HCI Group, Inc. (NYSE:HCI) Q3 2023 Earnings Call Transcript

HCI Group, Inc. (NYSE:HCI) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good afternoon and welcome to HCI Group’s Third Quarter 2023 Earnings Call. My name is Mike, and I will be your conference operator. [Operator Instructions]. 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 7, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 7, 2024, on the Investor Information section of HCI Group’s website at www.hcigroup.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Matt Glover: Thank you, Mike, and good afternoon. Welcome to HCI Group’s Third Quarter 2023 Earnings Call. On today’s call is Karin Coleman, HCI’s Chief Operating Officer; Mark Harmsworth, HCI’s Chief Financial Officer; and Paresh Patel, HCI’s Chairman and Chief Executive Officer. Following Karin’s operational update, Mark will review our financial performance for the third quarter of 2023, and then Paresh will provide a strategic update. To access today’s webcast, please visit the Investor Information section of our corporate website at www.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 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. And with that, I would like to turn the call over to Karin Coleman, Chief Operating Officer.

Karin?

Karin Coleman: 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 $1.43. This was a great result as a third quarter included $6.5 million of catastrophe losses from Hurricane Idalia which made land fall in Florida as a CAT 3 Hurricane. This marks the third straight quarter of pretax income over $20 million and brings year-to-tax pretax 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 Adalia 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 have been effective. They are continuing to bring stability to the Florida homeowner’s market and provide home policy holders with greater consumer choice. Similar to prior quarters, each of our business segments had a positive contribution to our quarterly results. At our insurance divisions, homeowner’s choice generated another quarter of consistent earnings and TypTap Insurance Group reported its third straight quarter of GAAP profitability. In Investments, 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, the HCI Group is approved to assume up to 125,000 policies, which includes the recent approval by the Florida Office of Insurance Regulation for a second Citizens assumption by TypTap. We won’t know for a few weeks the exact number of policies that elect to move to HCI, but our expectation is that HCI 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 $0.40 per share, our 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.

Mark Harmsworth : Thanks, Karin. So, as Karin mentioned, this is the third consecutive quarter where pretax earnings have been more than $20 million. In the first quarter, pretax income was over $20 million and included a one-time gain from the sale of real estate. In the second quarter, pretax income was over $20 million with no one-time gains. This quarter, pretax income was again over $20 million despite having a CAT 3 hurricane hit the state of Florida. These improving earnings are the result of trends we’ve been discussing for a while now. Higher average premium per policy, increasing investment income, flat operating costs, and improving claim trends. In the third quarter, gross premiums earned were up despite policies in-force being down, driven by rate adjustment made earlier in the year.

Higher average premium per policy both in Florida and outside of Florida has helped reduce the loss ratio and increased earnings. Increasing investment income is the second trend helping to drive improved earnings. If you 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. The 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 includes the loss expense related to Hurricane Ian of about $64.6 million. And the loss expense for the third quarter this year, it includes, as Karin mentioned, losses of $6.5 million for Hurricane Idalia. To get a clear 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 is being driven partially by higher average premium per policy, but more importantly, by lower claim frequency and reduced litigation frequency, we believe as a result of the insurance reform legislation in Florida. I 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. I should mention a few things from 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 $23.27 at the end of the third quarter. Cash and financial investments at the holding company level are just over $167 million, up from $140 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 investment at the holding company level, this increases total available liquidity at the holding company to just under a $0.25 billion, which is available to support new growth initiatives.

We give new opportunities, as Karin mentioned, we’re in the process of assuming a number of policies from Citizens, which we expect will increase premiums and, more importantly, substantially increase earnings starting in the fourth quarter. To summarize, this is another great quarter for the company, and we are positioned for even better results. Revenue is 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.

Paresh Patel: Thanks, Mark. Karin and Mark walk everyone through our solid financial position at the end of the third quarter with approximately $750 million of in-force premium and both of our insurance divisions being GAAP profitable and cash flow positive. But looking forward to Q4, we’re building on this space by assuming policies from Citizens. We expect to close out 2023 within a stone’s throw of $1 billion 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 are looking at and each is in different stages of development. But 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 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, we’ll disclose them as we go forward. Please stay tuned. And to summarize where we are, we had a solid quarter in Q3. In Q4, we will have additional growth in Florida by adding additional policies from Citizens and we are looking forward to a very bright 2024. With that, we’ll open the line for questions.

Operator: [Operator Instructions] And our first question will come from Matthew Carletti with JMP Securities.

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Q&A Session

Matthew Carletti: [Inaudible] the underlying loss trends, Mark, you talked a bit about it. I hope you could dive in a little further. I’ve always known you guys to be pretty conservative and kind of what you print, in a quarter. Can you give us a look behind the scenes and maybe what do you see in impedes or is there kind of some of the indications maybe even stronger than what we’re seeing and you’re just, giving a little time to make sure that it’s fully baked.

Mark Harmsworth : Yes, good question. So, yes, I mean, generally speaking, claims trends are really good. We’re seeing some pretty significant decreases in claim frequency. Whether adjusted claims frequency is down about 20% quarter-over-quarter, litigation, the number of lawsuits is 30% to 40% less than you would expect to have for quarters like Q3, Q4. So things are performing well. The Florida loss ratio has improved significantly as we’ve talked about. And yes, we’re still being, I would use the word prudent in how we reserve. So our loss expense is higher than what our paid or incurred are. And for the full year, we’ve kept reserves flat. I think that says something. The policy count is down, the number of open claims is down, but net reserves are flat.

So statistics like average reserve for 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 very good. And I would say that the trends are maybe even a little bit better than how it shows. Does that help?

Matthew Carletti: Absolutely. Yes, exactly what I was looking for. Maybe if I can on the takeouts, Karin, I appreciate your comments on I think you said expecting kind of $150 million to $250 million in-force premium. How should we think about in terms of average policy size for kind of what’s coming out of where you’re looking to take out of Citizens? I know you won’t know exactly, but kind of ballpark what’s the average premium for policy?

Mark Harmsworth: Matt, it’s Mark. I would assume about $3,700 per policy, that’s a good estimate at this point. We won’t know for a little bit yes, but that’s a pretty reasonable estimate of what we would expect on a consolidated basis.

Matthew Carletti: Okay, great. And then, maybe just the high level question. Can you talk a little bit about the competitive environment in Florida? I mean, obviously the loss picture is getting better. And you talked through that. But, we’ve all seen, the bankruptcies and the company shrinking and things like that. What kind of, can you give us an update on the competitive front, what you’re seeing in terms of companies that you’ll have an appetite to go out and write any substantial amount of business versus those that might still be playing a little bit defense.

Paresh Patel: Yes. Hey, Matt. Paresh here. So the things I would say about that, a lot of, there’s been a couple of new startups, so that’s been going on. A number of the existing players are obviously participating Citizens’ depopulations. So that’s kind of like an optimistic thing. We also note a couple of other carriers have mentioned that they’re shrinking their books and so on. So that’s also in the opposite direction a little bit. And Citizens is sitting there absorbing 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 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 will have more choices and more alternatives. And they’re starting with us. I mean, we’re talking about growing by almost a third in the next few months. So judge us by our actions, yes?

Mark Harmsworth: Absolutely. Great. So thank you for the answers and congrats on a nice quarter.

Operator: Next, we have Mark Hughes with Truist.

Mark Hughes: Yes, thank you. Good afternoon. What is your view at this point regarding voluntary policy growth? The increase at homeowner’s choice? Is that — what was the driver there this quarter? And then obviously the takeouts will have a big impact, but you’d be growing on a voluntary basis as well.