Hci Group Inc
NYSE:HCI
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Hci Group Inc
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Good afternoon and welcome to HCI Group's Second Quarter 2023 Earnings Call. My name is John, and I will be your conference operator. [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 June 8, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 9, 2024, on the Investor Information section of HCI Group's website at www.hcigroup.com.
I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.
Thank you, John, and good afternoon, everyone. Welcome to HCI Group's Second Quarter 2023 Earnings Call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the second quarter of 2023, and then Paresh will provide a strategic update.
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 results, 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 Karin Coleman, Chief Operating Officer. Karin?
Thank you, Matt, and welcome, everyone. HCI Group reported another strong quarter with pretax income of $20.3 million and diluted earnings per share of $1.28. Operating earnings improved over last quarter, again reflecting positive contributions from each of our business segments.
In insurance, gross premiums earned were stable, while losses and expenses declined, driving increased profitability in the quarter. Our consolidated loss ratio was approximately 34%, down from 47.9% last year and consistent with our expectations.
Homeowners Choice continued to generate healthy earnings, while TypTap Insurance Group reported its second straight quarter of GAAP profitability. In May, we finalized our reinsurance program for the coming year, with rates and terms that were consistent with our expectations. We filed an 8-K detailing this program with the SEC on May 31.
In investments, net investment income totaled $8.8 million, almost entirely derived from interest on our cash and fixed income holdings. Our portfolios continue to generate steady streams of income, benefiting from higher interest rates, short duration and reinvestment yields above 5%.
Finally, HCI Group continued to deliver on its commitment to shareholders, paying a dividend of $0.40 per share, our 51st consecutive quarterly dividend.
To summarize, this quarter highlighted the underlying strength of our diversified businesses and the true earnings power of HCI Group.
And now I'll turn it over to Mark to provide more details on our financial results.
Thanks, Karin. So as Karin mentioned, pretax income for the second quarter was $20.3 million, and diluted earnings per share were $1.28. The pretax income was similar to that of the first quarter this year with one significant difference. In the first quarter, we had a gain of almost $9 million from the sale of real estate, and this quarter's profit was driven simply from the regular ongoing operations of our insurance businesses in what we see as a strong, repeatable operating quarter.
In the past few quarters, we've highlighted several positive trends. And as you can see from the results, these trends continue to support sustained profitability. The trends we've discussed are higher average premium per policy, increasing investment income, lower policy acquisition costs, and most important, a lower gross loss ratio. Let's take a look at each of these.
First, as was the case in the first quarter, gross premiums earned are up despite policies in force being down driven by rate adjustments made over the past few quarters combined with the natural attrition of the book. Our consolidated average premium per policy is about 25% higher than it was a year ago, which helps reduce the loss ratio and improve earnings.
The second positive trend is that investment income is up. Investment income of $8.8 million is more than double what it was in the same quarter last year driven by increasing interest income on fixed term investments and on cash. Our investment strategy is working. And while our yield is up considerably, we still have a short term to maturity, which gives us the opportunity to further increase investment income in the coming quarters.
The third positive trend is that policy acquisition expenses are declining as a percentage of gross premiums earned. In Q2, policy acquisition expenses were 12.4% of gross premiums earned, down from 14.8% in the same quarter last year because of lower commissions and the transition of the UPC book.
The last and most important trend is the decline in the consolidated loss ratio, which is following the glide path we've been discussing over the past few quarters. On previous earnings calls, we said we expected a material beneficial impact from the new legislation in Florida, and that impact is starting to show up in our results.
The consolidated gross loss ratio was 34% this quarter, down considerably from 47.9% in the same quarter last year driven by lower claim frequency, flattening claim severity, lower litigation frequency and higher average premium per policy.
Wanted to mention TypTap just for a minute. You may recall that TypTap Insurance Group was profitable in the first quarter, and it was a gain in the second, reflecting some of the same trends discussed on a consolidated basis, higher average premium per policy, higher investment income and a lower loss ratio.
Just a few other quick things. Book value per share increased significantly from $18.91 at the start of the year to $21.92 at the end of the second quarter. Cash and financial investments at the holding company level were $164 million at the end of the quarter, up from $140 million at the start of the quarter.
Before turning it over to Paresh, I wanted to step back from the numbers to just add one thing. What I hope comes through in my comments here is that the trends that have led to these results are the same continuing trends we've been discussing for some time now, and we think that they are sustainable. We've managed the business carefully to get to this point. And while we can never predict the future, this quarter reflects what we expect to see going forward.
And with that, I'll hand it over to Paresh.
Thanks, Mark. Karin talked about our positive Q2 results, and Mark laid out why the results this quarter are sustainable. There are several items that we've talked about on previous calls that I think are worth reviewing. First, we've positioned our investment portfolio to provide investment income in a meaningful and sustainable fashion. By staying on the short end of the curve, we maintain maximum flexibility, and we are making a healthy income from that side of the business.
Second, following legislative reform that was passed last year in Florida, we anticipated that the loss ratio would come down, and it has.
Third, the uncertainty around the availability and affordability of reinsurance is now behind us with the placement of our 2023 reinsurance program.
And lastly, a year ago, we took decisive rate action to combat economic inflation, and those rate actions continue to work through our book of business.
So overall, while earned premium has been roughly level year-over-year, the profitability of the business has improved considerably. And all of this is important as a backdrop because we now have a healthy stable business. We can now look to the future, and the obvious thing to do is to expand and grow the business, especially in Florida, and that is exactly what we plan to do.
We've applied with the Florida OIR for a Citizens' depopulation in the fourth quarter of this year. We are starting from a baseline of approximately 200,000 policies and $740 million of in-force premium throughout the U.S. at the end of Q2. We will now resume growth to a higher number in the future.
In summary, going forward, we are looking to grow our policy count, grow our in-force premium and grow our profitability. With that, I will turn over for questions. Operator, please give instructions.
[Operator Instructions] The first question comes from Matt Carletti with JMP.
I guess, first, I'll pick up right where you left off, with the news of applying for a Citizens' depop. Is there any color you can give us on -- it sounds like Q4, but in terms of potential -- kind of the number of policies, the amount of premium that ideally, you'd like to execute on? Or is that stay tuned, yet to come?
It's a mixture of both. But Matt, just so [indiscernible] because they'll all be news in 30 days or so anyway. As you know, we've done this many years, and there's a process by which we go through. So what we've applied for is 75,000 policies in the month of November, November 21, to be precise. But as you should also know, that is a maximum number -- the actual number of policies we will get will be some number that is less than that. It's just the way the process works as you go through the various hoops. And the actual number of policies and premium we will get will actually be best known on November 21, the date of the assumption. It's just we're on that road between now and then, yes?
Yes. Is there anything that can -- maybe you can offer some guidance there? I mean we could look to pass takeouts you've done. I mean you've done a lot of them over the course of the company, obviously, not in recent history, but -- and the market was right for them. But I know there's been some legislative changes and rule changes around Citizens in terms of people having to go or not go. Any color you can provide there in terms of how that might change the potential conversion rate? Or if it's just too early to know, you won't know until you go through it?
Matt, historically, the numbers have been as high as 65%. The numbers have been as low as 20%, and some of that range -- and that's quite a wide range of between 20% and 65%, but that range is going -- is also being affected by new Citizens takeout rules that have now come into place and how the method works and everything else and the new regulations where people are more strongly encouraged to leave Citizens, shall we say, yes?
So given all of those things -- and we also don't know how many other people are applying for takeouts in November. But there is 1.3 million policies in Citizens, right? So this is a small drop in the Citizens universe, shall we say. So given all of those things, there is some variability to that number. But you can imagine to a carrier that has 200,000 policies, and 130,000 of which are in Florida, any number is going to be rather significant, yes?
Yes. For sure. That is very helpful. Maybe looking a little bigger picture, I know the focus is Florida, and you have a huge opportunity there. But TypTap has expanded outside of Florida, and we are seeing a lot of household names kind of recalibrate their appetite nationally. A lot of it seems climate change-related.
What kind of -- I think of HCI is having a lot of experience in a state that kind of has gone through that over the past 20, 30 years. Is there a longer-term opportunity there for HCI? Or what lessons kind of have you guys learned by operating in the environment that is Florida that maybe you can take elsewhere when the time is right?
Yes. Matt, I think, obviously, reading the headlines and the press releases and the statements and earnings call from a number of other carriers, et cetera, especially outside of Florida, you sort of get the level of angst that is going on. I think if I was to predict what's going to occur judging by what happened in Florida probably like 15, 20 years ago, the supply and number of people willing to offer policies is going to shrink. Demand isn't going away because every household still needs policies. So supply is going to shrink. Demand is going to stay the same or grow.
It'll take a while for premiums to adjust to the new reality that I think everybody is facing, using climate change as an example that you used. But eventually, all that will stabilize out, and there will be somebody, let's just say, by 2030 who will be providing insurance and will be doing it in a profitable manner, right? It's just between now and then, there will be a lot of churn in terms of both who the carrier is and who -- and what the rates are. That is what I think is starting to unfold throughout the country. We've seen this movie before because that's exactly what happened in Florida after the '04, '05 storms, yes?
Yes. That makes perfect sense. And just a couple of quick numbers questions, if I could, probably for Mark. On the policy acquisition costs, you highlighted kind of coming down to around about 12.5% from a couple of points higher a year ago. Are we -- could we kind of work through the adjustments there in terms of lower commissions and some of the forces? Or kind of where do you think that could go going forward?
Yes. I think that's about where it's going to be for the foreseeable future unless there's any other changes. It might drift down a little bit, Matt, but I think the bulk of that improvement that you've seen there is reflected in where -- is in the numbers now.
Great. And then just a quick numbers one. Do you have net written premiums handy?
Yes. So it's $113.6 million.
[Operator Instructions] The next question comes from Mark Hughes with Truist.
You have come a long way in a short period of time on loss costs. I wonder if you could maybe break out how much might have been more favorable weather in the quarter, how much is your own pricing initiatives and how much progress is actually -- tangible progress from the regulatory reform. Paresh, I think you'd said you think losses will get down to the 30% level. Is that still a good number? Could it go lower based on what we see here?
Mark, it's Mark. So to the first part of your question about the weather, so there really was not a discernible difference in the weather between Q2 last year and Q2 this year. So the decline in the loss ratio from second quarter last year to the second quarter of this year really didn't have anything to do with weather, right? There's always weather in Q2. We had a significant amount of weather in Q2 last year. We had a significant amount of weather in the second quarter this year. So that's not the reason that the loss ratio is down. So the loss ratio is down for the 3 or 4 things that I mentioned earlier.
And average premium is up. Obviously, that's going to help. Frequency is down, which helps. And the average ultimate cost of a claim is down because litigation is down. So those 3 things work their way through the loss ratio at a different pace. You see the impact of the average premium per policy going up, you see that first. So that's probably maybe 60%, 65% of the reason for the drop this quarter, the balance being some of the legislative changes.
But I think the most important thing to say, and I think I said it in my comments, is we developed an expectation of what we thought would happen to the loss ratio when we -- when the legislation came out, and that is still our expectation. What we've seen in the first half of the year is consistent with what we saw. Frequency is coming down. Litigation is coming down.
And to your point about the 30%, I think Paresh and I have both mentioned that we think the consolidated loss ratio will come down from about 40% to about 30%. And we'd take some time to get there, but we still feel that that's where we're headed. So the trends are moving in the right direction, and we're really encouraged by the progress.
How much are you going to pursue voluntary business as the year progresses? Are you going to be more dependent or look to drive growth on the takeout? The acquisition costs are certainly pretty attractive. Is that going to be the focus?
Mark, it's Paresh. Regarding that, I think we are doing voluntary business anyway. It's just how it runs to the book is where the numbers become different. The takeout is a opportunity that we've anticipated for a while and we've actually communicated on previous calls and is now here, and we are taking advantage of it. It's almost like in addition to the other things we've been doing.
So we are -- I guess the overall theme that we're trying to communicate is 2 quarters of [indiscernible] [ go past ], we -- people were asking, hey, what will this mean? How much impact will you see? People are trying to get it quantified. And we made -- we modeled things, and we sort of try to forecast where things were going to be and how things will evolve.
And I think what we're telling you halfway through the year is things are working out fairly much like we had said. And now it's come -- actually showing up in the numbers the way we had said it. And then the follow-up actions we had said we would take when that was achieved is what we're laying out for the back half of the year, yes? So...
Yes. Understood. The premiums ceded, [ what do you say ], a good run rate with the new reinsurance in place in terms of [ actual ] dollars?
Yes. It's Mark. Pretty similar to what's in 8-K, I think it's $67 million and change, very close to what it was in -- yes, actually, just about $67 million. So very similar to what it was in Q2.
Okay. Any change in the -- I think last quarter, you talked about your prior pattern of kind of boosting up reserves a little bit on a quarterly basis. And I think you shifted away from that. Is that -- was there any impact from that when we think about the loss ratio?
Not really. I mean we had -- net reserves are pretty flat so far this year. We didn't really have much adverse development in the first quarter. We booked a little bit less than $1 million. There's really -- there's not much going on there. I mean reserves for the most -- [ incurred ] for the most part are coming in where we expected them to. And so we're not having to really make any adjustments for prior periods, and we're keeping net reserves pretty flat for now. There are some indications that there -- that they could be starting to come down. But so far, we're keeping them flat.
Yes. TypTap written in the quarter was down year-over-year. Is that nonrenewal of flood business? What was driving that?
Yes. There's a little bit of noise in there, Mark. It's -- part of it is flood. About $8 million of it was flood because we had about $4 million of written premium in Q2 last year, and we had negative written premium this year just because we're -- there was a return of some of the unearned premium. So that's part of it. And the other is UPC Southeast. So the written premium was down in the second quarter for that, and that was just kind of a timing thing.
You may remember with the UPC -- changes at UPC, we renewed -- a lot of the policies that would normally have renewed in Q2 were renewed in Q1. And so we had higher earned -- higher written premium in Q1 and then less in Q2. And Q2 for UPC Southeast was actually a little bit negative. So there's a lot of noise in the Q2 written numbers that make it a little bit hard to follow. But in Q3, we'll be back to sort of the normal pattern of written premium.
How much cash at the holdco?
So as I mentioned, cash and financial investments at the holding company level is about $164 million. I think the cash component of that is about $135 million, something like that.
[Operator Instructions] We have a couple of questions in queue, the first coming from [ Lee Kerry with Kerry Partners ].
What an outstanding quarter, very pleasant. I want to get an idea from you on how the whole reinsurance environment is shaking out. I know there's been a lot of changes in different directions. Now that you've completed it and seen how it had ended up last month, what's the outlook going forward from that?
Lee, simple answer about the reinsurance outlook, and I didn't make it in my prepared remarks, was that beginning of the year, there was some uncertainty about the availability and affordability of reinsurance, right? And all of that speculation goes on.
And I think from what Mark has said and Karin has said and what was released in the 8-K, we placed our reinsurance program because we had anticipated these changes, et cetera. The numbers are there. It's now in the 8-K. So at least for us, we don't have a reinsurance variability anxiety until next June at the earliest, yes?
The other thing on a general reinsurance industry, I think, which is the nature of your question, I think the anxiety level amongst reinsurers, at least in terms of Florida, seems to have abated, especially by what happened in May. I think lots of reinsurance availability is now starting to normalize. Affordability is a different price, but that's just what that is, yes?
We have a follow-up coming from Mark with Truist.
Just wanted to make sure I was clear on the depop. It's been a while. You take the premium, whatever you end up being successful on. And then the -- really no reinsurance -- associated reinsurance costs or acquisition costs until those policies -- well, until you get to the next storm season or when the policies renew. Is that the right way to think about the financial impact?
Yes. And Mark, I'll split hairs with you. So when you do an assumption, you will book GWP on the assumption date of whatever earned premium there was. The acquisition cost will be 0 until those policies expire and renew onto our paper, at which point, will go back to normal. And the reinsurance cost on those policies with occasional -- with very few exceptions will be 0 until June 1 of next year, yes? So 3 components move in slightly different way, but just so you know, yes?
Yes. Any kind of subjective commentary about the quality of the policies in Citizens now with the increase? How do you -- how fertile is the takeout opportunity?
I think the way I would characterize it is Citizens has 1.3 million policies, if I remember correctly, until the end of June, right? That's a lot of policies. We are talking about trying to pick, at most, 75,000 policies. But if you have 65,000 policy, it'd be 5% of their book, right? Can we find 5% that we like out of that big of a pool? We like our chances, yes? But that is -- I'm not commenting on the entire pool. My sole mission is can I find 75,000 policyholders that we might want as HCI customers, and the answer would be yes.
[Operator Instructions] We have no further questions in queue. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Paresh Patel who has a few closing remarks.
On behalf of the entire management team, I would like to thank our shareholders, employees, agents and, most importantly, our current policyholders as well as our anticipated future policyholders for their continued support. We look forward to updating you on our progress in the coming quarters. Thank you, everyone.
At this time, this concludes our question-and-answer session. This concludes today's call. You may now disconnect.