Good afternoon, welcome to HCI Group's first quarter 2023 earnings call. My name is John, 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 it 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. I will now turn the call over to Matt Glover, Gateway Group, Inc. Matt, please proceed.
Thank you, John, and good afternoon, everyone. Welcome to HCI Group's first quarter 2023 earnings call. On today's call is 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 first quarter 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. Before 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 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 obligations to update any forward-looking statements. Now, with that, I'd like to turn the call over to Karin Coleman, Chief Operating Officer. Karin.
Thank you, Matt. Welcome everyone. HCI Group reported a strong first quarter with pre-tax income of $23.1 million 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 first quarter of profitability on a GAAP basis and more than $350 million of in-force premiums. 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 million, reflecting gains on the sale of two properties disclosed on our last call.
As a reminder, over the last three years, Greenleaf realized gross proceeds of close to $90 million and a gain of $60 million on just four transactions. We believe there is still plenty of upside in our real estate portfolio. In addition, our investment portfolio earned $9 million 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 million in interest income on an annualized basis with a low risk profile. We 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. Now I'll turn it over to Mark, who will provide more detail on our financial results.
Thanks. As Karin mentioned, pre-tax income for the quarter was $23.1 million, diluted earnings per share were $1.54, up from $0.09 in the first quarter of 2022. We've discussed several positive trends over the past few quarters, 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. Second, investment income is going up. As Karin mentioned, we had a gain from our real estate portfolio, even if that is excluded, the remaining $8.8 million of investment income is more than 3 times what it was 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 onto our cash, and when they started to go up, we carefully invested some of that cash in bonds. At the end of Q1, we have $500 million invested in fixed-term securities at an average yield of 3.7% compared to $150 million invested at 1.6% a year ago. We have continued to manage the risk as well. Our average term to maturity in the bond portfolio was just over one year, and we still have over $300 million 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% 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 million for the quarter. I saved the last trend, declining loss expenses for last, as it deserves more explanation. In the first quarter, 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. 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. These 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 Karin mentioned, we sold 2 of our commercial properties for a gain of $8.9 million, another example of our opportunistic real estate strategy. Just a few other quick things.
Consolidated cash flow from operations was $99 million or about $11 per share, compared to $57 million in the same quarter last year. Book 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 million at the end of the quarter, up from $145 million at the start of the quarter. Of course, this does not include the $120 million in value represented by our investments in real estate in Greenleaf. In summary, this was a strong quarter for us. Our operating strategies are paying off, the insurance market in Florida is improving, and we've positioned the business to deliver superior ongoing operating results.
With that, I'll hand it over to Paresh.
Thank you. Mark and Karin 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. We are finishing up the placement for both of our insurance companies. 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 Catastrophe Fund, the Reinsurance to Assist Policyholders or RAP program, and our multi-year contract, TypTap and Homeowners Choice had secured approximately 70% of their planned limit purchase.
The remaining 30% is being placed in the private market now and where enough capacity is available. On a blended basis, we think the rates will be higher, but the cost will be within expectations. 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. Both Homeowners Choice and Greenleaf at this point have solid proven track records on which we continue to build. Let's talk about TypTap Insurance Group. It made a GAAP profit in Q1 of this year. Last year, we talked about TypTap seeing periods of profitability. The first quarter of this year shows that we're executing on that vision, but our work is not done.
We continue to leverage our technology and optimize our book of business while maintaining strong retention ratios. We plan to build on the current momentum in TTIG. 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 Tailrow and Peril Risk. We still have work to do before these new companies write their first policies. 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. On prior calls, we highlighted there would 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. I'd like to open the call to questions. Operator?
Thank you, sir. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you 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 poll for questions. Our first question comes from Mark Hughes with Truist. Please proceed.
Yeah, thank you very much. Mark, you listed a number of drivers of the improvement in the loss ratio to 33 from 40, higher premiums, and then you mentioned 2 or 3 other things. Could you repeat those?
Yeah.
I didn't write them down.
Yeah. Part of it is obviously higher average premium per policy. The other thing I mentioned is claim severity is kind of moderating. Really more importantly, claims frequency is declining and also litigation frequency is also declining. Those are the 4 drivers. The number 3 and 4 probably being the most important.
How much of that do you attribute to the reform?
I mean, it's hard to say for sure. I mean, you know, we talked about it on the last call. You know, any comment I'd make about this, we'd sort of preface it by saying that, you know, it's early. But, you know, we talked about the expectations that we had of what we thought would happen. We talked about the decline we expected declines in claim frequency of, you know, 15%-20%. We talked about that on the last call. We talked about a decline in litigation frequency of, you know, about 30%. Like I said, it's early, but from what, from what we have seen so far, it would indicate that those assumptions were pretty reasonable. So it's, you know, it's definitely, it's definitely a significant part of it.
Excellent. How much did better weather help this quarter, do you think?
It was.
How would you characterize
Yeah. It was. Good question. A little bit, not a huge issue. You might recall in the first quarter of last year in Florida, we had more weather than you would normally see in a first quarter. We had less weather in the first quarter this year than last year in Florida, but we had more weather-related expense, weather-related losses in the Northeast this quarter than the first quarter last year. Weather was not really a big factor. It was, you know, it 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.
The setting up the two new carriers, I'm interested in kind of the thoughts on your broader appetite for new business. The written premiums, if I'm looking at it properly, yeah, the TypTap definitely up pretty meaningfully. What do you hope to capture with the two new carriers? Maybe refresh me on that.
absolutely, 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. While we haven't disclosed how they fit into the group and what exactly they'll be doing, we clearly are doing this to, in a, in a manner where they, those 2 new carriers were both expansive and complementary to the current 2 carriers that we have. Yeah.
Yeah. Mark, you'd mentioned how you started to slow the pace of reserve increases.
Yeah.
You hadn't gone in the other direction, though. Could you give us some dimension magnitude of that? You know, how much have you changed? How much are you still kind of working away at that quarter to quarter?
Yeah. You know, 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. There's a few reasons for that. We were growing, obviously, and also, you know, the number of open lawsuits and expected lawsuits was going up. We were expensing more than we were paying out, and as a result, reserves were increasing. In Q1 this year, net reserves were pretty flat. We didn't really increase them. We didn't decrease them. You know, our loss expense is pretty close to, you know, to what the incurred loss expense was and what the paid losses were.
We haven't really started to reduce them at this point. You know, given the trends and some of the numbers that we're seeing, you know, I think that's, you know, it's a possibility for the future. That's probably the next phase of this.
Thank you very much.
Once again, if you have a question or a comment, please indicate so by pressing star one on your touchtone phone. Once again, that's star one if you have a question or a comment. The next question comes from Matt Carletti with JMP. Please proceed.
Hey, thanks. Good afternoon.
Afternoon, Matt.
Just wanted to circle back on one of the questions Mark had there on weather, with Florida being a little maybe below normal and Northeast a little above normal, netting out to sounds like pretty normal. Would that comment hold true for TypTap when we think about it being GAAP profitable, that it did so in a normalized weather quarter, or did it run a little hot or a little cool?
Yeah, it was... I mean, that comment holds for both. I mean, it was, you know, less weather in Florida, more weather in the Northeast. But you know, the, you know, the improvement in the loss ratio, the biggest driver was the decrease in even, you know, 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, we were down substantially more than we expected it to be.
Okay.
You know, that statement that we made on the last call about, you know, loss ratios, expecting them to be, I think I said 25%. Paresh mentioned, you know, from 40% down to 30%. You know, what we saw in the first quarter would indicate that, you know, we're definitely heading towards that.
Okay. Then as we think about, you know, say growth across the year, and, you know, not so much... A bit more about e-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, you know, when reinsurance incepts, when, you know, how hurricane season might play into that, the reinsurance true-up later in the fall? Is it, is it reasonable to think that that might be a little more back-end weighted or am I thinking about that wrong?
Matt, you're thinking about it exactly correctly. Growth will be back-end weighted in the context of TypTap, yeah.
Yeah, exactly. Okay, great. Then just a numbers question probably for Mark. Do you have the net written premiums for the quarter?
Yeah. It's $129.4 million.
Wonderful. Great. Thanks so much.
Once again, if there are any remaining questions, please press star one on your touchtone phone. We have a follow-up coming from Mark Hughes with Truist. Mark, please proceed.
The improvement in severity, any comment around inflation, building materials? Is that part of this? Is that moderating?
Yeah. Good, good question. I'd use the term moderating, and you might recall, you know, inflation obviously was an issue, is an issue. I think it was probably the second quarter of last year where we really saw the, probably the biggest impact of that increase. It, it started to kind of level out after that. You know, I think Paresh has mentioned it, we tracked the cost of those things, and I think it's sort of been level since then. If you look at claim severity in the first quarter of this year, it's higher than the first quarter of last year. It is up.
it's, 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. it's higher than it was in the first quarter of last year. It's, I think, about 10% or so. it's not having the adverse effect that it was having, you know, in past quarters.
You essentially lap that in the current quarter?
Yeah. Mark, a different way of looking at this is in the 2nd quarter last year, it was unknown whether severity increasing was going to be a repetitive thing that followed 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. It's more of a step function, right? As opposed to a increasing ramp, which is obviously very good news.
Yeah. Yeah. 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.
Yeah.
We're only on the way, but, you know, we're at a 33% loss ratio, which is, pretty darn good and maybe.
Yeah.
Too much of influence from weather. You know, where, what's the right run rate?
Yeah. I'll go back again to something that we said in the last earnings call, I just mentioned that, you know, we, you know, we felt that that overall impact on the consolidated loss ratio is, you know, in the 25% range. Paresh talked about it going from 40 to 30. We still think that that makes sense and that that's the ramp that we're headed towards. Second quarter, you know, that doesn't necessarily say that that's gonna happen every quarter. Second quarter, I think everybody knows it's 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.
You know, I think we're in, you know, we're headed back down toward that 30% range. I think we'll see it, again, it's you have to be careful 'cause it's only 1 quarter, right? Those trends that we're seeing are good. You know, we need time to make sure that they settle in. Does that answer the question?
It does. Thank you. Is Have you seen any weather so far I mean, we're almost halfway through the first quarter, probably have April in hand. I know a lot of opportunity for other things to happen. Any reason to think so far?
Mark, it's Paresh. 2 things. Yes, we are picking up some weather in the second quarter. As Mark indicated, it's what you normally expect in the second quarter. It's been a choppy spring, there's been some height in claim activity. It's not anything beyond what our expectations were, right? From that sense, it's very good. The other thing I think, you know, 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 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 is probably sustainable. It'll fluctuate up and down a little bit, second quarter, because the weather might be slightly worse than it normally is. You are clearly and solidly on a path to having improved loss ratios and actually improved combined ratios for that matter.
Understood. Paresh, 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 Catastrophe Fund, the RAP program? What else did you mention in that?
Also our We have, you know, one or two multi-year contracts, so those rates were obviously set last year.
Yep. Then the 30% is being placed now. Any observations about the capacity or capital in the market? Any kind of recent shifts in sentiment around... I'm thinking, you know, the ILS spreads have narrowed or there's some maybe movement in that direction. Does that mean anything?
Mark, you know, we've heard and said similar things that we see all that movement. The more important thing that we are usually a focus at this point in time is can we get our program placed, right? That we're starting to feel confident about, and that's really it. We hear rumors or and/or conversations about what's happening in industry as a whole. You know, at this point in time, we've become very narrowly focused on making sure our programs are completed.
Yeah, fair enough. Maybe just one more. The mission expense improved nicely. I think you've mentioned some decline in commission rates, maybe mix. I assume if you're not pursuing much new business in 2 Q or 3 Q, maybe it stays at the same rate, maybe the mix is consistent on new and renewal. Does it pop back up in the fourth quarter? How much of this is gonna stay with us versus perhaps temporary?
I think, I mean, it does depend a little bit on that mix. You know, 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. You know, if you're modeling that, I think that rate that we're at now is probably a pretty good number.
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.
Mark, two things. One is all the real estate we own, we either have paid for in cash or where there is a loan, I think it's, the mortgage is a lot, by the very nature, long duration and fixed rate. Right? From our perspective, we don't feel any pressure on those things. The other thing is, and currently it looks, you know, well executed. As Karin mentioned in her prepared comments, the four transactions over the last three years, right? Have really, you know, freed up a lot of capital for the HCI Group by selectively selling certain assets, including the latest two shopping plazas that we did, which freed up about what, $41 million of capital.
Yeah, and Mark, I would just add one thing to that, you know, we've talked about this before, but, you know, there's that very sizable delta between what we've got the real estate on the books for and, you know, what it appraises for, you know, with bank appraisals or what we think it's worth. Even as we've gone through some of these transactions, you know, that number is not getting any smaller. You know, it's still. Even if you look at bank appraisals, there's still a $50 million difference between, you know, the bank appraised value of our real estate and what it's on the books for. You know, we've got some really good quality properties and very unlevered.
I think total debt on that $120 million of value is about $4.5 million. you know, good quality real estate in good markets. you know, to this point, the value's been maintained. It's very low, low leverage, and it's been, you know, Karin Coleman went through the numbers. It's been a great investment for us.
Okay. Thank you for all the answers.
Mm-hmm.
Thank you.
At 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.
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. Thank you.
This concludes today's call. You may now disconnect.