Image source: The Motley Fool.
HCI Group Inc (HCI 2.16%)
Q4 2019 Earnings Call
Mar 5, 2020, 4:45 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon and welcome to HCI Group's Fourth Quarter and Full Year 2019 Earnings Call. My name is Cynthia, and I will be your conference operator this afternoon. [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 April 5, 2020, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until June 5, 2020 on the Investor Information section of HCI Group's website at www.hcigroup.com.
I would now like to turn the call over to Rachel Swansiger, Investor Relations for HCI. Rachel, please proceed.
Rachel Swansiger -- Staff Attorney
Thank you and good afternoon. Welcome to HCI Group's fourth quarter and full year 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 full year of 2019 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 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 to actual events, 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.
Now, with that, I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Thank you, Rachel, and welcome, everyone.
Today, I'd like to start with a brief overview of our Company. HCI's principal operations are in insurance, software development and real estate. We have two insurance companies, TypTap Insurance Company and Homeowners Choice Property & Casualty Insurance Company, both of which provide homeowners and flood insurance primarily here in Florida. We also have an information technology subsidiary called Exzeo that develops insurance related products and services, several of which we use in our day-to-day operations. And lastly, we have Greenleaf Capital, which owns and manages our growing portfolio of real estate in Florida.
Recently, we began describing HCI as an insurtech insurance company. While insurance is our primary business, our focus is on developing and using insurance related technologies. We have developed a full suite of technology to speed up and lower the cost of producing, underwriting and servicing our insurance products. These tools also help improve our operating results.
For example, TypTap has an online coding and binding platform that can deliver a policy in minutes. Underwriting decisions on these platforms are virtually instantaneous. The platforms simplify the policy production experience for both consumers and agents, and when combined with our data analytics, they deliver superior operating results, as evidenced by industry-leading profit margins. I will speak more about our insurance tech and what it means to us in a moment.
Now, for some highlights for the fourth quarter. The fourth quarter marked the 47th out of 49 quarters that HCI has been profitable, the exceptions being the quarters in which hurricanes Irma and Michael hit. In December of this year, we also paid our 37th consecutive quarterly dividend at $0.40 per common share. As a note, at our current share price, that's a yield of about 3.7%. Compare that to the yield of a 10 year treasury note today. And finally, at the end of the quarter, TypTap's premiums in force quadrupled in size from the year-end of last year. This growth was organic, without any acquisitions and/or [Indecipherable]; a fantastic year for TypTap.
Before I talk about our business outlook, though, I'll turn it over to our CFO, Mark Harmsworth, who will walk us through our financial performance for the fourth quarter and full year. Mark?
Mark Harmsworth -- Chief Financial Officer
Thanks, Paresh.
Net income for the fourth quarter was $6.4 million, and diluted earnings per share were $0.82 on a GAAP basis and $0.76 on an adjusted basis. For the full year, net income of $26.6 million was up from $17.7 million last year and diluted earnings per share were $3.31 on a GAAP basis and $2.57 on an adjusted basis.
On the last few earnings calls, we've been discussing the Company has begun to grow again. In the second quarter, gross written premiums were up year-over-year. That trend continued in the third quarter and now again in the fourth quarter. In Q4, gross written premiums were up by 53%, driven by the growth of TypTap. TypTap wrote $24 million of premium this quarter compared to $4 million in the fourth quarter last year. For the full year, TypTap wrote over $60 million of premium compared to $14.5 million in 2018.
While gross written premiums have been up since Q2, it takes some time, of course, for those increases to work their way through to increases in earned premium, and that started this quarter. In Q4, gross earned premiums were up 6% from the same quarter last year, and net earned premiums were up 11% for the quarter and 1% for the year. At the end of 2019, premiums in force were almost 10% higher than they were at the end of last year.
Now looking at expenses for a minute. Total expenses in the fourth quarter were 15% lower than the same quarter last year, largely due to lower loss expenses. For the full year, expenses were up less than 1% and were more than offset by a 5% increase in total revenue. And as a result, net income was up for the year.
Now let's turn to the balance sheet. As you know, in 2019 we brought our debt level down considerably when we paid out in cash the $90 million in convertible bonds that came due in March. This reduced our debt to cap ratio from 58% at the end of last year to 48% at the end of this year. Despite paying down the debt, we still maintain a very strong cash and investment position. We have $495 million in cash and financial investments on a consolidated basis, and at the holding company level, we have $46 million in cash and investments as well as $55 million in additional liquidity from our revolving credit facility.
The individual insurance companies are also in a very strong financial position. The surplus in both insurance companies is up from the end of last year, and RBC ratios are well above target. We have just under $150 million in surplus in Homeowners Choice and just over $27 million in TypTap. There is plenty of surplus in the insurance companies to support future growth.
Cash flow remains strong. We generated over $54 million in consolidated cash flow from operations this year. We used those funds to buy back stock, increase dividends and strengthen the balance sheet. In 2019, the Board authorized a $20 million buyback program. Through the end of December, we had purchased 454,000 shares using about $18.8 million of the $20 million authorized. In December, the Board authorized an extension of the 2019 program into 2020, and in the first two months, we have purchased an additional 25,840 shares. This brings the total number of shares purchased under the plan to 479,850 at an average purchase price of $41.68, and this is now fully utilizes the $20 million authorized.
In the last three years, we have reduced the float by almost 1.9 million shares or about 20%. As a result, each shareholder owns 20% more of the Company even if they haven't bought any more stock. As I mentioned before, one of the additional benefits of reducing share count is that we can pay higher dividends per share without increasing the total cash outflow. Total cash dividends in the second half of this year were the same as last year, despite an increase of 7% per share.
2019 was a great year for us. Revenue grew, earnings are up, dividends per share are up, debt is down, share count is down and book value per share is up. But maybe more important, return on equity this year was 14.3% and total shareholder return over the last three years is just over 28%, despite hurricanes Irma and Michael. This may well be the best measure of performance.
Looking to the future, as you know, we have recently taken on a significant book of business, and we have the surplus and liquidity to take on more should the opportunity arise.
And with that, I'll turn it back to Paresh.
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Thanks, Mark.
As Mark indicated, 2019 was another successful year for us. Florida experienced a good weather year with the exceptions of basically a hailstorm in March and a glancing blow by Hurricane Dorian in September.
Following on from that, on February 13 of this year, we announced that under a plan approved by the Florida regulators, Florida based Anchor Property & Casualty Insurance Company will transition all of its policyholders to us by April 1. Anchor has approximately 43,000 policies representing close to $69 million in annualized premium which compares to our own book of business of over 131,000 policies and approximately $370 million of annualized premium. Under the deal, Anchor policyholders were under no obligation to participate in the transition. However, we expect to retain most of the business and that it will take some time for us to optimize the book, and we are very optimistic that this transaction will soon be accretive to earnings.
Why could we do this transaction? We could pursue this transaction because we have adequate capital, and most important, we have the technology and systems in place that enable us to swiftly integrate Anchor's policyholder data and begin servicing the policies. For example, within days of receiving regulatory approval, we produced and mailed over 43,000 notices to Anchor policyholders, and beginning April 1, we will begin servicing those transitioned policies, all this without a need for additional personnel. The power of our technology is such that it allows us to scale operationally without significant additional costs. In this case, we expect to add a business that is about the size of TypTap without hiring dozens of new employees. That's performance.
And with that, we're ready to open the call to your questions. Operator? Please provide the appropriate instructions.
Questions and Answers:
Operator
[Operator Instructions] And our first question will come from Matt Carletti of JMP. Please state your question.
Matthew Carletti -- JMP Securities -- Analyst
Thanks. Good afternoon.
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Good afternoon.
Matthew Carletti -- JMP Securities -- Analyst
Paresh, I was hoping you could maybe follow on your Anchor comments and Mark's comments about having plenty of surplus in liquidity should future opportunities arise and just talk a little bit about the broader landscape of Florida, some of the headlines about peers' capital pressures and potential rating agency actions and kind of what you see taking place as this year unfolds and as we move toward mid-year and what opportunities that might create for HCI.
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Okay. So, speaking about the general Florida marketplace, I think year-end numbers have just been coming out this week. And what you see across the board is, after multiple years of hurricanes and various other issues, most product carriers are financially challenged. Their gross premium to surplus ratios are at the upper ends of allowable limits, and I think a lot of them had to add capital to bolster their surplus at year-end 2019. So all of these things mean that you have companies that have both balance sheet challenges and of course core profitability challenges with their existing portfolios.
So, if you are in that kind of environment, if somebody needs to take over a policy or do an acquisition, it becomes very difficult to do because how do you fund it? In that context, this is HCI's reality. We could take over the Anchor book of business and add it to Homeowners Choice without needing to add any more capital. And, by the way, the regulators did ask us as to what this would do to our balance sheet and leverage. And even if we had done the Anchor deal before the end of last year, we would comfortably have met all the RBC ratios that are required and, even adding Anchor, our premium to surplus ratio basically goes to about -- is well under 3:1.
Matthew Carletti -- JMP Securities -- Analyst
Great. That's really helpful. If I could shift gears a little bit. I mean, TypTap put up some really nice growth in the quarter. Can you talk a little bit just about maybe how production progressed across the quarter, was it fairly stable, that it really kind of continued to grow week after week and where are we now in terms of whether it's weekly or annualized production rate?
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Yes. So, Matt, the growth of TypTap in production really went very well because -- obviously, as we have talked in the previous call, because of Dorian, things had sort of stopped when that was approaching. That was mid-September. And then it sort of started picking up from that, accelerated all the way through October, November and December, and that's why we ended up with the numbers we did.
At some point, we do have to manage where we are growing, how we are growing. So we are tempering TypTap's growth a little bit, but this is by design and out of an abundance of prudence, especially given that we are approaching the hurricane season and also we've done the Anchor acquisition. But fundamentally, we are in a very controlled position with both companies.
Matthew Carletti -- JMP Securities -- Analyst
Great. And then just one numbers question for Mark that I guess I want to ask every quarter. You have net written premiums for Q4 handy?
Mark Harmsworth -- Chief Financial Officer
Yeah, $35.1 million.
Matthew Carletti -- JMP Securities -- Analyst
Wonderful. All right. Thanks very much for all the color and congrats on a nice year. Best of luck going forward.
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Thanks, Matt.
Mark Harmsworth -- Chief Financial Officer
Thank you.
Operator
[Operator Instructions] And our next question will come from Mark Hughes with SunTrust. Please proceed.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Can you talk about the Anchor -- the impact on profitability, kind of the average loss ratio across the book, perhaps, and what steps you can take to move that over time, assuming it need to be moved?
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Yes, Mark. A couple of things. Clearly, we are taking over a book from Anchor that had challenges because otherwise Anchor wouldn't have had challenges. But what we know we can do is, over time, we will do a number of things. We will transition it over to our rates and forms which we're much more comfortable with. So that will alleviate some of the problem. And secondly, as we talked about earlier, we'll immediately pick up some improvement because we don't have the operating overhead that Anchor had as a separate company. So we won't get that incremental increase on our side, so that will improve profitability to some degree.
As far as their loss ratios go, I don't necessarily know that their loss ratios in and of themselves were particularly bad. I think they were trying to outrun their previous issues going back to 2015, 2016 when they started and were doing a lot of take-outs. And I think eventually, the company couldn't outrun those sins of the past, if you like. And the way we've constructed the deal, we only go and risk after April 1. So we don't have any of the sins of the past coming over to us. We just have to operate the current portfolio, which -- I have to commend the management -- the current management have done a good job of cleaning up.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
So April 1 will see that book -- will that be entirely written? Or will it just be the unearned premium that comes through the written ones [Phonetic]?
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Okay. So the technical answer to that is, what we are doing is a policy cancellation or stub period rewrite. So, for example, if somebody had a policy that was going to expire in October of this year, Anchor has issued a cancellation notice saying that that policy was being canceled as of April 1. Homeowners Choice has issued a stub policy covering April 1 to October to that same policyholder on Anchor's rates and forms. So there is no disruption to the policyholder. So that's how that rolls over. And, of course, Anchor will give us the unearned premium April 1 to October 31, less some agreed holdbacks, etc.
When October comes, we will renew that policy onto HCPCI paper at HCPCI rates and forms. And that will then make that policy look just like all of our other policies. That's the sequence in which all of this happens.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And then the capital situation at TypTap. I think at HCI, you described that being just under 3:1. I assume your, kind of, limit is 4:1. Is that the case? And then where do you stand with TypTap?
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Okay. So let's just -- because we've said a couple of the numbers. Let's just go through them a bit. And my 3:1 number was me being conservative. Homeowners Choice, at the end of 2019, has just under $160 million in surplus. And, roughly speaking, if you add the Anchor book to it, it's about $370 million in premium total between the two -- when you add that Anchor stuff in there. So, you can sort of see it's about 2.5:1, even less than that and leaves you plenty of room for growth. If you went to that 4:1 number,$160 million of surplus, you can basically write $640 million of premium. We're $370 million. It gives you an idea of how much room for growth we have.
TypTap is now at a slightly different point. It ended at $27 million of surplus, and it has about, as of today, I'd say about $70 million of premium in force. So, it still has about $30 million to grow before it hits that 4:1 number you were talking about. But against that tide, every day going by at this point, TypTap is earning money. So that surplus is going to start moving around unless TypTap starts growing very rapidly, in which case, because of how stat accounting works, we'll have to maybe add some more capital. But if you have to do that, that's a first-world problem to have, yeah?
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yeah, yeah. May I ask -- just sort of curious, any updates [Indecipherable] the opportunity to go by without the fraud AOB update. And just in the context of that, when you think about your loss ratio last couple of years or let's say this year, it's sort of hovered around 49%, 50%. You're at the lower end of that in the fourth quarter. Is that kind of a good run rate? Do you see anything changing in the book or the environment that moves it from that level?
Mark Harmsworth -- Chief Financial Officer
I don't think so, Mark. I mean, I tend to think of -- it's Mark. I tend to think of it more the core loss ratio as a percentage of gross premiums earned [Indecipherable] 25, 26, 27-ish range. I don't see that really changing significantly. As we've said before, it's a little bit early to tell the impact of AOB litigation. Generally it has slowed a little bit. But I don't see any major changes in that environment.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Thank you.
Operator
At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Rachel Swansiger who has a few closing remarks.
Rachel Swansiger -- Staff Attorney
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. We look forward to updating you on our progress in the near future.
Operator
[Operator Closing Remarks]
Duration: 25 minutes
Call participants:
Rachel Swansiger -- Staff Attorney
Paresh Patel -- Chairman of the Board of Directors and Chief Executive Officer
Mark Harmsworth -- Chief Financial Officer
Matthew Carletti -- JMP Securities -- Analyst
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
