Greetings, and welcome to the Homeowners Choice fourth quarter and year-end 2012 earnings call. At this time, all participants are in a listen-only mode. A brief 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, Mr. Jay Madhu, Vice President of Investor Relations for Homeowners Choice. Thank you, Mr. Madhu. You may begin.
Thank you. Thank you, and good afternoon. Welcome to Homeowners Choice fourth quarter and full year 2012 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 regarding our recent success, Richard will review our financial performance for the quarter and year, and then take the call back to Paresh for an update and business outlook. Finally, we'll open up the call to your questions. To access today's webcast, please go to the investor relations section on our corporate website at www.hcigroup.com. Before we begin, I would like to take the opportunity to remind our listeners that today's presentation, in response 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 success, results, and conditions but rather are subject to various risks and uncertainties. Some of the 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. Homeowners Choice, Inc. disclaims all obligations to update any forward-looking statements. Now 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 in a minute, we had a very successful quarter and year. The fourth quarter marked our 21st consecutive quarter of profitability. The fourth quarter highlights include the assumption of 39,000 policies from Citizens, as a result of which we had approximately 150,000 policies in force and about $340 million in annualized gross premiums at the end of the year. Next such highlight was retirement of all of our warrants in the fourth quarter. We also transferred our common shares to the New York Stock Exchange under the ticker symbol HCI. We issued a special dividend of $0.10 a share and increased our regular dividends to $0.25 a share.
Additional 2012 highlights include integrating the HomeWise assumption, purchasing the Jones Pass property, completing a $20 million follow-on offering last April, hiring Scott Wallace, handling approximately 900 claims related to Tropical Storm Debby and Hurricane Isaac, and increasing our annualized dividend from $0.50 a share at the end of year-end 2011 to the current $0.90 a share. I would like to turn the call over to our Chief Financial Officer, Richard Allen, to walk through the financial results for the fourth quarter and 2012. Richard?
Thank you, Paresh, and good afternoon, everyone. Fourth quarter income available to common stockholders totaled $13,100,000, or $1.19 diluted earnings per common share. This compares with $4,600,000, or $0.62 diluted earnings per common share for the fourth quarter of 2011. For the year ended December 31st, 2012, income available to common stockholders was $29,800,000, or $3.02 diluted earnings per common share, compared with $9,100,000 or $1.34 diluted earnings per share for 2011. Fourth quarter 2012 gross premiums earned increased 44.8% to $72 million from $49,800,000 in the same year-ago period. For the year ended December 31st, 2012, gross premiums earned increased 62.7% to $232,600,000 from $143,600,000 in 2011. Fourth quarter 2012 premiums ceded were 31.2% of the company's gross earned premiums earned, compared with 28% during the same period in 2011.
For the year ended December 31st, 2012, premiums ceded were 32.5% of gross premiums earned, compared with 38.7% in 2011. Net premiums earned for the fourth quarter of 2012 increased 38.3% to $49,600,000 from $35,800,000 in the same prior year period. Net premiums earned for the year increased 79% to $157,700,000 from $88,100,000 in the prior year. For the fourth quarter of 2012, loss and loss adjustment expenses totaled $15,900,000 compared with $16,900,000 in the same prior year period. Loss and loss adjustment expenses for the year ended December 31st, 2012 totaled $66,300,000 compared with $48,200,000 in 2011. The full year 2012 included approximately $3,500,000 related to the two tropical storms that Paresh had mentioned earlier.
Even with the increase in policy exposures from the assumption of the HomeWise business in November of 2011, we have noted significant favorable trends in both frequency of reported claims and in the average severity per claim. We consistently monitor claims activity for development of trends in frequency, severity, and causes of loss for the potential impact on incurred loss and loss expenses. The combined loss and expense ratio traditionally used in the property and casualty insurance industry was 60.6% for the fourth quarter of 2012 compared to 79.7% for the fourth quarter of 2011. Our combined ratio for the full year of 2012 was 72%, compared with 87.9% in 2011. Turning to the balance sheet, investments in fixed income and equity securities totaled $44,800,000 at December 31st, 2012 versus $39,800,000 at December 31st, 2011.
Cash equivalents and time deposits at December 31st, 2012 totaled $230,200,000 compared with $112,800,000 at December 31st, 2011. Unearned premiums at December 31st were $154,200,000, up from $108,700,000 at December 31st, 2011. The liability for loss and loss adjustment expenses was $41,200,000 compared with $27,400,000 at December 31st, 2011. As you can see, we have had successful underwriting results for the fourth quarter as well as the year ended December 31st, 2012. Now, I'd be glad to turn the call back over to Paresh.
Thank you, Richard. 2012 was our sixth year of operations and our sixth year of profitability. Over that time, we have grown from a startup to one of the top homeowners insurers in the state of Florida. Thus far in 2013, we have completed the offering of approximately $40 million of 8% senior notes. That was done in January. We have continued to integrate the Citizens policy that came in November and are on track to generate nearly $340 million of annualized gross premiums. We look forward to the opportunities and challenges that lie ahead. Finally, 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. With that, we're ready to open the call to your questions. Operator, please provide instructions.
Thank you. Ladies and gentlemen, if you would 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 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 is from Casey Alexander of Gilford Securities. Please go ahead.
Hi, good afternoon. Do you hear me?
Yes. Hi, Casey.
Great. Thank you. Thought I was in a vacuum there for a second. Pretty remarkable results. You said that you've identified noticeable lower frequency loss.
Casey, you're breaking up.
Hello?
Casey, you keep breaking.
I'm sorry. We lost Mr. Alexander. It seems like his phone cut out. The next question is from Robert Pond of Sidoti & Company. Please go ahead.
Good afternoon.
Hi. Hi, Robert.
I had a few questions here. First, on the reinsurance contract. I assume you're already in discussions with the reinsurers on a new contract for June 1st. Can you just give us a little color on what you're thinking as far as the new contract? How much coverage are you looking for? What it's going to cost? Any price changes? Any color there would be helpful.
Sure thing. Obviously, we're a bigger company this year than last year. We're probably looking at around about $800 million of vertical coverage. To the top of the tower, we've got $800 million. As far as pricing goes, there seems to be a softening in the marketplace, so the rates should be less. As you can imagine, we're buying more, but hopefully at a slightly lower rate. The overall absolute dollar spend will still be up, but not as up if the rates had not come down a little bit as well. Best estimates currently are, we are going to spend between $120 million-$140 million in reinsurance this year. Does that answer your question?
Yes. Thank you. That was very helpful. Second, can you just talk about the competitive pricing environment in Florida at this time? Has it changed at all from, say, 12 to 18 months ago? Have you seen any new entrants into the market or any existing players exit the market?
Well, let's answer them in reverse. Players exiting the market, I think the last real exit was HomeWise, which obviously we helped. Beyond that, I don't think there'll be exiting as such. As far as new entrants, I think successful competition, shall we say. There seems to be a number of new licensed insurers that have started up in the last year, ranging from Heritage Insurance to, there was one just last week.
CorVel.
CorVel, and there was another one, Weston, a couple of weeks ago. There seems to be that cycle of new startups occurring again. There may be more in the works, but at least I can name you a few. That's there. In terms of pricing pressures, et cetera, I think it's the same situation as always. It's a competitive marketplace, we fit right in.
Just more of a high-level question on growth opportunities. You completed the debt offering not too long ago. Can you talk about what you see for the company in terms of areas of growth? Is the plan to gain more market share in Florida, or is there a plan to enter new states or new business segments in the near future? Any sort of commentary on what's possibly in the pipeline would be great.
Okay. Very simple thing. Growing within the state, we've long maintained this thing about the 5% market share idea.
Yep.
Six years ago, when we were a little startup, it seemed preposterous to suggest such a thing. We seem to be within sight of that goal at this point. We are step by step working our way towards that goal, that thing is going to happen. Other states, other lines of business, et cetera, we're actually actively restructuring the organization to set up for those new opportunities and new things because we are looking past the day when we have 5% market share in the state of Florida and say, what can we do then? We're already looking at different opportunities and structuring the organization to support that.
Okay. Thank you for the answers.
Thank you.
Thank you. The next question is from Casey Alexander of Gilford Securities. Please go ahead.
Hey, Casey. Welcome back.
Yeah, sorry about that. You never heard an analyst scream before, but the moment I got cut off. The question that I was going for, and it may not have been asked while I was dialing back in, is that you've mentioned that you've identified trends of lower frequency and lower amounts of losses. What do you think that's due to? Are you suggesting that this level of losses versus this level of premiums is sort of a baseline that we should expect in the future? Should we be looking at something normalizing more at a higher rate versus the gross premiums?
Look, in terms of the lower losses and lower frequencies, it's a series of different things. It's all of these things. It's a complex set of issues that come together. If you recall, for years, we've had these sinkhole issues. Then they passed SB 408. When they did that in 2011, there was an echo effect right after they passed the regulation. People rushed to file their claims and so on. In late 2011, we were seeing surges in sinkhole claims, et cetera. We had said that there'll be a surge and then a drop-off. We're now seeing the other side of that, the drop-off. Yeah.
Okay.
You're seeing things of that nature that's occurred. The other side of claim frequencies, et cetera. I will put it down to good old-fashioned underwriting. Our operations team and underwriting team, under the leadership of Scott, have done a tremendous job of making sure that we have a well-underwritten book. While everybody says that, the results should speak for themselves, and you're seeing some drop-off in claim frequency, which also helps tremendously. All of these little items here and there are adding up to the numbers that you're seeing. That help?
Okay. Yes, it does. You've completed the policy takedown from Citizens a little more than three months ago. How do you see the retention rate of those policies developing thus far?
Slightly higher than we had projected, around 80% of renewal.
All right, that's good. Do you know what net investment income would've been x the real estate investments?
Offhand, no. It wouldn't have been substantially graver either, because the yield curve is very flat, and secondly, we weren't really looking to, how should I put it? Book any investment gains.
Right. Okay. All right. That's it for me right now. I'll step back in the queue because you answered the question that I intended to ask about proceeds of the bond offering and what your plans were for that.
Thanks.
Thank you. The next question is from Howard Halpern of Taglich Brothers. Please go ahead.
Hi, Howie.
Hi. Congratulations, guys. My question, I saw that the regulators gave a presentation to the legislature about what should be done with Citizens. I'm wondering what the legislature has done so far and what type of input the current industry participants are having, what are the long-term prospects if the legislature finally gets something done.
This is Scott Wallace.
Yes.
It seems as though every year, it's certainly been my experience that every year there's lots of ideas and a tremendous amount of discussion that goes on with various thoughts as far as legislative and regulatory activity. My experience is that maybe at best one out of 10 items may actually come to serious discussion and actually get passed. When we see those things taking place then those items that do pass through legislation, we deal with those, as we always do. We've been quite successful at doing that.
Okay. Another question regarding, were you granted a rate increase yet or is one still pending?
We were granted a rate increase by the Office of Insurance Regulation. That was a 5.9% average statewide rate increase that went into effect February 1st of this year.
Okay. Lastly, you talked about the higher renewal rate for the policy. It's an 80% renewal rate from Citizens. Of that renewal rate you increased, could you give an average of what the increase was from their Citizens policy to your policy?
Howard, I think that's mixing two different things. What we were talking about, the increased retention in what we were talking about was more in the sense of in takeouts past, we might have retained 70% of the policies on renewal. Now we're retaining 80%. That's what we're talking about increased retention. In terms of premium comparison as to what they're paying Citizens versus what they're paying us, we expect that to be roughly even.
Okay.
to what they were paying Citizens. We're not expecting there to be much of a
Okay.
renewal increase pass to the policyholders.
Okay. Well, keep up the great work, guys.
Thank you.
Thank you.
Thank you. The next question is from Edward Hemmelgarn of Shaker Investments. Please go ahead.
Yeah. Could you just elaborate a little bit more. It's on the loss adjustment expense. That's a really unexpected improvement. I know you talked about the fact that it was very good underwriting, is that certainly a trend that you would expect at least for the rest of this year?
I'm always hopeful that the trend continues. We also know in this business that we play the cards as they're dealt, not the ones that we would like to be dealt. Yeah?
I understand. Well, I guess let's say through the beginning of the hurricane season.
Yeah. So far the trends that Richard sort of talked about that were in the fourth quarter seem to be continuing in the first quarter.
So far they're continuing.
Okay.
We look at it monthly.
Yes.
I think the claims handling side of it has to do with it as well.
Yeah.
Where we've actually really enhanced and improved our quality assurance to help another area, which is we've really expanded our training to our staff as well, especially with regard to handling the claims.
Okay. Are the policies that you've been acquiring, certainly are they under $1 million in terms of insured value per home, or do you go over $1 million?
I think we've always been limited to under $1 million.
Okay. I noticed Universal set up a separate company to American to go after the million plus. Any interest on your part? It does appear as if the pricing is higher on the larger dollar value properties.
I'm sure it's something that Scott's looking at. However, I think one of the other things that's very true with us is that we seem to be doing quite well at what we already know how to do. Making sure we take advantage of the opportunities we already know how to take advantage of.
Right. Okay. Well, hey, great job.
Thank you.
Thank you. The next question is from Edward Williams of Capital Returns Management. Please go ahead.
Hey, good afternoon.
Hi there.
I was hoping you could just clarify, in regards to the severity and frequency trends driving the low loss ratio in the quarter. Is it safe to assume that you guys are saying that there's a low attritional loss ratio in Q4, or was there some favorable development in there, could you help me get an idea of which was which?
The attritional losses are the reported claims, which were down considerably, or significantly, I mean. There's some favorable development on prior years and prior quarter claims. As Scott said, from an operational standpoint, the claims department is much more active than, from my standpoint, more aggressive in settling claims. Just the reported claims, the attritional claims are not as high as we had originally anticipated, and we like that.
Fair enough. In terms of claims, any way you could quantify what the favorable development was?
No.
Fair enough. Then, in regards to the reinsurance spend, thank you for the guidance. I caught $120 million-$140 million expected this year. Could you just elaborate a little more or give a little color on structure as well, and the potential use of the captive as projected?
It's too early in the day to sort of sort all of those things out. Even the $120 million-$140 million is a broad range because we've discovered in years gone by that something happens, a few calamities around the world, and rates could go from being heading lower to heading higher very quickly. Therefore, that degree of color that was given is about as comfortable as we are currently, yeah.
Fair enough. Thanks very much.
Yeah. Thank you.
Thank you. We have no further questions in the queue at this time. I'll just turn it back over to management for any additional remarks.
Well, thank you, everyone, for attending the call as always. Hopefully, the next quarter, we will see you here at the same conference call again. Look forward to it. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.