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Homeowners Choice, Inc. (NYSE:HCI)

Q1 2013 Earnings Call

May, 02, 2013, 04:30 pm ET

Executives

Jay Madhu - VP, Investor Relations

Paresh Patel - Chairman & CEO

Richard Allen - CFO

Analysts

Robert Paun - Sidoti & Company

Edward Hemmelgarn - Shaker Investments

Operator

Greetings and welcome to the Homeowners Choice First Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A 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, Jay Madhu, Vice President of Investor Relations. Please go ahead.

Jay Madhu

Thank you and good afternoon. Welcome to Homeowners Choice first quarter 2013 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 Insurance Division. Following Paresh's opening remarks, Richard will review our financial performance for the quarter, and then turn the call back to Paresh for a brief 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 of our new corporate website at, 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 filing 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 the operations. Homeowners Choice, Inc., disclaims all the 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 shortly, we had a very successful and profitable first quarter of 2013. Among the highlights with the completion of underwritten public offering of $40 million of 8% senior notes deal in 2020. We believe this successful offering demonstrates investor confidence in our business model and the recognition of the strength of our balance sheet and the prudent cash flow management we have exhibited.

Another highlight, we declared a regular quarterly cash dividend of $0.225 per common share. In addition, we have continued the successful integration of our Citizen’s assumption from November 2012.

And finally, we purchased an office building in Ocala, Florida which is about a 100 mile from Tampa for those who are outside the state. The building is a center of the state and is approximately 16,000 square feet of space and sits at about 1.6 acres of land. The purchase price was $2 million. We intend to use a portion of this building for regulations operations and also as a disaster recovery site in case of a catastrophic event impacting our company’s home office.

Now I would like to turn the call over to our Chief Financial Officer, Richard Allen to walk through our financial performance for the first quarter. Richard?

Richard Allen

Thank you, Paresh and good afternoon everyone. First quarter income available to common stockholders totaled $20.4 million or $1.81 diluted earnings per common share. This compares with $6.8 million or $0.88 diluted earnings per common share in the first quarter of 2012.

First quarter 2013 gross premiums earned increased 50.9% to $82.5 million from $54.7 million in the first quarter of 2012. This increase is primarily the result of the earned premiums generated through the November 2012 assumption from Citizens.

Net premiums earned for the first quarter of 2013 increased to $60.6 million from $40.4 million in the same year ago period. For the first quarter of 2013, loss and loss adjustment expenses totaled $15.9 million compared to with $19.2 million in the comparable quarter of 2012.

Even with the increase in policy exposures from the Citizen’s assumption in November of 2012, we continue to observe the favorable trends in frequency of reported claims as well as the average severity per claim as was discussed in our fourth quarter earnings call. We are constantly monitoring claim activities for development of trends and frequency severity and the distribution and a positive loss for the potential impact on incurred loss and loss adjustment expenses. The combined loss and expense ratio to net premiums earned was 47.3% for the first quarter of 2013 compared to 74.9% for the first quarter of 2012. This combined ratio reflects the impact of the Citizen’s assumption on the net earned premiums, the denominator in this calculation.

Turning to the balance sheet, investments in fixed income and equity securities totaled $45.1 million at March 2013 versus $44.8 million at December 31, 2012. Cash and cash equivalents at March 31 totaled $279 million compared to a $230 million at December 31, 2012, partially reflecting the successful debt issue referred to by Paresh in his initial remarks. Unearned premiums at March 31, 2013 were $141 million compared to a $154 million at December 31, 2012. The liability for losses and loss adjustment expenses was $41.8 million compared to the $41.2 million at December 31, 2012. As indicated by our results, we've had a very successful first quarter.

Now, I'll turn the call back to Paresh. Paresh?

Paresh Patel

Thank you, Richard. The strong momentum built during 2012 continued in the first quarter of 2013. Our record profitability reflects our commitment to managing the operations, growing revenues and ultimately providing value to our shareholders. We continue to grow the business and remain committed to be one of the top Homeowners insurance providers in the state of Florida. Last month, we began doing business as HCI Group Inc. which we believe now more accurately present the company’s diversed, yet complimentary business activities, which include property and casualty insurance, information technology, real estate and reinsurance.

It will also help avoiding confusion between the parent company, our largest subsidiary, Homeowners Choice property and casualty insurance as well as our non-insurance enterprises. Along those lines, we launched our new information technology division, Exzeo. The division was formed to develop technologies for HCI’s own use, primarily in the insurance claim handling process. As we develop it though, we believe the utilization of the software will benefit many types of business across multiple industries. We plan to release Exzeo platform to the market place later this year, and while we remain committed to our insurance business and the Homeowners Choice brand, we're equally excited about other enterprises like Exzeo and the strategic opportunities that they offer.

Finally, on behalf of the entire management team, I would like to express our appreciation for the continued support we receive from our policy holders, agents, shareholders and employees. We look forward to yet another successful year ahead. And with that we are ready to open the call for your questions. Operator, please provide the instructions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Robert Paun with Sidoti & Company. Please state your question.

Robert Paun - Sidoti & Company

Number of questions here, first on the loss trends, I know seasonally the first quarter is typically the strongest, but can you just talk about what you saw in the quarter that led to such low loss ratio, and was there any prior year favourable development in there?

Paresh Patel

Robert it's Paresh. The basic thing we would tell you that we saw in the largest item in the first quarter was really the number of claims that actually came in, and the phones got a ring for a claim to come in. So the number of claims that actually came in and then the mixture of the claims clearly seven kinds of claims are more expensive than others, to just those two items I think speaks of the bulk of the performance that you are seeing. Was there some favourable claim development from previous years?

Richard Allen

There was about a $400,000 approximately of favourable development on prior exiting years.

Paresh Patel

But given what we are talking about here, I don't think that’s an immaterial cause here, yeah.

Robert Paun - Sidoti & Company

Also can you just talk about the operating expenses in the quarter, was there anything unusual there in this quarter that led to low ratio?

Richard Allen

The low ratio is really is driven by the increase in the net earned premiums.

Robert Paun - Sidoti & Company

Yeah, now I understand that, but is there maybe you can just talk about the expenses associated with the new assumption of policy that you did in November. Do you hire more underwriters or more claims handling staff to support the new business or do you already have the necessary staff in place?

Paresh Patel

Robert, when we have done the assumption way back when; when we were working on it, we had sort of said that as a consequence of growing this business by 50% we will probably create about 40 or 50 new positions across the company and we are sort of walking down that path, all 40 to 50 people come on board right off the back. But more importantly I think the positions that are being created are not at the top end of the corporate hierarchy shall we say, so consequently on a cost for policy or a cost for transaction or in this case an expense ratio, the cost do go down.

Robert Paun - Sidoti & Company

Okay, just final question on reinsurance. Can you just comment on the June 1 renewal and what you are expectations are there. Seems like industry commentary that reinsurance pricing has soften a bit. Are there any changes or updates to your comments that you made from the last conference call on reinsurance?

Paresh Patel

Okay. Let me answer the question in two parts. Yes, reinsurance costs are softening, but I think the comments that we had made last -- in the last earnings call were already reflective of that softening that we were anticipating. So when we sort of put out that range I think it was a $120 million to $140 million was the range we had put out, you know anticipated some of that softening. So we are not updating that in any great shape at least for that $800 million purchase that we had talked about, but that's basically where we are.

Operator

Our next question comes from Edward Hemmelgarn with Shaker Investments.

Edward Hemmelgarn - Shaker Investments

Yeah, my question revolves around the policy acquisition cost. I mean those have been certainly trending down as a percentage of net earned premiums, can you kind of show me in where you think that maybe gone, I mean it was down to 9.86% this quarter, you know a year ago it was 16.3% and that's.

Richard Allen

What you got to realize Edward is that all the earned premium coming from that November assumption there was no acquisition cost.

Edward Hemmelgarn - Shaker Investments

Right, so I can kind of assume that.

Richard Allen

Our normal acquisition cost on the renewal of business on our paper is about the 9.5% to 10%. Last year it was inflated a little bit because the HomeWise assumption had a 16%.

Paresh Patel

And you had accounting change.

Richard Allen

Yes, and we adopted a new -- there was a new accounting methodology for recognition of deferred acquisition costs that we absorb an extra $1.2 million in expenses last year.

Edward Hemmelgarn - Shaker Investments

Okay. So, is that 9.5% on the gross premiums or the net.

Richard Allen

The 9.5% is, it’s actually a net.

Edward Hemmelgarn - Shaker Investments

So what you are saying that there's really wouldn't view the number that you've given was, wouldn't have to be engrossed.

Paresh Patel

Yeah, Edward in terms of the, look overall in terms of policy acquisition costs right, you have a number of things that are flowing back and forth. You just got to factor them in into the thing. So we just report the numbers as they are. But the key variables you've got playing on was that compared to last year you had the accounting change that Richard talked about. We also have -- in 2011 we had a HomeWise acquisition, book-of-business acquisition that was flowing through which did have a seating commission etcetera attached to it which clearly the fittings acquisition did not.

And the other side of this is as renewals, the third item is renewals as to when they occur and one of the items we run into is renewals for us are not linear throughout the year as in not one top of the book renews every month. First quarter and fourth quarter tend to be somewhat lighter renewals where the second and third quarter tend to be heavy. So all of those things do play some effect on the policy acquisition costs.

Edward Hemmelgarn - Shaker Investments

But you readably recognized the policy acquisition costs over the life of policy, don't you?

Paresh Patel

Yes.

Edward Hemmelgarn - Shaker Investments

Right now you’ve got, almost everything that you’ve got is in cash and I understand that in terms of your very little way of investments and I understand the fixed income yields are really low, but do you anticipate it's going to remain in those lines or would you -- you tend to as you build your balance sheet that that might -- you might begin to stem maturities a little bit?

Paresh Patel

Let me ask you if I can answer in this fashion. The amount of cash that’s in the balance sheet at this point is not there as cash because we're maintaining liquidity or anything else of that nature. We clearly have much greater amount of cash than would be reasonably needed. The reason there is cash is because the lack of suitable investments available in the current market environment, and we're being very prudent and conservative in our portfolio management to say that as everybody on this call probably knows, chasing yield in this environment is not a prudent thing to do.

Edward Hemmelgarn - Shaker Investments

No, that certainly is true, but it's also the outlook is probably at least for a low rate, just probably going to the other few more years and would you ever envision putting more of it saying they are short term maturity paper, I mean I realize there is not much of a yield on that, but there maybe more than cash, would you ever -- is that something you might do over the next year?

Paresh Patel

We debate that regularly in the investment committee.

Edward Hemmelgarn - Shaker Investments

Okay.

Paresh Patel

Simple answer and still we can illustrate the point. If you sort of put a 100 million to work in this environment, you get around 50 basis points of yield, I think differently for $100 million you get a $500,000 a year in interest income.

Edward Hemmelgarn - Shaker Investments

Right.

Paresh Patel

Even rest of our business is it doesn't seem like we should be chasing that 500,000, but 500,000 is a lot of money, it doesn’t actually seem appropriate to be chasing that given the rest of the business, yeah.

Edward Hemmelgarn - Shaker Investments

So you are just saying for the return it's not worth the risk?

Paresh Patel

It’s simply put that exactly.

Edward Hemmelgarn - Shaker Investments

Okay. Right thanks. What the outlook do you anticipate that there will be opportunities to assume policies again from citizens in the latter -- second half of this year?

Paresh Patel

We always monitor and watch and see what's going on etcetera. We have been through six years operations to manage to five policy, take out five out of the six years. So I think the prognosis is probably pretty good, but at the end of it, we do despite that consistency, we do look every year with fresh eye to see whether it's worth it or not. So we won’t (inaudible).

Edward Hemmelgarn - Shaker Investments

Great, okay. And lastly just one more question, what has been your renewal rate?

Paresh Patel

We internally call our retention rate as in probably 100 policy renewals, we found out how many do we get staying with us and that number is running in the high 80s to like about 90%.

Edward Hemmelgarn - Shaker Investments

Okay, great.

Operator

(Operator Instructions) We have the question from Edward Hemmelgarn with Shaker Investments. Please take your question.

Edward Hemmelgarn - Shaker Investments

Sorry, one more question, what was the rate increase that you got for this year?

Paresh Patel

I think we indicated rate increases was 5.9%.

Edward Hemmelgarn - Shaker Investments

5.9 so if you are looking at 5.9% rate increase offsetting that high 80s renewal or retention rate that means and we should be expecting organic gross premium declined roughly 5% to 6%?

Paresh Patel

Assuming we don't do anything to offset that, yes.

Edward Hemmelgarn - Shaker Investments

Okay, great. Thanks.

Paresh Patel

Okay. I think we should be done for questions. One last comment obviously on May 22nd is going to be our annual shareholders meeting. I'd like to very thank you on this conference call obviously hopefully our shareholder and you obviously have interest in the company. Please join us and we would love to have you attend the meeting. Thank you.

Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening. Thank you.

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