HCI Group, Inc.

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 Karen Coleman, HCI Group's Chief Operating Officer, Mark Harmsworth, HCI's Chief Financial Officer, and Parish Patel, HCI's Chairman and Chief Executive Officer. Following Karen's opening remarks, Mark will review our financial performance for the first quarter of 2022, and then Parish 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'd like to turn the call over to Karen Coleman, Chief Operating Officer. Karen?

Thank you, Matt, and good morning, everyone. The first three months of 2022 marked another quarter of growth and profitability for HTI 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 subsidiaries. At Homeowners Choice, gross premiums written increased 12% over the first quarter of 2021 to $91 million. At TipTap, gross premiums written nearly doubled to just over $86 million. Our growing premium base produced a stable loss ratio around 40% similar to fourth quarter, highlighting steady operating performance across our insurance business. Our two renewal rights transactions with United Property and Casualty, one involving business in four northeast states and a second in three states in the southeast, continue to migrate into the HCI platform during the quarter. The northeast book 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're 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 equivalent. Since that time, interest rates have increased dramatically, improving returns on fixed income investments and other assets. We've 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're 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 a $20 million share repurchase program. Also during the quarter, we paid our 46th consecutive dividend to shareholders at 40 cents per share. One final note on legislative matters. Insurance markets in Florida remain fluid. While the Florida legislature adjourned in March without passing major reform, were encouraged by the governor's decision to call a special session in May and look forward to legislative proposals aimed at stabilizing the market for homeowners insurance in Florida. Now, I'll turn it over to Mark to provide more detail on our financial report. Mark?

Thanks, Karen. Adjusted earnings per share were $0.34 for the first quarter compared to $0.77 in the same quarter last year. On a gap 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 explain 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 factors out the unrealized investment losses, was $5.5 million compared to $7 million in the same quarter last year, a drop of just $1.5 million despite this being a more active quarter for weather, as I'll explain in a minute when I talk about the loss expense. This was another quarter of strong growth. Growth premiums earned were up 37% from $131 million in the first quarter of last year to 179 million in the first quarter this year. About half of the growth came from Florida and the other half from our national expansion. Florida growth premiums earned grew by 24.5 million from 110.3 million to 134.8 million. Growth premiums earned in the expansion states more than doubled from 20.5 million to 44 million. As Karen mentioned, gross premiums earned in TipTap's Florida homeowner's 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 three 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 notice in the balance sheet is that fixed maturity securities are up a little over $100 million since the end of the year. This relates to the Treasury purchases that Karen just mentioned. The average term to maturity for our fixed-term portfolio is now about two and a half years, and we have over $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. As for tip-taps, Cash flow from operations was $43 million, well up from $27 million in the same quarter last year. I've talked 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. Starting this quarter, we'll show that separately in the segmented information section of the queue 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, so we want to make sure that that number is shown clearly. In terms of liquidity, we have just over $130 million of cash investments outside of the two insurance companies and access to our $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 Karen mentioned, we announced a $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 31st, down just 26 cents 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'll hand it over to Parish.

Thanks, Mark. Karen 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, Governor DeSantis called a special session in Florida which is scheduled for the end of May. There is a growing awareness of the issues facing the Florida property market and we applaud the decision to take a deeper review of the situation. In recent weeks, we've also held meetings with reinsurers and the overall feedback has been very positive. Plenty of reinsurance capacity is available for HCI and we've received continue interest from reinsurance 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 reinsurance placement. But speaking of reinsurance, there is also a great reinsurance opportunity for HCI. Our reinsurance captive, Clara, offers us the ability to participate on certain portions of the HCI's reinsurance program. And as history has shown, Claddagh has earned a significant profit from his participation on HCI's insurance program. Switching topics, in this inflationary environment with a really hot real estate market in Florida, the true value of Greenleaf, our real estate division, is coming into focus. In recent weeks, we have turned down offers on certain of our properties at a valuation that is three times the number that is on our books. And to give an idea as to how valuable Greenleaf 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'll turn my comments back to insurance and technology operations. Homeowner's 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 it creates for the future. Next, I'm going to talk about Exio, which is our technology subsidiary and built the underwriting technology used by both of our insurance subsidiaries. The Exio underwriting technology, which has long been proven in Florida, is now being validated as we expand on a national basis. And the company that uses this technology the most is TipTap. TipTap is using Xero technology on its nationwide expansion. We have gone from operating in one state at the end of 2020 to currently operating in 12 states and we plan to increase our footprint this year and into the future. And TipTap is now starting 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 objectives 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 has arisen since the beginning of the year. As Karen 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.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Matt Carletti. Please announce your affiliation, then pose your question.

Hey, 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's 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, you know, at least in my mind, I think of it as Florida and non-Florida as kind of two separate, you know, answers maybe.

Sure, Matt. It's going to be a slightly involved answer. We sort of tend to grow in the first quarter, and we tend to stay flat over the next two quarters, and then we 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 – we are sort of going through the transition as the UPC book comes on board. And the biggest delta that's going to occur between now and the end of the year is the Southeast book, we have a 85% quota share on currently. And on June 1, it'll 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 comment shifting to Greenleaf about, you know, kind of just commentary on market values and what's happened with Florida real estate prices. In particular, you commented on, I don't know if it was a property or more than one property, that, you know, 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're owning that particular property with a view towards income over time, not necessarily capital gain? Just curious how you view that.

Yeah, 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 for a very credible party and this is what they're 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, 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 no, because we didn't want to lose that much money on the table. But on the other side of that is, Because we've 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 realized that we were just talking about old appraisals and those kinds of things, we thought it was best to quantify what would happen if we did dispose of the entire portfolio to give us an idea as to how much we're carrying it on the books for, yeah? Yeah. Julian, I'll let Mark make a financial comment.

No, I just think, Matt, it's a good question. Rather than focusing on that one property, it's a good question. But I think 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 then the last one, if I could, I just wanted to touch on, you know, the upcoming special legislative session and not in any way asking you to predict the outcome. But just, you know, I guess twofold. One is just your general thoughts on, you know, I think one of the things that's being proposed is maybe having the FHCF, you know, 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, you know, I think it's May 23rd or something like that, the special session, you know, and obviously reinsurance renewal coming up, kind of how just process-wise you guys are handling that with a lot of uncertainty, you know, just weeks away from your reinsurance renewal.

So, Matt, the way we're handling it, well, first of all, the CAAT Fund adjustments, et cetera, right? That is obviously one of the items that's being discussed. The problem, obviously, is you don't know whether that's what will happen or you'll do something else or whatever. So you could do a lot of what-if scenarios, and that's why, while we're encouraged, we have not made any conclusions as to what's going to happen. In terms of the placement, 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 you would 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 could move by quite a bit. So rather than speculate on it, we're just conditioning everybody to if you like, planning on a mad scramble towards the later part of May, yeah?

Thank you for the caller, and congrats on a nice start to the year. Thank you.

Your next question for today is coming from Mark Hughes. Please announce your affiliation, then pose your question.

Yeah, 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? You know, if you've got quarterly net investment income here of $3 million and you put a little more of that $60 per share to work, you know, a year from now, what's that investment income look like?

Yeah, good question. So, I mean, we're... We're in a good position, right, because we've got a pretty significant amount of cash, and we're 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 income if you look at where investment income is sitting at now. um, you know, we'll, we'll make prudent decisions about how to invest that and, um, and how to ladder that. Um, but, you know, just as an example, that's sort of how I think of it is, is what it would look like if we invested half of it. It's a, even, even just half of it is a very meaningful bump in investment income. Yeah.

Yeah. Parrish, uh, how much capacity, uh, would you look maybe to put to work, uh, in CLADA if, uh,

there is opportunity what you know what's the potential for both the capital and then the returns there so mark given where we think that we will definitely putting some money to work in Kata the only debate that we're having is how much and some of that is also going to depend on the special sessions and the insurance and everything else so we you know If the answer seems a little bit vague is because we've always been, you know, it's what we are, we wait for the opportunity to come in front of us. And when it does, we pounce on it. But the opportunities and there, we don't, we don't push a bad position, right. And if I could digress in that comment, you've seen this with us in every fashion, right? We bought real estate and held on to it for all these years. and suddenly 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 pile of $600 million of cash, which is what we've been doing over the last two years, while interest rates have been nothing, has been an exercise in discipline that someday the opportunity will come, just guard the cash. And here we are, suddenly in one quarter, that opportunity has blossomed in front of us. And CLADA is a very similar kind of thing. So as we go through the month of May, depending on what happens in reinsurance markets, CLADA will have great opportunities, but it will only exercise those opportunities as they become prudently obvious, yeah?

Yeah, yeah, okay. At TipTap, I think you've spoken previously about a goal of a billion in premium by 2020. 2025, that's still a good number. And you mentioned TipTap showing signs of profitability. I wonder if you could expect to be profitable for the full year, maybe hit 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 billion dollars for TipTap, yes, we're still on track for that. Again, ironically enough, if we wanted to, we could get there a lot, lot quicker. But there's an idea about pacing your growth so that your infrastructure and your company sort of stays alongside with that, yeah? So we're building this for the long term, so we are doing things in a measured way. As far as the profitability of TipTap goes, if you recall my comments last quarter, what would happen is first there'd be occasional months of profitability, then there will be occasional quarters, then there will be a year of profitability, and then there will be consistent profitability. Those are the four steps we will be going down eventually. Now, the quarterly profits, the occasional yearly profits, and consistent profitability is still in front of us. It's not been achieved yet. But that 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'll see in the queue, we didn't make that insurance group didn't make money in the quarter. But there was a month of profitability. And as we go along, I suspect we may have other quarters, what is an occasional month of profitability, but it may not translate into quarterly profitability just yet. But we are seeing that step by step progress towards that. Yeah. Understood. Yeah. And by the way, the reason it's slightly volatile is because we obviously are in the insurance business and weather is a part of it. And, you know, a storm here or there could take a profitable quarter and make it unprofitable. And it is the nature of the business, yeah?

Yeah. What about your potential to take advantage of the dislocation, other carriers having challenges, getting downgraded, either book rolls or your organic, you know, opening up the organic channel a little bit more? How do you see the environment right now?

It's a great time if you're only worried about top-line growth. It's a great time. You 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. And why we think in 10-year terms? Look at homeowner's choice. Most of their customers have been with homeowner's choice for well over six or seven years at this point and they stay with us consistently and it's a very good cash flow machine so if you're building for the long term you you are very deliberate as to when you take stuff on and we are sort of exercising that we're having to maintain our discipline to exercise patience so that we add business to the books at the right at the right time and at the end 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 dollar cash on the balance sheet until December even in December it was not really a an item, but we were aware it was building. And then suddenly in the first quarter an opportunity came along and here we are, yeah? So this is what gives us a lot of confidence as to where we're going, is that we now have a very solid track record of being disciplined operators, yeah?

Yeah. Then I'll ask one more if I might. when we think about the loss ratio, I think, uh, Mark, you pointed out reasonably steady here, um, and doing pretty well in spite of a little more weather, um, any kind of underlying trends that we ought to anticipate just as you kind of integrate the Northeast and the Southeast states here. Um, is there a likely trajectory or are we, uh, kind of waiting to see what happens with the special session, etc.?

Yeah, I mean, in terms of trends, I think a couple of data points. The last earnings call, I think I had said that Q4, our loss ratio was, I think, 40.3. And I said that with the new changes in business mix that we've been talking about for a year now, that that consolidated loss ratio, expect that to be sort of in the high 30s, maybe two, 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 was a tiny bit higher, 40.6. So, you know, it's pretty consistent with what we had expected given, you know, this level of business mix. And looking ahead, you know, what I had suggested, on the last earnings call, I think, you know, I'd say it's still the same. That's sort of our expectation and, you know, we've talked about all the individual, you know, components at various different times, but I think, you know, for modeling purposes, I think it's, you know, probably useful to just start thinking about a consolidated loss ratio at this level of mix and, you know, I think that, you know, 40-ish is probably about right, a little bit better if there's not weather around there, if there is. Does that help? It sure does.

Thank you for all the answers.

Thanks, Mark.

Once again, if there are any questions or comments, please press star 1 on your phone at this time. 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 unfolding in our future. These are not just words. We have great conviction and a track record of doing exactly that. Thank you. 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.