Good afternoon, and welcome to the HCI Group, Inc. second quarter 2019 earnings call. My name is Tim, and 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 through September 6th, 2019, starting later this evening. The call is also being broadcast live via webcast and available via webcast replay until September 6th, 2019, on the investor information section of the 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 and good afternoon. Welcome to HCI Group's second quarter 2019 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, and Mark Harmsworth, our Chief Financial Officer. Following Paresh's opening remarks, Mark will review our financial performance for the quarter and 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'd 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, 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, Inc. disclaims all the obligations to update any forward-looking statements. With that said, I would now like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?
Thank you, Kevin, and welcome everyone. In a moment, Mark will give you details on our financial performance. First, here are some highlights of the quarter. We generated fully diluted earnings per share of $0.90, continuing our consistent track record of profitability. We have been profitable in 45 of the last 47 quarters, the streak only being broken by Florida being impacted by hurricanes. Also, in June, we paid our 35th consecutive quarterly dividend. At roughly $40 a share, we yield about 4% a year, which is a pretty good dividend. Also, during the quarter, we completed our catastrophic reinsurance program for the 2019 hurricane season. I am pleased to say that while we reduced the absolute spend compared to last year's program, we maintained similar levels of limit and retention.
We believe this is due to the reinsurers appreciating our technologies that provide data transparency and efficient claims management. Finally, and most importantly, TypTap's growth in premium more than doubled in Q2 compared to Q1. TypTap's growth is organic and it's profitable. With that, I'll now turn over the call to our CFO, Mark Harmsworth, who will walk us through the financial performance for the second quarter. Mark?
Thanks, Paresh. Net income for the second quarter of $7.6 million was up from $6.4 million in the same quarter last year. For the first six months, net income of $14.3 million was down from $17.2 million in the same six months last year. Fully diluted earnings per share in the second quarter were $0.90 on a GAAP basis, down slightly from $0.92 in the second quarter last year, and on an adjusted basis, fully diluted earnings per share were $0.81 compared to $1.01 last year. This quarter was an encouraging one for us. On our last call, I talked about the different stages of growth that should start to reveal themselves in the numbers, and this quarter represented an important step in that direction.
Consolidated growth-written premiums of $133 million were 1% higher than the same quarter last year, driven by the growth of TypTap, our technology-powered insurance subsidiary. In the fourth quarter of 2018, TypTap wrote about $4 million of premium in flood and homeowners combined. In the first quarter this year, that grew by 50% to $6.1 million, and in the second quarter, that more than doubled to just under $14 million, driven by the growth of TypTap's new homeowners product. The growth of TypTap has fueled consolidated premium growth quarter-over-quarter, and we believe that this is a new phase for us as we move from one of carefully controlled risk reduction to carefully controlled profitable growth. A few other highlights from the quarter. As you know, we recently announced our new reinsurance program for the period June 2019 to May 2020.
We estimate the consolidated net reinsurance costs to be about $124 million for that period. This does include expected growth for TypTap but is subject to a true-up at the end of Q3. Also note that the estimated reinsurance costs are net of about $10 million of estimated benefits under a multiyear agreement. The insurance premiums ceded in the second quarter were slightly higher than they should be going forward, as of course, they only reflect one month of the new, less costly agreement. As has been the trend for a while, investment income was up from the same quarter last year, reflecting higher interest income and higher limited partnership income. We had a very small net realized loss on the sale of some investments, as well as a $1.3 million unrealized gain on equities, reflecting the increase in the stock market in the second quarter.
In terms of expenses, just a couple of things to note. First, obviously, interest expense is down significantly from the same quarter last year as a result of paying off the convertible debt in March. Second, loss expenses are up about $2.5 million from the second quarter last year. We had some adverse development in the quarter, and we increased reserves as we did in the first quarter. The second quarter was a fairly average one in terms of weather. The 2019 accident year is developing significantly better than 2018. To be cautious, we are reserving for 2019 at the same rate as the adjusted rate for 2018. As a result, our reserves on the balance sheet continue to go up.
As of June 30th, 2019, total reserves for daily claims, so excluding CATs, are about $2.75 million higher than December 31st, 2018, despite the fact that the number of open claims is actually down about 8%. While the recent AOB legislation may help the overall claims environment, we are continuing to take a cautious stance. Now to the balance sheet, just a couple of quick things here. First, long-term debt is down from the end of last year by about $88 million, and our debt-to-cap ratio has dropped from 58% to 47% after we paid down the convert back in March. Second, you'll notice a new item on the balance sheet for 2019 called revolving credit facility. This is the amount that we have drawn on the new credit facility with Fifth Third Bank to fund certain real estate investments this year. Just a few quick comments on capital management.
As you know, we declared and paid a dividend of $0.40 per common share in the second quarter and announced the dividend of the same amount for the third quarter. As Paresh mentioned, at the current stock price, that's a yield of right around 4%. The board approved a $20 million stock buyback program for 2019, and in the second quarter, we bought back 161,000 shares, bringing the total to about 192,500 shares to the end of June. The number of common shares outstanding is down about 4% to 8,053,000 at the end of June. This should continue to decline as we execute on the balance of the 2019 buyback plan, of which there is about $12 million left at the end of June. On a fully diluted basis, we are now just under 10 million shares outstanding at the end of June.
This should also continue to decline as we continue to execute on the buyback plan. Just as an aside, at the rate we're buying back shares, our basic share count by the end of 2019 should be about 11% less than it was at the end of 2017. That means that someone that owned a share of HCI stock on December 31st, 2017, they will effectively own 11% more of the company than they did 24 months before, and they received over $3 in dividends along the way. I should also mention book value. Our net book value per share is up from $21.71 at the end of 2018 to $23.16 at the end of the quarter.
In terms of HoldCo liquidity, we have over $50 million of cash and investments at the holding company level, as well as access to the remaining $55 million in the revolving credit facility for a total liquidity of just over $100 million. With that, I will turn it back to Paresh.
Thank you, Mark. Q2 demonstrates that our investments in technology and our focus on analytics are paying off. While some other insurtech companies say they're developing disruptive technologies, doing insurance in a better way, and hoping someday in the future to be profitable, we do all of that now. We have industry-leading technologies. We are already profitable. Our internal developed technologies include an automated online platform for quoting and binding policies. Other things we also have is an automated intelligent underwriting tool that help us do risk selection. We have policy management software and systems. We have world-class claims management software. All of these technologies make our processes fast, efficient, and cost-effective while improving both the customers' and the agents' experience and helping us reduce costs. We also believe we have superior analytics that identify trends and improve underwriting performance. Our underwriting standards are strict and exacting.
We are very selective in the policies we accept. Our automated underwriting tools incorporate all of these analytics. These tools have processes that are very similar to artificial intelligence software in that they are constantly learning and improving. We believe that these tools and their strict underwriting standards based on years of Florida data that have enabled us and will continue to enable us to profitably navigate the challenging Florida and South Florida market. All of these technologies analytics are embodied in TypTap, our technology driven insurance company. TypTap, in the second quarter, is adding about $1.5 million of new premium per week, up from $800,000 per week in the previous quarter and $500,000 per week in the quarter before that.
It now has over $32 million of premium in force. We project by the end of the year, TypTap will have over $50 million of premium in force. One more time, TypTap's rapid growth is organic and profitable. We're not sacrificing margins for the sake of growth. This is important, because bear in mind that $100 million of premium at a 20% margin generates the same profit dollars as $400 million in a premium with 5% margins. We're very proud of the progress TypTap is making. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.
Thank you. 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 the line of Matthew Carletti of JMP Securities. Please proceed with your question.
Hey, thanks. Good afternoon. Paresh, a couple questions to start. Maybe just sticking on TypTap. Can you paint a picture for us as you look ahead, not quarters, but several years down the road? How do you see kind of the TypTap developing vis-a-vis Homeowners Choice? At some point, do you kind of, as we're, I would say, past proof of concept, look to transition some of that over, or are they truly going to be kind of independent and maybe growth paths will be different?
Matt, look, the simple way of looking at that is Homeowners Choice has a wonderful set of customers, and people love that brand, and the people who are their customers have been long-term customers on average for six to seven years. We see no reason to disrupt that installed base.
Makes sense.
Yeah, that's the existing book, Homeowners Choice. The growth and the future of the company lies in TypTap. You've been on calls for several years. We are making sure that everybody clearly understands that we are doing the things that everybody said was impossible to do, which is grow organically, grow rapidly, make money. Right? This is all done one policy at a time, and TypTap has achieved numbers that are fantastic at a very early stage in its life in terms of premiums in force. Yeah?
Yep.
We are going to add more and more capabilities and lines of business and areas that we do business in to the TypTap brand, because that's a name that's synonymous with the future.
When you say areas that you do business and lines of business, can you expand there a little bit? Is that building the book a bit more outside of Florida, or is that getting more diversified even within Florida or a little bit of both?
Well, I'm going to start sounding insurtech-y. I'm sorry, think of it this way. When we started TypTap, we were going after the flood opportunity, and the flood opportunity is about $3 billion, I think, nationwide. We were doing it in Florida, so maybe it was about $1 billion. Yeah? That was the premium in Florida. We were addressing a $1 billion-dollar opportunity. By adding homeowners, we've added another $8 billion of opportunity, and we're now attacking a $9 billion market combined. We're trying to see how much of that market share can we get. In the future, what we're going to do is expand into other states and maybe other lines, because we're trying to increase that market, the total addressable market, and increase it from $9 billion to some much greater number.
As you know, in the insurance space, there are hundreds of billions of dollars of market space to eventually attack. You'd ask the question of long term, that's what we are aspiring to do, of course, over the next several years.
Great. Maybe shifting gears a little bit, what are your views on, kind of in your eyes, how has the AOB environment evolved in Florida, particularly given the changes that took place at July 1? What did you see in the kind of ramp up before July 1, and then how has that changed since July 1?
Obviously, July 1 is a inflection point because of the passage of the new law and going into effect on July 1. Right now it's too early to tell as to what major effect it has had on industry going forward. Will we know in a few months' time? Absolutely. Just that it's too early to tell them all. In terms of our experience and what we saw, we did not see a material difference in the number of AOB claims and or lawsuits leading up to July 1. I think that was the nature of your question as to what's going to happen post July 1 and what's going to look like July 1 of next year. It's just too early to tell.
Okay, great. Just a couple real short ones. You mentioned a little bit of reserve strengthening. Was that largely AOB related, or was that related to something else?
No, it's just general, fairly similar to
To what we did in the first quarter, we added two and a half million, something like that. About three-quarters of that is related to 2018. As you know, our loss ratio usually runs between about 23 and a half, 25 and a half. We initially booked 2018 a little bit on the lower end of that based on the way it looked at the end of the year, and we're just increasing that a little bit. We've moved it up from about 23 and a half to 24 and a half, I think. It just reflects an adjustment in the ultimate for 2018 and a little bit of 2017.
Okay. Last one, just a number. Do you have net written premiums handy?
I do. 51, well, $52 million.
Great. Thanks very much, and best of luck going forward.
Good.
Our next question comes from the line of Mark Hughes of SunTrust. Please proceed with your question.
Thank you. Good afternoon.
Good afternoon, Mark.
The TypTap, the run rate, did you say a million and a half per week here recently?
Yes.
Was there a boost in 2Q around kind of the start of storm season? Will that settle down a little bit in 3Q, or are you continuing to see that build?
Mark, at some point the accelerating build will tail off, but as I said in my prepared remarks, we were doing about $400,000 a week in December. It accelerated all the way through first quarter, where we ended at about $800,000 a week, and then it continued accelerating in the second quarter to a million and a half. We're still seeing doing that. Hopefully, it keeps accelerating through the end of the year. Obviously, trees don't go to the sky. Eventually, it will tail off. But even at a million and a half, it's a very good number to keep sustaining at, yeah.
Maybe just an update on where you're seeing success. What is the normal profile, either in terms of the structure or the behavior of the typical TypTap buyer?
Look, we're seeing two things that you should factor into this, This is looking under the hood that makes this thing very encouraging. Our quote-to-bind ratio is around 7%. Putting it differently is that every 100 quotes we do, we only end up taking about seven policies. It goes to that point about we're being selective. I think there's a lot more people who want to be TypTap customers than we are willing to accept as TypTap customers because it's helping us shape the profile of the book to what we want it to be. I think, I don't have it handy, but I know things that we monitor and look at is what the average premium per policy is, and it's quite healthy. I'm being told it's about $2,900. Mark, it's very similar to HCPC.
It's between $2,800 and $2,900 per policy.
A simple soundbite takeaway from this is we are growing TypTap organically with the same characteristics as we once upon a time grew Homeowners Choice, depopulating from Citizens. You can imagine how encouraged we are that if we get the same outcome as we eventually did with Homeowners Choice, this could be a wonderful outcome.
When you say a quote to bind, is that a request to quote? They ask for a quote from you and you bind 7% of those policies?
Actually, it's how we define it. These systems are automated, nobody requests a quote. They go to an agent, the agent types in the address and whatever. The fact that they got a quote for that policy is what triggers in our system. There were 100 opportunities at least started with TypTap for every seven that are bound.
Understood. The investment income in the quarter, any unusual items there? I think you said that partnership income was up. Is this a good sustainable level, would you say, on a go-forward basis?
Yeah, it was a little higher than normal, Mark. I think it was the limited partnership income averages about $750,000 a quarter, and in Q2 it was $1 million for the quarter, so about $250,000 higher than average. Other than that, I think everything was pretty normal. What we did in Q2 is probably a little higher than you'd expect going forward, mainly just because it was a good quarter for limited partnership income.
Policy acquisition costs continued to move up a little bit. Is that the TypTap effect or is that just the strong growth in the quarter?
Yeah. I talked about this a little bit on the last call, I had suggested that that's a percentage that will start to go up a little bit just as the mix changes. TypTap has a higher cost of acquisition per policy, as the balance shifts towards TypTap and in periods when TypTap is writing a lot, that percentage is going to go up. If we continue to write strong in Q3, it'll probably again be higher in Q3. Q2 is probably a pretty good estimate of where it will be. It's a little higher than what I had suggested on the call last time, just because TypTap grew considerably faster than I expected it to.
I wonder if, Paresh, you might comment on the competition. Is maybe reduced appetite on the part of other carriers for business influencing or contributing to your growth at TypTap? How do you assess the market when you look at your competitors?
There's been lots of different conversations and statements made by competitors all over the place on the matter. I think there's going to be more changes coming in the coming quarters because people have talked about rate increases and those kind of things, which again, tends to agitate a book of business. You will probably get more churn in the state of Florida. From a measure or metric from our perspective, the fact that we're doing, I think, something like 7,000 quotes a week gives us a very good idea that there is obviously a fair amount of business that is looking for a new carrier every given week. That gives us plenty of opportunity from which to select the policies that we want.
Roughly saying what that means like is that it was easier to select a good book of business from Citizens when they had a million and a half policies than when they have 500,000 policies. The 7,000 quotes a week tells us that there's lots of churn going on that lets us assemble the book we want. If people do rate increases, et cetera, and other dislocations in the marketplace, that will just enhance that number.
To Paresh's point before, while we are growing in TypTap and while we're excited about that, we're being very, very selective, as you said, about the policies that we pick. The reason for that goes to what I talked about in my comments about that sustainable, profitable growth, not just growing for the sake of growing.
Understood. Thank you.
I would like to remind our participants, at this time, if you would like to ask a question during the Q&A session, please press star one on your telephone keypad. Our next question comes from the line of Christopher Campbell of KBW. Please proceed with your question.
Hi. Good afternoon, gentlemen.
Good afternoon, Chris.
I guess just a few numbers questions. It sounds like the adverse development was $2.5 million. What were CATs as absolute dollar amount, and then what were repurchases?
In Q2, we had about $500,000 related to CATs, if you will. There's a couple things in there. First of all, we increased the ultimate. There's four CATs that we're keeping track of, right? Hurricane Michael, Hurricane Irma, Hurricane Matthew, and the hailstorm. We increased something. We're obviously looking at that every quarter. We increased the ultimate for the hailstorm from Q1 from $5 million to $5,250,000. There's $250,000 worth of expense for that in Q2. We also had about two to $250,000 worth of expense related to Hurricane Matthew, and that's just something that sort of continues to run a little bit. The rest of it is just.
Cats.
That's it for CATs. No movement in Hurricane Michael or Hurricane Irma. That's the only CAT numbers that are in that $24 million.
Okay. Got it. Just a quick question on Hurricane Matthew. Why has that storm been so hard for companies to get their estimates right on? We're seeing a lot of development on that, not just HCI, but in general. Was there anything special about that storm that made it harder to adjust than a normal CAT?
Are you talking about Hurricane Matthew or Hurricane Michael?
Hurricane Matthew, yeah.
Hurricane Matthew was what?
Two years ago.
Two years, yeah. The development on that has not really been that significant from the initial ultimate. It's maybe 15% higher than originally, something like that. There's not that many claims left open. It's just some of those claims, you end up settling them for a little bit more than you expected to. We've still got some pretty good reserves left for that. I don't think it's really developed.
Yeah, I don't think anybody's really talking about-
Yeah
Matthew development in any great fashion, yeah?
Yeah.
Okay. Yeah. I'm just thinking one of your peers also had Matthew development this quarter too.
Oh, okay.
Yeah.
Yeah.
Seems kind of late reported, yeah. I was just seeing if there's anything special about it. What accident years drove the reserve strengthening? Was that all 2018?
No. Probably the best way to look at it is to look at the first six months total. We've booked about four and a half million dollars worth of adverse on what we think of as daily claims. About two-thirds of that is 2018. There's a little bit for 2017, very minor amounts for prior years. I think I talked earlier about that. The development on 2018 has just been a little bit higher than what we expected. We tweaked that, but not dramatically higher.
Okay.
It's mostly 2018 and 2017.
Okay. Perfect. What was the dollar amount you guys spent on share repurchases? I think it was 161,000 shares. How much was that in actual dollars?
For the quarter?
Yeah.
$6,663,000.
Perfect. I think you had mentioned you guys didn't see a spike up in terms of AOB claims before the deadline. How would you describe, now that we're a little over a month into the post-AOB reform era, have you seen a noticeable year-over-year improvement in any of your July claims metrics that are giving you confidence that AOB reform might be a positive in terms of core loss ratios?
Chris, as we stated earlier, it's just too early to call. The reason being is, don't forget, the legislation and what it does is for all AOBs that are signed after July 1. You still have a tail going back a couple of years, several years, of AOBs that were signed before that.
Yeah.
This has got to take a while to shake out in any direction as to what concrete effect it has. 35 days or 36 days after legislation went into effect, it's just too early to tell.
Just to add to that a little bit. I agree it's too early to tell. There may be a positive impact of it, we're not baking any of that into our reserving methodology at this point. I think I mentioned it earlier in my prepared remarks. If you take out the hailstorm, which we treated separately, 2019 is developing favorably compared to 2018. We're just continuing to reserve at that higher rate. If some positives come out of AOB, we'll deal with it. I think it's going to be a while before we really start to see that, we're not baking any of that optimism into our reserving methodology in any way.
Just one last one on the reinsurance deals. It sounds like you're spending less overall with similar limits and retentions. I guess, just was your pricing down? Is that the way we should think about it, just given how little loss creep that you guys had?
Chris, the reason it's difficult to answer that question in that context is because different people have different ways of saying, "Was pricing up, down, left or right?" Are you talking about on a risk-adjusted basis, et cetera, and so on. All I know is at the end of the day, we've got a similar tower to the one as last year. The money we've spent is $several million less. How it allocates into all the different pieces, different layers move around in different ways.
Got it. Were there any major parts of the program that changed? I'm thinking on a risk-adjusted basis. It sounds like you paid less.
That's what I'm saying, is that risk-adjusted basis is a technical computation, and it's designed to say per unit cost, it was this or that. The other side of it is for our economics is how many millions of limit did you buy and what was the dollar spend for? What we're saying is that we bought the same units as last year, and we had a gross spend that was less. We'll leave it to everybody else to say whether that's rates are up or down or left or right. Yeah.
Makes sense. All right. Thanks for all the answers.
Yeah.
I would like to remind all of our participants at this time, if you would like to ask a question, please press star one on your telephone keypad. At this time, this does conclude our question and answer session. I would like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
On behalf of the entire management team, I'd like to express our appreciation for the continued support we receive from our shareholders, employees, agents, and most importantly, our policyholders. We look forward to updating you on our progress in the near future.