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HCI Group Inc (NYSE:HCI)
Q3 2020 Earnings Call
Nov 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 Third Quarter 2020 Earnings Call. My name is Christine, 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 December 5, 2020, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until November 5, 2021 on the Investor Information section of HCI Group's website at www.hcigroup.com.

I would now like to turn the conference 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 third 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 third 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. 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 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 and Chief Executive Officer

Thank you, Rachel, and welcome everyone. I hope everyone is healthy and staying safe. While the 2020 Atlantic hurricane season had a record number of storms, only one storm, Hurricane Sally, has affected HCI thus far. We previously released our loss estimates for that storm, which only affected our Homeowners Choice insurance operation and the TypTap Insurance operation was not affected.

Here are some highlights from the quarter. In July, Greenleaf completed the sale of our headquarters property. In September, we paid a $0.40 per share dividend, our 40th consecutive quarterly dividend. This dividend marks our 10-year anniversary of paying dividends. Over the years, notwithstanding hurricanes and business environments, we paid $11.82 per share in cumulative dividends to the shareholders. Currently, the dividend here has fell over 3% based on today's share price.

Another news, our insurance operations continued to grow. By quarter's end in-force premiums at Homeowners Choice had grown to $341 million from $306 million at the end of the third quarter last year. And at TypTap, in-force premiums have more than doubled from $87 million -- to $87 million from $40 million at 30 -- September 30, 2019.

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

Mark Harmsworth -- Chief Financial Officer

Thanks, Paresh. Diluted earnings per share on a GAAP basis were $1.70, up from $0.73 in the third quarter last year. On an adjusted basis, diluted earnings per share were $1.60, up from $0.67 last year. This was another strong quarter for growth, earnings and cash flow. Consolidated gross written premiums were up 20% over the third quarter last year. Homeowners Choice was up 10%. TypTap flood was up 16% and TypTap homeowners business wrote $22.5 million in premium, which was 87% higher than the same quarter last year.

Gross earned premiums have been growing as well. Consolidated gross earned premiums were up 24% over the third quarter last year, driven by increases across all businesses. Homeowners Choice earned premiums were up 12%, TypTap flood was also up 12% and earned premiums for TypTap's homeowner business were also were up 200% of the same quarter last year. Year-to-date, consolidated gross written premiums and consolidated earned premiums are both up 22%.

The other big story this quarter was the sale of one of our real estate assets. We have talked many times about significant unrealized value in our real estate portfolio. In other words, the true economic value of these assets is significantly higher than what we've shown in the balance sheet. The sale of our Cypress Commons property in July is an example of us realizing some of that value. As announced, we sold Cypress Commons in Tampa for $44 million in cash and realized a gain of $37 million before tax. This increased book value per share by about $3.50 generated $37 million of net new cash, and we have the opportunity to indefinitely defer the income tax on this gain.

Loss expense was up $24 million over the same quarter last year. The company is growing and so loss expenses will also grow. The $24 million increase breaks down like this. Gross premiums earned were up $20 million and we booked about $9 million of incremental loss expense related to that growth. In addition, cat losses were $15.5 million higher than third quarter of last year, driven by a net exposure to Hurricane Sally of just over $17.5 million, offset by the impact of Hurricane Dorian last year.

The core loss ratio for Homeowners Choice was about 30% this quarter. This includes the anchor-assumed business where we have been reserving a higher rate. As these policies renew, the core loss ratio should return to about 26%. This should go even lower when approved rate increases kick in. The core loss ratio for TypTap is about 37% for flood and homeowners combined. And again, that will go lower when approved rates kick in.

Before moving on from loss expense, I did want to mention something about adverse development, as it often comes up as a question. In 2019, we booked about $9 million of adverse development, which was similar to the amount we booked in 2018. So far this year, we've had less than $1 million of adverse development. One other note on the income statement, personnel expenses are up about $1.9 million from the third quarter last year. Half of this amount or about $1 million relates to an increase in bonus expense for incentive-based compensation that is linked to net income.

Now to the balance sheet. Cash flow continues to be strong. During the first nine months, cash flow from operations is just over $75 million, driven by increases in unearned premiums and reserves. As we've been growing, we are setting aside more money for losses than we pay. As a result, reserves are increasing. To be more specific, non-cat reserves are $31 million higher than they were at the end of 2019, reflecting again our conservative stance on reserving.

Debt-to-cap ratios continued to decline, reflecting the increasing strength of the company's financial position. At the end of 2018, our debt-to-cap ratio was 58%. At the end of 2019, that was down to 48%. And at the end of September, it is down to 45%. Book value per share continues to increase. At the end of 2018, it was $21.71. At the end of 2019, it was $23.90. And at the end of September, it is up again to $25.63.

At the holding company level, we have about $50 million in cash and financial investments as well as $55 million of available room on our credit facility. So we have lots of liquidity at the holding company level. And speaking of our credit facility, we have just agreed to terms to renew our credit facility with a third to extend it out another three years with available capacity of $65 million.

The surplus position in Homeowners Choice remained strong. While Homeowners Choice has been growing and we booked a full retention loss for Hurricane Sally, we still have significant excess surplus in Homeowners Choice. As we've been discussing, TypTap is growing. And to support that growth, we will be contributing $10 million to $15 million from the holding company to increase surplus in TypTap in the fourth quarter.

In terms of share buybacks, we have used about $4 million of the $20 million buyback that we announced earlier this year for 2020. In addition, we completed the 2019 plan earlier this year, and the total bought back under both plans is 129,142 shares at an average price of $9.93. So in summary, it was another good quarter for us. Revenue is growing, earnings are up, cash is up, book value per share is up and debt levels are down.

And with that, I will pass it back to Paresh.

Paresh Patel -- Chairman and Chief Executive Officer

Thanks, Mark. Our technology-driven insurance subsidiary, TypTap, continues to be our growth engine. Gross written premiums at TypTap continue on a course for doubling each year. I'll talk more about that in a minute. As I mentioned moments ago, total premiums in-force were $87 million at the end of Q3, putting TypTap well on the path to exceed $100 million by the end of the year. We continue to make steady progress on Phase 1 of TypTap's previous announced nationwide expansion plan. We received recently the necessary approval from the Florida regulators. And in October, we applied to the State Insurance Regulators in all 20 states to approve -- get approvals to write homeowners insurance in those states. We are working with the regulators in each stage individually. And we are pleased to announce that we have already received our first Certificate of Authority from the great State of Montana. We look forward to keeping you informed of our progress in the coming months.

As you may recall, in early 2019, we communicated our goal of growing TypTap to $50 million of premium in-force by the end of 2019, and we achieved that. Then we announced our goal for 2020 was to grow TypTap to $100 million of in-force premiums, and we are well on the track to achieve that goal as well. So our growth goal for 2021 is for TypTap to double yet again and surpass $200 million of premium in-force by the year end of 2021. Note that this is a goal, not a guidance, nor a prediction. But we believe based on the current trajectory and our expansion plans, this goal is very achievable.

And ultimately, our goal over the next decade is to grow TypTap into a $5 billion premium in-force company. TypTap is growing rapidly and organically, but not by taking every policy that comes along. It is growing by applying analytics and technology-based underwriting tools to select profitable policies and to mitigate risk. And as I mentioned, we continue to explore. As I mentioned on our last call, we continue to explore opportunities to maximize the value of TypTap.

And with that, we're ready to open the call to your questions. Operator, please provide the instructions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Matt Carletti with JMP Securities. Please go ahead.

Matthew Carletti -- JMP Securities -- Analyst

Hey, thanks. Good afternoon. Paresh, I've got a couple of questions. The first one is, thank you for giving some -- your updated views on TypTap and kind of where things are and where you expect it to go. I was hoping that you might be able to give kind of a very brief update on whatever is going on in some of your other divisions; Greenleaf, Claddaugh, NGO, even the broader environment within Homeowners Choice would be great. I know that TypTap -- the focus and it should be what we're excited about, but I suspect there's good things going on elsewhere as well.

Paresh Patel -- Chairman and Chief Executive Officer

Absolutely, Matt. And unfortunately, it may be something slightly less than brief, but I'll go through that individually.

Matthew Carletti -- JMP Securities -- Analyst

That's all right. Sure.

Paresh Patel -- Chairman and Chief Executive Officer

So let's start with Greenleaf, our real estate operation. In selling the headquarters property, Greenleaf has gone the full cycle of buying properties at the right price, managing them well when they are on our portfolio and then exiting the property at the right price as well. And that discipline is what really makes a real estate operation. And as we look at where Greenleaf sits today because of the general economic environment, Greenleaf is unaffected by all the trials and tribulations of COVID-19 because of kinds of properties that we own. And we continue on, but that isn't true of the economy as a whole and real estate as a whole. So I think in the coming year, Greenleaf is going to have a tremendous opportunity in front of it to add to the portfolio additional properties, which we'll be picking up at the right price because of the economic malaise that is going on currently. So that's Greenleaf, has great opportunity in front of it.

There is Claddaugh, our real estate -- our reinsurance operation. As we stated in previous calls, Claddaugh retained some of the risk from two insurance companies, namely, Homeowners Choice and TypTap. And as we now come into the end of hurricane season, it's an interesting position it's in. Because unlike most reinsurers, Claddaugh so far has had pretty much a loss for a year. And therefore, it will book very nice profits for 2020 and we should give it a lots of dry powder to do reinsurance in 2021 from retained earnings, which is great. And because of who the clients are and how well this has worked out, it should help Homeowners Choice and TypTap hold down any reinsurance increases in the 2021 wind season. So Claddaugh is very well positioned.

Next, let's talk about Homeowners Choice. This is our oldest division and the original one I started the company with. And it's grown to be about $341 million premium in-force as of the end of the third quarter. Now one of the interesting things that's happened with Homeowners Choice, it continues to operate well. It has plenty of surplus, as Mark said. Things are healthy. But what's happened is because of all the activity this year, most of the rest of Florida industry -- insurance industry is in severe crisis. And what this likely to lead to that everybody will tell you is Citizens will grow again in the coming months.

Well, guess what that's going to lead to a year from now? Takeouts will be back. And there is no company who can do takeout from Citizens better than Homeowners Choice. So not only does it have that lying in front of it, the other thing is because of what's going on, there are no other competitors who would want to do the same thing anymore. So TypTap -- Homeowners Choice suddenly finds itself coming into the sweet spot of what it was made it its brand over the years. And it's doing that without any serious competition out there, which is a phenomenal position to be in.

And one other thing about Homeowners Choice I will tell you is it did get hit by Hurricane Sally. But if you saw how well the claims in Hurricane Sally, about 1,600 of them were handled, you would be very impressed. And it was done because of two things. One was the operational capabilities of the Homeowners Choice group and the team. But secondly, it was supported by fantastic technology. And where did that technology come from? It came from our technology division, Exzeo. And Exzeo really supports two companies; Homeowners Choice and TypTap. And both companies rely exclusively on Exzeo technology and it's worked out very well for them. So you certainly look at Exzeo and go, wow, this software is really coming to scale.

And that finally then brings us to TypTap. And TypTap is just about five years old at this point, a little bit under that, 4.5 years. And it's grown from nothing to $100 million premium in-force. And it's done this despite there being five very active hurricane seasons, various other issues in industry and it's done this very well. But suddenly, now it sits here and it operates in the Florida space, which is about a $10 billion total available market or TAM. And again, it's writing and its only real serious competitor at this point is Citizens.

So it find itself in a very strong position, but it could just continue doing business in Florida and very quickly grow to about the same size as Homeowners Choice is currently, about $300 million in premium. That opportunity is sitting right there in front of it. But we didn't stop at that. In addition to that, we've applied for these licenses in these 20 states. And just to put this into perspective what those 20 states represent, they represent another $35 billion of TAM, insurance space for TypTap to compete in. And we are doing that in addition to the Florida opportunity for TypTap.

So in summary, to your question, if I was to make it very brief, I would tell you, Greenleaf is well positioned. The market in front of it is fantastic. Claddaugh has done very well in a very tough reinsurance market. Homeowners Choice is coming back into the sweet spot that it's known for. Exzeo technology is being shown -- showcased all over the place as how great it is. And TypTap has as a $10 billion opportunity with no competitor in front of it, and an additional $35 billion opportunity or TAM that it's going to compete in and for future growth. We have a very different view of 2021 than most companies. Hopefully that answers your question?

Matthew Carletti -- JMP Securities -- Analyst

It does. No, that's great, and I appreciate the detail. My other question relates to kind of that last part, going back to TypTap and that $35 billion opportunity in the initial 20 states and then ultimately nationwide. This quarter is really highlighted for a number of your -- others in the market of Florida that have embarked on diversification into other states, it's caused them a lot of pain this quarter. And so I wanted to ask you just how you guys plan to go about it? How you might do it differently or how you think about it differently in terms of managing those changing exposures? And how deductibles and reinsurance programs and stuff might impact the book differently as you go from being a single state expert in Florida and pushing into some of the rest of the country?

Paresh Patel -- Chairman and Chief Executive Officer

Thanks, Matt. Look, great question. And as a way of background, when most of the other Florida carriers decided a few -- several years ago to expand outside Florida and diversify away from Florida, we avoided getting on that train. And we fundamentally didn't get on that train because we couldn't see if that expansion was actually going to be profitable or not. And I think some of the results have sort of borne that out.

So why are we doing this now with TypTap? Well, one word, technology. Given how the software and the technology works, we think we can do it correctly. And secondly, the other big item in this is, we're not doing this because we are running away from Florida or we're saying, Florida is terrible so let's try these other places. We are going to go into those 20 states because we think we can compete effectively in each and every one of those states. And by the way, the business model is different because we are not relying on Florida reinsurance to cover the losses in those states. They will stand on their own, which is a major departure from what most of the industry has done historically.

Matthew Carletti -- JMP Securities -- Analyst

Great. Thank you very much for the answers, and best of luck.

Paresh Patel -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And we'll move next to Mark Hughes with Truist. Please go ahead.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thank you. Good afternoon.

Paresh Patel -- Chairman and Chief Executive Officer

Good afternoon, Mark.

Mark Harmsworth -- Chief Financial Officer

Hey, Mark.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Hello, Paresh. Mark, you were going through the components of the loss expense increased $24 million. I didn't pick up the last one. I think you had mentioned the TypTap. What was the impact there?

Mark Harmsworth -- Chief Financial Officer

So I talked about the growth in -- I didn't specifically talk about TypTap there. So it was just the $24 million -- yeah, it was just premium growth of about $9 million and then about $15 million of net exposure from Sally.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

So the $9 million was a component of the TypTap?

Mark Harmsworth -- Chief Financial Officer

Yeah, yeah. So we've got -- I mean, as I mentioned in my prepared remarks, we've got premium growth in TypTap as well as premium growth in Homeowners Choice. But a big chunk of that $9 million, about $7 million of that, $7 million, $7.5 million of that is the growth in TypTap.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

When you think about the loss profile for Homeowners Choice versus TypTap, say for 2021, are they going to be similar? Is TypTap going to be better in this new business, you're thinking of TypTap as more attractive than your existing book?

Mark Harmsworth -- Chief Financial Officer

Yeah. I mean, I think similar in terms of...

Paresh Patel -- Chairman and Chief Executive Officer

Mark, let me answer it in a slightly different context. It is similar. The HO-3 is similar to the HO-3 business that Homeowners Choice has. But the reason why things work out differently is the mixture of all the different product lines that you have. TypTap's numbers are affected by the fact that we have a flood book, which has a very low loss ratio, non-cat loss ratio. That moves it around. Homeowners Choice's numbers are affected by the DP-3 book we have, the HO-4, HO-6 book we have and as well as the wind own book that's there, right? So on a blended number, the number Mark gives you, it appears to be one thing, but it's really coming through due to the mixtures of the business. Does that make the answer clear as mud?

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Complicated, complicated.

Paresh Patel -- Chairman and Chief Executive Officer

Yeah.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

No, that's helpful. When you think about the takeout opportunity, say, I think you said the next year, is that -- I assume you do that after wind season. So literally is it kind of next year, late 2021 that that comes to fruition?

Paresh Patel -- Chairman and Chief Executive Officer

Yes. That would be the rational logical way of doing it, yeah? And by the way, to the point about forward-looking statements and whatever, this is me talking about what happens if Citizens grows. Citizens is currently sitting around 500,000 policies, but it could grow to pick a number by this time next year. That's when we will be exercising the opportunity, yeah?

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah. You used -- I think you were describing the only competitors in the market or main competitors would be HCI/TypTap and Citizens. Is it that bad? I wonder if you could just comment a little bit more on the competitive environment and who's kind of shutdown not even in the business for new customers?

Paresh Patel -- Chairman and Chief Executive Officer

Yeah. So let me answer it in the following manner. I think most of the industries either shutdown, as you put it, has some financial distress. So you've got those kinds of things going on. But beyond that, the ones that are -- don't fall into those categories, they are repositioning their book, their business, meeting rate increases, various other housekeeping items that they need and they would want to put into place before they even remotely think about growth. So everybody is very generally distracted, right? That was the bigger point we were making. We weren't casting explosions to any particular company or the industry as a whole. But generally speaking, what we sense is most of our competitors are very -- are occupied with other priorities at the moment.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then is there a way to characterize kind of the pocket which you are seeing as most attractive for TypTap? I guess, you don't want to give us the secret sauce so to speak, but I'm just curious if there is any general profile of what looks particularly good to you at this point?

Paresh Patel -- Chairman and Chief Executive Officer

Yeah. Look, I think this is again goes back to the things we can now do, which are just amazing. Because we are no longer making decisions based on, oh, we think Orlando is a good place to write or Jacksonville is a good place to write or whatever, right? Our systems now can decide on an individual rooftop, an individual house as to whether it makes sense for us or not. So we have become a lot more agnostic in terms of geographical areas. Having said all of that, TypTap's general area of growth is South of I4, yeah?

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And for the less educated on Florida's geography, that's...

Paresh Patel -- Chairman and Chief Executive Officer

Sorry. I should -- if you draw a line between Tampa and Daytona Beach on the East Coast or you could say Orlando South kind of thing, that would get you the same sort of area.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah. Yeah, exactly.

Paresh Patel -- Chairman and Chief Executive Officer

Southern part of this, yeah?

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah, understood. Thank you very much.

Paresh Patel -- Chairman and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions] At this time, I'm showing no further questions from our audience. 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: 31 minutes

Call participants:

Rachel Swansiger -- Investor Relations

Paresh Patel -- Chairman and Chief Executive Officer

Mark Harmsworth -- Chief Financial Officer

Matthew Carletti -- JMP Securities -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

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