HCI Group, Inc. (NYSE:HCI) Q1 2022 Earnings Conference Call May 5, 2022 8:30 AM ET
Matt Glover - Investor Relations
Paresh Patel - Chairman and Chief Executive Officer
Karin Coleman - Chief Operating Officer
Mark Harmsworth - Chief Financial Officer
Conference Call Participants
Matt Carletti - JMP
Mark Hughes - Truist Securities
Good morning and welcome to HCI Group’s First Quarter 2022 Earnings Call. My name is Holly 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 June 4, 2022 starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 23, 2023 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 and good morning everyone. Welcome to HCI Group’s first quarter 2022 earnings call. On today’s call is Karin Coleman, HCI Group’s Chief Operating Officer; Mark Harmsworth, HCI’s Chief Financial Officer; and Paresh Patel, HCI’s Chairman and Chief Executive Officer. Following Karin’s opening remarks, Mark will review our financial performance for the first quarter of 2022, and then Paresh will provide an operational outlook. 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 today 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 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 good morning everyone. The first 3 months of 2022 marked another quarter of growth and profitability for HCI, with reported earnings of $0.09 per share and adjusted earnings of $0.34 per share, excluding the impact of unrealized investment losses. Compared to fourth quarter 2021, adjusted earnings improved despite elevated weather related costs, which Mark will touch on in a moment.
Our insurance business continued to grow with gross written premiums up 40% from the first quarter of 2021, reflecting growth at both of our insurance continues. At Homeowners Choice, gross premiums written increased 12% over the first quarter of 2021 to $91 million. At TypTap, gross premiums written nearly doubled to just over $86 million. Our growing premium base produced a stable loss ratio of around 40%, similar to fourth quarter, highlighting steady operating performance across our insurance business. Our 2 renewal rights transactions with United Property & Casualty, one involving business in 4 Northeast states and a second in three states in the Southeast, continue to migrate into the HCI platform during the quarter. The Northeast have fully transitioned to HCI as of April 1, while the Southeast book will begin to transition on June 1.
Now shifting gears, I’d like to take a moment to talk about how we are managing our balance sheet. You may recall, last quarter, we highlighted actions we took in 2021 to significantly reduce our debt. Today, I’ll touch on our investment portfolio, which is well positioned for the evolving interest rate environment. HCI Group and its subsidiaries ended the year with investable assets of more than $800 million, with over $600 million in cash and cash equivalents. Since that time, interest rates have increased dramatically, improving returns on fixed income investments and other assets. We started to put some of our cash to work, allocating capital to higher-yielding investments, mostly at the short end of the interest rate curve. During the quarter, we purchased over $120 million in short-duration treasury securities. We are focused on finding additional opportunities to increase income from our portfolio in 2022.
Lastly, we remain confident in our business strategy and intrinsic value of our shares. To that end, in March, the Board approved the $20 million share repurchase program. Also during the quarter, we paid our 46th consecutive dividend to shareholders at $0.40 per share. One final note on legislative matters, insurance markets in Florida remained fluid. While the legislature adjourned in March without passing major reforms, we’re encouraged by the Governor’s decision to call special session in May and look forward to legislative proposals aimed at stabilizing the market for homeowners insurance in Florida.
Now, I will turn it over to Mark to provide more detail on our financial results. Mark?
Thanks, Karin. Adjusted earnings per share were $0.34 for the first quarter compared to $0.77 in the same quarter last year. On a GAAP basis, earnings were $0.09 per share compared to $0.75 in the first quarter last year. The difference between GAAP earnings per share and adjusted earnings per share relates to unrealized investment losses. These are unrealized changes in the market value of equities. These unrealized losses explained about half of the change in GAAP net income from last year to this year, and of course, result from the general market decline during the quarter.
On an operational level, we had a good quarter. Adjusted net income, which factored out the unrealized investment losses, was $5.5 million compared to $7 million in the same quarter last year and dropped to just $1.5 million despite this being a more active quarter for weather, as I will explain in a minute when I talk about the loss expense. This is another quarter of strong growth. Gross premiums earned were up 37% from $131 million in the first quarter of last year to $179 million in the first quarter of this year. About half of the growth came from Florida and the other half from our expansion – our national expansion.
Florida gross premiums earned grew by $24.5 million from $110.3 million to $134.8 million. Those premiums earned and the expansion states more than doubled from $20.5 million to $44 million. As Karin mentioned, gross premiums earned in TypTap Florida Homeowners business were double what they were in the same quarter last year, continuing their pattern of strong organic growth.
As the company has grown, some of our ratios have changed as the business mix has changed. One of those has been the consolidated loss ratio. The consolidated loss ratio was 40.6% this quarter compared to 35% in the first quarter last year. About half of that increase was from business mix and the other half because of weather. We had a couple of wind and hail events in the quarter that added about 3 points of loss ratio or about $6 million of loss expense for the quarter. As I mentioned, despite the $6 million of weather-related losses, adjusted net income was only down $1.5 million in the same quarter last year.
One thing you might note that the balance sheet is at fixed maturity. Maturities are up a little over $100 million since the end of the year. This relates to the treasury purchases that Karin just mentioned. The average term to maturity for our fixed term portfolio is now about 2.5 years, and we have over $500 million – $550 million in cash. The business continues to be a strong generator of cash. Consolidated cash flow from operations was just over $57 million in the quarter compared to $36 million in the same quarter last year. After TypTap, cash flow from operations was $43 million, well up from $27 million in the same quarter last year.
I will talk to a few times about the delta between net income and cash flow from operations. Part of that difference is non-cash expenses like stock-based compensation. During the quarter during – starting this quarter, we’ll show that separately in the segmented information section of the Q so that anyone can see that impact. This quarter, stock-based compensation was $4.3 million. While this is part of our expenses, this is a non-cash item that we want to make sure that, that number is shown clearly.
In terms of liquidity, we have just over $130 million of cash and investments outside of the two insurance companies and access to a $65 million credit facility. As you know, we have significantly delevered the balance sheet in the past year or so. Last year, we reduced long-term debt from $156 million down to $45 million. And at the end of the first quarter, our debt-to-cap ratio is less than 16%. As Karin mentioned, we announced our $20 million stock buyback plan. As it was approved in mid-March, there were no shares bought back in the first quarter, and we’ll report on the progress of that throughout the year.
Just a couple of quick numbers you might want book value per share is $31.66 as of March 31, down just $0.26 from the end of the year. Basic shares outstanding for purposes of dividends and book value per share are 10,125,000 and fully diluted share count is about 10,160,000.
And with that, I will hand it over to Paresh.
Thanks Mark. Karin and Mark gave a great summary of where we ended the quarter. I want to focus my comments on where we are headed. As many of you on this call are aware, government Ascensus called a special session in Florida, which is scheduled for the end of May. There is a growing awareness of issues facing the Florida property market and we applied decision to take a deeper view of the situation.
In recent weeks, we have also held meetings with re-insurers and the overall feedback has been very positive. Plenty of reinsurance capacity is available for HCI and we received continued interest on insurances to join the HCI program. However, we must wait to see what comes from the special session to get a final pricing outcome on this year’s insurance placement. While speaking of reinsurance, there is also a great reinsurance opportunity for HCI. Our reinsurance captive, Claddaugh, offers us the ability to participate on certain portions of the HCI’s reinsurance program. And as history has shown, Claddaugh has earned a significant profit from its participation on HCI’s reinsurance program.
Switching topics, in this inflation environment with a really hot real estate market in Florida, the true value of Green lease, our Real Estate division, is coming into focus. In recent weeks, we have turned out offers on certain of our properties at a valuation that is 3x the number that is on our books. And to give an idea as to how valuable Green list has become, if we sold our entire real estate portfolio at current market prices, we would expect to book a $75 million gain on our carrying costs. With that, I will turn my comments back to insurance and technology operations. Homeowners Choice continues to be a powerhouse and a top performer in the Florida homeowners market. The cash generated Homeowners Choice has helped us fund our growth, and we like the flexibility to create for the future.
Next, I want to talk about Exzeo, which is our technology subsidiary and built the underwriting technology used by both of our insurance subsidiaries. The Exzeo underlying technology, which has long been proven in Florida is now being validated as we expand on a national basis. And the company that uses its knowledge the most is TypTap. TypTap is using Exzeo technology on its nationwide expansion. We have gone from operating in 1 state at the end of 2020 to currently operating in 12 states and with plans to increase our footprint this year and to the future. And TypTap is now firing to show signs of profitability in line with my comments last quarter. We are very pleased with how the first few months of this year have progressed, and we remain committed to our long-term objective to build a book of business that produces consistent profitability.
Before wrapping up, I want to make a few comments about a new opportunity that is arisen since the beginning of the year. As Karin highlighted, we ended 2021 with over $600 million in cash and cash equivalents. To put this into perspective, this represents about $60 per share in cash that we have on our balance sheet. This is how much cash we’ve been sitting on, – and most of that cash hasn’t really been earning any real income. But with rising interest rates, as we put the cash to work, it should produce meaningful income.
In closing, all of our business units are performing well. We have a tremendous opportunity to put our investment portfolio to work. We have a very strong balance sheet that is unlevered, and we have set the stage for bigger opportunities that are unfolding in the future.
With that, we’re ready to take questions.
[Operator Instructions] Your first question for today is coming from Matt Carletti. Please announce your affiliation then pose your question.
Thanks. Good morning. It’s Matt Carletti with JMP.
Good morning Matt.
Hey, good morning. First question, I was hoping to ask you a question about growth. I mean it was really strong in the quarter, but I know it’s not kind of straight line across the year. So, can you help us with how we should think about the cadence of growth for the remainder of the year, particularly thinking about upcoming reinsurance renewals, wind season so forth? And maybe, at least in my mind, I think of it as Florida and non-Florida as kind of two separate answers maybe?
Sure, Matt. It’s going to be a slightly involved answer. We still tend to grow in the first quarter, and we tend to stay flat over the next two quarters, and then we will grow again in the fourth quarter. That has been our cadence over the years. One would expect this year would be not materially different. As far as outside Florida goes, there, we are sort of going through the transition as the UPC book comes onboard. And the biggest delta that thing to occur between now and the end of the year is the Southeast book we have an 85% quota share on currently. And on June 1, it will go to 100%. So, that should produce some slight incremental increase in gross premiums. But beyond that, it’s at least stable for the next couple of quarters.
Okay. Great. And then I caught your comments shifting to Greenleaf, about the kind of just on market values and what happened with Florida real estate prices. In particular, you commented on, I don’t know if it’s a property or more than one property that you were offered 3x kind of carried value and turned down. I was just curious, why did you turn that down? Was it that you viewed it as undervalued? Was it that you are owning that particular property with a view towards income over time, not necessarily capital gain? Just curious how you view that?
Yes, Matt, great question. So look, what happened, and I won’t name the property, the specific property. But what happened was we got an offer on that property, and it was a very credible party considering what they are willing to pay. The problem was when we sort of looked and said what comparable properties have sold for in the general area. The offer was, I would say, 25% – 20% to 25% too low, right. So, instead of 3x, it should have been 4x, if you like. But that gives you an idea as to why we said down, because we didn’t want to lose that much money on the table. But on the other side of that is because we have held the property for so long and we purchased it at such a good price, right. This is why you see that very high multiple. And when we realize that we were just talking about all the appraisals and those kinds of things, it is best to quantify what happened if we did dispose of entire portfolio to give us an idea as to how much we are carrying it on the books for, yes. I see, and I will let Mark make a financial comment on the…
No, I just am glad, Matt, it’s a good question rather than focusing on that one property. It’s a good question. But I think we have – it shows that we own some – it’s not the core business, but we own some really valuable real estate, and I think that it’s been a very good investment for us over the last few years.
Great. And last one, if I could. I just wanted to touch on the upcoming special legislative session and not in any way asking you to predict the outcome. But just, I guess twofold. One is your general thoughts on, I think one of the things that’s being proposed is in the FHCF, lower the retention offer more low down coverage, which would obviously be cheaper. And then the kind of second part of the question is just how – given the timing, I think it’s May 23 or something like that, a special session, obviously, reinsurance renewal coming up, kind of how just process-wise, that you guys are handling that with a lot of uncertainty just weeks away from your reinsurance renewal?
So Matt, the way we are handling it – well, first of all, the cat fund adjustments, etcetera, right, that is obviously one of the items that’s being discussed. The problem, obviously, you don’t know whether it’s going to – whether that’s what will happen or there will be something else or whatever. So, you could do a lot of what is scenario. And that’s why while we are encouraged, we have not made any conclusion as to what’s going to happen. Internally of the place, and this is why we made the comments just so that we were transparent with all the investors is that because of the special session, finalizing reinsurance will be a little bit later this year than we expect in other years. Having said all of that, the way that’s probably going to go is that as soon as clarity comes through on the cat fund, I think people will start placing programs and getting it done. Until that point, the number of customers we might have acquired a bit. So, rather than speculate on it, we are just commissioning everybody to feel like planning on mad scramble towards the in the later part of – later part of May, yes.
Thank you for the color and congrats on the nice start to the year.
Your next question for today is coming from Mark Hughes. Please announce your affiliation, then pose your question.
Yes. Thank you. Good morning. Truist Securities. Mark, the opportunity to put more of your cash to work, what’s the pace going to be on that? And if you have got quarterly net investment income here $3 million and you put a little more of that $60 per share to work a year from now? What’s the investment income look like?
Yes, good question. So, I mean we are in a good position, right, because we have got a pretty significant amount of cash and we are going to layer that in and invest that carefully. But just as an example, even if we invested, say, half of that, $275 million at 2.5 points, that’s about $7 million a year or $1.75 million per quarter. And that’s a significant bump in investment and if you look at where investment is kind of sitting at now. So, we will make prudent decisions about how to invest that and how to ladder that. But just as an example, that’s sort of how I think of it is what it would look like if we invested half of it. It’s even just half of it is a very meaningful bump in investment income.
Yes. Paresh, how much capacity would you look maybe to put the work in Claddaugh? If there is opportunity, what’s the potential for both the capital and then the returns there?
So, Mark, given where things are, we will definitely be putting some money to work in Claddaugh. The only debate that we are having is how much. And some of that is also going to depend on the special sessions and insurance and everything else. So, we – so the answer seems a little bit vague is because we have always been – it’s what we are. We wait for the opportunity to come in front of us and when it does, we pounce on it. If the opportunities aren’t there, we don’t push a bad position, right. And if I could digress in that comment, you are seeing this with us in every fashion, right. We bought real estate and held on to it for all these years. And certainly, it’s become a wonderful asset. It wasn’t a popular decision when we did it, but we knew it was the right one. Sitting on $600 million of cash or building up a pilot kind of number of cash, what we have been doing over the last 2 years, while the interest rates could be nothing, has been an exercise and discipline that some days opportunity will come just got the cash. And here, we are settling one quarter the opportunity of loss front of it. And Claddaugh is a very similar kind of thing. So, as we go through the month of May, depending on how it happens in reinsurance markets, Claddaugh will have great opportunities, but it will only exercise the opportunities as they become prudently obvious, yes.
Yes. Okay. At TypTap, I think you have spoken previously about a goal of $1 billion in premium by 2025, that’s still a good number. And you mentioned two signs of profitability. I wonder if you could – do you expect to be profitable for the full year, maybe pick profitability by the end of the year, just occasionally be profitable depending on the weather? How to think about that as well?
Okay. So, great question. The $1 billion for TypTap, yes, we are still on track for that. Again, ironic enough, if you wanted to get there a lot a lot quicker, but there is an idea of outpacing your growth so that your infrastructure and your company sort of stay alongside with that, yes. So, the building is for long-term. So, we are doing things in a measured way. As far as the profitability of TypTap goes, if you recall my comments last quarter, what will happen is first at the occasional months of profitability, then there will be occasional quarters, then there will be the year of profitability [indiscernible]. Those are, of course, absolutely going down eventually. Now the quarterly profit, the occasional yearly profit on the system profitability is still in front of us not the mature yet. But the first thing of an occasional month being profitable, that actually has already been done. We actually had a profitable month in the first quarter. But obviously, overall, as you will see in the queue, we didn’t took that insurance group make money in the quarter, but there was a month of profitability. And as we go along, I suspect we may have other quarters where there is an occasional amount of profitability that it may not translate into quarterly profitability just yet. But we are seeing that step-by-step progress towards that, yes.
Yes. And by the way, the reason it’s probably volatile is because we obviously are in the insurance business and weather is a part of it. And a strong here or there could take a profitable quarter and make it unprofitable, and it is the nature of the business, yes.
Yes. About your potential to take advantage of the dislocation other carriers having channel lenders getting downgraded either book rolls or your organic opening at the organic channel a little bit more. How do you see the environment right now?
It’s a great time. If you – all you worry about top line growth, it’s a great time. Just open up and business will pour in. The art of all of this is that you take on a book of business that you know is going to be profitable for the next 10 years, right. And why we think in 10-year terms, look at Homeowners Choice. Most of our customers have been with Homeowners Choice for well over 6 years or 7 years at this point. And they stay with us consistently, and it’s a very good cash flow machine. So, if you are building for the long-term, you are very deliberate as to when you take stuff on. And we are sort of exercising that we are having to maintain our discipline, to exercise patience so that we add business to the books at the right time kind and with the right customers and at the right price. So, it may look like we haven’t done anything yet, but we are setting the stage behind the scenes in a lot of ways, waiting for the right moment to come along just like the $600 million cash on the balance sheet until December – even in December, it was not really an item because it was close – we were aware it was building, and then suddenly in the first quarter an opportunity came along and here we are, yes. So, this gives us a lot of confidence as to where we are going is that we now have a very solid track record of being disciplined operators, yes.
Then I will ask one more, if I might. When we think about the loss ratio, I think Mark, you pointed out reasonably steady here, things have been doing pretty well in spite of a little more weather. Any kind of underlying trends that we ought to anticipate just as you kind of integrate the Northeast and the Southeast states here? Is there a likely trajectory, or are we kind of waiting to see what happens with the special session, etcetera?
Yes. I mean in terms of trends, I think a couple of data points. The last earnings call, I think I had said that for Q4, our loss ratio was, I think 40.3%. And I have said that with the new changes in business mix that we have been talking about for a year now. With that consolidated loss ratio, we expect that to be sort of in the high-30s, maybe two or three points higher than that if we have a bit of weather. And then you look at what happened in Q1, we had a bit of weather, and the consolidated loss ratio wasn’t kind to get higher for 40.6%. So, it’s pretty consistent with what we had expected given this level of business mix. And looking ahead, what I had suggested on the last earnings call, I think I would say it’s still the same. That’s sort of our expectation. And we have talked about all the individual components at various different times. But I think for modeling purposes, I think it’s probably useful to start thinking about a consolidated loss ratio at this level of mix. And I think that 40%-ish is probably about right, a little bit better if there is not weather around where if there is. Does that help?
It sure does. Thank you for all the answers.
[Operator Instructions] There are no further questions in queue. That does conclude today’s question-and-answer session. I would like to turn the floor back over to Paresh for 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. As we end this call, I want to summarize my earlier closing comments. We have a tremendous opportunity to put our investment portfolio to work. We have a very strong balance sheet that is unlevered and we have set the stage for the bigger opportunities that are involved in our future. These are not just words. We have great conviction and a track record of doing exactly that. Thank you. We look forward to talking to everybody next quarter.
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.