HCI Group, Inc. (HCI) Q1 2019 Earnings Call Transcript

HCI Group, Inc. (HCI -1.01%)
Q1 2019 Earnings Call
May 2, 2019, 4:45 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the HCI Group, Inc. first quarter 2019 earnings call. My name is Kevin and I'll be your conference operator this afternoon. At this time, all participants will be a 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 for replay through June 2nd, 2019 starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until June 2nd, 2019 on the investor information section of HCI Group's website at www.hcigroup.com.

I would now like to turn the call over to Kevin Mitchell, HCI's Senior Vice President of Investor Relations. Sir, please proceed.

Kevin Mitchell -- Senior Vice President of Investor Relations

Thank you and good afternoon. Welcome to HCI Group's first quarter 2019 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, and Mark Harmsworth, our Chief Financial Officer. Following Paresh's opening remarks, Mark 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 take your questions. To access today's webcast, please visit the investor information 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 a material adverse effect on the company's business, financial conditions, and the results of operations. HCI Group, Inc. disclaims all the obligations to update any forward-looking statements.

With that said, I would like now to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?

Paresh Patel -- Chairman and Chief Executive Officer

Thank you, Kevin and welcome, everyone. As many of you know, Brevard County on the East Coast of Florida, Cape Canaveral, experienced a hailstorm in late March. Our preliminary lost estimates were between $4 million and $7 million. Mark will discuss this in more detail in a moment.

You might think that these hailstorms are unusual in Florida, but we do typically get about one or two every year. This particular storm included strong winds, causing hail damage not only to roofs but to windows, siding, and fences as well, hence our calling it our as a special event.

Moving on to some of our results and highlights for the first quarter -- we bounced back to profitability after Hurricane Michael. We have now been profitable in 44 of the last 46 quarters. Also during the quarter, we paid our 34th consecutive quarterly dividend and our board increased our quarterly dividend by 6.7% to $0.40 per share. This is our ninth dividend increase in nine years.

In March, we repaid $90 million in convertible debt. Lastly, our real estate division, Greenleaf-Capital continued its growth by purchasing 8.5 acres of property in the Westshore business district of Tampa.

With that, I'd like to turn it over to our CFO Mark Harmsworth, who will walk us through our financial performance for the quarter. Mark?

Mark Harmsworth -- Chief Financial Officer

Thanks, Paresh. Net income for the quarter of $6.7 million was down from $10.8 million in the same quarter last year. Diluted earnings per share were $0.82 compared to $1.11 last year. These results were negatively impacted by the late March hailstorm in Brevard County. In March, we issued a press release giving a range of ultimate losses of $4 million to $7 million. In Q1, we booked a $5 million provision, which is our best estimate of the ultimate cost of the storm.

On a positive note, the financial impact of the storm was offset by a $5.3 million unrealized gain on our equity portfolio. This unrealized gain reversed most of the unrealized loss from Q4 last year. Investment income for the quarter was up only slightly from Q1 last year as limited partnership income, which can very significantly from quarter to quarter was down. However, interest income was $1 million higher than the first quarter of last year, driven by significantly higher yields on all our income-producing assets.

You might notice that policy acquisition expenses are up from last year. We had a premium tax return provision adjustment, which explains the increase. However, going forward, policy acquisition expenses will be slightly higher as a percentage of gross premiums earned in the past between 11.5% and 11.75% as TypTap becomes a bigger percentage of our written and earned premium.

Speaking of TypTap, I wanted to take a minute to talk about growth. As we know, we have gone through a period of contraction in our Homeowners Choice book. On the other hand, we have been growing the TypTap book. While it hasn't had a material impact on the financials up, growth is continuing to build in TypTap and should start to positively impact results in the future.

This growth in TypTap should reveal itself in the numbers in three phases. First, consolidated growth premiums in force will start to increase. Second, we should soon get to a quarter where consolidated gross premiums written are higher than the same quarter of the previous year. Third, we can get to a quarter where consolidated growth premiums earned are higher than the same quarter of the previous year.

We expect all of these growth indicators within the next 12 months. In fact, we have already reached the first. In March of this year, consolidated gross premiums in force were higher than the they were in February. What does that mean? It means that we have started to grow again.

In Q1, gross premiums written in TypTap of $6.2 million were almost ripple the first quarter of 2018, driven in large part by the growth in our new technology-enabled homeowners' business. The growth of TypTap Home has been impressive. In the fourth quarter of 2018, we were riding about $500,000 a month in premiums.

In April, we had written that much before the end of the first week. We are very encouraged by the growth here and we expect it to continue. However, it isn't just about growth. It's about profitable growth, the kind of profitable growth that can be achieved through strict underwriting policies and the efficiencies of automation available through our technology platform built by Exzeo.

Now, turning to the balance sheet for a minute -- as Paresh mentioned, on March 15th, we settled in cash at maturity all of our 3.875% convertible senior notes totaling just under $90 million. This is a significant change in our financial position in a few ways. First, our debt to cap ratio falls from 58% at the end of last year to 47% at the end of March. Second, our interest expense now drops by about $7.4 million a year, $0.85 million per quarter.

Third, cash outflows for cheap loan interest dropped by about $3.5 million per year. Fourth, our fully diluted share count has dropped by approximately 1.475 million shares. Lastly, the combination of all of those things should boost fully diluted earnings per share by about $0.08 to $0.12 per quarter from what it otherwise would have been.

Just as a point of clarification, interest expense this quarter wasn't impacted much by the debt being paid because it happened late in the quarter. However, going forward, quarterly interest expense should be about $2.85 million, down about 35% from where it has been for some time.

Also, on the balance sheet, you'll notice that reserves are down about $23 million. This relates principally to payments made for Hurricanes Irma and Michael. This is offset somewhat by the new reserves for the March hail event. Also, we increased reserves on normal daily claims by well over $1 million during the quarter and reserves for daily claims are about 2% higher at the end of March than at the end of December, while the number of open claims and the number of open lawsuits are both lower.

On our last earnings call, we disclosed the ultimate loss estimate for Hurricane Irma of $411 million and the ultimate loss expense from Michael as $22.25 million, both including flood. We have made no changes to either of those estimates.

Now, just a couple of points on capital management and liquidity -- in the quarter, we paid a dividend of $0.40, as Paresh mentioned, up from the $0.375 that we paid in the fourth quarter of 2018. During the quarter, we repurchased 31,789 shares for total consideration of $1.337 million or an average of $42.06 per share.

In terms of holding company liquidity, after repaying the convertible notes, we still have about $55 million in cash and investments at the holding company level, as well as the additional liquidity provided by our $65 million revolving credit facility. Speaking of which, we drew $8 million on the credit facility related to a real estate acquisition in the Westshore Business District in the quarter.

Just two other things -- the number of common shares outstanding on March 31st was 8,359,889, down 3% from a year ago and the number of fully diluted shares outstanding at the end of the quarter was about $10,160,000. Lastly, book value per share as of March 31st was $22.37, up from $21.71 at the end of 2018.

With that, I'll turn it back to Paresh.

Paresh Patel -- Chairman and Chief Executive Officer

Thank you, Mark. As Mark stated, our insurance business returned to profitability in the first quarter. Let's be clear -- our vehicle for growth in the future is TypTap, our insurance subsidiary that is powered by software from our technology subsidiary, Exzeo.

TypTap is growing at a rapid pace. Gross written premiums have doubled each year since it began writing business in early 2016. It is accelerating. For example, at the end of 2018, we were writing about $500,000 of premium per month. Two months later at the end of February, we were writing $500,000 of premium per week. By the end of April, we were writing $800,000 of premium per week.

TypTap's gross written premiums are now over $20 million. It should grow to about $40 million in the next year very easily. Margins should be stable at around 20%. So, with that, keep in mind that $40 million of premium at a 20% margin produces about the same profit dollars as doing $160 million of premiums at a 5% margin.

As always, we focus on the bottom line effects rather than the topline numbers. We are excited about TypTap's growth because it demonstrates the power of our Exzeo technology. We look forward to updating you on our growth in the next quarter and in the coming quarters thereafter.

With that, Operator, please provide the appropriate instructions.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing *1. One moment please while we poll for questions.

Our first question today is coming from Matt Carletti from JMP Securities. Please proceed with your question.

Matt Carletti -- JMP Securities -- Analyst

Good afternoon. Paresh, just a few questions to start. There's recently been some AOV reform passed that I think is a good step in the right direction and remains to be seen exactly how it's implemented. Would you mind sharing your thoughts on the matter and what sort of impact it will have?

Paresh Patel -- Chairman and Chief Executive Officer

Sure. Matt, we're obviously very appreciative of the legislators and everybody who made the effort to get this legislation passed during the last session -- the session isn't quite over yet -- but obviously, the bill is sitting on the Governor's desk and he's expected to sign it. But a lot of effort by a lot of people -- we think it will have a positive outcome. But obviously, we need to let time play out as to how exactly it's implemented and also, what happens as a deadline of July 1 approaches. But it's a positive step. It's just too early to tell what quantitative effect it will have.

Matt Carletti -- JMP Securities -- Analyst

Okay. Then on the upcoming reinsurance renewals, I know that your program isn't complete yet, but any color you can give on how the environment is unfolding from your perspective and the progress you've seen so far.

Paresh Patel -- Chairman and Chief Executive Officer

I think the overall item that everybody seems to agree on is the reinsurance placement for the whole industry is much behind schedule compared to previous years. So, I think it's early May. I've yet to hear of a program that is done. A lot of them still haven't got their quotes back. It's going to take a little while. We're obviously in the middle of those conversations as well. The good news is in four weeks, it will all be done one way or the other.

Matt Carletti -- JMP Securities -- Analyst

Great. One last high-level question -- you mentioned in your opening comments Greenleaf bought, I think, 8.5 acres in the Westshore area. Do you guys have any big plans for that 8.5 acres currently?

Paresh Patel -- Chairman and Chief Executive Officer

I don't know that we have plans for it this very second, but usually we buy properties with an eye to the future as to what it would be. Again, having just bought it two months ago, we're trying to ascertain all the alternatives and see what's possible before we actually make concrete plans.

Matt Carletti -- JMP Securities -- Analyst

So, stay tuned. Lastly, quick number for Mark -- do you have net written premiums in the quarter handy?

Mark Harmsworth -- Chief Financial Officer

Yeah, sure. It's 36,197,000.

Matt Carletti -- JMP Securities -- Analyst

Wonderful. Thanks very much. Best of luck the rest of the year.

Mark Harmsworth -- Chief Financial Officer

Thanks, Matt.

Operator

Our next question today is coming from Mark Hughes from SunTrust. Your line is now live.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good afternoon. The issue on the policy acquisition costs, what was the driver there? I know you said this, but I didn't get it.

Mark Harmsworth -- Chief Financial Officer

Sure. It was up a bit. You'd expect it to be down a little bit. There are a couple of things in there. First of all, not all of it varies directly with gross premiums earned. Some parts of it are flat. But the big thing, Mark, was we had -- what we do every quarter is we estimate the premium taxes. That's obviously part of that expense. Then at the end of the year, we file the return and chew it up. In the first quarter of last year, we had a positive adjustment for that. In the first quarter this year, we had a negative adjustment for that. It was like a $300,00.00 swing or something like that. So, that was the big factor there.

Then just as I mentioned, generally as TypTap grows, because it's a voluntary business, the cost of acquisition is a little bit higher. So, that as a percentage of a gross premiums earned is drifting up a little bit. It's really sort of all of those things.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Then the TypTap, is that still largely flood? I think you're making some progress on homeowners as well. Could you talk about the mix there?

Paresh Patel -- Chairman and Chief Executive Officer

Sure. Obviously, the flood business in TypTap had a three-year head start or two and a half-year head start to the homeowners' business. The homeowners' business is really taking off at this point. So, I think within a quarter or two quarters, the homeowners' business is probably going to be much larger than the flood business in TypTap. That's the trajectory we're on.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Could you just elaborate on that a little bit more, what has really caught -- I won't say caught fire -- but what's created the momentum in that business where you really see the good strength? What's driving that?

Paresh Patel -- Chairman and Chief Executive Officer

Well, a couple of things -- I'm going to give you a long answer here -- the technology that we built a few years ago, initially we deployed it to do flood insurance, which is a much simpler product than homeowners' insurance in terms of all the data points you need, etc. Having said that, it's also a much more tough market because given the NFIP and everything else, not all business is profitable. So, you have to be very careful which risks you select. So, it does limit growth.

When we then apply the technology to a much larger and much more complex product with homeowners, we suddenly found two things -- one, it works even better and secondly, you're now playing in a much larger market, a $10 billion marketplace. That has helped tremendously in terms of -- that's why a homeowner takes off quicker, a much bigger market, much more need. Secondly, because of all the stretches in the last few years, the competitors have basically backed off in terms of trying to pick up market share. So, all of those things are contributed.

But the key item that we have, which I think a lot of folks don't, is technology. It makes a huge difference. To give you an idea, there was a day last week where we needed 1,000 quotes to buy 50 policies, which shows you quality of underwriting standards, that we don't take every policy that comes in. But against that, we had only a handful of people supporting it because most of that was done without it touching human hands, yeah?

Mark Harmsworth -- Chief Financial Officer

And Mark, I gave some of these numbers in my prepared remarks, but TypTap consolidated gross premiums written tripled over the first quarter last year. So, they went from about 2 million to a little over 6 million. And of that $4 million increase, the majority of that was from the homeowners, the new homeowners product.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Very good. Thank you. Was there any reserve strengthening in the quarter?

Mark Harmsworth -- Chief Financial Officer

Yeah. We increased reserve by about $2 million, again, sort of out of caution. We actually bumped up our total reserves. I mentioned that as well in my prepared remarks, just sort of out of caution, continuing to watch the litigation environment to actually -- we increased it by about $2 million.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. Great. Thank you.

Operator

Thank you. Our next question is coming from Freddie Sleiffer from KBW. Your line is now live.

Freddie Sleiffer -- KBW -- Analyst

Hi. Good afternoon. Just to quickly follow-up on Mark's question about the adverse development, which accident did this come from and was that just homeowners?

Mark Harmsworth -- Chief Financial Officer

It's a little early to start allocating it by accident year. That's a question you can ask me at the end of the year.

Freddie Sleiffer -- KBW -- Analyst

Okay. Then just going back to the premium decline, it was close to 4% this quarter. Do you expect this to persist, the homeowners choice premium declines? I know TypTap has grown a lot, but is there anything you're doing to curb this?

Paresh Patel -- Chairman and Chief Executive Officer

Freddie, as we've sort of said about this stuff, we are really focusing on the growth of TypTap, not where homeowners are gradually contracting year over year as it has been for several years at this point. The key takeaway from this is TypTap is now large, $20 million, and getting larger, doubling in size every year. So, its growth is starting to overpower any contraction hat might occur on the homeowners' choice side. So, that's the focus.

Freddie Sleiffer -- KBW -- Analyst

Then just to follow-up on that a little, what are the implications for your expense ratio going forward? You have the premium decline from the homeowners' choice that sort of drive it upwards and then I think Mark mentioned the high acquisition cost for TypTap. Is there an expense ratio range that you target or something that you want to achieve?

Mark Harmsworth -- Chief Financial Officer

I think it's going to be small. Both are fairly high-margin businesses. The TypTap book is running at about a 20% pre-tax margin, which is not dissimilar to homeowners. The numbers from TypTap are growing, but as a percentage, it's still fairly low. I don't think in the foreseeable future we're going to see anything significant. The only real thing worth mentioning is what I had mentioned about policy acquisition expenses. That's why I mentioned that. That's not a big number.

Paresh Patel -- Chairman and Chief Executive Officer

The bigger overall takeaway from this is that the growth, the business that is growing, TypTap, has similar margins or better than the business that is shrinking. So, we're not replacing high-margin business with low-margin business. We are actually replacing with similar or better margin business.

Freddie Sleiffer -- KBW -- Analyst

Okay. Got it. Then I think Matt already touched on reinsurance a little, but I think there are some rumors going around about some of your competitors seeing 20% to 30% rate increases on parts of their towers. So, I was wondering if you could give some color around what you were maybe expecting in terms of pricing and also if you're considering making any changes to the structure of your tower.

Paresh Patel -- Chairman and Chief Executive Officer

I've heard those rumors too. That's all the comment I'll have on the rumors regarding the other people in the market. As far where we are, we obviously as a key juncture in the negotiations for reinsurance at this point, and as I said earlier, it will be done in the next four weeks, this will not be a good point to speculate as to what the rate would be, whether it's an increase or not, etc. Again, in four weeks, we'll know.

Freddie Sleiffer -- KBW -- Analyst

Okay. Finally, just a quick follow-up on the AOB reform, do you think if the legislation is passed, you'll start offering cheaper policies that prohibit the AOB? Also, does this impact higher thinking about fighting for rate increases? I forget -- do you have one pending with a regulator right now?

Paresh Patel -- Chairman and Chief Executive Officer

Okay. Let me try to answer those questions in reverse order. I don't think we have a rate increase pending with the regulator at the moment. As far as policies that restrict AOB, etc., this is part of the reason why we're saying we've got to let it play out, because I'm sure the OIR would pass rules as to how you implement it, what the cost of it is, etc. Until we see those things, it would be wrong to speculate whether we offer restricted policy or not. It's how the legislation is implemented that will decide that. What was the third part of the question?

Freddie Sleiffer -- KBW -- Analyst

If the AOB reform changes how you're thinking about rate increases.

Paresh Patel -- Chairman and Chief Executive Officer

Yeah. It doesn't necessarily change anything for us. It's too early again. But for a lot of folks, we are sitting there looking at choppy waters because you have reinsurance costs gong up. Hopefully with AOB, loss ratios should be going down and the numbers will become what they will. Again, I think it's just too early to tell.

Freddie Sleiffer -- KBW -- Analyst

All right. Thank you very much for the answers.

Paresh Patel -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. At this time, this concludes our question and answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing remarks.

Kevin Mitchell -- Senior Vice President of Investor Relations

On behalf of our 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 policy holders. We look forward to updating you on our progress in the near future.

Duration: 27 minutes

Call participants:

Kevin Mitchell -- Senior Vice President of Investor Relations

Paresh Patel -- Chairman and Chief Executive Officer

Mark Harmsworth -- Chief Financial Officer

Matt Carletti -- JMP Securities -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Freddie Sleiffer -- KBW -- Analyst

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