HCI Group, Inc.

Good afternoon and welcome to the HCI Group Investor 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 is being recorded and will be available for replay through February 21st, 2024, starting later today. The call is also being broadcast live via webcast and available via webcast replay until January 22nd, 2025. 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, John, and good afternoon, everyone. Welcome to HCI Group's investor call. On today's call is Mark Harmsworth, HCI's Chief Financial Officer, and Parish Patel, HCI's Chairman and Chief Executive Officer. To access today's webcast, please visit the investor information section of our corporate website at www.hcigroup.com. Before we begin, I'd 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'd like to turn the call over to Mark Harmsworth, Chief Financial Officer. Mark.

Thanks. Good afternoon everyone and thank you for your time. We've made a couple of announcements recently and wanted to take a few minutes to explain them in a little more detail. Earlier this month we sent out a press release explaining that we'd notified the remaining holders of our 4.25% convertible notes of our intention to redeem them. The holders have already begun the process of electing to convert them into common shares and we expect that to be completed before the end of the first quarter. As a result of these conversions, consolidated total liabilities will decrease by $23.9 million, stockholder equity will go up by the same amount, the debt-to-cap ratio will decline by about 4.5%, interest expense will decrease by just over $1 million a year, and book value per share will go up by about $1. There will be some dilution, of course, but the 397,000 shares issued will not affect the fully diluted share count because in this calculation, these shares are already accounted for as if they have been converted. Today, we issued a press release stating that we'd extended the term of some of the warrants held by Centerbridge. 450,000 of the warrants had their expiration dates extended. We will book a small one-time non-cash charge to stockholder equity in the first quarter for this. Today's press release also announced that our subsidiary TipTap Insurance Group repaid the $100 million invested by Centerbridge back in February of 2021, fully redeeming the preferred shares that had been issued to them. We've been preparing for the potential of this repayment for a while now. As mentioned on the last earnings call, we had $167 million of cash and financial investments at the holding company level as of September 30th. We earmarked $50 million of that for this purpose, and the balance of the payment came from our credit facility with Fifth Third Bank. You may recall that we recently renegotiated that facility, and it was with the potential of this repayment that we did that. $50 million is specifically spelled out in that agreement for this purpose, and its repayment to the bank is termed out over a five-year period. The interest rate on that is floating and is currently about 7%. There are a number of significant positive impacts from redeeming the preferred shares. First, our debt-to-cap ratio will drop a further 3%, even though we financed half of the repayment. Second, our earnings per share will go up because the dividends paid to CenterBridge were a reduction of earnings available to shareholders in the earnings per share calculation. Third, HCI's ownership of TTIG is now well over 90%. Lastly, the facility we used to finance half of the repayment is a much more flexible financial instrument. Because it's within the envelope of the credit facility, we can pay it off at any time or even borrow back some of the principal payments made, and so it is fully flexible. In terms of timing, the potential center bridge redemption was about a year away, but in February, the dividend rate on the preferred shares would have gone up from 7.5 to 9.5%. We had the money set aside and so it made sense to do it now and avoid the most expensive year on that contract. The money for this repayment is coming from capital that we already had at the holding company and our credit facility. The new capital that we raised back in December was raised for growth and that money is still there after this transaction. Also today, we filed a new S3 registration statement We needed to file that in order to register the Centerbridge warrants and the shares underlying the warrants have exercised. As part of that new registration statement, we included the capacity for an ATM. We do not have any immediate plans to use this. And with that, I'll turn it over to Parish.

Thanks, Mark. I want to take a few moments to elaborate on some of Mark's comments. But before I talk about our relationship with Centerbridge, I wanted to provide a quick update about TipTap's January assumption business from citizens. The assumption is pretty much complete and results in the addition of a further 9,500 policies and a premium of $53 million. So in total, between TipTap's December and January assumptions, we have added approximately 16,500 policies and over $83 million of in-force premium. Moving on to the converts. We've already begun the process of converting them, and 14 million has already been converted as of this call. So in terms of cleaning up the balance sheet, we are making very good progress. Finally, moving on to the bigger item, which is the transaction with Centerbridge that we've announced today. Many of you may be wondering about the purpose and timing of this. Well, we are seeing an opportunity to unlock the value of the different assets under the HCI group umbrella. But in order to unlock the value, we must maneuver and rearrange a few items. We all thought it would be beneficial if we have full autonomy and the flexibility to pursue these strategic objectives. So we thought it would be a good landing point for both parties if we were to remove the Centerbridge ownership from the equation and at the same time extend some of their warrants. So as we unlock the future value of the company, Centerbridge, we're able to get some participation in any upside value that we may create. This new arrangement puts HCI and its center bridge in direct alignment for the future. We are very excited about the future that is now in front of us. With that, we will open up for questions.

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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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 will come from Michael Phillips with Oppenheimer. Please proceed.

Thanks, and good evening, everybody. I want to ask a couple questions if I could around this round of Citizens Depop. You got the 9,500 policies you mentioned. It implies a higher average premium that we've seen in the past round. I wonder if there's any reasons for that or anything we can take away from that.

Good question, Michael. So the tip-top takeout was always a more complicated one than the earlier November one where it was homeowner's choice. And really fundamentally what had happened was we originally anticipated taking 25,000 selections in December. But because of the popularity of depopulation, a number of policies that we wanted had been removed from the pool that we could select from for the month of December. So we had then selected what we could in December and then waited for the other policies to come back in the month of January, which they did, which is what our January selection looks like. So it doesn't surprise me that the January selection is performing better than the December one because that was just part of timing and how citizens worked and the intricacies of how takeouts work and what's available and what isn't. So overall, between the two takeouts, we have achieved what we originally set out to achieve in one single takeout, which was about 16,500 policies and about 80 million of premium. So we've accomplished the mission. It just was a little bit more complicated than we would originally have anticipated. Hopefully that helps.

No, it does. Yeah, thank you, Prashant. One more, maybe related to the DPOP, but kind of just broader on if you can provide any updates on how the new business, the condo, the core business is tracking. Kind of where that stands today.

Yeah, so that is a February depop. It is also underway as we speak, and so far it is looking like on track with our expectations. You know, we're sort of trying to get that business up to the appropriate scale, and we will be doing this until we get it to that point, yeah? But it's going well. Okay.

Yep, no, thank you. Last one, Mark mentioned well over 90% ownership of TipTap now. You know, If we use the numbers from your last queue, it was around 93%. I guess I'm trying to figure out how much. Can we get an exact number of what that is, more so than 93% from your last queue, based on all the news today?

Yeah, it's between 90% and 93%. I think it's pretty close to 93%. The portion that is not homeowners or HCI is employee ownership, and that's less than 10%. Yeah.

Okay. Perfect. All right. Thank you, guys. Appreciate it.

Thank you.

The next question comes from Mark Hughes with Truist. Mark, please proceed.

Yeah, thanks. Good afternoon. Good afternoon, Mark. Mark, you say that the EPS will go up. Any ranges or any additional detail on how much accretion you could see from this?

Yeah, so the biggest change, Mark, If you think about the EPS calculation, for example, in the third quarter of 2023, you had that reduction in income available to shareholders when you do the EPS calculation. And it was a steady reduction of about $2.4 million every quarter, which is about $0.25 a quarter. So there was a $0.25 EPS reduction as a result of the center bridge preferred, and that goes away after this.

And then the offset would be whatever investment income you were generating on the $50 million in cash as a whole?

Yeah, so it's not a huge lift mark. I mean, The bulk of the stuff that we're doing here is balance sheet management. Debt to cap is going down. Book value per share is going up. It is a creative. If you take the lost investment, the investment income that you otherwise would have on the $50 million, you look at the expense on the other $50 million, you get about $5, $5.5 million of a change there. Tax effect, that's about $4 million. But then the $9.5 million dividend on the center bridge preferreds was not tax deductible. So you get about a $5.5 million net difference there every quarter. Does that make sense? Yeah.

But again. Thank you. The one-time non-cash charge for extending the warrants, how do you do that calculation? Is that sort of Black-Scholes calculation?

Yeah, it requires evaluation. It's not a big number, Mark, because really what it is, it's just the change in the value of the warrants specifically ascribed to that change, the extension alone. So you don't go back and revalue the warrants. You just look at how much more are they worth because of the fact that it's extended. And it's It's not a big number. It'll be $2 million to $3 million. We have to have evaluation done, but that's sort of the range of it. And it's not an expense. It's sort of straight to shareholder equity. APIC, I think it's APIC.

Yeah. And then, Parrish, you used the expression opportunity to unlock value. Certainly, you've laid out a very active growth plan for homeowner choice and for TIP TAP. Is there something else that we should think about in terms of unlocking value?

Mark, I'd say yes, but the other part of this is just look back in terms of what we've been talking about over the last several quarters, right? We said there was an opportunity coming. We talked about the takeouts, then we did the takeouts, then we did the core thing. Now, every one of those things, even like the takeouts, when we were talking about them, they were potentially X thousand policies. You actually had to apply, get granted, and actually execute on them. So we are step by step headed somewhere. But where we're going to end up requires us to complete each step as we go along. just like we feel a lot more comfortable to take out now that they're done, yeah? Core is the only variable left. But in the same sense, we have a destination in mind, but it requires us to complete this step and the next couple of steps that we've got in mind. We're not quite at a spot whereby we can talk about those next steps, but they will be forthcoming, yeah?

Yeah.

Okay.

Thank you very much.

Thank you. The next question comes from Casey Alexander with Compass Point. Please proceed.

Hi, thank you. Two quick questions. One, looking at the information that you gave us relative to the tip-tap policy acquisitions, my calculation is that the average premium per policy is quite a bit higher than the ones that HCI did. Is there something structurally different about the direction that tip tap went with their acquisitions that results in that? Is it geographic or, or have I just miscalculated it?

Um, no, very observant Casey, as always. Wonderful question. The bulk of the difference comes from the fact that homeowners choice also can, you not only does HO3s, which are the homeowners policies, but also does HO6s, which are condo policies and DP3s, which are, uh, landlord policies, if you like. And because HO6s and DP3s tend to have a lower premium, and there was a mix of that in the HCI takeouts, in the homeowner's choice takeouts, that's why you end up with that premium. The tip-tap premium is slightly different because tip-tap only does HO3s. So that's why the average is high. Yeah?

Well, when I start getting specific insurance category names, it makes me wish I hadn't asked the question.

Sorry about that. It's basically a product mix.

My next question, yeah, I get it. The product mix, that makes sense. My next question is, and perhaps I'm parsing the words too tightly, but one of the things that you said was that tip-tap redeeming the preferred results in better alignment of your corporate objectives. And Again, perhaps I'm parsing this too hard, but was there something about CenterBridge's ownerships that didn't align with the corporate objectives that by taking them out of the preferred position that now improves that alignment?

No, I wouldn't go in that direction, Casey. What I would kind of more tell you is that Centerbridge had preferred shares, right? Those preferred shares had a whole number of covenants that came with it, yeah? If you want to do an IPO, it has to be of a certain size, it has to have this, that. There's a lot of those kinds of covenants. And you would expect them to be there, and they were there because Centerbridge was an investor in TipTap, not HCI Group, yeah? Now, these are all normal corporate practice covenants that you would expect there to be and that also complicates every time you want to do anything you have to make sure that all parties interests are fairly treated etc that's what makes the same you will do exactly the same thing you would have done otherwise but you now have to do a lot more accounting for this and everything else sort of like what mark just went through earlier with mark hughes about what happens to controlling interest and all that kind of minor accounting changes to EPS and everything else, right? It's those kinds of things that we now find ourselves free of, yeah?

Okay. So it didn't naturally or organically come from some difference of opinion about how to run the business then. That's what I'm trying to get at.

Well, actually, great question, and it gives me an opportunity to respond, right? And I'll tell you this. The partnerships, with Centerbridge has been very positive. I think if you got them on the phone, they would tell you the same thing. And the result I can say that is what has always occurred in both the HCI board level and the TipTap group board level is everybody on the board acts for the best interests of the corporation, not whichever particular hat they wear outside the room, right? And Centerbridge has been exemplary in that. So we are not doing this out of any difference of opinions, and that is actually further enhanced by the fact that we're not announcing any board changes in conjunction with this transaction.

Wow, that makes sense. Great. Thank you for taking my questions. I appreciate it.

Thank you. Once again, if there are any remaining questions, please press star 1 on your touchtone phone. The next question comes from Matt Carletti with JMP. Please proceed.

Hey, good afternoon. Good afternoon. I was hoping I could take this question as like a 30,000-foot question, but there's just a lot of – obviously a lot going on both here and in recent months. So I was hoping you could maybe just update us on kind of your view of your kind of excess capital position, kind of taking into account the stuff announced today, the takeouts that you've assumed already, kind of bringing those onto the book. obviously knowing that you kind of had this capital earmarked before you did the recent capital raise, just kind of maybe bring us up to date. And then I'm not even that much looking for a capital number as I am maybe, you know, a rough idea of how much premium from here you could put on the current capital base, you know, without touching the ATM, as you said, you're not planning on using it.

Yeah. Hey Matt, it's Mark. Thanks for the question. So, I mean, We're obviously in a really good capital position here. I mentioned before we had a significant amount of liquidity at the holding company level. Before this transaction, we have a significant amount of capital at the holding company. After this transaction, the underwriters themselves are well capitalized given the size of where we're at now. So there's definitely additional capital available for the growth opportunities that we see in front of us. In terms of size, I think it's significant, and it just depends on how aggressive we want to be. I mean, we raised $85 million in December We specifically raised that for growth. I mean, you can kind of do the math on the kind of growth you can get from that. That money is still there. It's still earmarked for growth. We don't need to put that into the underwriters to take care of what the recent transactions we've done with Centerbridge. So we're in a really good spot. And in terms of whether we use that, when we use that capital, I think that those are strategic decisions that we have to make. But We're in a really strong capital position, and I think that's a good place to be right now. Thanks for the call. Helpful as always.

Hey, Matt. My 30,000 take, non-financial but similar kind of thing, is look at the actions taken, right? We have enough liquidity that we not only grew the company by, you know, with the With the January takeout, we're now sitting at about $1.5 billion in premium. I think SAR ended Q3 with about $770. We find ourselves in such financial flexibility that we could not only grow the business by whatever that is, 40%, we also started core. We did raise the capital, but we also feel comfortable stroking $100 million check, right? Which obviously... if you were remotely concerned about liquidity and cash flow, you would not be doing, yeah? So just the actions should tell you a lot. And a lot of it's driven by the fact that we don't want to keep it for another year and pay 9.5% interest, yeah?

Yeah, yeah. That makes a lot of sense. Perfect.

Thank you. Thanks, Matt.

At this time, this concludes our question and answer session. This concludes today's call. You may now.