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spk07: Good afternoon and welcome to HCI Group's first quarter 2024 earnings call. My name is Kelly 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 7, 2024, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 8, 2025, on the Investor Information section of HCI Group's website, www.hcigroup.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please go ahead.
spk02: Thank you, Kelly, and good afternoon, everyone. Welcome to HCI Group's first quarter 2024 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 first quarter of 2024, 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 in response 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.
spk00: Thank you, Matt, and welcome, everyone. In the first quarter, HTI Group reported pre-tax income of $77.4 million and earnings per share of $3.81. Similar to my comments last quarter, each business unit made a positive contribution to our results, including another quarter of Homeowner's Choice and TipTap both being solidly profitable. In-force premiums grew in the first quarter and remained above $1 billion. We reported another quarter of improvement in our underwriting results, Despite modest weather losses in the quarter, our gross loss ratio improved to 31% compared to 34% in the prior year's quarter. HCI continued to deliver on its commitment to shareholders, paying a dividend of 40 cents per share, our 54th consecutive quarterly dividend. Also in the quarter, we completed our first assumption at Condo Owners Reciprocal Exchange, or as we call it CORE, which totaled $40 million of in-force premium. Following quarter end, CORE completed a second assumption in April, which brings total in-force premium to $55 million. Before I turn it over to Mark, I wanted to provide a quick update on the business that Homeowners Choice and TipTap has assumed from Citizens since November 2023. Overall, the power of the technology we've built is showing its value, and we've seen results exceed our expectations. We were able to evaluate citizens' entire portfolio and select the 70,000 policies that best met our underwriting standards. So far, what we have observed is we were able to offer the majority of policyholders a renewal offer that was comparable to or less than if they had stayed with citizens. We've retained more policyholders than we had expected. The loss ratio in the business we've assumed is better than anticipated, and we've added more than a quarter of a billion dollars of premiums in a few months with almost no added expense. Now I'll turn it over to Mark to provide more details on our financials.
spk06: Thanks, Karen. So as Karen mentioned, this was another good quarter for the company. Pre-tax income was just over $77 million, and diluted earnings per share were $3.81. These results are being driven by the same positive trends we've been discussing for a while, premium growth, higher investment income, better loss trends, and declining expense ratios. Growth premiums earned were 42% higher than the same quarter last year, driven by growth in Florida. Earned premium includes $67 million of premium assumed from citizens, of which $3.6 million relates to core, which I'll talk about in a minute. Investment income of $14 million this quarter was about 40% higher than the fourth quarter last year, continuing the trend of higher investment income each consecutive quarter driven by higher cash and investment balances combined with higher rates. As we mentioned on the last call, we're starting to lock in some of the higher rates by strategically adding term to our bond portfolio. We recently purchased $170 million of two-year treasuries at just under 5%. The consolidated gross loss ratio this quarter was 31%, down from 33.6% in the same quarter last year. When the legislative changes were announced in 2022, we expected the growth loss ratio to come down to around 30%, which it has. The loss ratio is slightly higher than in Q4 because, as Karen mentioned, we had some weather this quarter. Maybe more important, the positive loss trends we've been discussing for over a year now have continued. As an example, litigation propensity for the number of lawsuits for any given number of claims is 35% lower than it was before the legislative changes took effect. I mentioned declining expense ratios in my introduction. Labor and operating expense as a percentage of gross premiums earned have been declining with each consecutive quarter. Why? Because of our operational leverage. In the past 12 months, we've added more than $300 million of premium and added only a handful of people. Along with the lower loss ratio, this helps lead to a lower combined ratio, which was around 70% in the fourth quarter last year and just under 67% this quarter. This, of course, is being impacted by the citizens' assumptions for which we have limited reinsurance and policy acquisition expenses. But once these normalize, we expect the combined ratio to be in the low to mid 80s, which is indicative of a very healthy insurance company and reflects the operational efficiencies we've generated with our technology platform in TipTap. Before I move to the balance sheet, I wanted to mention one more thing in the income statement. As Karen mentioned, we recently started CORE, which is a new operating model for us in that we only administer the policies. Even though we do not own the underwriter, we are required to consolidate its income statement into ours. That means consolidated premiums include CORE premiums, consolidated reinsurance includes CORE reinsurance, and the same for loss expense and policy acquisition expense. Then, of course, there's an adjustment to net income for any economic gains or losses which are not ours. In order for a reader to be able to see the impact of CORE, we now show it separately in our segmented financial information in the 10Q. Now to the balance sheet, which continues to improve, driven by profitability, debt management, and capital management. You may recall we recently completed a number of capital transactions, and when combined with growing profitability, the result is a much stronger balance sheet. In the last 12 months, consolidated cash and investments have gone up by $340 million. Holding company liquidity has grown by $30 million. Debt has dropped by more than $60 million. The debt-to-cap ratio has declined from 62% to 37%. Shareholder equity has more than doubled to $395 million. And lastly, book value per share has gone up from just under $21 per share to over $38 per share. In summary, this was another great quarter for the company. Revenue's up, all of our expense ratios are down, and the balance sheet has continued to strengthen. And with that, I'll hand it over to Parish.
spk01: Thank you, Mark. As highlighted by Karen Mark's comments, HCI posted outstanding results in the first quarter. This is because of our technology. And it is not just a talking point. It is driving our operational capabilities as well as our financial results. And even though we've grown to over $1 billion of in-force premium, this is just a fraction of the $150 billion homeowners premium market across the U.S. So there is still plenty of room for growth. But more interesting is something new that we're noticing. Let me elaborate. We have added 70,000 new customers across Homeowners Choice and TipTap. In addition to that, we've added over 400 condo association policies at core. The process was seamless because we have the platform to efficiently onboard these policies and as we've demonstrated, we can do it profitably. But we're also noticing that as these policyholders come up for renewal, they are staying with us in ever greater numbers. This is true across homeowner's choice, tip-tap, and core. Furthermore, we have seen strong interest from others to also join. Our phones have been ringing with prospective customers interested in getting a policy from one of the HCI group of companies. And it extends even further than that. We're also hearing from agents, brokers, and investors asking if we can do more. So in summary, the opportunity that is unfolding in front of us isn't to add some incremental policies. It is much bigger than that. We are looking to see how we can double or triple the size of the business. We think large numbers of policies are out there still searching for a better solution. And this is just the beginning. There is a growing sense that these trends are expanding throughout the country. And we can use our technology platforms to capture the various opportunities out there in the market as they arise. But as always, it will be done in our typical prudent fashion, and we are setting ourselves up to be ready to take advantage as these opportunities present themselves. With that, I will turn it over to questions.
spk07: Thank you, sir. 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 a speakerphone, to provide optimal sound quality. Please hold just a moment while we poll for questions. Your first question is coming from Michael Phillips with Oppenheimer. Please pose your question. Your line is live.
spk04: Thanks. Good afternoon, everybody. First question, Mark, when you mentioned combined ratio expectations, you said low to mid-80s. What time frame? Was that this year or just kind of a longer-term time frame?
spk06: No, I mean this year. Yeah, like now. Okay. I mean, the point was it's obviously significantly lower than that right now. But once we normalize, you know, toward the end of the second quarter with reinsurance and PAC for citizens' policies,
spk04: know that that's that's that's our expectation for a combined ratio like the second half of the year okay okay great thank you um and then um i guess just curious how i mean you guys reinsurance was coming up pretty soon um how do you think about that given the big growth from citizens i mean i don't know if it's in one direction you're you know most of your 2024 growth is going to be in florida so maybe more concentrated than the other ones would have been so if you buy more or you just pick a company so you need less? How are you thinking about the need for reinsurance relative to the prior years because of citizens?
spk01: Hey, Michael. It's Parish. Look, we have managed this business to grow it from around $50 million of premium back in 2007 all the way to what it is now. So as the business grows and shrinks, which it has done occasionally as well, we buy an appropriate amount of reinsurance. So Yes, the business has grown, but we're already in the market trying to buy an appropriate tower for the upcoming wind season. We are right in the middle of those negotiations and everything else. So the two items that are there is we are buying an appropriate size tower for the appropriate size business. The only item that is not finished yet is what will the cost of that reinsurance be. But one presumes because you're buying a lot more quantity, it might be the overall dollars will go up, but it's a question of will it go up as a percentage of revenue, yeah?
spk04: All right, okay, good. Yeah, thank you. And then, I guess, lastly, you mentioned the phone calls that are coming in. You know, you're not looking to grow the company policy by policy, but maybe looking to do more stuff. I guess, are you also considering, are you getting any calls, and would you consider you know, maybe be fronting for other homeowners companies that already write business that don't have your technology and front for them as you expand outside of Florida and to more nationwide? Would that be an option?
spk01: Yes. There are a number of options that people have approached us with and obviously we're evaluating them, including people wanting us to buy books of business or buy small carriers kind of thing. So there's a broad range of options that are unfolding in front of us. Obviously, we're trying to make sure we're prudent as to the way we deploy our technology so that it has maximum long-term value. But fronting could be an example as well, yeah?
spk04: Okay, yeah, sure. Thank you. Last one for now, just a numbers question. You had mentioned the in-force premium from core April to $55 million. I think before you said you were targeting around $75. Is that still the case for core?
spk01: Ultimately, yes.
spk04: And that's this year, correct, right?
spk01: Yeah. Okay. I think that you brought up CORE. Look, I also want to point out how amazing this is, right? CORE had zero revenue on January 1 this year. It's May 8th, less than five and a half months later, and you're already up to $55 million, as we had sort of laid out that we would be doing this, right? This is how easily and seamlessly we can add to this, yeah?
spk04: Okay, great. Thank you, guys.
spk07: Your next question is coming from Mark Hughes with Truist. Please pose your question. Your line is live.
spk05: Yeah, thank you. Good afternoon. Hey, Mark. The low to mid-80s combined ratio, just to be clear, is that gross or net earned? Of net earned. That's on net earned? Yeah. Yeah. Okay. And then the, what is the cash at the holdco at this point?
spk06: So holding company liquidity at the end of Q1 is about 220 million.
spk05: And then did you give an earned premium number for the takeout this quarter?
spk06: So what I had said was in earned premium, there's $67 million of that relates to citizens' assumptions, and of that 67, 3.6 million of it is core. Okay. And that's, of course, some of that is direct, some of that is assumed, but in Q1, most of that is assumed, right? Yeah. And then how do you feel about the, uh, go ahead. No, no, sorry. I was coughing. Sorry about that.
spk05: Okay. Um, how do you feel about the, uh, takeout opportunity? Are there still attractive policies after what you've done and others? Uh, how do you feel about, uh, the, uh, potential say next, uh, next time around?
spk01: Hey, Mark is parish. Um, You know, as we had said previously, there's still 1.1 million policies in citizens, right? We can clearly see using our technology that a large number of them are green, a large number of them are red, right? So there is still an opportunity there, right? It's just a question of when to go after them and what is the most prudent fashion in which to do so, yeah?
spk05: Yeah. And then is there a written number associated with the takeout? You obviously just gave the earned, but is there a written just for referencing? For written?
spk06: Yeah. So there's about the total assumed written in Q1 was about $43 million.
spk05: And that was, was that already incorporated into the Homeowner's Choice and QPTAT?
spk06: Yeah, I mean, I can give it to you by underwriter if you need it that way. But of that 4319, that was core.
spk01: And Mark, from previous conversations, you know, it works like differently with citizens because your written premium is only the unearned premium that you're assuming. So it sort of comes in a lump fashion until we do renewals and get them onto our paper, yeah.
spk05: Yeah. And when you're talking about the success you're having with the citizens' takeout, I think you said the renewals are coming in better than expected. Your pricing, generally you're able to offer pricing that's in line or less. for renewal. Was there another aspect of that? Again, as you were describing the success you've had with the citizens takeouts, was that covering the benefits or the better experience?
spk00: The other item is the loss ratio on the business we've assumed is better than we anticipated.
spk05: Yeah, that was it.
spk00: And, you know, you've added that quarter of a billion dollars of premium with almost no added expenses.
spk05: Exactly. Okay. All right. Thank you very much. Thanks, Mark.
spk07: Once again, if you do have any remaining questions or comments, please press star 1 on your phone at this time. Your next question is coming from Matt Carletti with Citizens J&P. Please pose your question. Your line is live.
spk03: Thanks. Good afternoon. Matt Parrish, good afternoon. Parrish, when you talk about looking forward and opportunities to double, triple the size of the company, as you kind of hit those milestones, how do you view HCI kind of being similar or different? And I guess where I'm going with this is more geography than anything else. how much opportunity you consider continue to see in Florida? Is there a certain market share at which you feel like you've got enough of the market? Um, or do you kind of see Florida growing in lockstep with, with the rest of the country and, and not changing much, you disguise being bigger.
spk01: Okay. Um, Matt, if I was speaking just geography wise, right. Uh, you know, when we talk about the 150 billion, probably about two 20 billion is in Florida. Yeah. So plenty of room to grow there. And that's obviously right in our backyard, and that opportunity is there. In the rest of the country, the other $130 billion, a big chunk of it in Texas, a chunk of it in California, et cetera, right? And all of these markets are going through their stress. Just read any of the industry press and you'll see it. I think all of those markets will eventually – stabilize out at much higher numbers, and at some point there will be an opportunity. How quickly that takes, we can be patient to when it actually happens. So we're just setting ourselves up. We're not handicapping as to when California will become an opportunity or when Oklahoma will become an opportunity. We're just sitting here, we're patiently waiting. But when they do become an opportunity is when we will jump in, yeah? Yeah.
spk03: And how do you think about, you talked a bit in your comments and in the press release about the leverage that the technology provides. How do you think about as you become, you know, say twice the size or three times the size? Like, is there a certain expense ratio you believe you can operate or a certain, you know, spread, you know, better than kind of what the market is? Yeah.
spk01: Matt, I think we think of it in a slightly different context, but just to sort of put this, right? So if you imagine that the first billion, and these are the numbers, yeah? When we write the second billion, right, losses will go up proportionately because you double the business, you might end up with a similar number. Aging commissions will probably double up as well. But all the other kinds of corporate overhead, other expenses, right? those will not double up. They will increase somewhat, but it's very easy to see that they will not double up. And that's where I think the leverage increases. There will be some additional expense because it won't be zero, but we just added 280 million of premium, almost 300 million of premium, and we've hardly had any dollar increase in operating expenses. That's where that leverage is coming from, yeah? And the automation is just beginning, yeah? Yep.
spk03: Yeah. Great. And then, if I could just a couple, I guess, one, I guess, one numbers question, one maybe numbers. You mentioned Q1 had a little weather to it, and that's maybe why you're, you know, like a point or fraction of a point higher on cost-loss ratio. I know it's only about halfway through the quarter, but any early insights on Q2? Is it looking normal, looking active, just from what you guys see?
spk06: So far, it looks pretty normal. nothing unusual at this point in April.
spk03: Okay, great. And the last one, just numbers.
spk06: Uh, do you have net written premiums, uh, consolidated handy? Yeah. 186, 187 million. Wonderful. All right. Thanks very much. Appreciate it.
spk01: All right. Thanks Matt. Yeah. Hey Matt, I think about a question from before. Um, The other thing, by the way, and this is why I'm so excited in what I was saying in my prepared remarks, right? We've long talked about technology in personal lines and homeowners policies and that kind of thing. The interesting thing is in getting core up and running, we suddenly realize how much of our technology platform speeds up time to market of a new line of business, commercial, residential, is different to residential, yeah? And it has opened our eyes that this platform can be used not only in different geographies, but also in different lines of business, right? You can go from residential to commercial residential to why not go to commercial, et cetera, right? I'm not saying we're doing that today, but we're certainly looking at this platform could be used in lots of ways that we've never used it before. Because once it's successful, you can just add on to it. So that's what is creating that opportunity about maybe doubling or tripling. There is more here than just writing more policies, yeah?
spk03: Yeah, no, that makes a lot of sense. Well, thank you, and congrats on a really nice start to the year. Thank you.
spk07: Your next question is coming from Michael Phillips, again with Oppenheimer. Please push your question. Your line is live.
spk04: Hey, thanks. One more. Thanks for letting me back in. Kind of a follow-up to Mark, your comments about litigation propensity down around 35%. Can you remind us, how are you handling your prior year lost PIPs and reserves, given what you're seeing there for that propensity to come down?
spk06: Yeah, that's a good question. I mean, we've, for all of the accident quarters, you know, prior, we've made assumptions about what we think the ultimate cost of loss cost will be for any of those accident quarters, and that includes assumptions that we've made for the number of lawsuits that we will ultimately get. And so, I mean, literally every quarter we're updating that estimate of how many lawsuits we'll ultimately get. And what I would say is that things are developing you know, for the older accident quarters prior to the legislative changes, things are developing pretty much as we expected them to be, nothing unusual. We didn't have any adverse development in the, we didn't have any adverse development at all in the first quarter. For the accident quarters after the legislative changes, we're still being, you know, we made selections that took into account the changes in legislation. We're still evaluating those as to whether we should, you know, potentially bring them down a little bit, but we haven't really done much of that yet. I mean, we'll have to, we need a little bit more time to go by. So, you know, the way those accident quarters are developing is, you know, we've got about 35% fewer lawsuits than we would have gotten in the old world, if you will, or the old rules. And, but we haven't, We haven't reserved quite that optimistically, if that makes sense.
spk04: No, it does, yeah. So you didn't reserve for a call at whatever the number, a 35% drop, or that's probably not the right number. But as you said, you built something in, but it wasn't to the level that you're currently seeing, right? Okay.
spk06: Yeah, I mean, we knew it was going to be better, but it's better than we thought it was going to be. So it's good.
spk01: All right. Michael, the other side of that is we actually go back. We have stated that many a time, that we expected the numbers to be better, but we didn't have enough evidence to book to the better number. So we've tended to be conservative in the quarters since the legislation got passed. But eventually, reality, whatever it is, will manifest itself. And I think Mark will at that point make appropriate adjustments.
spk04: Okay, great. Thanks a lot, guys. Thank you.
spk07: 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.
spk01: On behalf of the entire management team, I would like to thank our shareholders, employees, agents, brokers, and most importantly, our policyholders for their continued support. Thank you.
spk07: This does conclude today's conference call. You may now disconnect your phone lines and have a wonderful day. Thank you for your participation.
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