
So we are doing balance sheet management as we go along.
The other thing that helped us move in that direction was if you get into the queue, you will see that we refinanced our corporate headquarters and borrowed $9.2 million early in January.
So we're shifting the debt from being in the convert and at the holding company down to Greenleaf and being backed by the assets of the real estate which up to now have no debt on it and of course, at the same time, you're borrowing this money on a much longer time basis, like 15 years, as opposed to three years.
So it's all part of optimizing the balance sheet.
My expectation is probably before the end of the year.
Thank you.
I think we had a little bit of development and would go back over 2013, 2014 and 2015 but that's normal this time of the year, for at least 2015, it would be normal because as you close out the year, you sort of get a little bit of that to lead over into the first year.
Some of this is going on because of, as you know, the ongoing AOB items.
We had a loss with the other day from a claim that was paid in 2011, has been closed for four years.
AOB is creating a cottage industry as we've said many a time before.
It will be identified in the queue (technical difficulty).
<UNK>, as much as you look it up on the queue, because it then lays out across all the years as opposed to reading from a kind of read over the phone.
I got it right here for you.
I knew you were going to ask.
Weighted average shares that went into the earnings per share count were [$9.641 million].
<UNK>, I think our year-over-year reinsurance, right, has a lot of things moving parts.
It makes it difficult to sort of say it's just to do with one thing or the other.
Some of it is, yes, there is a slight softening of the reinsurance market, but also, as we've come off our multi-year contract as you're talking about, which would have had prices from 2014 baked into them, you get a much bigger delta as you move out of 2016.
So you get some of that.
You also get some benefits as we've re-optimized our reinsurance tower to fully integrate in the wind-only policies from a couple of years ago.
So you'll get all of those things that are benefiting us.
Against that, I would tell you that we have in certain areas, especially in the placement of the Cat Fund actually paid a premium to the Cat Fund because we wanted better coverage, going forward.
So it's slightly more expensive, but it's a better coverage.
So that's what we did.
We identified $5 million for the weather events and we had $3 million of reserve strengthening [or roughly] $4 million of reserve strengthening, and we didn't really specify anything for the AOBs.
<UNK>, look, we tend not to think of it that way and break it out, because at some point, what that suddenly starts becoming is that, well, if it wasn't for this, if it wasn't for that, the losses would have been a certain other number.
We had $27 million losses for the quarter and we generally sort of talk in terms of what the actual numbers were as opposed to, if only this and this hadn't happened, the number would have been something different.
So reality, that's why we don't break out the AOB to, how much of it is AOB or how much of it is just due to increased claims severity or a mixture of claims being different or any of those kinds of things.
Well, let's go through that in the slightly different fashion.
We reserve the way we reserve and we reserve the claims to what we think the value of the claim is.
Obviously, when you get litigation, you have to change reserves just for the lawyers' fees involved, so that in itself causes some changes, but generally speaking, what I'm talking about, about the past, et cetera, is that, litigation usually starts in some cases quite a long time after the claim has been filed and/or the claim has been filed and closed and so consequently, you would not have reserves against that claim till the data lawsuit comes in or the additional reserves against that claim till the data lawsuit comes in.
So that's what's creating some of the adverse development I think for a number of carriers at the moment, us included.
It's on a slight upward trend now.
Actually, I'm going to digress here and talk about some of the things that we're doing using our technology division.
We've actually been mapping every claim that's had a litigation attached to it.
Every property has a litigation attached to it for the last 2.5 years and as you look at those trends, et cetera, we note that while we are seeing a slight upward trend for the homeowners choice book of business, our rate of increase is materially less than the rate of increase we're seeing in a number of other carriers.
And equally well, just to be balance about, there are a couple of carriers that we see, we're not seeing any increase in litigation trends.
So, on a blended average basis, I think we're seeing a slight increase, but we seem to be well below the what seems to be the market average.
Yes, it's the right way to think of it.
One of the items I would just clarify, <UNK> was asking about policy accounts but you're asking about premium.
There is a slight difference in what the average premiums are for the two books.
So the two things don't cross over at the same time.
It's too early to quantify yet.
I just know that there will be a difference because it's different lines of business.
It's difficult to answer, <UNK>, because while there is an item of flood, there is also a question of the mixture of policies that are rolling of the books, right.
So, for example, a flood policy is considerably higher than a renters policy but it may not be higher than a wind-only policy.
So depending on what mixture of policies you're looking at on the homeowners choice side, it could have a different effect.
On behalf of the entire management team, I would like to express our appreciation for the continued good support we receive from our shareholders, employees, agents and most importantly, our policyholders.
We look forward to continued success.
