Good afternoon. Welcome to HCI Group's first quarter 2015 earnings call. My name is Keith, and I will be your conference operator this afternoon. At this time, all participants will be in listen-only mode. Before we begin today's call, I'd like to remind everyone that this conference is being recorded and will be available on replay through May 30th, starting later this evening. This call is also being broadcast live via webcast and will be available via webcast replay until July 30th, 2015, on the investor information section of the HCI Group website at hcigroup.com. I would now like to turn the call over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. Sir, please go ahead.
Thank you. Good afternoon. Welcome to the HCI Group's first quarter 2015 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, Richard Allen, our Chief Financial Officer, and Scott Wallace, President of our Property and Casualty Insurance division. Following Paresh's opening remarks, Richard will review our financial performance for the first quarter of 2015. 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. 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. I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh?
Thank you, Kevin. Good afternoon, everyone. Thank you for joining us for HCI Group's first quarter 2015 results. We're excited to report our results and provide a business outlook. As most of you know, HCI Group owns subsidiaries engaged in diverse yet complementary business activities, including homeowners insurance, reinsurance, real estate, and information technology. HCI's largest subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc., is a leading provider of property and casualty insurance in the state of Florida. Homeowners Choice is the fifth-largest P&C insurer in the state with annualized premiums of $430 million as of the end of fiscal year 2014. As of March 31st, 2015, we had approximately 175,000 policies in force throughout the state.
Our reinsurance subsidiary, Claddaugh Casualty Insurance Company, which participates in Homeowners Choice reinsurance program, gives us some flexibility in negotiating with our third-party reinsurers and retaining risk if we so choose. Our information technology division, Exzeo, develops web and cloud-based applications designed to improve our insurance operations. We believe they will add value to other companies as well going forward. Finally, HCI also owns Greenleaf Capital, which owns and manages our real estate operations. Our real estate portfolio consists of at least 2 class A office buildings, 90 acres of waterfront property, and multiple retail locations that are currently under development. Turning to our results for the quarter. As Richard will expand on shortly, we reported exceptional results for our first quarter ended March 31st, 2015. The first quarter, which marked our 30th consecutive quarter of profitability, was highlighted by the following events.
We increased our quarterly dividend to $0.30 per share, which represents an increase of 9% from our previous quarterly dividend rate. We also assumed a small crunch of policies from Citizens in February, totaling 4,704 policies with about $11 million in estimated annual premium. Of these policies, 1,605 were wind-only. Our $40 million share repurchase plan expired at the end of the quarter. During the quarter, we repurchased 37,869 shares of stock at a total cost of $1.6 million, or an average purchase price of approximately $400.51 per share. Under the plan over its lifetime, we repurchased a total of 1,028,570 shares at an average purchase price of approximately $38.85 per share. Turning to our operations, our core insurance business continued to deliver strong results. As Richard will discuss in a moment, our operating ratios continue to lead the industry, and our retention levels remain good and consistent.
Overall, the HCI Group had net cash provided by operating activities that exceeded $59 million. Before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the quarter. Richard?
Thank you, Paresh. Good afternoon, everyone. First quarter of 2015, income available to common stockholders totaled $25.3 million or $2.21 diluted earnings per common share. This is an increase of
$0.144 diluted earnings per common share in the first quarter of 2014. Net premiums earned for the first quarter increased 23.1% to $81.7 million from $66.4 million in the first quarter of 2014. This increase is primarily due to the mix of business generated through the December and February Citizens assumptions. The wind-only policies recently assumed from Citizens are not subject to reinsurance costs until June of 2015. For the first quarter of 2015, reinsurance costs were 25.4% of gross premiums earned, as compared to 29.3% in the same quarter a year ago. Through March 31st of 2015, and for reinsurance treaty years beginning June 2013, with our placement of the multiyear reinsurance treaties, benefits of $6.4 million respectively. In addition, we have deferred recognition of $5.9 million as of March 31st related to these adjustments and as discussed in prior earnings calls.
Our loss ratio applicable to the first quarter of 2015, which we define as loss adjustment expenses related to gross premiums earned, was 17.4% compared with 19.8% in the first quarter of 2014. Based on specific exposures wind-only policies are minimal, and in the absence of specific weather activity, it should. The expense ratio applicable to the first quarter of 2015, which we define as underwriting expenses, interest, and other operating expenses related to gross premiums earned a total of 22.2% in the first quarter of 2014. This decrease is primarily the result of the increased gross premiums earned, as mentioned earlier. Expressed as a total of all premiums earned, the combined loss and loss expense ratio 2015 was 50.4% compared to 60% in 2014. Improvements in these ratios reflect a significant increase in gross premiums earned.
Investment income was impacted by the recognition of other-than-temporary impairment losses in the first quarter of 2015 of $1.7 million. With the current market volatility and the size of our investment portfolio, impairments may develop. Investment in fixed maturity and equity securities totaled $218 million at March 31st, 2015, an increase of $75.5 million from the December 1st, 2014 level of $142.6 million. During the current quarter, we added approximately $61 million to our investments in fixed maturity securities. Total stockholders' equity at March 31st, 2015, was $206 million, compared to $182.6 million at December 31st, 2014, an increase of 12.8%. Net book value per share has increased to $20.32 at the end of the quarter from $17.92 at December 2014.
During the quarter, our insurance company, Homeowners Choice Property & Casualty, received permission from the Office of Insurance Regulation, and paid a dividend to the parent in the amount of $16.7 million. We're very pleased with these results for the first quarter of 2015, and remain committed to increasing shareholder value. I'd like to turn the call back over to Paresh. Paresh?
Thank you, Richard. Obviously, we are very pleased with these results. The operational momentum we established during 2014 carried into the first quarter of 2015. Even as we remained focused on applying our strict underwriting standards, minimizing operating costs, while providing our policyholders the highest levels of service. We continued to have our core insurance business deliver record results. More importantly, during the first quarter, operating activity of the overall HCI Group enterprise provided net cash of nearly $60 million in addition to the over $88 million provided in 2014. With this cash flow and increasing our book value period after period, we can continue to grow even without new major business initiatives. We are continually improving our operations. We have homegrown systems and technology that enable us to streamline and closely monitor our insurance businesses and identify trends.
In our insurance operations, we consistently focus on policyholder retention, exposure management, and distribution development. Turning to reinsurance. For 2015 renewal, we think the market remains soft. We do not know how it will turn out. We do plan to investigate alternatives that allow us to accept more measured risk within our reinsurance program using our product reinsurance subsidiary. As Richard stated earlier. We expect to continue diversification of business operations and investments throughout the year. For example, we're making investments in real estate that we believe will add long-term value to the shareholders in a tax-efficient manner. The value of these assets may not be fully reflected on our financial statements for a while to come. Consequently, while this diversification may cause temporary earnings volatility, we believe that in the long term, they will be a net positive.
Finally, in terms of acquisitions and mergers, we remain confident that significant accretive opportunities lie in front of us. We just have to be patient and wait for them to come to us. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.
Yes. Thank you, sir. At this time, we begin the question and answer session. If you would like to ask a question, please press star then one on your touchtone phone. To withdraw your question, please press star, then two. Again, star then one will allow you to ask a question, star then two withdraws your question from the list. Please hold while I assemble our roster. The first question comes from Matt Carletti with JMP Securities.
Hey, thanks. Good afternoon. Just a couple of, I think, all numbers questions today. First off, do you have gross and net written premiums handy?
For the quarter, $81,454,000.
It's a million.
Or million. Net was $53.6 million.
53.6. Could you repeat gross? It cut out for the first part of it.
$81.5 million.
$81.5 million. Okay, great. My other question is on the expense ratios, both commissions and other operating. They were both lower than we've seen them in recent memory in the quarter. On the commissions, has something changed there that makes it lower? Are the wind-onlys influencing that? Secondly, on the other operating, it's been kind of pretty stable around $nine and a half million for several quarters. Is that more of how we should think about that in terms of fairly steady dollars and the ratio be whatever it is, how the earn comes out?
A lot of the wind-only policies haven't really renewed yet, and there will be a slight increase in our deferral rate on deferred commissions.
Okay.
Okay. Thank you. Oh, I'm sorry.
Yeah. If I could follow up. Is there something else that's dragging down the commission expense? It's been 12-ish in the quarter, and it's been between 14 and 16 for the past year.
No, you've got quite a bit of earned premium not subject to commissions yet.
Okay. I follow you. Then on the other side, the other half of the question, the operating expenses. Should I look at it more in dollars?
I'd look at it more in dollars.
Are you pretty comfortable? Should we look at it, ballpark, it was $10 million in the quarter. As you grow, obviously, we should expect some scale there. Is that, in the near term at least, a fairly maintainable number?
It should be relatively consistent throughout the year.
Great. Very helpful. Congrats on a nice quarter. Thanks.
Thank you, Matt.
Thank you. The next question comes from Dan Farrell with Piper Jaffray.
Hi, good evening. Just first question, Paresh, you made the comment in your prepared remarks about feeling confident that we'll continue to see some opportunities in M&A. I was wondering if you could expand on that a little bit. Is there anything in the marketplace that you're observing that makes you think that that can take place? Is it the increasing competitive environment that might create opportunities? I just wanted to try and get a little more of your thoughts around that comment. Thank you.
Yeah. Evening, Dan. Love the new business card. The idea about the M&A activity, we're seeing people having different opportunities come for sale. The other side of this is as word is getting out that we Meaning other states we are getting all kinds of business opportunities that are provided to us. I'm giving you a range that it's been as far afield as owning a chain of donut franchises. Right? I'm not saying that we're going to do that. I'm just sort of saying that we Some of those things may turn out to be a very good investment. I say this in the context of once upon a time, we bought our headquarters office building, which looked very unusual at the time, and it is now appraised at more than twice what we paid for it. Right?
This is a comment about it may create some volatility in the short term, but it's really good long-term value. That's what we're looking at. We think something will come. There are opportunities out there.
Great. Thank you. I was wondering if you could just give us any updates on how your efforts are going with flood insurance.
As sort of said for the last couple of quarters, it's been slow, but it's hopefully starting to now take some traction from the basis that the NFIP just passed through their first 25% rate increase as of April 1 of this year. As people start seeing those, we're hoping to pick up a little bit more activity in the flood book. Equally, while you've got to appreciate that when you are looking at 175,000 existing policies, it takes a lot of flood policies to become a immaterial number, but it is increasing.
Okay, great. Thank you very much.
Thank you.
Thank you. The next question comes from Casey Alexander with Gilford Securities.
Hi, good afternoon. Can you review the total policies that you received from both takeouts, the December and the February, the number of policies and what you believe the premium attributed to those policies will be over the course of the next year?
Okay. Casey, I think the official numbers, you can look them up on the Citizens website, was about 36,500 policy were technically assumed in December, 4,700 were technically assumed in February. If you add those together, you end up with about 40,000 policies. I say technically assumed because they post that, so you've got to almost think of where do you end up net of that. Boiling through all of that stuff, I think what we set out to do and what we did achieve between the two takeouts is about $100 million of premium in force. That'll roll onto our books over the next year. That answer your question?
Yes, it does. The attrition rate, how do you see that developing? I know that's always a moving number, but how has it been developing thus far?
I almost will tell you it's incredible how good it is, right? Because of the way we've been doing these takeouts, policyholder, et cetera, we are seeing renewal rates on the assumed book to be consistent with our existing book, which is approaching 90%. The book isn't rolling off, if that's what the question is, yeah?
Yeah. I would never ask you to speak to the results of a competitor, but a competitor reported and had adverse reserve development from 2014 and also water losses apparently this year in the Tri-County area. That has been the bulk of where their takeouts have been. I was wondering if you guys have seen anything similar either this year or last year related to water losses in the Tri-County area.
I can't speak to other people's numbers, but I can speak to our first quarter. In Q1, at least from a claims frequency perspective in the Tri-County area, our claim count was actually down. Part of that was mainly because last year in Q1, there was a bad storm that went through Palm Beach that actually elevated the claim count a little bit, right?
Right.
That's why we're down. If you actually net it out for that particular thing from Q1 last year, I would say we haven't seen an uptick in frequency. Severity, we have seen some slight uptick because the Assignment of Benefits issues are more active down there, but not enough.
Significant.
To make it a material conversation item on our part. If any, which I think it wasn't really there, is baked into our numbers already.
Yeah.
Okay. That's great. Thank you. Lastly, as much as I like a good donut, we certainly appreciate your contemplative plan as it relates to acquisitions. Do you expect that the board would take up a new share repurchase plan? You used last year's very judiciously in terms of when you executed it and the prices that you executed it at. I think it's made a lot of sense in lieu of a good acquisition falling in your lap. Do you think that you as a manager, would recommend to the board, of which you're also Chairman of the Board, to take up a new share repurchase program?
Casey, look, over the course of years of this stuff, in the same share price, same whatever environment, we do change our minds as time goes along. I will tell you, having just come off of one, we will probably wait to see how some of the next few months develop, right? The item being is, on the one hand, if we may end up doing an acquisition, until that day, building up some cash reserves would be a useful thing to do.
On the other hand, if no to put that capital to work arises, it'll eventually reach a point whereby we'll say, "What is the best use of the cash?" The board will obviously debate the obvious answer that you get to at that point, which is either a share buyback, dividend increase, or some kind of special dividend or the usual kinds of things that we talk about.
Correct.
Well, I thought maybe you might just want to have one in your pocket in case there's real volatility in the market, and yet no opportunity has shown itself yet, that it might make some sense. Thank you very much for taking my questions. I appreciate it.
Absolutely, Casey. Look, let me just answer that last little bit about having one in our pocket. Generally speaking, we've tended to be a company that when we say we're doing a buyback, we actually go and buy back shares. I think there is some concern that we don't want to suddenly say we've got a buyback in place that doesn't actually buy back shares. I think if and when we were to announce it, we generally have then very quickly followed through and executed upon it. It puts us where we are.
Yeah. Okay, great. Thanks for taking my questions.
Thank you.
Thank you. Once again, as a reminder, if you would like to ask a question or offer a comment, please press star then one on your touch-tone phone. The next question comes from Arash Soleimani from KBW.
Thanks, good afternoon. Just a few questions here. It seems like what you're saying is the acquisitions you're going after are more likely to be outside of insurance. Is that the right way to think about it?
Arash, I don't necessarily know that we would absolutely say that would be I think what we would tell you is the insurance acquisitions that we've been looking at tend to be very richly priced currently. Would we like to do an acquisition in insurance? We would gladly do it, we are not seeing competitive pricing as we are seeing some other areas. That's where the difference of opinion comes from.
Okay. It sounds like you're saying you'd be just as happy to do it outside insurance as you would to do it in insurance. There's not a preference for one or the other per se?
Yeah. Look, we're in the market to buy something, a good business that's fairly priced. Right?
Right. In terms of if it's something outside insurance, is it something that would maybe fit in well with, like an Exzeo or something existing that you already have, or would it be potentially something that's in an industry outside, I guess, your current operations?
We've stated this for several years, and we've usually executed upon it. If we were to do an acquisition, the conversations we have is, first of all, is it a good business to own? Secondly, do we know that there's a management team that we've identified that's going to run it, which is whether it's existing management team or some other management team, because we don't presume to suddenly imagine that we know how to run an insurance company in Colorado any more than we presume that we have the expertise to run a donut franchise in Texas. Yeah?
Right. I guess in terms of the this is a similar question, but in terms of future plans for HCI's next step, is the right way to think about that as on the Citizens front, obviously, that stuff's not the opportunity it was even Q4 of this past year or in prior quarters. Is the next step for HCI from your position, M&A? I guess what I'm asking is M&A the next thing for HCI?
Well, I think for is more clearly answered if we can know what's going to happen this summer throughout the few U.S. in terms of hurricanes and other catastrophes, et cetera.
Right.
I say that because those things would materially change the outlook, we do know that about this business, is that every six months, outlooks change very quickly.
Right.
Given all of that, all we are doing is making sure that we are prepared for when that opportunity comes along to take advantage of it. Equally well, if there is no opportunity, which is where currently the ideas seem to be from Citizens, et cetera, to be patient and wait.
Right.
Plan for the day when that does arrive, yeah?
Right. That makes sense. Are you also looking at M&A opportunities in other states?
We are looking at M&A opportunities wherever we are presented them.
Okay.
In whatever lines of business we're presented them. This is a game whereby you say no a lot of times to get to a yes.
Right.
It's just the nature of the deal, yeah?
Okay. Did you say something earlier about cloud? The call was cutting out a bit at that point. I just heard you mentioning something with cloud. I just want to know if you could repeat that.
Yes. Okay. Hey, great question. Look, that we have that are internal to the organization. Given our cash position and the health of the business and the cash flow that's there. We are in a position, if we deem appropriate, to actually retain some risk in Claddaugh, and thereby actually increasing our profitability by being a strategic reinsurer of our own insurance company.
I think this past year you were at $10 million in Claddaugh. Is what you're saying, that you would increase to $10 million?
Yes, possibly.
Is that in terms of your, I think, the total, if you take Claddaugh all and I guess what you retained in terms of a third party insurer that you worked with, so I think you had an $18 million retention. Should we think of that this year as something you want to keep the same, something you want to increase now that you're bigger? What's the right way to, I guess, think of the 28? Should we assume the 28 moves up, moves down, stays the same?
Well, simple ways of thinking about this. As far as the insurance subsidiary goes, typically the industry norm is 15% of year-end surplus from the previous year.
Okay.
Which would put us at about $26 million just for the insurance subsidiary.
Okay.
Right. That is not occurring for any other reason than the increase in the surplus and capital position of the insurance subsidiary.
Okay.
You see these things are getting bigger for us and for everybody else as businesses grow and thrive.
Okay.
The Claddaugh part, we might increase it from $10 million to some other number, assuming we think it's appropriate.
Okay, that would basically the goal there would just be to deploy excess cash that you have in a way that you deem profitable.
Yes.
Okay. Numbers question for Richard. Did you mention what the weighted average diluted shares outstanding?
Weighted average at the end of the quarter was $11.4 million.
Okay.
That's the diluted share count. The weighted average diluted share count was 11,300,000.
11.
Approximately.
Okay, thank you. Was there any favorable or unfavorable development in the quarter?
As far as?
Just reserves developing either favorably or unfavorably.
They're consistent.
Okay.
They're consistent as they have been.
Okay. The last question I had here. In terms of the flood, I know you mentioned April 1, there's a rate increase that kicks in. Let's say that does get you some traction on the flood front. How should we think of the margins on that business? The reason I ask is because I think maybe one year ago even, you had mentioned something about that business being a breakeven business. Is that something where you think you could actually have a positive underwriting margin?
Yeah, I think at this point, because of the progress we've made in terms of selections of policies, et cetera, we are now looking at that business as much better than breakeven. In fact, one that meets our profit target.
Okay.
As long as we take the right policies and we say no to the wrong policies, yeah?
Okay. Thank you for the answers and congrats on the quarter.
Thank you.
Thank you.
Thank you. We are currently out of time, at this point, I would like to turn the call back over to management for any closing comments.
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 continued success in 2015.
Thank you. Thank you for joining us on today's presentation. This concludes today's call. You may now disconnect.