NYSE:HCI HCI Group Q1 2023 Earnings Report $145.35 -0.51 (-0.35%) Closing price 04/17/2025 03:59 PM EasternExtended Trading$146.08 +0.73 (+0.50%) As of 04/17/2025 04:07 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast HCI Group EPS ResultsActual EPS$1.50Consensus EPS $0.09Beat/MissBeat by +$1.41One Year Ago EPSN/AHCI Group Revenue ResultsActual Revenue$129.03 millionExpected Revenue$118.27 millionBeat/MissBeat by +$10.76 millionYoY Revenue GrowthN/AHCI Group Announcement DetailsQuarterQ1 2023Date5/9/2023TimeN/AConference Call DateTuesday, May 9, 2023Conference Call Time4:45PM ETUpcoming EarningsHCI Group's Q1 2025 earnings is scheduled for Tuesday, May 6, 2025, with a conference call scheduled on Wednesday, May 7, 2025 at 4:45 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfilePowered by HCI Group Q1 2023 Earnings Call TranscriptProvided by QuartrMay 9, 2023 ShareLink copied to clipboard.There are 7 speakers on the call. Operator00:00:00Afternoon, and welcome to HCI Group's First Quarter 2023 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 is being recorded and will be available for replay through June 8, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 9, 2024, on the Investor Information section of HCI Group's website at www.hcigroup.com. Operator00:00:40I will now turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed. Speaker 100:00:47Thank you, John, and good afternoon, everyone. Welcome to HCI Group's Q1 2023 earnings call. On today's call is Karen Coleman, HCI's Chief Operating 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 Q1 of 2023, and then Paresh will provide a strategic update. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Speaker 100:01:21Before we begin, I'd like to take this opportunity to remind our listeners that today's presentation and responses to questions may contain forward looking statements made pursuant to 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 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 obligations to update any forward looking Now with that, I'd like to turn the call over to Karen Coleman, Chief Operating Officer. Speaker 100:02:12Karen? Speaker 200:02:13Thank you, Matt, and welcome, everyone. HCI Group reported a strong Q1 with pretax income of $23,100,000 and diluted earnings per share of 1.54 Our Homeowners Choice, TypTap and Greenleaf subsidiaries all contributed to earnings with several noteworthy accomplishments during the quarter. TypTap Insurance Group, our insurance and technology subsidiary, reached a milestone with its Q1 of profitability on a GAAP basis And more than $350,000,000 of in force premium. At both of our insurance companies, loss ratios improved from last quarter driven by lower claim volumes, partially due to legislative reforms enacted in Florida last year. Our real estate division, Greenleaf Capital, earned over $9,000,000 reflecting gains on the sale of 2 properties disclosed on our last call. Speaker 200:03:07As a reminder, over the last 3 years, Greenleaf realized gross proceeds of close to $90,000,000 And a gain of $60,000,000 on just 4 transactions. And we believe there is still plenty of upside in our real estate portfolio. In addition, our investment portfolio earned $9,000,000 during the quarter with 90% of it coming from interest income alone. This is a result of steps we took to reposition the balance sheet into short duration interest earning assets over the last year. We now have an investment portfolio capable of generating $30,000,000 in interest income on an annualized basis with a low risk profile. Speaker 200:03:50We also continued to deliver on our commitment to shareholders, paying a $0.40 per share dividend, our 50th consecutive quarterly dividend. In summary, it was a solid profitable quarter with all three of our main divisions contributing to the success of the quarter. And now, I'll turn it over to Mark, who will provide more detail on our financial results. Speaker 300:04:13Thanks. As Karen mentioned, pre tax income for the quarter With $23,100,000 and diluted earnings per share were $1.54 up from $0.09 in the Q1 of 2022. We've discussed several positive trends over the past few quarters, and those trends are translating into material, sustainable improvements in earnings. First, gross premiums earned are up despite policies in force being down, driven by rate adjustments made over the past few quarters. This means that while revenue is up, exposure is down. Speaker 300:04:482nd, investment income is going up. As Karen mentioned, we had a gain from our real estate portfolio, but even if that is excluded, the remaining $8,800,000 The investment income is more than 3 times what it cost in the same quarter last year. This increase in investment income is being driven by Steadily increasing interest income on our bond investments and on cash. When interest rates were low, we held on to our cash and when they started to go up, We carefully invested some of that cash in bond. At the end of Q1, we have $500,000,000 invested in fixed term securities At an average yield of 3.7 percent compared to $150,000,000 invested at 1.6 percent a year ago. Speaker 300:05:33We have continued to manage the risk as well. Our average term to maturity in the bond portfolio was just over 1 year And we still have over $300,000,000 in cash. The third positive trend is that policy acquisition expenses are declining As a percentage of gross premiums earned, in Q1, policy acquisition expenses were 12.6% of gross premiums earned, Down from 16.4 percent in the same quarter last year because of lower commissions and a change in the mix of new versus renewal business. This reduced expenses by more than $7,000,000 for the quarter. I saved the last trend declining loss expenses for last as it deserves more explanation. Speaker 300:06:17In the Q1, our consolidated loss ratio was 33%, Down considerably from 40% in the same quarter last year. The lower loss ratio was driven by higher average premium per policy, moderating claim severity As well as lower claim and litigation frequency, some of which is as a result of the legislative changes in Florida. I should note that we did not get to these lower loss ratios by reducing reserves. While we have slowed the pace of reserve increases, we have not yet started to reduce them. So stepping back, that's 4 positive trends that I went through and the combined impact of all of these trends is a material positive impact on the operating performance of the company as evidenced by the strong earnings in the quarter. Speaker 300:07:02These trends have also positively impacted our insurance and technology subsidiary, TypTap Insurance Group, Higher average premium per policy, higher investment income and a lower loss ratio and a lower expense ratio led to TypTap Insurance Group being profitable for the quarter. Our Real Estate division also had another very strong quarter. As Karen mentioned, we sold 2 of our commercial properties for a gain of $8,900,000 Another example of our opportunistic real estate strategy. Just a few other quick things. Consolidated cash flow from operations Was $99,000,000 or about $11 per share compared to $57,000,000 in the same quarter last year. Speaker 300:07:43Book value per share increased to $20.97 from $18.91 during the quarter. A quick comment on holding company liquidity. Cash and financial investments outside the insurance entities were $160,000,000 at the end of the quarter, Up from $145,000,000 at the end at the start of the quarter. Of course, this does not include the $120,000,000 in value represented by Our investments in real estate in Greenleaf. In summary, this was a strong quarter for us. Speaker 300:08:17Our operating strategies are paying off. The insurance market in Florida is improving and we've positioned the business to deliver superior ongoing operating results. And with that, I'll hand it over to Paresh. Speaker 400:08:30Thank you. Mark and Karen outlined our strong financial results for the quarter. We are seeing the benefits of the company's underwriting and rate actions as well as the bold leadership provided by the Florida legislature in 2022. These benefits should continue in the upcoming quarters and provide a solid foundation for the future. Before talking about future prospects for HCI, I wanted to briefly comment on reinsurance. Speaker 400:09:01We are finishing up the placement for both of our insurance companies. And like prior years, we will provide full details when everything is finalized. Our reinsurance program is progressing as expected. We came into the renewal with the majority of the program already set. Between the Florida Hurricane Cat Fund, the Reinsurance Assist Policyholders or RAP program and our multiyear contract, TypTap and Homeowners Choice had secured approximately 70% of their plan limit purchase. Speaker 400:09:37The remaining 30% is being placed in the private market now and where enough capacity is available. On On a blended basis, we think the rates will be higher than the cost we were within expectations. Now looking towards the future. Homeowners Choice continues to be regarded as one of the best performing homeowners carriers in Florida. And Greenleaf continues to prove its worth As a separate real estate division that delivers solid long term returns. Speaker 400:10:11Both Homeowners Choice and Greenleaf at this point Have solid proven track records on which we continue to build. Now let's talk about TypTap Insurance Group. It made a GAAP profit in Q1 of this year. Last year, we talked about ticked up seeing periods of profitability. The Q1 of this year shows that we're executing on that vision, but our work is not done. Speaker 400:10:37We continue to leverage our technology and optimize our book of business, while maintaining strong retention ratios, and we plan to build on the current momentum Finally, we continue to make progress on items we mentioned in previous calls. We had talked about setting up additional insurance companies. We are in the process of setting up 2 new carriers Named Tailorow and Per Risk, we still have work to do before these new companies write their first policies with progress is being made. In closing, from our perspective, we are starting to see a turn in the operating environment in Florida. The underwriting actions we've taken over the past several months, along with the benefits of legislative reforms, have started to show up in our Q1 results. Speaker 400:11:32On prior calls, we highlighted there will be an opportunity for us in the near future. We are seeing that opportunity unfold in front of us. The days ahead are even brighter. With that, I'd like to open the call to questions. Operator? Operator00:11:52Thank you, sir. At this time, we will be conducting a question and answer session. One moment please while we poll for questions. Our first question comes from Mark Hughes with Truist. Please proceed. Speaker 500:12:28Yes. Thank you very much. Mark, you listed a number of drivers of the improvement in Loss ratio to 33 from 40, higher premiums and then you mentioned 2 or 3 other things. Could you repeat those? Speaker 300:12:48Yes. So part of it is obviously higher average premium per policy. The other thing I mentioned is claim severity is kind of is moderating. And really more importantly, claims frequency is declining and also litigation frequency is also declining. And those are the 4 drivers, number 3 and 4 probably being the most important. Speaker 500:13:22And how much of that do you attribute to the reform? Speaker 300:13:29I mean, it's hard to say for sure. I mean, we talked about it on the last call. Any comment I'd make about this, we'd sort of preface it by saying that it's early. But We talked about the expectations that we had of what we thought would happen. We talked about The decline we expect the declines in claim frequency of 15% to 20%. Speaker 300:13:57We talked about that on the last call. We talked about a decline in litigation frequency of about 30%. And like I said, it's early, but From what we had seen so far, it would indicate that those assumptions were pretty reasonable. So It's definitely a significant part of it. Speaker 500:14:22Excellent. How much did better weather help this quarter do you think? Speaker 300:14:27It was a good question. A little bit, not a huge issue. You might recall in the Q1 of last year in Florida, we had more weather than you would normally see in a Q1. So we had less weather in the Q1 this year than last year in Florida, but we had more Weather related expenses weather related losses in the Northeast this quarter than the Q1 last year. So Weather was not really a big factor. Speaker 300:15:02It was a little bit of the drop, but not really a big one. Just because of those things, Those two things really sort of offset one another mostly. Speaker 500:15:15In the Setting up the 2 new carriers, I'm interested in kind of Thoughts on your broader appetite for new business, the Written premiums, if I'm looking at it properly, yes, the TypTap definitely up Pretty meaningfully. What do you hope to capture with the 2 new carriers? Maybe refreshment on that? Speaker 400:15:54Absolutely, Mark. 2 things. In terms of just growing the top line, We can do that just within the 2 carriers that are already up and operating. The 2 new carriers Are being set up because we are now starting to set up for the next phase of our growth. And while we haven't Disclose how they fit into the group and what exactly they have been doing. Speaker 400:16:24We clearly are doing this In a manner where those 2 new carriers were both expansive and complementary to the current 2 carriers that we have, yes? Speaker 500:16:39Yes. And then, Mark, you had mentioned that you started to slow The pace of reserve increases, you hadn't gone in the other direction though. Could you give us some dimension and magnitude Of that, how much have you changed? How much are you still kind of working away at that quarter to quarter? Speaker 300:17:04Yes. So we went through this period where and we talked about it a lot where we were Expensing more than we paid out and reserves were going up. And there's a few reasons for that. We were growing, obviously, and also The number of open lawsuits and expected lawsuits was going up. And so we were increasing our We're expensing more than we were paying out and as a result reserves were increasing. Speaker 300:17:32In Q1 this year, net reserves were pretty We didn't really increase them, we didn't decrease them. So our loss expense is pretty close to what the incurred loss And what paid losses were. So we haven't really started To reduce them at this point, but given the trends and some of the numbers that we're seeing, I think that's a possibility for the future. That's probably the next phase of it. Speaker 500:18:10Thank you very much. Operator00:18:24The next question comes from Matt Carletti with JMP. Please proceed. Speaker 600:18:30Hey, thanks. Good afternoon. Speaker 200:18:33After that. Speaker 600:18:34Just wanted to circle back on one of the questions Mark had there on weather, with kind of Florida being a little Maybe below normal and Northeast or above normal, netting out to sounds like pretty normal. Would that comment hold true for TypTap When we think about kind of being GAAP profitable that it did so in kind of a normalized weather quarter or did it run a little hot or a little cool? Speaker 300:18:59Yes, it was I mean, that comment holds for both. I mean, it was less weather in Florida, more weather in the Northeast. But it's the improvement in the loss ratio, the biggest driver was The decrease in even weather adjusted claims frequency was down considerably, even if you take weather out of it. If you remove the weather claims in both quarters and just look at weather adjusted frequency, it was down substantially, More than we expected it to be. And that's why that statement that we made on the last call about loss ratios, Expecting them to be I think I said 25%, Paresh mentioned, from 40% down to 30%. Speaker 300:19:51What we saw in the Q1 would indicate that we're definitely heading towards that. Speaker 600:19:57Okay. And then as we think about, Say growth across the year, and then not so much a bit more about exposure growth or kind of when you as you start up, Obviously, new companies or even within the existing companies think about not just kind of rate growth. How should we think about that in terms of timing with when reinsurance incepts, when How hurricane season might play into that, the reinsurance true up later in the fall, is it reasonable to think that, that might be a little more back end weighted or am I thinking about that wrong? Speaker 400:20:34Matt, you're thinking about it exactly correctly. Growth will be back end weighted in the context of press count, yes? Speaker 600:20:42Yes, exactly. Okay, great. And then just a numbers question probably for Mark. You have the net written premiums for the quarter. Speaker 300:20:50Yes. So it's $129,400,000 Speaker 600:20:55Wonderful. Great. Thanks so much. Operator00:21:06We have a follow-up coming from Mark Hughes with Truist. Mark, please proceed. Speaker 500:21:13The improvement in severity, Any comment around inflation, building materials, is that part of this? Is that moderating? Speaker 300:21:25Yes. So good question. So I use the term moderating and you might recall, inflation obviously Was an issue, is an issue. I think it was probably the Q2 of last year where we really saw Probably the biggest impact of that increase, but it started to kind of level out after that. And I think Paresh has mentioned it, we track the cost of those things and I think it's sort of been level since then. Speaker 300:21:58So if you look at claim Severity in the Q1 of this year, it's higher than the Q1 of last year. It is up. It took that bump in Q2 of last year and since then hasn't moved a lot, and that's why I use that term moderating. So It's higher than it was in the Q1 of last year, but I think about 10% or so. But it's not having The adverse effect that it was having in prior past quarters. Speaker 500:22:30So you essentially lap that in the current quarter? Speaker 400:22:36Yes. Mark, a different way of looking at this is in the Q2 last year, it was unknown Well, severity increasing was going to be repetitive in that following through quarter after quarter after quarter. I think what Mark is saying and what we're seeing Is that the average severity took a jump in Q2 of last year, but then it's been flat since then. So it's more of a step function, right, as opposed to Increasing ramp, which is obviously very good news. Speaker 500:23:08Yes, yes. Mark, any thoughts on loss ratio for the maybe not for the year, but kind of the underlying Trend line, I think you're suggesting that you're seeing improvement, but we're not we're only on the way, But we're at a 33% loss ratio, which is pretty darn good and maybe Not too much of influence from weather, where What's the right run rate? Speaker 300:23:45Yes. So I'll go back again to something that we said in the last earnings call and I just mentioned that We felt that overall impact on the consolidated loss ratio is in the 25% range. Paresh talked about it going from 40% to 30%. And we still think that that makes sense and that that's the ramp that we're headed 2nd quarter that doesn't necessarily say that that's going to happen every quarter. 2nd quarter, I think everybody knows, is sort of A quarter where there's usually some weather, the loss ratio in the second quarter is usually a little higher than it is in the first quarter. Speaker 300:24:27But I think we're headed back down toward that 30% range. I think we'll see it. Again, you have to be careful that it's only 1 quarter, right? And those trends that we're seeing are good, But we need time to make sure that they settle in. So does that answer the question? Speaker 500:24:51It does. Thank you. Have you seen any weather so far in the I mean, we're almost halfway through the Q1, Probably have April in hand. I know a lot of opportunity for other things to happen, but any reason to think so far? Speaker 400:25:12Mark, it's Paresh. Two things. Yes, we are picking up some weather in the Q2. But as Mark indicated, it's what you normally expect in the Q2. There's been It's been a choppy spring, so there's been some heightened claim activity, but it's not anything Beyond what our expectations were, right? Speaker 400:25:38So from that sense, it's very good. The other thing, I think, to summarize some of the Stuff your conversations back and forth with Mark. I think what's being indicated is That movement from 40.6% last year to 33.6% this year, right, isn't The result of a one time windfall, whether it be reserve relief or one time One quarter where the weather was unusually benign, right? There's none of those kinds of things in Q1 numbers. It's sort of telling you that a lower loss ratio is on the way and it's probably sustainable. Speaker 400:26:25It will fluctuate up and down a little bit, second quarter Because the weather might be slightly worse than normally is, but you are clearly and solidly on a path You're having improved loss ratios and actually improved combined ratios for that matter. Speaker 500:26:44Understood. And then, Harish, you've mentioned 70% of the reinsurance program is already placed. And that's I think you said that Is it the cat fund, Florida Hurricane cat fund, the RAP program? What else did you mention in that? Speaker 400:26:59Also, our we have 1 or 2 multiyear contracts. So those rates were obviously set last year, yes? Speaker 500:27:10Yes. And then the 30% is being placed now. Any observations about the Capacity or capital in the market, any kind of recent Shift in sentiment around I'm thinking the ILF spreads have Narrowed or there's some maybe movement in that direction. Does that mean anything? Speaker 400:27:41Mark, we've heard and said similar things that we see all that movement. The more important thing that we are usually focused on at this point in time is can we get our program placed, right? And that we are starting to feel confident about, and that's really it. We hear rumors and or Conversation is about what's happening in the industry as a whole. But at this point in time, we've become very narrowly focused on making sure Our program is completed. Speaker 500:28:18Yes, fair enough. Maybe just one more. The mission expense Improved nicely. I think you mentioned some decline in commission rates, maybe mix. I assume if you're not pursuing much new business in 2Q or 3Q, maybe the It stays at the same rate, maybe the mix is consistent on new and renewal. Speaker 500:28:45Does it then pop back up in the 4th quarter? How much of this is going to stay with us versus perhaps temporary? Speaker 300:28:54I think, I mean, it does depend a little bit on that mix. But I think it's been coming down for a while and I think where it is now, I think it will probably decline a little bit more, but not a lot. So if you're modeling that, I think that rate that we're at now is probably Speaker 500:29:18And I'll maybe ask one more, if I might. Anything in Greenleaf around some of these concerns around commercial real estate and the lending environment, does that Have any impact on valuations or liquidity in the market? I know Florida is hot, but I'm just curious. Speaker 400:29:45Mark, Two things. One is, all the real estate we own, we either have paid for in cash Or where there is a load, I think it's the mortgage is unlocked by the very nature, Long duration and fixed rate, right? So from our perspective, we don't feel any pressure on Thanks. Yes. The other thing is and currently it looks well executed. Speaker 400:30:16As Karen mentioned in her prepared comments, the 4 transactions over the last 3 years, right, have Really freed up a lot of capital for the ACI Group by selectively Selling certain assets, including the latest 2 shopping closers that we did, Speaker 300:30:36which freed him about $31,000,000 of capital. Yes. And Mark, I would just add one thing to that, that we've talked about this before, but there's that very sizable Delta between what we've got the real estate on the books for and what it appraises for with bank appraisals or what we think it's worth. And even as we've gone through some of these transactions, that number is not getting any smaller. It's still even if you look at bank appraisals, There's still a $50,000,000 difference between the bank appraised value of our real estate and what it's on the books for. Speaker 300:31:15We've got some really good quality properties and very unlevered. I think total debt on that $120,000,000 of value is about $4,500,000 Good quality real estate and good markets. To this point, the value has been maintained. It's very low leverage It's been Karen went through the numbers. It's been a great investment for us. Speaker 500:31:42Okay. Thank you for all the answers. Speaker 300:31:45Thank you. Operator00:31:49At this time, this concludes our question and answer session. I would now like to turn the call over to Paresh Patel, who has a few closing remarks. Speaker 400:31:59On behalf of the entire management team, I would like to thank our shareholders, employees, agents And most importantly, our policyholders for their continued support. Thank you. Operator00:32:13This concludes today's call. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallHCI Group Q1 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) HCI Group Earnings HeadlinesThe Goldman Sachs Group Cuts Amarin (NASDAQ:AMRN) Price Target to $7.00April 20 at 1:33 AM | americanbankingnews.comHead to Head Review: Kronos Bio (NASDAQ:KRON) and Amarin (NASDAQ:AMRN)April 19 at 3:04 AM | americanbankingnews.comNow I look stupid. Real stupid... I thought what happened 25 years ago was a once- in-a-lifetime event… but how wrong I was. Because here we are, a quarter of a century later, almost to the exact day, and it’s happening again. April 21, 2025 | Porter & Company (Ad)Amarin (NASDAQ:AMRN) Now Covered by Analysts at StockNews.comApril 18 at 1:54 AM | americanbankingnews.comAmarin (NASDAQ:AMRN) Sets New 52-Week Low - Here's What HappenedApril 13, 2025 | americanbankingnews.comAmarin trading halted, news pendingApril 11, 2025 | markets.businessinsider.comSee More Amarin Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like HCI Group? Sign up for Earnings360's daily newsletter to receive timely earnings updates on HCI Group and other key companies, straight to your email. Email Address About HCI GroupHCI Group (NYSE:HCI), together with its subsidiaries, engages in the property and casualty insurance, insurance management, reinsurance, real estate, and information technology businesses in Florida. It provides residential insurance products, such as homeowners, fire, flood, and wind-only insurance to homeowners, condominium owners, and tenants for properties, as well as offers reinsurance programs. The company also owns and operates waterfront properties and retail shopping centers, and an office building, as well as commercial properties for investment purposes. In addition, it designs and develops web-based applications and products for mobile devices, including SAMS, an online policy administration platform; Harmony, a policy administration platform; ClaimColony, an end-to-end claims management platform; and AtlasViewer, a mapping and data visualization platform. The company was formerly known as Homeowners Choice, Inc. and changed its name to HCI Group, Inc. in May 2013. HCI Group, Inc. was incorporated in 2006 and is headquartered in Tampa, Florida.View HCI Group ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Archer Aviation Unveils NYC Network Ahead of Key Earnings Report3 Reasons to Like the Look of Amazon Ahead of EarningsTesla Stock Eyes Breakout With Earnings on DeckJohnson & Johnson Earnings Were More Good Than Bad—Time to Buy? 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There are 7 speakers on the call. Operator00:00:00Afternoon, and welcome to HCI Group's First Quarter 2023 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 is being recorded and will be available for replay through June 8, 2023, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 9, 2024, on the Investor Information section of HCI Group's website at www.hcigroup.com. Operator00:00:40I will now turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed. Speaker 100:00:47Thank you, John, and good afternoon, everyone. Welcome to HCI Group's Q1 2023 earnings call. On today's call is Karen Coleman, HCI's Chief Operating 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 Q1 of 2023, and then Paresh will provide a strategic update. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Speaker 100:01:21Before we begin, I'd like to take this opportunity to remind our listeners that today's presentation and responses to questions may contain forward looking statements made pursuant to 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 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 obligations to update any forward looking Now with that, I'd like to turn the call over to Karen Coleman, Chief Operating Officer. Speaker 100:02:12Karen? Speaker 200:02:13Thank you, Matt, and welcome, everyone. HCI Group reported a strong Q1 with pretax income of $23,100,000 and diluted earnings per share of 1.54 Our Homeowners Choice, TypTap and Greenleaf subsidiaries all contributed to earnings with several noteworthy accomplishments during the quarter. TypTap Insurance Group, our insurance and technology subsidiary, reached a milestone with its Q1 of profitability on a GAAP basis And more than $350,000,000 of in force premium. At both of our insurance companies, loss ratios improved from last quarter driven by lower claim volumes, partially due to legislative reforms enacted in Florida last year. Our real estate division, Greenleaf Capital, earned over $9,000,000 reflecting gains on the sale of 2 properties disclosed on our last call. Speaker 200:03:07As a reminder, over the last 3 years, Greenleaf realized gross proceeds of close to $90,000,000 And a gain of $60,000,000 on just 4 transactions. And we believe there is still plenty of upside in our real estate portfolio. In addition, our investment portfolio earned $9,000,000 during the quarter with 90% of it coming from interest income alone. This is a result of steps we took to reposition the balance sheet into short duration interest earning assets over the last year. We now have an investment portfolio capable of generating $30,000,000 in interest income on an annualized basis with a low risk profile. Speaker 200:03:50We also continued to deliver on our commitment to shareholders, paying a $0.40 per share dividend, our 50th consecutive quarterly dividend. In summary, it was a solid profitable quarter with all three of our main divisions contributing to the success of the quarter. And now, I'll turn it over to Mark, who will provide more detail on our financial results. Speaker 300:04:13Thanks. As Karen mentioned, pre tax income for the quarter With $23,100,000 and diluted earnings per share were $1.54 up from $0.09 in the Q1 of 2022. We've discussed several positive trends over the past few quarters, and those trends are translating into material, sustainable improvements in earnings. First, gross premiums earned are up despite policies in force being down, driven by rate adjustments made over the past few quarters. This means that while revenue is up, exposure is down. Speaker 300:04:482nd, investment income is going up. As Karen mentioned, we had a gain from our real estate portfolio, but even if that is excluded, the remaining $8,800,000 The investment income is more than 3 times what it cost in the same quarter last year. This increase in investment income is being driven by Steadily increasing interest income on our bond investments and on cash. When interest rates were low, we held on to our cash and when they started to go up, We carefully invested some of that cash in bond. At the end of Q1, we have $500,000,000 invested in fixed term securities At an average yield of 3.7 percent compared to $150,000,000 invested at 1.6 percent a year ago. Speaker 300:05:33We have continued to manage the risk as well. Our average term to maturity in the bond portfolio was just over 1 year And we still have over $300,000,000 in cash. The third positive trend is that policy acquisition expenses are declining As a percentage of gross premiums earned, in Q1, policy acquisition expenses were 12.6% of gross premiums earned, Down from 16.4 percent in the same quarter last year because of lower commissions and a change in the mix of new versus renewal business. This reduced expenses by more than $7,000,000 for the quarter. I saved the last trend declining loss expenses for last as it deserves more explanation. Speaker 300:06:17In the Q1, our consolidated loss ratio was 33%, Down considerably from 40% in the same quarter last year. The lower loss ratio was driven by higher average premium per policy, moderating claim severity As well as lower claim and litigation frequency, some of which is as a result of the legislative changes in Florida. I should note that we did not get to these lower loss ratios by reducing reserves. While we have slowed the pace of reserve increases, we have not yet started to reduce them. So stepping back, that's 4 positive trends that I went through and the combined impact of all of these trends is a material positive impact on the operating performance of the company as evidenced by the strong earnings in the quarter. Speaker 300:07:02These trends have also positively impacted our insurance and technology subsidiary, TypTap Insurance Group, Higher average premium per policy, higher investment income and a lower loss ratio and a lower expense ratio led to TypTap Insurance Group being profitable for the quarter. Our Real Estate division also had another very strong quarter. As Karen mentioned, we sold 2 of our commercial properties for a gain of $8,900,000 Another example of our opportunistic real estate strategy. Just a few other quick things. Consolidated cash flow from operations Was $99,000,000 or about $11 per share compared to $57,000,000 in the same quarter last year. Speaker 300:07:43Book value per share increased to $20.97 from $18.91 during the quarter. A quick comment on holding company liquidity. Cash and financial investments outside the insurance entities were $160,000,000 at the end of the quarter, Up from $145,000,000 at the end at the start of the quarter. Of course, this does not include the $120,000,000 in value represented by Our investments in real estate in Greenleaf. In summary, this was a strong quarter for us. Speaker 300:08:17Our operating strategies are paying off. The insurance market in Florida is improving and we've positioned the business to deliver superior ongoing operating results. And with that, I'll hand it over to Paresh. Speaker 400:08:30Thank you. Mark and Karen outlined our strong financial results for the quarter. We are seeing the benefits of the company's underwriting and rate actions as well as the bold leadership provided by the Florida legislature in 2022. These benefits should continue in the upcoming quarters and provide a solid foundation for the future. Before talking about future prospects for HCI, I wanted to briefly comment on reinsurance. Speaker 400:09:01We are finishing up the placement for both of our insurance companies. And like prior years, we will provide full details when everything is finalized. Our reinsurance program is progressing as expected. We came into the renewal with the majority of the program already set. Between the Florida Hurricane Cat Fund, the Reinsurance Assist Policyholders or RAP program and our multiyear contract, TypTap and Homeowners Choice had secured approximately 70% of their plan limit purchase. Speaker 400:09:37The remaining 30% is being placed in the private market now and where enough capacity is available. On On a blended basis, we think the rates will be higher than the cost we were within expectations. Now looking towards the future. Homeowners Choice continues to be regarded as one of the best performing homeowners carriers in Florida. And Greenleaf continues to prove its worth As a separate real estate division that delivers solid long term returns. Speaker 400:10:11Both Homeowners Choice and Greenleaf at this point Have solid proven track records on which we continue to build. Now let's talk about TypTap Insurance Group. It made a GAAP profit in Q1 of this year. Last year, we talked about ticked up seeing periods of profitability. The Q1 of this year shows that we're executing on that vision, but our work is not done. Speaker 400:10:37We continue to leverage our technology and optimize our book of business, while maintaining strong retention ratios, and we plan to build on the current momentum Finally, we continue to make progress on items we mentioned in previous calls. We had talked about setting up additional insurance companies. We are in the process of setting up 2 new carriers Named Tailorow and Per Risk, we still have work to do before these new companies write their first policies with progress is being made. In closing, from our perspective, we are starting to see a turn in the operating environment in Florida. The underwriting actions we've taken over the past several months, along with the benefits of legislative reforms, have started to show up in our Q1 results. Speaker 400:11:32On prior calls, we highlighted there will be an opportunity for us in the near future. We are seeing that opportunity unfold in front of us. The days ahead are even brighter. With that, I'd like to open the call to questions. Operator? Operator00:11:52Thank you, sir. At this time, we will be conducting a question and answer session. One moment please while we poll for questions. Our first question comes from Mark Hughes with Truist. Please proceed. Speaker 500:12:28Yes. Thank you very much. Mark, you listed a number of drivers of the improvement in Loss ratio to 33 from 40, higher premiums and then you mentioned 2 or 3 other things. Could you repeat those? Speaker 300:12:48Yes. So part of it is obviously higher average premium per policy. The other thing I mentioned is claim severity is kind of is moderating. And really more importantly, claims frequency is declining and also litigation frequency is also declining. And those are the 4 drivers, number 3 and 4 probably being the most important. Speaker 500:13:22And how much of that do you attribute to the reform? Speaker 300:13:29I mean, it's hard to say for sure. I mean, we talked about it on the last call. Any comment I'd make about this, we'd sort of preface it by saying that it's early. But We talked about the expectations that we had of what we thought would happen. We talked about The decline we expect the declines in claim frequency of 15% to 20%. Speaker 300:13:57We talked about that on the last call. We talked about a decline in litigation frequency of about 30%. And like I said, it's early, but From what we had seen so far, it would indicate that those assumptions were pretty reasonable. So It's definitely a significant part of it. Speaker 500:14:22Excellent. How much did better weather help this quarter do you think? Speaker 300:14:27It was a good question. A little bit, not a huge issue. You might recall in the Q1 of last year in Florida, we had more weather than you would normally see in a Q1. So we had less weather in the Q1 this year than last year in Florida, but we had more Weather related expenses weather related losses in the Northeast this quarter than the Q1 last year. So Weather was not really a big factor. Speaker 300:15:02It was a little bit of the drop, but not really a big one. Just because of those things, Those two things really sort of offset one another mostly. Speaker 500:15:15In the Setting up the 2 new carriers, I'm interested in kind of Thoughts on your broader appetite for new business, the Written premiums, if I'm looking at it properly, yes, the TypTap definitely up Pretty meaningfully. What do you hope to capture with the 2 new carriers? Maybe refreshment on that? Speaker 400:15:54Absolutely, Mark. 2 things. In terms of just growing the top line, We can do that just within the 2 carriers that are already up and operating. The 2 new carriers Are being set up because we are now starting to set up for the next phase of our growth. And while we haven't Disclose how they fit into the group and what exactly they have been doing. Speaker 400:16:24We clearly are doing this In a manner where those 2 new carriers were both expansive and complementary to the current 2 carriers that we have, yes? Speaker 500:16:39Yes. And then, Mark, you had mentioned that you started to slow The pace of reserve increases, you hadn't gone in the other direction though. Could you give us some dimension and magnitude Of that, how much have you changed? How much are you still kind of working away at that quarter to quarter? Speaker 300:17:04Yes. So we went through this period where and we talked about it a lot where we were Expensing more than we paid out and reserves were going up. And there's a few reasons for that. We were growing, obviously, and also The number of open lawsuits and expected lawsuits was going up. And so we were increasing our We're expensing more than we were paying out and as a result reserves were increasing. Speaker 300:17:32In Q1 this year, net reserves were pretty We didn't really increase them, we didn't decrease them. So our loss expense is pretty close to what the incurred loss And what paid losses were. So we haven't really started To reduce them at this point, but given the trends and some of the numbers that we're seeing, I think that's a possibility for the future. That's probably the next phase of it. Speaker 500:18:10Thank you very much. Operator00:18:24The next question comes from Matt Carletti with JMP. Please proceed. Speaker 600:18:30Hey, thanks. Good afternoon. Speaker 200:18:33After that. Speaker 600:18:34Just wanted to circle back on one of the questions Mark had there on weather, with kind of Florida being a little Maybe below normal and Northeast or above normal, netting out to sounds like pretty normal. Would that comment hold true for TypTap When we think about kind of being GAAP profitable that it did so in kind of a normalized weather quarter or did it run a little hot or a little cool? Speaker 300:18:59Yes, it was I mean, that comment holds for both. I mean, it was less weather in Florida, more weather in the Northeast. But it's the improvement in the loss ratio, the biggest driver was The decrease in even weather adjusted claims frequency was down considerably, even if you take weather out of it. If you remove the weather claims in both quarters and just look at weather adjusted frequency, it was down substantially, More than we expected it to be. And that's why that statement that we made on the last call about loss ratios, Expecting them to be I think I said 25%, Paresh mentioned, from 40% down to 30%. Speaker 300:19:51What we saw in the Q1 would indicate that we're definitely heading towards that. Speaker 600:19:57Okay. And then as we think about, Say growth across the year, and then not so much a bit more about exposure growth or kind of when you as you start up, Obviously, new companies or even within the existing companies think about not just kind of rate growth. How should we think about that in terms of timing with when reinsurance incepts, when How hurricane season might play into that, the reinsurance true up later in the fall, is it reasonable to think that, that might be a little more back end weighted or am I thinking about that wrong? Speaker 400:20:34Matt, you're thinking about it exactly correctly. Growth will be back end weighted in the context of press count, yes? Speaker 600:20:42Yes, exactly. Okay, great. And then just a numbers question probably for Mark. You have the net written premiums for the quarter. Speaker 300:20:50Yes. So it's $129,400,000 Speaker 600:20:55Wonderful. Great. Thanks so much. Operator00:21:06We have a follow-up coming from Mark Hughes with Truist. Mark, please proceed. Speaker 500:21:13The improvement in severity, Any comment around inflation, building materials, is that part of this? Is that moderating? Speaker 300:21:25Yes. So good question. So I use the term moderating and you might recall, inflation obviously Was an issue, is an issue. I think it was probably the Q2 of last year where we really saw Probably the biggest impact of that increase, but it started to kind of level out after that. And I think Paresh has mentioned it, we track the cost of those things and I think it's sort of been level since then. Speaker 300:21:58So if you look at claim Severity in the Q1 of this year, it's higher than the Q1 of last year. It is up. It took that bump in Q2 of last year and since then hasn't moved a lot, and that's why I use that term moderating. So It's higher than it was in the Q1 of last year, but I think about 10% or so. But it's not having The adverse effect that it was having in prior past quarters. Speaker 500:22:30So you essentially lap that in the current quarter? Speaker 400:22:36Yes. Mark, a different way of looking at this is in the Q2 last year, it was unknown Well, severity increasing was going to be repetitive in that following through quarter after quarter after quarter. I think what Mark is saying and what we're seeing Is that the average severity took a jump in Q2 of last year, but then it's been flat since then. So it's more of a step function, right, as opposed to Increasing ramp, which is obviously very good news. Speaker 500:23:08Yes, yes. Mark, any thoughts on loss ratio for the maybe not for the year, but kind of the underlying Trend line, I think you're suggesting that you're seeing improvement, but we're not we're only on the way, But we're at a 33% loss ratio, which is pretty darn good and maybe Not too much of influence from weather, where What's the right run rate? Speaker 300:23:45Yes. So I'll go back again to something that we said in the last earnings call and I just mentioned that We felt that overall impact on the consolidated loss ratio is in the 25% range. Paresh talked about it going from 40% to 30%. And we still think that that makes sense and that that's the ramp that we're headed 2nd quarter that doesn't necessarily say that that's going to happen every quarter. 2nd quarter, I think everybody knows, is sort of A quarter where there's usually some weather, the loss ratio in the second quarter is usually a little higher than it is in the first quarter. Speaker 300:24:27But I think we're headed back down toward that 30% range. I think we'll see it. Again, you have to be careful that it's only 1 quarter, right? And those trends that we're seeing are good, But we need time to make sure that they settle in. So does that answer the question? Speaker 500:24:51It does. Thank you. Have you seen any weather so far in the I mean, we're almost halfway through the Q1, Probably have April in hand. I know a lot of opportunity for other things to happen, but any reason to think so far? Speaker 400:25:12Mark, it's Paresh. Two things. Yes, we are picking up some weather in the Q2. But as Mark indicated, it's what you normally expect in the Q2. There's been It's been a choppy spring, so there's been some heightened claim activity, but it's not anything Beyond what our expectations were, right? Speaker 400:25:38So from that sense, it's very good. The other thing, I think, to summarize some of the Stuff your conversations back and forth with Mark. I think what's being indicated is That movement from 40.6% last year to 33.6% this year, right, isn't The result of a one time windfall, whether it be reserve relief or one time One quarter where the weather was unusually benign, right? There's none of those kinds of things in Q1 numbers. It's sort of telling you that a lower loss ratio is on the way and it's probably sustainable. Speaker 400:26:25It will fluctuate up and down a little bit, second quarter Because the weather might be slightly worse than normally is, but you are clearly and solidly on a path You're having improved loss ratios and actually improved combined ratios for that matter. Speaker 500:26:44Understood. And then, Harish, you've mentioned 70% of the reinsurance program is already placed. And that's I think you said that Is it the cat fund, Florida Hurricane cat fund, the RAP program? What else did you mention in that? Speaker 400:26:59Also, our we have 1 or 2 multiyear contracts. So those rates were obviously set last year, yes? Speaker 500:27:10Yes. And then the 30% is being placed now. Any observations about the Capacity or capital in the market, any kind of recent Shift in sentiment around I'm thinking the ILF spreads have Narrowed or there's some maybe movement in that direction. Does that mean anything? Speaker 400:27:41Mark, we've heard and said similar things that we see all that movement. The more important thing that we are usually focused on at this point in time is can we get our program placed, right? And that we are starting to feel confident about, and that's really it. We hear rumors and or Conversation is about what's happening in the industry as a whole. But at this point in time, we've become very narrowly focused on making sure Our program is completed. Speaker 500:28:18Yes, fair enough. Maybe just one more. The mission expense Improved nicely. I think you mentioned some decline in commission rates, maybe mix. I assume if you're not pursuing much new business in 2Q or 3Q, maybe the It stays at the same rate, maybe the mix is consistent on new and renewal. Speaker 500:28:45Does it then pop back up in the 4th quarter? How much of this is going to stay with us versus perhaps temporary? Speaker 300:28:54I think, I mean, it does depend a little bit on that mix. But I think it's been coming down for a while and I think where it is now, I think it will probably decline a little bit more, but not a lot. So if you're modeling that, I think that rate that we're at now is probably Speaker 500:29:18And I'll maybe ask one more, if I might. Anything in Greenleaf around some of these concerns around commercial real estate and the lending environment, does that Have any impact on valuations or liquidity in the market? I know Florida is hot, but I'm just curious. Speaker 400:29:45Mark, Two things. One is, all the real estate we own, we either have paid for in cash Or where there is a load, I think it's the mortgage is unlocked by the very nature, Long duration and fixed rate, right? So from our perspective, we don't feel any pressure on Thanks. Yes. The other thing is and currently it looks well executed. Speaker 400:30:16As Karen mentioned in her prepared comments, the 4 transactions over the last 3 years, right, have Really freed up a lot of capital for the ACI Group by selectively Selling certain assets, including the latest 2 shopping closers that we did, Speaker 300:30:36which freed him about $31,000,000 of capital. Yes. And Mark, I would just add one thing to that, that we've talked about this before, but there's that very sizable Delta between what we've got the real estate on the books for and what it appraises for with bank appraisals or what we think it's worth. And even as we've gone through some of these transactions, that number is not getting any smaller. It's still even if you look at bank appraisals, There's still a $50,000,000 difference between the bank appraised value of our real estate and what it's on the books for. Speaker 300:31:15We've got some really good quality properties and very unlevered. I think total debt on that $120,000,000 of value is about $4,500,000 Good quality real estate and good markets. To this point, the value has been maintained. It's very low leverage It's been Karen went through the numbers. It's been a great investment for us. Speaker 500:31:42Okay. Thank you for all the answers. Speaker 300:31:45Thank you. Operator00:31:49At this time, this concludes our question and answer session. I would now like to turn the call over to Paresh Patel, who has a few closing remarks. Speaker 400:31:59On behalf of the entire management team, I would like to thank our shareholders, employees, agents And most importantly, our policyholders for their continued support. Thank you. Operator00:32:13This concludes today's call. You may now disconnect.Read morePowered by