Good afternoon, and welcome to HCI Group's second quarter 2024 earnings call. My name is Ali, 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 September 7th, 2024, starting later today. This call is also being broadcast live via webcast and available via webcast replay until August 8th, 2025, on the investor information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Mr. Matt Glover of Gateway Investor Relations. Matt, please proceed.
Thank you, and good afternoon, everyone. Welcome to HCI Group's second quarter 2024 earnings call. On today's call are Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the second quarter of 2024, and then Paresh will provide a strategic update. To access today's webcast, please visit the investor information section of our corporate website at hcigroup.com. Before we begin, I'd 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 Karin Coleman, Chief Operating Officer. Karin?
Thank you, Matt, and welcome everyone. Before getting into a few comments on the quarter, I wanted to quickly touch base on Hurricane Debby. Our sympathies go out to those impacted by Debby. Our team is actively assisting our policyholders during this difficult time. Our early view is that Debby is not expected to be a reinsurance event, and we expect its losses to be well within our statutory retention. Now for the quarter update. In the second quarter, HCI Group reported pretax income of $76 million and earnings per share of $4.24. This was a tremendous outcome. Gross premiums earned increased almost 45% in the quarter to $264 million, with contributions from each of our insurance divisions. In-force premiums continued to be above $1 billion.
We reported another quarter of improvement in our underwriting results. Including weather losses in the quarter, our gross loss ratio was 29.7%. HCI continued to deliver on its commitment to shareholders, paying a dividend of $0.40 per share, our 55th consecutive quarterly dividend. We had several notable accomplishments in the quarter. First, Condo Owners Reciprocal Exchange, known as CORE, assumed additional policies from Citizens, and its total run-rate premium is approximately $70 million. Second, we completed our annual reinsurance program in the quarter, which included a structure similar to last year, and the retention at both of our insurance carriers was largely unchanged. We were pleased with the outcome, and we appreciate the continued support of our reinsurance partners. We believe reinsurers recognize the value of our technology and our claims organization.
With reinsurance now secure, we expect our total reinsurance spend across all reinsurance towers to be approximately $92 million per quarter. This includes the consolidation of CORE's reinsurance spend and minor risk transfer enhancements. I'd like to reaffirm a few statements I made last quarter related to the assumption of policies from Citizens. First, I mentioned that we were retaining more policies than we expected. As more policies come up for renewal and transition to our paper, this is still the case. The retention of policies continues to exceed our expectations. Second, I mentioned that the loss ratio was coming in better than expected. As this book becomes more seasoned, this is still the case. The loss ratio on policies we assume from Citizens is continuing better than expected.
Given the proven success of our technology to select attractive policies from Citizens, we have applied to assume additional policies from Citizens. Homeowners Choice has been approved to assume up to 25,000 policies in October. TypTap has also been approved to assume 25,000 policies in October, and both companies have applied to participate in a November assumption as well. Additionally, CORE has been approved to assume policies from Citizens in October. We will update everyone on our plans closer to the assumption date. Overall, we posted another quarter of solid profitability, and we continue to make solid progress on our top line and bottom line. Now I'll turn it over to Mark to provide more details on our financial results.
Thanks, Karin. As the numbers show, this was another solid quarter for the company. Pretax income was just over $76 million, and diluted earnings per share were $4.24. These continued outstanding results are being driven by premium growth, higher investment income, a lower loss ratio, and lower expense ratios. Gross premiums earned of $264 million were 45% higher than the same quarter a year ago. The growth is being driven primarily by Florida, where the number of policies in force is up 40% from the same quarter last year. Investment income of over $16 million is almost double what it was in the second quarter last year, driven by higher rates, but also by higher invested balances.
Consolidated cash and investments at the end of the quarter, up 45% higher than a year ago, driving investment income higher. The consolidated gross loss ratio was 29.7% this quarter, down from 34% in the same quarter last year. We said some time ago that the loss ratio would come down to 30%, and we are there. For the first six months of this year, the consolidated loss ratio was 30.4%. While we had a little less weather than expected during the first half of the year, the lower loss ratio was driven by improvements in the frequency of all types of claims, as well as much lower litigation propensity. The combined ratio this quarter was just under 68%.
This is a little lower because of the Citizens' assumptions, for which we had limited reinsurance and policy acquisition expenses for part of the quarter. If we normalized the numbers for that, the combined ratio this quarter would have been closer to 80%. This is a considerable decrease from our 90% combined ratio in the second quarter last year. The reduction in the combined ratio is being driven by improving loss trends, rate actions taken last year, as well as operational leverage. As an indication of that leverage, labor and operating expenses as a percentage of gross premiums earned in the first six months of this year are 9.5%, down from 11% during the same period last year. Our technology is allowing us to grow without adding a lot of additional costs, and this is helping to drive profitability.
Now, a few comments on the balance sheet, which continues to improve. Over the last 12 months, consolidated cash and investments have increased by $390 million. Debt has dropped by $70 million. Shareholder equity has increased by $259 million. The debt-to-cap ratio has dropped from 62% to 34%, and book value per share has grown from $22 to $43. These improvements in the balance sheet have resulted from careful debt management, capital management, operational efficiency, profitability, and growing cash flow. I should also quickly talk about capital. We've been able to maintain holding company liquidity at well over $200 million, despite the significant debt reduction. In addition, surplus at the underwriter level continues to increase. In summary, we're in a solid financial position, and it continues to improve.
The combined ratio is down, debt is down, premium revenue is up, investment income is up, cash and investments are up, and capital continues to grow. With that, I'll hand it over to Paresh.
Thank you, Mark. Before going into my comments, I also want to offer my sympathies to those impacted by Hurricane Debby, and I wish everyone a speedy recovery. Now, moving my thoughts back on HCI. The insurance industry has a universal measure of success, the combined ratio. Across the broader industry, we see that even incremental improvement in the combined ratio requires a lot of effort. If you want to move the combined ratio down in a material way, it is very, very difficult. As was highlighted in Mark's comments, in a few quarters, we've been able to show a huge improvement in underwriting results. Why is that? It's because of our technology. Our technology has not only led to a better-than-average combined ratios in the tough times, but it has shown that it can significantly improve the combined ratios in good times.
We know we have the technology that works and that it can drive a better combined ratio. This is a huge accomplishment. And given our history, we ask ourselves, what else can we accomplish? With that, I turn it over for questions. Operator, please provide instructions.
Thank you. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question is coming from Michael Phillips with Oppenheimer. Your line is live.
Thanks. Good afternoon, everybody. I guess first question would be around kind of cat loss potential. You know, there's been a lot of concerns, I guess, that we're fielding in the past couple of weeks, and certainly maybe in the past month. You know, gee, what if, given all the growth these guys have had, certainly from Citizens, what if something big comes through? What would that look like? And I don't know if there's a way to quantify that at all. Maybe if you could, I don't know if you can do this, is, you know, what if another Ian came through again? What would that look like in today's book? I think you had just under $1 billion gross and maybe $70 million or $65 million net.
So, you know, Matt, is there a way to talk about that as kind of similar path of what Ian would look like today? Thanks.
... Yeah, Michael, it's Mark. So, you know, first thing, if a storm like Ian comes through, you know, there would be a significant loss. There obviously would be a significant loss. We've got, the way to think about it is, there's the statutory retentions of, of Homeowners Choice and TypTap. Homeowners Choice is about $14 million, TypTap's about $9 million. And then after that, it kind of depends a little bit, on, you know, where the storm is and in which underwriter the insurance or the, the loss is in. Because as you know, we've utilized Claddagh in this year's reinsurance program.
So, you know, depending on the size, depending on which underwriter is impacted, because Claddagh is involved in the TypTap program, you could have a loss of, you know, $40 million-$45 million in TypTap if that layer was fully utilized, and if that loss was a TypTap loss. And then beyond that, as you know, anything beyond that gets a little bit complicated. But, you know, we do have some, you know, based on multi-year reinsurance benefits, there is the potential for some unwinding of those reinsurance benefits. But again, that sort of depends on, you know, size and which underwriter is affected. But that should sort of give you an idea.
Michael, and I guess yeah, sure. I'm sorry, go ahead first.
Answering that in a, from a different perspective, because we understand, given forecast, everybody's concerned. Why don't we just look at Ian? Ian was what Ian was. We had a net loss, right? It's all there. It is painful, no question. But in terms of where Ian estimates and where we sit at this point, right? Both, both insurers went through about 40% of their tower in Ian, which was a Cat 5, right? So should there be a weather event, we will have in a certain amount of net retained losses. But after that, it is going to be covered by our reinsurance towers. And the key item, I think, that we sort of feel comfortable about with, is that we have bought more than adequate reinsurance to, you know, to pay the claims, and that's the whole purpose of it.
Based on historical numbers, et cetera, that's what gives us comfort. Yeah?
Yeah, okay, sure. Thank you. That, that's helpful. I guess, you know, I was going to say one of the big differences between now and then is pricing's up quite a bit since 2022, so that's, that's good news as well.
Yeah.
I guess for next question would be on your the numbers Karin gave on the October what you're assuming and may have applied for 25,000. Do you think, I guess, the acceptance rate for this time around, is there any reason to think it might be different than what it was last year? I think you were just under 60%. Should that be higher this year, or any thoughts there?
Just generic comments is, I think, the October takeout, there are, 9, 10, 12 carriers, something like that, and over 400,000 policies that have been at least requested by these carriers who have been approved, us being two of them, obviously. This is on the personal side. On the commercial side, it's slightly different. So, you know, to put this in perspective, when Homeowners Choice did the November takeout last year, there were—the OIR had approved just over 200,000 policies in that takeout. This one's over twice that size. So I think it's gonna be a lot more competitive, but we anticipated that. The other side of that is we like our, our opportunities and, take-up rates, et cetera.
So the other side, the other caveat that everybody's also aware of, is all of this also depends on your first question as to what happens over the summer in terms of weather events, yeah? So, it, it's a lot of, you know, unforeseen or fuzzy numbers at the moment. We'll know in two to three months, yeah?
Okay. Yeah, thank you. And then last question for now, I guess, is your gross loss ratio, 30%. You mentioned some of the lower litigation in Florida again, and I think in the past you've talked about maybe kind of a round number. It's down last quarter, the quarter before, you said around down about 35% or so. Is that still about the rate, or has it gotten even better than that from what you said last time?
Yeah, it has. You know, claims frequency is down, like, 25%-30%, and litigation frequency, so litigation based on any number of claims, is 35%-40% now. So it's, yeah, it's actually getting a little bit better.
Okay, good. All right, cool. Congrats on the quarter, and that's it for me for now. Thank you.
Thank you.
Thank you. Our next question is coming from Matt Carletti with Citizens JMP. Your line is live.
Yeah, thanks. Good afternoon, everybody. Karin, in your opening comments, you referenced how a lot of the takeouts are retaining better when they come up for renewal. I was hoping you could maybe expand on that a little bit and help us with maybe, as we think about kind of the takeouts that were done in the fall and kind of the weighting of how much of that might have been concentrated with Q2 renewal dates? How much of that, as we look forward, might be Q3 or Q4 renewal dates? Just to help us understand kind of the population of policies coming up for renewal as we think about them, you know, retaining a little better.
Sure. Sure. Well, I can tell you that, you know, when we were doing the forecasting, we were expecting about a 65% retention rate the first year of the policies coming over, and it's holding closer to 85%.
Wow! Okay, perfect. And then as we think about Q2, Q3, is there much difference in kind of the weighting of those renewal dates between the quarters, or is it pretty similar?
Yeah. Hey, hey, Matt, I think,
Mm-hmm.
When I get into the technical nitty-gritty, the policies we took over from Citizens last November, right? Will all roll onto our paper in a timeframe from, let's say, February 22nd to November 21st, 2024. That's roughly the-
Mm-hmm
- the timeframe, and it's an even spread. Whenever they roll over, is I think what Karen's talking about, the 85% instead of the 65%. So but until they roll over, they tend to be on our paper 90% of the time. That's not a-- that's just how that works, because you assume the policy, so you've got the economics. It's the big step is what happens when you offer a renewal, yeah? And-
Yeah.
so the fact we're doing 85 versus 65, which also tells us that there isn't gonna be much of an attrition, whether 20 policies renew next week or 200 renew next week. Yeah?
Right. Right. No, that's a great outcome.
Mm-hmm.
And then, Paresh, next question for you is, you know, my understanding is Citizens is, you know, pushing some rate increases maybe a little bigger than they have in the past. And, you know, what does that... How does that kind of fit into how you look at, kind of take out, you know, the, the potential for success in takeouts? Does it change at all, kind of the—you've referenced, I think, about 400,000 kind of green light policies in the past as, as you kind of viewed Citizens.
Does it kind of change that population at all, or does it just, you know, does it make you think that you'll have a higher maybe attachment rate as you, you know, try for those takeouts because they're gonna be getting, you know, their Citizens' price is gonna be going up over time, a little faster?
Yeah. Matt, I would tell you that I think, given our effectiveness in last year's takeout, I think this year's number would be very similar. That's the all, if on a level, like-for-like basis, especially if the rate-
Mm-hmm
- increase, et cetera. Against that, you, my, to the earlier questions or comments, 400,000 policies being tagged for October, that in and of itself should tell you that things are getting more competitive, yeah? And-
Yeah, that's right.
So yeah, you have that, offsetting numbers, and reality will be what it will be. Yeah?
Okay, perfect. And then, my last one, just, Mark, my, my quarterly numbers question, if you have net premiums written handy?
Yeah, it's $230 million.
All right, great. Thanks so much. Congrats on the quarter.
Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star one on your telephone keypad. Our next question is coming from Mark Hughes with Truist. Your line is live.
Yeah, thank you. Good afternoon.
Good afternoon.
Good afternoon.
In thinking about the impact of Debby, I think you've described it as being within the retention, so something less than $14 for HCI and $9 for TypTap. Is that the right way to think about it?
Uh-
That's the retention rate. I can tell you that the claim volume coming in as of late today is relatively low. Between the two carriers, we have less than 245 claims reported.
Is that to say closer to zero than to the retention numbers? Is that one way to think about it?
Well, it is still an ongoing event, so I think we have to consider that as well.
Yeah. Yeah.
But I mean, 250 claims, it's not a lot of claims.
Yeah.
You've got to get to a lot more than 250 claims to get to, you know, 14 + 9, $23 million. So, you know, when we say within Statutory Retention, the storm's still ongoing. You know, we have to be a little bit careful about what we say, but it, you know, 250 claims is not a lot of claims.
Yeah, yeah. Okay. And then, any way to quantify how much benefit you got from more favorable weather this quarter? I think you said a little less than usual and maybe last year, but how much of a help was that?
It's not, it's not really that much, Mark. I mean, our expectation of Q2 was maybe a point or two higher. That's it. I mean, it's not really a weather story. If you look at... I think I said earlier, if you go back to the second quarter of 2022, claims frequency is down 30%. If you divide that between weather and non-weather, and this won't be a perfect analysis, but you know, weather's down 32%, and non-weather is down 28% or something like that. So the improvement in the loss ratio, the improvement in frequency, it's not a weather story. It's all claims are down.... And you know, when I said it's down a little, it was a little lower than we expected it to be.
It was, it was a very slight difference. So, I mean, I think we had said when we originally talked about 30% loss ratio, could be a little bit higher than that in a heavy weather quarter, a little bit lower than that in a light weather quarter. But, you know, 29.7 was, was-
What it was.
It is what it is. Yeah, and it-
Yeah.
Weather is, weather is not, weather is not really the story. Weather is not what's driving it down there.
Yeah. Thanks for that, clarification. How about your posture around voluntary policy growth? I don't think you do much in the storm season, but, when we get into the fourth quarter, perhaps, you know, how much appetite will you have? I guess, TypTap would be more to the point. But, you know, include the other subs, if you want, CORE or, Homeowners Choice, but just how much voluntary growth are you interested in at this point?
Mark, it's Paresh. We, we are interested in growth and everything else, but you got to also keep in mind two mitigating factors. One, is given the size and scale that both of our carriers now operate at, you know, increment, incremental growth from, from voluntary writing is almost, you know, is there, but it sort of gets dwarfed by all the other things we're doing, right? If you, if you did get the 25,000 policies, think of how much premium that is compared to writing 25,000 policies voluntarily, one at a time, yeah?
Yeah. Yeah.
Yeah. So that's why it becomes a thing that, it's not the thing to focus on as such, yeah? Doesn't mean it isn't going on at the same time, but it's not going to be the, the material item.
And, Paresh, you ended your commentary, I think, suggesting that there was more to be done. And I'm sort of curious if there's anything that you would care to share in terms of what you can do with the technology and capital that you can discuss now?
Yeah. Look, quick, here's what I'm trying to articulate, right? We are all part of the insurance industry, and industry uses combined ratio as a benchmark, right? And listening to the efforts of every management team and everything else, everybody's trying to improve their combined ratios. If you can improve it by a couple of points, it's a great—it's a lot of effort and, you know, requires. Yeah, generates a sense of achievement. And that's one point. The other point that's also there is everybody always is always selling every insurance management team the benefits of technology. And if you have this technology and that technology and this and that, it will improve your results, right? Let you grow faster and or improve your—more importantly, improve your combined ratio. So technology has long been touted. Insurance companies long want this thing, right?
And we see all of that. We get bombarded with the same stuff. The interesting thing, what our technology has done, is look at how much we moved our Combined Ratio in the space of a year, and this isn't because there was a hurricane last year, and there was a hurricane this year. This is actual numbers and some of these things, and the growth and selecting risks from Citizens and doing it efficiently and all that. You know, it's the difference between technology that promises to improve your Combined Ratio versus technology that has been proven to improve your Combined Ratio. That's the sudden thing we find ourselves in, that we actually have technology that seems to work in the field.
If it does that in this tough line of business, that is homeowners insurance, especially in Florida, in a climate change environment, what happens if you apply this in a more benign line of business somewhere? What difference could we make there? That's. I'm just asking the question, you know, but it's worth exploring, and that's where the aspirations come to, yeah?
Yeah. Yeah. Okay. Let's go one more. The growth earn premium, you've been about $250 million the last couple of quarters, and you talked about $1 billion in policies in force. Is that a pretty good run rate at this juncture? You know, we'll get puts and takes, maybe some voluntary more takeouts that you've applied for later in the year, but is that a reasonable way to think about it, kind of the $250 million or so?
Yeah. I mean, setting aside any takeouts that we might or might not do, if you look at the business where it is now, $250 is a pretty, you know, pretty good run rate.
Yeah. Okay. All right. Thank you very much.
Thank you.
Thank you. Once again, ladies and gentlemen, if you have any final questions or comments, please press star one on your telephone keypad at this time. Once again, that's star one on your telephone keypad if you have any further questions. Okay, as we have no further questions at this time, this concludes our question and answer session, and I would now like to turn the call back over to Paresh Patel, who has a few closing remarks.
On behalf of the entire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. As I had said earlier in my comments, our thoughts and prayers are with those that are affected by Hurricane Debby, and we stand ready to help in every way we can. Thank you, and talk to you next quarter.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and we thank you for your participation.