HCI Group, Inc. (NYSE:HCI) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon and welcome to HCI Group’s First Quarter 2023 Earnings Call. My name is John, and I will be your conference operator. [Operator Instructions] Before we begin today’s call, I would like to remind everyone that this conference is being recorded and will be available for replay through June 8, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 9, 2024, on the Investor Information section of HCI Group’s website at www.hcigroup.com. I will now turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Matt Glover: Thank you, John, and good afternoon, everyone. Welcome to HCI Group’s First 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 first 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’d like to take this 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, 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 disclaims all obligations to update any forward-looking statements. Now with that, I’d like to turn the call over to Karin Coleman, Chief Operating Officer.

Karin?

Karin Coleman: Thank you, Matt, and welcome, everyone. HCI Group reported a strong first quarter with pretax income of $23.1 million and diluted earnings per share of $1.54. Our Homeowners Choice, TypTap and Greenleaf subsidiaries all contributed to earnings with several noteworthy accomplishments during the quarter. TypTap Insurance Group, our insurance and technology subsidiary, reached a milestone with its first quarter of profitability on a GAAP basis and more than $350 million of in-force premium. At both of our insurance companies, loss ratios improved from last quarter, driven by lower claim volumes partially due to legislative reforms enacted in Florida last year. Our real estate division, Greenleaf Capital, earned over $9 million, reflecting gains on the sale of 2 properties disclosed on our last call.

As a reminder, over the last 3 years, Greenleaf realized gross proceeds of close to $90 million and a gain of $60 million on just 4 transactions. And we believe there is still plenty of upside in our real estate portfolio. In addition, our investment portfolio earned $9 million during the quarter, with 90% of it coming from interest income alone. This is a result of steps we took to reposition the balance sheet into short-duration, interest-earning assets over the last year. We now have an investment portfolio capable of generating $30 million in interest income on an annualized basis with a low risk profile. We also continued to deliver on our commitment to shareholders, paying a $0.40 per share dividend, our 50th consecutive quarterly dividend.

In summary, it was a solid, profitable quarter with all 3 of our main divisions contributing to the success of the quarter. And now I’ll turn it over to Mark, who will provide more detail on our financial results.

James Harmsworth: Thanks. As Karin mentioned, pretax income for the quarter was $23.1 million, and diluted earnings per share were $1.54, up from $0.09 in the first quarter of 2022. We discussed several positive trends over the past few quarters and those trends are translating into material, sustainable improvements in earnings. First, gross premiums earned are up despite policies in force being down, driven by rate adjustments made over the past few quarters. This means that while revenue is up, exposure is down. Second, investment income is going up. As Karin mentioned, we had a gain from our real estate portfolio, but even if that is excluded, the remaining $8.8 million of investment income is more than 3x what it was in the same quarter last year.

This increase in investment income is being driven by steadily increasing interest income on our bond investments and on cash. When interest rates were low, we held on to our cash, and when they started to go up, we carefully invested some of that cash in bond. At the end of Q1, we have $500 million invested in fixed-term securities at an average yield of 3.7% compared to $150 million invested at 1.6% a year ago. We have continued to manage the risk as well. Our average term to maturity in the bond portfolio was just over 1 year, and we still have over $300 million in cash. The third positive trend is that policy acquisition expenses are declining as a percentage of gross premiums earned. In Q1, policy acquisition expenses were 12.6% of gross premiums earned, down from 16.4% in the same quarter last year because of lower commissions and a change in the mix of new versus renewal business.

This reduced expenses by more than $7 million for the quarter. I saved the last trend, declining loss expenses, for last as it deserves more explanation. In the first quarter, our consolidated loss ratio was 33%, down considerably from 40% in the same quarter last year. The lower loss ratio was driven by higher average premium per policy, moderating claims severity as well as lower claim and litigation frequency, some of which is as a result of the legislative changes in Florida. I should note that we did not get to these lower loss ratios by reducing reserves. While we have slowed the pace of reserve increases, we have not yet started to reduce them. So stepping back, that’s 4 positive trends that I went through, and the combined impact of all of these trends is a material positive impact on the operating performance of the company as evidenced by the strong earnings in the quarter.

These trends have also positively impacted our insurance and technology subsidiary, TypTap Insurance Group. Higher average premium per policy, higher investment income and a lower loss ratio and a lower expense ratio led to TypTap Insurance Group being profitable for the quarter. Our real estate division also had another very strong quarter. As Karin mentioned, we sold 2 of our commercial properties for a gain of $8.9 million, another example of our opportunistic real estate strategy. Just a few other quick things. Consolidated cash flow from operations was $99 million or about $11 per share compared to $57 million in the same quarter last year. Book value per share increased to $20.97 from $18.91 during the quarter. A quick comment on holding company liquidity.

Cash and financial investments outside the insurance entities were $160 million at the end of the quarter, up from $145 million at the end — at the start of the quarter. Of course, this does not include the $120 million in value represented by our investments in real estate and Greenleaf. In summary, this was a strong quarter for us. Our operating strategies are paying off, the insurance market in Florida is improving, and we’ve positioned the business to deliver superior ongoing operating results. And with that, I’ll hand it over to Paresh.

Pareshbhai Patel: Thank you. Mark and Karin outlined our strong financial results for the quarter. We are seeing the benefits of the company’s underwriting and rate actions as well as the bold leadership provided by the Florida legislature in 2022. These benefits should continue in the upcoming quarters and provide a solid foundation for the future. Before talking about future prospects for HCI, I wanted to briefly comment on reinsurance. We are finishing up the placement for both of our insurance companies, and like prior years, we will provide full details when everything is finalized. Our reinsurance program is progressing as expected. We came into the renewal with the majority of the program already set. Between the Florida Hurricane Cat Fund, the Reinsurance Assist Policyholders, or RAP program, and our multiyear contract, TypTap and Homeowners Choice had secured approximately 70% of their plan limit purchase.

The remaining 30% is being placed in the pilot market now and where enough capacity is available. On a blended basis, we think the rates will be higher but the cost will be within expectations. Now looking towards the future. Homeowners Choice continues to be regarded as one of the best performing homeowners carriers in Florida. And Greenleaf continues to prove its worth as a separate real estate division that delivers solid long-term returns. Both Homeowners Choice and Greenleaf at this point have solid proven track records on which we continue to build. Now let’s talk about TypTap Insurance Group. It made a GAAP profit in Q1 of this year. Last year, we talked about TypTap seeing periods of profitability. The first quarter of this year shows that we’re executing on that vision.

But our work is not done. We continue to leverage our technology and optimize our book of business while maintaining strong retention ratios, and we plan to build on the current momentum in TTIG. Finally, we continue to make progress on items we mentioned in previous calls. We had talked about setting up additional insurance companies. We are in the process of setting up 2 new carriers named Tailrow and perRisk. We still have work to do before these new companies write their first policies, but progress is being made. In closing, from our perspective, we are starting to see a turn in the operating environment in Florida. The underwriting actions we’ve taken over the past several months, along with the benefits of legislative reforms have started to show up in our Q1 results.

On prior calls, we highlighted there will be an opportunity for us in the near future. We are seeing that opportunity unfold in front of us. The days ahead are even brighter. With that, I’d like to open the call to questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from Mark Hughes with Truist.

Operator: [Operator Instructions] The next question comes from Matt Carletti with JMP.

Operator: [Operator Instructions] We have a follow-up coming from Mark Hughes with Truist.

Operator: At this time, this concludes our question-and-answer session. I would now like to turn the call over to Paresh Patel who has a few closing remarks.

Pareshbhai Patel: On behalf of the entire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. Thank you.

Operator: This concludes today’s call. You may now disconnect.