Hci Group Inc
NYSE:HCI
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Hci Group Inc
Earnings Call Analysis
Q3-2023 Analysis
Hci Group Inc
HCI Group has exhibited robust performance with a pretax income of $20.1 million and earnings per share reaching $1.34, even after accounting for $6.5 million in losses from Hurricane Idalia. This demonstrates resilience in the face of natural disasters affecting their covered regions.
By adding customers from Citizens, HCI group expects a substantial boost to its top line, potentially adding $150 million to $250 million of in-force premium. This forward-looking strategy is indicative of a strong growth trajectory for the company.
Comparing year-over-year figures and adjusting for significant weather-related losses, HCI has improved its gross loss ratio from 41.4% to 32%. This impressive decline reflects improved underwriting discipline, favorable legislation, and a reduction in claim and litigation frequencies.
The company's diligent cost management is reflected in its increasing operating leverage, as it boosts premium revenue without proportionally increasing operating expenses. This effective strategy has yielded a 25% growth in shareholder equity and raised the book value per share from $18.91 to $23.27 within the fiscal year.
HCI Group maintains considerable liquidity with nearly $0.25 billion at the holding company level, designed to support new growth opportunities. One of the upcoming initiatives is the launch of Condo Owners Reciprocal Exchange, marking HCI's foray into commercial residential insurance, expected to strengthen the company's market position.
With strategic policy assumptions and organic growth, HCI is on track to nearly reach a $1 billion in-force premium by the end of 2023, with plans to surpass this milestone early in 2024. This goal underscores the company's ambition and capability for continuous expansion.
The executive's comments highlight a mixed landscape in the Florida insurance market, with both new entrants and existing carriers adjusting their portfolios. HCI Group's confidence in its own growth and improving market conditions reflects a positive outlook for the industry's evolution.
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Good afternoon, and welcome to HCI Group's Third Quarter 2023 Earnings Call. My name is Mike, and I will be your conference operator. 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 December 7, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 7, 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, Mike, and good afternoon. Welcome to HCI Group's Third Quarter 2023 Earnings Call. On today's call is Karin Goldman, 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 third 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'd 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 operations. HCI Group disclaims all obligations to update any forward-looking statements. Now with that, I'd 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 $20.1 million and diluted earnings per share of $1.34. This was a great result as the third quarter included $6.5 million of catastrophe losses from Hurricane Idalia which made landfall in Florida as a cat 3 hurricane.
This marks the third straight quarter of pretax income over $20 million and brings year-to-date pretax income to over $63 million. Gross premiums earned increased almost 4% in the third quarter. Our consolidated gross loss ratio was 35.4% in the quarter. But adjusting for the hurricane Idalia losses that I mentioned, our gross loss ratio saw a sequential improvement to approximately 32%. We remain on a path of continued improvement in our underlying gross loss ratio, which Mark will elaborate on in a few minutes.
Legislative reforms introduced last year in Florida have been effective. They are continuing to bring stability to the Florida homeowners market and provide policyholders with greater consumer choice.
Similar to prior quarters, each of our business segments had a positive contribution to our quarterly results. At our insurance division, Homeowners Choice generated another quarter of consistent earnings and TypTap Insurance Group reported its third straight quarter of GAAP profitability.
In investments, net investment income totaled $9.4 million, almost entirely from our cash and fixed income holdings. Our investment portfolio generated another quarter of steady income and has benefited from the current rate environment. HCI is pursuing top line growth in the fourth quarter, and the company is currently adding customers from Citizens. In total, HCI Group is approved to assume up to 125,000 policies which includes the recent approval by the Florida Office of Insurance Regulation for a second Citizens assumption by TypTap. We won't know for a few weeks the exact number of policies that elect to move to HCI but our expectation is that HCI could add between $150 million to $250 million of in-force premium.
Finally, HCI Group continued to deliver on its commitment to shareholders, paying a dividend of $0.40 per share, our 52nd consecutive quarterly dividend. To summarize, HCI Group delivered another quarter of solid profitability, and we think there is an opportunity to build on our momentum. Now I'll turn it over to Mark to provide more details on our financial results.
Thanks, Karin. So as Karin mentioned, this is the third consecutive quarter where pretax earnings have been more than $20 million. In the first quarter, pretax income was over $20 million and included a onetime gain from the sale of real estate. In the second quarter, pretax income was over $20 million with no onetime gains. This quarter, pretax income was again over $20 million despite having a Cat 3 hurricane hit the state of Florida. These improving earnings are the result of trends we've been discussing for a while now, higher average premium per policy, increasing investment income, flat operating costs and improving claim trends.
In the third quarter, gross premiums earned were up despite policies in force being down, driven by rate adjustments made earlier in the year. Higher average premium per policy, both in Florida and outside of Florida has helped reduce the loss ratio and increase earnings. Increasing investment income is the second trend helping to drive improved earnings. If you look at the income statement this quarter, it looks like investment income is down, but that's because we had a real estate sale in the third quarter last year. If you adjust for that, ongoing investment income is almost double what it was a year ago, and it continues to go higher.
Third positive trend is that expenses have been flat. We're driving significant operating leverage by generating higher premium revenue without increasing operating expenses. The last trend is the continued improvement in the loss ratio. I should clarify one thing quickly. If you look at the loss expense for the third quarter last year, it includes the loss expense related to Hurricane Ian of about $64.6 million. And the loss expense for the third quarter this year, it includes as Karin mentioned, losses of $6.5 million for Hurricane Idalia. To get a clearer picture of loss trends, we need to adjust for both. If we do that, the consolidated loss ratio in the third quarter last year was 41.4% and in the third quarter this year, the gross loss ratio is down to 32%. This improvement in the loss ratio was being driven partially by higher average premium per policy, but more importantly, a lower claim frequency and reduced litigation frequency, we believe as a result of the insurance reform legislation in Florida.
I mentioned this before, but we are not getting to these lower loss ratios by reducing reserves. In fact, net reserves at the end of Q3 are the same as they were at the start of the year.
I should mention a few things on the balance sheet. Shareholder equity has grown by about 25% so far this year and book value per share is up from $18.91 at the start of the year to $23.27 at the end of the third quarter. Cash and financial investments at the holding company level are just over $167 million up from $140 million at the start of the year. We're also happy to announce that we signed a new credit facility with Fifth Third Bank with significant improvements. The amount of the credit available increases from $50 million to $75 million and the term of the facility has been extended from 2 years to 5.
Combined with cash and financial investments at the holding company level, this increases total available liquidity at the holding company to just under $0.25 billion, which is available to support new growth initiatives. Speaking of new opportunities, as Karin mentioned, we're in the process of assuming a number of policies from Citizens, which we expect will increase premiums and more importantly, substantially increased earnings starting in the fourth quarter.
To summarize, this is another great quarter for the company, and we are positioned for even better results. Revenue is going up, investment income is going up. The loss ratio was coming down. Policy acquisition and operating expenses are flat and earnings are growing. With that, I'll hand it over to Paresh.
Thanks, Mark. Karin and Mark walk everyone through our solid financial position at the end of the third quarter. With approximately $750 million of in-force premium and both of our insurance divisions being GAAP profitable and cash flow positive. But looking forward to Q4, we're building on this space by assuming policies from Citizens. We expect to close out 2023 within a stone [ throw ] of $1 billion of in-force premium and we expect to cross that mark in early 2024. And while reaching this milestone will be an accomplishment, we are already planning for what comes next.
There are several initiatives that we are looking at and each is in different stages of development. But one item of note is that we are in the process of forming a new reciprocal carrier in Florida. The new carrier is going to be called Condo Owners Reciprocal Exchange and will mark our entry into commercial residential insurance space. Our application is currently pending regulatory approval, and we hope to commence operations in early 2024.
Beyond that, we have additional plans, and we will stay -- we'll disclose them as we go forward, please stay tuned.
To summarize where we are, we had a solid quarter in Q3. In Q4, we will have additional growth in Florida by adding additional policies from Citizens, and we are looking forward to a very bright 2024. With that, we'll open the line for questions.
[Operator Instructions] And our first question will come from Matt Carletti with JMP.
The underlying loss trends, Mark, you talked a bit about it. I was hoping you could dive in a little further. I've always known you guys to be pretty conservative in kind of what you print in the quarter. Can you give us a look behind the scenes and maybe what are you seeing in paid? Or is there kind of some of the indications maybe even stronger than what we're seeing and you're just given a little time to make sure that it's fully baked?
Yes. Good question. So yes, I mean, generally speaking, the claims trends are really good. We're seeing some pretty significant decreases in claim frequency. Whether adjusted claims frequency is down about 20% quarter-over-quarter, litigation, the number of lawsuits is 30% to 40%, less than you would expect to have for quarters like Q3, Q4. So things are performing well. The Florida loss ratio has improved significantly as we've talked about. And yes, we're still being, I would use the word prudent in how we reserve. So our loss expense is higher than what our paid or incurred are. And for the full year, we've kept reserves flat. And I think that says something. The policy count is down. The number of open claims is down but net reserves are flat. So statistics like average reserve for open claim and those kinds of things are up significantly. So we're taking a fairly prudent approach to reserving. It's -- when you look at the face financials, it looks very good. And I would say that the trends are maybe even a little bit better than how it shows. Does that help?
Absolutely. Yes. Exactly what I was looking for. And then maybe if I can on the takeouts. Karin, I appreciate your comments on -- I think you said expecting kind of $150 million to $250 million in-force premium. How should we think about it in terms of average policy size for kind of what's coming out of -- where you're looking to take out of Citizens. I know you won't know exactly, but kind of ballpark, what's the average premium per policy?
So Matt, it's Mark. I would assume about $3,700 per policy. That's a good estimate at this point. We won't know for a little bit yet. But that's a pretty reasonable estimate of what we would expect on a consolidated basis.
Okay. Great. And then maybe just a high-level question. Can you talk a little bit about the competitive environment in Florida. I mean, obviously, the loss picture is getting better. You talked through that. But we've all seen the bankruptcies and the company shrinking and things like that. What kind of -- can you give us an update on the competitive front. What you're seeing in terms of companies that have an appetite to go out and write any substantial amount of business versus those that might still be playing a little bit defense?
Matt, Paresh here. The thing I would say about that, a lot of -- there's been a couple of new start-ups, so that's been going on. A lot -- a number of the existing players are obviously participating [ Citizen ] of the populations. So that's kind of like an optimistic thing. We also note a couple of other carriers have mentioned that they're shrinking their books and so on. So that's also in the opposite direction a little bit. And Citizens is sitting there, absorbing any movement back and forth. So all of those things are playing out. So I'd say it's a mixed bag at this moment in time in terms of people growing was [ shrinking ].
From our own perspective, I think we sort of see that the Florida insurance space is getting to a better place. And obviously, it gets to a better place, there will be -- policy holders will have more choices and more alternatives. And we're starting with us. I mean we're talking about growing by almost 1/3 in the next few months. So just by our actions, yes.
Absolutely. Congrats on a nice quarter.
[Operator Instructions] Next, we have Mark Hughes with Truist.
What is your view at this point regarding voluntary policy growth, the increase at Homeowners Choice. Is that -- what was the driver there this quarter? And then obviously, the takeouts will have a big impact, but would you be growing on a voluntary basis as well?
Mark, great question. But a couple of things. Because we have both Homeowners Choice and TypTap in the Florida market, part of our agreement and how regulators like -- have us operate. Homeowners Choice doesn't write voluntary single policies. It only does block so business like takeouts, et cetera. So there isn't voluntary writing on the Homeowners Choice side. On the TypTap side, there is, and it just continues along at its own steady pace and we're supplementing it with a couple of takeouts in this particular moment in time, yes.
Yes, understood. The reciprocal exchange you're talking about, what's the thing there, what's the economic model? How quickly will that get ramped up?
Again, so we wanted to kind of get in front of this because what's happened is we filed with the OIR for approval, and the filing itself makes it somewhat public that we are in the process of doing this. So we want to make sure that the transparency that all shareholders are aware that this is going on.
The thesis for the business really is that while there's a hard market or semi-hard market going on for the residential [ personal ] line residential business. It's a very, very tough market right now, very hard market for commercial residential. This is like the whole condo buildings and that kind of stuff. So we were presented with an opportunity to enter that line of business and grow at a significant rate. And we've spent a few months doing the economics and the math and everything else. And we think it's a healthy business for us to enter, where we can add value both to our shareholders, but more importantly, to the policyholders and the condo owners that will be the policyholders of this company. So it seemed like there was an opportunity to do a win-win solution where everybody is looking for some alternatives. And we are -- as we always do, pioneering our way into a new area.
And then the -- Mark, I think you've talked notionally about a 30% gross loss target. Here you are at [ 32% ]. It's -- I wouldn't say it's early days, but you've gotten pretty close pretty quickly. Is that still the right target? Or could you perhaps go lower than that?
Yes. I mean I think we've talked about the 30% a few times. We said that it would take a little bit of time to get there. The loss ratio has dropped every quarter now for a number of quarters. I think 30% is still the right target. Could it be a little bit less than that in some quarters, I think it probably could. But I think 30% is, I think, still probably a comfortable target on a consolidated basis that -- at least for now.
[Operator Instructions] We now hear from Casey Alexander with Compass Point.
Yes. Just a little clarification. The Condo Owner Reciprocal Exchange, is that being ceded by -- is that a part of the 125,000 policies that are being taken down from Citizens that are specific to that market? Or are you entering that market with a different distribution scheme distribution channel?
Casey, let me answer the question this way, right? All that's going on with the Condo Owners Reciprocal Exchange is that we have an application with the OIR with the regulators. It is not included in any of the 125,000 policies that we've been approved because we can't be approved for doing any of those things until the application is approved.
So then I'm curious what is the sort of distribution strategy to actually write that business. Is it independent brokers? Or how do you expect to get in that market once you are approved?
Actually, we have all the usual avenues open to us. There could be a depopulation from Citizens for that business. And that business also generally works slightly differently to our personal lines residential, which sort of tends to auto renew every year. Here, because it's condo association and condo boards are involved, it's a slightly more complicated sales cycle that involves brokers, and we will use brokers. And it just reapplied for and re-underwritten every year. It just is a larger premium per policy kind of business. And it just has a slightly different rhythm to it, and that's why we're doing it the way we are.
Okay. And then my last question is sort of more high-level question about the depopulation. HCI was built on depopulations in the late early 2000s and then didn't do very many for quite an extended period of time and now is moving back into the market. What's different about this depopulation compared to the depopulations that you did in the past when you were originally building the company. And sort of why the acceleration back into that market at this time, just -- I just think high level, that's a helpful thing to hear.
Absolutely. So you're right. We did depopulations back before they were popular back in 2007, '08, '09, '10 kind of time frame, then we did some again in '11, '12, '13, '14, we kind of -- our last big depopulation in 2014. We did do some other minor top-up ones in '17, '18 and '19. I think '19 was the last time we did a depopulation before this year.
But the item in all of that stuff is that we were doing this as Citizens had peaked out to 1.2 million policies, I think, in 2012. And then we stopped when the policy count dropped around 400,000. And because the moment had passed, what has occurred as everyone should be aware of is in the last 2 years or so, Citizens ballooned to around what is the 1.7 million policies, 1.4 million policies at this point. And again, there's opportunity for us to depopulate from that pool. Along the way is what I would say it's just like what it used to be before, it is in the sense that some of the rules have changed from Citizens, but more importantly, our technology and our capabilities have advanced tremendously in the last decade. So for us to do a depopulation at this point, it's a lot more easier and automated and easier for us to risk selection than it was a decade ago. So from all of those things, it has improved. So to put it this way, Homeowners Choice is doing what it was built to do only new or better and much more improved.
We have Mark Hughes with Truist.
Yes. The expense ratio looked pretty good this quarter. Any one-timers? Or is this something that's sustainable?
It was. If you compare it quarter-over-quarter, there was one thing that creates just a little bit of a bump. Stock-based compensation in the third quarter last year was about $1 million or $2 million higher than the third quarter of this year. So that's one of the reasons that it's down. But if you go back and look for the last quite a while, you put labor and OpEx together, it's been pretty flat for a number of quarters. And so yes, I would say that it's sustainable.
The percentage -- the ratio is going down a little bit because gross premiums are going up a bit, but the dollar value of labored OpEx combined has been flat for a while, and I think it's reasonable to assume that it will for -- in the future for a while.
Okay. So opportunity for continuing improvement in the ratio.
Yes, yes.
Okay. And then the -- I think I can back into the math, but your hit rate, 125,000 policies, you talk about premium $150 million to $250 million. I didn't get to my calculator fast enough, but what do you think could be the hit rates on that? How does that kind of compare to your historic experience?
Mark, I think it's going to be very similar to what we've said in the past, right? And I think we had said when all said and done, we will end up with somewhere like pick a number between 40,000 to 70,000 policies, somewhere in that kind of range. In terms of policy count, percentages, you can sort of say that's somewhere between 33% and 65% or so.
That seems to be pretty good. Is that a function of less competition or more astute picking? You're picking policies that others have overlooked? Or I guess you're saying that's not inconsistent with the past?
Yes. So I think I'll leave -- I'll just make some general comments. So we are expecting somewhere between that -- and I just had the calculator, Mark. Sorry, it's between 40% and 60%, right, is what we're expecting our success rate to be. I don't necessarily know that everybody else is also in the 40% to 60% range. We haven't followed everybody closely enough to know that. We just know that we run our own race. And that was what we were kind of hoping to get, and we seem to be achieving that mechanism because that's where our technology enables us to do.
We try to make it a smooth and easy transition for Citizens policyholders. And because of that, large numbers of them are -- look at this as a favorable opportunity to leave Citizens and join us, and that's what they do. And then they stay with us. To give you an idea because Casey asked earlier about takeouts, we have policyholders now who are on their 17th renewal with us. And these are people we'd depopulated from Citizens back in 2007. So as you're watching this play out, it's -- we run our own race and we know how our book behaves.
Matt Carletti with JMP.
Just a couple of numbers housekeeping questions, probably for Mark. Net written premium and TypTap surplus if you have or surplus at TypTap, if you have it.
Yes. So net written premium consolidated was $132 million -- $132.1 million and TypTap -- and then -- sorry, and then TypTap surplus, $91.6 million.
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.
Thank you. 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. Thank you.
At this time, this concludes our question and answer session. This concludes today's call. You may now disconnect.