HCI Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good afternoon and welcome to HCI Group’s First Quarter 2015 Earnings Call. My name is Stephen. I will be your conference operator this afternoon. At this time, all participants will be in listen-only mode. Before we begin today’s call, I’d like to remind everyone that this conference call is being recorded and will be available on replay through May 30th starting later this evening. This call is also being broadcast live via webcast and will be available via webcast replay until July 30, 2015 in the Investor Information section of the HCI Group website at hcigroup.com. I’d now like to turn the call over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please go ahead.

[Kevin Mitchell:]

Thank you and good afternoon. Welcome to the HCI Group’s first quarter 2015 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; Richard Allen, our Chief Financial Officer; and Scott Wallace, President of our Property and Casualty Insurance Division. Following Paresh's opening remarks, Richard will review our financial performance for the first quarter of 2015, 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 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 condition and results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements. Now, I’d like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

[Paresh Patel:]

Thank you Kevin and good afternoon everyone. Thank you for joining us for HCI Group’s first quarter 2015 results. We are excited to report our results and provide our business outlook. As most of you know HCI Group owns subsidiaries engaged in diverse, yet complementary business activities, including homeowners' insurance, reinsurance, real estate and information technology. HCI’s largest subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc., is a leading provider of property and casualty insurance in the State of Florida. Homeowners Choice is the fifth largest P&C insurance in the state with annualized premium of $430 million as of the end of fiscal year 2014. As of March 31, 2015, we had approximately 175,000 policies enforced throughout the state. Also our reinsurance subsidiary, Claddaugh Casualty Insurance Company, which participates in Homeowners Choice reinsurance program, gives us some flexibility and negotiating with our third-party reinsurance and retaining risk if we so choose. Our Information Technology division, Exzeo, develops web and cloud based applications designed to improve our insurance operations. We believe they will add value to other companies as well going forward. Finally, HCI also owns Greenleaf Capital, which owns and manges our real estate operations. Our real estate portfolio consists of at least two Class A office buildings, 19 acres of waterfront property and multiple retail locations that are currently underdevelopment. Now turning to our results for the quarter. As Rich will expand on shortly, we’ve reported exceptional results for our first quarter ended March 31, 2015. The first quarter, which marked our 30th consecutive quarter of profitability, was highlighted by the following events. We increased our quarterly dividends $0.30 per share, which represents an increase of 9% from our previous quarterly dividend rate. We also assumed one small trench of policies from Citizens in February totaling 4,704 policies with about $11 million in estimated annual premium. Of these policies, 1605 were wind-only. Our $40 million share repurchase plan expired at the end of the quarter. During the quarter, we repurchased 37,869 shares of stock at a total cost of $1.6 million or an average purchase price of approximately $42.51 per share. Under the plan, over its life time, we have repurchased a total of 1,028,570 shares at an average purchase price of approximately $38.85 per share. Turning to our operations, our core insurance business continue to deliver strong results. As Richard will discuss in a momentum, our operating ratios continue to lead the industry and our retention levels remain good and consistent. Overall, the HCI Group had net cash provided by operating activities that exceeded $59 million. But before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the quarter. Richard?

[Richard Allen:]

Thank you Paresh and good afternoon everyone. First quarter of 2015, income available to common shareholders totaled $25.3 million or $2.21 diluted earnings per common share. This is an increase [Audio Disturbance] diluted earnings per common share in the first quarter of 2014. Net premium earned for the first quarter increased 23.1% to $81.7 million from $66.4 million in the first quarter of 2014. This increase is primarily due to the mix of business generated through the December and February Citizens assumptions. The wind-only policies recently assumed from Citizens are not subject to reinsurance cost until June of 2015. For the first quarter of 2015, reinsurance cost were 25.4% of gross premiums earned as compared to 29.3% in the same quarter a year ago. Through March 31, 2015 and for reinsurance treaties years beginning June 2013 with our placement of the multiyear reinsurance treaties, benefits of $6.4 million respectively. In addition, we have deferred recognition of $5.9 million as of March 31 related to these adjustments and as discussed in prior earnings calls. Our loss ratio applicable to the first quarter of 2015, which we defined as losses – loss adjustment expenses related to gross premiums earned was 17.4% compared with 19.8% in the first quarter of 2014. Based on specific exposures [Audio Disturbance] wind-only policies are minimal and in the absence of specific weather activity [Audio Disturbance]. The expense ratio applicable to the first quarter of 2015, which we defined as underwriting expenses, interest and other operating expenses related to gross premiums earned totaled 22.2% in the first quarter of 2014. This decrease was primarily the result of the increased gross premiums earned as mentioned earlier. Expressed as a total of all expenses related to net premiums earned, the combined loss and loss expense ratio for 2015 was 50.4% compared with 60% in 2014. Improvements in these ratios reflect a significant increase in gross premium earned. Investment income was impacted by the recognition of other-than-temporary impairment losses in the first quarter of 2015 of $1.7 million. With the current market volatility and the size of our investment portfolio impairments may develop. Investment in fixed-maturity and equity, securities totaled $218 million at March 31, 2015, an increase of $75.5 million from December 31, 2014 level of $142.6 million. During the current quarter, we added approximately $61 million to our investments in fixed-maturity securities. Total shareholders equity at March 31, 2015 was $206 million compared to $182.6 million at December 31, 2014, an increase of 12.8%. Net book value per share has increased to $20.32 at the end of the quarter from $17.92 at December 2014. During the quarter, our insurance company Homeowners Choice Property & Casualty received permission from the office of insurance regulation – excuse me – and paid dividend to the parent in the amount of $16.7 million. We’re very pleased with these results for the first quarter of 2015. We remain committed to increasing the shareholder value. Now, I’d like to turn the call back over to Paresh. Paresh?

[Paresh Patel:]

Thank you, Richard. Obviously, we’re very pleased with these results. The operational momentum we established during 2014 carried into the first quarter of 2015. Even as you remain focused on applying our strict underwriting standards, minimizing operating costs and while providing our policyholders the highest levels of service. We continued to have our core insurance business to deliver record results. More importantly, during the first quarter, operating activities, the overall HCI Group enterprise provided net cash of nearly $60 million in addition to the over $88 million provided in [Audio Disturbance]. With this cash flow and increasing our book value period after period, we can continue to grow even without new major business initiatives. We are continually improving our operations, we have home grown systems and technology that will enable us to streamline and closely monitor our insurance businesses and identify trend. In our insurance operations, we consistently focused on policyholder retention, exposure management and distribution development. Turning to reinsurance; for 2015 renewal, we think the market remains soft, but we do not know how it will turnout. We do plan to investigate [indiscernible] that allow us to except more measured risk within our reinsurance program using our Claddaugh reinsurance subsidiary [Audio Disturbance] Richard stated earlier. We expect to continue diversification of business operations and investments throughout the year. For example we’re making investments in real estate that we believe we’ll have long-term value to the shareholders in a tax efficient manner. The value of these assets may not be fully reflected on our financial statements for a while to come. Consequently while this diversification may cause temporary earnings volatility, we believe that in the long-term they will be a net positive. Finally, in terms of acquisitions and mergers, we remain confident that significant accretive opportunity lying in front of us, we just have to be patience and wait for them to come to us. With that, we’re ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator:]

Yes, thank you, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] The first question comes from Matt Carletti with JMP Securities.

[Matt Carletti:]

Thanks. Good afternoon. Just a couple, I think all numbers questions today. First off do you have gross and net written premiums handy?

[Richard Allen:]

For the quarter – I think $1,454,000 – and net was $53.6 million.

[Matt Carletti:]

$53.6 and could you repeat gross, cut out for the first part of it?

[Richard Allen:]

$81.5 million.

[Matt Carletti:]

$81.5 million. Okay, great. And then my other question is on the expense ratios both commissions and other operating. They’re both lower than we’ve seen them in recent memory in the quarter. On the commissions has something changed that makes it lower the wind-only is influencing that? And then secondly, on the other operating should – have been kind of pretty stable around $9.5 million for several quarters. Is that more of how we should think about that in terms of fairly steady dollars and the ratio be whatever it is, how the earn comes out?

[Richard Allen:]

Part of the wind-only policies haven’t really renewed yet and there will be a slight increase on our deferral rate – deferred commissions.

[Matt Carletti:]

Okay, thank you. I am sorry – yes, I just – if I could follow up. So is there something else that’s dragging down the commission expense, it’s been 12-ish in the quarter and it’s been 14 and 16 for the past year.

[Richard Allen:]

Matt, you’ve got quite a bit of earned premium, not subject to commissions yet.

[Matt Carletti:]

Okay, I follow you, I follow you. And then on the other side, I have half of the question, the operating expenses, so if you look at more in dollars, is that…

[Richard Allen:]

I’d look at more in dollars.

[Matt Carletti:]

Yes, I know you’re pretty comfortable, I mean, it should be – should we look at it ballpark with $10 million in the quarter. As you grow obviously that – where we should expect some, some scale there, but is that a – in the near term at least a fairly maintainable number?

[Richard Allen:]

It should be relatively consistent throughout year.

[Matt Carletti:]

Great, very helpful. Thanks – congrats on the nice quarter and thanks.

[Richard Allen:]

Thank you, Matt.

[Operator:]

Thank you. And the next question comes from [indiscernible].

[Unidentified Analyst:]

Hi and good evening. Just – first question, Paresh, you made the comment in your prepared remarks about feeling confident that you’ll continue to see some opportunities in M&A. I was wondering if you could expand on that a little bit. Is there anything in the marketplace that you’re observing that makes you think that back and take place is it in the increasing competitive environment that that might create opportunities. I just want to try and get a little more of your thoughts around that that comments. Thank you.

[Paresh Patel:]

Yes. Good evening, Dan. I love the new business card. The idea about the M&A activity, I mean we are seeing people having different opportunities [indiscernible], the other side of this is as world is getting out that [Audio Disturbance] of the states. We are getting all kinds of business opportunities that are provided to us. And I am giving you a range that it’s been hard field as owning a chain of donor franchises, right, and I will say that we’re going to do that. I’m just sort of say that we – and some of those things may turn out to be a very good investment. And [Audio Disturbance] in the context of once up on a time, we bought our headquarters office building, which looks very unusual at the time. And it is now appraised at more than twice of what we paid for it, right. So this is a comment about – it makes some volatility in the short-term, but it’s really good long-term and that’s what we’re looking at. So we think something will come [Audio Disturbance] there are opportunities out there.

[Unidentified Analyst:]

Great thank you. And then I was wondering if you could just give us any updates on how you’re efforts are going with the flood insurance?

[Paresh Patel:]

As sort of said in the last couple of quarters, it’s been slow, but it’s hopefully starting to now take some traction from the basis that the NFIP just pass through their first 25% rate increase as of April 1 of this year. So as people start seeing as we’re hoping to pick up a little bit more activity in the flood book, but equally why but we’ll appreciate that when you’re looking at 175,000 existing policies, it takes a lot of flood policies to become an immaterial number but it is increasing.

[Unidentified Analyst:]

Okay great thank you very much.

[Paresh Patel:]

Thank you.

[Operator:]

Thank you. And the next question comes from Casey Alexander with Gilford Securities.

[Casey Alexander:]

Hi, good afternoon. Can you review the total policies that you received from both takeouts the December and the February? The number of policies and what you believe the premium attributed to those policies will be over the course of the next year?

[Paresh Patel:]

Okay, Casey, I think the official numbers and you can look them up in the Citizens website, was about 36,500 policies were technically assumed in December and 4700 were technically assumed in February. So if you add those together, you end up with about 40,000 policies. I say technically assumed because [Audio Disturbance] almost think of way that you end up a net of that, but dwellings for all of that stuff I think what we’ve said afternoon and what we did achieved between the two takeouts is about $100 million of premium in force that will roll on to our books over the next year. Does that answer your question?

[Casey Alexander:]

Yes, it does. And the attrition rate how do you see that developing, I know that’s always a moving number but how is it been developing thus far?

[Paresh Patel:]

I almost would tell you it’s incredibly how good it is, right. The – because of the way we’ve been doing these takeouts and policy out et cetera, we are seeing renewal rates on these – on the assumed book to be consistent with our existing book, which is approaching 90%. So the book isn’t rolling up, is that’s what the question is, yes.

[Casey Alexander:]

Yes, yes. I would never ask you to speak to the results of the competitor, but a competitor reported and had adverse reserve development from 2014 and also water losses apparently this year in the Tri-County area. And that has been the bulk of where their takeouts have been. I was wondering if you guys have seen anything similar either this year or last year related to water losses in the Tri-County area.

[Paresh Patel:]

I can’t speak to other people’s numbers, but I can speak to our first quarter. In Q1, at least from a claims frequency perspective in the Tri-County area, our claim count was actually down. And part of that was mainly because last year in Q1, there was a – a bad storm that went to Palm Beach, so that could elevated the claim counts a little bit, right. So that’s why we’re down. If you actually netted out for that particular thing from last year – from Q1 last year, I would say we haven’t seen an uptick in frequency. Severity, we have seen some slight uptick because the – the assignment of benefits issues are active down there. But not enough to make it a material conversation item on our part and check if any which I think wasn’t really there, it’s baked into our numbers already.

[Casey Alexander:]

Okay, okay that’s great, thank you. And lastly, as much as I like a good donor, we certainly appreciate your contemplated plan as it relates to acquisitions. Do you expect that the board would take up a new share repurchase plan because you use last years very judiciously in terms of when you executed it and the prices that you executed at. And I think it’s made a lot of sense in lieu of a good acquisition falling in your lap. Would you – do you think that that you – you as a manager would recommended to the board of which you’re also a Chairman of the board to take up the new share repurchase program?

[Paresh Patel:]

Casey, look over the course of the years of this stuff in the same share price say in whatever environment, we do change our minds as times goes along. And I would tell you having just come off of one, we will probably wait to see how come up the new few months develop. Right the item being is, on the one hand if we made – doing an acquisition until that day building up some cash reserves would be a useful thing to do. On the other hand if no [Audio Disturbance] and to put that capital to work arises, it will eventually reach a point whereby I’ll say what is the best in use of the cash and the board will obviously debate the obvious answers that you get to at that point which is either a share buyback dividend increase or some kind of special dividend or usual kinds of things that we talk about.

[Casey Alexander:]

All right. Well, I thought maybe you might just want to have one in your pocket in case there is real volatility in the market and yet that no opportunities shown itself yet is that – by make some sense. But thank you very much for taking my questions. I appreciate it.

[Richard Allen:]

Absolutely, Casey. And look let me just answer that last one, you said we’re having one in our pocket. Generally speaking, we tended to be a company that when we say we’re doing a buyback we actually go and buyback shares. So, I think there is some concern that we don’t want to certainly say we’ve got a buyback in place. That is not actually buyback shares. I think if you heard when we would announce it, we generally have been very quickly follow-up through and executed upon in. So it puts us where we are.

[Casey Alexander:]

Okay, great. Thanks for taking my questions.

[Richard Allen:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from Arash Soleimani from KBW.

[Arash Soleimani:]

Thanks and good afternoon. A few questions for you, so it seems like what you’re saying is the acquisitions you’re going after or more likely to be outside of insurance, is that the right way to think about it?

[Richard Allen:]

Arash, I don’t know, if you know that we would absolutely say that would be – I think what we would tell you is the insurance acquisitions that we have been looking at tend to be very richly priced currently. So we like to do an acquisition in insurance, we would gladly do it. But we are not seeing competitive pricing like – as we are seeing in some other areas. So that’s were the differences of opinion comes from.

[Arash Soleimani:]

Okay. And so, it sounds like you’re saying you would be just as I guess just as happy with outside insurance as we look to do it in insurance is not a preference or one of the other prefers.

[Richard Allen:]

Yes, look we’re in the market to buy something a good business that’s fairly priced, right?

[Arash Soleimani:]

Right, right. And in terms of is it something outside insurance or is it something that would maybe fit in well with like an Exzeo, something existing that you already have or would it be potentially something that’s in an industry outside. I guess your current operations.

[Richard Allen:]

We’ve stated this call several years usually executed upon in. If we want to do an acquisition, the conversation we’ll have is first of all, is it a good business going and in secondly, do we know that there is a management team that’s going to – that we’ve identified that’s going to live which is why there is existing management team or some other management team because we don’t presume to suddenly imagine that we know how to run an insurance in Colorado, any more than we presume that we have the expertise to run – I don’t I’d franchise in Texas, yes?

[Arash Soleimani:]

Right, right. And I guess in terms of the so this is a similar question but in terms of future plans for HCI – HCIs next step is that right way to think about that as on the citizens front obviously that’s not the opportunity, it was even Q4 of this past year, or in prior quarters. So in the next step for HCI premier positions, is M&A – I guess what am I asking you is, is M&A the next thing for HCI?

[Richard Allen:]

I think first like is more clearly answer if we can know what’s going to happen this summer in – throughout this year I would say its in terms of hurricanes and other catastrophes et cetera. I would say that because those things are materially change the outlook and we do know that about this business is that every six months outlooks changing very quickly.

[Arash Soleimani:]

Right.

[Richard Allen:]

So giving all of that all we are doing is making sure that we’re prepared for when that opportunity comes along to take advantage of it, equally well if there is no opportunity which is we’re currently the ideas seems to be from Citizens et cetera to be patient and wait…

[Arash Soleimani:]

Right.

[Richard Allen:]

And plan for the day when that does arrived, yes.

[Arash Soleimani:]

Right, that makes sense. And are you also looking M&A opportunities in other states?

[Richard Allen:]

We are looking at M&A opportunities wherever we are presented them…

[Arash Soleimani:]

Okay.

[Richard Allen:]

And I think whatever lines of business we presented – you know with this is again whereby you say no, a lot of times to get to a yes.

[Arash Soleimani:]

Right.

[Richard Allen:]

It is each one of the deal, yes.

[Arash Soleimani:]

Okay. And if you thinking is there something earlier about Claddaugh, the call had cutting out a bit at that point. I just heard as you mentioned something with Claddaugh, I'm just wondering if you could repeat that?

[Paresh Patel:]

Yes, hey, great question. That we have that our internal to the organization using our cash position and the health of the business and the cash flow that’s there, we are in a position, if we had been appropriate to actually retain some risk in Claddaugh and thereby actually increasing our profitability by being strategic reinsurer of our own insurance company.

[Arash Soleimani:]

So I think this past year you had $10 million in Claddaugh, so that’s what you’re saying that would increase the $10 million.

[Paresh Patel:]

Yes. Possibly.

[Arash Soleimani:]

Okay. And is that in terms of your I think the total, if you take Claddaugh and I guess what you retained with in terms of the third party insurance that you work with, I think, had an $18 million retention. Should we think of that if we are something you want to keep the same, something you want to increase now that you are bigger, what’s the right way that I guess think of – think of I guess the 28 – should we assume that 28 moves up, moves down is the same?

[Paresh Patel:]

Simple way to just thinking about this, as far as the insurance subsidiary goes typically the industry normally is 15% of year end and it’s surplus from the previous year.

[Arash Soleimani:]

Okay.

[Paresh Patel:]

Which put us at about $26 million just for the insurance subsidiary.

[Richard Allen:]

And that is not occurring for any other reason than the increase in the surplus and capital position of the insurance subsidiary.

[Arash Soleimani:]

All right.

[Paresh Patel:]

So you see these things are getting bigger for us and for everybody else as business is grow and thrive.

[Arash Soleimani:]

Okay.

[Paresh Patel:]

The Claddaugh part we might increase it from $10 million to some other number assuming we think it’s appropriate.

[Arash Soleimani:]

Okay. So that was basically the goal there will just be to deploy excess cash that you have in a way that you’ve been profitable.

[Paresh Patel:]

Yes.

[Arash Soleimani:]

Okay. And numbers of question for Richard, did you mentioned what the weighted average that with the shares outstanding.

[Richard Allen:]

Weighted average at the quarter – end of the quarter was 11.4 million and that a diluted share count, the weighted average diluted share count was 11,300,000 million, approximately.

[Arash Soleimani:]

Okay. Thank you. And was there any favorable or unfavorable development in the quarter?

[Richard Allen:]

As far as…

[Arash Soleimani:]

Or just reserve developing that favorably or unfavorably?

[Richard Allen:]

They’re consistent.

[Arash Soleimani:]

Okay.

[Richard Allen:]

They’re consistent…

[Arash Soleimani:]

Okay. And then the last question, I have here in terms of the flood, I know you mentioned April 1, there is a rate increase [indiscernible], let’s say that’s – I get you some traction on the flood front. How should we think of the margins on that business? The reason I asked this, I think maybe one year ago, you’ve been – there was – you had something about that business being a break even business. Is that something what – where you could actually have a positive underwriting margin?

[Paresh Patel:]

Yes, I think at this point because of the – how – the progress we’ve made in terms of selections of policies et cetera. It will be – we are now looking at that business much better than break even in fact one that meets our profit target.

[Arash Soleimani:]

Okay.

[Paresh Patel:]

As long as we take the right policies and we say no to the wrong policies, yes.

[Arash Soleimani:]

Okay, okay, thank you for the answers and congrats on the quarter.

[Paresh Patel:]

Thank you.

[Operator:]

Thank you. Now, we are currently out of time. So at this point, I would like to turn the call back over to management for any closing comments.

[Paresh Patel:]

On behalf of the entire management team, I would like to express our appreciation for the continued support we received from our shareholders, employees, agents and most importantly our policyholders. We look forward to continued success in 2015.

[Operator:]

Thank you. Thank you for joining us on today’s presentation. This concludes today's call. You may now disconnect.