Greetings, welcome to HCI first quarter 2014 earnings conference call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance or technical support during this conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your moderator, Mr. Kevin Mitchell. Thank you. You may begin.
Thank you, good afternoon. With me today are Paresh Patel, our Chairman and Chief Executive Officer, Richard Allen, our Chief Financial Officer, and Scott Wallace, President of the Property and Casualty Insurance Division. Following Paresh's opening remarks, Richard will review our financial performance for the quarter, then turn the call back to Paresh for an operational update and business outlook. We will open up the call to your 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 operation. HCI Group, Inc. disclaims all obligations to update any forward-looking statements. I would like to turn the call to Paresh Patel, our Chairman and Chief Executive Officer. Paresh?
Thank you, Kevin, and good afternoon, everyone. As Richard will expand on shortly, we reported strong results for our first quarter ended March 31st, 2014. Among the highlights of the quarter were: first, in January, we were the first admitted homeowners insurance carrier to offer flood insurance in the state of Florida. Two, in March, we initiated a share buyback program, and during the quarter, we repurchased and retired 210,836 shares of HCI common stock at a total cost of $7.8 million, or an average price of approximately $37 per share. We also announced the cancellation of the conversion feature of our 7% Series A preferred shares, listed on the NASDAQ as HCIP, and voluntarily delisted them from the NASDAQ. Conversion of these shares and delisting simplifies our capital structure as well as reduce our listing costs.
Before I go on, I would like to invite our CFO, Richard Allen, to take us through our financial performance for the first quarter. Richard?
Thank you, Paresh, and good afternoon, everyone. For the first quarter of 2014, income available to common stockholders totaled $17.6 million, or $1.44 diluted earnings per common share. This is an increase of 13.5% and 9.9%, respectively, from the $15.5 million or $1.31 diluted earnings per common share in the fourth quarter of 2013, and down from the $20.4 million or $1.81 diluted earnings per common share in the first quarter of 2013. Primary drivers in the change in 2014 from the first quarter of 2013 are quarterly reinsurance costs for the treaty year starting June 1 of 2013, increased by approximately $6 million per quarter over the prior treaty year. Debt service interest and cost increased by approximately $1.9 million. Policy acquisition costs were recognized in the first quarter of 2014, includes commissions and premium taxes on the policies originally assumed from Citizens in November of 2012.
Other operating expenses include recognition of approximately $3.3 million in additional compensation costs and related expenses, including $1.7 million of stock-based compensation expense. Gross premiums earned in the first quarter of 2014 increased 2.7% to $93.9 million from $91.4 million in the prior quarter, and 13.7% from the $82.5 million reported in the first quarter of 2013. The increases were primarily due to the renewal of policies assumed from Citizens in Novembers of 2012 and 2013. Premiums ceded in the first quarter of 2014 totaled 29.3% of gross premiums earned. This compares with 30.6% in the fourth quarter of 2013 and 26.6% in the first quarter of 2013. Benefits of the multi-year reinsurance treaties recognized in the first quarter and for the treaty year to date are $5.4 million and $18 million, respectively.
Net premiums earned for the first quarter of 2014 increased 4.7% to $66.4 million from $63.4 million in the fourth quarter of 2013, and increased 9.6% from the $60.6 million in the same year-ago period. We have increased the fixed income position in our investment portfolio and our position in dividend-paying equity securities. This has improved our net investment income in the first quarter of 2014 to $1.1 million from $0.7 million in the prior quarter and $0.1 million in the first quarter of 2013. Loss and loss adjustment expenses during the first quarter of 2014 were $18.6 million, compared with $17.3 million in the fourth quarter of 2013, and $15.9 million in the first quarter of 2013. The increase in 2014 is primarily the result of some torrential rainstorms in Palm Beach and Martin counties in January.
In addition, the increase from the first quarter of 2013 is primarily related to the increased policy exposures related to the prior assumptions. We consistently monitor claim activity for development and emerging trends in frequency, severity, and causes of loss for the potential impact on incurred losses and loss adjustment expenses. Other operating expenses, which include a variety of general and administrative expense, total $9.5 million in the first quarter of 2014 compared with $12 million in the prior quarter and $6.1 million in the first quarter of 2013. The decrease from the prior quarter was attributable to higher compensation and related costs in the fourth quarter of 2013. This accounts for approximately $1.3 million of the variance. Interest expense from our senior notes totaled $2.6 million in the first quarter of 2014.
The company's 3.875% convertible notes that were issued in December of 2013 were the main reason for the increase, compared with $1.2 million in the prior quarter and $700,000 in the first quarter of 2013. We are encouraged by our results for the first quarter of 2014, and we remain committed to increasing shareholder value in future periods. Now with that, I'd like to turn the call back over to Paresh. Paresh?
Thank you, Richard. We're off to a strong start in 2014. Our 26th consecutive quarter of profitability was marked by our highest quarterly net premium recorded since inception. The operation momentum continues to build. Our core business again delivered profitable results as we remain focused on applying our strict underwriting standards and minimizing operating costs. At the same time, providing our policyholders with the highest levels of service. Our overall strategic focus remains on property and casualty insurance as a leading provider in the state of Florida. That said, we are excited about the opportunities presented in new markets like flood insurance, as well as in our other divisions, Exzeo and Greenleaf Capital. We remain optimistic as we approach our reinsurance renewal date. The market continues to provide signs of favorable development as we negotiate final terms and conditions.
Other positive development is that we continue to deploy our large cash position within our investment portfolio and look forward to better returns in the months ahead. In summary, our consistently profitable core business, coupled with our strong cash position of almost $300 million, allows us to patiently seek accretive growth opportunities as they arise. With that, we're ready to open your call for questions. Operator, please provide the appropriate instructions.
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. Our first question is from Dan Farrell, analyst. Please proceed with your question.
Thank you very much, Sterne Agee. Just a quick question for you regarding the reinsurance environment. I was wondering if you could talk about your outlook for your reinsurance purchases going forward and how you're thinking about approaching it strategically, whether it be improving the coverage or letting more of the benefit fall to the bottom line. Thank you.
Okay. Thanks, Dan. By the way, thank you for picking up coverage on the company and the buy rating. As far as the reinsurance program goes, we have obviously in very advanced stages of placing our 2014 reinsurance program. Generally speaking, in the way of color, the per unit costs have dropped significantly, we are also buying a greater number of units of reinsurance, and we're doing it basically for two reasons. One is as we've grown in the size of the company, we need to buy more units. Secondly, also because the unit costs have come down so dramatically, we're buying more units just out of an abundance of caution.
Having said that, the way this is going to flow out into our ongoing business is, I think our reinsurance costs amortized over 2014 should be very similar to that which has been amortized over the previous year.
Okay. That's helpful. It's probably difficult for you to give any specific answers, but how do you think about the acquisition costs ratio going forward? Obviously, the reinsurance can have an impact there, and I was just wondering if what we're looking at right now is a reasonable run rate, or if that could bounce around.
Great question. Look, with regards to acquisition cost, there's been some conversation about the impact of Clearinghouse, et cetera, versus takeouts, versus growing business organically, et cetera. Very simple thing that we've done is that we've actually started launching a new program that was developed by our software division called Exzeo Proplet. What Proplet lets you do, it lets you quote policies in almost like a Google-like manner, very quickly. It is almost the exact opposite of what's happening in the Clearinghouse. With this, what we're able to do is we're able to scale up our voluntary underwriting business in a big way without having the corresponding costs of underwriting staff and reviewing quotes and all the other pieces that go with it. We can maintain underwriting discipline while pushing much greater volumes through, and those systems are coming online as we speak.
From our perspective, I think we are looking at policy acquisition costs, notwithstanding things like salary raises or those kinds of things-
Okay
Higher taxes or higher real estate or insurance costs, that it should stay roughly around the same levels as it has in the past.
Okay. All right, great. That's very helpful. Thank you.
Yeah.
Our next question comes from Matt Carletti with JMP Securities. Please proceed with your question.
Hey, thanks. Good afternoon. Paresh, you mentioned in one of your prior answers, just touched on the Clearinghouse, there's been some press of late, kind of talking about how it's been a slow start and I guess there's been a lot of questions about just the take-up rate and the success of it. I know you guys have elected at least at this point, not to participate. Just curious if you could update us on your thoughts and what you're seeing.
Yes, Matt. Simple thing is obviously we're not participating yet, I note the excellent article that was written in the Insurance Journal, on April 21st.
Yes.
I think Scott can talk a little bit more about that in terms of what it tells you as to what's going on inside the inner workings of the Clearinghouse. The anecdotal evidence we get from talking to our marketing folks in the field, et cetera, and from talking to agents, is that the Clearinghouse is a binding offer of coverage and not a quoting tool. Before you can even get a price, you have to answer about 100 questions, and it takes about 30 minutes to work your way through that. It becomes a very labor-intensive item for agents, and they're not necessarily happy about it, shall we say. Yeah? In that context, what we've started launching is, like I said, our new Proplet application that we've licensed from Exzeo. In that tool, you can basically get a quote in about a minute.
That difference is clearly having an effect in terms of activity.
Got you. Is that live yet? Did it just go live, or will it soon go live?
It's been on a limited release.
Being introduced on a limited basis.
Yeah. I think Scott rolled it out to about 12 agents. From the data we're seeing, I think, the 12 agents or so have been quoting. The quoting of policies has jumped anywhere between 5-fold and 20-fold from getting this tool.
Wow. That's great. Just my only other question is related to the flood initiative. If you could just update us on where it stands and the progress. I know it's just starting to roll out, and particularly now that we, at least since the last time we talked, have a little bit more clarity on where the federal-level reforms will be in terms of costs being raised on the NFIP and so forth.
Yeah. The flood product has been rolled out. I think we've probably written 100 policies or so to date. Again, as Proplet gets rolled out into more and more places, the flood stuff goes along with it because it is a primary mechanism for quoting flood policies as well. Just with the rollout of 12 agents, we've picked up about 100 policies in a couple of months. So it gives you an idea as to how quickly this thing could ramp up. Obviously, the modification of Biggert-Waters that was done a couple of months ago may affect the take-up rate in the short term, but as those rate increases, which are still there, they're just sort of on a slower glide path flow through. We will pick up more business along the way.
Of course, as is our nature, the months in between, we get to study the experience of what we're seeing and optimize our systems and processes to take great advantage of it, yeah?
Yep. No, that's great. Then last quick numbers question, just do you have gross written and net written premiums for the quarter handy?
Richard's looking them up as we speak. We may answer them after the next question if it takes him a little second to find them.
That's all right.
It may take me a minute.
You can answer it later. That's all right.
Okay.
Thanks a lot, and congrats on a nice quarter.
Thank you.
Matt?
Our next question comes from Casey Alexander with Gilford Securities. Please proceed with your question.
Hi, good afternoon. I just want to kind of clarify what you said about what you've learned about the reinsurance contract thus far. Is my understanding that you're paying a lower rate as a percentage of gross premiums, but since you're buying more, the absolute U.S. dollars is going to be similar to the year before?
Casey, let me characterize it in a different way, is that reinsurance rates are down considerably. We are buying more reinsurance, basically because of two items. We're buying more reinsurance, one, because we have a bigger book, that inherently means we have to buy a little bit more. Also because it's in some ways so cheap, we are buying a little bit more because of that, just in case something happens. We're doing this in the context of trying to keep our reinsurance spend, not in terms of percentage, but in terms of absolute U.S. dollars, flat year-over-year. ±$1 million a quarter, shall we say.
Okay. It's U.S. dollars flat, because rates are down so much, the actual coverage is up on a year-to-year basis.
Yes.
Okay. Does that mean that you expect to have your probable maximum loss? It's a bigger company than it was a year ago. Is the dollar amount of the probable maximum loss likely to be in the same neighborhood, or are you actually buying so much that the probable maximum loss could even be lower?
When you say probable maximum loss, you mean the top of the tower, or are you talking about the retention at the bottom of the tower?
The retention at the bottom of the tower.
Yeah. I think the retention at the bottom of the tower is going to be somewhat consistent with what we've historically done.
15% of statutory surplus.
Yeah, 15% of the year-end surplus at the end of 2013, the previous year.
Right.
It would be around $18 million or so, I believe.
Yeah.
Okay. All right. Great. That's very helpful. Thank you. Secondly, now that you've had your most recent Citizens takedown for six months or so, how is the attrition rate of the policies running compared to previous takeouts that you've done?
Casey, as we've said years gone by, every takeout we do, the attrition rate gets better and better. Attrition rate gets lower and less and less. Let me make sure I say it that way, right? We retain more and more of the policies. I think the last we looked, our retention of these new Citizens takeout policies is actually running neck and neck with the rest of our book.
Okay.
Mid to high 80s, yeah?
Okay, mid to high 80s. Great. What was the total policy count at the end of the quarter?
Approximately 160,000.
160,000. Okay. The 200,000 shares that was repurchased, was any of that a part of the repurchase contract with Deutsche Bank related to the convertible debt issue, or was that all separately related to the later announced share repurchase program?
It was entirely to do with the later announced share buyback program.
Okay, great. Lastly.
Hang on, Casey, one more thing about that. When we announce the buyback, when we usually say we're going to do a buyback, we usually mean it, and we basically follow through. That's what you're saying, yeah?
You still have $32 million available on the buyback, though?
Yes.
Yes.
Right. Okay. Lastly, this last week, and it may be early. This is just the last few days. There has been an enormous amount of flooding up in the Panhandle. Should we be adjusting our models to a certain extent on the loss and loss adjustment expenses to account for that? Do you have any color? Have you had any influx of claims at the claims center, and are your adjusters out there and giving you some color as to what you are seeing out in the field?
This is Scott Wallace, and to answer your question, the number of claims that we have received as a result of the rain event in the Panhandle is but a little bit more than a handful. We anticipate the total claims coming out of this activity is probably going to be less than 20.
Okay, great.
Casey, adding a different color to that also is that we tend not to be very big market share-wide in the area that's being drenched by the water.
Right.
The second part also that we would probably say is that, yes, there will be some activity. We'll pick up some losses. We picked up, I think, as Richard said earlier, losses in the-
Palm Beach and Martin counties
back in January. The way we've always taken these things is that Yeah. A, most of those policies, when we have these losses, we take them as routine course of business. That's the business we're in, right?
Right.
There will be some stuff we'll pick up from this. One more thing, just because of the nature of those losses, those losses that we're picking up is because it rained for 24 hours and produced about 20 inches of rain in 24 hours. The claims we're getting are not flood claims. We're getting claims because people's roofs are leaking, that kind of thing. Even there's lots of flooding going on, we're not covering the flood policies up there, yeah?
Right.
Just thought we should clarify now that we're in the flood business, yeah?
Understood. All right. Thank you very much for taking my questions.
Thank you.
Our next question comes from Arash Soleimani with KBW. Please proceed with your question.
Hi, thank you. I don't know if you mentioned this earlier on the reinsurance program for starting June 1. Is that going to be a reinsuring to 1 in 100 or 1 in 150?
Arash, it's a very simple answer to that. It depends on which data set you use as to what it means, because while everybody's very precise in their modeling, depending on which model you use, you get a very different answer. To give you a standard answer, I think basically if you use the OIR model, the one that's used by our regulators, we are way north in terms of 1 in 150, approaching 1 in 200. If you use-
Rating agency
rating agency models, we are definitely north of 1 in 100. That's just the first event, plus we have enough coverage to exceed 1 in 50 in using rating agency models for the second event, then it goes on from there.
Okay. My next question was, in terms of your growth in Florida, I know you said you're trying to get to about 5% market share. Just looking at some of the TIV data by county, it looks like right now between Pinellas and the Tri-County, it's about 52.5% of TIV in those areas. The remainder to get to the 5% market share, would some of that seek to sort of diversify that exposure? Do you anticipate that it'll be within those counties? Just trying to get a sense of-
Yeah
how it will shake out.
Yeah. Arash, I would tell you to group it in a slightly different fashion. I would group it as Tri-County, which is Dade, Broward, and Palm Beach. The other way to group Pinellas is to group Pinellas with Hillsborough or the greater Tampa Bay area. Roughly speaking, what we've historically tried to maintain is about a third of the exposure in Tri-County, a third of the exposure in the Tampa Bay area, and a third of the exposure in the rest of the state. I would imagine that as we grow the business, we will be maintaining roughly those ratios.
Okay, perfect. Just lastly, in terms of just sort of on the topic of growth still, what are the plans for, I guess, any sort of expansion outside of Florida? I know some of your competitors have some aggressive plans outside of the state. I know you yourself mentioned Alabama as one avenue. Just trying to look, I guess, five years down the road, are there other states outside of Alabama also that would interest HCI, or what's sort of the trajectory there?
Yeah. Given you're using a five-year timeline, I would tell you that, yeah, in that kind of timeframe, we would be in multiple states. Probably more up the eastern seaboard, that kind of thing. Maybe a selective couple of places along the Gulf Coast. Those all look probably in our future, shall we say.
Okay, great. Thanks for the answers, congrats on the quarter.
Thank you.
Our next question comes from Geoff Dancey with Cutler Capital Management. Please proceed with your question.
Hi, Paresh. How are you doing?
Hey, Geoff. How are you?
Doing good. Doing good. Got a question for you. First, I was happy to see the share repurchases. I'm wondering, when you look at those share repurchases and consider any increase in your dividend, how do you balance those two things?
Very simply in the following manner, right? We've always sort of been mindful of the idea of how do we provide a return to our shareholders based on their investment kind of thing. Clearly, we have the two levers, which is dividends or a buyback. Really, our board has actually been very mindful and observant, and changes as the world changes in terms of when you declare dividends versus when you buy back shares, because they not only consider the share price, but also the tax scenarios and where we are in what it would mean to shareholders, et cetera. There's a number of factors that go into it. I think currently there seems to be more favor to see any growth would be more in buybacks than in dividends.
I say that changes because as circumstances would change, I'm sure they would change their minds too, yeah?
Hopefully those circumstances are the stock price back up in the 40s or higher.
Yeah. Just to make an illustration, I think if the stock was, and I'll just do an extreme number so nobody thinks I'm making a prediction. If the stock was 85, we'd probably be doing more dividends and less buyback, right?
Okay. You had mentioned before that as you do more takeouts from Citizens, your attrition improves. Why is that?
I can only speculate on the matter, I think what it is, as time has gone on, and don't forget, we're now seven years, eight years into this thing. People have developed comfort with our reputations, our history, how we've treated the previous takeouts, both from agents, from their neighbors, and just general conversation around the state. That helps in terms of retaining people. Also, we've gotten better at saying we only want to pick people who we know are going to stay with us, because one of the characteristics about how we run our business is that we like to take people on as customers and then have them never leave. Right? We're not really looking to have people come on board and leave in a matter of weeks or months, yeah?
It's inefficient.
When you think about getting up to, I know this 5% market share number you had, I think that's many years old now, that number.
I wonder, is that still the number that you're looking for in Florida, what you think is optimal?
Yeah.
How do you get to what you think is optimal? Is it through how much of it is through takeouts, and how much of it is through organic growth?
Okay. I'm going to answer this on a five-year timeframe, like the previous caller asked, right?
If you're going to get there over the next five years, I suspect it's not going to happen on a step-by-step basis, you could see steady progress month-over-month. That's just not how we've grown the company. It'd be unusual to expect that to happen going forward. I think more likely what's going to happen is we maintain the size of business we are, then we're going to get from where we are. Just to put 5% into perspective, it's about 250,000 policies.
The question is, where do the next 100,000 policies come from? They'll come not being written one at a time. They will probably come because we do a block in the takeout, or if there's a hurricane, it could come in the block of an acquisition of somebody, or somebody having an issue, et cetera. Much as everybody seems to think that those opportunities will not arise, just in the last quarter, we've had two-
Two or three
eah, two or three opportunities of acquiring books. I'm speaking about them now because I don't think any of the three of them are going to occur. Even in this market, that stuff was available. That's probably how we're going to get there. We're going to get there in going along flat for a while, then suddenly leaping by 50,000 policies or so.
Sure.
Do that twice, and you're there, yeah?
Is competition for those books, is it the competition that's making it not attractive to take those on?
Those other two books? Well, there's a question about price.
Yeah.
What it would cost you to have those books. We also have a different item that we have to be concerned about. We have an existing book of business that is performing very well. It's very easy to grow the top line by taking on more business. If the new business isn't up to our standards, what's going to happen is that the existing business is going to have to subsidize that business for a while we clean it up. To give you an idea, there's been lots of talk lately about how much business people are writing, et cetera. What we are looking at internally is we are basically binding about 6% or 7% of the inquiries we get for new business.
Putting it differently, we could grow our voluntary book almost 15 fold more from the inquiries we're already getting if we just took everybody. The problem would be you grow the top line at the cost of the bottom line, and we've always been more focused on the bottom line.
All right. Thanks for that explanation.
Thanks.
My last question for you, is 5% still what you think is the right number to be in the Florida market?
5%, I think, easily makes sense. I think, you're hearing it here first, given how good our staff and systems and people are getting, we may be able to grow this thing to 6% or 7% or 8% and maintain the margins.
Sure.
Yeah.
All right. Great. Thank you for your time.
Thank you.
Okay.
Any Operator? Well, at this time, this concludes our question and answer session. I would like to thank everyone for joining us on the call, and most importantly, want to thank our shareholders, employees, agents, and most importantly, our policyholders. We look forward to continuing success in 2014. Thank you, everyone, and have a great evening.