HCI Group Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to HCI Group's Third Quarter 2024 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 7, 2024, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 7, 2025, on the Investor Information section of HCI Group's website at www.hcigroup.com.

Operator

I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Speaker 1

Thank you, Paul, and good afternoon. Welcome to HCI Group's Q3 2024 Earnings Call. On today's call is Karen Coleman, HCI's Chief Operating Officer Mark Harmsworth, HCI's Chief Financial Officer and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karen's operational update, Mark will review our financial performance for the Q3 of 2024 and then Paresh will provide a strategic update. To access today's webcast, please visit the information section of our corporate website at www.hcigroup.com.

Speaker 1

Before we begin, I'd like to take the opportunity to remind listeners that today's presentation and responses to the 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.

Speaker 1

ACI Group disclaims all the obligations to update any forward looking statements. Now with that, I'd like to turn the call over to Karen Colvin, Chief Operating Officer. Karen?

Speaker 2

Thank you, Matt, and welcome, everyone. Since our last call, we have been impacted by 3 hurricanes. Hurricanes Debbie and Helene occurred in the Q3 and Milton made landfall early in Q4. These storms have affected our customers as well as our neighbors, employees, families and families in Florida, Georgia, South Carolina and North Carolina. Our hearts and prayers go out to everyone impacted.

Speaker 2

These three events have produced more than 10,000 claims and we expect to pay 100 of 1,000,000 of dollars to help our policyholders rebuild their lives. Despite Category 1 and Category 4 hurricanes making landfall in the Q3, HCI Group had positive earnings reporting pretax income of $14,000,000 and diluted earnings per share of $0.52 This is a tremendous result. HCI continued to deliver on its commitment to return value to shareholders by paying a dividend of $0.40 per share, our 56th consecutive quarterly dividend. Subsequent to the Q3, we successfully added policies from Citizens. Given the expectation for competitive assumption process, our original plan was to add roughly 40,000 policies from Citizens in the Q4.

Speaker 2

We were pleased with the response from policyholders and were able to reach our target ahead of schedule. At the October assumption, approximately 42,000 policyholders chose to join HCI. In closing, I want to address the talk about the impact of this year's overly active hurricane season on future rates for Florida. We believe it is important to have stability for our policyholders and therefore we're not looking to increase rates in Florida at this time. Now I'll turn it over to Mark to provide more details on our financial results.

Speaker 3

Thanks, Karen. As Karen mentioned, this has been a very active storm season. We issued a press release in October detailing the expected impact of Hurricanes Debbie and Helene in the Q3 and the actual results are consistent with what we said in that release. Despite a net expense of $58,000,000 from hurricanes Debbie and Helene, pre tax income in the 3rd quarter was just over $14,000,000 and diluted earnings per share were $0.52 The reason we made money in a quarter with those hurricane losses is due to the strength and profitability of the underlying business. The underlying loss ratio this quarter was a little under 25% and maybe more importantly, the underlying combined ratio was 70%.

Speaker 3

With a low underlying combined ratio and a well structured reinsurance program in place, the impact of a storm or 2 in a quarter can be more than offset and the results of the Q3 clearly show that. Now let's talk about Q4. In early October, Hurricane Milton made landfall in Florida as a Category 3 storm, and we expect the net expense for Milton to total $128,000,000 including the reversal of benefits under a multiyear reinsurance agreement. This loss is higher than the storm losses in the Q3, but again, underlying profitability should mitigate a lot of that. That underlying profitability should be higher in the Q4 than the Q3, partially as a result of the premium growth from the Citizens assumption we announced recently.

Speaker 3

We expect total in force premium from this assumption, which happened in late October, to be around $200,000,000 adding an additional

Speaker 4

$35,000,000 to gross premiums earned in the 4th quarter. There should be minimal added costs associated with this premium other than, of course, the incremental loss expense. Just a couple of things

Speaker 3

on the balance sheet, which continues to strengthen. During the 12 months ended September 30, cash and investments are up $490,000,000 shareholder equity has more than doubled, book value per share has almost doubled, debt to cap has been cut in half and we've grown the company by almost 40%. Book value per share increased in the Q3 despite the 2 hurricanes. In Q4, we expected to take a bit of a step back, but by the end of January or February, we expect book value per share to be back to where it was at the end of September. What about holding company liquidity?

Speaker 3

Total cash and financial investments at the holding company level grew during the Q3 and are well over $200,000,000 And with that, I'll hand it over to Paresh.

Speaker 5

Thank you, Mark. As indicated by Karen and Mark's comments, it has been a very interesting few months. At the start of every hurricane season, our preferred outcome is always the same. We hope for a very quiet year. But we also plan for the possibility of catastrophic events like hurricanes and we buy a conservative reinsurance program to cover such possibilities each year.

Speaker 5

This just happens through one of those years when we will have recoveries under those reinsurance contracts. But with all of that said, I want to step back and look at the bigger picture. Despite the 3 hurricanes making landfall in Florida, our balance sheet remains strong and the underlying business is performing well. And as we look forward, I want to highlight several trends that we are unfolding that we're seeing unfolding. First, we think Florida is an attractive homeowners market and we are committed to operating in the state in the future.

Speaker 5

2nd, as Karen highlighted in her comments, our customers have endured a lot over the past few months and we have no plans to increase our policyholders rates in Florida in the coming year. Building on that commitment, we have added another 42,000 policyholders who chose to move to HCI from citizens. And we believe the best way to demonstrate our confidence is to grow the business and which is exactly what we have done. And finally, we also think this will be an opportunity to grow the business further in the future. Therefore, we are currently working to start our 4th admitted carrier, TOWRO, which we plan to have fully operational by early 2025.

Speaker 5

In summary, we have withstood an active hurricane season. Our business is healthy. We have no plans to increase rates in Florida at this time and we've added recently added 42,000 new customers and we are starting a new carrier that will be operational in a few months. With that, I'll turn it over for questions.

Operator

Thank you. At this time, we will be conducting a question and answer And the first question today is coming from Matt Carletti from Citizen JMP. Matt, your line is live.

Speaker 4

Thanks. Good morning or good afternoon. Paresh, I was hoping you might be able to offer some observations on Milton, just specifically how we should think about it. I mean, I think we always like to compare it to maybe prior storms. So I don't know if Ian's kind of the right comparison.

Speaker 4

But just with the claims you've seen coming in, maybe kind of the impact that the reforms have had, how big of an event you feel it is for Florida, you're on the ground seeing it firsthand, whereas I think a lot of the others are kind of model estimates. Just any insights you have there would be helpful.

Speaker 5

Sure. Thanks, Matt. Couple of things, right? We track how claims come in. And usually within by this time, we would have received 3 weeks into the storm about 2 thirds of the ultimate number of claims we're going to get, right?

Speaker 5

So using that as a benchmark, we are seeing Milton come in at roughly between one half to two thirds the size of Ian. Yes? Okay. Just by the claim count. And I want to explain it further in the sense of this is actual claim counts, even though the business has grown considerably since Ian made landfall.

Speaker 5

So even though we have a lot more policies, the actual claim counts we're seeing is much lower. And that is occurring, I think, because Milton was no Ian, right? Simple as that.

Speaker 1

Correct.

Speaker 5

Okay, great.

Speaker 4

That's good. That's very helpful. Matt? On the takeouts, you kind of hit your 40,000 or And you broke up. I'm sorry, can you hear me okay?

Speaker 5

Yes. Can you repeat the question please? Yes.

Speaker 4

Sure. Yes. It's about the takeouts and just maybe what insights you might have on the conversion was very strong, even stronger than we saw last year, which was stronger than kind of historical. Just why you think that might be and just kind of some of the dynamics there?

Speaker 5

Okay. So just as background for everybody else listening on the call, the takeout for October was very heavily sought after by a number of carriers. And I think about 400,000 policies were approved to be depopulated in that month. And we were our 2 carriers participating in that takeout were amongst the lowest pick. So we kind of had expected that we might get a head rate in the low 40s, right.

Speaker 5

So if every 10 policies we selected, we'd get 4 of them at best, right? That was the whole idea. And because we wanted as Karen mentioned, we want to get to 40,000 policies, we said let's then do November as well because we might need multiple attempts to get to our requisite 40,000 policies. What happened in practice though is we had a very high take up rate. And I think some of that is just because of Milton and things going on and other things, I think it just speaks to the brand that HCI, Homeowners Choice and TypTap have built up that people, if they're doing anything, would prefer those things.

Speaker 5

And our technology, making sure that we only selected people who wanted to come with us. So all of that coming together gives you that very high take up rate. I think I've seen the numbers for the rest of the people in who participated in October take up. I think collectively it's sitting at around 50%. So yes, we did much better, but I think there's a lot of factors that contribute.

Speaker 5

Great. Great. Sorry, Matt, one other thing just so that we because we did it so well in October, we are not going to therefore then also participate in November because we've reached our capacity in 1 month, yes?

Speaker 4

Understood. That makes sense. And one last one, if I could. Mark, you mentioned the underlying loss ratio is around 25% in the quarter, which I believe is kind of the lowest number we've seen yet, so it keeps showing improvement. Is there anything in that number that's one time in nature unique or as we look forward is that in your view a fairly sustainable kind of line in the sand?

Speaker 3

No, I mean that's a pretty stable number. That number has been normalized. We booked a small credit to reduce the expense on prior periods. It wasn't a big number, but we've taken that out and looking at the 25, it would have been actually even less than that. So 25 is a good number.

Speaker 3

I think that that's a good number going forward. In the Q4, as you know, sometimes claims in a quarter where you've had a significant storm, sometimes the daily claims can be a little bit less. But I think 25% is a pretty good number for the next couple of quarters until we get into the weather in Q2 and Q3 of next year.

Speaker 4

Great. All right. Thank you very much for the answers. I appreciate it.

Speaker 6

Your next question is coming from Mark Hughes with Truist. Please proceed with your question. Your line is live.

Speaker 7

Yes. Thanks. Good afternoon.

Speaker 5

Good afternoon, Mark.

Speaker 7

Good afternoon, Paresh. Mark, the I think you suggested the incremental $35,000,000 in premium in the 4th quarter from the takeouts, and we're working off of a base of what, dollars 265, dollars266 in the Q3. And then the $200,000,000 was that the kind of when you have it for a full quarter, it would be that $35,000,000 would be more like $50,000,000

Speaker 4

Is

Speaker 7

that the way to read it?

Speaker 3

Yes. Yes. Yes. It's a little bit prorated for Q3.

Speaker 7

Yes. And then what kind of Q4, go ahead. Yes. What kind of premium ceded should we think about for kind of on a run rate basis, either absolute dollars or percentage?

Speaker 3

Yes. So good question. So the premium ceded in Q3 were I think $109,000,000 but you had the $12,000,000 adjustment that we talked about there. The right number now going forward, sort of the normalized number is about $102,000,000 dollars That should be the number except for the adjustment that we've mentioned for Milton. Dollars 102,000,000 is the new sort of quarterly baseline number.

Speaker 3

Then for Q4, of course, you have to make the adjustment for Milton, but that's the number going forward and that will take you through until the end of May.

Speaker 7

Yes. And refresh me on the Q4 adjustment for Milton.

Speaker 3

So the adjustment to the premium ceded line is about $50,000,000 for Milton. That's included in the $128,000,000 that I mentioned in my prepared remarks. And that's the reversal of benefits under the multiyear agreement with Berkshire.

Speaker 7

Yes. So $50,000,000 ceded premium and then what $78,000,000 in losses?

Speaker 3

Yes, exactly.

Speaker 7

Okay. How much cash at the Holdco?

Speaker 3

Over 200,000,000

Speaker 7

And then, Paresh, your comment about the new carrier, refresh me on and I might have missed some of your comments today, but the new carrier, the size, intent, what area we're targeting?

Speaker 5

Mark, it's just normal business for us in the sense of we had one carrier back in the day, which is Homeowners Choice. We grew it to a certain size. Then we start our 2nd carrier, Tip Tap. Both Tip Tap and Homeowners Choice have well north of $500,000,000 premium loan growth at this point. We had already started our 3rd carrier core as a reciprocal for commercial residential last year And Taro, it's something on that legacy.

Speaker 5

It will be our next growth carrier. It's a reciprocal based in Florida and we're going to capitalize it. We're going to give it a surplus note. We'll grow it starting in 2025, yes.

Speaker 8

Yes.

Speaker 7

When I think about the G and A this quarter, about $19,000,000 is that a reasonable run rate or is that going to is there still some distortion around the takeouts or anything unusual? Is that a decent run rate?

Speaker 3

Yes, that's a pretty good run rate. I mean Q4 sometimes tends to be a little bit lower than Q3, but that's generally there's nothing odd in that number. That's a pretty good go forward number. The same thing for operating expenses.

Speaker 7

Okay. Any comments on the competitive environment in Florida with these storms, maybe some new capital in the market or you tell me is what's the appetite among the carriers for new business? Obviously, there is enthusiasm about the takeouts, but how would you characterize the competitive environment?

Speaker 5

Mark, it's been a little bit over 3 weeks after 3 or 4 weeks, 4 weeks, I guess, after Milton at this point. And I think I'm not going to speak for every carrier out there, but I think they are we're all busily taking care of policyholders and taking care of claims and all those kinds of things. So that dust of what comes next is just beginning to settle. So but everybody seems to be healthy and it seems to be business as usual. So I don't think appetite went up or down.

Speaker 5

As far as your part of the question about new capital, well, TayoRoe is technically we want to lead the way, so here we are. But I'm sure there are other carriers or other capital that may be forming.

Speaker 4

I don't have

Speaker 5

visibility as to who's going to fund what or whatever kind of thing, but it's normal to expect that there will be some capital that will enter the state at this point, yes? So wait and see. Operator, next question.

Speaker 6

Your next question is coming from Casey Alexander with Compass Point. Please pose your question. Your line is live.

Speaker 8

Yes. Thank you. Mark must be a great analyst because his first four questions were exactly what my questions were going to be. So I'm okay. I'll hop back in the queue.

Speaker 8

Thank you.

Speaker 6

You have a question coming from Michael Phillips with Oppenheimer. Please pose your question. Your line is live.

Speaker 9

Thanks. Good afternoon. I guess I wanted to ask a little bit about the comments about rates in Florida and your strategy for at least the coming year not to raise rates. Does that signify, I guess, a desire on your part, excluding all the Depop business you're getting to grow in Florida ex the Depop stuff?

Speaker 5

Michael, it's Paresh. I think we would characterize it slightly differently than that as we sort of that's why we made the comments we did. We see what's been going on with our policy orders, etcetera. And the commentary and news articles and everything else, the latest anxiety that afflicts a lot of insurance is, oh my god, what will my insurance rates be like next year, right? Anxiety causes issues, etcetera.

Speaker 5

We just wanted to kind of let our policyholders know actions that we will be taking, right? I'm not speaking for the industry or for anybody other than ourselves, but we are not looking to raise rates in 2025 in Florida because I think, frankly, we don't necessarily see a need to do so. It's not solely up to us, but that's at least what our beliefs are.

Speaker 2

It

Speaker 9

sounds good. Obviously, your margins are strong. I wonder if that will have any implications for maybe slight pressure on your margins the next year?

Speaker 5

I'm sure it might have some effects on the margins, but we're not doing this for margins in any given quarter. We and our policyholders have a long term look, in terms of all of this stuff, let's talk about some of this. We have a policyholder who's been with us since 2,008 and all the events and whatever. And unfortunately, when Helane went by, they had a car parked next door outside that next to their house that caught fire and pretty much burnt the whole house down. I think that person is not I'm just talking to them, whatever, I'm just seeing the claim notes, It's fairly traumatized by all of this stuff, right?

Speaker 5

Do we really need to say that they should be thinking about whether we're going to raise rates next year or not? That's why we're doing this is because we answer the phones, we look at the claims. We're Floridians too. And when we see all of this stuff, it just makes this is one more effort on our part to try and help people build and restore themselves to normality. So can go back to the relationships we've had with our policyholders, yes?

Speaker 9

Yes, it makes sense. Yes, thank you for that. But I guess one more, little maybe more higher level would be a large part of your strategy obviously has been at least for the past year and longer of course it comes and goes, but this year has been a big part of your story as the Depop business. And I'm sure that's always going to be present at some point in future years. But if you put that aside, what's next for HCI?

Speaker 9

Kind of what's the next strategy? And I would think it's this. I'll try to answer the question, but tell me if I'm right or wrong, maybe help me out go deeper. It's growing outside of Florida. And if that's the case, then let's talk about that.

Speaker 9

If it's not, it's a different answer, tell me what that is. But kind of what else for HCI when you put Depop aside?

Speaker 7

Okay.

Speaker 5

So we do Depops because they're there. It isn't the only item that we have. We've run the company for several years when there were no Depops. So it just is the flavor of the month currently. But the longer term kind of thing and I was kind of remembering a question you had asked beginning of hurricane season about what happens if there's another year or another hurricane or whatever.

Speaker 5

Well, guess what, we've had 3 landfalling hurricanes in 1 hurricane season and we are healthy and we're not just saying that, our actions build to that effect, right? Our deeds speak even louder than our words. And what how you could also look at this is in a world where that's being afflicted by climate change and more catastrophes, etcetera, maybe we have figured out a way to do risk selection and underwriting to a level that lets us basically be climate adapted. And if that's what we've done, just happens to be the place we've done it at where it's also one of the most intense places to do it at. It kind of sets you up very nicely to say maybe we can do this in the rest of the country and opportunities will occur, right?

Speaker 5

And the other side of that is what we've also done is that we tend to allocate capital to where we can get the highest ROE, right? So here we are putting up numbers that they are what they are, and I'm sure we do our best to make sure we do it correctly. Our results speak for themselves, yes?

Speaker 9

No, no. Yes, thank you. I think it's certainly a testament to your strength with a lot of tough results coming in. You guys have served quite well. So thank you.

Speaker 9

I think that's all I had. Thank you very much.

Speaker 5

Thanks, Tim.

Speaker 6

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.

Speaker 5

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.

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HCI Group Q3 2024
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