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HCI Group Inc (NYSE:HCI)
Q2 2020 Earnings Call
Aug 6, 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 Second Quarter 2020 Earnings Call. My name is Christie, and I will be your conference operator this afternoon. [Operator Instructions] Before we begin today's call, [Operator Instructions] and will be available for replay through September 5, 2020. Starting later this evening. The call is also being broadcast live via the webcast and available via webcast replay until August 6, 2021, 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 -- Investor Relations

Thank you, and good afternoon. Welcome to HCI Group's Second Quarter 2020 Earnings Call. With me on today's call is 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 second quarter of 2020 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. The 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 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 -- President and Chairman and Chief Executive Officer

Thank you, Rachel, and welcome, everyone. I hope everyone is healthy and staying safe. First, very quickly, our comment about hurricane Isaac. Isaac stayed off the coast of Florida, therefore, we've had very few claims, and we don't expect many. Also, as I've stated before, HCI's operations have not been materially impacted by the COVID-19 pandemic, and we continue to do business normally. Now on to our second quarter results. It was a solid quarter. Our fully diluted unadjusted earnings per share were $1.08. Highlights for the second quarter include: gross written premiums that were up 29% over the same quarter last year. Net income was up 18%. We paid $0.40 per share dividend, our 38th consecutive quarterly dividend. And based on today's share price, our stock has a yield of 3.4%.

Also, we completed integration of the policies we transitioned from anchor property and casualty. And retention of that book has been as expected. And finally, we also completed our catastrophic reinsurance program for the 2020 hurricane season. We increased our first event coverage tower from $960 million to almost $1.4 billion. We believe the additional limit better positions the company for the 2020 hurricane season. And although, there was a higher expense incurred for the higher limit, we determined that it was most important to protect the business enterprise over maximizing short-term profit margins.

I will now turn the call over to our CFO, Mark Harmsworth, who will walk us through our financial performance for the second quarter. Mark?

Mark Harmsworth -- Chief Financial Officer

Thanks, Paresh. The second quarter was another good one for us. On a GAAP basis, diluted earnings per share were $1.08. On an adjusted basis, diluted earnings per share were $0.86, which was up from $0.81 in the second quarter last year. For the first six months, adjusted earnings per share were $1.41, up from $1.15 from the first six months of last year. As you know, we've been talking about growth for a number of quarters now, and that upward trend has continued. Gross written premiums were up 29% over the same quarter last year and up 24% year-to-date. The increase is being driven by the continued growth of TyTap as well as the transition of policies from anchor property and casualty. Gross earned premiums were also up 29% this quarter and 21% year-to-date.

Again, driven by the growth in TypTap as well as the transition of business from Anchor. Back in June, we announced our new reinsurance arrangement for June 2020 to May 2021 and we purchased significantly higher limits, and the net premiums for that are estimated to be $44 million per quarter, up from $31 million from the previous treaty year. Reinsurance expense this quarter reflects two months at the old rate and one month at the new rate. As in the past few quarters, there were some significant changes with investment income. While total investment income was about the same as last year. There were some shifting around within the components of it.

Net investment income was down, driven by lower limited partnership income and lower yields on cash, but both realized and unrealized investment gains were up substantially as the equity markets recovered and we also sold some fixed-term securities at a gain. Loss expense was up about $15 million over the same quarter last year. This was largely driven by the increase in gross premiums earned and a change in the mix of business, but it was also impacted by some weather in the quarter and then offset somewhat by lower prior year development. To be more specific, about $13 million of the increase was driven by growth in earned premium and exit business. We booked about $6 million of weather-related losses and then these two increases were offset somewhat by lower prior year development, which was about $4 million less than the same quarter last year.

Before turning to the balance sheet, just two other quick things in the income statement, during the quarter, we repurchased a small amount of our converts, while we bought these at a discount to par value because of the way that the accounting done is for convert sorry, the accounting is done for converts, we booked a small loss of $150,000. One last thing. You may notice that the effective tax rate is a little low this quarter at about 24%, driven by a couple of unusual wind falls, and we expect that to return to the normal 27%. Now to the balance sheet, our cash and cash flow remains strong. In the first six months cash flow from operations was well over $100 million, driven by increases in unearned premiums and an increase in reserves.

As the book is growing, we are setting aside a considerable amount of money in reserves to pay claims that may eventually come. To the end of June, we have increased non-CAT reserves at just over $26 million. In other words, our loss expense for the first six months is $26 million higher than we have paid out in claims. This continues our conservative stance on reserving. Speaking of a strong balance sheet, yesterday, we announced something that will strengthen it further. As stated in the press release, we closed on the agreement to sell our Cypress Commons property. Since this closed in July, that is not reflected in our second quarter financials. When it is recorded in the third quarter, it will increase earnings per share, book value per share and cash.

We have mentioned many times that our book value was understated because our real estate portfolio is reflected on a cost basis. While this transaction will significantly boost book value per share, there are still significant unrealized gains in our real estate portfolio that effectively understate book value even after this one transaction closes. A few things on capital management. As you know, in June, we paid a dividend of $0.40 per share, although the amount per share was constant, the total amount of just over $3 million in cash was 7% less than the same quarter last year due to the decrease in the number of shares outstanding. You may recall that we announced a $20 million buyback plan for this year.

In the second quarter, we bought back 51,834 shares at an average price of $40.48. The total shares bought back so far this year on the 2020 plan are 102,844 at an average price of $38.64. At the end of June, there was about $16 million available under the 2020 plan. Just one other quick number. Book value per share at the end of the quarter was $23.75. And again, this is before the recognition of the gain on Cypress Common. In summary, this is another good quarter for us. Written premiums are growing, earned premiums are growing, cash flow is growing and the balance sheet remains strong and is getting stronger.

And with that, I'll turn it back to Paresh.

Paresh Patel -- President and Chairman and Chief Executive Officer

Thanks, Mark. Obviously, we are very pleased with our second quarter performance. Our results demonstrate that HCI has entered a period of growth. And for reasons I'll explain here, we expect the growth to accelerate. Our engine for growth and profitability is the Typtap insurance company, our technology-based insurance company. eight years ago, we began investing in technology with the mission to develop software, data analytics and artificial intelligence to simplify the insurance experience for agents and prospective policyholders. While at the same time, there are a few simple questions and receive quick responses. Typtap uses powerful algorithms designed to identify policies that deliver profitable results while mitigating risk.

And as everyone knows, TypTap has grown rapidly and organically over the last four quarters over the last four years, and also over the last four quarters. As agents and prospective policyholders discover its simplicity, ease of use and speed. Premiums in force at the end of the second quarter exceeded $75 million, 3 times the size it was a year ago. And we expect that they will reach $100 million before the end of the year. And as we announced this morning, we plan on expanding TypTap's footprint nationwide. If fully realized, this expansion plan will lead to an increase in Typtap's addressable market by nearly 10 times from approximately $10 billion within Florida to more than $105 billion nationwide.

While experiencing premium growth, TypTap has been consistently profitable. Its analytics and policy selection technologies have led to industry-leading combined underwriting ratios. All of this, while operating in Florida, a very challenging litigation and hurricane prone market, Typtap has survived profitably despite several hurricanes and indigos climate.

So in summary, we believe that at this point, TypTap is a proven platform that has industry leading technology, analytics, growth and profitability. Our goal at this point is to maximize the value of TyTap for our shareholders, all of you on this call. And we plan to do this through continued organic growth and expanding into additional states. Additionally, we will be exploring strategic opportunities, which could include outside investment, joint ventures, licensing or even a spin off.

With that, we are ready to open the call to your questions. Operator, please provide the appropriate instructions.

Questions and Answers:

Operator

Thank you sir, the floor is now open for questions. [Operator Instructions] And our first question comes from Matt Carletti with JMP Securities.

Paresh Patel -- President and Chairman and Chief Executive Officer

Good afternoon.

Matt Carletti -- JMP Securities -- Analyst

Good afternoon Paresh. So I was hoping to follow-on kind of that last line of commentary that you had and focus more on the future than what happened in the quarter. A high-level question. Could you what are some of the lessons learned? You've kind of refined TyTap. You've been in the market in Florida for a few years, strong growth, strong returns, as kind of how you built the company. What lessons have you learned as you've done that, that will kind of you can make the expansion nationwide, a, successful; and b, probably, I would imagine you could do it a bit quicker than it took you in Florida because you had to learn on the fly the first time. And now you know how to do it.

Paresh Patel -- President and Chairman and Chief Executive Officer

All right. Thanks, Matt. It's a great question. The lessons we've learned along the way. And this is why it's taken us we waited patiently for the four years to prove that what we thought was going to happen was actually happening and we have the results to back it up. But fundamentally, there's a couple of things. One is we have shown that we know how to organically grow our business very quickly. Typtap has tripled in size in a year. So you've got to be able to produce business. But more importantly, it's not just about producing business is can you actually do it profitably.

And in the slide deck we put up, we showed you our loss ratios compared to the industry average. So you don't have to grow fast, but if you really have something of value, it should do it at a better result than the average industry average. And we have proven both of those things. And we've done it consistently across two product lines, both flood and wind, homeowners insurance. So having done that, we know we have the techniques, the algorithm is down as to how to grow into other states and grow there as well. So we are now about to embark on that expansion journey at this point, having proven the platform.

Matt Carletti -- JMP Securities -- Analyst

Okay. And then in terms of kind of the behind the scene stuff, I mean, I know it took you you built kind of the database, algorithms and everything behind it. And there's a lot of proprietary data there, and you did it for I think 5.5 million homes or however many are in Florida. Can you talk a little bit about kind of that process as you expand outside of Florida, how it might be kind of how we might look at the timing and how we might think of you adding states I'd imagine it's not 49 all at once, but they might come regionally or a few at a time?

Paresh Patel -- President and Chairman and Chief Executive Officer

Yes. Matt, what we've done is we've sort of divided into Phase I, Phase II. Phase I, we're going to expand to 20 additional states, and Phase two will be the balance of the state. Now obviously, for those that are aware of this, insurance is regulated on a state-by-state basis. So we will be applying to each of these 20 states. And they will take their appropriate amount of time in granting us a license and for us to get operations running.

So all 20 states will not come online immediately. They will come on one after the other as the application process completes itself and then we set up operations. So this is a not a short-term journey, but more of a medium-term journey that we will be on. And we're just making every know that where we're going to go over the next decade. And that's really the item that we're we're on here, yes.

Matt Carletti -- JMP Securities -- Analyst

Great. And then last question on TyTap. I know in Florida, you found, while it can be direct-to-consumer, you found that the agents really love it for the ease of use and how fast it is. Do you think it will be a similar approach as you go into these new states? Do you expect it to be more of a tool agents fall in love with and get you in the door there? Or are you thinking about ways you could do more kind of direct-to-consumer marketing or otherwise to kind of go right to the end customer?

Paresh Patel -- President and Chairman and Chief Executive Officer

Good question. The biggest thing we think about in the other states is agents or agents, policyholders or policyholders, behavior, human behavior tends to be the same. Florin does all have a different from Texans or New Yorkers for that matter, right? Not of those new expansion states, but just as an example. So a lot of the stuff, I think, will behave similarly. And as far as are we talking about going direct-to-consumer, probably not because I think the agents do control most of the business. And we've tried to make this thing agent-friendly and actually consumer-friendly as well because when the agents recommended to the consumer, they have to like it as well.

So we've the best way of looking at what we've done over the last four years, why we've sort of stay focus in Florida is we sort of said, let's make sure you build the first state correctly and that you prove that this stuff works. Then it's almost like franchising going to all the other states, just replicating that you're winning formula over and over again. So this is why we didn't suddenly expand to 50 states four years ago, even though we might have been able to do that. A number of other people took that approach. We want to get one right first and then expand, and that's what we're doing now. That's why we're really excited because we know we have something that works.

Matt Carletti -- JMP Securities -- Analyst

Right. Makes sense. One last one, just a quick one for Mark, and I apologize if I missed it, but net written premiums in the quarter if you have it.

Mark Harmsworth -- Chief Financial Officer

Sure. Yes, it's $137.5 million for Q2.

Matt Carletti -- JMP Securities -- Analyst

Wonderful. All right, thank you very much for the answers and best of luck with the expansion. Thank you.

Paresh Patel -- President and Chairman and Chief Executive Officer

Thanks, Matt.

Operator

And our next question comes from Mark Hughes with Truth Securities. Please proceed.

Mark Hughes -- Truth Securities -- Analyst

Thank you. Mark, how much did anchor contribute to gross written premium in the quarter?

Mark Harmsworth -- Chief Financial Officer

About $42.5 million. Some of the and some of that is renewal.

Mark Hughes -- Truth Securities -- Analyst

Understood. Paresh, you talked about maybe pursuing or exploring strategic opportunities in a Sunbake. You were painting a fairly broad brush there. Are there any relationships, some associations or partnerships that can help help with the national expansion? And I wonder if you could just expand on what sort of things you have in mind.

Paresh Patel -- President and Chairman and Chief Executive Officer

Mark, great question. And it's a broad question, right? I think my written comments were my prepared comments were more to do with the capital structure of the company in terms of how we would grow TyTap. I think the nature of your question could also apply to would we be using third-party distribution networks, etc., to sell our products, etc. And/or partner with incumbent insurance companies in various states. And yes, we are open to those possibilities as well. The key item to take away from my prepared remarks is we are on a mission to maximize the value of TyTap to the shareholders, and we will do what's prudent to make that happen.

Mark Hughes -- Truth Securities -- Analyst

And I hearing you that you're thinking about the potential that the growth as attractive as you might like that might put a capital strain on the company and and so you're contemplating how to handle that. Is that what you're saying?

Paresh Patel -- President and Chairman and Chief Executive Officer

A little bit yes. I mean, up to now, if you can imagine what we've done with TyTap, it has entirely been paid for by the capital structure of the HCI group, right? And in the initial phase of expansion, we can continue to have enough cash to continue the growth. But you have to contemplate the possibility that if you've got out you've got additional capital in, you might be able to grow at a much faster rate. And because we have to balance our capital with our growth. So why wouldn't you consider partnerships in that fashion, yes?

Mark Hughes -- Truth Securities -- Analyst

Yes. The in looking at your presentation, you highlighted some attractive loss numbers for TypTap. Could you kind of give us a sense of what you think the run rate, what this platform could do outside of Florida?

Paresh Patel -- President and Chairman and Chief Executive Officer

Yes. Just to put some of these numbers into perspective, on a nationwide basis, the homeowners insurance business is $105 billion in premium. And I think in 2018, which is the last year, we actually had numbers for it ran a combined combined, 103% combined. Putting it differently, the industry took in $105 billion. And when all the expenses were paid, it probably cost them like $108 billion or $106 billion or $107 billion, right? It's not exactly the highest margin business. What we are looking to do is carve out a $5 billion book out of that but one that runs probably more like a 90 combined, not 103. That 13 points is a big deal when you're talking about $5 billion, yes?

Mark Hughes -- Truth Securities -- Analyst

Yes. Anything you would anticipate in the kind of the near-term ramp up expenses as you're looking to expand in other states? Obviously, there's some groundwork that needs to be done. How how much should we think about the magnitude of that?

Paresh Patel -- President and Chairman and Chief Executive Officer

Actually, Mark, I think the biggest magnitude of that are the items that we've already talked about in our prepared remarks, say, because we were talking about growth and everything else, we went and took a more conservative stance in buying reinsurance this year in the size of the tower we bought, right, just because we didn't want to be distracted, should there be an active hurricane season. On the other hand, also from Mark's prepared remarks, what you saw was we've taken a much more conservative stance in terms of the money we are setting aside in reserves for non-CAT claims. So these are really the biggest capital items that we're doing in terms of actually applying the states, etc., that isn't as expensive as opposed to the steps we've already taken. The operational expenses increase will be very minimal going forward.

Mark Hughes -- Truth Securities -- Analyst

Understood. Thank you very much.

Paresh Patel -- President and Chairman and Chief Executive Officer

Thank you.

Operator

And our next question comes from Bill Broomall with Dowling & Partners. Please proceed.

Bill Broomall -- Dowling and Partners -- Analyst

Great, thank you. If I could just follow-up on the expansion plans. Looking at your Phase I state, is there a certain reason why you might go to certain states first? Because it looks like it doesn't you have a couple of states in the southeast, but it's in the middle of the country, it's not on the coastal area. So I was just wondering if you could help us understand how you got to the different states in Phase I, what kind of attracted you to those first?

Paresh Patel -- President and Chairman and Chief Executive Officer

Simple answer I will give you, Bill, analytics. We sort of went looking at all the other 49 states, and we look at a number of different factors as to what would make sense as to what sequence to go after them. And when you actually did the analytics, it took us to the set of states that you're looking at currently. And we did that because it made sense. And ultimately, think of it this way, if you are going to be nationwide, you have to go to all 49 states. You're just debating the order in which you're going to go do them. And we wanted to make sure that we pick the states we like first. And secondly, the item was we wanted to be clearly communicate that we are talking about going national, not we're going to be regional in the Southeast? Are we going to be a coastal rider or anything else of that nature.

Bill Broomall -- Dowling and Partners -- Analyst

Understood. Understood. And when you think about the analytics and using your technology, in Florida, I was thinking you'd have a lot of data from your operations that you could then use to kind of help your models. I was wondering how you plan to handle the data and getting the necessary information you need to kind of input into your models to properly underwrite in other states, kind of is it third-party it's going to be a lot of third-party data, but any thoughts on getting the data necessary to do this expansion would be helpful.

Paresh Patel -- President and Chairman and Chief Executive Officer

Okay. Yes. Let me answer the question in a slightly different way in terms of what's really involved in this expansion. So or to do it in Florida for that matter. There's one part where you need to get the raw data. And when we started doing this in Florida, all those years ago, that raw data wasn't available. So we actually created it ourselves. In this day and age, raw data is available much more readily available throughout the country. So the value of creating your own data has somewhat decreased over time. And we can use third-party data sources.

But more importantly is what we did over the last four years is we've built an algorithm that works that knows how to process that data, digest it and make smart decisions very, very quickly. That algorithm doesn't really change as you go from state to state. It adapts. And given that we already have this, this is what makes this so much easier to do. Now yes, we use data to learn all these techniques over the last four years. But once you learn to hit a once you learn to head a golf ball straight down the middle of the fairway. It doesn't matter which golf course you're playing on. It's the technique that counts. That analogy, but you get the idea.

Bill Broomall -- Dowling and Partners -- Analyst

Yes. No, that does. It does. And kind of one of the questions that does come up when you think about using technology to underwrite with a focus on maybe homeowners and flood in there too as well. But to do a national expansion, you think the customers that you're going after have a home and a car and you think about a lot of the national carriers who are out there, they might be able to write both. And I was wondering how you kind of attack the problem of customer acquisition, knowing that some people a lot of people out there will bundle home and auto together?

Paresh Patel -- President and Chairman and Chief Executive Officer

Look, again, it's a great question, and it sort of goes back into shades of the question Mark asked earlier about partnerships and so on. And clearly, that would be an advantage. Fortunately, one of the things that's happened over the years is there are a lot of auto carriers, insurtech auto carriers, and they're just on the auto side. They might want to partner with somebody on the homeowner side. And there's very few guys who have our capability to partner with them. So we have been working on the problem and we have some interesting thoughts that we would do. I don't want to get into it too much, but it's clearly both a problem, but also an opportunity.

Bill Broomall -- Dowling and Partners -- Analyst

Right. Right. Okay. And one last, just a number of question. What was the in-force premium was a little over 75 in at Q2, what was the in-force at Q1?

Mark Harmsworth -- Chief Financial Officer

For I don't have it I don't have it.

Bill Broomall -- Dowling and Partners -- Analyst

I could follow-up later. That's not a problem.

Mark Harmsworth -- Chief Financial Officer

Yes. Yes. Yes. Sorry, I don't have it right here. I've got it at the year-end, but the Q1.

Paresh Patel -- President and Chairman and Chief Executive Officer

Yes. Bill, we know it's going to be somewhere north of 60 somewhere in the high 60s kind of range. The only reason I say that is because, as you know, we sort of slowed down in the second quarter a little bit, and we were well north of 50 by the end of 2018, 2019 anyway, yes?

Bill Broomall -- Dowling and Partners -- Analyst

Right. And just a follow-up on that. You talked about reaching 100 by the end of the year, I believe, in your prepared remarks. Does that mean that you'd slow down, but we're now you're kind of returning to maybe focusing on growth a little bit more again. Just to get there. Yes. I guess, maybe something it is you pulled back or you're kind of opening up the spigot again, maybe a little bit?

Paresh Patel -- President and Chairman and Chief Executive Officer

We are losing this figure, yes. We're losing this figure a little bit. And look, one of the other things that we've sort of clearly established, and it's good to do it in both directions. That we can turn this figure off and drive growth to basically zero. And equally well, we can turn this figure on and drive growth to whatever we need to want it to be. So that degree of pinpoint control is amazing because I can tell you, I try to do this at Homeowners choice, it's very difficult to do in a traditional insurance company. But TyTap does it so easily, it's incredible. But yes, so at this point, really the plan between here and the end of the year is probably to maybe grow a little bit during hurricane season. But then really accelerate in the fourth quarter as hurricane season ends and try to make that $100 million mark by the end of the year.

Mark Harmsworth -- Chief Financial Officer

Bill, Mark, the answer to your question. Sorry, I was just going to jump in with the it was about a little over $71 million at the end of Q1, TyTap consolidated.

Bill Broomall -- Dowling and Partners -- Analyst

Perfect. Thank you for that commentary, that was exactly I was trying to figure out the timing of this hurricane season, but that was helpful. Thank you.

Operator

Yes. At this time, this concludes our question-and-answer section. I would now like to turn the call back over to Rachel Swansiger, who has a few closing remarks.

Rachel Swansiger -- Investor Relations

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: 35 minutes

Call participants:

Rachel Swansiger -- Investor Relations

Paresh Patel -- President and Chairman and Chief Executive Officer

Mark Harmsworth -- Chief Financial Officer

Matt Carletti -- JMP Securities -- Analyst

Mark Hughes -- Truth Securities -- Analyst

Bill Broomall -- Dowling and Partners -- Analyst

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