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Executives

Paresh Patel - Chief Executive Officer

Richard R. Allen - Chief Financial Officer

Scott Wallace – President of Property & Casualty Division

Jay Madhu - Vice President of Investor Relations

Analysts

Casey Alexander - Gilford Securities

Robert Paun - Sidoti & Company

Howard Halpern - Taglich Brothers

Edward Hemmelgarn - Shaker Investments

Edward Williams - Capital Returns Management

Homeowners Choice (HCI) Q4 2012 Results Earnings Call March 5, 2013 4:30 PM ET

Operator

Greetings and welcome to the Homeowners Choice Fourth Quarter and Year-end 2012 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jay Madhu, Vice President of Investor Relations for Homeowners Choice. Thank you. Mr. Madhu, you may begin.

Jay Madhu

Thank you. Thank you and good afternoon. Welcome to Homeowners Choice fourth quarter and full year 2012 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer; Richard Allen, our Chief Financial Officer, and Scott Wallace, President of our Property and Casualty Insurance Division. Following Paresh's opening remarks regarding our recent success, Richard will review our financial performance for the quarter and year, and then take the call back to Paresh for an update and business outlook. Finally, we will open up the call to your questions.

To access today's webcast, please go to the Investor Relations' section on 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 success, results and conditions, but rather are subject to various risks and uncertainties. Some of the 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. Homeowners Choice, Inc. disclaims all obligations to update any forward-looking statements.

Now I will turn the call over to Paresh Patel, our Chairman and Chief Executive Officer. Paresh?

Paresh Patel

Thank you, Jay, and good afternoon everyone. As Richard will expand on in a minute, we had a very successful quarter and year. The fourth quarter marked our 21st consecutive quarter of profitability. The fourth quarter highlights includes, the assumption of 39,000 policies from Citizens, as a result of which we had approximately [150,000] policies in force, and about $340 million in annualized gross premium at the end of the year.

(Inaudible) highlight was retiring of all of our warrants in the fourth quarter. We also transferred our common shares to the New York Stock Exchange under the ticker symbol HCI. We issued a special dividend of $0.10 a share and increased our regular dividends to $0.25 a share.

Additional 2012 highlights include, integrating the HomeWise assumption. Purchasing the (inaudible) property, completing a $20 million following off (inaudible); hiring Scott Wallace; handling approximately 900 claims related to Tropical Storm Debby and Hurricane Isaac; and increasing our annualized dividend from $0.50 a share at the end of -- year-end 2011, to the current $0.90 a share.

Now I would like to turn the call over to our Chief Financial Officer, Richard Allen, to walk through the financial results for the fourth quarter and 2012. Richard?

Richard R. Allen

Thank you, Paresh, and good afternoon everyone. Fourth quarter income available to common stockholders totaled $13.1 million or $1.19 diluted earnings per common share. This compares with $12.6 million or $0.62 diluted earnings per common share for the fourth quarter of 2011. For the year ended December 31, 2012, income available to common stockholders was $29.8 million or $3.02 diluted earnings per common share, compared with $9.1 million or $1.34 diluted earnings per share for 2011. Fourth quarter 2012 gross premiums earned increased to 44.8% to $72 million from $49.8 million in the same year ago period.

For the year ended December 31, 2012, gross premiums earned increased 62.7% to $232.6 million from $143.6 million in 2011. Fourth quarter 2012 premiums ceded were 31.2% of the company's gross earned premiums earned compared to 28% during the same period in 2011.

For the year ended December 31, 2012, premiums ceded were 32.5% of gross premiums earned, compared with 38.7% in 2011. Net premiums earned for the fourth quarter of 2012 increased 38.3% to $49.6 million from $35.8 million in the same prior year period. Net premiums earned for the year increased 79% to $157.7 million from $88.1 million in the prior year.

For the fourth quarter of 2012, loss and loss adjustment expenses totaled $15.9 million compared with $16.9 million in the same prior year period. Loss and loss adjustment expenses for the year ended December 31, 2012 totaled $66.3 million, compared with $48.2 million in 2011. The full year 2012 (inaudible), $3.5 million related to the two tropical storms that Paresh had mentioned earlier. Even with the increase in policy exposures from the assumption of the HomeWise business in November of 2011, we have noted significant favorable trends in both frequency of reported claims and in the average severity per claim.

We consistently monitor claims activities for development of [tranche] and frequency, severity and causes of loss for the potential impact on incurred loss and loss expenses. Combined loss and expense ratio, traditionally used in the property and casualty insurance industry was 60.6% for the fourth quarter of 2012, compared to 79.7% for the fourth quarter of 2011. Our combined ratio for the full year of 2012 was 72%, compared with 87.9% during 2011.

Turning to the balance sheet, investments in fixed income and equities securities totaled $44.8 million at December 31, 2012, versus $39.8 million at December 31, 2011. Cash, cash equivalents and time deposits at December 31, 2012, totaled $230.2 million, compared with $112.8 million at December 31, 2011. Unearned premiums at December 31 were $154.2 million, up from $108.7 million at December 31, 2011. The liability for loss and loss adjustment expenses reached $41.2 million compared with $27.4 million at December 31, 2011. As you can see, we have had successful underwriting results for the fourth quarter, as well as the year ended December 31, 2012.

Now, I will be glad to turn the call back over to Paresh.

Paresh Patel

Thank you, Richard. 2012 was our sixth year of operations, sixth year of profitability. Over that time, we have grown from a startup, to one of the top homeowners insurance in the state of Florida. Thus far in 2013, we have completed the offering of approximately $40 million of 8% senior notes, that was done in January, and we have continued to integrate the Citizens Policy assumed in November, and are on track to generate nearly $340 million of annualized gross premiums. We look forward to the opportunities and challenges that lie ahead.

Finally, on behalf of the entire management team, I would like to express our appreciation for the continuous support we receive from our shareholders, employees, agents, and most importantly, our policyholders.

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

Question-and-Answer Session

[Operator Instructions]. Our first question is from Casey Alexander of Gilford Securities. Please go ahead.

Casey Alexander - Gilford Securities

Hi. Good afternoon. Do you hear me?

Paresh Patel

Yes, hi Casey.

Casey Alexander - Gilford Securities

Great, great. Thank you. There was a bit of vacuum there for a second. Pretty remarkable results. You said that you have identified noticeable (inaudible) loss.

Paresh Patel

Casey, you are breaking up.

Jay Madhu

Hello? Casey?

Operator

I am sorry, we have lost Mr. Alexander, due to his phone. The next question is from Robert Paun of Sidoti & Company. Please go ahead.

Robert Paun - Sidoti & Company

Good afternoon.

Paresh Patel

Hey Robert.

Robert Paun - Sidoti & Company

A few questions here. First, on the reinsurance contract. I assume you are already in discussions with the reinsurers on a new contract for June 1. Can you just give us a little color on what you are thinking as far as the new contract? How much coverage are you looking for, what it's going to cost, any price changes? Any color there would be helpful?

Paresh Patel

Sure thing. We are probably looking at -- obviously we are a bigger company this year than last year. We are probably looking at around, probably about $800 million of [vertical] coverage. (inaudible) of about $800 million. As far as pricing goes, there seems to be a softening in the marketplace. So the rates should be less. But as you can imagine, we are buying more, but hopefully at a slightly lower rate. So (inaudible) will still be up. But not as up even if the rates come down a little bit as well. But my best estimate is currently, we are going to spend between $130 million -- maybe $140 million in reinsurance this year. Does that answer your question?

Robert Paun - Sidoti & Company

Yes, thank you. That was very helpful. Second, can you just talk about the competitive pricing environment in Florida at this time? Has it changed at all, from say 12 to 18 months ago, and have you seen any new entrants into the market, or any existing players exit the market?

Paresh Patel

Well, let's answer them in reverse. While exiting the market, I think the last real exit was HomeWise, which was obviously we helped. Beyond that, I don't think we will be exiting as such. As far as new entrants, I think success builds from competition, shall we say, there seems to be a number of new licensed insurers that has fired up in the last year, ranging from heritage insurance to one just last week. I (inaudible), there was another one, [Colval] and then one other one, (inaudible) a couple of weeks ago. So there seems to be that cycle of new startups (inaudible) again. There may be more in the west, but at least I can name a few.

In terms of pricing pressure, etcetera, I think it's the same situation in the east. It's a competitive marketplace and we fit right in.

Robert Paun - Sidoti & Company

Got you. Thank you. Finally, just more of a high level question on growth opportunities. Obviously you have completed the debt offering not too long ago. Can you talk about what you see for the company in terms of areas of growth? Is the plan to gain more market share in Florida, or is there a plan to enter new states and new business segment in the near future? Any sort of commentary on what's possibly in the pipeline, would be great?

Paresh Patel

Okay. Very simple thing. As far as growing within the state, we have long maintained this thing about the 5% market share idea.

Robert Paun - Sidoti & Company

Yeah.

Paresh Patel

Six years ago, when we were [part of it], it seemed preposterous (inaudible). We seem to be within sight of that goal at this point. So we are on step-by-step, working our way towards that goal. So that thing is going to happen. As far as other states, other lines of business, etcetera, we are actually -- actively restructuring the organization to set for those new opportunities and new things, because we are looking at the day when we have 5% market share in the state of Florida; and say what will we do then? We are already looking at different opportunities, and structuring the organization to support that.

Robert Paun - Sidoti & Company

Okay. Thank you for the answers.

Paresh Patel

Thank you.

Operator

Thank you. The next question is from Casey Alexander of Gilford Securities.

Jay Madhu

Hi Casey. Welcome back.

Casey Alexander - Gilford Securities

Yeah. Sorry about that. You've never heard an analyst scream before, but the moment I had cut off. The question I was going for, and I don't think it was -- it may not have been asked well, I was dialing back in, is if you have met and if you have identified trends of lower frequency and lower amounts of losses. What do you think that's due to, and are you suggesting that this level of losses, versus this level of premium is sort of a baseline that we should expect in the future, or should we be looking at something that's normalizing more at a higher rate, versus the gross premiums?

Paresh Patel

In terms of the lower losses and lower frequencies, it's a series of different things that we got to -- a lot of these things. It's a complex set of issues that come together. If you recall for years we have had the central issues, and the fact that before '08, and when they did that in 2011, there was I think (inaudible) regulation. People rushed to file their claims and so on, and so in late 2011, we were seeing surges in central claims etcetera, and we had said that there will be a surge and then a drop off. We are now seeing the other side of that, the drop off, yes.

Casey Alexander - Gilford Securities

Okay.

Paresh Patel

So you are seeing sort of -- things of that nature occur. The other side of claim frequencies etcetera is, and I will put it down to good old policy and underwriting. Our operations team and underwriting team under the leadership of Scott, are doing a tremendous job of making sure that we have a well underwritten book. While everybody says that, the results do speak for themselves, and we are seeing from drop-off in claims frequency, dropped off (inaudible) tremendously. So all these new items here and there are adding up to the numbers that you are seeing. Does that help?

Casey Alexander - Gilford Securities

Yes, it does. Now you have the -- you completed the policy takedown from Citizens a little more than three months ago. How do you see sort of the retention rate of those policies developing thus far?

Paresh Patel

It's slightly higher than we had projected. They are under 80% of renewals.

Casey Alexander - Gilford Securities

All right. That's good. The -- do you know what net investment income would have been ex the real estate investments?

Paresh Patel

All time low. It wouldn't have been substantially greater either, because the year progressed very flat and secondly, we weren't really looking to -- how shall I put it, [book to have] investment gains.

Casey Alexander - Gilford Securities

Okay. All right. Well that's it from me right now. I will step back in the queue, because you answered the question that I intended to ask about, [courtesy] to the bonds offering, what your sort of plans were for that?

Paresh Patel

Okay.

Operator

Thank you. The next question is from Howard Halpern of Taglich Brothers. Please go ahead.

Paresh Patel

Hi Howie.

Howard Halpern - Taglich Brothers

Hi. Congratulations guys. My question I guess is, I saw that regulators gave a presentation to the legislature about what should be done with this and I am wondering what the legislature has done so far, and what type of inputs the current industry participants are having, and what are the long term prospects, if the legislature finally gets something done?

Scott Wallace

Hi, this is Scott Wallace. It changes though every year, and it's certainly in my experience, every year there is lots of ideas and a tremendous amount of discussion that goes on with very positive price legislative and regulatory activity. My experience is that maybe [expect] one out of 10 items may actually come to serious discussion and actually get passed. When we see those things taking place and those items that do pass to legislation, we deal with those as we always do, and we have been quite successful at doing that.

Howard Halpern - Taglich Brothers

Okay. Another question regarding, were you granted a rate increase again, or is [one still pending]?

Scott Wallace

We were granted a rate increase by the Office of Insurance Regulation and that was a 5.9% average statewide rate increase that went into effect, February 1 of this year.

Howard Halpern - Taglich Brothers

And lastly, you talked about the higher renewal rate for the policy, at 80% renewal rate for Citizens, and of that renewal rate, you increased -- could you give an average of what the increase was from the Citizens policy to your policy?

Paresh Patel

Howard, I think that's mixing two different things. When we were talking about increased retention, we were talking about more in the sense of, if we take out the past, we might have retained 70% of the policy (inaudible). That's what we talked about increased retention. In terms of premium comparison as to what they are paying Citizens and what they are paying us, we expect that to be roughly even to what they were paying to Citizens. So we are not expecting there to be much of a (inaudible). The renewal increase back to the policyholders.

Howard Halpern - Taglich Brothers

Okay. Well, keep up the great work guys.

Paresh Patel

Thank you.

Operator

Thank you. The next question is from Edward Hemmelgarn of Shaker Investments. Please go ahead.

Edward Hemmelgarn - Shaker Investments

Yeah. Could you just take -- I mean, you (inaudible) a little bit more, I mean, it's on the loss adjustment expense, and that's a really unexpected improvement. Is that -- I know you have talked about the fact that it was a very good underwriting, but is that certainly a trend that you would expect, at least for the rest of this year?

Paresh Patel

I am always hopeful that the trend continues. As we also know in this business that we would (inaudible) positive, not the ones that we would like to be done.

Edward Hemmelgarn - Shaker Investments

I understand. My guess is that let's say, through the beginning of the hurricanes?

Paresh Patel

Yeah, I mean so far, the trend that Richard talked about during the fourth quarter, seems to be conceding in the first quarter.

Richard R. Allen

So far, they are continuing. If you look at it monthly --

Scott Wallace

And I think the claims analyst side of it has to do with it as well. So we have actually really enhanced and improved our quality of assurance to help another area which is -- we have really expanded our training to our staff as well. Especially, with regards to handling the clients.

Edward Hemmelgarn - Shaker Investments

Are the policies that you have been acquiring certainly, are they under $1 million in terms of insured value per home or do you go over $1 million?

Paresh Patel

I think we have always been limited to under $1 million.

Edward Hemmelgarn - Shaker Investments

I know, Universal setup a separate company to American to go after the $1 million plus. Any interest on your part, because that grew as the pricing was higher on the larger dollar value properties?

Paresh Patel

I am sure that's something we have started looking at. However I think, one of the only things that's very clear with us, is that we seem to be doing quite well with what we already know what to do. So we are likely sure to take advantage of the opportunities we already know how to take advantage of.

Edward Hemmelgarn - Shaker Investments

Right. Okay, well hey, great job.

Paresh Patel

Thank you.

Operator

Thank you. The next question is from Edward Williams of Capital Returns Management. Please go ahead.

Edward Williams - Capital Returns Management

Good afternoon. I was hoping you could just clarify. In regards to the severity in frequency trends driving the low loss ratio in the quarter, is it safe to assume that you guys are saying that you have a low attrition of loss ratio in Q4, or when there is a favorable development in there, and could you help me get an idea of which was which?

Richard R. Allen

The attritional losses are reported claims, which were down considerably, or significantly I mean, and there are some favorable development on prior years and prior quarter claims. As Scott said, from an operational standpoint, the claims requirement is much more active and from my standpoint, more aggressive in settling claims, and just the reported claims, the personal claims are -- run out of time as we originally anticipated, we like that.

Edward Williams - Capital Returns Management

Fair enough. In terms of price, anyway you could quantify what the favorable development was?

Richard R. Allen

No.

Edward Williams - Capital Returns Management

Fair enough. And then, in regards to the reinsurance spend, thank you for the guidance, like from $120 million to $140 million expected this year, could you just elaborate a little more and give a little color on structure as well, and the potential use of the (inaudible) expected?

Richard R. Allen

It's too early in the days to sort of [fill] all of those things out. Even $120 million to $140 million, is a -- is not strange, because we have discovered in the years gone by that from the (inaudible) go from being heavy lows or heavy highs very quickly. So therefore, that's the degree of color that we have given and that's as comfortable as we are in the current year.

Edward Williams - Capital Returns Management

Fair enough. Thanks very much.

Richard R. Allen

Yes. Thank you.

Operator

Thank you. We have no further questions in the queue at this time. I will just turn it back over to management for any additional remarks.

Jay Madhu

Well, thank you everyone for attending the call as always, and hopefully, the next quarter we will see you here at the same conference call again. (inaudible). Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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