HCI Group, Inc.

Good afternoon and welcome to HCI Group's third quarter 2020 earnings call. My name is Christy and I will be your conference operator this afternoon. 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 5, 2020, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until November 5th, 2021 on the investor information section of HCI Group's website at www.hcigroup.com. I would now like to turn the conference over to Rachel Swanciger, investor relations for HCI. Rachel, please proceed.

Thank you and good afternoon. Welcome to HCI Group's third quarter 2020 earnings call. With me on today's call is Parish Patel, our Chairman and Chief Executive Officer, and Mark Harmsworth, our Chief Financial Officer. Following Parish's opening remarks, Mark will review our financial performance for the third quarter of 2020, and then turn the call back to Parish for an operational update and business outlook. Finally, we will take your questions. To access today's webcast, please visit the investor information section of our corporate website at www.hcigroup.com. Before we begin, I would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan, and project, and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual 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 Parish Patel, our Chairman and CEO. Parish?

Thank you, Rachel, and welcome, everyone. I hope everyone is healthy and staying safe. While the 2020 Atlantic hurricane season had a record number of storms, Only one storm, Hurricane Sally, has affected HCI thus far. We previously released our loss estimates for that storm, which only affected our homeowner's choice insurance operation, and the tip-tap insurance operation was not affected. Here are some highlights from the quarter. In July, Greenleaf completed the sale of our headquarters property. In September, we paid a 40 cents per share dividend our 40th consecutive quarterly dividend. This dividend marks our 10-year anniversary of paying dividends. Over the years, notwithstanding hurricanes and business environments, we paid $11.82 per share in cumulative dividends to the shareholders. Currently, the dividend yield is still over 3% based on today's share price. On other news, our insurance operations continued to grow. By quarter's end, in-force premiums at Homeowner's Choice had grown to $341 million from $306 million at the end of the third quarter last year. And at TipTap, in-force premiums had more than doubled from $87 million from $40 million at September 30th, 2019. I will now turn over the call to our CFO, Mark Harmsworth, who will walk us through our financial performance for the quarter.

Mark. Thanks, Parrish. Diluted earnings per share on a GAAP basis were $1.70, up from 73 cents in the third quarter last year. On an adjusted basis, diluted earnings per share were $1.60, up from 67 cents last year. This was another strong quarter for growth, earnings, and cash flow. Consolidated gross written premiums were up 20% over the third quarter last year. Homeowner's Choice was up 10%, Tip Tap Flood was up 16%, and Tip Tap Homeowner's Business wrote $22.5 million in premium, which was 87% higher than the same quarter last year. Gross earned premiums have been growing as well. Consolidated gross earned premiums were up 24% over the third quarter last year, driven by increases across all businesses. Homeowner's Choice earned premiums were up 12%, Tip-Tap Flood was also up 12%, and earned premiums for Tip-Tap's homeowner business were up 200% over the same quarter last year. Year-to-date, consolidated gross written premiums and consolidated earned premiums are both up 22%. The other big story this quarter was the sale of one of our real estate assets. We have talked many times about significant unrealized value in our real estate portfolio. In other words, the true economic value of these assets is significantly higher than what we've shown in the balance sheets. The sale of our Cypress Commons property in July is an example of us realizing some of that value. As announced, we sold Cypress Commons in Tampa for $44 million in cash and realized a gain of $37 million before tax. This increased book value per share by about $3.50, generated $37 million of net new cash, and we have the opportunity to indefinitely defer the income tax on this gain. Loss expense was up $24 million over the same quarter last year. The company is growing, and so loss expenses will also grow. The $24 million increase breaks down like this. Growth premiums earned were up $20 million, and we booked about $9 million of incremental loss expense related to that growth. In addition, CAT losses were $15.5 million higher than the third quarter of last year, driven by a net exposure to Hurricane Sally of just over $17.5 million, offset by the impact of Hurricane Dorian last year. The core loss ratio for homeowner's choice was about 30% this quarter. This includes the anchor assumed business, where we have been reserving at a higher rate. As these policies renew, the core loss ratio should return to about 26%. This should go even lower when approved rate increases kick in. The core loss ratio for TIP-TAP is about 37% for flood and homeowners combined. And again, that will go lower when approved rates kick in. Before moving on from loss expense, I did want to mention something about adverse development, as it often comes up as a question. In 2019, we booked about $9 million of adverse development, which was similar to the amount we booked in 2018. So far this year, we've had less than $1 million of adverse development. One other note on the income statement, personnel expenses are up about $1.9 million from the third quarter last year. Half of this amount, or about $1 million, relates to an increase in bonus expense for incentive-based compensation that is linked to net income. Now to the balance sheet. Cash flow continues to be strong. During the first nine months, cash flow from operations is just over $75 million, driven by increases in unearned premiums and reserves. As we've been growing, we are setting aside more money for losses than we pay. As a result, reserves are increasing. To be more specific, non-CAT reserves are $31 million higher than they were at the end of 2019, reflecting, again, our conservative stance on reserving. Debt-to-cap ratios continue to decline, reflecting the increasing strength of the company's financial position. At the end of 2018, our debt-to-cap ratio was 58%. At the end of 2019, that was down to 48%. And at the end of September, it is down to 45%. Book value per share continues to increase. At the end of 2018, it was $21.71. At the end of 2019, it was $23.90. And at the end of September, it is up again to $25.63. At the holding company level, we have about $50 million in cash and financial investments, as well as $55 million of available room on our credit facility. So we have lots of liquidity at the holding company level. And speaking of our credit facility, we have just agreed to terms to renew our credit facility with Fifth Third to extend it out another three years with available capacity of $65 million. The surplus position in Homeowner's Choice remains strong. While Homeowner's Choice has been growing and we booked a full retention loss for Hurricane Sally, we still have significant excess surplus in Homeowner's Choice. As we've been discussing, TIPTAP is growing and to support that growth, we will be contributing $10 to $15 million from the holding company to increase surplus in TIPTAP in the fourth quarter. In terms of share buybacks, we have used about $4 million of the $20 million buyback that we announced earlier this year for 2020. In addition, we completed the 2019 plan earlier this year, and the total bought back under both plans is 129,142 shares at an average price of $39.93. So in summary, it was another good quarter for us. Revenue is growing, earnings are up, cash is up, book value per share is up, and debt levels are down. And with that, I will pass it back to Parrish.

Thanks, Mark. Our technology-driven insurance subsidiary, TipTap, continues to be our growth engine. Growth and premiums at TipTap continue on a course for doubling each year. I'll talk more about that in a minute. As I mentioned moments ago, total premiums in force were $87 million at the end of Q3, putting TipTap well on the path to exceed $100 million by the end of the year. We continue to make steady progress on phase one of TIPA's previously announced nationwide expansion plan. We received recently the necessary approval from the Florida regulators, and in October we applied to the state insurance regulators in all 20 states to get approvals to write homeowners insurance in those states. We are working with the regulators in each state individually, and we are pleased to announce that we've already received our first certificate of authority from the great state of Montana. We look forward to keeping you informed of our progress in the coming months. As you may recall, in early 2019, we communicated our goal of growing TIP TAP to $50 million of premium enforced by the end of 2019. And we achieved that. Then we announced our goal for 2020 was to grow TIPTAP to $100 million of enforced premiums. And we are well on the track to achieve that goal as well. So our growth goal for 2021 is for TIPTAP to double yet again and surpass $200 million of premium enforced by the year end of 2021. Note that this is a goal, not a guidance or a prediction, but we believe based on the current trajectory and our expansion plans, this goal is very achievable. And ultimately, our goal over the next decade is to grow TipTap into a $5 billion premium-enforced company. TipTap is growing rapidly and organically, but not by taking every policy that comes along. It is growing by applying analytics and technology-based underwriting tools to select profitable policies and to mitigate risk. And as I mentioned, we continue to explore, as I mentioned in our last call, We continue to explore opportunities to maximize the value of TipTap. And with that, we're ready to open the call to your questions. Operator, please provide the instructions.

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. And if you're using a speakerphone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, it is star one to ask a question. And our first question comes from Matt Carletti with JMP Securities. Please go ahead.

Hey, thanks. Good afternoon. I've got a couple questions. You know, the first one is, you know, thank you for, you know, giving some of your updated views on TipTap and kind of where things are and where you expect it to go. I was hoping that you might be able to give kind of a very brief update on whatever's going on in some of your other divisions, you know, Greenleaf, CloudAwe, Exeo, Even the broader environment within homeowner's choice would be great. You know, I know that TipTap is the focus and should be what we're excited about, but I suspect there's good things going on elsewhere as well.

Absolutely, Pat. And unfortunately, it may be something slightly less than brief, but I'll go through the division individually. That's all right. Sure. So let's start with Greenleaf, our real estate operation. In selling the headquarters property, Greenleaf has gone the full cycle of buying properties at the right price, managing them well when they're on our portfolio, and then exiting the property at the right price as well. And that discipline is what really makes a real estate operation. And as we look at where Greenleaf sits today because of the general economic environment, Greenleaf is unaffected by all the trials and tribulations of COVID-19 because of the kinds of properties that we own. And we continue on, but that isn't true of the economy as a whole and real estate as a whole. So I think in the coming year, Greenleaf is going to have a tremendous opportunity in front of it to add to the portfolio additional properties, which we will be picking up at the right price because of the economic malaise that is going on currently. So that's Greenleaf, has a great opportunity in front of it. There's PLATA, our reinsurance operations. As we stated in previous calls, PLATA retains some of the risk from two insurance companies, namely Homeowner's Choice and TipTap. And as we now come into the end of hurricane season, it's an interesting position. Because unlike most reinsurers, PLATA so far has had pretty much a loss-free year. And therefore, it will draw very nice profits for 2020, and we should give it lots of dry powder to do reinsurance in 2021 from retained earnings, which is great. And because of who the clients are and how well this has worked out, it should help Homeowner's Choice and TipTap hold down any reinsurance increases in the 2021 wind season. So, CLADA is very well positioned. Next, let's talk about Homeowner's Choice. This is our oldest division and the original one that started the company with. And it's grown to be about $341 million premium in force as of the end of the third quarter. Now, one of the interesting things that's happened with homeowner's choices continues to operate well. It has plenty of surplus, as Mark said. Things are healthy. But what's happened is because of all the activity this year, Most of the rest of the Florida insurance industry is in severe crisis. And what's likely to lead to, that everybody will tell you, is citizens will grow again in the coming months. Well, guess what that's going to lead to a year from now? Takeouts will be back. And there is no company who can do takeouts from citizens better than homeowners choice. So not only does it have that lying in front of it, The other thing is because of what's gone on, there are no other competitors who would want to do the same thing anymore. So Homeowner's Choice suddenly finds itself coming into the sweet spot of what's made its brand over the years, and it's doing that without any serious competition out there, which is a phenomenal position to be in. And one other thing about Homeowner's Choice, I will tell you, is it did get hit by Hurricane Sally. But if you saw how well the claims in Hurricane Sally, about 1,600 of them, were handled, you will be very impressed. And it was done because of two things. One was the operational capabilities of the homeless choice group and the team. But secondly, it was supported by fantastic technology. Where did that technology come from? It came from our technology division, Exeo. And Exeo really supports two companies. Homeowner's Choice and TipTap. And both companies rely exclusively on Exeo technology and it's worked out very well for them. So you suddenly look at Exeo and go, wow, this software is really coming to scale. And that finally then brings us to TipTap. And TipTap is just about five years old at this point, a little bit under that, four and a half years. And it's grown from nothing. to $100 million in premium in force. And it's done this, you know, despite there being five very active hurricane seasons, various other issues in the industry, and it's done this very well. But suddenly, it now sits here, and it operates in the Florida space, which is about a $10 billion total available market, or TAM. And again, it's writing, and its only real serious competitor at this point is Citizens. So it finds itself in a very strong position that it could just continue doing business in Florida and very quickly grow to be about the same size as Homeowner's Choice is currently, about 300 million in premium. That opportunity is sitting right there in front of it. But we didn't stop at that. In addition to that, we've applied for these licenses in these 20 states. And just to put this into perspective, what those 20 states represent, They represent another $35 billion of TAM insurance space that TipTap could compete in. And we are doing that in addition to the Florida opportunity for TipTap. So in summary to your question, if I was to make it very brief, I would tell you Greenleaf is well positioned. The market in front of it is fantastic. CLADA has done very well in a very tough reinsurance market. Homeowner's Choice is coming back into the sweet spot that it's known for. Exios technology is being shown, showcased all over the place as how great it is. And TipTap has a $10 billion opportunity with no competitors in front of it, and an additional $35 billion opportunity or TAM that it's going to compete in to get time for future growth, right? We have a very different view of 2021 than most companies. Hopefully that answers your question.

It does. No, that's great, and I appreciate the detail. My other question relates to kind of that last part, going back to TIPTAP and that $35 billion opportunity in the initial 20 states and ultimately nationwide. This quarter is really highlighted for a number of your projects. you know, the others in the market of Florida that have embarked on diversification into other states, you know, it's caused them a lot of pain this quarter. And so I wanted to ask you just how you guys plan to go about it, how you might do it differently or how you think about it differently in terms of, you know, managing those changing exposures and how, you know, deductibles and reinsurance programs and stuff might impact the book differently as you go from being a single state, you know, expert in Florida in pushing into some of the rest of the country?

Thanks, Matt. Look, great question. And in the way of background, when most of the other Florida carriers decided several years ago to expand outside Florida and diversify away from Florida, we avoided getting on that train. And we fundamentally didn't get on that train because we couldn't see if that expansion was actually going to be profitable. And I think some of the results have sort of borne that out. So why are we doing this now with TPSAP? Well, technology. Given how the software and the technology works, we think we can do it correctly. And secondly, the other big item in this is we're not doing this because we are running away from Florida or we're saying, Florida's terrible, so let's try these other places. We are going to go into those 20 states because we think we can compete effectively in each and every one of those states. And, oh, by the way, the business model is different because we are not relying on Florida reinsurance to cover the losses in those states. They will stand on their own, which is a major departure from what most of the industry has started to do.

Thank you very much for the answers and best of luck.

Thank you.

And as a reminder, ladies and gentlemen, if you would like to ask a question, please press star then one on your telephone keypad. And we'll move next to Mark Hughes with Truist. Please go ahead.

Yeah, thank you. Good afternoon.

Good afternoon, Mark. Mark.

Hello, Parrish. Mark, you were going through the components of the loss expense increase to $24 million. I didn't pick up the last one. I think you had mentioned the tip-tap. What was the impact there?

So I talked about the growth. I didn't specifically talk about tip-tap there. So it was just the $24 million. Yeah, it was just... Premium growth of about $9 million and then about $15 million of net exposure from Sally.

So the $9 million was a component of the TIP TAP?

Yeah, yeah, yeah. So we've got, I mean, you know, as I mentioned in my prepared remarks, you've got premium growth in TIP TAP as well as premium growth in Homeowner's Choice. But a big chunk of that $9 million, about $7 million of that, $7, $7.5 million of that is the growth in TIP TAP.

When you think about the loss profile for Homeowner's Choice versus TipTap, say for 2021, are they going to be similar? Is TipTap going to be better? Is this new business you're thinking of at TipTap, is it more attractive than your existing book?

Yeah, it's, I mean, you know, I think similar in terms of, in terms of, in terms of.

Mark, let me answer it in a slightly different context, right? It is similar. The HO3 business is similar to the HO3 business that Homeowners' Choice has. But the reason why things work out differently is the mixture of all the different product lines that you have. Tip-tap numbers are affected by the fact that we have a flood book, which has a very low loss ratio, non-cat loss ratio. That moves it around. Homeowners' choices numbers are affected by the DP3 book we have, the HO4, HO6 book we have, and as well as the wind-only book that's there, right? So on a blended number, as the number Mark gives you, it appears to be one thing, but it's really coming through due to the mixtures of the business. Does that make the answer clear as mud?

It's complicated. It's complicated. Yeah. Yeah, that is helpful. When you think about the takeout opportunity, you say, I think you said next year, is that, I assume you do that after win season, so literally is it kind of next year, late 2021 that that comes to fruition?

Yes, that would be the rational, logical way of doing it, yeah? And by the way, it's to the point about forward-looking statements and whatever. This is me talking about what happens if citizens grow. Citizens currently sitting around 500,000 policies, but it could grow to like a number by this time next year. That's when we will be exercising the opportunity, yeah?

Yeah. You used, I think you were describing the only competitors in the market or main competitors would be HCI slash TIPTAP. and citizens, is it that bad? I wonder if you could just comment a little bit more on the competitive environment and who's kind of shut down, not even in the business for new customers.

Yeah, so let me answer it in the following manner. I think most of the industries, either shut down as you put it, has some financial distress. So you've got those kinds of things going on. But beyond that, the ones that won't fall into those categories, they are repositioning their book, their business, meeting rate increases, various other housekeeping items that they need and they want to put into place before they even remotely think about growth. So everybody's very generally distracted, right? That was the bigger point we were making. We weren't casting aspersions to any particular company or the industry as a whole, but generally speaking, what we sense is most of our competitors are very, are occupied with other priorities at the moment.

And then is there a way to characterize, you know, kind of the pockets that you are seeing as most attractive or tip-tap, I guess, for it? You don't want to give up the secret sauce, so to speak, but I'm just curious if there's any general profile of what looks particularly good to you at this point.

Yeah, look, I think this is, again, goes back to the things we can now do, which are just amazing, because we are no longer making decisions based on, oh, we think Orlando is a good place to write or, you know, Jacksonville is a good place to write or whatever, right? Our systems now can decide on an individual rooftop, an individual house, as to whether it makes sense for us or not. So we have become a lot more agnostic in terms of geographical area. Having said all of that, TPSA's general area of growth is south of I-4.

And for the less educated on Florida geography, that's... Oh, sorry.

If you draw a line between Tampa and Daytona Beach on the east coast, or you could say Orlando south kind of thing, that would get you the same sort of area.

Yeah, exactly. Okay. Yeah, understood. Thank you very much.

Welcome.

And as a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. At this time, I'm showing no further questions from our audience. I would now like to turn the call back over to Rachel Swanfinger, who has a few closing remarks.

On behalf of the entire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. We look forward to updating you on our progress in the near future.

Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.