HCI Group Inc (HCI) Q1 2021 Earnings Call Transcript

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HCI Group Inc (HCI 0.55%)
Q1 2021 Earnings Call
May 6, 2021, 4:45 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to HCI Group's First Quarter 2021 Earnings Call. My name is Tom [Phonetic] and I will be your conference operator this afternoon. At this time, all participants will be in a listen-only mode. 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 June 6, 2021 starting later this evening. The call is also being broadcast live via webcast and available via replay until May 6, 2022 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 first quarter 2021 earnings call. With me on today's call is Karin Coleman, our Chief Operating Officer; Mark Harmsworth, our Chief Financial Officer and Paresh Patel, our Chairman and Chief Executive Officer. Following Karin's opening remarks. Mark will review our financial performance for the first quarter of 2021 and then Paresh will provide an operational outlook and 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 conditions and results of operation. HCI Group disclaims all the obligations to update any forward-looking statements.

Now with that, I would like to turn the call over to Karin Coleman, our COO. Karin?

Karin Coleman -- Chief Operating Officer

Thank you, Rachel, and welcome everyone. It's been a tremendously busy and productive start to 2021 for HCI. As you can see by our financial performance, our disciplined construction continues to produce consistent profitability, growth and best-in-class margins. The first quarter was marked by several important achievements, first, at the HCI Group level consolidated in-force premium surpassed $0.5 billion, and we expect it to continue increasing in the coming quarters. In March, we paid $0.40 per share dividend, our 42nd consecutive quarterly dividend.

Second Greenleaf Capital, our real estate division, continuing to be a valuable part of our diversification strategy, both in producing positive cash flows and capital appreciation. Third, Homeowners Choice to be profitable and grew strategic acquisitions such as Anchor and UPC.

Fourth TypTap grew as well. It's about $130 million of in-force premium putting it on track to reach its goal of $200 million by the end of the year. And as previously disclosed, TypTap raised $100 million from Centerbridge Partners. Also if national expansion continues on track, not only with receiving regulatory approvals but also in writing its first policy outside of Florida.

Finally, in response to the immense growth we are seeing, we recently created separate management teams for HCI and TypTap Insurance Group. This separation will allow each management team to focus on specific growth initiatives, as we established infrastructure for a $1 billion company. Since 2007, HCI has a proven track record of success and growth with the achievements, I've just outlined, we look forward to seeing HCI continue on this path throughout 2021 and beyond.

I'll now turn it over to Mark to discuss HCI financial results for the first quarter of 2021. Mark?

Mark Harmsworth -- Chief Financial Officer

Thanks, Karin. This was another good quarter for us with tremendous growth, new capital and strong earnings. Diluted earnings per share were $0.75, up from $0.07 in the first quarter last year. Growth was a big story in the quarter, as it has been for some time now. Gross premiums written were up 65%, with strong growth coming from both of our insurance companies.

In Homeowners Choice, gross premiums written were up 39% from $58 million to $81 million. And in TypTap, gross premiums written were up 142% from $18 million to just under $45 million. Consolidated gross premiums earned were up 42%, again, growth came from both Homeowners Choice and TypTap. In Homeowners Choice, earned premium was up 35% from just under $76 million to over $102 million, driven in part by the strategic acquisition business from Anchor and UPC.

And TypTap earned premium was up 73%, led by the organic growth of its homeowners' product. As an indication of the impact of some of this growth, consolidated growth premiums earned this quarter were the highest they have ever been in any quarter in the history of the company and, of course, they are going higher.

Looking at the income statement, you'll see that loss expense is up significantly. This is simply connected to the growth in gross premiums earned as of March 31st, non-cat loss reserves are up about $10 million higher than at the end of December, as we continue to expense more than we are paying out. This continues our conservative reserving methodology. Both of our insurance companies are in a strong financial position. Homeowners Choice surplus of $127 million at the end of March is up about $7 million from the end of last year and TypTap surplus of $50 million is up $11 million from the end of last year.

Couple of things on capital and liquidity. As previously announced, TypTap Insurance Group raised $100 million of growth capital from Centerbridge Partners this quarter. It is a new line on the balance sheet called "redeemable non-controlling interest". The $86 million there reflects being out received less transaction costs and also net out the value attributed to the warrants of about $8.6 million

In terms of holding company liquidity, we have just over $50 million of cash and financial investments in HCI and full access to our $65 million credit facility with Fifth Third, that's well over $110 million of liquidity at the holding company level. In addition, there is another $55 million of cash in the holding company for TypTap Insurance Group. As you know there have been a few changes in share counts. So we included some of that data in the press release. For purposes of estimating diluted earnings per share, the diluted share count is about $10.1 million at the end of March. This is up about 350,000 shares from the new shares issued under the renewal rights agreement, as well as the dilutive effect of the warrant.

Wrapping up, the company continues to improve in every way. Both insurance companies are growing, earnings are up, and our capital positions are strengthening at the insurance company level and at the holding company level.

And with that, I'll hand it over to Paresh.

Paresh Patel -- Chairman & Chief Executive Officer

Thank you. Thank you, Karin and Mark, for that summary of the results for the first quarter. By the way, Karin Coleman is our new Chief Operating Officer. She's been with the company in various capacities for over 10 years and will be joining our call is going forward. You've seen the results from Karen, Mark. HCI is reaping the benefits of the decisions made in previous years, including our investments in technology and data and our consistent focus on profitable underwriting.

Currently, TypTap is experiencing rapid growth within Florida. And as Karin mentioned earlier, it has begun operating outside of Florida. Our transaction with UPC also continues on track and it should be a great accelerator for TypTap's growth outside of Florida.

Finally, we continue to explore strategic opportunities for both HCI and TypTap. In summary, the entire group is performing well. And as we are benefiting from the decisions we made previously we expect to benefit from the decisions we are making today. Our brightest days are yet ahead of us. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. And your first question is coming from JMP Securities, Matt Carletti. Matt, your line is live. You may ask your question.

Matt Carletti -- JMP Securities -- Analyst

Thanks, good afternoon. Paresh, I was hoping I could start with kind of state of the Florida market. Obviously, you guys are in a strong position. I think a lot of your peers are in [indecipherable] position. And so, just kind of how do you both weather HCI and or TypTap kind of see the market unfolding for yourselves over the balance of the year? And as part of that, if you have an opinion on the recently passed legislation and what that might mean for claims and fraudulent activity as we move forward.

Paresh Patel -- Chairman & Chief Executive Officer

Okay, Matt. Look, we're going to -- us for the question in two parts. The first part, I'm going to let Karin tell you with some numbers, some of the impacts of the legislation and we're going to answer in the context of if it had been in place when Irma hit the state of Florida.

Karin Coleman -- Chief Operating Officer

Thanks, Gary.

Matt Carletti -- JMP Securities -- Analyst

Okay.

Karin Coleman -- Chief Operating Officer

Okay. So we believe that the legislation will be helpful in the reduction of the first notice of loss that occurred when we went back and we looked at the Irma numbers that we had. The first year. One claims that were filed 9% of those went into lawsuit. So people that filed timely claim in Irma, 29% ended up in more states.

In year two, the loss -- the claims that were filed 34% of them have ended up in so far. And the new year, those sort of late reported claims. More than 50% of them are already in lawsuit. So the reduction of the time to file should help quite a bit.

Paresh Patel -- Chairman & Chief Executive Officer

So, Mark, you get -- kind of get the idea just that and the legislation, moving it from three years to two years, has a slight impact on claims, but has a huge impact of litigation. Yes. So...

Matt Carletti -- JMP Securities -- Analyst

Yes. That's real life example is very helpful.

Paresh Patel -- Chairman & Chief Executive Officer

Yes. Thanks. But just -- and also the sliding fee schedule should help reduce litigation of a minor dispute, yes? So all of those things. Even positive, and it was a good legislation because the folks who did have five claims in year one and year two, they are not impacted. Yes.

So it was a good balance legislation and worked out fine. And as far as speaking about the Florida market, I think the Florida market continues to be, in a general sense, challenging and I think that's been by a number of our peers.

The item that really is differentiating both HCI and TypTap from most of our peer group is, basically, back to those decisions are made years ago to invest in technology and data. Yes.

That is what in the line us to operate in exactly the same terrible environment that as all of our peer group operates in with the materially different results. Yes. Is it -- we sort of alluded to this a couple of years back and you see it really play out at this point deal.

Matt Carletti -- JMP Securities -- Analyst

Yes. Great. And then maybe if I could focus on TypTap for a moment. Could you just kind of provide us an update of, I mean, obviously, has been expanding. We've seen the press releases of the license in a number of additional states.

Just where that stands compared to kind of the original path, you set out several months ago. You're ahead of schedule. I caught in your comment $130 million of in-force premium. So it does feel like we're well on our way toward your do you had a $200 million -- your target for the year.

Mark Harmsworth -- Chief Financial Officer

Yes, absolutely look. And I got to hand it to the TypTap management team as well here because if you recall over over the years we've -- we were $25 million and we said we'll get to $50 million by doubling. They did that. Then we said it's $50 million, we're double it to $100 million, that was last year. They did that. And this year, we have said we will double from $100 million to $200 million. And just by the Q1 numbers, they're well on track for that. So the team is executing really well, OK?

In terms of TypTap's prospects on a more macro level, I would break it into 3 areas. Florida obviously is very well. It's right on track with what we had said and expected. The expansion into the other states, and getting licenses and the rates and forms approved, it's a little bit slower than we had anticipated, but some of that is is understandable because we do have to get together with regulators in very state. And in a COVID environment, it's sometimes delays things. So we're may be running a little bit behind them, but not much. But if you think in the space of years, this is not a material difference.

The third part, right, which is really exciting is because of the UPC transaction. The four Northeast states that we've acquired from UPC, they will really accelerate growth for TypTap in those areas. So on balance, one is -- Florida has been really well, Northeast is growing -- is going to be way better than we had originally thought. And then the other states are running a little bit slower than we had anticipated. But on balance, pretty good outcome.

Matt Carletti -- JMP Securities -- Analyst

Great. And then last question, if I can, I mean, obviously, the annual reinsurance renewals coming up here in end of the month. You know any thoughts you could provide as, either from just a market perspective? I mean we, obviously, know the market itself has had its challenges, but you guys have stood out as putting up much better results, What that might mean for HCI? And if there's anything you could share specific HCI in terms of changes you might expect to make to the program, if it's significantly more or less limit or changes to retention and so forth?

Mark Harmsworth -- Chief Financial Officer

Yes. So a couple of things in terms of the market in general. right, if the annual ritual we've got renewals coming up June 1st sort of the rest of the Florida industry and the negotiations are well under way. Putting a little bit of perspective, June 1 this year from our perspective, looks a lot smoother than June 1 last year did with COVID a problem, with COVID being then, et cetera. So things will get sorted out, things will be fine.

And the other things that we should point out -- this is particular to HCI Group and TypTap and us -- is that instead of as TypTap is mature and this current talk about separate management teams, et cetera, we are also beginning to now buy reinsurance in a whole different way. So instead of buying one wind tower, there's a HCI wind tower, a Homeowners Choice wind tower, I should say. There's a TypTap wind tower and this Florida. And then there's a third wind tower for non-Florida. And then the fourth tower, which is flood tower.

So we've sort of had to -- as we've segmented the business and grown-up had to now start looking at these in the separate entities, which is a different thing to what, I think, most -- the direction, most companies have had in here, yes.

Matt Carletti -- JMP Securities -- Analyst

And given the like in the differences and kind of seasonality of cat seasons and things like that, as you expand nationwide, is it a reasonable assumption that we might expect different retention levels, so forth on like TypTap tower versus a API floor, or a ex-Florida tower versus Florida tower nuances like that?

Mark Harmsworth -- Chief Financial Officer

Yes, Matt. The biggest take away from this is to how we are looking at not only TypTap and Homeowners Choice but also Florida, the Northeast other parts of the country is, we, basically, look at each geographic area, let's say, and we think of it as a separate business, and we make sure that it's -- our rates are adequate and we have appropriate reinsurance for that geographical areas.

So each geographic area has to sort of makes sense on its own not some we sell we benefit because we're buying a big Florida tower so that we just put the risk in there, right, and those kinds of things. We actually are looking at these things as separate businesses that we are, hopefully, running profitably. So, eventually, if we'll end up with, say, 10 separate businesses that are all profitable -- run properly run, they sort of had it -- had a benefit of addressing each other, should there be a problem with one of them, yes.

Matt Carletti -- JMP Securities -- Analyst

That makes sense. Great, well thanks. Thank you very much for the color. You know best of luck and congrats on a start of the year.

Mark Harmsworth -- Chief Financial Officer

Thank you.

Operator

And the next question is coming from Truist Securities, Mark Hughes. Mark, your line is live and you may ask your question.

Mark Hughes -- Truist Securities -- Analyst

Yes. Thank you. Good afternoon. Mark, could you talk about the loss ratio? In prior quarters you've alluded to some of the impact from Anchor and UPC and of that loss ratio impact might trend over time as you refine that book, rate prices where need -- needed, et cetera. Could you talk a little bit about that, how much impact this quarter and where it's going.

Mark Harmsworth -- Chief Financial Officer

Yes, I mean it was a -- it was a pretty straightforward quarter, really. It was -- it was like I said in my prepared remarks that -- the increase in loss expense, which is just really completely attributable to the -- to the increase in the gross premiums earned. Thge consolidated loss ratio was, I think, about 35%.

So we have different pieces of the business that we reserve in different ways. So Homeowners Choice is that sort of 24% to 25% ratio and the anchor book is a -- is a little bit higher, though we're in and then onto our paper. So the pricing is in line. The loss ratio is a little bit higher there, because that tends to be strictly Homeowners. This loss ratio is little bit higher on TypTap. And then the loss ratios. I think we probably talked about last time around for UPC is more like in the -- in the 50% range.

So it's really just sort of -- this is the sort of a straightforward quarter of the premiums times of the loss ratio. And, of course, we track everything else to make sure that everything is on track to support those loss ratios and pay incurred, those types of things came in pretty much in line with what we expected.

Mark Hughes -- Truist Securities -- Analyst

And similar question on the policy acquisition expense, were there any unusual items in there, or is this a reasonable run rate?

Mark Harmsworth -- Chief Financial Officer

Yes, the only thing that's different is -- as you know the policy acquisition rate on them -- on the -- on TypTap is a little bit higher, but you're sort of used to seeing that flowing through.

In -- the one thing that's a little bit different than what you've -- we may be seen is that the policy acquisition expense on the UPC book is higher. It comes in -- and I think 35% range. So if you -- if you -- if you'd see that increase that you see from Q -- from say Q4 to Q1, is it really just related to that? And then that will come back down a little bit over time. But that's -- you'd see a little bit of a -- a little bit of a bump in the pack rate in Q1. And it's just -- it's really the UPC book.

Mark Hughes -- Truist Securities -- Analyst

And then the higher tax rate, was there any offset in operating expenses?

Mark Harmsworth -- Chief Financial Officer

Yes, good question. So we had -- the tax rate can move around a little bit, but what was a little unusual this quarter is we had some restricted shares that were -- that were canceled, and this is part of the reorganization Karin mentioned [indecipherable], and so there was little bit of movement around in the restricted shares. Some new ones were granted, some were canceled, so there was, I think 140,000 restricted shares canceled, something like that. And then the dividends, related to that get reclassified we expensed them in the -- in the GAAP books, but they're not deductible for tax purposes. And so, we had this happen a couple of years ago where you have a unusually high permanent difference, and it's just sort of a one-time thing. So -- and I think that pushed the tax rate to 30%, 35% or 36% or something like that. But nothing's changed in terms of the overall long-term tax rate of about 20%, 27%, 28%.

So, is it an unusual thing? And you do is about -- there was -- operating expenses were a little bit higher than normal because of that reclassification that happened. So this is sort of a one-time thing -- impacts the tax rate, and we were up against a very low tax rate in Q1 last year because we had some windfall -- windfalls run through. So that kind of explains that difference. Does that -- is that what you were getting at? Is that helpful?

Mark Hughes -- Truist Securities -- Analyst

Yes, that is helpful. Thank you very much.

Mark Harmsworth -- Chief Financial Officer

Yes. You're welcome.

Operator

Thank you. [Operator Instructions] And your next question is coming from Raymond James, Greg Peters. Greg, your line is live. You may ask your questions.

Greg Peters -- Raymond James -- Analyst

Good afternoon and thank you for letting me ask a question. I wanted to pivot to the real estate operations. I noted that in your comments, you highlighted the fact that you're benefiting in part from mark-to-market adjustments in the value of the real estate operations.

And if I look at the schedule of what you own the Florida real estate market, as you well know is on fire. And I'm just curious about your buy sell and the whole decision making process, it relates to some of these properties, your T.R. Burden and Merida [Phonetic] property, we bought in 2011 has to be, of course, substantially more than what your cost is. So just looking for some perspective on that?

Mark Harmsworth -- Chief Financial Officer

Yes. So, it's Mark. I'll take part of that question. So, in terms of sort of the mark-to-market, we're not -- we're not taking advantage of it in any way in the numbers that you see, right? So, we've got some properties as you -- as you alluded to, we've got some properties where there is a pretty substantial difference between what we have it on the books for and what it appraises for, let alone what potentially it might actually be worth. So that -- there's a pretty significant delta there. And that does not show up anywhere. We don't -- we can't do any of mark-to-market or whatever. And we used to talk about this. You know, a year or two ago, we would say we had $30 million maybe of unrealized gains there. We sold one property. And as you know, we had $44 million gain on it. So -- and if we still have probably $30 million or so win realized gains that are -- that are -- that are there.

So we -- it's part of our real estate strategy long-term strategy, as we've talked about before is capital appreciation. And I think we've made good on that strategy. We've realized some of that stuff in the past and we'll continue to do that. But there is that sort of hidden asset, if you will, on the balance sheet, if -- it's -- we cannot take advantage of any kind of mark-to-market that we could do if they were equities or fixed term securities or something like that.

Greg Peters -- Raymond James -- Analyst

Thanks. And then just pivoting back to TypTap you talked about the rollout into new states. And I know you just had a call on this, but if -- just give us perspective or how you're approaching pricing for the new states, how you're developing pricing? Any background on that would be helpful.

Paresh Patel -- Chairman & Chief Executive Officer

Absolutely, Mark -- Greg, sorry. Sorry. Sorry, Greg. I'm having a senior moment here.

Greg Peters -- Raymond James -- Analyst

That's OK. That's OK. I have them every day.

Paresh Patel -- Chairman & Chief Executive Officer

Yes. So, yes, the way we develop pricing is we are talking about being entry-admitted markets and being admitted, that means there's lots of data on incumbents in the each of these states. So at a high level, we tend to look at probably the top 10 carriers in any given state, and see what the pricing looks like, et cetera, and then we try to develop pricing that is competitive with a couple of them, that we -- still we would like to model ourselves after. So that's, roughly, how the pricing is set. It's set to be market and or slightly on the competitive side of the market in any given state. But you have to do it state by state to see what's going on. And, obviously, at that point you then have to go through the rate in the form filings and your work with the regulators in each state to to get appropriate rates and forms filed and approved. So it's quite a cumbersome process. I'm simplifying it a lot, but there are a lot of people who look quite a lot of hours in each state to get it -- to get it just off the ground, yes.

Greg Peters -- Raymond James -- Analyst

Makes sense. And anyway as well, thanks for letting me ask the questions.

Mark Harmsworth -- Chief Financial Officer

Thank you.

Paresh Patel -- Chairman & Chief Executive Officer

Thank you. Yes.

Operator

And there are no further question 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 -- 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. Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.

Duration: 30 minutes

Call participants:

Rachel Swansiger -- Investor Relations

Karin Coleman -- Chief Operating Officer

Mark Harmsworth -- Chief Financial Officer

Paresh Patel -- Chairman & Chief Executive Officer

Matt Carletti -- JMP Securities -- Analyst

Mark Hughes -- Truist Securities -- Analyst

Greg Peters -- Raymond James -- Analyst

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