Transcript of HCI Group, Inc. Third Quarter 2016 Earnings Call November 3, 2016

Transcription

1 Transcript of Participants Kevin Mitchell Vice President, Investor Relations Analysts Matthew Carletti JMP Securities Arash Soleimani Keefe, Bruyette & Woods Presentation Good afternoon. Welcome to HCI Group s. My name is Tim, and I will be your conference operator this afternoon. At this time, all participants will be in a listen-only mode. Before we begin today s call, I would like to remind to everyone that this conference call is being recorded and will be available for replay through December 3rd starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until December 3rd on the Investor Information section of the HCI Group website at I would now like to turn the call over to Mr. Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed. Kevin Mitchell Vice President, Investor Relations Thank you, and good afternoon. Welcome to HCI Group s third quarter 2016 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; and Richard Allen, our Chief Financial Officer. Following Paresh s opening remarks about the recent storm activity in Florida, Richard 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 answer questions. To access today s webcast, please visit the Investor Relations section of our corporate website at hcigroup.com. Before we begin, I d like to take an 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 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 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. disclaims all the obligations to update any forward-looking statements. With that said, I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

2 Thank you, Kevin, 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 insurance in Florida. The newest addition to our company which we introduced earlier this year is TypTap Insurance Company featuring typtap.com, an online platform for quoting and binding policies. TypTap currently offers private flood insurance to Florida homeowners. We encourage our listeners to visit the TypTap website at tpytap.com to experience the platform. It provides a quote in seconds and a policy in minutes. Additionally, we have a Bermuda-based reinsurance subsidiary called Claddaugh Casualty Insurance Company, which participates in our Homeowners Choice reinsurance programs. We also have an information technology operation called Exzeo, which develops innovative products and services for insurance subsidiaries including technology powering typtap.com. We expect to find other means to leverage Exzeo Technology s capabilities. And finally, we have Greenleaf Capital, which owns and manages our growing portfolio of real-estate investments. Okay, so the big thing everyone wants to talk about is hurricanes, and I know you want to hear about it, so I ll get right to it. First, as with any disaster, our thoughts are with those who have been impacted. We are working diligently to keep our policyholders get their lives back to normal as quickly as possible and they are in our thoughts and prayers. So getting to specifics, most specifically Hurricane Hermine made landfall in Northwest Florida in early September, making it the first hurricane to hit Florida in 11 years. Thus far, we have received over 300 claims related to Hermine and currently expect losses totaling approximately $2.5 million. Hermine was not a material event for us. Hurricane Matthew, a Category 4 hurricane, skirted the East Coast of Florida in early October before making landfall in South Carolina. Although it did not make landfall in Florida, it still had a significant impact on this state. Thus far, we have received approximately 2,000 claims related to Matthew, and we estimate pre-tax losses of $20 million to $25 million at this time. Neither Hurricane Matthew nor Hurricane Hermine will trigger reinsurance recoveries outside of the HCI Group. So although Florida hadn t experienced a hurricane since 2005, we prepare and plan for these types of events each year was no exception. Hermine and Matthew put our preparations and planning to the test. I am pleased to report the performance of our CAT response team and our technology has exceeded even by elevated expectations. For example, nearly all claims for both storms were handled by our personnel here at headquarters in Tampa, Florida, and our reliance on third parties for any kind of call handling services was very minimum. Furthermore, using tool developed by our Exzeo technology group, including exzeo.com, which is a logistic software, and our Atlas Viewer data visualization tool, our team was able to one, estimate the impact ahead of storms and allocate resources in advance; two, identify trends and reduce claim processing times; and three, keep stakeholders informed in real-time of what was happening. As a result, after the hurricanes, we quickly returned our business operations at normal and more importantly, we helped our policyholders get their lives back normal as quickly as possible. The data provided by Atlas Viewer has been well received by regulators and reinsurers. We believe that this will have long-term beneficial effects to the company. Now, turning to our results for the quarter. As Richard will expand on shortly, we reported profitable results despite Hurricane Hermine during the third quarter, marking it as our 36th consecutive quarter of profitability. We also paid $0.30 per share dividend, marking our 24th consecutive quarter paying a dividend. Our cumulative dividends paid since inception now total $5.85 per common share. Page 2

3 Now, before I go further, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the third quarter. Richard? Thank you, Paresh, and welcome, everyone. For the quarter ended September 30th, our net income was $11.3 million, or $1.10 diluted earnings per share compared to the same period of 2015 of $7.4 million or $0.71 diluted earnings per share. From an operational point of view, significant variances or commentary are net premiums earned was relatively flat with an increase of $535,000, reflecting the reduction in reinsurance premiums quarterover-quarter as previously discussed, and the impact of our rate reduction from January and normal policy attrition. Losses and loss adjustment expenses decreased slightly quarter-over-quarter. In the current quarter, we were impacted by Hurricane Hermine while in the same quarter of the prior year, we incurred losses of a significant rain event that centered on the Gulf Coast of Florida. All other expenses increased slightly primarily the result of increased staffing requirements. Other significant contributors for the quarter were net investment income increased $3.3 million, reflecting gains on our limited partnerships and other investments. We recognized a gain on the Greenleaf purchase of a public anchored shopping center of $2 million, the result of favorable fair value as compared with the purchase price negotiated in the original development contract. Other than temporary impairment losses of $0.2 million, we re lower by $1.7 million as compared to the prior year s same quarter of $1.9 million. During the third quarter, we repurchased a total of 198,055 shares of common stock to an average price of $30.29 for a total cost of $6 million. With the repurchase made in the first six months of the year for the first nine months of the year, there remains $2 million as of September 30th. As of November 1st, the repurchase plan has been completed. Net book value increased to $25.38 from $23.10 at December 31, Paresh? Thank you, Richard. Even with impact of Hurricane Hermine, we are pleased with our results for the third quarter of Over the past few years, we have begun several strategic initiatives and diversify our business operations. They paid off in Q3. For example, we continue to optimize our book of business by ensuring the policies fit our stringent risk profile. As a consequence, top-line growth slowed. This slowdown resulted in a decrease in our gross premiums earned but contributed to a reduced reinsurance spend compared with last year. I have often stated that we re more interested in the bottom-line than the top-line. Despite the two recent hurricanes, we believe our insurance division is appropriately capitalized for any growth that we may contemplate; it doesn t need additional capital. Additionally this year, we launched our new insurance subsidiary TypTap which sells private flood insurance. Since March, we have seen strong interest from our agent network and at current, we have over 1,500 TypTap policies in force. The recent hurricanes had a minimal financial impact on TypTap. We believe the technology underlying TypTap coupled with the current state of the flood insurance market will afford us excellent growth opportunities in the future. We re saying this considering that the National Flood Insurance Program, NFIP, experienced multiple flood events this year and is up for reauthorization in We plan to continue strategic investments in technology and real-estate, and we ll have more on that in the future. With that, we re ready to open the call for questions., please provide the appropriate instructions. Thank you, sir. At this time, we will be conducting a question-and-answer session. [ instructions.] The first question comes from Matt Carletti of JMP Securities. Please proceed with your question. Page 3

4 Q: Hey thank you. Good afternoon. Afternoon, Matt. Q: Paresh, couple questions to start. First one, your loss ratio improved a bit in the quarter at least sequentially even despite the small amount of hurricane losses. Can you comment on that a little bit? I assume it has something to do with maybe where your provisions are versus AOB and what the actual are coming out. I might be wrong in that. And if it s not, can you give us an update on AOB and where things stand for HCI more broadly? Okay, Matt, in terms of dollars, obviously the loss and loss adjustment expenses went down slightly year-overyear. I think and we took some make sure we pointed it out, last year in Q3, we had those 21 days of rain on the West Coast which resulted in a lot of claims, etc. So the numbers, and obviously this year we have Hermine but I think what you re sort of seeing is maybe some of the losses from last year might be little bit more than Hermine was this year. In terms of AOB, I think if you re doing that comparison of Q3 this year versus Q3 last year, I think it was comparable. So it didn t improve but it didn t get any worse. So by Q3 last year, we were already into the full brunt of AOB. So that s why I think it s comparable in a flat basis year-over-year. Q: Yeah. I was looking more on a ratio basis and the loss ratios improved versus sequentially as we went through the year. I remember the first couple quarters this year, at least one of them had some adverse development related to AOB. Was there less of that or none of that in the quarter or was that similar this quarter? Yeah, in terms of adverse development, I think there was less thereof. I think we had our reserving fixed to that point, yeah? Q: Right, that s what I was getting at, yeah. I think that s the delta. Okay. Yeah. Q: Great. And then second question would be you made an announcement maybe just a couple weeks ago now about first takeout announcement we ve seen from you guys in a little while. Just wondering if you could comment on that. Often when you guys do takeouts, there s different flavor to a takeout or is it just as simple as you haven t done a takeout in a while, Citizens changes every day, what comes in and out and there s opportunity for some new business? Okay, Matt, that s going to be a slightly complicated answer, I ll just say that because of what it is, right? There are a couple of background information items that become relevant in our decision. One is Citizens is in the process of changing how takeouts are done, and there ll be a new process that will go into effect as of January 1. So we re at the end of system that we had I d say got a perfected to quite a degree for the last decade, it s going to come to an end at the end of this year, so this is our last hurrah. That s one. Q: Got you. Page 4

5 Secondly, because of the AOB stuff, year ago everybody was rushing to do takeouts and obviously we stepped back. It s amazing how much difference a year makes because at this point there are very few people advocating takeouts. We tend to have a same viewpoint regardless of whether it s popular or unpopular when we look at things. So all of these things were there. The other preventing item that causes the question to come up is gee Citizens shrunk. Aren t all the good policies gone? Yes, if you talk in generalizations, but this is all about detail and where we got into details is the following set of things that make this thing happen. One is we shrank all year, so consequently we have extra capacity with which to take on some more policies, and we don t necessarily increase our risk, we just replenish the risk compared to what we already shedded over the course of the year. Q: Okay. But secondly, in the fact that everybody else steps back and we now have a clear shot at it, there is an underlying thing. There were lot of people who were tagged for takeout by other carriers in previous years, and they opted out. They didn t want to leave Citizens. Maybe they didn t want to leave Citizens because of the carrier they would end up with. So all of those people are still sitting in there. We ve been keeping track of all this stuff. So given that the system is going to change in January, it was a clear opportunity to take one final shot at those people and giving them an alternative to come join the happy customer base of HCI and see if they want to leave Citizens for us as opposed to somebody else. So given all of those things, it was a wonderful clear opportunity to do this and obviously it speaks somewhat to the planning and organization of this company that we had planned for all of this back in the summertime despite Matthew coming ashore on October 6 th. By October 20th, we were sending out letters for this takeout, etc. We ve basically not made a big deal of it because I think it s going to be 5,000 to 10,000 policies which is more of a replenishment than anything else, and we didn t want to send mixed messages over it. Q: Got you. Okay. That s very helpful. And then just for Richard, a few numbers questions and I apologize if I missed them, but gross written and net written premiums and then just what you have for book value per share fully diluted at quarter end? Gross written for the current quarter $93,264,000. Q: Okay. Prior quarter $105,371,000. That s in thousands. You need the nine months? Q: No, just the quarter. Okay. And then, what was it, net written premiums? Q: Net written premiums, yeah. Current quarter $64,022,000, prior quarter $64,294,000. Q: Great. And just quarter end book value? Page 5

6 Well, the quarter end book value, we had spoken you wanted the shares too, the share counts that go into that? Q: Yeah. The book value was Q: So, $25.38? Yes. Q: Great. Thank you very much. Thank you. [ instructions.] Our next question comes from the line of Arash Soleimani of KBW. Please proceed with your question. Q: Hi, good afternoon. Good afternoon. Q: Just had one followup to Matt s question, looking up the loss ratio. Was there any development at all this quarter for 3Q 16? Repeat your question please. Q: I m just trying to back into the accident year loss ratio, so I wanted to know what prior period development was for this quarter. The actual dollar amount for the current quarter, I m not sure of yet. We re still working on that for the statutory blanks. Q: Okay. But it sounds like it s fair to assume that it s lower than last quarter or last year. I would say less than prior quarters. Q: Less than prior quarter? Okay. And the other question I had was can you give me the policy count if you have that handy? Glad you asked, it s about 146,000, and I m keeping it near a thousand plus or minus a couple of thousand just for the simple reason that I think this quarter should hopefully illustrate to everybody policy count isn t how the Page 6

7 business is managed, it s loss ratios and everything else that count. And I assume that you asked the question and I know it s been an ongoing item. This is an interesting quarter where we shrank the top-line, the gross premium, we were even on the net premium line, and we were up on the pre-tax earnings despite there being a cap, sometimes makes you wonder about if growth is the only way of running a business, doesn t it? Q: Oh, no I was just Arash, I wasn t suggesting that you were suggesting that, I was mainly pointing out that has been a quarterly conversation that s gone on for several quarters, and it might be a useful point to have that conversation in the reverse scenario at this point. Q: Sure, no, that makes sense. Thank you. And I guess sounded like you told Matt AOB is basically the same I guess in terms of its impact last year versus this year. Just from a litigation perspective, I know last quarter you provided some trends in your book. What are the litigation trends looking like this quarter compared to prior quarters? Okay, Arash, I ll give you more detail than probably you care for, but in terms of lawsuits and things, we actually had seen a slight lull in the summer, but for the last two or three months it s come back to normal expectations, and normal expectations is the same amount of lawsuits as we were getting last year, which is about 100 a month. So we are back to that kind of number, so that s why we can t sit here and say that AOB is getting worse, equally well, if you re getting 100 lawsuits a month which is about the same as last year, it s not getting any better either. Q: Right, right. And are you seeing any kind of heightened AOB activity from like Matthew or Hermine? Were you seeing, I guess, public adjusters trying to take advantage of those situations? Great question, but to be fair about Hermine and Matthew, those events are too fresh for some of that activity to start yet. I suspect while in those things it s at a minimal level currently, it will escalate over the course of time. That s just naturally how these things work out. It s too early to tell. Q: And I know you said the takeout that you had signed up for was I guess because you said it s the last opportunity that could be there for so you haven t actually do you have any plans of actually doing a takeout or you just wanted to have that on the shelf? No, I think the takeout s underway and just so that I clarify my statement as to last opportunity, I m saying it s the last opportunity under the current Citizens takeout process, not saying it s the last opportunity to ever do a takeout ever again. I m just saying Citizens is going through a material change of process as of January, and the current process we know very well and we ve used for years. So one last time. The takeout s in process as we speak. Q: So when would the actual takeout date be? I think we assume the policy as of November 22 nd. Q: Okay. I apologize if you d already mentioned this, just what s the amount of policies, annualized premiums would be associated with that? Page 7

8 It s not going to be a great deal. We think it s going to be somewhere 5,000 to 10,000 policies, and you can therefore extrapolate to 12 million to 24 million in premium in force. Q: So that s on an annualized premium in force, okay. Yeah. Q: And I assume this new process that you re saying is coming, is it more difficult or seems like is it worse in a certain way? No, I wouldn t characterize it any such kind of thing. Citizens has been working hard at this and has planned a major overhaul of the takeout process for quite a while, and it s being implemented in January. In some ways, I think if you would ask Citizens, they will probably tell you it s an improvement and it s more consumer friendly etc. So my points should not be taken as we saying anything bad about the new process, it s just that it s different and we are very familiar with the current process. Q: Sure, sure. And just another question, on the loss ratio, is what we saw this quarter kind of a fair run rate? Let me give you a very caveated answer. It may be a fair number assuming a few sets of things: One, the AOB and litigation environment doesn t change, it can get better, it can get worse; two, obviously the number that we have for the quarter obviously has Hermine built into it, so you d have to back that out; and three, that number will move based on other, what s the phrase everybody s been using, kitty-cat events that may add to the underlying number. But all of those variations are part of doing the business. Q: Sure, sure. And I know you said this in the beginning, how many claims you had 300 claims from Hermine. How many was it from Matthew? We said more than 300 for Hermine and approximately 2,000 for Matthew thus far. Q: Okay. And then any updates on TypTap? Are you getting I guess more traction with that? Any changes in appetite from policyholders? Yes, absolutely, TypTap keeps improving week after week. I think last week was a record week in terms of number of policies down, etc. So every week life gets better, and I think as I said in my prepared statements, we currently have 1,500 policies in force for TypTap, and it continues to grow. Q: Can you remind, what was the average premium for policy in TypTap? I don t think I went into that, but I think you re looking at a couple of million dollars, maybe a little bit more in premium. Q: Alright. That was all my questions. Thanks very much and congrats on the quarter. Page 8

9 Thank you. Thank you. There are no further questions at this time over the audio portion of the conference. I would now like to turn the conference back over to Kevin Mitchell, who has a few closing remarks. Kevin Mitchell Vice President, Investor Relations Thank you for joining us on today s call. We look forward to updating you in the future. Thank you for joining us for our presentation. This concludes today s call. You may now disconnect. Page 9