Good afternoon. Welcome to HCI Group's third quarter 2019 earnings call. My name is Thelma, I will be your conference operator this afternoon. 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 on December 5, 2019, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until December 5, 2019, on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Kevin Mitchell, HCI's Senior Vice President of Investor Relations. Sir, please proceed.
Thank you. Good afternoon. Welcome to HCI Group's third quarter 2019 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, Mark Harmsworth, our Chief Financial Officer. Following Paresh's opening remarks, Mark will review our financial performance for the quarter and first nine months of 2019, then turn the call back to Paresh for an operational update and business outlook. Finally, we will take your questions. To access today's webcast, please visit the Investor Information section of our corporate website at hcigroup.com. Before we begin, I would like to take the 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, 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 statement. With that, I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh.
Thank you, Kevin. Welcome everyone. Before Mark provides details around our financial performance for the quarter and the first nine months of 2019, I would like to touch on some events and highlights from the quarter. Obviously, we generate diluted earnings of $0.73 per share. HCI has been profitable now in the last 48 quarters, with the two exceptions being quarters in which Hurricane Irma and Hurricane Michael hit. In July, we paid a dividend of $0.40 per common share. Our 36th consecutive quarterly dividend. The current yield is nearly 4%. As most of you know, hurricane activity generally peaks in the third quarter of every year. This year, we had a quiet third quarter. Although Hurricane Dorian devastated the Bahamas in September, it skirted the east coast of Florida without making landfall. Our estimated losses from Dorian were slight.
However, as we always do when a hurricane threatens Florida, we suspend new business until the Dorian threat had passed. That suspension impacted our new business production for about three weeks of the quarter. Despite the suspension, consolidated gross written premiums were up 8% over the third quarter of 2018, reflecting the rapid growth of TypTap Insurance Company, our technology-driven insurance subsidiary. With that, I'll now turn it over to our CFO, Mark Harmsworth, who will walk us through the financial performance for the third quarter. Mark.
Thanks, Paresh. Net income on a GAAP basis for the third quarter was $5.9 million, and GAAP diluted earnings per share were $0.73. On an adjusted basis, net income for the quarter was $5.4 million, and adjusted diluted earnings per share were $0.57. Year-to-date, net income on a GAAP basis was $20.1 million and $14.7 million on an adjusted basis. Year-to-date diluted earnings per share were $2.49 on a GAAP basis and $1.82 on an adjusted basis. The third quarter was another chapter in our growth story. In the second quarter, written premiums grew from the previous year, and that trend continued in the third quarter. Gross written premiums of $97.3 million are 2% higher than the same quarter last year and are 2% higher year-to-date. This growth, as Paresh mentioned, has been driven by TypTap.
TypTap wrote over $16 million in premium this quarter and has written more than $36 million year-to-date. We're really excited about the growth here, and we expect it to continue. The growth in written premium will start to translate into higher earned premium, and we expect that to happen in the fourth quarter. This would be the first time a quarter-over-quarter increase in gross premiums earned has happened in some time. A couple of other things on the income statement. In June, we announced our new reinsurance program, and that's leading to reinsurance premiums of $31 million per quarter. This is showing some significant growth in TypTap, but we did say that premiums could increase if TypTap growth outpaced our expectations, which it has. In Q3, premiums ceded for reinsurance are about $500,000 higher than the $31 million just mentioned.
This reflects a higher TIV adjustment than anticipated because of the extraordinary growth at TypTap. Reinsurance in Q4 should be about the same as it was in this quarter. Net investment income is about $1.4 million less than the same quarter last year. This is driven largely by the fact that limited partnership income was unusually high in the third quarter of last year. Loss expense in Q3 was about $1.5 million higher than last year. This was largely driven by TypTap. While we expect the long-term core loss ratio to be similar to that of Homeowners Choice, in order to build reserves and be conservative, we have been and will continue to reserve at a higher loss ratio. While this may drive slightly higher loss expenses in the near term as in this quarter, we think this is the right thing to do.
We've booked a loss reserve in the quarter for Hurricane Dorian of about $1 million. Loss expense year-to-date is about $11 million higher than the first nine months of last year. About one-third of this is explained by TypTap, as mentioned above, and most of the balance by the hail events that we had in the first quarter. If you're looking really closely, you might notice that our effective tax rate this quarter is a little low at 24.2%. This is due to the lowering of the Florida corporate income tax rate. The drop was retroactive to January 1st, the full year-to-date benefit was booked in Q3. With this new Florida rate, we expect a go-forward consolidated income tax rate to be about 26.8%. To the balance sheet.
The press release shows a comparison to December 31st, 2018, I'll make a few comments on those movements. You will see some changes within investments, the biggest of which is a $66 million reduction in short-term investments, which of course, was sold to fund the $90 million debt paydown in March. Fixed term securities are up. Some securities matured and were used to pay down the debt, we also purchased some new corporate bonds back in January to capitalize on the increase in rates that was happening earlier in the year. Reinsurance recoverable and loss reserves are both up. We increased the ultimate for Hurricane Michael to $32.5 million and the ultimate for Hurricane Irma to $508 million. These changes increase reinsurance recoverables and loss reserves on the balance sheet have no impact on the income statement.
As of September 30th, we have paid about $368 million in Irma claims. We have an additional $140 million in reserves. In terms of overall loss reserves on the balance sheet, the increase is largely driven by the CAT adjustments mentioned above. Reserves for daily reserves are also up despite open clips and open litigation being down as we continue to take a cautious reserve stance. A few comments on capital management. As you know, we are now paying a dividend of $0.40 per share. This is about 7% higher than it was last year, the actual cash dividends paid in the quarter are the same as last year because the share count continued to drop. Speaking of which, we have continued the execution of our $20 million buyback plan approved for 2019.
At the end of September, we had bought back about 368,000 shares at an average price of over $41.25 a share. There is just under $5 million left of $20 million authorized, we will continue with the program until the end of the year. The number of common shares outstanding at the end of September was approximately 7,883,000. This is down 7% from a year ago and 13% from two years ago as our buyback program continues to reduce the shares outstanding. The fully diluted share count at the end of the quarter was 9,860,000. Book value per share at the end of September was $22.37, which is up 8% from the start of the year.
One final item in terms of holding company liquidity, we have about $50 million of cash and investments at the holding company level as well as access to the $55 million available on the revolving credit facility. With that, I will turn it back to Paresh.
Thanks, Mark. As you can see from our financial results, Q3 was another successful quarter for HCI. We are growing organically and profitably, driven primarily by TypTap, our technology-based insurance subsidiary. Despite the suspension of new business production due to the pendency of Hurricane Dorian, gross new premium at TypTap increased fourfold compared to a year ago. Earlier in the year, we had projected that TypTap would have more than $50 million of premiums in force by the end of the year. Updating that forecast at this point, we expect TypTap will surpass that number by Thanksgiving. Despite the pendency of Dorian, we will be there a month ahead of schedule. This underlines that the value of our investments in technology and analytics is now clear. We can now grow rapidly while maintaining strict underwriting standards. With that, we are ready to open the call for questions.
Operator, please provide the proper instructions.
Thank you, sir. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. Questions will be taken in the order they came in. Ladies and gentlemen, if you do have a question, please press star one on your telephone keypad at this time. Okay, our first question comes from Matthew Carletti with JMP Securities. Please state your question.
Thanks. Good afternoon. Two questions. Paresh, I was hoping you might be able to give a little more color on the success of TypTap, in particular, how does that growth kind of build over the quarter? Maybe a month-to-month picture or however you want to frame it. How should we think about where you've been getting the best traction? Are there certain geographies within Florida that you're finding it works better or certain types of production sources?
Okay. In terms of growth of TypTap, we were growing quite rapidly, finding more business every week compared to the week before. Obviously, we went to nearly zero when Dorian was approaching. From that standing start, business has come roaring back, and our best performing week was last week. I say that with some hesitancy in mind because usually there's a cyclicality to the business, and new business production tends to fall off in the fourth quarter. So far, we haven't seen it in TypTap. Business cycles are business cycles, and we will have some kind of slowdown in the near future. We've said we are going to probably be $50 million in force by the end of November.
We've set it a goal for next year of trying to get to about $100 million if the trends continue, which right now is looking very good. In terms of where we are getting business from, we're getting it from all the places we would like to get it from. The portfolio is coming up in a very similar footprint as the one that we have for Homeowners Choice, with the exception that we're not writing a lot of business in the Panhandle. Everything is going according to plan or actually slightly ahead of plan. To put this into perspective, I think, in April, we had said we would get to $50 million by the end of the year, so it was about 39 weeks away. We're going to be about four weeks ahead of schedule on that, despite having a three-week setback due to the Dorian.
That gives you an idea as to how much business is performing ahead of our expectations.
Curious your thoughts on. We've been here looking at Insurtech. There sure are a lot of companies out there, and some doing a pretty good job differentiating themselves and some not. One thing that's very common is growth, and TypTap clearly is participating in that. One thing that's less common is profit, and that is something that I think you guys have figured out with TypTap. Curious, just with some of the headlines, the valuation metrics, and some stuff that you see out there that are getting reported from a bunch. How do you think of that when you think about TypTap's worth within HCI?
Great question. Yes, we are aware of the valuation metrics applied to a lot of other companies that are basically entirely focused on growth. Eventually, income is what is necessary. Otherwise, it's just buying the business. We've always taken that different viewpoint that Insurtech, it has the word insurance in it, so it has to make insurance sense. We focused more on getting the formula correct and then starting to scale up. We have approached it the reverse of what a lot of other folks have done, which is start with tech first, then we worry about making money later on. We said make money first and then scale up. That is starting to now come to fruition as we're seeing this thing grow.
As far as the valuation of TypTap, clearly, I don't think any value is particularly being ascribed to TypTap within the HCI Group, let alone Exzeo, which is providing the underlying technology. Eventually, I think the two things will have to meet. Either some of the Insurtech companies will have to come down in valuation to where we are, or the world will have to acknowledge that our valuation should rise to approach that of some of these companies because we are actually achieving in TypTap the promise that some of these companies hold for the future, but they hope to someday attain.
Great. Thank you for the coloring. One quick numbers question for Mark to get my quarterly question. Net written premiums, do you have that handy?
Yeah, $65.76 million.
Thank you very much. Congrats on a nice quarter, guys. That's lovely to report.
Yeah, thanks a lot.
Our next question from Mark Hughes with SunTrust. State your question.
Thank you. Good afternoon.
Good afternoon, Mark.
I wanted to ask TypTap. You described how you're being conservative on setting losses as you're ramping up there. When do you think you'll know or have a good idea or how much time before you're confident that you can perhaps set those losses at a more normal long-term level?
As we've said, we're pretty excited about the growth. In terms of its size, it's still fairly small relative to Homeowners Choice, obviously. There's just not enough data to get your arms around that. As I said in my script, we expect that rate to be about what Homeowners Choice is, potentially a little bit less, where we've got a lot of experience. We're applying the same general underwriting standards. We have no reason to think that it won't do that. We just feel like the right thing to do through this growth phase is to try and build up reserves and do so by going with a higher loss ratio. I see where you're getting at. I think the most important thing is there's no reason to think it'll be different from that of Homeowners Choice.
Can you quantify how much more you're putting in terms of the cushion?
In
Let me take that one.
Yeah.
Mark. It's difficult to say how much we put in there in cushion because it's small enough that one large fire would make that cushion disappear in the short term. The key thing that we are trying to point out is that we're being conservative, one. Two, that when we approach $100 million in premium, that's when these businesses stabilize out. We're on that track, but we're not quite there yet. Three, that we are doing this conservative booking ahead of things. We're not running this, that someday we hope as we scale up, the loss ratio will improve. We're actually already there, and we're taking a more conservative plan just in case we miss something and the loss ratio does deteriorate a little bit from the number that's imposing currently.
Understood. You had mentioned that, I think your reserves are up, your open litigation is down. Could you just give us a few thoughts that maybe management might be able to share around the open litigation and then your observations about new lawsuits, have the plaintiff's attorneys started to target non-storm claims? As I understand it, they had a lot to do with turn on with cycles. Are they going back to data claims? The recent regulatory changes, are they having much of an impact?
A lot of questions. As we've said before, I think it's a little early to tell whether those legislative changes are going to have a material impact on litigation flow and on loss reserves. In terms of numbers, open claims from the end of the year to the end of the third quarter are down about 15%. Open litigation is down more than that. Those are pretty significant drops. Encouraged by the fact that open litigation is down even more than the claims are down. In fact, that drives a lot of the reserve requirements. Yeah, as I kind of said in the script, in order to sort of keep a cautious stance, daily reserves are still up from the end of the year to the end of the third quarter.
Okay. Mark, adding something to Mark's comments and some other different color. What we are seeing across our books is our Tri-County, this is speaking just on CAT-free claims, not the CAT stuff, right? We are seeing an improvement in terms of lawsuits in Tri-County area, which is slightly being offset by the increase in lawsuits in the non-Tri-County area. The lawsuit cure is spreading beyond Tri-County. Because of some of the underwriting decisions we took several years ago, we are seeing the payoff by the reduction in the number of lawsuits we are getting in Tri-County. We are monitoring the non-Tri-County area as something to watch going forward.
Any way to characterize, similar to Matt's question, why your growth keeps on getting better? Do you find that it's distribution? Do you find that the ease of use or convenience perhaps for the agents is leading to a kind of a learning curve where you see progressively more business out of the agents once they're on the system and working with you? Any way you could flesh that out a little bit?
Yeah. I think it's a number of things, but really the core underlying thing is the technology that we deployed. What the technology lets the agents do is that they can very quickly get an underwriting decision, yes, no, maybe, four or five questions at most, which is a lot quicker than anything else. To the extent that we are open for business and we know what our risk appetite is, it's become a very easy go-to location for agents. To put this into perspective, we're only binding something like six, seven% of the quotes we do in a given week. What we've achieved in technology is that we can do thousands of quotes and do them very efficiently.
That has a huge translation, not only for efficiency for us as an organization, but also if you value the agent's time, they can do lots of quotes and get an answer almost instantaneously. As we stay agent-focused and they see the value of this, we sort of become their. We're not quite there yet, but we're starting to become their go-to insurer when somebody walks into the door. Okay? We're becoming favorites. They're becoming fans of the quality, huh?
Yeah. A very good picture.
Thank you.
Again, ladies and gentlemen, if you do have a question, please press star one on your telephone keypad at this time. Please hold while we pull for questions. While we wait, our next question comes from Christopher Campbell with KBW. Please state your question.
Yes. Hi, good afternoon, gentlemen.
Good afternoon, Chris.
Hey, I guess my first question is just a numbers one. What are the CATs and then the reserve development for the quarter?
I think Mark gave the CAT in his prepared remarks.
Yeah, I gave the number for, we updated the ultimate for Michael to thirty-two and a half. We updated the ultimate for Irma, and then I gave the paid number for Irma and the reserve number for Irma.
No, but I was thinking about the net CATs. Like the net CATs that would hit your numbers.
That would hit the-
not the loss trade numbers. Yeah. The actual net CAT losses that you guys had this quarter.
Oh, I see. Okay. Yeah. Sorry about that. We were thinking about Hurricane Michael and Hurricane Irma there. The only thing we really have is Hurricane Dorian. We put up $1 million for Hurricane Dorian.
That was for caution.
Yeah. That's it. In terms of CAT losses in the loss reserve, there's just $1 million, and that relates to Hurricane Dorian. Sorry about that.
Yeah. Actually, I think we're having trouble answering the question or thinking about it in our heads because for us, Q3 was a CAT or a kitty cat-free quarter as well. We're just looking at Dorian, the number of claims that have come in, and just another day at the office.
Okay. Got it. Reserve development, was there anything this quarter?
Yeah, we've been doing the same thing. I think I've mentioned it. Each quarter, we've been investing a couple of million dollars in reserve development. Each quarter, we'll look at that at the end of the year. Year to date, I think we're at about $6.5 million, something like that. We did the same thing in the third quarter that we did in the first two quarters. No real change there.
Okay. How much was that in this quarter?
This quarter was $2 million.
Okay. $2 million. Okay. Got it. Great. I think you guys had mentioned that the open litigation is down more than the or I think the litigation claims are down more than the claims or than the closed claims.
Yes.
I guess, if frequency is down, is severity up? Is that why the daily reserves are actually rising, is that you're seeing a narrow frequency, but then more inflation in those losses?
I don't know if I would characterize it that way. I think Mark said some of the development was because of CAT now growing and us being conservative positions on that. The other part of it is, in terms of number of open claims coming down is because the frequency of new claims coming in has dropped off significantly. If you imagine that we were hypothetically, say, closing 20 suits a week, but if we're only getting 15, the numbers eventually are going to come down. Number of open suits is going to eventually come down. That kind of effect you're seeing is that the frequency of new suits coming in has been tailing off for several months now, and it's starting to have an effect.
If you look on a reported basis, number of claims, as Paresh mentioned, number of claims is coming down, number of lawsuits is coming down more than the number of claims is coming down. The number of open claims, total lit and non-lit, as I mentioned, is down about 15%. Lit is down more than that. Part of that is just because we're getting fewer litigation claims and also because we're probably closing a little faster. If your question is related to why are you still getting some adverse development, some of that is just caution and some of that is chewing up litigation reserves for prior years a little bit. The overall trends are very strong. Claims are dropping, lawsuits are dropping, open clips are dropping. A lot of the reserve increases have sort of been cautious.
Sorry, yeah. I'm trying to think about it right. I'm thinking about the loss ratio was up to 50.2 this quarter versus 47.6 a year ago. If I'm just thinking about the puts and takes, right? The benefits would be the lower frequency of lawsuits. Severity is getting any worse, and then the only like delta would be then the growth in TypTap, right? If the loss costs are coming down and then CATs aren't a big deal, I would expect that those frequency numbers would be like, the loss costs should be coming down versus up. I'm trying to, I guess, in a way back into where we should expect the core loss ratio to be going forward.
Chris, I think Mark in his prepared remarks talked about the $11 million. The bulk of which was to do with TypTap, and then $6.5 million was to do with the hail event in the first quarter.
Yeah. Chris, if you look at loss expense, and you can look at it on the quarter, or you can look at it year to date, either way. Right? I think what you're getting at is sort of, hey, how come the core loss ratio isn't dropping? Right?
Right. Yeah. I'm thinking, like, the bigger part of your book is paying these better [loss checks.
Yeah. First a little bit of the detail and then a little bit bigger picture. When you go through, there's a lot of things that are in the numbers, and we mention them in the prepared remarks. If you're looking year-to-date, there's about $11 million that relates to TypTap. There's $1 million for Dorian. You've got some money in there for the hail event in the first quarter. You've got a significant amount of money in there that really sort of relates to other things. If you back some of those numbers out and look at year-to-date, the core loss expense for the current year is lower than the core loss expense for last year, which is sort of what you would expect to see. That's happening.
Great. That's all. Yeah, I'll look at the year-to-date numbers. I think that'll be easier to see it. Then just kind of one last one, as you're growing TypTap, does that change your share repurchase appetite over time?
I don't think those are two things that are interrelated because we have not had to tap any capital in TypTap since we capitalized it three years ago with the $25 million. Despite having weathered four hurricanes. It's making money. Key item. It's making money. We have plenty of capital with which to keep our insurance operations running and do all the other things that we do as well.
Okay, perfect. Well, thanks for all the answers.
Thank you.
At this time, we conclude our question and answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
As always, on behalf of the entire management team, I'd like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. We look forward to updating you on our progress in the near future.
Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.