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spk01: Good afternoon, and welcome to HCI Group's fourth quarter 2022 earnings call. My name is John, 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 April 8, 2023, starting later today. Call is also being broadcast live via webcast and available via webcast replay until February 8, 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.
spk05: Thank you, John, and good afternoon, everyone. Welcome to HCI Group's fourth 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 fourth 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 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 Exchange Commission. Should any risks or uncertainties develop into actual results, these developments could have material adverse effects on the company's business, financial conditions, and results of operations. HCI Group disclaims all 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?
spk00: Thank you, Matt, and welcome, everyone. HCI Group reported net income of $2.6 million and diluted earnings per share of 18 cents for the fourth quarter, an improvement over last year and last quarter. Let me start with our insurance division. Results in our insurance subsidiaries benefited from three factors. First, prior rate actions. Second, a decline in our gross loss ratio to 39.4%. The 39.4 includes costs associated with Hurricane Nicole and Winter Storm Elliot. Third, investment income nearly tripled over Q4 last year as we put our balance sheet to work at yields over 4% while maintaining short duration and ample liquidity. As for Hurricane Ian, the claims received for Homeowners Choice and TIP TAP insurance totaled just over 13,000. We continue to support policyholders impacted by Hurricane Ian, leveraging our technology and resources to expedite the claims handling process. Mark will provide more detail in his remarks. On the legislative front, in December, the Florida legislature passed Senate Bill 2A, which squarely addresses the rising cost of litigation and social inflation in the Florida property insurance market. The provisions of this law, billed on Senate Bill 2D, passed in May, and represent substantial changes to the laws governing the litigation of property insurance claims in Florida. Provisions in this landmark bill include three main items. It eliminates one-way attorney fee provisions related to property claims, it abolishes assignment of benefits, and it reduces the filing deadline to one year for policyholders reporting a claim. Mark will detail the favorable impacts we're seeing in our business, We have heard some industry experts projecting a reduction to loss expense on the order of 25 to 40%. Obviously, the level of improvement will vary from company to company, but we expect to see a significant change in litigation costs when the changes take full effect. We commend Governor DeSantis and the Florida legislature for taking decisive action to stabilize the property insurance market in Florida. now moving to our real estate subsidiary green leaf capital we will disclose in our 10k that we are under contract to sell two of our retail shopping center investment properties for gross proceeds of more than 31 million dollars similar to the sale of cypress property in 2020 and the century park right-of-way in 2022 these transactions highlight our ability to capitalize on the strength in the florida real estate market We plan to provide more detail on these transactions on our next call. Finally, a word on capital. In a difficult year for the industry, HCI continued to return capital to our shareholders through dividends and share repurchases. During the quarter, we repurchased nearly 3% of outstanding shares at an average cost of $37 per share and paid our 49th consecutive quarterly dividend to shareholders at 40 cents per share. These actions underscore the strength of our balance sheet and the commitment we have to our shareholders. Now I'll turn it over to Mark who will provide more detail on our financial results.
spk04: Thanks, Karen. So as Karen mentioned, net income this quarter was $2.6 million or 18 cents per share. Net income includes a small revaluation gain of about $800,000 related to the UPC book and loss expense includes $7.5 million for the combined cost of Hurricane Nicole and Winter Storm Elliot. Even with these storm losses included, the fourth quarter consolidated loss ratio was 39.4%, which is the lowest of the year and a point lower than the fourth quarter last year. There are a number of reasons, a number of things helping to lead to a lower loss ratio. First, claim frequency has been declining. In the second half of 2022, claim frequency was 12% less than the second quarter, sorry, than the second half of 2021. Second, while the average premium per policy is going up, claim severity has started to level off. While severity climbs steadily from the first quarter of 2021 to the second quarter of 2022, it has not changed much since then. Third, litigation frequency has started to moderate. For the full year, litigation frequency was only down slightly, but in the fourth quarter of 2022, litigation frequency was 15% less than the fourth quarter of 2021. Looking ahead, we are confident that the downward trajectory of the consolidated loss ratio will continue. As Karen mentioned, the Florida legislature has passed legislation that should further reduce loss expenses as follows. First, because 15 to 20% of our total claims are AOB claims, we expect claims to drop by a similar percentage. Second, because the average severity of an AOB claim is higher than a non-AOB claim, we also expect claims severity to decline. Third, with the abolishment of the one-way legal fee statute and AOBs being unenforceable, we expect lawsuit frequency to drop by 30% or more. In terms of the overall impact on loss expense, we've seen models showing a 25 to 40% decrease in loss expense And while we are modeling at the lower end of that range, we expect this to have a material positive impact on loss expense. There are a couple of other trends in the business that I also wanted to point out. As you can see, investment income was about three times what it was in the fourth quarter last year. When interest rates were low, we kept most of our investable assets in cash so we could capitalize when interest rates increased, as they have. At the end of last year, we had $40 million in fixed income investments And at the end of this year, we had over $480 million invested, which combined with higher rates is driving higher investment income. Another positive trend is in policy acquisition expenses. Gross premiums earned were up 17% from the fourth quarter last year to the fourth quarter this year, yet policy acquisition expenses are slightly lower because of the mix of renewals versus new business, lower commissions, and lower costs related to the UPC business. Now I wanted to move over to a couple things in the balance sheet. As you know, Hurricane Ian landed in Florida right at the end of the third quarter. Since then, we've had time to evaluate the claim development, and we have adjusted the ultimate down by about 15%. This, of course, has no impact on the income statement, but it is important. We're getting more comfortable that the impact of this storm is significantly less than expected. In terms of non-CAT claims, I mentioned that the loss ratio was down, But we didn't get there by decreasing reserves. In fact, we have been increasing them. During the year, daily loss expense was about $40 million higher than losses paid, and reserves are 25% higher at the end of this year than they were at the start. This is significant because it means that loss ratios are going down even as we have increased loss reserves. Just a few other things. We're in a good surplus position with each of our underwriters with RBC ratios over 330% for both. In terms of holding company liquidity, we have just under $150 million of cash and financial investments at the holding company levels, and our $50 million credit facility with Fifth Third. Karen mentioned it, that we completed our share buyback program in the fourth quarter. The total dollar amount bought back under that program was $17 million for the year, and when combined with the shares bought back as part of our convert offering, the total number of shares bought back in the year was over 1.4 million, or about 14% of the shares outstanding at the start of the year. So in summary, average premium per policy is going up, loss ratios are coming down, profitability is improving, legislative changes should lead to further improvement, and if you owned a share of HCI stock at the beginning of the year, you own 16% more of the company than you did a year ago. And with that, I'll hand it over to Parrish.
spk03: Thank you, Mark. I want to begin with a reflection on our history and then discuss the future. We have a track record of being good allocators of capital and doing what we thought was best for shareholders, even if it seemed counter to industry views. For example, we patiently maintained our large cash position where interest rates were at record lows for several years. Now we are seeing a significant increase in investment income. We've deployed the cash in short-term treasuries and the full impact of our decisions will flow through over time. Second, we're leveraging our investment in technology to change how underwriting is done. TIPSAPP has now grown to have $320 million of enforced premium and is writing business in 13 states. This is up from just $100 million in premium and only operating in one state two short years ago. TIPSAPP is just getting started and we will continue its geographic expansion. Last May, we saw an opening to a capital at attractive terms and executed on that opportunity. Because of this, we have tremendous amount of liquidity holding company, and this gives us the flexibility to execute on any new opportunity that may arise. And as Karen highlighted, Greenleaf is trading assets now, both buying and selling real estate and creating tremendous value for the parent company. But looking to the future, we want to build on that track record and deliver consistent profitability and strong returns for our shareholders. And in 2023, there is an opportunity, we think, to do both. Let me provide some context in color. Florida is an overlooked opportunity. Putting it simply, look at where the industry is today versus where it was a year ago. In 2022, because of actual inflation, as well as social inflation, the industry was playing catch-up, raising rates in order to bring back sound operational margins. Those rate actions are now coming through because of the lag on their implementation. But the elimination of one-way attorneys fees and EOBs will lead to improved loss trends. And as Mark highlighted, we're already seeing improvement in our gross loss ratios. A year ago, reinsurance costs were increasing, and there were some concerns about the availability of reinsurance. This year, for the upcoming June 1 renewal, we expect reinsurance costs to increase. It's normal, given there was a loss. However, it appears to be just a cost issue, not an availability issue, which is fantastic, and this is something that we can handle. A year ago, Operational and G&A costs were increasing due to inflation and a very tight labor market. This year, those costs have stabilized. And given our disciplined approach to managing our investment portfolio, our investment income is increasing this year versus last year. So when you combine all of these different inputs, for the first time in several years, there are more tailwinds than headwinds for the Florida insurance industry. The decisions that we made over the last several years have positioned us for this day. And with the improving operating environment in Florida, the moment has arrived. And with that, I will open up for questions. Operator, please provide instructions.
spk01: Thank you, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from Mark Hughes with Truist. Mark, please proceed.
spk07: Yeah, thanks. Good afternoon.
spk01: Good afternoon, Mark.
spk07: On the reinsurance outlook, you say it's not availability but cost. Any way to frame that up a bit? It seems like folks have talked about 30% to 50% increases. What do you think?
spk03: Sure thing, Mark. Yeah, I think some of the rates could go up that much, but it's also a question of will you be paying that across every single dollar of reinsurance spend? To put this into perspective, for both companies, about 60% of the reinsurance limit is purchased from the Florida Hurricane Cat Fund, and while that is expected to go up a little bit, it's not going to be 30% to 50%. Secondly, both of our underwriters, both Homeowner's Choice and TIP Tax, deferred the WRAP layer from last year. So those layers will be now provided in 2023, and they come at zero cost. So that actually tends to drag down the cost of reinsurance for us. The private market reinsurance will go up to some of the numbers you talked about, but we also have Homeowner's Choice, which has a large section at the bottom of the insurance program placed on a multi-year basis with fixed renewal terms. So given all of these things, yes, it will go up, but it won't be the headline 30 to 50% that you're looking at, yeah? That you alluded to.
spk07: How much of the program is exposed to more private market adjustments?
spk03: Well, for homeowner's choice, Very little. I'd say, I'm ad libbing here a little bit, maybe about $150 million of private market limit out of a $900 million tower. TipTap, I think, is a similar number, but TipTap doesn't have the benefit of the one multi-year deal that Homeowner's Choice does, yeah?
spk07: Yeah, okay. Was there any reserve development in the quarter?
spk04: Yeah, there's some. I mean, that's something that, as you know, we've done consistently over the last couple of years. It's pretty similar to what it was in the fourth quarter of last year, pretty similar. And if you look at the full year, it's pretty similar to what it was for the full year. So no real significant changes there. What was it in the fourth quarter of last year? I think it was about 12 and a half, something like that, 10, 12, similar this year.
spk03: I think it's included in the 39 1⁄2.
spk04: Yeah, yeah, of course. Yeah, yeah, it's all included in there. Yeah.
spk07: Okay, yeah. And then the... You mentioned the $800,000 gain. Is that separate from the... There's a $3 million remeasurement item in the income statement. Are those separate? And could you explain both of them?
spk04: Yeah, it's... There was sort of two things that happened at the same time. So we had to adjust the valuation on the UPC, how that was originally booked. And what happened is there's two pieces to it. There was an asset that we set up and that asset was reduced by a couple million dollars. So that was an expense. And then we also reduced the contingent liability because we had a contingent liability for commissions that were owing over a certain size. the contingent liability comes down and the asset also went down, and those two sort of offset one another, the net is about $800,000 or $900,000. But they show up in two different lines. That's why you see that $3 million in the revenue line.
spk07: Yeah, okay. You mentioned you think a potential for losses to improve 25% to 40% when fully implemented. When do you think that will be when, I think you said, you're modeling kind of the lower end of that improvement range? But when does that fully kick in, do you think?
spk04: Well, I mean, it's a little hard to say because these things are going to transition, right? So, you know, when we talk about the low end of that range, say 25%, you know, I think it's probably going to take a couple of years. It could potentially take a couple of years to fully get to that. as some of the AOV, for example, transitions through. But you'll see significant improvement, obviously, in 2023. So I think that will – we had talked before about the loss ratios coming down over time, and I think that that will continue through 2023 and 2024 as that sort of transitions through the book.
spk07: And then final question, your growth – Presumably you're modulating your growth depending on what you see here in the market. It looks like you're a little more restrained in the fourth quarter, correct? Maybe you see it differently. How do you see that stacking up in 2023, your enthusiasm about growing the top line?
spk03: Look, Mark, it's similar to the question that we've already sort of what I said in my statement. We have a lot more tailwinds than headwinds, but the one headwind that is there is the cost of reinsurance. And, you know, and we do live in a cat-prone country at the moment. So given both of those things, you know, we are both energized about growing, but making sure we grow at the right time in the right way. So, you know, we've passed on deals to grow already in the last few months because it wasn't the right deal at the right time. So it's opportunities as they arise and executing on them when they do, yeah?
spk04: Hey, Mark, it's Mark. Just one thing I just wanted to add in there. I know embedded in your question there, I think you were probably referring to the GOAT's written premium number in Q4, which is down. Yeah. Yeah. Yeah. So part of that is a bit of an anomaly there in the way that the UPC quota share agreements are accounted for. So in the fourth quarter of last year, we signed the fourth UPC quota share agreement. And the way those are booked is when you set up the quota share, you book all of the unearned premium. It gets booked to written premium, and then the offset is in unearned premium. So that was $35 million in the fourth quarter of last year. And then the written premium you see in the fourth quarter this year is just sort of as the book renews. So you have to sort of factor that out. And if you do that, gross written premium is up about 7% quarter over quarter. And premiums in force, which you could argue, maybe a better way to look at it, premiums in force have continued to grow throughout the year. So that drop that you see in the fourth quarter is a little impacted by that UPC thing. Does that make sense? Sure does.
spk07: Yep. Thank you very much.
spk01: Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touchtone phone. The next question is coming from Matt Cardetti with JMP. Please proceed.
spk06: Hey, good afternoon. Good afternoon, Matt. If I try to put it all together, kind of a lot of what has been talked about in terms of the kind of mark you talked about, the magnitude of the impact just from some of the models on the reforms and the timing. And we think about, um, you know, obviously reinsurance costing more, but you guys doing a good job of taking rate and, um, you know, inflation guard and things like that. When we get to kind of say that two years that Mark was talking about, what do you think combined ratios look like? Is, are we, are we, do you think we're back in kind of the 85 and 90% world that I think of as kind of, you know, TTI putting up over the long run or, Where do you think you can get to?
spk03: Okay. Great question, Matt. Um, so let me try to answer this question in a couple of items. And by the way, um, one of the things that we've been very careful in doing, and I should speak a little bit on Mark's behalf here. Um, when we do loss provisioning for a quarter, we do it in the quarter. So we already have set money aside for losses with the data loss in Q1, 2022, for example. even though the claim may come in, you know, this summer. So we put those money up aside. What we're seeing already in Q1, et cetera, is that the claims now are dropping off. They're not coming in as fast. And why that becomes important, if the claim doesn't come in, then later on there can be a lawsuit that would come in. So the claim frequency goes down, the lawsuit frequency goes down, and where this is ultimately going to lead to is the money we have to reserve for each quarter is going to improve as we go forward. It'll take a while for it to roll through, but some of that is also important to know that each quarter we sort of start from fresh to say, what will it eventually cost? But to your bigger question, this is the importance of why you've got to have a healthy Florida insurance industry, because we took, along with the rest of the industry, you know, pick a number between 20 and 30 billion in expenses in the end. And that was all done through private insurance and reinsurance. And we thank the legislature and the governor for passing the reform, which is going to give us a better outcome. But here's what the numbers now look like, right? So if a year ago you took a dollar of premium, you're probably looking at, and I'm just approximating numbers here, so don't try to reconcile them, but it's pretty reasonably accurate. A year ago, you took a dollar of premium. You spent about $0.36, $0.38 on reinsurance. You may have got a penny of investment income because interest rates were so low. You also had about $0.40 of attritional or non-CAT losses. And then you had policy acquisition costs, corporate overhead, et cetera, around $0.23, all of which would basically lead you to a very 1% margin, shall we say. Here's what's happening as this thing bakes through. Because of the rate increases, Actually, let's go the other way around. So let's start from the bottom. The corporate overhead, which is about $0.23, is going to stay roughly about the same. For Mark's earlier comments, what we see in attrition losses because of legislation passed is probably likely to go from $0.40 to maybe around $0.30. Now, offsetting that, the reinsurance costs will go up. But they'll go up from like $0.38 to, say, $0.45. So they'll go up some pennies there. But if you had your investment portfolio well positioned, instead of making a penny, you're going to make about three pennies. So all of these pennies are not something to add up. But the biggest item that will also happen is because rates went up, you will make about $1.20 in premium. Take a while, but that's where you're going to get to. And so therefore, your margins will increase substantially. And that is what we needed to replenish surplus and create a healthy floor industry so the steps that have been taken will eventually lead to that outcome and that is a very very very positive outcome and that's what keeps us very excited in terms of if you add up those numbers as to what it does to margins yeah yeah very very helpful and very um very easy way to think about it so thank you um one other if i could just a quick one um you mentioned a green leaf uh selling or
spk06: you know, entering an agreement to sell the two retail properties. I think I heard 31 million gross proceeds. What are those carried out in terms of book value today? And, um, any, any guidance you can give on when you think that transaction might close?
spk03: Yeah. Hey man, look, um, we wanted to make sure we mentioned it because it's in our 10 K and not everybody reads our 10 K and subsequent events and everything. So, The two properties are under contract, they haven't closed, and we tend not to add up the number, count the dollars till we actually have them in our hands. We only mentioned it because we want full transparent disclosure to everybody, yeah? And that's why, but we will, and as Karen alluded to, we will talk further about it at the next earnings call when we hope to report that we've actually sold two properties, yeah?
spk06: Fair enough. Sounds great. Thank you for the color. Appreciate it.
spk01: If there are any remaining questions, please indicate so by pressing star 1 on your touchtone phone. The next question comes from Casey Alexander with Compass Point. Please proceed.
spk02: Yeah. Hi. Good afternoon. A lot of my questions have been answered, but I do have one question. The expected 25% improvement in loss expenses is would really only apply to those expenses that come from the state of Florida, if I understand it correctly. So as you look forward in the expansion of the book, including TIPCAP outside the state of Florida, what percentage of your losses would you be expecting to come from the state of Florida as opposed to that percentage that you would expect to be coming from outside the state of Florida?
spk04: Yeah, so it's Mark. So, yeah, you're right. So the 25% or so that we talked about is on the Florida loss expense. So Florida is about 80% of our book. So that 25% drop is not going to be on the non-Florida. But there's other things going on that are already affecting the loss ratio as well, you know, rates. you know, drops in frequency that we are already starting to see even before the legislation. And so, you know, when we talk about the consolidated loss ratio going, let's say, from 40 down to 30, you know, we're sort of looking at that 25% drop on the 80% of the book that's Florida. But also, I think the loss ratio on Florida will drop more than that when you take into account some of those other things. And that will get us, I think, to 25% on the consolidated loss ratio, even though, to your point, 20% of the book is outside of Florida.
spk02: Okay. That's the only question I had left. Thank you.
spk07: Thank you.
spk01: At this time, this concludes our question and answer session. I would now like to turn the call back over to Parish Patel, who has a few closing remarks.
spk03: 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 you with an update on our progress on our next earnings call. Thank you very much.
spk01: At this time, this concludes our question and answer session. This concludes today's call. You may now.
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