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spk00: Good afternoon and welcome to HCI Group's third quarter 2022 earnings call. My name is Paul 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 December 8, 2022, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 8, 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.
spk06: Thank you, Paul, and good afternoon. Welcome to HCI Group's third quarter 2022 earnings call. On today's call is Karen Coleman, HCI's Chief Operating Officer, Mark Harmsworth, HCI's Chief Financial Officer, and Parish Patel, HCI's Chairman and Chief Executive Officer. Following Karen's operational update, Mark will review our financial performance for the third quarter of 2022, and then Parish will provide a strategic update. 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 this 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 Karen Coleman, Chief Operating Officer. Karen?
spk01: Thank you, Matt, and welcome, everyone. Before we discuss the quarter, I would like to express our sincere sympathy for all who have been impacted by Hurricane Ian, the Category 4 hurricane that hit Florida just six weeks ago. Every day as we work with our customers, we're reminded of the thousands who have been affected and the time it will take to fully recover. Serving our policyholders remains our top priority. It is why we're here. Having navigated 15 storm seasons and several major hurricanes, HCI was prepared when Ian made landfall on September 28th. Our dedicated customer service teams answered calls, providing a human voice to our policyholders while keeping wait times to a minimum. After just 14 days, we had received over 10,000 claims across Homeowner's Choice and CHIP TAP. We thank all of our associates for their hard work and dedication to our policyholders. Immediately after Ian made landfall, our proprietary technology showcased its ability within the claims handling process. Our systems are specifically designed to drive efficiency in claims processes through resource allocation, management oversight, and report automation. We have real-time information at our fingertips. This unique transparency is invaluable and is a proven differentiator in claims handling. On October 10th, We shared our preliminary views of Hurricane Ian in a presentation posted to our webpage. To date, we received just over 12,000 claims in line with our initial estimates and consistent with a loss that is comfortably within our reinsurance powers. Now, moving on to our third quarter financial results, the pre-tax impact of Hurricane Ian was $78 million for the quarter, resulting in a loss of $51 million for the company. If not for Ian, we would have reported a profit for the quarter. Gross premiums earned grew more than 20% over last year, while our loss ratio, excluding Ian, improved more than six points, sequentially, to 41%. This improvement in our loss ratio reflects both the decline in daily claims frequency and rate actions at both of our carriers. Mark will provide more detail on these numbers. Investment income was another bright spot in the quarter, highlighting the power of our diversified business model and the potential to generate additional income from our balance sheet. In the third quarter, net investment income increased $16 million over last year, including a $13 million gain from the sale of 1.5 acres of land in our Greenleaf subsidiary. Excluding this gain, income from our investment portfolio doubled over last year as we put cash to work in short-duration debt instruments. With rates increasing and plenty of liquidity on hand, we look forward to generating more income from our sizable investment portfolios. Finally, we remain committed to returning capital to shareholders. During the quarter, we continued to execute our share buyback and paid our 48th consecutive dividend at 40 cents per share. And in October, we declared a similar dividend to be paid in the fourth quarter. And now I'll turn it over to Mark to provide more detail on our financial results. Mark?
spk03: Thanks, Karen. Hurricane Ian was obviously an event that had a significant impact on our results for the quarter. I'll discuss that impact as well as some positive trends in the business that are a little harder to see because of Ian. Last month on our website, we presented the net impact of Ian, and those numbers have not changed. The total expense related to Ian this quarter, $77.6 million, $65 million of higher loss expense, and $12 million of higher reinsurance expense as we reversed some accrued benefits under our multi-year reinsurance agreement. I also wanted to explain the gross loss estimates. As you know, we have a few different reinsurance towers and I'll explain the impact by reinsurance tower. For Homeowners Choice, the growth loss estimate is $550 million and the reinsurance tower limit is $936 million. For TipTap, the growth loss estimate for Florida Wind is $370 million and the reinsurance tower limit is $610 million. For TipTap Flood, the growth loss estimate is $40 million and the reinsurance tower limit is $61 million. And lastly, for the non-Florida tower, the expected growth loss is $10 million against the reinsurance limit of $525 million. These are, of course, estimates, and while things are progressing as expected, it's still early and these numbers could change. However, we have significant additional capacity in our reinsurance towers should claims start to develop outside of these expectations. So let's turn to the rest of the quarter. On a pre-tax basis, we lost $63.6 million in the third quarter. The loss from Ian was $77.6 million. So before Ian, we made just over $14 million pre-tax, which is obviously a strong quarter. There are two positive trends that I wanted to point out. Loss ratios are coming down, and investment income is going up. Let's talk about the loss ratio first. If you remove the impact of Ian, the loss ratio this quarter is 41.4%. This is more than six points lower than the second quarter this year and lower than the third quarter last year. There are three main things that drive the loss ratio, frequency, severity, and average premium for policy. Claims frequency is down for both homeowner's choice and TIP TAP. It is significantly lower than the second quarter this year and lower than the third quarter last year. The other thing that's happening is average premium per policy is increasing, while increases in average claim severity has started to moderate. In other words, average premium per policy is going up faster than average severity. The combination of all these factors is resulting in lower loss ratios for both homeowner's choice and TPSAP. Our last call, I said we expected the loss ratio to start coming down, and it has come down faster than expected. Looking ahead, we are hopeful the legislative changes already passed will provide a further tailwind for continued lower loss ratios. The second trend I mentioned is that investment income is going up. Investment income this quarter was just over $18 million. $13 million came from the sale of a small land parcel, as previously announced, and when that's taken out, investment income of about $5 million is double what it was in the same quarter last year, and it will continue to increase. We are starting to see the impact of higher interest rates and in a very beneficial way. Our strategy has been to remain disciplined with a preference for cash and short-term assets. With returns now improving, we are putting more money to work and this is beginning to have a meaningful impact on our results. I wanted to touch on holding company liquidity. At the end of September, we had just over $150 million of cash and financial assets at the holding company level and well over $100 million of unleathered real estate. Before the end of the year, we may downstream some capital into our two insurance companies, but we have more than enough capital available to do that. This is one of the advantages of having a strong holding company with a solid liquidity position. Just another couple of things quickly. To the end of September, we've bought back 149,000 shares under our buyback program, and when combined with those bought back as part of the convertible issue, we have bought back a total of 1,186,000 shares so far in 2022. As of September 30th, the number of shares outstanding was 8,926,000, which is 12% lower than at the start of the year. In conclusion, while the end was obviously a significant event, We are prepared for these events with a well-structured reinsurance program and a solid balance sheet. Looking ahead, the fundamentals are starting to improve, and we look forward to playing an important role in the evolving Florida homeowners market. And with that, I'll hand it over to Mark.
spk02: Thanks, Mark. Let me start by offering my deepest sympathies to those who have been impacted by Hurricane. We are here to help our policyholders move forward and rebuild their lives. And while on a daily basis the entire company is currently working to take care of our policyholders, this is an earnings call and everyone is expecting a business outlook, which is why the following commentaries focus on the business aspects of the company and the future outlook. So let us begin. Clearly, Ian has been a devastating event that has caused a massive disruption to the Florida market. However, history suggests that with great disruption comes great opportunity as well. And Ian has firmly established the value of our main business, which is insurance, not only to our policyholders, but to others as well, including the Florida legislature. As Ian approached, no one thought they had too much insurance. Everyone appreciated the coverage they had, and some wished they had even bought more. Going forward, the demand for insurance will only increase. No one is considering going without insurance in the next hurricane season. The Florida legislature must solve for the availability of homeowners insurance next year, and they will have a special session next month to do just that. And under any range of outcomes from that session, we are poised to benefit. Why is that? Because we know what it takes to succeed in Florida. There are four imperatives, capital, technology, and reinsurance. And then in addition, you need a seasoned management team that can deliver the results. In the past, people have under appreciated everything with the need for capital. We have always talked about need to be good at all four. and HCI Group is uniquely positioned in all four areas. But let's go through them in detail. First, there is a shortage of surplus capital in Florida. But we raised capital earlier this year and have significant liquidity at the holding company level. Second, we have invested in cutting-edge technology for over a decade now, and our systems are proven at this point both within Florida as well as outside Florida. This is neither cheap nor quick to be able to replicate it. Our technology not only provides efficiency, but has been proven to drive superior underwriting results. And third, there is a concern regarding reinsurance in the industry. But let's be clear. The debate is about reinsurance capacity shrinking and repricing, not about the total lack of reinsurance. Homeowner's Choice has already secured about three quarters of its Florida reinsurance needs for next year, and TipTap is not that far behind. The balance of reinsurance needs to be secured, but there will be a flight to quality, and we should be the beneficiary. Simply put, we expect there to be enough reinsurance available for our needs in 2023. Finally, We have an experienced management team that has navigated successfully in Florida for 15 years. We are up for the upcoming challenges in 2023. In summary, we expect IAN to be a watershed event for the Florida market. Next year, we expect policyholders, capital providers, and reinsurers will gravitate towards high performance. We think We are the company to thrive in that environment. With that, we will open for questions. Operator, please provide the instructions.
spk00: Thank you, sir. 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. Once again, please press star 1 if you have a question at this time. And please hold while we poll for questions. And the first question is coming from Matt Carletti from JMP. Matt, your line is live. Please proceed.
spk05: Thanks. Good afternoon.
spk00: Hey, Matt.
spk05: Parrish, I was hoping I could actually just kind of follow on from those last points you made and last quarter. provide us with an update in terms of plans to establish a new subsidiary company with a pretty sizable opportunity in terms of, you know, potentially a few hundred million dollars worth of business, you know, put on the books fairly quickly. Kind of fast-forwarding a few months, you know, now post-E-In, can you update us on kind of your thought process there in terms of if you still see the same opportunity, a better opportunity, a worse opportunity, and if your timeline and your thinking about that has changed at all?
spk02: Sure, Matt. So in terms of the timeline, we are, you know, through all of this, we have been making progress towards setting up those subsidiaries. So that continues as previously stated, and we expect them to be hopefully up and operating sometime next year. As far as the opportunity goes in Florida, I think, as I said in my prepared remarks, Ian has really crystallized the value of the product that we sell, insurance. The demand for it is going to be greater than ever, and it's just a question of making sure you have a mechanism whereby you can provide insurance to people who will be our customers in a healthy, profitable manner, which is what we're working at every day.
spk05: Okay, great. And then you made some comments there about your reinsurance and having Homeowner's Choice secured about three-quarters of its needs already and TipTap not far behind. Is there any other color you can provide, even high level? And I'm thinking along the lines of magnitude of change in pricing or if it requires significant changes to retentions or if you just haven't crossed the bridge on those items yet in terms of having to make a decision.
spk02: Yeah, Matt, the simple answer to that is I don't know the extent of the repricing or any of those aspects or how much the supply will shrink. But what I do know is it isn't going to zero. And there will be a flight to quality. And we are the folks that people think of first when they think about who do they want to place reinsurance with. So those are the nature of the comments. I was just providing perspective that all the
spk05: debate that's going on in industry about reinsurance is about a reduction in supply not a elimination of reinsurance so right yeah okay great and then mark if I could just you know follow up from some of your comments you talked about kind of the underlying you know attritional loss ratio obviously we've seen kind of the improvement come faster than planned can you talk a little bit about, you know, expectations moving forward? Are you seeing kind of continued improvements in some of the items that you talked about that we should, you know, expect, you know, continued improvement or have we just kind of gotten to the finish line quicker and, and kind of, you know, we should accept, expect, expect more stabilization maybe.
spk03: Um, yeah, good, good question. Um, you know, obviously anything that I say is, is, you know, about trends is, is going to be weather dependent, but, um, You know, we do expect continued improvement. You know, as I mentioned in my prepared remarks, you know, the trends are moving in the right direction. Frequency is coming down. You know, arguably more important, average premium for policy is going up faster than the severity is going up. So, you know, the example in Q3, the average premium for policy was about 17% higher than the third quarter of last year. an average severity was up about 8%. So there's a, you know, there's a good gap there. And I think that gap may well widen because some of the, you know, some of the premium increases are just starting to kick in. So if you, if you look, for example, this is, this is just homeowner's choice, um, in Florida, but in the third quarter we wrote nine or 10% more in gross written premium with 13% fewer policies. And obviously claims don't come from premium. They come from policies, right? So I think that gap may likely widen. So to come back to where I started, I think it's going to continue to improve. I think on the last call I said we expected it to come down a couple of points per quarter because of the impact of those things. Obviously it came down faster in Q3 than we had expected, but I think we'll still see that drop of a couple of points from the third quarter to the fourth quarter, weather dependent, of course. But the general expectation is that the trends are moving in the right direction, and we expect it to keep doing that.
spk05: Great. Very helpful. Thank you both for the color.
spk00: Thank you. Thank you. Once again, ladies and gentlemen, if you have a question, you can enter the Q&A queue by pressing star 1 on your phone at any time. Once again, that's star1.com. to enter the queue at any time to ask a question. And the next question is coming from Mark Hughes from Truist. Mark, your line of life, you may proceed.
spk04: Yeah, thank you, good afternoon. Mark, the formulation you just gave us, severity up 8%, what did you say for pricing?
spk03: So that number was on a consolidated basis, and it was a Florida number. So average premium per policy as of the end of the third quarter is up about 17% from Q3 last year to Q3 this year. And then severity up 8%? Yeah, 8, 8.5, something like that.
spk04: Okay. Paris, you mentioned three quarters of the tower is already in place. Does that represent the... premium or is that just dollars of coverage?
spk02: Mark, it's mostly the limit. If you just measure it in terms of how much limit we're buying. In terms of dollars, I think for... I'll go through a homeowner's choice because that's the one I mentioned. We have a multi-year cover down low. Then we have the CAT Fund, which will be available to us next year, and we deferred the WRAP layer for those, you know, the reinsurance policyholder that was passed in the special session on May 24th. So all of those pieces will be there for us in the upcoming year. So it really fills out most of the needs for homeowner's choice very quickly between just those three pieces. So again, the general tenor of my commentary and also actually some of the numbers Mark was talking about, is we're not disputing that Ian was a watershed event and Florida has annual insurance, there will be challenges for the industry as a whole. We were just trying to distinguish that for us in the specific, the future is much brighter than the general commentary that's going on in industry. We wanted to make sure we said this thing in this call because Apart from earnings calls, we don't really get many opportunities to make public statements. And I thought this was a moment to let everybody know that things that are said in the generalities do not necessarily apply to us in the specific, yeah?
spk04: Understood. How much capital do you think will be downstreaming? And could you kind of give us an update on any appropriate capital ratios at the subs? You know, once you do that, kind of leverage limits?
spk02: Yeah, let me answer that and to say no comment. And the reason for that is I think with the special session upcoming and whatever legislative items they pass, you know, it will definitely color what we do thereafter for year end. I think as Mark alluded to, we already have the money, but how we allocate and what we do with it is going to be very dependent on what is done in the special session.
spk04: When you mentioned the 150 of the hold code and then 100 million of unlevered real estate, that's separate from the 150, correct?
spk03: Yeah, yeah, yeah. And yeah, so that 150 is, you know, most of that is cash or near cash. That's at the holding company level. You know, the real estate stuff is outside of, the insurance companies, but that's in addition to it. And also, I'm not counting the credit facility in that either.
spk04: What about the development? You had a little, I think, adverse last quarter. How are you seeing that lately?
spk03: Yeah, I mean, there's some in Q3 as well. You know, I would say the same thing that I said in the last, for Q2, there's a couple of specific things. You know, Ed is one of them. A couple of accident quarters for TipTap back in 2020 that we're just working through. So it's there, you know, similar to Q2. So, yeah, there's still some of that that's there. But, you know, that's included in that loss ratio, right? And, you know, the other thing, too, I've said this before, and it's still true, we're expensing more than we're paying out, right? If you... take cats out because those kind of, with the timing of reinsurance payments and that kind of thing, it can distort things a bit. But if you just look at sort of regular non-cat reserves, we're, I think, about $29 million higher in reserves at the end of September than we were at the end of December. So, you know, those loss ratios that you see while they're improving, you know, we're still dealing with some adverse and, you know, we're still in a situation where we're expensing more than we're paying. So we're still building reserves.
spk04: Yeah. Yeah. What's your, uh, how are you looking at growth here? Kind of in the fourth quarter as we speak, um, are you, uh, kind of biding your time until the legislature act? Do you think this is a good time to be growing?
spk02: Uh, Mark, let me take that one. I think, uh, given Ian, um, we sort of paused right into business, and given what's laid out for the balance of this year, it makes sense to pause until you know what the legislature does, yeah? Yeah, makes sense.
spk04: Okay, I think that was it for me. Thank you very much.
spk00: Thank you. At this time, this concludes our question and answer session. I would now like to turn the call back over to Paresh Patel, who has a few closing remarks.
spk02: 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 comments. There is an increasing demand for our product and a realization of the importance of a healthy insurance market. We have all the pieces in place to benefit from a tremendous opportunity in front of us, and we have the right management team to execute on this opportunity. We look forward to providing an update on our progress in our next earnings call. Thank you. Have a great evening.
spk00: Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect at this time. Thank you for your participation.
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