Greetings, and welcome to the Homeowners Choice first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Madhu, Vice President of Investor Relations. Please go ahead.
Thank you, and good afternoon. Welcome to Homeowners Choice first quarter 2013 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 Insurance division. Following Paresh's opening remarks, Richard will review our financial performance for the quarter, and then turn the call back to Paresh for a brief update and business outlook. Finally, we will open up the call to your questions. To access today's webcast, please go to the investor relations section of our new 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 filing 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 the operations. Homeowners Choice, Inc. disclaims all the obligations to update any forward-looking statements. I'll turn the call over to Paresh Patel, our Chairman and Chief Executive Officer. Paresh?
Thank you, Jay, and good afternoon, everyone. As Richard will expand on shortly, we had a very successful and profitable first quarter of 2013. Among the highlights were the completion of an underwritten public offering of $40 million of 8% senior notes due in 2020. We believe this successful offering demonstrates investor confidence in our business model and the recognition of the strength of our balance sheet and the prudent cash flow management we have exhibited. Another highlight, we declared a regular quarterly cash dividend of $0.225 per common share. In addition, we have continued the successful integration of our Citizens assumption from November 2012. Finally, we purchased an office building in Ocala, Florida, which is about 100 miles from Tampa for those people outside the state.
The building is in the center of the state and has approximately 16,000 sq ft of space and sits on about 1.6 acres of land. The purchase price was $2 million. We intend to use a portion of this building for our regular insurance operations and also as a disaster recovery site in case of a catastrophic event impacting our company's home office. I would like to turn the call over to our Chief Financial Officer, Richard Allen, to walk through our financial performance for the first quarter. Richard?
Thank you, Paresh. Good afternoon, everyone. First quarter income available to common stockholders totaled $20.4 million, or $1.81 diluted earnings per common share. This compares with $6.8 million, or $0.88 diluted earnings per common share in the first quarter of 2012. First quarter 2013 gross premiums earned increased 50.9% to $82.5 million from $54.7 million in the first quarter of 2012. This increase is primarily the result of the earned premium generated through the November 2012 assumption from Citizens. Net premiums earned for the first quarter of 2013 increased to $60.6 million from $40.4 million in the same year-ago period. For the first quarter of 2013, loss and loss adjustment expenses totaled $15.9 million, compared with $19.2 million in the comparable quarter of 2012.
Even with the increase in policy exposures from the Citizens assumption in November of 2012, we continue to observe the favorable trends in the frequency of reported claims as well as the average severity per claim, as was discussed in our fourth quarter earnings call. We are constantly monitoring claim activities for development of trends in frequency, severity, and the distribution and the causes of loss for the potential impact on incurred loss and loss adjustment expenses. The combined loss and expense ratio to net premiums earned was 47.3% for the first quarter of 2013, compared to 74.9% for the first quarter of 2012. This combined ratio reflects the impact of the Citizens assumption on the net earned premiums, the denominator in this calculation. Turning to the balance sheet. Investments in fixed income and equity securities total $45.1 million at March 2013 versus $44.8 million at December 31st, 2012.
Cash and cash equivalents at March 31st totaled $279 million, compared with $230 million at December 31st, 2012, partially reflecting the successful debt issue referred to by Paresh in his initial remarks. Unearned premiums of March 31st, 2013, were $141 million compared with $154 million at December 31st, 2012. The liability for losses and loss adjustment expenses was $41.8 million, compared with $41.2 million at December 31st, 2012. As indicated by our results, we have had a very successful first quarter. I'll turn the call back to Paresh. Paresh?
Thank you, Richard. The strong momentum built during 2012 continued into the first quarter of 2013. Our record profitability reflects our commitment to managing the operations, growing revenues, and ultimately providing value to our shareholders. We continue to grow the business and remain committed to being one of the top homeowners insurance providers in the state of Florida. Last month, we began doing business as HCI Group, Inc., which we believe now more accurately represents the company's diverse yet complementary business activities, which include property and casualty insurance, information technology, real estate, and reinsurance. It will also help avoiding confusion between the parent company, our largest subsidiary, Homeowners Choice Property Casualty Insurance, as well as our non-insurance enterprises. Along those lines, we launched our new information technology division, Exzeo. The division was formed to develop technologies for HCI's own use, primarily in the insurance claim handling process.
As we develop it, though, we believe the utilization of the software will benefit many types of businesses across multiple industries. We plan to release the Exzeo platform to the marketplace later this year. While we remain committed to our insurance business and the Homeowners Choice brand, we are equally excited about other enterprises like Exzeo and the strategic opportunities that they offer. Finally, on behalf of the entire management team, I would like to express our appreciation for the continuous support we receive from our policyholders, agents, shareholders, and employees. We look forward to yet another successful year ahead. With that, we are ready to open the call for your questions. Operator, please provide the instructions.
Thank you. If you would like to ask a question, press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Robert Paun with Sidoti & Company. Please state your question.
Good afternoon.
Good afternoon, Robert.
A number of questions here. First, on the loss trends, I know seasonally the first quarter is typically the strongest. Can you just talk about what you saw in the quarter that led to such a low loss ratio? Was there any prior year favorable development in there?
Robert, it's Paresh. The basic thing we would tell you that we saw in the largest item in the first quarter was really the number of claims that actually came in. The phone's got to ring for a claim to come in. The number of claims that actually came in then the mixture of the claims. Clearly, certain kinds of claims are more expensive than others. Just those two items, I think, speak to the bulk of the performance that you're seeing. Was there some favorable claim development from previous years?
There was about $400,000, approximately a favorable development on prior accident years.
Yeah. Given what we're talking about here, I don't think that's a material cause here.
Right. Thank you. Can you just talk about the operating expenses in the quarter? Was there anything unusual in there in this quarter that led to the low ratio?
The low ratio is really driven by the increase in the net earned premiums.
Yeah, no, I understand that. Maybe you could just talk about the expenses associated with the new assumption of policies that you did in November. Do you hire more underwriters or more claims handling staff to support the new business, or do you already have the necessary staff in place?
Robert, when we had done the assumption way back when we were working on it, we had sort of said that as a consequence of growing this business by 50%, we would probably create about 40 or 50 new positions across the company. We're sort of walking down that path. All 40 or 50 people don't come on board right off the bat. More importantly, I think the positions that are being created are not at the top end of the corporate hierarchy, shall we say. Consequently, on a cost per policy or a cost per transaction, or in this case, an expense ratio, the costs do go down.
Okay. Just final question on reinsurance. Can you just comment on the June 1st renewal and what your expectations are there? Seems like industry commentary suggests that reinsurance pricing has softened a bit. Are there any changes or updates to your comments that you made from the last conference call on reinsurance?
Okay, let me answer the question in two parts. Yes, reinsurance costs are softening. I think the comments that we had made in the last earnings call were already reflective of that softening that we were anticipating. When we put out that range, I think it was $120 million to $140 million was the range we had put out, anticipated some of that softening. We're not updating that in any great shape, at least for the $800 million purchase that we had talked about. That's basically where we are.
Okay. Thank you for the answers.
Thank you.
Our next question comes from Edward Hemmelgarn with Shaker Investments. Please state your question.
Yeah, my question revolves around the policy acquisition cost. Those have been certainly trending down as a percentage of net earned premium. Can you kind of fill me in on where you think that may be going? It was down to 9.86% this quarter. A year ago, it was at 16.3, and it's been as high as 20.
What you got to realize, Edward, is that all the earned premium coming from that November assumption, there was no acquisition cost.
Right.
So-
Kind of assumed that.
Our normal acquisition cost on renewal of business on our paper is about the 9.5%-10%. Last year's was inflated a little bit because the HomeWise assumption had a 16%.
You had an accounting change in too.
Yes, there was a new accounting methodology for recognition of deferred acquisition costs that we absorbed an extra $1.2 million in expenses last year.
Okay. Is that 9.5% on the gross premiums or the net?
That 9.5% is effectively on net.
On net. What you're saying then is it really the number that you've given is, what was it? Wouldn't it have to be on gross?
Yeah. Edward Hemmelgarn, in terms of overall, in terms of policy acquisition costs, right?
You have a number of things that are flowing back and forth. You just got to sort of factor them in into this thing. We just report the numbers as they are as such, yeah?
The key variables you got playing on was that compared to last year, you had the accounting change that Richard talked about.
Sure.
You also have, in 2011, we had a HomeWise acquisition, a book of business acquisition that was flowing through, which did have a ceding commission, et cetera, attached to it.
Which clearly the Citizens acquisition did not. Yeah? The other side of this is as renewals, the third item is renewals as to when they occur. One of the items we run into is renewals for us are not linear throughout the year, as in not one twelfth of the book renews every month.
Sure.
First quarter and fourth quarter tend to be somewhat light on renewals, where the second and third quarter tend to be heavy. All of those things do play some effect on the policy acquisition costs, yeah?
But you-
As well, yeah?
You ratably recognize the policy acquisition cost over the life of the policy, don't you?
Yes.
Oh, okay.
Yeah.
All right. Let's see if there's anything else. Right now, you've got, well, almost everything that you've got is in cash, and I understand that in terms of your very little in the way of investments, and I understand the fixed income yields are really low. Do you anticipate it's going to remain in those lines, or would you tend to, as you build your balance sheet, that you might begin to extend the maturities a little bit?
Let me see if I can answer it in this fashion. The amount of cash that's on the balance sheet at this point is not there as cash because we are maintaining liquidity or anything else of that nature. We clearly have much greater amounts of cash than would be reasonably needed.
Right.
The reason it's there as cash is because the lack of suitable investments available in the current market environment. We are being very prudent and conservative in our portfolio management to say that, as everybody who's on this call probably knows, chasing yield in this environment is not a prudent thing to do.
No, that certainly is true, but it's also the outlook is probably, at least for low rates, is probably going to be out there for a few more years. Would you ever envision putting more of it, say, in just short-term maturity paper? I realize there's not much of a yield on that, but there may be more than cash. Would you ever or is that something you might do over the next year?
We debate that regularly in the investment committee.
Okay.
Simple answer, and see if I can illustrate the point. If you put $100 million to work in this environment, you get around 50 basis points of yield.
Right.
Putting it differently, for $100 million, you get $500,000 a year in interest income.
Right. I'm well aware of that.
Given the rest of our businesses, it doesn't seem like we should be chasing that $500,000. While $500,000 is a lot of money, it doesn't necessarily seem appropriate to be chasing that given the rest of the business, yeah?
You're saying for the return, it's not worth the risk.
Simply put, that's exactly it.
Okay. All right. Thanks. What's the outlook? Do you anticipate that there will be opportunities to assume policies again from Citizens in the latter second half of this year?
We always monitor and watch and see what's going on, et cetera. We've been through six years operations. We've managed to find policies, take out five out of the six years. I think the prognosis is probably pretty good, but at the end of it, despite that consistency, we do look every year with fresh eyes to see whether it's worth it or not. We won't really know that till the middle of summer, yeah?
Great. Okay. Lastly, I just have one more question. What has been your renewal rate?
We internally call it our retention rate.
Sure
For every 100 policy renewals we send out, how many do we get staying with us? That number is running in the high 80s to about 90%.
Okay, great. Thanks again.
Thank you once again. If you'd like to ask a question at this time, press star one on your telephone keypad. We will pause for a couple of moments to see if there are any final questions. Once again, star one to ask a question, star two to remove yourself from queue. We have a question from Edward Hemmelgarn with Shaker Investments. Please state your question.
Hi again, Edward.
Yeah, just sorry, one more question. What was the rate increase that you got for this year?
I think the indicated rate increase was 5.9%. Yeah.
5.9%. If you're looking at a 5.9% rate increase offsetting about a high 80s renewal or retention rate, that means we should be expecting organic gross premium decline of roughly 5%-6%?
Assuming we don't do anything to offset that, yes.
Okay, great. Thanks.
Okay, I think we seem to be done for questions. One last comment. Obviously, on May 22nd is going to be our annual shareholders meeting. By the very fact that you're on this conference call, obviously, hopefully you're a shareholder and you obviously have interest in the company. Please join us. We'd love to have you attend the meeting. Thank you.
Thank you. This concludes today's conference. All parties may disconnect. Have a great evening. Thank you.