Good afternoon, and welcome to HCI Group third quarter 2015 earnings call. My name is Matt, 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 to replay on December 3rd, later this evening. The call is also being broadcast live and available via webcast replay until December 3rd on the investor information section of the HCI Group website at hcigroup.com. I'd now like to turn the call over to Mr. Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please proceed.
Thank you, and good afternoon. Welcome to HCI Group's third quarter 2015 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, and Richard Allen, our Chief Financial Officer. Following Paresh's opening remarks, Richard will review our financial performance for the third quarter of 2015 and then turn the call back to Paresh for an operational update and business outlook. Finally, we will answer questions. To access today's webcast, please visit the investor relations 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 material adverse effects on the company's business, financial conditions, and results of operations. HCI Group, Inc. disclaims all obligations to update any forward-looking statements. Now, I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh.
Thank you, Kevin, and good afternoon, everyone. Welcome to HCI's third quarter 2015 results. As most of you know, HCI Group is a holding company with subsidiaries engaged in various business activities. Our principal operating subsidiary is Homeowners Choice Property & Casualty Insurance Company, which provides homeowners insurance in Florida. In addition, we have a Bermuda-based reinsurance subsidiary called Claddagh Casualty Insurance Company, which participates in the Homeowners Choice reinsurance program. We use Claddagh to retain selective levels of catastrophic risk. We also have an information technology operation called Exzeo. Exzeo develops innovative products and services for Homeowners Choice, the insurance industry, and perhaps other industries. Finally, we have Greenleaf Capital, which owns and manages a diverse and growing portfolio of real estate investments. We continue to investigate strategic opportunities to add to our existing operations and to further diversify our operations through other operating divisions.
Turning to our results for the quarter. As Richard will expand on shortly, we reported profitable quarters for the third quarter, marking our 32nd consecutive quarter of profitability. A few important takeaways for the quarter are the following. One, our insurance subsidiary experienced increased claims activity due to a weather event in West Central Florida. Secondly, we experienced investment losses primarily caused by a few investments in our equity portfolio in Q3. Despite this, we still generate $7.4 million of net income or $0.71 diluted earnings per common share. We paid $0.30 per share in dividends, which marked our 20th consecutive quarter of paying dividends. Q3 is always our most challenging quarter considering our exposure to hurricanes and other weather-related events. We are very happy to finish the quarter with a substantial profit.
Before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the third quarter. Richard.
Thank you, Paresh. Good afternoon, everyone. For the third quarter of 2015, income available to common stockholders was $7,371,000, or $0.71 diluted earnings per common share. For the same period of 2014, we reported income available to common stockholders of $14,052,000, or $1.23 diluted earnings per common share. For the nine-month period ending September 30th, 2015, net income available to common stockholders was $54,771,000, or $4.84 diluted earnings per common share. Net income available to common stockholders for the same nine-month period of 2014 was $48,106,000, or $4.07 diluted earnings per common share. This reflects increases of 13.9% and 18.9% respectively for the nine-month period. Gross premiums earned for the three-month period ending September 30th, 2015 were $103,842,000 compared to $88,944,000, an increase of 16.7% over the same period in 2014.
This increase is primarily due to the renewal of policies assumed in December of 2014 and February of 2015. Premiums ceded for the current three-month period were $41,070,000 compared to the $27,684,000 reported for the same period in 2014. This recognizes the increase in cost of our reinsurance program for the current treaty year that was impacted by rate increases from the Florida Hurricane Catastrophe Fund and an overall increase in the units of reinsurance purchased for the current hurricane season. Losses and loss adjustment expenses incurred for the third quarter of 2015 were $26,200,000, or 41.7% of net earned premiums, compared to $21,991,000, or 35.9%, of net earned premiums for the same period of 2014. The increase in losses and loss adjustment expenses in the quarter is a result of the extended rains in Florida and some development in prior year loss reserves.
Operating expenses increased by approximately $900,000 quarter-over-quarter, primarily the result of increased policy acquisition cost on renewal of policies assumed from Citizens in December 2014 and February 2015, and an increase in salaries due to an increase in staff count. Minimal increases are partially offset by a reduction in other operating expenses resulting from a reduction in the stock-based compensation expenses. Our investment portfolio generated a loss of $800,000 for the quarter compared to investment gains in the same period a year ago of $4,507,000. In the current quarter, we recognized losses from limited partnership investments of $2,400,000, offset by approximately $1.9 million in interest and dividend income, as compared with the same period in 2014, in which we realized gains of $3,294,000.
During the current quarter, we recognized other than temporary impairment losses of $1,886,000 on two fixed maturity and five equity securities. Our combined ratios, the percentage of losses and loss adjustment expenses and operating expenses to net premiums earned, are 78.6%, compared with 72.1% for the quarterly periods of 2015 and 2014, respectively. For the nine-month periods of 2015 and 2014, our combined ratios are 60.7%, compared with 65.1%, respectively. Our combined ratios to gross premiums earned improved both quarter-over-quarter and for the comparative nine-month periods. On the balance sheet, stockholders' equity has increased to $229,140,000 from $182,585,000 at December 2014, an increase of 25.5%. Invested assets have increased to $233,216,000 from $168,799,000 over the prior year end. Cash and cash equivalents at September 30, 2015 are $331,542,000 compared to December 31, 2014 of $314,416,000.
As has been discussed in prior earnings calls, the benefit of the multiyear reinsurance treaties have been recorded in other assets of $31,836,000. Net book value per common share has increased to $22.32 as of September 30, 2015, as compared to $17.92 at December 31, 2014, an increase of 24.6%. Our balance sheet continues to present a solid financial base for growth opportunities in the future. Paresh?
Thank you, Richard. We are very pleased with our results for the third quarter. As the 2015 hurricane season comes to a close, we want to update our shareholders on a number of important initiatives. On January 1, 2016, we're implementing a rate decrease of 5% for our homeowners policies, 8% for our renters' policies, and 2% for condo owners' policies. Rates for the dwelling fire policy will remain unchanged, and our wind-only rates will remain unchanged until we file rates in early 2016. We view these rate changes as a proactive customer retention tool. Because rate changes become effective upon policy renewal, it will take 12 months for these rate reductions to roll through our entire book of business. Exzeo, our technology division, continues to develop software products that help drive efficiency within our insurance division and create future opportunities for both business and margin expansion.
Greenleaf Capital, our real estate division, has completed construction of the anchor tenants at two separate retail shopping locations in Q3. We continue to evaluate additional opportunities and expect more from Greenleaf in the future. Finally, Homeowners Choice has filed with regulators to expand its product offerings to include flood as a standalone product. Additionally, we have a number of other exciting opportunities across all four divisions, and we look forward to updating you on these developments in the future at the appropriate time. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.
Thank you, sir. At this time, we'll be conducting a question and answer session. If you'd 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'd 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 to the line of Matt Carletti from JMP Securities. Please proceed with your question.
Hey, guys. Just had a few, a lot of numbers questions, actually. You mentioned kind of the rains and I guess some unfavorable on prior claims running through the loss ratio. Could you kind of split that out as we look at the loss ratio kind of versus prior periods? How many points of that can you allocate to the rain, and how much are we talking in terms of prior period adjustments?
Matt, rough rule of thumb, maybe about two-thirds, one-thirds, two-thirds being the rain side of the.
Increase
of the increase, yeah?
Right. Of the delta versus kind of a cleaner quarter. Yeah.
Yeah. The adverse development that Richard is talking about, just to provide some color to it's the pickup in all of this AOB and litigious society we live in, that's sort of coming back through the book, yeah?
Gotcha.
That's what's causing that.
On the investment income, I think Richard touched on the numbers. I apologize for not being to jot them down fast enough, it was negative in the quarter. What again was driving that? What is flowing through? Is that the limited partnerships that's flowing kind of the volatility in the quarter flowing through net income as opposed to being a more below the line realized gain sort of mark, realized loss?
Yes, Matt. Really, it's two pieces that are coming together. One is obviously we have an OTTI committee, as has been discussed in previous quarters, they view and review all the holdings and mark them down when they see it is appropriate. By the way, they only go in one direction. They only mark stuff down. If it comes back up again, they'll have to mark it up. Okay?
Of course. Yeah. Until you sell it. Yeah.
Yeah, that's just how it's done. Q3 was volatile in that sense, so there was some markdown coming from the OTTI. I think it involved a total of eight security or six-
Seven. Yeah, eight
eight securities and a couple of bonds. That was what it was. It is them doing their job.
Yep.
The other thing was one of the limited partnerships, which is more of a equity-based partnership.
Yep.
Clearly, Q3 wasn't a good investment period.
Of course
Those things we mark to market. It isn't we're out of that fund or anything else, but we mark to market.
Great. Both of those, in terms of the actual net investment income line, I can see where often LPs would flow through, but is the OTTI flowing through there too? Usually I wouldn't think of that as a income statement or at least operating income sort of item.
The OTTI is a separate line. There's two lines there on the statement, Matt.
Yep.
Just below investment income and realized gains.
Simple answer to your question is yes, it is flowing through the income statement.
Right, through the income statement, but what I'm trying to get at is what's flowing through when you report a loss of $519,000 on net investment income. What piece is flowing through that net investment? Essentially, what I'm trying to get at is, absent the volatility in the quarter, how should I look at net investment income on a more normalized basis?
The net investment income includes the loss from the limited partnership.
Okay, perfect. I think I heard you say that was about $2.4 million.
Yes.
Okay, perfect. That's very helpful. Lastly, I know I didn't scribble them down quick enough, and I know, Richard, you gave at least one of them. Could you just repeat the gross written premium and net written premium in the quarter?
Gross written premium in a quarter was $105,787,000.
Perfect.
Net written premium for the quarter was $64,294,000.
Okay, great. Thanks very much for the answers. I'll let somebody else get in the queue.
Thank you.
Thank you, Matt.
Our next question comes to the line of Casey Alexander from Ladenburg Thalmann. Please proceed with your question.
Hi, good afternoon.
Afternoon, Casey.
Good afternoon, Casey.
I'm interested in the strategy around the rate decrease first. There has been sort of a pretty regular 2%-3% premium attrition on a quarterly basis. Is it your hope that the rate decrease will stem that policy attrition?
No, Casey, I don't actually know that, given how high our retention numbers are, that they can go much higher. It isn't necessary from that side. The other part of that is that it isn't to make them go higher, but I think you are, looking forward, you're looking at a much more competitive and softer primary insurance market. It's better to take a few preemptive steps than reactive steps when your retention starts moving in the wrong direction.
Okay, great. That makes some sense. As regards the rain and also the settlement and development of older claims, do you expect any spillover into Q4 on either of those events?
The rain events, I think we already are seeing normalized claim activity before the end of Q3, because the rain events occurred from mid-July to early August.
Right.
Those should be fully served by now.
That stuff has fairly passed us by. The second part about the adverse development stuff, this is increasing lawsuit and that kind of activity, reopening old claims activity. That one, I would like to hope it isn't continuing on. History tells me otherwise, yeah.
Lawyers will be what lawyers will be.
Yes.
There was a pretty fair-sized drawdown in the fixed maturity portion of the investment portfolio. Is that a strategic decision? It led to a pretty broad increase in cash on a quarter-over-quarter basis. Is there a strategic decision being made as it regards to the management of the portfolio?
Casey, I wouldn't necessarily talk in terms of strategic stuff, I could tell you what that drawdown is. In hindsight, things look differently, going into midway through the quarter, et cetera, the investment committee felt you may be looking at an upcoming time of rate increases. Remember how certain everybody was about that September rate increase?
Right.
As a safety mechanism, we went more to cash in the event that rates were increased, which may have had a negative impact possibly on the bond portfolio. You needed to rebalance a little bit in those lines, and that's what went on. I don't think you can infer from that big strategic changes going forward. It was a time and a place.
Okay. You said that the, I believe Greenleaf was working on sort of co-development of a shopping center, which they had an option to acquire at the end of the development period. Has the company decided whether they're going to exercise that option and acquire that property, or just finish up with the co-development of it?
Okay. Let me give you an appropriate answer. What we are announcing at this point is two of those co-development ventures have actually now opened for business, which is great progress. Yes, we have an option to purchase both of those properties. There's some delay in the timeframe at which we can exercise our option, but we do have options on both properties. As to what we will do, it would be inappropriate for me to speculate right now as to which direction we're going to move on that. Right? We will make comments when we actually pull the trigger or pass on pulling the trigger at the appropriate time.
Right. You've finished the construction, but you still have time to make that decision.
Yes. Actually, the way it works is that the decision is made at some future point, not too distant in the future, but there's a point at which point we either say yes or no.
Okay.
We're not at that point yet. Yeah?
Lastly, I know several of the properties that the company owns are also in the Tampa area where you had the excess rain. Was there any impact on the owned properties as a result of the tremendous rain that fell? It was unbelievable.
Yeah. Actually, I guess it speaks to how well we maintain our properties. No, there was no impact whatsoever on our properties.
Okay, great. Thank you so much for taking my questions.
Thank you.
As a reminder, if you'd like to ask a question, it is star one on the telephone keypad. Our next question comes to the line of Arash Soleimani from KBW. Please proceed with your question.
Thank you, good afternoon. Just a few questions here. Was the increase in the ceded premium percentage, was that from the wind-only policy? Would that have been the major driver there?
Good afternoon, Arash. You're talking about the premium ceded and the reinsurance, basically the reinsurance costs, right?
Yeah. Premium ceded as a percentage of gross.
Yeah. Yes, you're seeing a couple of things flow through there. Just to provide color, we had released an 8-K talking about how much reinsurance we were buying, and you would've noted that we were buying a much taller tower than we have in years past. Part of that was because it was our first year with the wind-only book. We wanted to be overly cautious of a single big event taking us to the top of the tower, so we were increasing the height of the tower. Obviously, that comes at a cost, so you've got some of that flowing through there. The other item that's flowing through there is obviously a bigger book. The third item is the Cat Fund.
The Florida Hurricane Cat Fund changed a couple of its allocations and the rate online that they charge for various reasons that we can go into if you're interested, but I think most people are aware of them. The net result of that was that increased our reinsurance cost as well, and that happened very late in the renewal cycle. Those are the three factors that increased that ceded premium. I think it will get better into the 2015 season because obviously, we have a better handle on all of the items going forward.
Can you remind us what the reinsurance load is for the wind-only policies versus, I guess, a traditional homeowners policy?
We don't necessarily break it out separately, and it's very difficult to break it out separately, just because rates are lower, but then the number of perils that you're covering is also lower. You end up with lots of different moving parts. I think we are very well satisfied with the margins that we are making on the current wind-only book.
Okay. How is the October takeout progressing?
Just for the record, the official date for the October takeout was October 27th. I think Citizens will eventually publish a list as to who assumed what, et cetera. I think they've already sort of put out something, about 48,000 policies in total were taken out across all the carriers. I think our portion of it was around 2,700 policies. I think the takeout business is not dead yet. It's sitting in ICU, and there's a priest in the room.
Okay, thanks. In terms of, I think Casey had asked about the adverse development or what basically was the year-over-year increase in the loss ratio, just to be clear. Two-thirds was from rain, one-third from adverse development. Is that the-
Yeah
right way to think of it?
I'm not looking at that number. It's in front of me, but I think it was about four points. I'd say about a point and a third would be adverse stuff, and two and two-thirds would have been the rain.
Was it a frequency or a severity issue? Can you comment on that?
About the rain. Let me talk about the rain. Maybe that'll clarify this for everybody. About a third of Homeowners Choice's book is in the Tampa Bay area, which is mostly Pinellas and Hillsborough County. We have very little in Pasco County, but that was affected as well. Across all these three counties, it sort of rained for around 20 days straight, so much so that you had places that were under a couple of feet of water. Not from anything other than the rain was coming down faster than the drains could drain the water out. We picked up increasing claim activity for this.
The claim activity that we pick up. What happens is that when you have that much rain that consistently, where somebody in a roof has a slight hole, in a normal rain event, rainstorm, they may get two or three drops of water that comes through, and it's usually absorbed by the insulation in the attic. Getting 20 days straight of rain, and it was a lot of inches of rain as well, you don't get the two or three drops. You probably end up with 200 drops. Now, the insulation gets soaked. The water comes through to the ceiling and et cetera. You pick up claim activity from roof leaks and internal damage from water running down walls, et cetera, those kinds of things. That's what we saw in those three weeks of solid rain.
Obviously, it hasn't been raining since then, those claim activities have reverted back to normal. It's a one-time event. I don't want to make it seem like that's what we're in the business of. Losses occur. We're just pointing out what it was as opposed to it's unusual. Two years ago, we were discussing, or three years ago, we were discussing Tropical Storm Isaac and Debby.
There's always something.
That's what it was this quarter. That's why we love getting out of Q3 with profit.
Okay. Were there any water mitigation issues?
Not really in the third quarter.
No more than there's normally any other situation. The rains and the water mitigation issues were slightly different, because they're also in different parts of the state.
Okay. I guess in terms of your flood opportunity, there was I guess, NFIP rate change that went into effect. Any greater opportunity there that you're seeing? I guess, can you just talk a bit about that?
Absolutely. The flood opportunity, and this is why we're doing spend on flood, et cetera, to us, is getting better and better. It's getting better and better for two reasons. Obviously, when we originally got into it a couple of years ago, there was a massive rate change that the NFIP was pushing through, that got dialed back. That changed the dynamics quite a bit. Now, as the rate increases are going through, we are seeing increasing activity of people saying, "Could we move to Homeowners Choice?" That is moving in our direction. It's a slow increase, but it's starting to increase in that fashion. The other thing that is working in our favor is in the interim two years, with the small number of policies that we have, et cetera, we have gained experience and developed better underwriting capabilities, et cetera.
We are actually more poised to take advantage of the situation as well. Both items are working in our favor. Just to illustrate some things that do work in our favor. In the rains in Tampa earlier in the summer, we did generate our first two flood claims, which actually is very good from a learning and a systems and processes development perspective. They weren't materially big, but it made sure that all of everything works, and we could see what to do in those cases, et cetera. I think we have a huge and growing experience base from which we can really expand on the flood opportunity. Stay tuned for more developments.
Well, thanks for that thorough answer. I know this is your favorite question. Can you just tell us about the policy count at the end of the quarter?
It is my favorite question. I basically had an answer ready, that I figured somebody would ask. A quarter three end policy count is about 163,000, and that compares to just under 148,000 last year. It is up about 15,000 year-over-year.
Okay. Numbers question, what was GWP? I am not sure if someone asked what gross written premiums were.
Gross written premiums for the quarter, excuse me, were $105,371,000.
Compared to?
Compared to $86,085,000.
$86.85. Okay. Did you say what the actual dollar amount of the adverse was already?
No, we did not.
No, we did not. Part of what we're trying to not get into is breaking it out would make it appear that we think it's unusual one time, that kind of thing. This is the business we're in. When you write insurance and reinsurance, events occur, things occur, and we generally just roll them into our earnings. It's not exceptional.
All right. It was basically lawsuits and such, just in the ordinary course of business, I guess?
We're in a business of insurance, and it happens.
Yeah. Say it just like the rain event, yeah?
Okay
Yeah, we didn't break it out as a separate dollar item either, yeah?
Okay. I know some of your competitors have been seeing some of their takeout premiums return, I guess, largely because of higher opt-out rates. Is that something that you're seeing as well?
Yes, we are. I think different people will have different numbers in terms of what percentage of people are opting out, but we can all agree that we are seeing higher opt-out levels.
Okay. What about retention? I know you talked about doing some rate decreases to boost retention. What is the retention you're seeing now in your policies?
Yeah. Sorry, let me just correct you on that, just because I did that with Casey. We're not doing the rate things to increase retention. I think we're doing it to maintain retention, because retention is already at such a high level that I don't think there are many things you can do to increase it. We are reducing rates, partly retention, but partly also given our loss history and how things have worked out. A rate decrease is warranted, so we're doing that. Where our retention rates are, and I did look into that just before I came in here as well. Year-over-year, so if you compared first nine months of this year to first nine months of last year, especially in terms of policy books that were consistently the same. Retention rates are consistent with last year, so we're not seeing a drop-off in retention.
It's staying at the same high level that it has stayed. I think that speaks to.
Was it 88%? Is that the number you've thrown out before?
Yeah. It's a very high 80, approaching 90 kind of number, yeah.
Okay.
We're still staying consistent with that.
I'm sorry, what was the last part?
We're staying consistent with that. I think it reflects, hopefully, the satisfaction our policyholders have with us being their insurer for what is usually their largest assets. I think just like when the rains came, a lot of people were happy that we were their carrier of choice.
Okay. I apologize if someone had asked this already, did you say what the share count was, weighted average diluted shares outstanding?
No, we hadn't, I think Rich is looking it up.
The diluted earnings per share as of for the quarter, it was $11,371,000.
Okay.
For the year, for the nine-month period, it was $11,347,000.
Okay. All right. Thank you very much for your time.
Thank you, Arash.
Thank you.
Due to time constraints, this concludes our question and answer session. I'd like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
On behalf of the 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 our continued success.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.