Good afternoon, welcome to the HCI Group Inc. First Quarter 2019 Earnings Call. My name is Kevin, and I'll 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'd like to remind everyone that this conference call is being recorded and will be available for replay through June 2, 2019, starting later this evening. This call is also being broadcast live via webcast and available via webcast replay until June 2, 2019, in 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 Senior Vice President of Investor Relations. Sir, please proceed.
Thank you, good afternoon. Welcome to HCI Group's first 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 some 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 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 a material adverse effect on the company's business, financial conditions, and the results of operations. HCI Group Inc. disclaims all the obligations that relate to any forward-looking statement. With that said, I would like now to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?
Thank you, Kevin, welcome everyone. As many of you know, Brevard County on the east coast of Florida near Cape Canaveral experienced a hailstorm in late March. Our preliminary loss estimates were between $4 million and $7 million. Mark will discuss this in more detail in a moment. You might think that these hailstorms are unusual in Florida, but we do typically get about one or two every year. This particular storm included strong winds causing hail damage not only to roofs, but to windows, siding, and fences as well, hence us calling it out as a special event. Moving on to some of our results and highlights for the first quarter. We bounced back to profitability after Hurricane Michael. We have now been profitable in 44 of the last 46 quarters.
Also during the quarter, we paid our 34th consecutive quarterly dividend, and our board increased our quarterly dividend by 6.7% to $0.40 per share. This is our ninth dividend increase in nine years. In March, we repaid $90 million in convertible debt. Lastly, our real estate division, Greenleaf Capital, continued its growth by purchasing eight and a half acres of property in the West Shore business district of Tampa. With that, I'd like to turn it over to our CFO, Mark Harmsworth, who will walk us through our financial performance for the quarter. Mark?
Thanks, Paresh. Net income for the quarter of $6.7 million, down from $10.8 million in the same quarter last year. Diluted earnings per share were $0.82 compared to $1.11 last year. These results were negatively impacted by the late March hailstorm in Brevard County. In March, we issued a press release giving a range of ultimate losses of $4 million to $7 million. In Q1, we booked a $5 million provision, which is our best estimate on the ultimate cost of the storm. On a positive note, the financial impact of the storm was offset by a $5.3 million unrealized gain on our equity portfolio. This unrealized gain reversed most of the unrealized loss from Q4 last year. Investment income for the quarter was up only slightly from Q1 last year. Limited partnership income, which can vary significantly from quarter to quarter, was down.
However, interest income was $1 million higher than the first quarter of last year, driven by significantly higher yields on all our income-producing assets. You might notice that policy acquisition expenses are up from last year. We had a premium tax return to provision adjustment, which explains the increase. However, going forward, policy acquisition expenses will be slightly higher as a percentage of gross premiums earned than in the past, between 11.5%-11.75%, as TypTap becomes a bigger percentage of our written and earned premium. Speaking of TypTap, I wanted to take a minute to talk about growth. As you know, we have gone through a period of contraction in our Homeowners Choice book. On the other hand, we have been growing the TypTap book.
While it hasn't had a material impact on the financials yet, growth is continuing to build in TypTap and should start to positively impact results in the future. This growth in TypTap should reveal itself in the numbers in three phases. First, consolidated gross premiums in force will start to increase. Second, we should soon get to a quarter where consolidated gross premiums written are higher than the same quarter of the previous year. Third, we will get to a quarter where consolidated gross premiums earned are higher than the same quarter of the previous year.
We expect all of these growth indicators within the next 12 months. In fact, we have already reached the first. In March of this year, comparisons of gross premiums in force were higher than they were in February. What does that mean? It means that we have started to grow again. In Q1, gross premiums written in TypTap of $6.2 million were almost triple the first quarter of 2018, driven in large part by the growth in our new technology-enabled homeowners business. The growth of TypTap Home has been impressive. In the fourth quarter of 2018, we were writing about $500,000 a month in premiums. In April, we had written that much before the end of the current week. We are very encouraged by the growth here and we expect it to continue. However, it isn't just about growth, it's about profitable growth.
It's profitable growth that can be achieved through strict underwriting policies and the efficiencies of automation available through our technology platform built with Exzeo. Now turning to the balance sheet for a minute. As Paresh mentioned, on March 15th, we settled in cash at maturity all of our 3.875% convertible senior notes totaling just under $90 million. This is a significant change in our financial position in a few ways. First, our debt-to-capital ratio fell from 68% at the end of last year to 47% at the end of March. Second, our interest expense now drops by about $7.4 million a year, $0.85 million per quarter. Third, cash outflows for coupon interest dropped by about $3.5 million per year. Fourth, our fully diluted share count has dropped by approximately 1,475,000 shares.
Lastly, the combination of all of those things should boost fully diluted earnings per share by about $0.08-$0.12 per quarter from what it otherwise would have been. Just as a point of clarification, interest expense this quarter wasn't impacted much by the debt being paid because it happened late in the quarter. However, going forward, quarterly interest expense should be about $2.85 million, down about 35% from where it has been for some time. Also on the balance sheet, you'll notice that reserves are down about $23 million. This relates principally to payments made for Hurricane Irma and Hurricane Michael. This is offset somewhat by the new reserves for the March hail event.
Also, we increased reserves on normal daily claims by well over a million dollars during this quarter. Reserves for daily claims are about 2% higher at the end of March than at the end of December while the number of open claims and the number of open lawsuits are both lower. On our last earnings call, we disclosed the ultimate loss estimate for Hurricane Irma of $411 million. The ultimate loss estimate for Hurricane Michael of $72.25 million. That includes the flood. We have made no changes to either of those estimates. Just a couple of points on our capital management and liquidity. In the quarter, we paid a dividend of $0.40, as Paresh mentioned, up from the $0.375 we paid in the fourth quarter of 2018. During the quarter, we repurchased 31,189 shares for total consideration of $1,337,000, or an average of $42.06 per share.
In terms of holding company liquidity, after repaying the Convertible Notes, we still have about $55 million of cash and investments at the holding company level, as well as the additional liquidity provided by our $65 million revolving credit facility. Speaking of which, we drew $8 million on the credit facility related to a real estate acquisition in the West Shore business district in the quarter. Just two other things. The number of common shares outstanding on March 31st was 8,359,889, down 3% from a year ago, and the number of fully diluted shares outstanding at the end of the quarter was about 10,160,000. Lastly, book value per share as of March 31st was $22.27, up from $21.71 at the end of 2018. With that, I'll turn it back to Paresh.
Thank you, Mark. As Mark stated, our insurance business returned to profitability in the first quarter. Let's be clear, our vehicle for growth in the future is TypTap, our insurance subsidiary that is powered by software from our technology subsidiary, Exzeo. TypTap is growing at a rapid pace. Gross written premiums have doubled each year since it began writing business in early 2016, and it is accelerating. For example, at the end of 2018, we were writing about $500,000 of premium per month. Two months later, at the end of February, we were writing $500,000 of premium per week, and by the end of April, we were writing $800,000 of premium per week. TypTap's gross written premiums are now over $20 million, and it should grow to about $40 million in the next year very easily. Margins should be stable at around 20%.
With that, keep in mind that $40 million of premium at a 20% margin produces about the same profit dollars as doing $160 million of premium with a 5% margin. As always, we focus on the bottom-line effect rather than top-line numbers. We are excited about TypTap's growth because it demonstrates the power of our Exzeo technology. We look forward to updating you on our growth in the next quarter and in the coming quarters thereafter. With that, operator, please provide the appropriate instructions.
Thank you. We're now accepting your question-and-answer session. You can actually place in the question queue, 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'd like to remove a question from the queue. For participants using speakerphone, it may be necessary to pick up your handset before pressing star one. One moment please, while we poll for questions. Our first question today is coming from Matthew Carletti from JMP Securities. Please proceed with your question.
Thanks. Good afternoon.
Good afternoon.
Paresh, just a few questions to start. There's recently been some AOB reform passed that I think it's a step in the right direction, and remains to be seen exactly how it's implemented. Would you mind sharing your thoughts on the matter and what sort of impact you think it'll have?
Sure. Matt, we're obviously very appreciative of the legislators and everybody who made the effort to get this legislation passed during the last session. The session isn't quite over yet, but obviously the bill is sitting on the governor's desk and is expecting to sign it. A lot of effort by a lot of people. I think it will have a positive outcome, but obviously we need to let time play out a little bit to how exactly it's implemented and also what happens as the deadline of July one approaches. Sure, it's a positive step. The story is how, what quantitative effect it will have. Yeah.
On the upcoming reinsurance renewals, I know that your program isn't complete yet. Just any color you can give on just how the environment's unfolding from your perspective and the progress you've seen so far.
Okay. I think the overall item that everybody seems to agree on is reinsurance placement for the whole industry is much behind schedule compared to previous years. I think it's early May and I've yet to hear of a program that is done. In fact, a lot of them still haven't got their quotes back. It's going to take a little while. We're obviously in the middle of those conversations as well. The good news is in four weeks it'll all be done one way or the other.
Okay, great. One last high level question. You mentioned in your opening comments, Greenleaf bought, I think it was eight and a half acres in the West Shore area. Do you guys have any plans for that eight and a half acres currently?
I don't think, though, that we have plans for it at this very second, obviously we usually buy properties with an eye to the future as to what it would be. Again, having just bought it two months ago, we're trying to entertain all the alternatives and see what's possible before we actually make concrete plans.
Okay. Stay tuned. Last quick number from Mark. Do you have written premiums in the quarter handy?
Yeah, sure. It's $36 million, 197,000.
Wonderful. All right. Thanks very much, and best of luck rest of the year.
Thanks, Matt.
Thanks. Our next question today is coming from Mark Hughes from SunTrust. Your line is now live.
Yeah, thank you. Good afternoon. Just on the policy acquisition cost, what was the driver there again? I'm sorry. I think you said it, but I did not get it.
Yeah, sure. It was up a bit. You'd expect it to be down a little bit. There's a couple of things in there. First of all, not all of it varies directly with both premium and earn. Some of the parts of it are flat. Big thing, Mark, was we had a thing. What we do every quarter is we estimate the premium taxes. That's obviously part of that expense. Then at the end of the year, we file the return and true it up. In the first quarter of last year, we had a positive adjustment to that. In the first quarter of this year, we had a negative adjustment to that. It was like a $700,000 swing or something like that. That was the big factor there.
Then just as I mentioned, just generally, as TypTap grows, because it's voluntary business, the cost of acquisition is a little bit higher. As a percentage of gross premiums earned is drifting up a little bit. It's really sort of all of those things.
The TypTap. Is that still largely flood? I think I heard you making progress on homeowners as well. Can you talk about the mix there?
Sure. Obviously the flood business in TypTap is going to have a 3-year head start to the homeowners business. The homeowners business is really taking off at this point. I think it's within 1 quarter or 2 quarters, the homeowners business is going to be much larger than the flood business in TypTap. That's just the actuals there are.
Can you just elaborate that on a little bit more? What has really caught, I don't want to say caught fire, but what's created the momentum in that business that where you really see the strength that is driving that?
Well, a couple of things. One is, and I'm going to give you a slightly long answer here. The technology that we built 2 years ago, initially we deployed it to do flood insurance, which is a much simpler product than the homeowners insurance in terms of all the data points you need, et cetera. Having said that, it's also a much more tough market because given the NFIP and everything else, not all business is profitable. You have to be very careful which risks you select. It does limit growth. When we then apply the technology to a much larger and much more complex product as in homeowners, we suddenly found 2 things. One, it works even better, and secondly, you're now playing in a much larger market, a $10 billion marketplace.
That has helped tremendously in terms of that's why homeowners takes off quicker, much bigger market, much more need. Secondly, because of all the stresses of the last few years, the competitors have basically maxed off in terms of trying to pick up market share. All of those things all contribute. The key item that we have, which I think a lot of folks don't, is technology. Makes a huge difference. To give you an idea, there was a day last week where we did 1,000 quotes, to bind 50 policies, which shows you the quality of our underwriting standards, that we don't take every single policy that comes in. Against that, we had only a handful of people supporting it. Most of that was done without touching human hands.
Mark, I gave some of these numbers in my prepared remarks, TypTap consolidated growth premiums written tripled over first quarter last year since it went from about $2 million to little over $6 million. Of that $4 million increase, the majority of that was from the new homeowners product.
Very good. Thank you. Was there any reserve strengthening in the quarter?
We increased reserves by about $2 million. Just again, sort of out of caution, we actually bumped up our total reserve. I mentioned that as well in my prepared remarks. Just sort of out of caution, continuing to watch the litigation environment. Actually, we increased it by about $2 million.
Okay, great. Thank you.
Thank you. Our next question is coming from Freddie Weber from TDW. Line is now live.
Hi, good afternoon. Just to follow up on Mark's question about the adverse development, which accident years does this come from, and was that just homeowners?
It's a little early to start allocating it by accident year. That's a question you should ask me at the end of the year.
Okay. Then just going back to the premium decline, it was close to 4% this quarter. Do you expect this to persist, the Homeowners Choice premium decline? I know TypTap has grown a lot, is anything you're doing to curb this?
Freddie, as we sort of said about this too, right? We are really focusing on the growth of TypTap, not on where Homeowners Choice is gradually contracting year-over-year, and it has been for several years at this point. The key takeaway from this is TypTap is now large, $20 million, and getting larger, doubling in size every year. Its growth is starting to overpower any contraction that might occur on the Homeowners Choice side.
Okay.
That's the takeaway we have. Yeah?
Yeah. Okay. Then just to follow up on that a little, what is the implication to your expense ratio going forward? Because you have premium decline from the Homeowners Choice that's been dragging it. Then I think Mark mentioned higher acquisition costs with TypTap. Is there an expense ratio range that you target or something that you want to see?
I think it's going to be small. Both are fairly high margin businesses. The TypTap book is running about a 20% pretax margin, which is not dissimilar to homeowners. The numbers from TypTap are growing, but as a percentage, it's still fairly low. I don't think in the foreseeable future we're going to see anything significant. The only real thing worth mentioning is what I had mentioned about policy acquisition expenses. That's why I mentioned that. That's not a big number.
Yeah. Look, the bigger overall takeaway from this is that the business that is growing, TypTap, has similar margins or better than the business that is shrinking. We're not replacing high margin business with low margin business. We are actually replacing with similar or better margin business.
Okay. Got it. I think Matt already touched on reinsurance a little, but I think there's some rumors around about some of your competitors seeing 20%-30% rate increases on parts of their towers. I was wondering if you could give some color around what you're maybe expecting in terms of pricing. Also if you're considering making any changes to the structure of your tower.
I've heard those rumors too. That's the only comment I have on the rumors regarding the other people in the market. As far as where we are, we are obviously at the key juncture in the negotiations for reinsurance at this point. As I said earlier, it'll be done in the next four weeks. This would not be a good point to speculate as to what the rate would be, whether there's an increase or not, et cetera. Again, four weeks from now.
Okay. Just finally, just a quick follow-up on the AOB reform. Do you think that once, if the legislation is passed, you'll start offering cheaper policies that prohibit AOB? Does this impact at all how you're thinking about filing for rate increases? I forget, do you have one pending with the regulator right now?
Okay. Let me try to answer those questions in reverse order. I don't think we have a rate increase pending with the regulators at the moment. As far as policies that restrict AOB, et cetera, this is part of the reason why we're saying we've got to let it play out, because I am sure the OIR will pass rules as to how you implement it, what the cost of it is, et cetera. Until we see those things, it would be wrong to speculate whether we offer a restricted policy or not. It's how the legislation is implemented that will determine that. The third part of the question.
If the AOB reform changes how you're thinking about rate increases.
Yeah. It doesn't necessarily change anything for us. We're too early again. For a lot of folks, we are sitting there looking at choppy waters because you have reinsurance costs going up, hopefully with AOB loss ratios will be going down, and the numbers will become what they will, right? Again, I think it's just a little bit too early to tell.
All right. Great. Thank you very much for the answers.
Okay. Thank you.
Thank you. At this time, this concludes our question and answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
On behalf of our entire management team, I would 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.
Thank you for joining us today for our presentation. This concludes today's call.